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The Aquarium - Large debt weighs on future financial performance

Warwick Jones

We were not surprised that the Aquarium released its results before our meeting with The Aquarium's CFO. It was unlikely that we would be given an "exclusive". The Post & Courier ran the story on Saturday morning last though did not focus on some of the things we think are important.

Summary of Revenue, Expenses and Cash flow
We won't go into all the factual details but a summary of the results and those of the previous years is contained in the following files. (Editors note. December 3, 2006. We have been tidying up this site and substituted a later file which includes financial results for 2003 and before, but for 2004 and 2005 as well. Note also that the Aquarium made some adjustments to reported profits for 2003 when it reported for 2004. Consequently, the figures in text that follows, do not precisely match the figures in the table). Also note that the Aquarium opened its doors in May 2000. For that reason, the figures for 1999 and 2000 are not very meaningful. Download file

We would make the following points:
a. The Aquarium incurred a loss of $2.3 million in 2003. The situation is not as bad as it seems. The loss included a one- time- loss of $0.84 million following the decision to give up some space on the Fountain Walk property that the Aquarium had leased under a long-term agreement. The loss was really a book entry and did not impinge on operating results. Without this abnormal item, the loss would have been $1.7 million.

b. The loss was after a provision for depreciation and depletion of $1.36 million. This provision is essentially a book item and is provided to reflect the wear and tear of the aquarium's buildings and fixed assets. It is not a cash item and if added back to the loss, the Aquarium sustained a negative net cash flow of $340,000. This, in very broad terms, is a measure of the net cash generated, or in this case, net cash outflow. However. Mr Jack Higgins, CFO said that the form 990 does not provide a true measure of cash flow. The Aquarium's cash holding increased by $121,000 in 2003.

c. Figures indicate that attendance this year will fall below that of last year. Because there has been a modest increase in admission charges, most likely admission revenue will be steady. This continues to make the Aquarium dependent on grants - from the City, State, and benefactors. These grants represented near 24% and 15% of total revenue (ignoring retail sales) in 2002 and 2003 respectively. In 2003, the Aquarium received $840,000 in gifts and grants. And in 2002, the figure was $1.64 million. How long can this largesse continue?

d. The Aquarium has long term liabilities of $9.47 million. The liabilities comprise bank debt of about $8.7 million and $700,000 that relates to the leased space on Fountain Walk that has now been subleased. Details of the loan with the bank are confidential. The interest rate seems to be floating which mean it can move up or down in line with the general level of interest rates. In 2003, interest amounted to $369,000 but if bank charges are included, the total finance bill amounts to about $460,000. In 2002, the total interest and bank charges amounted to $521,000.

e. The financial performance this and next year is unlikely to allow significant debt repayment. We understand that the debt of the Aquarium was originally short term. It is probably academic as to what it was. Even if the provider wished to recover his debt, it is unlikely to push the Aquarium into bankruptcy given the opprobrium attached with such a move. But the repayment of this debt seems unlikely in the short term with attendance revenue down and grants and gifts being used largely for financing operations.

What about the future?
So much for last year! What about this year and the future? Readers can draw their own conclusions as to what the future course of profitability and cash flow of the Aquarium might be. We have made ours and it is contained in 1. above. We have assumed that there will be a slight improvement in grants, admission revenue and membership, and a slight decrease in operating costs over the next 2 years. We have also assumed steady profits from retailing activities. Of course, our projections could be wrong, and very wrong if there is a generous burst, or serious decline of gifts and grants.

So our forecast is for a slightly negative cash flow - i.e. operating result with depreciation and depletion added back - but nevertheless an improvement over that of last year. However, despite our projected improvement there is little scope for debt repayment. Our forecast also raises the question as to how the debt will be repaid. Indeed, if there is not a more substantial increase in cash flow over the next year or so, it may well be that the debt will grow above $8.7 million. And it must be stated that the cash flow we project is unrealistic in a sense because we do not take account of any equipment replacement that may be necessary in the next two years.

Some thoughts
We think the Aquarium is a great attraction and provides a fine educational service to the community. We don't think it is well served by a board that consists of 41 members. Most are prominent members of the local business and educational community. Maybe the large number of board members facilitates fund raising, but we are sure that it does not contribute to effective governance. We think a board of about one third the size would be more effective.

Most corporations are able to provide their accounts within 3 months of the close of a year. Non-profits are given four and a half month to file with the IRS. There is no reason why a non-profit cannot make its financial performance known to the public at this time, or earlier. The public should not be denied this information because the board was unable to meet, as was the case with the Aquarium, until October to approve the accounts. This would have been 10 months after the close of the year. The Aquarium board needs to do some soul searching!