Shakespeare & Company's Fiscal Crisis

Catastrophe or Bump in the Road

By: - Oct 15, 2009

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Four and a half months ago Tony Simotes hit the ground running taking over from founder, Tina Packer, as artistic director of Shakespeare & Company. Based on the grim findings of a report by the Nonprofit Finance Fund, commissioned and paid for by the Massachusetts Cultural Council, during a press conference to discuss the findings this week, it appeared that Simotes had hit the wall.

Since coming on board in June it has been a familiar sight, the Tony and Tina act, to see them bound on stage before or after openings during 18 record breaking productions, and appeal to the audience for contributions. The message entailed the final increment of a $10 million capital campaign. When $1.2 million is raised (by June of 2010) that would activate a pledged donation of $800,000 from the Kresge Foundation. Since June the company has taken in $200,000 in mostly small donations.

Last summer, we posted an interview with Simotes, and two reports on a meeting with Packer. We tried to provide an overview of the history of Shakespeare & Company, its  transition of leadership,  the acquisition and development of  property in Lenox, and a long term prognosis. Packer provided a detailed document on the complex relationship between S&Co. and its initial landlord, The Mount. There were no updated documents since the purchase and move to the campus of what was originally the Lenox School for Boys. We obtained the most recent IRS report filed with the charity desk of the Attorney General's office.

While research indicated fiscal issues we were surprised by recent news reports that S&Co is $10 million in debt. For the past five years (the time frame of the report) there has been a rising operating deficit that now stands at $4.7 million. The report states that S&Co. must raise $2.3 million to cover its operating expenses. Part of the strategy for survival entails $8.15 million in "replacement funding for balance sheet restructuring."

Dipping into capital funds and donations to balance the books  has been a quick fix leading to long term disaster. As Laurel and Hardy used to say "Another fine mess you've gotten us into."

Of course S&Co is not unique in having been caught in the downturn which has toppled giants on Wall Street and caused restructuring of  corporations like General Motors and Chrysler. During the boom business expanded, added staff, and assumed debt. Individuals who bought homes for $200,000 saw rapid increases in value to $250,000. But now that home is worth just $150,000. For non profits that ersatz home owner, facing declining  net worth and a devalued portfolio, is not willing to make contributions to capital campaigns.

In the case of S&Co. a significant increment of pledges were either not honored or reduced by as much as half. Charitable sources from government, foundations, and private sources have either eroded of been eliminated. For the Lenox based theatre company this occurred over the past decade when $18 million has been spent for property acquisition, renovations, and transition costs. Spending and borrowing all that money also made it impossible to meet the annual operating budget of $5 million.

As long as the money was coming in through donations, pledges, grants, and ticket sales nobody was paying attention to the bottom line. Then, as has happened for the largest corporation and non profit, to the average wage earner, the well went dry. The key indicator, The Dow Jones Industrial Average, toppled from a record high in the 14,000s to a free fall in the mid 6000s last March. Since then, there has been a record setting recovery which broke the bench mark of 10,000 just yesterday.

That provides some breathing room and reasons to be more sanguine. If you didn't panic or sell off, and dollar cost averaged, portfolios should be back some 50% from the bottom in March. That is still 50% short of the unrealistic high of delusional wealth. But we are on track for splitting the difference  over the next couple of years. Not all analysts, however, agree on this prognosis.

The good news is that individuals, corporations and non profits have restructured. Cutting costs and reducing redundancy increases profits. In the case of S&Co.  a step toward balancing the books.

This was the message of Simotes  and his mantra of "The Way Forward" during a  detailed meeting with the media to analyze the report. This did not prevent sensational reporting. " 'Bleak Picture' in Lenox" was the front page headline in the Berkshire Eagle.

During a time of restructuring for S&Co. perception and image is crucial. Potential donors are unlikely to put money into a sinking ship.

The final line of the NFF report states "Potential Alternatives- dissolution or bankruptcy." But the media failed to add an important statement. "This assessment report does not recommend, advocate, or suggest any course of action on the part of MCC,  S&Co., the Commonwealth of Massachuetts or any of its authorized entities or individuals, S&Co.'s bank lender, or other creditors or any other interested partyÂ…"

The report states that, if no action is taken, it May result in dissolution or bankruptcy. But the report is not recommending these drastic actions; or suggesting them to creditors. Simotes was emphatic in stating that no such actions have been initiated.

The report, with its harsh but sharply defined realities, was initiated at the request of Simotes, as a part of his leadership transition to provide a "snapshot of the checkbook." The intention was to have a firm grasp of the financial status of the company. The report has opened the books to the board, staff, donors, community and the media. Tough as it is we are now all on the same page.

During the press conference Simotes was joined by Packer as well as Richard Mescon, the Chairman of the Board, and Nick Puma, Managing Director. Mescon often came to the podium to address specific financial and structural questions. Packer offered insights on the nature of theatre management as well as the status of the campus and its properties. Puma listened but offered no comments.

In his remarks Simotes often returned to the mantra, and possible title for a marketing campaign "The Way Forward." This was an umbrella for restructuring to face an immediate crisis as well as to establish long term policies.

The business model that has prevailed through the life of the company is no longer viable. The former plan entailed being a tenant of The Mount. That when something is broken you go to the landlord. Having moved to the Lenox campus S&Co. is now the landlord. There are new priorities to secure insurance, fix leaks, plow sidewalks and preserve an eclectic mix of functional as well as deteriorating buildings.

"We are not outdoors anymore stringing lights in trees or shooting off flares from the roof of a building" he said. "It's like moving into a new house. What do you fix and repair? Do you take a wall down? We are now indoors like any other theatre. You are coping with structures and new issues as well as making art."

He conceded that "This is a bleak picture and I am not happy." But he conveyed that he is up to the task, and the right man for the job. "I needed a quick picture of the check book; the cash flow, debt, and deficit spending. My job is to right the ship. To put it back on track. We can no longer run year to year deficits. It's not right. You can't keep going back to donors. We need help but we are not looking for a bailout. We are looking for the best options for the company to succeed. Like every other non profit we got caught by the downturn."

The bad habit of spending more than was taken in goes back a number of years, arguably, beyond the five years of the study. It was masked by a time of overall prosperity. But there were issues to be dealt with. The global downturn just accelerated that process.

Part of the step forward entails negotiations with Century Bank in Medford which are ongoing. Simotes stated that he wanted to take advantage of the "cheap money" that is available. Banks are currently offering historically low interest rates. Regarding debt service Simotes said that "We can only service debt so much each year. I'm willing to look at it long term. Not that we need to pay it off and then everything will be just fine. We need to work on our aesthetic product as well. We are not hitting the streets with a tin cup and yelling 'fire.' That's not the point. We want the curtain to part so we can see the check book. The ice is thin."

Looking forward he said "If you look at the operating deficit year after year it has to stop or you fold."

During most of its history S&Co. was a tenant and the landlord fixed the leaks. But Packer interjected to state that as a result of spending $18 million over the past decade "We now have something we didn't have before. This building (referring to the building that houses the Bernstein Theatre) was bleeding money. It bankrupted the three previous owners. That had to be solved. We had to get this under control. Nick Puma, God bless him, took this on. We got it built quickly and for just $8 million. It was very quick but it also got us in trouble. This building has to be dealt with. It is an incredible plus for us."

The question was asked whether, even before the downturn of the past couple of years, the company had been cutting it close? The emphatic answer from Packer was "God yes."

One source of revenue "That we could count on year after year was the $1.5 million taken in just before the opening season in education programs." Packer explained that they were held at participating campuses. But with ownership of property there was a change. Instead the program was shifted to mid season and students were housed on site in dormitories. That meant that staff and visiting actors were shifted to several rental properties at a cost of $100,000. It was also necessary to rent cars to move them about. The program will be shifted back to open the season in 2010.

When the record program of 18 shows was announced last winter Packer told the media that by staging all those performances the company intended to play and earn its way out of a bad economy. That has been partly effective.

In a bad year, when most arts organizations have faced declining ticket sales, S&Co has edged forward. So far it has sold 51,000 tickets compared to 49,000 for 2008. Hound of the Baskervilles is still running and is a great success. Elizabeth Aspenlieder will star in Les Liaisons Dangereueses  when it opens in January. Her one woman performance in Bad Dates sold well during its winter run. It was the first attempt by S&Co. to present year round programming.

Packer's bold scheme generated ticket sales but also created problems which Simotes articulated.  "It meant we were having openings every week" he said. "So I got to meet a lot of you (media). Some shows you liked and some you didn't. But it also created gaps between productions and there were nights when both theaters were dark during high season. So we plan to reduce the program to ten shows with longer runs."

Part of Packer's strategy was to remount S&Co. productions. The season opened with a brief run of Romeo and Juliet with a young cast that had been touring for several months. Last summer's hit production of Othello, starring John Douglas Thompson,  was restaged. But with four cast changes and extra work for its director, Simotes. Thompson is currently starring in The Emperor Jones Off Broadway. He is expected to return in another Shakespeare play next summer..

There was also a rerun of Hamlet. As well as two of the three plays in the Diva Series, Packer in Shirley Valentine as well as the popular Golda's Balcony.

Most, if not all, of the plays represented bare pipe productions with minimal sets. They were designed to be cost efficient. Although Aspenlieder won the Norton Award for the one woman show Bad Dates its more elaborate set could not be adapted for the Diva Series of one woman shows.  When I asked about that last summer Packer told me that there had been many meetings about solving the problem. She assured me that the winter production of  Les Liaisons Dangereueses will consist mostly of costumes and furniture. Meaning that it will be likely to have a summer rerun.

Taking over as artistic director Simotes commented that he wants to work with some of his friends. "Like Olympia Dukakis who came in recently for a reading" She is likely to appear next season. "We will also have a new play by Joan Ackerman." Without losing focus on Shakespeare and classical theatre Simotes will put his own stamp on the company.

A member of the Lenox Chamber of Commerce made a statement rather than asking a question. He emphasized the importance of the company to the economy and cultural status of the community. But for S&Co., and the two prior owners of the property, restrictions and variances have been a part of the problem.

The greatest asset of the company is its 32 acres of  Lenox  property. Simotes discussed ambitions to bring in suitable tenants. It is a business model that Mass MoCA has used to make its vast campus help to pay bills. But North Adams does not restrict diverse commercial tenants on the 14 acre site of the former Sprague Electric. Lenox, as things currently stand, will only allow occupancy for cultural and educational use. That critically reduces potential tenants and business partners. If Lenox is sincere in supporting S&Co. it will have to look at those restrictions.

I asked Simotes if developing the historic Stanford White building complex in the heart of the campus was a part of the development plan. "Absolutely" was the response, but not immediately. Given the extent of the fiscal crisis I asked if it is wise to defer such a crucial piece of the puzzle?

The general response was that there are a lot of ideas and plans in the works but that the company must first meet immediate issues and obligations. Including making payroll although there have been staff cuts and an across the board 10% reduction of salaries.

"For the past ten years the company has grown and expanded" Simotes said. "In the past we wondered whether the actors would get paid. As we grew that meant taking on staff. The head of each program required assistants. Not only did everyone get paid we also offered benefits." Not keeping up with those rising costs led to deficit spending.

In addition to the historic landmark, Stanford White buildings, there are a number of other vacant and deteriorating properties. As the result of an engineering study of the campus and buildings the recommendation emerged that resulted in developing half of the structure that houses the Bernstein Theater. It may be adapted from 65 to 186 seats.

In addition to the theatre the building is designed to earn income. Simotes commented that next season, in addition to its own minimal sets,  the scene shop will construct those for the Berkshire Theatre Festival. The building is designed to be functional year round.

Packer explained that there are buildings that are not worth saving. "But if you tear down a building there is a two year window in which you can replace it." This is a part of the Lenox restriction that no new structures may be built on the property. The company can only remodel or work within the footprint of existing buildings. We asked how that would be dealt with in terms of the long term ambition to build a replica of Shakespeare's Globe or Rose theatres. Just how sincere is Lenox in supporting the company?

In 2000, S&Co. paid $4.1 million for 70 Kemble Street. In 2006, 30.14 acres were sold including the Spring Lawn Theatre for $3.9 million ($3.3 million in cash received). This money was applied to reduce debt. Packer stated that the new owners planned to "Build a boutique hotel and three years later that has still not happened. They can't get the variances including an environmental impact study."

While Simotes discussed hoping to find tenants and business partners he stressed that the company intends to "Be a good neighbor" in working with Lenox on finding a proper mix and match. But Lenox has to ease up on and be more realistic about restrictions as a part of the equation for the survival and growth of the company. Part of that expansion is initiating an MFA program. It is being discussed as limited to just a dozen students.

The bottom line of $10 million in debt seems overwhelming. Mescon stated that the debt is likely to be reduced by $2 million rather quickly. When loans are restructured and the company has a solid new business plan there are donors ready to step up with the remaining $1.2 million of the capital campaign. At which point the Kresge grant will provide the final $800,000.

As we approach the holiday season in the Berkshires, for S&Co. "Yes, Virginia, there is a Santa Claus." And, hopefully not coal in the stockings hung by the chimney with care.




Link to Alan Chertok column in the Berkshire Eagle

Link to Berkshire Eagle coverage

Link to New York Times coverage

Link to Boston Globe coverage