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.
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