The Price of Liberty is Eternal Vigilance
Aquarium gets a break
But it needs $3.3 million by 2010. Hullo sales taxWarwick Jones, Editor
Give the Aquarium its due. It has been tardy in the past in releasing its accounts. As a non profit, it is obliged to make its accounts for the previous year available to the public before May 15 of the following year. Last year, it was not until late August that we were able to secure a copy. But this year, City Council members and the press had copies by May 16. As usual, the release was accompanied by an optimistic spin. Mr. Jack Higgins the CFO was quoted in the P&C as saying "things are looking good". And with a potential $3.3 million loan forgiveness and a break on interest payments, things certainly seem much brighter. But it ain't all sunshine!
Break even on a cash flow basis
Let's have a closer look. Viewers can see a summary of the accounts Download file
There were no surprises in the results. The Aquarium continued to incur a sizable loss which last year amounted to $1.15 million. However, the accounts in a sense distort the operating performance. The results are after a provision of $1.17 million for depreciation. This is a notional charge and is made to reflect the "wear and tear" of assets of the period. It is not a cash outlay. Adding this back to the results, the Aquarium "broke even" for the year. However, one can't dismiss depreciation even if it is notional. Assets do wear out and they need to be replaced sometime.
The accounts show that the Aquarium still very dependent on gifts and contributions These are still running at near $1 million a year and they will need to continue at this level at least if the Aquarium is going to "break even" at an operating basis. Indeed they may have to increase if the profit derived from the Gift Shop continues to decline. Earnings from the Gift Shop have been falling each year since 2001 and last year amounted to $670,000 down from $760,000 in 2003.
Loans re negotiated again
What is more interesting than the operating performance is the negotiation of the terms of the outstanding loans. The Bank loans have been renegotiated a number of times, a reflection of the inability of the Aquarium to generate sufficient cash for their repayment. At the end of 2004, the loans stood at $8.5 million. This amount now has been divided in to two Loans, called A and B. Loan A has a face value of $1.84 million and Loan B a face value of $6.66 million. Loan A is straightforward. It bears interest at an annual rate of 6% and must be repaid by January 31, 2010. The principal must also be amortized at a rate of $25,000 a month to January 31, 2008 and at $40,000 a month for the 2 years there after.
Potential savings of $3.3 million
Loan B is not straightforward. It bears interest the annual rate of 8% and is due for repayment also by January 31, 2010. However, it can be extended for another 4 years with conditions. But the more interesting condition relates to the years prior to 2010. The Aquarium need pay only 2% of the total 8% interest charge in cash; the remaining balance can be deferred to 2010. As well, for every dollar that the Aquarium can repay of this loan before January 31, 2010, the banks will forgive one dollar of debt. But as well as this break, all or part of the deferred interest will be forgiven depending on how much debt is repaid.
A good deal
In summary, the Aquarium at the end of 2004 had debt of $8.5 million. If it can pay back $5.2 million January 31, 2010, the remaining $3.3 million of debt will be forgiven. And if is able to repay this amount, the annual interest charge over the next 4 years or so would represent less than 2.5% of the $8.5 million, well below market rates.
This is clearly a good deal. But whether it reflects the acumen of the Aquarium, or the recognition by it bankers of the desperate financial position of the Aquarium and the opprobrium that would fall on them if they moved to receivership, is conjectural. Clearly, the banks have written down the loan values in their accounts. And considering that there is no longer a surplus on the balance sheet of the Aquarium, maybe the loans have been cast into the "Bad and Doubtful" category.
We expect that the Aquarium, and the City will move aggressively to find the money to meet the easy terms of the renegotiated loans. The logic is clear. Not only is there considerable saving in the repayment of principal and interest. But should the Aquarium fail to meet the January 10, 2010 requirement, all accrued interest becomes payable and within the following 4 years. Of course the Aquarium could again call the banks' bluff. But with the City having an obligation to take over the Aquarium's assets and liabilities, we expect a real effort will be made to come up with the cash this time.
Where will the money come from?
So the issue is where will the money come from? Given some hard work and perhaps some luck, the Aquarium may be able to get by over the period to January 31, 2010. On a cash generation basis, the Aquarium operated close to "break even" in 2004. It now has to find an estimated $530,000 a year for the next 3 years and then about $630,00 a year for the remaining 2 years to meet its cash obligations to the banks - interest and principal repayments. However, it will no longer have the interest payment on the original $8 million plus bank loans, which in 2004 represented $381,000. So if it can lift annual cash flow by about $200,000 -$300,000 it should squeak in. But then on January 31 2010, it has to find another $3.3 million. If it can't, the liability increases to $8.6 million.
Press here to see the tables showing our estimates of interest and repayments over the next 4 years or so. We have shown the best outcome - if Loan A conditions are met and $3.3 million is repaid for Loan B - and the worst outcome - the principal repayments of neither loan A nor B are made. It is possible that something in between these extremes may occur.
We would expect a strong appeal would be made to past benefactors and to the public sometime in the future, perhaps frantically as 2010 approaches. Or is a certain Mayor looking anxiously for a bail out from revenue derived from the newly instituted Half -Cent Sales tax?