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

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The hospital supply companu spent $807,000 on sales advice from a management consulting firm and subsequentlt persuaded banks to let it off the hook for meeting part of the terms of acredit agreement. The expense meant SRI could not meetthe "minimum fundas flow coverage ratio" covenang in the credit agreement, according to SRI's annual repory filed March 23 with the . The ratio is a measurre banks use to determine if a company has enougu cash to cover itsinterest expense, Wally SRI's CFO and senior VP, said.
Lendersd agreed to waive the ratio for the fourtjh quarterof 2006, but SRI expect to spend more on management consulting fees this year and Ruiz said there' s no assurance the banks will continue the The waiver is one of several uncertainties faciny Tampa-based SRI ( : STRC). Its presidenft and CEO, Christopher Carlton, unexpectedl resigned Feb. 5. Next month, the boards of directors gets anew chairman, Charles Federico, forme CEO of (Nasdaq: OFIX), an orthopedic products SRI is working to turn around its financial results, after postingb a net loss in 2006 of $1.9 millioh on revenue of $93.
8 "Clearly we lost money last year and it affectede our ability to meet the (bank) but they were fairly aggressiv e from the get-go," said Ruiz, who is part of a management team running day-to-day operations at SRI. "The flow ratiop target was setrather high. It was achievable, but with the it was not in the cards for Banks put covenants in their credit agreements with corporate clients as a way of monitoringthose results, said Penny Hulbert, presidenrt of , a Tampa-based financial consulting firm.
A bank doesn'tf want to write covenants so tightly thatthey won't be met but also doesn'y want to make covenants meaningless, she "There's a fine balance between providing flexibilityy and serving as a monitoring tool," Hulbert said. Largerf banks increasingly are not putting as many covenants in theird deals becausethey don't want to spend the moneh to monitor them and becausee they don't want to tie the handw of their clients too she said. When situations occur that keep a company from meetingits it's an opportunity for bankers and clientsd to talk about what happened and where the companyg is going, Hulbert said.
That's what occurref with SRI, which has a three-year, $30 milliohn revolving credit facility with Wachoviaand LaSalle. After SRI signedc a contract Nov. 1 with , a global managemeny consulting firm, "we sat with our bank s and explained it to them and gottheire concurrence," Ruiz said. All of the $807,000 was charged in the fourtbh quarter of 2006 to develop a plan formakingh SRI's sales effort more efficient and SRI, with a fairlyt lean headquarters staff, is likely to ask the consultantsa to return to implement the plan, including setting up a customerf satisfaction department, Ruiz said.
That's expected to cost roughl y $450,000 in the second quarter of 2007, accordintg to the March 23 SEC filing. Failinf to meet the terms of a bank agreemenft could be a red flag for Hulbert said, although there are so many reasons a companyg might not meet a bank covenant that it'e impossible to generalize. For hundreds of companies fell short of their covenants througuh no fault of their own when hurricanes tore through Floridza in 2004and 2005.
But she said investors should be wary when a company with falling sales and net losses also can't meet the terms of their bank In its March 23 SRI warned that its business is capital intensive and it mighf not be able to raise fundsd on acceptable terms if it can't meet the covenant in its creditf facility. Ruiz said he hasn't hearr about any investor fallout since disclosinfgthe waiver, but investors may already have had thei say. SRI's stock hit a 52-week low of $3.86t a share on Nov. 14, abouy a week after the company released detail s of the managementconsulting contract. The stocki has since rebounded and closedat $4.83 a sharee March 26.