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The Aquarium - Time running out on debt deal?

Confronted by poor economy

Warwick Jones

We had not forgotten about the Aquarium. We usually start bothering it for the annual accounts at the time they are due in May. Invariably we are told it has filed with the IRS for an extension or asks $30 payment for copying. When we receive a copy, it is invariably a few days or so after the Post and Courier has published a story with a predictable positive spin. So last year, we decided to leave the Aquarium alone and wait.

It was a long wait. The Aquarium was supposed to file its IRS 990 form for 2007 in May 2008 but two extensions were sought which gave it until November 2008 to file. We never saw a report in the P&C so we presume it never received a copy or chose not to comment. We picked up the IRS 990 off yesterday.

Performance in 2007 deteriorated from 2006
Those of us who follow the financial results of the Aquarium will not be surprised. The entity continues to rely on gifts and grants to remain viable. But the performance in 2007 deteriorated over the previous year. And we wonder if there was any improvement in 2008 or scope for improvement this year.

Looking at the accounts prompted us to refer to the agreement the Aquarium made with it bankers in 2004. Under this agreement, a sizable chunk of the loans and interest would be forgiven if the Aquarium met certain repayment conditions. Since 2004, debt has been reduced but given the tough economic conditions and the down turn in the economy and tourism revenues, it seems questionable whether the Aquarium will be able to fully take advantage of the renegotiated conditions, even though they are very favorable.

An operating loss of $2.17 million
But first the 2007 accounts - a summary, as well as that of previous years can be seen by pressing Download file
To view the Balance Sheet, press Download file

In 2007, the Aquarium had an operating loss of $2.17 million. But it also had the benefit of an abnormal item representing the savings that flowed from the debt negotiations in 2004 and accrued in 2007. Then there were gifts and grants of $1.63 million and in consequence. Adding these, the deficit for 2007 was reduced to $0.2 million.

This figure of $0.2 million is not necessarily a good measure of cash that flowed to the Aquarium in 2007. As we have pointed out in previous reports, the Aquarium also makes a provision for depreciation. This is a notional charge for the wear and tear of equipment and the building. It should be added back to determine cash flow. But at the same time, the benefit from the debt restructuring should be subtracted as it is not a cash item. This leaves a net balance which we call net cash flow of $0.36 million. This compares with a net cash flow in 2006 of $1.16 million. So there has been quite a decline over the year.

Some folk have quibbled about our calculation of cash flow and claim we are too generous. Part of the depreciation prevision will be consumed by replacing equipment and not all will be available cash. This is true, so we will simply say our measure of cash flow is generous. But if we have been generous, we have been equally generous in all years. And the deterioration in 2007 cannot be masked.

Lower operating results likely in 2008 and 2009
The deterioration in the operating account and cash flow in 2007 bodes poorly for 2008 and 2009 with the weakness or decline in economic conditions. Not only are we likely to see lower operating results in both years, but gifts and grants most likely will be down too for the same reasons.

Little chance of obtaining full forgiveness unless...
Which brings us back to the renegotiated debt. In 2004, bank debt was $8.5 million. In broad terms, the Bankers agreed that if the Aquarium repaid $5.2 million by the end of January 2010, all of the remaining debt - $3.3 million would be forgiven. We are not sure precisely what bank debt was at the end of 2007. Total mortgage debt was $6.08 million but there was $0,4 million in “Bank of America investments”. We guess that net bank debt was about $5.7 million, a reduction of about $2.8 million since 2004. So in 2008 and 2009, the Aquarium has to find about $2.4 million to pay to the banks and achieve the full promised forgiveness of $3.3 million. On the basis of the 2007 performance, it seems a lost cause!

...Mayor Riley finds a generous benefactor or more grants
But we will not underestimate Mayor Riley. He may well find a donor, or secure grants from some government bodies. It is also possible that the loan terms will be renegotiated again. In the renegotiated agreement of 2004, the remaining liability was divided into 2 loans, A and B. A was for $1.84 million and was repayable on January 31, 2010. Loan B was for $6.66 million. For every dollar repaid before January 31, 2010 of Loan B, a dollar of principal would be forgiven. A similar favorable arrangement related to interest liability. However, the Aquarium has the option to extend the term of Loan B by 4 years, but not with the continued option of forgiveness.

We think that the Aquarium will have repaid all of Loan A by January next year but unless the Mayor can produce a large grant or gift, a large part of Loan B will remain outstanding. Our guess is that net cash flow in 2008 and 2009 will go largely to the continued amortization of Loan A and that it will be paid off by January 2010. But we don’t expect much will be available to repay more on Loan B. We estimate that the Aquarium has so far repaid $1 million of this loan and received the forgiveness of $1 million. This leaves the Aquarium with a $4.7 million balance or so on Loan B.

We expect the Aquarium to survive the harsh times, but it will be a struggle.

For the record, the cumulative losses of the Aquarium, from opening to the end of 2007 amount to $24.9 million. The amount of funding from gifts and grants over the same period was $17.15 million. The latter amount does not take any account of the initial funding of the Aquarium, a figure which is hard to determine but probably around $70 to $80 million..

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