These are bleak days for Flow General Inc., the McLean-based research firm and manufacturer of biomedical and research equipment.
It was barely a year ago that Flow's stock soared to 45 3/8 a share on the New York Stock Exchange after the firm got a National Cancer Institute contract to develop interferon, a drug many hope will lead to a breakthrough in cancer care. But soon after hitting that all-time high, Flow stock began skidding, and this month it slumped as low as 10 1/2 a share, its lowest point in two years.
What happened to Flow, once the darling of some Wall Street brokerages, but now viewed with distrust by investors?
One of the reasons for Flow's woes can be found at U.S. District Court in Alexandria, where today the company's General Research Corp. subsidiary and five of its executives are scheduled to go on trial on federal criminal charges. It's alleged that the company and executives conspired to hire former Army officers with inside information so that General Research could win a $2.6 million military computer contract.
If the criminal case were not enough, a week ago Flow disclosed it had settled a civil suit brought by the Securities and Exchange Commission. The SEC complaint, to which the company consented without admitting or denying the allegations, said Flow did not completely disclose to stockholders how it intended to use funds raised in a 1980 stock offering.
While the SEC case would normally be considered small cheese, it took on added significance in the context of the company's other problems.
For not only does Flow have criminal and civil legal headaches, but also it is having difficulty delivering those glowing and growing quarterly earnings that securities analysts so appreciate, and which the company's management had promised. Wall Street doesn't like surprises, but recently Flow has been coming up with a bunch--none of them happy.
Says Scott King of F. Eberstadt & Co. Inc., who had recommended investing in Flow: "I'm more cautious than in the past."
Jules Marx of Laidlaw Adams & Peck Inc. says, "Things seem a lot more serious than we were led to believe."
Even at L. F. Rothschild, Uttenberg, Towbin, the firm that underwrote Flow's most recent stock offering, the turn of events has caused concern. "A lot of investors are very upset and they're calling me about it," says analyst Stephen L. Handley.
Handley, in a May 19 analysis of the company, wrote that the recent decline in earnings "following two previously disappointing quarters, has created a credibility problem with investors which can only be dissipated by time and an improved performance."
Among the causes cited by company officials for Flow's earnings decline are cutbacks in government contracting under the Reagan administration, foreign currency losses by its recently expanded overseas holdings, and product developments that have fallen behind schedule.
At the center of the Flow reverses, as he has been during its successes, is president and chief executive officer Joseph E. Hall, a 46-year-old chain-smoking, coffee-chugging executive with a snappy handshake.
No shrinking violet, Hall has what the military calls "leadership quality." His curriculum vitae runs four pages, opening with a "SUMMARY OF ACCOMPLISHMENTS" and concluding with a laudatory description of "Joe" Hall, "a dynamic, many faceted, innovative yet practical person. Into each new endeavor pursued, he has brought to bear a common sense application of business principles as well as his entrepreneurial uniqueness . . . Joe combines common sense with future-oriented outlook."
"Why has all this happened now?" says Hall, exhaling a huge puff of smoke through gritted teeth. "I wish I knew the answer to that."
True to his education as an accountant, Hall says the bottom line is to get the worst over as quickly as possible. He calls the criminal indictments "damned painful because I think I'm an honest person and I think we're an honest company"
Fiesty by nature, Hall says he is so confident that the government's charges are groundless that he has dismissed any suggestions of an out-of-court settlement. "We're overjoyed we finally have a trial. We haven't sought a postponement, don't want one," he says.
Hall says he can't comment on the SEC suit because of the settlement terms, but insists that if he weren't saddled by the criminal case he would have challenged the commission in court, too. The heart of the matter, he suggests, is that Flow has become a bigger company and thus a target for the government and others.
"I would pose a question," Hall says when asked what he thinks has gone wrong. "Four years ago when we were doing $40 million sales, enjoying a small profit, would anyone have bothered with either of these situations? You can read into this whatever you want to."
Hall became president of Flow in 1976 and soon after bought a microwave technology company called Mosley Associates, an action that set Flow on an acquisitive course. "We had been stuck on $40 million for a number of years," says Hall. "We paid cash for Mosley and it easily paid for itself."
Since then, Flow has acquired six companies, culminating with the $60 million purchase in March of Worthington Diagnostics from Milipore Corp. Sales grew with each acquisition and, by the end of 1981, Flow's annual revenues had climbed to $112 million.
In earlier days, Flow attracted academic types who had little concern with profits and loss statements. In those days, the company, like so many other think-tanks clustered around the Beltway, lived off government contracts--some highly classified, some far-out. For example, Flow in 1977 got a $1 million, three-year contract to write a definitive history of the Vietnam War with a dozen high ranking South Vietnamese officers as paid consultants.
"The absolute requirement to make a profit and grow were not recognized," says Hall. While the firm still attracts academic types, the need for profit is now stressed. "Understandably they are not as concerned with the bottom line as I am and that results in some interesting discussions about the direction of various projects."
With the acquisitions, Flow has become less dependent on government contracts. Hall says government contracting accounted for 42 percent of the company's business in 1981. Next year, when the results of the Worthington acquisition are figured in, government contracts will be 25 percent of Flow's business.
But, for now, Hall is halting acquisitions while he seeks to digest the companies Flow has already picked up. The company recently reorganized its diverse operations under two divisions, applied sciences and biomedical.
The biomedical division involves products for research labs, clean air equipment, advanced equipment systems and electronic systems for microbiology research and diagnostic kits for clinics and hospitals. With the addition of Worthington Diagnostics, the biomedical division accounts for about two-thirds of revenues.
The applied sciences group includes the think-tank operation as well a number of products, including computer software, testing devices and communications systems for the broadcasting industry.
As the company becomes more concerned about profit margins, this division becomes more vulnerable to cutbacks because much of its work is research and development that doesn't return quick profits.
Hall says he is excited about being involved in R&D projects--in "things way out there"--and insists that the company intends to continue such work.
Douglas H. Poretz, director of corporate communications, sees Flow in the future as being involved in an "emerging industry that doesn't have a name yet, but includes genetic engineering, cell technology and the like. We are hoping to define an industry the way that IBM defined its industry."
The announcement last March of the $2 million grant to Flow Labs to experiment with interferon got the company a burst of publicity. A couple of months later, the world learned that Flow Labs was experimenting with growing skin tissue outside of the body.
Both developments, but particularly interferon, grabbed the investing public's attention. "We were very careful not to hype interferon, but it was hyped nevertheless," says Poretz. "We can't deny that we talked about interferon, but we were as cautious as possible."
Wall Street analysts generally cite the run-up of the stock price after the interferon announcement and the continuing decline as the most troubling aspect of Flow's recent history.
Michael Le Coney, an analyst with Merrill Lynch Pierce Fenner & Smith, says the interferon incident confirmed his long-held doubts about Flow. "It looked like we were wrong for two or three years," he says. "But now it seems that our instincts were right. It looks like the stock was trading as an interferon play."
But what really stunned investors was the apparently unanticipated plunge in Flow's net income in the quarter that ended March 31--the very time its other troubles were coming to a head. The company's profits fell from $2 million (25 cents a share) a year earlier to $389,000 (5 cents).
Poretz, speaking for the company, disclaims any responsibility for misleading the analysts. "We never made any predictions about earnings. Analysts did, but we never did."
But one analyst, who asked not to be identified, said "my clear understanding was that they were expecting modest gains" in the quarter when earnings collapsed.
Flow has some fence-mending to do on Wall Street, but first it must seek to win the trial that begins today.
The outcome of the trial, which is expected to run about eight days, will not only have a psychological effect on Flow's highly sensitized investors, but also it will affect the company's future operations. If Flow loses the case, it could be prevented for a period of time from competing for new military contracts. Even with Flow's diversification away from government business, that would have an impact on the company's finances.