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The hospital supply company spent $807,000 on sales advice from a management consulting firm and subsequently persuadedx banks to let it off the hook for meetintg part of the terms of acredity agreement. The expense meant SRI could not meetthe "minimuj funds flow coverage ratio" covenan in the credit agreement, accordinyg to SRI's annual report filed March 23 with the . The ratiio is a measure banks use to determine if a compan has enough cash to cover itsinterest expense, Wally Ruiz, SRI'x CFO and senior VP, said.
Lendersx agreed to waive the ratio for the fourth quarterfof 2006, but SRI expects to spend more on managemenyt consulting fees this year and Ruiz said there's no assurancd the banks will continue the waiver. The waiver is one of severakl uncertaintiesfacing Tampa-based SRI ( : STRC). Its presiden t and CEO, Christopher Carlton, unexpectedly resigned Feb. 5. Next the board of directors gets anew chairman, Charles Federico, former CEO of (Nasdaq: OFIX), an orthopedic products SRI is working to turn around its financialo results, after posting a net loss in 2006 of $1.9 millio on revenue of $93.8 million.
"Clearly we lost monegy last year and it affectexd our ability to meetthe covenants, but they were fairly aggressive from the said Ruiz, who is part of a management team runnin day-to-day operations at SRI. "Thwe flow ratio target was setrather high. It was but with the loss, it was not in the cards for Banks put covenants in their credit agreements with corporate clientes as a way of monitorinfthose companies' results, said Penny Hulbert, president of , a Tampa-basex financial consulting firm. A bank doesn'yt want to write covenants so tightly thatthey won'yt be met but also doesn't want to make covenantes meaningless, she said.
"There's a fine balance betweenn providing flexibility and serving as amonitoringv tool," Hulbert said. Larger banks increasingly are not putting as many covenantxs in their deals becausethey don't want to spendr the money to monitor them and because they don'tg want to tie the hands of theirf clients too tightly, she said. When situations occure that keep a company from meetintgits covenants, it's an opportunityy for bankers and clients to talk abou t what happened and where the companhy is going, Hulbert said. That's what occurred with SRI, which has a $30 million revolving credit facility with Wachovia and After SRI signed acontract Nov.
1 with , a globak management consulting firm, "we sat with our banka and explained it to them and got their Ruiz said. All of the $807,000 was chargexd in the fourth quarter of 2006 to develop a plan formakinfg SRI's sales effort more efficient and SRI, with a fairly lean headquarters staff, is likely to ask the consultantss to return to implemengt the plan, including settingf up a customer satisfaction Ruiz said.
That's expected to cost roughly $450,00 0 in the second quartetr of 2007, according to the March 23 SEC Failing to meet the terms of a bank agreementf could be a red flagfor investors, Hulberf said, although there are so many reasons a company mighrt not meet a bank covenant that it'sd impossible to generalize. For instance, hundredas of companies fell short of theirf covenants through no fault of theif own when hurricanes tore througgh Florida in 2004and 2005.
But she said investorzs should be wary when a company with fallingf sales and net lossesalso can'tg meet the terms of their bank In its March 23 filing, SRI warned that its busines s is capital intensive and it might not be able to raise funds on acceptabls terms if it can't meet the covenant in its credit Ruiz said he hasn't heard about any investor fallouft since disclosing the but investors may already have had their say. SRI'ds stock hit a 52-week low of $3.86 a sharde on Nov. 14, about a week after the company release details of the management consulting The stock has since rebounded and closedat $4.8w a share March 26.
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