Despite Soaring Sales, Photo Supplier Files for Chapter 11 : Reorganization: For Traditional Industries of Agoura Hills, expanding revenues couldn’t keep up with the fast-growing firm’s costs.
Traditional Industries Inc. in Agoura Hills is a classic example of how merely having sharply rising sales does not ensure success.
Although Traditional’s revenue soared from $13.4 million in fiscal 1985 (ended June 30) to $62.3 million in fiscal 1989, the company ran out of cash two weeks ago and was forced to file for reorganization under Chapter 11 of the federal bankruptcy laws.
Arland D. Dunn, Traditional’s founder and chairman since its formation in 1976, and President Alan F. Kane have resigned. The man now running the company is Walter Kornbluh, president of Pacifica Management Advisors Inc., a Century City firm that specializes in helping troubled companies.
Traditional sold photographic packages--cameras, film, albums and developing services--directly to consumers. The packages typically cost several hundred dollars, but in most cases Traditional would let the buyer finance the purchase over 24 or 36 months.
That meant Traditional wouldn’t get its total income for two or three years, although the company recorded the full amount of the sales up front--thereby creating the sparkling sales growth. But in many cases Traditional’s customers defaulted, eroding the true value of the transactions.
In the meantime, Traditional was paying out real cash up front in sales commissions, the cost of the photo equipment and corporate overhead, including Dunn’s and Kane’s annual salaries of $400,000 and $300,000 in fiscal 1990, respectively. The result: The faster Traditional grew, the more its cash flow was stretched.
Traditional kept going with the help of its lenders, but they finally stopped making new credit available, Kornbluh said. The company already owed $23.9 million to its two main banks, Sanwa Bank and Imperial Bank, according to its filing in U.S. Bankruptcy Court in Los Angeles. Traditional listed overall debts at $47.9 million and its total assets at $48.5 million.
“When a company expands as fast as they did and the emphasis is on getting more sales, then you take marginal sales, which have a higher degree of bad debt risk,” Kornbluh said. “In the end, that’s what did them in.”
Perhaps sealing Traditional’s fate was an 18-month dispute with the Federal Trade Commission, which had objected to some of Traditional’s sales practices. As part of a settlement, Traditional agreed to contact thousands of its customers to see which of them might be entitled to a rebate or cancellation of their sales contracts.
But that step prompted many customers to delay their payments, “and when you’re growing fast, you need every penny,” Kornbluh said. Traditional reported a loss of $5.5 million on revenue of $40.8 million for the nine months ended March 31, 1990, the last period for which Traditional has published its financial statements.
Traditional’s stock followed suit. Three years ago the stock fetched $12 a share (adjusted for a 4-for-3 split in 1988). Now it would take 50 Traditional shares to buy a cheeseburger; the stock had sunk to 3 cents a share even before the bankruptcy filing.
Kornbluh said his main job now is to service Traditional’s existing accounts--the company isn’t making any new sales--and to find out how much money Traditional can expect to collect from those customers.
The $48.5 million in reported assets includes only that money owed to the company by customers whose accounts are up to date or only slightly delinquent, Kornbluh said. He said he doesn’t yet know how many more receivables Traditional has outstanding with customers who are seriously delinquent in their payments.
