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 $807,000 on sales advice from a managemenyt consulting firm and subsequently persuaded bankes to let it off the hook for meetingg part of the terms of acredit agreement. The expense meang SRI could not meetthe "minimumj funds flow coverage ratio" covenant in the credi agreement, according to SRI's annuall report filed March 23 with the . The ratik is a measure banks use to determine if a compant has enough cash to cover itsinteresr expense, Wally Ruiz, SRI's CFO and senior VP, Lenders agreed to waive the ratio for the fourtgh quarter of 2006, but SRI expects to spend more on managemenft consulting fees this year and Ruiz said there's no assuranced the banks will continue the waiver.
The waiver is one of several uncertaintiesfacinbg Tampa-based SRI ( : STRC). Its president and CEO, Christophee Carlton, unexpectedly resigned Feb. 5. Next the board of directors gets a new Charles Federico, former CEO of OFIX), an orthopedic productds company. SRI is workingf to turn around itsfinanciakl results, after posting a net loss in 2006 of $1.9 millioh on revenue of $93.8 million. "Clearlhy we lost money last year and it affectef our ability to meetthe (bank) covenants, but they were fairly aggressivw from the get-go," said Ruiz, who is part of a managementf team running day-to-day operations at SRI. "Thde flow ratio target was setratherf high.
It was achievable, but with the it was not in the cardafor us." Banks put covenants in their credi agreements with corporate clients as a way of monitoring those companies' results, said Penn Hulbert, president of , a Tampa-baseed financial consulting firm. A bank doesn't want to write covenantx so tightly thatthey won't be met but also doesn't want to make covenant meaningless, she said. "There's a fine balancd between providing flexibility and serving as amonitorint tool," Hulbert said.
Larger banks increasingl y are not putting as many covenant s in their deals becausethey don'tt want to spend the money to monitor them and becauswe they don't want to tie the hands of their clients too tightly, she said. When situationds occur that keep a company from meetingits covenants, it's an opportunity for bankerss and clients to talk about what happened and whered the company is going, Hulbert That's what occurred with SRI, which has a three-year, $30 million revolvinb credit facility with Wachovia and LaSalle. After SRI signedd a contract Nov.
1 with , a global managemenyt consulting firm, "we sat with our banks and explained it to them and gotthei concurrence," Ruiz said. All of the $807,0009 was charged in the fourth quarter of 2006 to developo a plan formakingf SRI's sales effort more efficient and SRI, with a fairly lean headquarterxs staff, is likely to ask the consultants to returjn to implement the plan, including setting up a customer satisfaction department, Ruiz said.
That's expected to cost roughlyt $450,000 in the second quarter of according to the March 23 SEC Failing to meet the terms of a bank agreement could be a red flagfor investors, Hulber said, although there are so many reasone a company might not meet a bank covenant that it's impossible to generalize. For instance, hundreds of companies fell short of their covenants through no fault of theitr own when hurricanes tore through Floridas in 2004and 2005. But she said investorsa should be wary when a company with fallingt sales and net lossesalso can't meet the termsz of their bank deals.
In its March 23 filing, SRI warnes that its business is capital intensive and it might not be able to raises funds on acceptable terms ifit can't meet the covenant in its credi t facility. Ruiz said he hasn't heard about any investof fallout since disclosingthe waiver, but investors may alreadyh have had their say. SRI's stock hit a 52-week low of $3.866 a share on Nov. 14, abouty a week after the company released detailse of the managementconsulting contract. The stocki has since rebounded and closedat $4.83e a share March 26.