Durham's Carolina Theatre discovers $1 million deficit
City officials are working with the group that manages the Carolina Theatre to better understand how the historic entertainment venue has amassed nearly $1.1 million in debt.
“What they have sent, it’s not all that clear, quite frankly, and we just need our finance people to meet with their finance people to go through the numbers,” City Manager Tom Bonfield said.
On Monday, the nonprofit’s leaders announced they had run up an additional $800,000 in debt since July 2013, when they and the rest of the board thought the city-owned theater was making a profit. The city pays Carolina Theatre of Durham Inc. $654,000 a year to run the complex on Morgan Street.
Previous information released by the nonprofit had indicated the organization ended the 2013 fiscal year with a $68,730 surplus, ended the 2014 fiscal year with a $41,000 surplus and cut its long-term debt to $224,909.
The numbers marked the first back-to-back profitable years since fiscal years 2007 and 2008, the organization reported.
But the numbers were wrong.
In an interview, chief executive officer Bob Nocek and board president Scott Harmon said they learned earlier this year they were making decisions based on faulty accounting.
They became aware of the errors in May when the state put a levy on the organizaton’s bank account seeking unpaid sales tax on ticket sales, they said. The nonprofit owed about $155,000, which Nocek said they paid by July.
A subsequent examination of the financial data by an accounting firm and management indicated the losses were due to “errors and omissions in our financial reporting,” the men said. There was no intentional misrepresentation or fraud, they said.
“It was just done wrong,” Harmon said. “It was just bad.”
Nocek joined the Carolina Theatre staff as vice-president/chief operating officer in 2009 and took over in 2010. He expanded concerts and other live performances in the 1,000-seat Fletcher Hall from about 60 events per year to over 100, added weekend matinees in the cinemas and increased rental activity.
By the end of the fiscal year this past June, the theater had generated a record $5 million in overall revenue, up from $3.5 million two years earlier.
But while more money was coming in, bills weren’t getting paid.
Nocek and the board added programs, hired additional staff and made decisions he says he would not have made had he known the theater’s true financial position.
“There were things we should have seen along the way,” Harmon said. “Bob should have known this was going on, and the finance committee of the board should have known this was going on.”
Financial oversight included management by then finance director Sam Spatafore, who started in April 2013, according to his LinkedIn account profile. Harmon and Nocek declined to discuss or even confirm Spatafore was finance director. All they said is that the finance director no longer works for the nonprofit.
Efforts to reach Spatafore by phone and through his linkedin.com account Monday were unsuccessful.
Spatafore had previously worked as an arena accountant for the PNC Arena from October 2011 to March 2013, and as a controller for ARKS Funding for four years where he managed $31 million for church construction projects among other duties, his LinkedIn profile states.
For two years ending in July 2005, Spatafore was director of finance at Alltel Pavilion at Walnut Creek, where he worked with Bob Klaus, current manager of the Durham Performing Arts Center and former vice president and general manager for Clear Channel Entertainment, which managed the pavilion, according to his LinkedIn profile.
“I recommend Sam in the highest fashion and if given the opportunity would hire him at a moments notice for my current business,” Klaus wrote on Spatafore’s profile.
Efforts to reach Klaus for comment Monday were unsuccessful.
Harmon said theater went from having a bookkeeper and an outside accountant who would bless the figures every month, to hiring a director of finance. Every month, the finance director met with Nocek and the finance committee, four board members with accounting and finance backgrounds, and reviewed the finances, Harmon said.
The organization’s finances for the fiscal year 2013-14 were audited, but no concerns were raised, Harmon said. A new audit firm has been selected and previous financial disclosures and audits will be re-examined.
The nonprofit has also hired Thomas, Judy & Tucker to manage its finances.
Asking for help
The city extended its contract with the nonprofit last year to run through 2024. The contract includes city reviews twice a year. In addition, Nocek said, Reginald Johnson, the city’s Community Development Department director, attends most board meetings. City Councilwoman Cora Cole-McFadden also sits on the board.
To address short-term cash flow shortages, the board has asked the city to advance the organization about $75,000 from each of the remaining eight years on the contract – or $600,000.
Harmon said it’s not unusual for nonprofit arts organizations to carry deficits and that Nocek’s job – his contract was extended last year through June 30, 2019 – is not in danger.
“We live hand to mouth and on the edge of our cash flow,” Harmon said.
Moving forward, Nocek said, the nonprofit plans to pay down the debt by achieving long-term profitability.
It has cut full-time staff from 22 to 18 through attrition, one layoff and one staffer who went from full time to part time. It will also scale back live events to between 60 and 70 per year and take fewer programming risks.
Bonfield said after the city’s and nonprofit’s accountants meet in the next week or so, he will meet with the nonprofit’s finance committee “to talk about what their proposal is moving forward and whether or not we think the request that they have made is ... a viable solution to their financial problems.”
The City Council will likely discuss the issue in early 2016, he said.
“We just have a lot more questions,” Bonfield said.
‘We can turn this situation around’
The Carolina Theatre will celebrate its 90th year in 2016 with a series of special events, including a 90th Anniversary Celebration Concert Jan. 30 featuring Kristin Chenoweth, the original Glinda in the Broadway hit “Wicked.” In part of a statement Monday, theater officials said they do not expect their newly discovered debt to affect fans’ theater-going experience.
“Although we will make some adjustments to programming over the next few year while we work through this difficult situation, we will do so in a way that is barely noticeable to our fans, but allows us to become profitable again. Our concerts, comedy and cinema programming is the reason Durham has come to love the Carolina Theatre as it does, and we intend to fully continue to deliver the same quality performances we have over the past few years. We are confident that we can turn this situation around in the coming years.”