Fees meant to help spark business end up a source of pain - Tampa Bay Business Journal:

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The hospital supply company spent $807,00o on sales advice from a managemenft consulting firm and subsequently persuaded bankxs to let it off the hook for meetinf part of the terms of a credit The expense meant SRI could not meetthe "minimunm funds flow coverage ratio" covenant in the credit agreement, accordingg to SRI's annual report filed Marchy 23 with the . The ratiok is a measure banks use to determine if a compant has enough cash to cover its interest Wally Ruiz, SRI's CFO and senior VP, said.
Lenderzs agreed to waive the ratio for the fourtj quarterof 2006, but SRI expectsx to spend more on management consulting fees this year and Ruiz said there'xs no assurance the banks will continu e the waiver. The waiver is one of severakl uncertaintiesfacing Tampa-based SRI ( : STRC). Its presideng and CEO, Christopher Carlton, unexpectedly resigned Feb. 5. Next the board of directors gets a new Charles Federico, former CEO of (Nasdaq: OFIX), an orthopedi products company. SRI is working to turn arounf itsfinancial results, after posting a net loss in 2006 of $1.9 millioh on revenue of $93.8 million.
"Clearlyh we lost money last year and it affectefd our ability to meetthe covenants, but they were fairly aggressive from the get-go," said Ruiz, who is part of a management team runningy day-to-day operations at SRI. "The flow ratio target was set rather high. It was but with the loss, it was not in the cardsz for us." Banks put covenantz in their credit agreements with corporate clientzs as a way of monitoringthoser companies' results, said Penny Hulbert, president of , a Tampa-basexd financial consulting firm. A bank doesn'rt want to write covenants so tightlty thatthey won't be met but also doesn't want to make covenantsd meaningless, she said.
"There's a fine balances between providing flexibility and serving as amonitorinh tool," Hulbert said. Larger banks increasingly are not puttinf as many covenants in their dealse becausethey don't want to spend the monety to monitor them and because they don't want to tie the handds of their clients too tightly, she said. When situationss occur that keep a company from meetingtits covenants, it's an opportunity for bankers and clientsd to talk about what happened and wher the company is going, Hulbergt said. That's what occurred with SRI, whichg has a three-year, $30 million revolvingf credit facility with Wachoviaaand LaSalle. After SRI signed a contract Nov.
1 with , a globap management consulting firm, "we sat with our bank s and explained it to them and gottheirr concurrence," Ruiz said. All of the $807,000 was charged in the fourty quarter of 2006 to develop a plan formakingg SRI's sales effort more efficient and SRI, with a fairly lean headquartersw staff, is likely to ask the consultante to return to implement the plan, including settintg up a customer satisfaction department, Ruiz That's expected to cost roughly $450,000 in the seconc quarter of 2007, according to the Marcn 23 SEC filing.
Failing to meet the termx of a bank agreement coul d be a red flagfor investors, Hulbert although there are so many reasons a company mighy not meet a bank covenanf that it's impossible to generalize. For hundreds of companies fell short of their covenants through no faultr of their own when hurricanes tore through Florida in 2004and 2005. But she said investorws should be wary when a companyy with falling sales and net lossesalso can'tf meet the terms of their bank In its March 23 SRI warned that its business is capital intensive and it might not be able to raise funds on acceptable terms if it can' meet the covenant in its credi t facility.
Ruiz said he hasn't heard about any investor fallout sinces disclosingthe waiver, but investord may already have had their say. SRI's stocl hit a 52-week low of $3.86 a sharwe on Nov. 14, about a week after the company releasefd details of the management consulting The stock has since rebounded and closedat $4.83 a share March 26.