Province gave Fatkat $500,000 loan guarantee

Sept. 16, 2009

MIRAMICHI - This is part 6 of our look at documents obtained from the provincial government under the Right to Information Act regarding its dealings with Fatkat Animation.

On Sept. 27, 2007 the province received a copy of television network YTV's conditional offer to Fatkat for licensing rights to the television show "Three Delivery."

Fatkat also provided the province with copies of similar agreements from MTV Networks and BBC, although it's not clear on what dates and a licence agreement from Nickelodeon Australia sent Oct. 17, 2007.

As the month drew to a close, a representative from the Royal Bank's media and entertainment division e-mailed Business New Brunswick in response to a voicemail left by someone from the department.

In the e-mail, the bank's representative said financing is based on fully financed incorporated projects and they don't pre-approve loans to productions.

"That said, we do provide letters of intent to known producers when they require such for other investors such as Telefilm Canada and this too is based on a locked budget; financial structure and cash flow (may only be draft in the early stages)."

The e-mail also asked if Business New Brunswick changed the terms of the loan guarantee.

On Nov. 1, someone from Fatkat e-mailed Business New Brunswick to update them on changes at the company and inform them Fatkat was no longer working on a show called "Supa Strikers."

Fatkat said that as the project continued, the client made "gross misconceptions concerning the scope of the project in relation to the approved budget."

It went on to say Fatkat did everything they could to try and make the production work and deliver to the client's constant demands at a "significant cost" to the company.

"It soon became apparent that this project was not going to work for either party, and the client has replaced Fatkat with a low cost Indian studio."

Fatkat's management didn't expect the change to affect the company's projected profits and planned to compensate by switching their focus to smaller commercial jobs with higher margins, instead of large scale broadcast productions, the e-mail said.

It also said the company had made its first sale of original author material to Teletoon.

"Margins are much higher on these productions which will also assist to cover the lost profits from 'Supa Strikas'." On Nov. 2, a Fatkat representative e-mailed Business New Brunswick to say they thought a line of credit in the works was company based, not production based and they wanted a provincial loan guarantee to provide cash flow until they had financing in place for "Three Delivery."

"I can honestly say that RBC financing will not be in place for a minimum of 4 weeks (best case scenario!) and Fatkat does not have the amount of cash to float this production at this time," the e-mail said.

In their reply, Business New Brunswick said the financial forecast they used to evaluate the guarantee was weighed with revenues from "Three Delivery", even though the line of credit wasn't specifically targeted to the show.

"In a case like this we want to ensure the project will go ahead before the guarantee goes in place. Without "Three Delivery" the future would look much different and another business plan and evaluation would need to be performed."

On Nov. 8 the province sent Fatkat a letter to confirm approval of a $500, 000 loan guarantee for a $600,000 bank loan.

The guarantee was set to expire Nov. 30, 2010 unless the bank demanded payment under the guarantee, but the letter stated the Business New Brunswick minister could end the guarantee at any time, provided they gave the bank reasonable written notice.

As security for the guarantee, the letter said the government required a security agreement on all of Fatkat's assets, which would offset the debts subject to any prior claims from other creditors and a personal $500,000 guarantee from company owner Gene Fowler.

Under the terms of the loan guarantee, Fatkat agreed to pay back to the government any amounts paid or payable by the province to the bank in respect to the guarantee, along with interest calculated at a rate of 4.4 per cent annually.

Fatkat also agreed that any money used from the loan would be for no other purpose than to help develop the animation business.

One of the conditions set out in the approval letter was a requirement that Fatkat "pay and satisfy all taxes, rates and public charges, due or falling due with respect to the Company (Fatkat) and operate the business in a good businesslike manner."

On Jan. 8, 2008 an e-mail from an unknown sender wished "Happy New Year to all at Fatkat" and asked for an update on the company's financing through the Royal Bank, their ability to meet the next two or three payrolls and the long form contract for money from NB Film.

In their response, Fatkat said the bank was passing the "Three Delivery" project through their risk department and the company hoped to hear from them soon.

They also said cash flow was tight and Fatkat was behind on their payroll deductions to the Receiver General, but if they received money due from YTV on time it would cover payroll until Feb. 1.

"If we close the financing for this deal before the end of this month, we will have a bit of breathing room. We are at the mercy of the bank on this one however..."

The e-mail went on to say both Fatkat and YTV approved the long form for their contract and Fatkat was waiting for YTV to sign off on it, but the network's legal department was out the previous week.

A similar situation arose with Fatkat's co-venture partner Animation Collective with whom the contract was being drafted, but their lawyer was also out until Jan. 15.

In a final note on the e-mail they asked if there was "any indication as to the reality of a $500,000 guarantee?"

A Jan. 16, 2008 letter from then Business New Brunswick Minister Greg Byrne to Fatkat informed them the province had approved the company's application for financial help on "Three Delivery."

Byrne said the department approved $250,000 under New Brunswick Film's Equity Investment Program and the project would be eligible for an NB Film tax credit estimated at $1,572,080.

On Jan. 30, 2008 an e-mail from an unknown sender to an unknown recipient asked if they had been in contact with company called Aver Media, which is a private lender for television and film productions.

The e-mail also asked what documentation was needed to move forward on the Royal Bank line of credit.

In the reply the sender said they had been in contact with someone at Aver to get financial information about the company and had spoken with a contact at Telefilm Canada, but they couldn't provide much information about Aver and the sender went on to say they were going to contact someone at Manitoba Film.

The e-mail went on to say they would start the legal agreement process once the Royal Bank sent the term sheet outlining the conditions for the credit line.

A third e-mail that day confirmed YTV had deposited funds into Fatkat's account, although it did not specify how much they deposited.

YTV's licence fee "Three Delivery" was $76,000 per episode, which amounted to $1,976,000 for the entire season of 26 episodes.

On Feb. 21 an internal Business New Brunswick e-mail discussed Fatkat's existing RBC line of credit, which the company had borrowed up to $200,000.

"Fatkat has used some collections to reduce this back down to $100,000. However the bank has placed Fatkat with its Special Collections Branch," the e- mail said.

The e-mail also talked about information the Royal Bank received from the Canada Revenue Agency, which informed them Fatkat was about $250,000 in arrears on employee deductions.

"Fatkat had mentioned to me that they would not pay some current source deductions in order to fund payroll but did not mention the full extent of the arrears," the unknown Business New Brunswick representative said.

The representative went on to say RBC hadn't agreed to the loan guarantee yet and Fatkat was in talks with another lender in case RBC declined.

They also said RBC wanted the Canada Revenue Agency to honour Fatkat's repayment plan for the outstanding deductions and didn't want them to take government funds from future tax credits, if Fatkat got any.

At that time, Fatkat had laid off about 25 employees for a savings of $600, 000 annually, the e-mail said and added RBC was waiting the company's external accountants to prepare their June 30, 2007 financial statements, which the bank expected to receive by Feb. 22.

Finally, the e-mail said RBC expected to reach their decision on the loan guarantee by Feb. 29.

"In spite of these changed I still intent [sic] to proceed with the loan guarantee as this guarantee was not recommended based upon security, but on potential. This potential remains."

Fatkat asked for $1 million loan guarantee

Sept. 11, 2009

This is part 5 of our look at documents obtained from the provincial government under the Right to Information Act regarding its dealings with Fatkat Animation.

In 2006, as Fatkat moved ahead with plans to buy the Newcastle Legion, the company requested further assistance from the province.

Included in the documents sent to Business New Brunswick were income statements and balance sheets for the year ending June 30, 2006, although the numbers on the income statement differed from those on a statement of earnings and retained earnings for the same period reviewed by accounting firm Grant Thornton.

On the income statement, Fatkat listed $172,169 as their retained earnings for the year, while the Grant Thornton reviewed earnings showed retained earnings of $99,902.

The firm reviewed balance sheet showed $341,773 in assets and liabilities, while the other listed $420,516. Fatkat provided the government with both sets of numbers.

When Fatkat bought the building they agreed to rent the first floor to the Legion for two years with the option to renew for another two and gave the Legion first option to buy the building if Fatkat wanted to sell in the future.

That agreement was later extended into a 10 year lease to end in 2016.

In a letter dated March 23, 2006, but with an application signed March 23, 2007, Fatkat requested a $1 million loan guarantee for expansion.

The application listed a $175,000 owner's investment, $600,000 in unguaranteed term loans, the $1 million guaranteed loan and $225,000 from the Regional Development Corporation as sources of funds for the project.

Of the money invested by the company, $75,000 was to be borrowed from the Community Business Development Corporation with a $30,000 guaranteed investment certificate, computers and equipment pledged as security.

Fatkat listed $11,159 in shareholder loans, a $319,000 mortgage, a $277,000 loan from the Atlantic Canada Opportunities Agency and an operating line of credit in progress under "present debt," but didn't specify an amount for the line of credit.

The company planned to use $400,000 of the funds for building upgrades, $750, 000 for machines and equipment, $75,000 for inventory and accounts receivable, $75,000 to reduce accounts payable, $600,000 for product development and $100, 000 for recruiting.

In the company's annual cash flow projections Fatkat listed an expected surplus of $82,105 of money coming in over money going out for 2007.

Fatkat predicted further surpluses of $154,582 for 2008 and $277,721 for 2009.

At the same time, Fatkat predicted retained earnings of $295,007 for 2007, $624,978 for 2008, $1,209,520 for 2009 and $1,982,993 for 2010.

The company also listed their long-term debt for 2007 at $814,224, with that amount predicted to increase to $1,133,006 in 2008 then drop down to $954,899 in 2009 and $769,929 in 2010.

As part of the financial data submitted to the government, Fatkat sent a sheet titled "Compensation of Shareholders, Management and their relatives," which listed a shareholder whose name was blacked out who had a salary of $70, 000 and a spouse whose name was blacked out with a salary of $34,000.

A letter from the Royal Bank dated April 12, 2007 in which they amended an unknown agreement from 2006 and added a $100,000 revolving demand facility, which is a type of loan.

Fatkat owner Gene Fowler provided a $50,000 guarantee for the loan.

Fatkat later submitted an application for financial assistance from Business New Brunswick signed and dated Aug. 13, 2007 in which they requested a $500,000 loan guarantee for working capital and bridge financing.

The application listed the bank line of credit, mortgage and ACOA loan, but only listed the amount for the shareholder loan.

On Aug. 21, 2007 an unknown Business New Brunswick representative e-mailed Fatkat with questions about the financial statements the company provided.

The writer asked why direct wages were expected to drop from $5.7 million in 2009 to $5.5 million in 2010 while non-direct wages increased from $1.04 million in 2008 to $1.24 million in 2009 and $1.625 million in 2010 with no increase in staff beyond the 150 people peak in 2008.

They also asked what an expected increase in recruitment expenses was based on, what craft expenses were and why they increased, what the company included in marketing costs and why they increased, and why Fatkat expected training costs to increase as much as they predicted for 2007.

A Fatkat representative addressed the questions and replied the direct wages were calculated based on a percentage of revenue which varied depending on the projects and they expected subcontracting to decrease in 2010.

Non-direct wages were expected to increase due to raises for management to bring them closer to earning industry standards, they said.

The reply said recruitment expenses would rise based on Fatkat's plan to be more aggressive with Fowler travelling to recruit.

In another e-mail a Business New Brunswick representative asked about production costs and a line on the balance sheet that referred to deferred government assistance, which the company listed as a liablity.

The Fatkat representative explained production costs included things like expenses for music, post production and scripts.

They also explained the government assistance was money for grants from the government to help buy new equipment and their building.

"We didn't want to reduce the value of our assets so Grant Thornton (accountant) wanted us to treat the grants as a deferred liability, but actually it should be treated as equity since we don't have to pay it back."

Business New Brunswick and Fatkat exchanged several e-mails as the government department asked questions about information the company provided them.

On Sept. 11, 2007 Business New Brunswick asked Fatkat to explain how the bank would finance tax credits, to which Fatkat replied 90 per cent were financed through a revolving line of credit.

Business New Brunswick also asked what something called the HTF Contigency was and Fatkat explained it was the profit they would make on an unspecified project.

After they answered Business New Brunswick's questions, Fatkat asked if the department could give them any sort of timeline or status on an unspecified application.

In a Sept. 12, 2007 e-mail the documents show one the early mentions of Fatkat's Three Delivery project, which Fowler has since said played a major role in the company's downfall.

The e-mail listed funding sources for the $7.4 million project, which included $1.95 million from television network YTV, $1.99 million in tax credits, $1.2 million from Nicktoons, $511,000 from BBC, $80,000 from Nick Australia, $417,250 from Animation Collective, which left $1,251,750 unfinanced.

Fatkat said they planned to finance the rest through worldwide consumer products, for which they estimated they would raise $1 million to $2 million, mobile rights, which they expected to raise $50,000-$70,000, video games, which would bring in $20,000-$30,000 and something referred to as "worldwide territory", which would raise $200,000-$300,000.

The company planned to use several sources of funding until they could raise the unfinanced portion of the costs.

The temporary funding sources included $400,000 through monthly claims for workforce expansion, $160,000 in a lump sum from ACOA marketing funding and $66, 000 from RDC marketing funding.

Each funding source had a hand written check mark next to it, except for the RDC marketing, which had a line through it and $55,000 scribbled underneath it.

Fatkat also listed $575,800 under aged receivables on large productions from seven sources, which included a $210,000 loan guarantee from the province and $101,800 in tax credits due in 2008.

The e-mail noted Fatkat said they would have to start production that September to meet delivery for the next season and would have to start production with 16 per cent less funding than was needed to complete it.

"This application for a loan guarantee is very critical to Fatkat's ability to meet our cash flow needs."

Business New Brunswick's response in the same e-mail said another way to make it work would be to make the loan guarantee conditional on Fatkat getting YTV funding in place "on terms acceptable to the Minister."

It went on to say money wouldn't flow from the government until Fatkat and YTV had an agreement in place.

On Oct. 2, 2007 an e-mail with both the sender and recipient blacked out addressed issues about the deal's funding.

"I am dressed in black today as I knew I would be e-mailing you and black is the required colour," the e-mail said.

The e-mail went on to say the sender spoke with someone whose name was blacked out who had agreed to send them copies of signed agreements from YTV, Nicktoons, BBC, Nick Australia and Animation Collective, along with any documents to support the $1 million to $2 million in consumer products they planned to use to fund the rest of the project.

The reply from Fatkat had hand several hand written notes blacked out, but ACOA, BDC, $400,000 and $173,000 were still visible.

"Told him I was on it and would follow ASAP," the Fatkat representative said.

Province gave Fatkat thousands in film credits

Sept. 9, 2009

This is part 4 of our look at documents obtained from the provincial government under the Right to Information Act regarding its dealings with Fatkat Animation.

As Fatkat requested more help from the province, Business New Brunswick required them to submit several years' worth of financial statements.

For the year ending June 30, 2004, Fatkat's unaudited statements of earnings and retained earnings showed revenue of $209,199 over 217 days.

Fatkat posted a gross profit of $96,673, $128,210 in wages and salaries, $16, 355 in salaries and retained earnings of $38,343.

On the company's balance sheet they listed $48,618 under "payable to shareholder, non-interest bearing, no set terms of repayment" which is the same amount listed under "advances from shareholder."

Fatkat only had one shareholder, whose name is not known because it was blacked out in the documents from the province.

Under the New Brunswick film tax credit, the province gave Fatkat a tax credit up to a maximum of 40 per cent of eligible salaries, which reduced the production costs for a project called "And Yet I Blame Hollywood" by $28,298.

By 2005, Fatkat posted revenues of $349,549 with a gross profit of $151,454, but took a net loss of $20,563 and only stayed in the black because of earnings from the previous year, which brought 2005's retained earnings down to $17,880.

Salaries for 2005 increased to $90,600 while wages and benefits rose to $202, 355.

The company listed long-term debt of $36,265 in the form of an interest free loan from the Atlantic Canada Opportunities Agency with a five-year repayment schedule.

Fatkat also had a $10,000 line of credit, of which they borrowed the total amount and pledged a NB Film Tax Credit for security.

For 2005 the province provided a film tax credit that reduced production costs for projects called "Horseback Salad" and "Odd Job Jack" by $44,409.

By 2006 Fatkat's revenue was up to $613,532 for a gross profit of $392,819 after expenses, such as $166,566 for wages and benefits.

Salaries in 2006 jumped to $217,918 and after general and administration costs, under which Fatkat listed bad debts of $14,377, the company posted net earnings of $82,122.

With the earnings from 2005, Fatkat posted retained earnings of $99,902 for 2006, which included $20,000 listed under "loan forgiveness."

Fatkat still maintained a $10,000 line of credit, but it was unused at year end, although the company's loan from ACOA increased to $94,628, along with an $8,000 interest free NB Film Development Loan.

Another source of Fatkat's funding in 2005 was Business New Brunswick under their Technology Adoption and Commercialization Program under which they received $9,000 for equipment and software costs in July 2005 and $6,000 in September 2005.

In January 2005, the Miramichi Regional Economic Development Fund sent a letter to Fatkat to inform them of approval of up to $15,350 in funding for marketing activities, which they listed as a laptop, materials, promotions, an LCD projector, a Blackberry, tradeshow booth, tradeshows and travel.

Later that year, the economic development fund sent another letter dated June 8 to confirm approval of up to $32,000 in further funding for a portion of costs associated with marketing activities, such as travel, accommodations and food and entertainment on sales trips, along with $14,000 for event sponsorship, $20,000 for signage and billboards, $4,000 in "disposable giveaways", $15,000 in "high-end giveaways" such as jerseys and $5,000 in miscellaneous costs, such as business cards and brochures.

In July 2006, the Business New Brunswick Minister, whose name was blacked out, sent a letter to Gene Fowler, whose name was blacked out, to congratulate them on their nomination as the Ernst and Young Entrepreneur of the Year award.

"You are one of a select group of business people. You have proven leadership in challenging and prosperous times, and commitment to your industry and community," the letter said.

On Aug. 25, 2006, the Community Economic Development Fund sent a letter to Fatkat stating they would issue a $1,612 cheque to cover 50 per cent of the costs for a growth potential assessment.

The documents provided by Business New Brunswick also included a direction of payment letter to the department's project executive from Fatkat that authorized Business New Brunswick to pay out of an unspecified loan of $125,000 to the Business Development Bank of Canada on Oct. 24, 2006.

Fatkat also provided the province with receipts from suppliers during their renovations, as well as statements from credit card companies showing where they were spending money.

Invoices listed where Fatkat was spending thousands of dollars, with money going to many local businesses, including Downeast Mobility, Lounsbury Furniture, Allison's Manufacturing and Miramichi Bolt and Screw.

Visa statements also listed purchases, such as at Boston Pizza in Miramichi and O'Briens Irish Pub in New York, with notations of either a P, check mark or X next to each purchase, with no indication of what the notations meant.

Some of the more sizeable purchases included $134.95 spent at Friday's Roast Beef in Ottawa, which had an X next to it and $907.50 for a company called Elite Limousine Inc. in Ottawa, which also had an X next to it on the statement.

A few of the purchases had hand written notes with the words "no receipt" scribbled next to them, while a charge for $47.91 at the Chatham Subway had "personal expense" written next to it with both a check mark and X.

A statement from July 14 to Aug. 14, 2006 showed a $353.40 charge from a business called Bejewel in Fredericton, $116.77 at a 7-11 in Flushing, N.Y., $146.41 at a Barnes and Noble in New Jersey, $120 at Boston Pizza in Miramichi and $116.77 in cash advances.

A November 2006 statement showed a $360 at Choo Choo's, along with a $60 charge from GTA Airport Limousine in Georgetown, Ont., $60 from Gill Limo in Lasalle, Que. and four charges of $36.95 each NB Liquor in Miramichi.

Each charge had an X next to it on the copy of the statement.

Another statement included a $3.66 cash advance interest charge, although no statements showed when the cash advance was withdrawn or how much was taken.

Fatkat requested money before coming to Miramichi

Sept. 7, 2009

This is part 3 of our look at documents obtained from the provincial government iunder the Right to Information Act regarding it's dealings with Fatkat Animation.

On April 4, 2003 a Fatkat representative whose name was blacked out sent an e-mail to Business New Brunswick in which they talked about the possibility of relocating the studio to New Brunswick from Nova Scotia.

The e-mailer called two Business New Brunswick representatives, whose names were blacked out, "honourable and sincere people" and said how excited they were about moving to New Brunswick.

But the e-mail also said there were a few things standing in their way and they wanted to be open and honest about them.

One of the issues was a lease on an apartment until December, which the e- mailer couldn't break, but they were looking for someone to take it over and asked if any funding was available for moving.

A note scribbled after the request had a simple no for an answer, while other hand written notes said "ACOA EI program" and "tax issue."

The e-mailer also said they were looking to buy a house in Chatham, but the bank wouldn't approve a mortgage without a signed contract.

"I'm sure secured government funding or a big production contract would persuade them. Or is there something else that the government could do to help us?"

The e-mail went on to say there was concern about selling a big production contract and although there seemed to be a lot of potential business headed their way, the e-mailer said they were clearing out room in their apartment so they could work in the same location with an associate whose name was blacked out.

"But if something big does come in, say a production gig to produce 16 episodes of a animated series. We'll have to set up shop really quick. This is where I ask how fast can funding come through if a contract is on the line?"

The Fatkat representative mentioned the possibility of someone whose name was blacked out becoming a partner in the company and had several questions about the implications of being based in Halifax.

"NB wage subsidies obviously wouldn't apply but ACOA funding is maritime based is it not? So I can't see a problem. Or am I incorrect?"

The writer also asked if there were any programs they could apply for as soon as possible to keep the potential partner around until government funding kicked in.

"If things keep going at the pace they are we should be fine. These are just the variables we're looking at and I like being completely honest about my situations especially with the two people that will be playing a part in the Fatkat's future."

A second e-mail later that day asked if the unknown Business New Brunswick representatives could connect them with some of the companies they were talking about over the previous few days because Fatkat always had room for more projects.

"Things are very exciting for us right now. All we need is a long term contract to help push us in the right direction. Anything you could do to help would be most appreciated and never forgotten."

It went on to say they would send letters of interest as they receive them and asked if they would be of use to the representatives.

On April 9, 2003 a Business New Brunswick representative sent Fatkat an e- mail in which they said they spoke with someone from the Training, Employment and Development Department who provided details about the Self-Employment Benefit (SEB) program.

The e-mail told Fatkat to talk to someone whose name was blacked out, but the company representative had met during a visit to New Brunswick.

The Business New Brunswick representative thought it would be worth calling to let them know how far the Fatkat representative was in the employment insurance process.

"That way, he will be able to provide the guidance and information necessary so you can take advantage of the SEB program when you relocate to New Brunswick. "

An e-mail from a Business New Brunswick project executive, which was undated but spoke of being out of the office April 30, thanked Fatkat for sharing their comments and suggestions regarding the Fatkat Animation business plan.

The improvements listed by the executive were a letter from NBCC Miramichi outlining where the students are going for employment opportunities, a greater outline of animation firms in New Brunswick and Atlantic Canada, and letters of intent from potential clients.

They also said once the improvements were completed and a marketing plan drawn together, Business New Brunswick would re-engage Fatkat in the evaluation process.

The project executive addressed Fatkat's concerns about ACOA's history with information technology startups and said one of their colleagues had dealt with information technology files in the past and might have been able to move things along.

The documents included Fatkat Animation's one-time expenses for the first month as $60,498 for items such as computers, animation tables and leasehold improvements.

A separate note on the same page listed $42,098 for equipment, $5,400 for furniture and $27,680 for software.

Fatkat listed $2,779 for supplies including animation paper, tape and pencils.

One page with a heading called contract work listed monthly amounts next to six blacked out names for a total of $30,300.

Those contract amounts were included under payroll in the monthly expense figures, along with $2,500 for rent and $5,000 for possible travel costs.

Another page repeated the monthly expenses and had a typed side note titled "from balance sheet" and listed long-term debt as $17,100.

Under startup costs, Fatkat listed one-time expenses at $57,148, but the other figures remained the same.

A comment at the end of the financials said it would be more cost effective to switch to salaried employees once revenues reached $100,000.

On the company's starting balance sheet they listed a $17,100 shareholder loan, an $8,000 shareholder loan and $83,780 startup loan under liabilities and equity.

Under the company's profit and loss projection Fatkat listed a net loss of $2,211.30 for March 2003, but predicted the net profit would gradually increase every month up to $22,963.53 in March 2004, which was the last month listed.

Fatkat received millions for expansion

Sept. 4, 2009

This is part 2 of our look at documents obtained from the provincial government iunder the Right to Information Act regarding it's dealings with Fatkat Animation.

As Fatkat continued to expand, the company needed to move so they could keep up with the staffing and space requirements needed as a result of the rapid growth.

In June 2006, Business New Brunswick sent the first disbursement of $18,000 out of $36,000 contributed by the Miramichi Economic Development Fund for new equipment, software and renovations at the company's studio on Duke Street.

The funding represented 20 per cent of the project's total eligible costs and before they could receive any funding Fatkat had to submit proof of funding from other sources.

Those sources included $72,000 from the Atlantic Canada Opportunities Agency with the possibility of more, a $36,385 term loan from the Community Business Development Corporation and $15,000 in assistance from Business New Brunswick's Technology Adoption and Commercialization Program.

Advances came as Fatkat provided the province with documentation showing the company incurred eligible costs.

With each advance, Business New Brunswick set out a list of conditions, including one that prohibited Fatkat from making any announcements related to the funding without prior consent of the department's representatives.

It also stipulated Fatkat could not sell or transfer any assets related to the project for 36 months without the department's approval.

On July 25, 2006 Fatkat sent a letter to Business New Brunswick in which they informed the department of plans to buy the former Legion building on Pleasant Street at a total cost of $482,500 for the project, which included the purchase price and the cost of renovations.

Fatkat requested $125,000 from RDC for the project.

In a letter dated Sept. 13, 2006 and accepted by Fatkat Sept. 27, Business New Brunswick confirmed they increased funding to $161,000, including the original $36,000 for the Duke Street studio.

The company also included their income statement for the year ending June 30, 2006 in which they posted $172,169 in earnings retained by the company after expenses.

Some of the conditions were amended to show changes in funding from other sources, including ACOA's contribution of $72,000, CBDC's contribution of $31, 500 and $319,000 from the Business Development Bank of Canada.

In November 2006 Fatkat sent a letter to then Business New Brunswick Minister Greg Byrne to request additional assistance for further expansion.

The letter, signed by a Fatkat representative whose name was blacked out, said the company employed 55 full-time, salaried employees and had outgrown their 3,500 square foot space.

"Due to the rapid growth of Fatkat Animation Studios, management anticipates that Fatkat will outgrow the new building within a year. If the company was to turn down projects due to limited capacity, it would be a crushing blow to Fatkat, a hot commodity in the domestic animation market."

The letter went on to say the company was on the eve of having their own properties green lit, which would require between 50 to 100 new employees who would relocate to the Miramichi, but the company didn't have enough room for the expected new staff.

Fatkat's plan called for the addition of a third floor and a restructured floor plan to handle the overflow of work, with Miramichi Engineering drafting the plans.

In the letter, the company representative said typical Fatkat employees were under 30-years-old, single and from western or central Canda, and added the company was also able to draw New Brunswickers back to the province.

"The Miramichi community has been able to enjoy the presence of young people around town, spreading their disposable income accordingly and volunteering with numerous local organizations."

Fatkat requested $350,000 in assistance from the Regional Development Corporation's Miramichi Prosperity Fund and New Northern Initiative.

The company listed the total cost for the expansion at $1 million, including $239,000 for the building's purchase price, $366,000 for renovations to the existing structure, $150,000 for the addition, $100,000 for air conditioning and heat upgrades, and $145,000 for computers, software and desks.

Fatkat planned to contribute $500,000 on top of $125,000 RDC already contributed for renovations.

Business New Brunswick responded to the letter by telling Fatkat Business New Brunswick would need a business plan before department staff could review and identify possible funding sources.

A Business New Brunswick project executive whose name was blacked out responded to the submitted business plan and said three years of financial statements prepared by an outside accountant, three years of forecasted financial statements on annual basis with cash flow forecasts on a monthly basis, resumes for the company's senior management and a completed application, which the company provided.

In a letter dated Jan. 2, 2007, an unknown Business New Brunswick project executive wrote to Fatkat to acknowledge receipt of a request for an additional $136,279 in assistance to purchase new computers and software.

The letter said the department had not yet addressed the previous request for funding on the $1 million project and requested a revised business plan in order to proceed with the evaluation.

Business New Brunswick sent Fatkat two letters, the first dated Dec. 6, 2006 and the second dated April 24, 2007, with both stating the company would need to qualify for funding from other government programs before they considered the request for money under the Miramichi Economic Development Fund.

Neither letter referenced which funding request they were referring to.

In a June 12, 2007 letter Fatkat said they had a lot of new projects coming with the potential to double their employee needs.

Fatkat requested more funding for expansion to help them accommodate the new employees they planned to hire.

"As the new projects are due to begin shortly, it is urgent we begin expansion as soon as possible in order to be prepared to meet the required start dates and employee needs."

The letter listed the expected cost of expansion at $504,190.81, with funds from an ACOA loan of $250,000, $129,190.81 from Fatkat and $125,000 from the Miramichi Economic Development Fund.

Another undated letter with 2008 projections referred to an application for an extension to the project to buy $435,000 worth of equipment, including servers, software and computers.

A scribbled note on the page said the application was "not yet approved."

Another letter dated June 25, 2007 requested financial assistance to help accommodate new employees they would need to hire as the company expanded.

The total value of the equipment and software Fatkat said they needed was $578,539.87, which they planned to finance through a $289,269.93 ACOA loan, $144,634.97 from the Regional Development Corporation and $144,634.97 from Fatkat.

A letter dated Aug. 29, 2008 informed Fatkat Business New Brunswick had approved a non-repayable contribution of $107,500 under the Miramichi Economic Development Fund to help the company buy equipment and carry out improvements to the building.

As with other expansion financing, Business New Brunswick required proof of financing from other sources, including $190,750 from ACOA, $32,500 from the Regional Development Corporation and a line of credit worth $92,693.02.

Province helped Fatkat attend conferences

Sept. 2, 2009

This is part 1 of our look at documents obtained from the provincial government regarding it's dealings with Fatkat Animation.

New details about Fatkat Animation's dealings with the province have come to light thanks to a Right to Information Request by the Miramichi Leader.

More than 1,300 pages of documents from Business New Brunswick show correspondence between the company and the government in their dealings with the province over financial support.

In the first part of a series, the Miramichi Leader will look at expenses incurred during trips to trade shows and conferences, a portion of which the province reimbursed Fatkat.

As part of their marketing strategty representatives from Fatkat took part in several animation trade shows and conferences around the world over a span of several years.

The goal of the trips was to meet potential clients, make connections and boost the company's sales by showcasing their product at the conventions.

Between 2004-2006 Fatkat got back from the provincial government $21.326.72 in costs from attending conferences and bringing in potential buyers.

Fatkat applied for and received the funding through Business New Brunswick's Trade Assistance Program and Rural Exporter Program.

The trips included conferences in London, UK, Ottawa, Dallas, three in New York City, two in Banff and two in Cannes, France.

In a letter from Business New Brunswick dated Sept. 1, 2005, the department's trade executive, whose name was blacked out, explained Business New Brunswick would share the conference's costs with Fatkat, up to 50 per cent of their total costs.

A handwritten note by someone whose name was also blacked out wished Fatkat luck.

"We wish you continued at this huge conference," the note said.

In a letter describing the conference in Cannes, a Fatkat representative whose name was blacked out on the letter, described it as a prestigious conference in their industry, which would allow them to reach world markets and meet with executives.

At the time, Fatkat listed their total sales as $345,710 for 2005 and $204, 686.29 for 2004.

In the case of the Oct. 17-21, 2005 conference in Cannes, Fatkat projected incremental sales from the project at $1.4 million in the first year and $1.5 million in the second.

As part of the cost sharing programs, Fatkat was able to claim part of the return airline tickets, the conference registration fees and per diems of $150 per day.

Several of the letters from Business New Brunswick to Fatkat confirming the department's approval of the submitted claims included hand written notes.

"Your on your way to success; keep up the good work!" said one note.

Another note on one of Fatkat's Trade Assistance Program and Services evaluation report had the word "wow" scribbled next to a comment about the potential for 30 new hires.

In an e-mail from Fatkat to Business New Brunswick from Feb. 1, 2005, they forwarded a message from the Canadian Consulate General, which invited Fatkat to co-host the Canada Networking Reception at the KidScreen Summit in New York and asked if the TAP program would cover 50 per cent of the costs.

Business New Brunswick's senior trade executive replied they would if there was room in Fatkat's $15,000 limit for the program.

"This looks like and [sic] Ideal opportunity to make contacts."

Another e-mail from Fatkat to Business New Brunswick dated July 6, 2005 outlined several projects they were working on with a total potential value of $9.8 million.

One project involved a one minute animation test and another was moving ahead toward production, while the rest were still in the negotiation phase.

Fatkat projected total staff requirements of 210 people if all the projects moved into production.

The response from Business New Brunswick asked Fatkat to keep them updated on their success with the TAP program and other Business New Brunswick trade related service for the department's weekly report to the minister and senior management.

"It consists 'entirely' trade success stories from companies like yours," the e-mail said.

Fatkat's evaluation reports detailed the products or services promoted during the projects, estimates of new sales and the number of potential customers contacted, whether or not participation will lead to increased sales or new job opportunities and outlined activities the company planned to undertake to follow-up on the project.

On their Trade Assistance Programs and Services evaluation reports Fatkat provided the province with estimated sales figures stemming from the conferences.

They also included estimated sales figures on their funding applications forms.

The numbers did not always match up, like in the case of a conference in July 2004 for which they estimated on their evaluation report potential sales of $60,000 in the first six months after the conference and $100,000 in the 12 months following.

For the same conference, the application stated estimated sales of $30,000 for the first year, $60,000 for the second and $40,000 for the third and fourth.

A similar sitatuation occured with the report for a June 2004 conference, which saw estimated sales of $10,000 for the first six months and $50,000 for the first year, while the application had estimates of $70,000 for the first year, $200,000 for the second, $350,000 for the third and $500,000 for the fourth.

The company predicted the conferences and incoming potential sales would generate about $22 million in possible sales between 2004 and 2010, although the totals vary depending on which of Fatkat's figures are used.

Fatkat equipment on auction block

Aug. 28, 2009

Fatkat's assets got a little skinnier yesterday at an auction of the animation studio's equipment.

Computers, monitors, bookshelves, filing cabinets, a barbecue, pool table and foosball table were just some of the items on the auction block.

Fatkat owner Gene Fowler said he knew the sale was coming for a few months, but it wasn't a big deal to him and the equipment served him well over the years.

"Great stuff. I'm sure the Royal Bank will get all their money back."

Although the company received millions of dollars in support from various government agencies, the company was not able to find enough contracts to repay its debts and folded in May.

At the time Fowler said the company would need six to eight years of consistent revenues of $5 million to $6 million to repay all outstanding debts.

Prior to Fatkat's demise, Fowler announced he was forming a new animation studio called Loogaroo, which would use a different business model than the previous studio.

Although he said Loogaroo is just getting started up, he said they bought some of the Fatkat gear from a private sale with the auctioneer prior to yesterday's auction for the rest of the equipment.

"I'm sure it will go to a happy home. There's still a lot of good stuff over there. If there's any animators I'm sure they'll get some good stuff."

As for what he thought of the last remnants of his company being sold off at auction, Fowler said it was just a business.

"I've already moved on. I moved on a long time ago. Businesses come and go. It's the nature of it. No business lasts forever, of course there are a few businesses that have lasted a long time, but no businesses last forever."

Fowler said Fatkat owed a lot of people money and although he didn't know the exact amount, it was well over $1 million.

In June he declared personal bankruptcy to help expedite the proceedings, he said.

"I'm absolved of all the debt."

Fowler said there are still some people in the Miramichi he feels connected to that the company owed money, and he plans to repay them, despite his bankruptcy.

"It's going to take me a while, but I'm still going to do it. That's just my personal obligation, my moral obligation."

But he won't be able to repay the money owed to different organizations like the Atlantic Canada Opportunities Agency because of the large amount owing, he said.

"ACOA knew what they were getting into when they gave me all that cash and everybody else did too. I used that money for exactly what it was intended for and that was buying capital equipment or marketing or putting people to work and I did that for a very long time without interruption."

Fowler said it's not the first business that has folded after receiving funding, and he is still friends with the people at ACOA.

"They hold no grudges and nobody else does either."

Business New Brunswick was one of the government departments to help Fatkat and had a $500,000 loan guarantee with Fatkat.

Department spokesperson Ashley Bursey said she wasn't sure if they were going to get any money out of the sale.

"It's really too early to tell right now."

The bank is in the process of liquidating Fatkat's assets and Business New Brunswick won't know if they will get any money until they are done.

"We really won't know until that's all finished."

Money wasn't the goal, says Fatkat owner

May 15, 2009

A few weeks after news of layoffs, Fatkat Animation Studio's owner has announced the company will declare bankruptcy.

About two weeks ago, Fatkat laid off all but three of its employees as they struggled to find enough contracts to keep people working.

On Wednesday, Fatkat founder Gene Fowler said some of the company's government supporters were willing to hold off as long as necessary, but creditors weren't.

"The talks with the creditors didn't go as we had hoped."

Since 2003 Fatkat received more than $2 million in aid from both the provincial and federal governments, including a $500,000 loan guarantee from Business New Brunswick and another $500,000 loan from the Atlantic Canada Opportunities Agency, of which $479,879 is still owing.

In 2006 the province gave Fatkat $125,00 for new equipment and in 2007 the Post Secondary Education, Training and Labour Department gave them $370,000 to expand staff.

The company also received an unknown amount in New Brunswick film tax credits, with at least $405,842 in 2007. The Finance Department will not release the rest of the figures because of privacy reasons.

Both Fowler and provincial representatives have cited the current economic downturn, which lead to a lack of contracts for the company as reasons for the financial problems.

Fowler said the company would need six to eight years of consistent $5 million to $6 million in revenues to pay off all the outstanding debt.

"It just didn't seem worth it. We were tired. We have been going full steam some of us for 10 years and we are tired so we felt that if we were going to continue to work together as a team, and we do want to, that it would be best to do it with a fresh start."

During a meeting of business leaders in Fredericton Tuesday, Fowler told the crowd the company reached all its goals, but forgot to set a goal to make money.

When asked how a company could overlook the goal of making money, Fowler said it was an important aspect of business if money is what you want.

"Money has never been a goal of mine. It just hasn't."

Fowler said he wanted to do something different for the animation industry to create a place where artists could go to work, live as slow paced life and not worry about paycheques, which is different from what most studios have to offer.

But the company had to make sure they had work for the staff and money to pay them, which they did for five years, he said.

"The fact of the matter is we spent it as quickly or if not quicker than it came in to keep people employed."

Fowler said they knew something was wrong with the business model in 2007 because they were moving too fast. That was when they brought in an external consultant to give management and executive training to try and fix the problems at Fatkat.

But things were moving too fast to fix things while they were still working on contracts and by January 2008 he realized they would have to stop everything to fix the business model they were using, Fowler said.

"I couldn't just halt in the middle of a production to fix the business model."

Despite the problems within the company, Premier Shawn Graham announced a $500,000 loan guarantee for Fatkat when he was in Miramichi in August 2008.

Fowler said the executives all know how to move the business forward to make it profitable and create a good working environment that caters to artists.

"We just can't do it with Fakat. Fatkat, it's taken on too much water."

The company made some mistakes along the way, one of which was retaining staff even when there wasn't work, he said.

"That was a huge no-no, but you don't see that when you're doing, you know $8 million a year and you have 120 people working for you. Things are going so fast you just don't see that it's a really silly mistake."

Fowler said that model would only work if they had a client that went in with a long-term multi-year contract to give them steady work.

"Before we would retain staff, whether we had the agreements or not, and just hope for the best and we did a damn good job of keeping everybody employed, but it was a failed model if there wasn't any work at the exact right time."

Once he emerges from bankruptcy, Fowler said he wants to start a new animation studio and there is not doubt he could maintain one in the Miramichi.

There are a lot of ex-Fatkat animators still living in the Miramichi with more than enough for projects he would bring in to the new studio, he said.

"Whether they're all going to stay, I doubt it. If there's work they're probably going to stay."

Fowler said his team was meeting Wednesday to decide what to do to get the new company going and put the details together for the new business.

"My first goal is to get work in as fast as possible to establish a new studio and put the great, amazing team that I had here at Fatkat to work as fast as possible."

Despite his plans to move fast on a new business, Fowler said he didn't know how long it will take him to get it up and running.

"I have no idea what's going to be happening with Fatkat at the moment. I have some inclination what might be taking place in the next few weeks, but I don't know how occupying it's going to be on my time."

Fowler said the company brought a lot of people back to Miramichi and spent about $7.5 million in payroll in the last three or four years in downtown Miramichi.

"I know people want to know where their tax money went. Guaranteed we used it for exactly what it was meant for and that was to create jobs and we did that. We did a very good job of that."

But the new studio probably won't see staff levels as high as Fatkat had at its peak of 120 in 2007, he said.

"If I'm running the shop, which I probably will be with my executive team, we all agreed that that kind of staff, it's just too hard to recruit and it's too hard to maintain so what we'll probably do, and I mean maximum size that we'll get, is probably 50 and that's just peachy by us."

Fowler said there are different ways to fund a company and he doesn't expect to borrow money when he starts the new studio.

"I doubt that I'll be starting it with any credit because I'll be going personally bankrupt as well, but I can start it with a project. All I need is one project to start a company and I can't see that being a problem at all. It's just a matter of time."

The government money Fatkat received helped and brought cash in quickly to help them grow faster, but they won't look for government money for a new studio, he said.

"I don't think we need to. There's smarter ways to fund a company."

As for the animators that are still in the Miramichi, Fowler said they will only stay here for so long, although he talked to some who said they are willing to wait.

"I've got to do my part to look for work. I'm sure they're looking for work too."

Acting Business New Brunswick Minister Jack Keir said he doesn't know if all or part of the loan guarantee will be called in and the department will follow the process as it goes forward.

"We'll let the process unfold through bankruptcy and play it out from there. I guess what I'd want to just emphasize is it's a good company. It was very innovative. It's the type of company that we'd certainly like to do business with in New Brunswick and the economy caught up with them."

Although he said he didn't want to speculate on whether or not the province would give a new company under Fowler any money, they will talk to anybody who has a good business plan or makes a good business case.

"We'd always talk to them about what those opportunities will be and frankly if it's good for New Brunswick and if it's a good business case and it's good for New Brunswick then Business New Brunswick will always be willing to look at it."

Miramichi Centre MLA John Foran said he was disappointed to hear Fatkat was filing for bankruptcy and was surprised to hear it happened so quickly since he first heard about their layoffs.

"It's no surprises there are companies that are failing, although Fatkat, the last information I had on them was that they were restructuring and downsizing and because of that I actually had no reason to believe they would go to the step of declaring bankruptcy."

Miramichi-Bay du Vin MLA Bill Fraser said he was also disappointed to hear about the bankruptcy and it was bad for the city to see a company close.

"It's bad for the community and the people that worked there and the businesses that also did business with them and the people that worked there. You know, it's just bad all around."

Financial woes force Fatkat move

April 29, 2009

Despite extensive government funding the well has been running low at Fatkat Animation Studios.

Business New Brunswick spokesman Ryan Donaghy confirmed yesterday Fatkat's financial situation has forced it to reduce its number of staff.

"It's my understanding that they've reduced staff levels to control costs and stuff. It is my understanding that at this point they are still in operation and have not vacated the building."

Despite initial reports the business had closed, Fatkat owner Gene Fowler said the animation studio hasn't shut down.

"We're still there."

The company has moved out of its location at the Legion hall in Newcastle and is switching locations because it can no longer afford to stay in the building, he said.

"It's just hard times at the moment. We're between projects and I can't afford to retain that type of facility."

A call to Fatkat's office went unanswered Tuesday and an automated recording gave no indication of any changes, but when asked when the decision was made to move to a new location Fowler said the company has not moved in yet.

"We're just in between. We can no longer afford that building."

Over the years Fatkat has received substantial amounts of money from the province through grants and loan guarantees.

During the Bernard Lord era, they received $83,000 in 2007 and an additional $77,000 from the Atlantic Canada Opportunities Agency.

Under the Shawn Graham Liberals, $125,000 went to Fatkat in 2006 for new equipment at its Newcastle office and another $370,000 to help expand staff in 2007.

On top of that, the Miramichi Regional Economic Development Fund gave Fatkat $410,130 for seven projects. In total the province gave over $1.06 million, plus a $500,000 loan guarantee from Business New Brunswick.

Business New Brunswick would work with the company and their bank in the event Fatkat is unable to repay money owed to lenders, Donaghy said.

"Certainly we'll be working with those proponents to identify the status of that guarantee and look at what portion of that guarantee might need to be accessed by the bank."

But the money hasn't always been coming in, with the Business Software Alliance levying a $36,000 fine against Fatkat for using unlicensed software.

Initially Business New Brunswick had reported Fatkat was closed, but Donaghy later confirmed the studio is still in business, but with a reduced staff.

"It's our understanding they are basically down to a skeleton staff, but they are still operating now. The specifics and detailed information would obviously have to come from the company."

Public Safety Minister John Foran said he had heard rumours about the company moving, but as of Tuesday morning he hadn't seen any official documentation.

He did say the company provided a lot of employment and brought a lot of new people to the region.

"Let's just hope they're going through a rough time and they're going to be able to survive it."