The Price of Liberty is Eternal Vigilance
Operating results deteriorate further
Higher gifts and grants boost cash flowWarwick Jones
The Post & Courier was able to get a copy of the Aquarium's 2005 accounts some weeks ago. City Council members got theirs only before today's Council meeting. We were able to get our copy only yesterday, and it was the IRS 990 filing which by law is available to the public. Makes you wonder doesn't it? And it happens every year.
Reliance continues on gifts and grants
As in previous years, the Aquarium continues to rely on gifts and grants to keep its financial head above water. And last year, it did well with the receipt of about $1.63 million, well above the previous year's $1.19 million. We don't know the source of all gifts and grants though the City and County each made contributions of about $50,000. But the one gift that made the difference was that of $500,000 from the Spaulding - Paolozzi Foundation of which Mayor Riley is a board member. Without this generous gift, the Aquarium would be struggling. And indeed, without a considerable improvement in operating results, the Aquarium will need the generosity of benefactors to continue, and at an even higher level if it is to cover the operating deficit and its loan repayment schedule.
But first a look at the operating results. Download fileto see the 2005 results, cash flow, and balance sheet.
Operating deficit reduced
Revenue of $4.54 million in 2005 from members and attendance was slightly higher than the previous year's $4.4 million. However by cutting expenses, the Aquarium was able to reduce the operating deficit from $2.33 million to $1.84 million. The reduction was achieved despite a fall in the profits of its retailing activities. This deficit was largely covered by gifts and grants of $1.63 million.
But cash position improved
However, the cash position of the Aquarium did improve during the year. The profit was after a $0.96 million charge for depreciation. This is not a cash item. It is a notional charge to reflect the wear and tear of assets. However, assets do wear out and will need to be replaced some time in the future.
We note some factors that influenced results.
• There was a savings of probably about $100,000 with the resignation of the CEO. He was not replaced immediately but this years figure costs should bear a fuller charge.
• The interest charge looks high at $550,000 considering the reduction that was negotiated early last year in interest rates and loan repayments. The reduction in interest was contingent on reduction in principal amounts by 2010 so the actual and ultimate charge may be lower than that shown. But the benefit may not be brought to account until 2010, and when the principal reduction is achieved.
• A benefit of $610,000 has been taken into the 2005 surplus to reflect the the reduction in the loan principal in the restructuring negotiated early last year. We have treated this as an abnormal item. However, as the Aquarium has yet to fulfill all of the requirements to realize the benefit, we wonder whether it should indeed be bringing any of the gain into profits, Assuming it continues with its accounting treatment of these gains, there should be further substantial benefits over the next few years. Although the negotiated loan liability reductions truly contribute to the accounting surplus, they make no immediate contribution to cash flow.
We anticipate little improvement this year
We expect that the operating deficit will continue this year at a level similar to that of last year i.e at around $1.8 million. However, adding back depreciation and optimistically assuming that say only $100,000 of assets need to be replaced, the cash deficit will be about $ 1 million. This is the amount that will need to be raised in grants and gifts to cover the operating deficit. But the amount will need to be larger still if the Aquarium is to reduce loans to levels negotiated early last year.
The following is copied from a note we wrote last year in May. It is still applicable. Note that the bank loan is not specifically mentioned in the IRS 990 form for 2005. At the end of 2005, mortgages and notes were $7.34 million compared with $9.2 million at the end of 2004. The bank loan was $8.5 million at the end of 2004.
Loans re negotiated again?
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 bank debt of $8.5 million. If it can pay back $5.2 million by January 31, 2010, the remaining $3.3 million of debt will be forgiven. And if it 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 (and much better in 2005, Cash generation is defined as operating deficit plus gifts and grants ) 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. So if it can lift annual cash flow by about $200,000 -$300,000 a year 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.