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Wed, Aug 08, 2001 - Page 19 News List

Cost of funding soars at Flow International

Capital obtained by the company has been described as `high-end loan sharking,' but it was the best that the company could do in the present climate

By Floyd Norris  /  NY TIMES NEWS SERVICE , NEW YORK

During the boom days, capital was cheap for many companies. But in the new world of financing, it is the lender who sets the terms. Companies that need money can end up paying a lot.

Consider Flow International Corp, a company that has a good business in using high-pressure water systems for cutting industrial materials, as well as a promising newer technology for food treatment. It is profitable, and borrows money from banks at reasonably low rates.

But when it sought long-term loans this year, the terms were quite different. The US$25 million it obtained from John Hancock, the insurance company, was described as "high-end loan sharking" by R. Keith Long, a hedge fund manager who owns 235,000 shares in Flow.

Under terms of the deal, the company will pay 13 percent interest on the money, half of which must be paid back in six years and half in seven. But that is only part of the deal. John Hancock also received 5.25 percent of the company as an equity sweetener. The total cost of the loan amounts to about 20.6 percent a year.

Stephen Reichenbach, Flow's chief financial officer, conceded that the financing was not cheap, but said on Monday it was the best the company could do. Flow hired an investment banker -- Bank of America -- and "received a tremendous number of proposals," he said. "This was the best out there." Other proposals included deals that would have been far more dilutive to shareholders, he said.

"We would have loved to do some sort of equity deal," said Ron Tarrant, the company's chief executive. But in the current state of the equity market, that did not appear possible.

At the heart of the problem for Flow is that it has considerable leverage at a time when investors are suddenly more concerned about balance sheets. Two years ago, Reichenbach said, banks were quite happy to have borrowers whose senior debt was four times pretax cash flow, or earnings before interest, taxes, depreciation and amortization. Now, he said, they want a ratio of no more than 2.8:1, a fact that forced Flow to seek additional financing.

Flow is one of those companies that seemed promising for years. In 1989, Philip Carret, a well-known money manager who died in 1998 at the age of 101, was quoted in The New Money Masters, a book by John Train, as saying that Flow was "a concept stock" that looked promising. "They use a jet of water under very high pressure to cut solid objects,'' Carret explained.

Flow still looks promising to some investors, but its followers have not grown rich. On Monday it closed at US$13.79, up US$0.34, in NASDAQ trading. It is up 25 percent this year, but it is barely above its 1986 high.

The technology that attracted Carret is still there, making money and growing. But that is viewed by Wall Street as part of the machine-tool industry, and few investors find that business exciting.

The other business, much smaller now, is called ``Fresher Under Pressure'' by Flow. It uses high-pressure water flows to destroy bacteria in foods while preserving all the nutrients. Flow says the treatment extends the shelf life of foods without subjecting them to extreme heat for long periods.

Promising as it may be, for now it is consuming more cash than the other business generates, and the stock market seems to give little value to it.

Long, who runs a hedge fund called Otter Creek Partners, is waging a low-budget proxy fight to win one of the three board seats up for election at this year's annual meeting later this month. Rather than spend the money to contact all shareholders, he is trying to reach out to institutional holders who may be frustrated by the stock price.

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