The Finish Isn’t Glossy for Marketer of Photos : Sales: Bankrupt Traditional Industries’ $48-million debt is no longer Arland Dunn’s problem. With his handsome earnings while running the company, he has launched a new business.

When Traditional Industries Inc. had its initial public stock sale in early 1986, the offering’s prospectus made no mention that during the 1970s, Traditional’s founder and chairman, Arland D. Dunn, worked for a company called Atlantic Industries Inc. and that Martin Osman, a major stockholder of Traditional, had been an Atlantic executive.

Prospective investors in Traditional might have found Atlantic worth studying. Because, like Agoura Hills-based Traditional, Atlantic was a direct marketer of photo supplies and services.

But after enjoying growing sales for a few years and a hot stock, Miami-based Atlantic ran into trouble with the Federal Trade Commission, lost money, watched its stock sink to $1 and then disappeared in the late 1970s. Dunn? He went off to start Traditional in 1976.

Traditional turned out to be an Atlantic reprint. Traditional also grew rapidly but then got into a dispute with the FTC over its sales practices, lost money and last month limped into bankruptcy court. Traditional’s stock, which fetched $12 a share three years ago, is now worth pennies. It’s now up to the U.S. Bankruptcy Court and Traditional’s creditors to see if the creditors can somehow get at least some of the $48 million owed them.

But that’s no longer Arland Dunn’s problem. He’s gone, if not very far. Dunn, 51, quit Traditional when the company filed for bankruptcy, and thanks to the handsome earnings that he enjoyed while running Traditional, he’s already started yet another photo company. Dunn runs Lifeprints Inc. from newly leased space in Traditional’s own building.

Say this for Dunn: He knows how to promote, and he knows how to survive. By Dunn’s own account, he reaped about $3 million during his Traditional tenure by periodically selling some of his Traditional shares. His salary, which reached $400,000 last year, was extra. And so was the $15,000 to $20,000 a month the company paid in rent for its corporate offices, which were formerly owned by Dunn.

Traditional hired independent salespeople to sell its photo packages to consumers, nearly all of whom bought the packages with installment credit that Traditional provided. The average purchase was about $900, and Traditional’s sales shot up to $62.3 million in its fiscal year that ended June 30, 1989, from just $13.4 million four years earlier. But the rising sales, which were recorded in full upfront, masked cash-flow problems.

Many of Traditional’s sales were undermined because the customers later defaulted on their payments or canceled sales. Things got so bad that in the quarter that ended March 31, 1990, Traditional had to set aside $6 million to cover its bad loans.

Also costly was Traditional’s 18-month dispute with the FTC. The agency alleged, among other things, that Traditional made false claims about the quality of its photo enlargements and other services.

Traditional denied any wrongdoing, but settled the complaint in July, 1989, by agreeing to cancel sales contracts for some customers and change its sales practices. But over the next year it was twice found in contempt of court for violating the agreement.

And after March, 1990, Traditional never again filed financial statements with the SEC. As with any public company, Traditional had an outside accounting firm--in this case KPMG Peat Marwick--audit its financial results. But Traditional’s fiscal 1989 results were the last audited by KPMG; Dunn said the company couldn’t pay the accounting firm after that. So over the next 21 months until Traditional filed for bankruptcy, the company never provided the SEC with more recent, audited numbers.

Those filings that Traditional did make with the SEC show that Dunn’s outside holdings profited from their relationship with Traditional, and that Dunn’s executives and some of his family members were able to tap Traditional’s piggy bank.

Consider:

* Between fiscal 1987 and fiscal 1989, Dunn owned Traditional’s headquarters building in Agoura Hills, during which he collected between $15,000 and $20,000 a month in rent. The company said the rent was “on a comparable basis” with other nearby office rents. In January, 1990, Dunn sold the building to an unidentified third party for an undisclosed price.

* In fiscal years 1987 and 1988, Traditional bought $2 million worth of photo albums from a separate Dunn company, Crown Albums. Then in July, 1988, Traditional bought Crown from Dunn for 83,535 Traditional shares, then worth about $800,000.

* In December, 1985, Dunn’s daughter Debra and her husband, Michael Kelly, bought a Traditional subsidiary named Honeymoon Village Inc., which provided wedding services in Las Vegas, for no cash and a $189,000 promissory note payable over seven years at 10% annual interest. But four years later, the Kellys still owed Traditional $207,000 on the sale (including accrued interest), and Michael Kelly owed an additional $100,000 that he received in loans, Traditional’s fiscal 1990 proxy shows.

Dunn said in an interview that Honeymoon Village was intended to give Traditional another avenue for selling its photo packages, but that the company found out only later that Nevada authorities would not permit it. “We couldn’t do the business we thought we could,” he said, adding that Traditional eventually wrote off the Kelly debt.

* Osman, Dunn’s former associate at Atlantic Industries, owed Traditional $227,000 as of June 30, 1989, a sum representing unpaid loans and unpaid interest “over the past several years.” Traditional finally wrote off the loans “due to expected un-collectibility.” Osman became one of Traditional’s stockholders in 1984 when Traditional bought one of Osman’s later companies, PhotoMagic, in exchange for Traditional stock.

* Richard E. Parrish, Traditional’s chief financial officer, borrowed $115,000 from the company in April, 1988, pledging an undisclosed number of his Traditional common shares as collateral. Dunn said the loan was later settled after Parrish “paid part of it.”

* Over the years, Traditional also made “advances” and no-interest loans to some of the hundreds of independent salespeople nationwide who peddled Traditional’s photo packages. But in the quarter that ended June 30, 1989, Traditional wrote off $1.3 million of those loans.

Ironically, some of those salespeople are now alleging that in the weeks just before Traditional’s bankruptcy filing on March 28, the company repeatedly sent them worthless commission checks with the knowledge that there was not enough money in its bank accounts. The checks totaled more than $130,000, the salespeople allege.

The Los Angeles County district attorney’s office is investigating those claims. Dunn has denied any wrongdoing, saying the checks bounced because the company’s banks froze its bank accounts under pressure from one of Traditional’s major creditors and due to other factors.

In the months leading up to Traditional’s bankruptcy, the salespeople weren’t the only ones unable to get money due them from the company. For instance, Chinon America Inc., a photo equipment supplier, alleged in a civil suit that Traditional failed to pay more than $48,000 it owed for Chinon products it had bought. The suit was filed four months ago in Superior Court in Van Nuys. Dunn said “we just couldn’t pay it.”

Dunn was more fortunate. The income that he earned from the album sales, rent payments on Traditional’s building, his stock sales and his salary enables him to live handsomely: a 5,300-square-foot house in Thousand Oaks, a second house in Huntington Beach, a condo in Lake Arrowhead, and vacant land in Westlake Village and Camarillo, according to real estate records.

The most recent SEC filings also show that as of January, 1990, Dunn still owned 917,485 shares, or 23% of the company overall, which made Dunn the company’s biggest stockholder. The stock is now basically worthless.

But that’s about the same number of shares Dunn owned when the company went public--shares for which Dunn conceded that he paid nothing because he was the company’s founder. So on that stock, Dunn suffered a loss on paper only. The lead underwriter on Traditional’s initial public offering was Morgan Keegan & Co. in Memphis, Tenn., which did not return a telephone call seeking comment.

Another major Traditional stockholder, William D. Walsh, suffered very real losses because of Traditional’s collapse. As recently as July, 1989, Walsh--a Menlo Park investor and an ex-director of Traditional--was still buying Traditional’s stock for $8.98 a share, the SEC filings show. But less than a year later, when Walsh began unloading his shares in a rapid series of sales, the stock had dropped to 25 cents a share or less.

For instance, in one sale last September, Walsh sold 3,000 of his shares for 19 cents each. That’s $570, before trading commissions.

In addition, Walsh guaranteed for Traditional a $3.5-million bank loan that the company defaulted on last year, forcing Walsh to pay off the loan, Walsh’s lawyer Michael H. Kalkstein said. Then in January, Walsh got a court-ordered lien on Traditional’s assets, which prompted Traditional’s major lenders, Imperial Bank and Sanwa Bank, to freeze Traditional’s accounts. Dunn said that was the reason the salespeople’s paychecks temporarily bounced.

Kalkstein said Walsh hasn’t fully calculated his losses from Traditional. But Kalkstein said his law firm is “investigating all of Mr. Dunn’s dealings with Traditional and the benefits he received from those dealings.”

Kalkstein said he is also reviewing a request by Dunn that the bankruptcy court sell some of Traditional’s sales contracts to Dunn so that, among other things, Dunn and his new company can make good on the salespeople’s checks that bounced.

In filings with the bankruptcy court, Dunn has offered $50 for each of about 2,000 contracts that Traditional’s sales force wrote up, but that Traditional never processed before it filed for Chapter 11. David Gould, one of Traditional’s lawyers, said Traditional doesn’t mind selling them to Dunn because the company itself has no intention of completing the sales.

“We’re not going to attempt to fulfill those contracts, so the bottom line is if we can get $50,000 or any other amount, we’re just that much better off,” Gould said. A hearing on the proposal is scheduled for May 2.

Court filings show that the contracts, which would cost Dunn about $100,000 if he bought all of them, have a combined face value of $2 million, assuming all the customers actually made all their installment payments. So even if Dunn converted only half of them into actual sales, he’d still generate $1 million worth of business on a $100,000 investment.

No wonder Dunn said he’s optimistic about his new venture, despite the problems at Traditional. Selling photo packages to consumers, he said, “is a good business.”