In February, Jim Green, a financial wheeler-dealer in Vancouver's video industry, completed a deal that put $3 million into the bank account of KCTS-TV. The>"/>
In February, Jim Green, a financial wheeler-dealer in Vancouver's video industry, completed a deal that put $3 million into the bank account of KCTS-TV. The desperately needed money is funding a significant share of the shows in the pipeline at Seattle's public-television station. Never entirely explained to the staff or announced to the public, the investment has been the subject of confusion and dark speculation among present and former staffers. "Some people talk about them like an episode of The Sopranos," a former KCTS consultant says of the investors.
SEATTLE WEEKLY COVERAGE OF KCTS • KCTS Mess: Negative numbers at Channel 9. (12/4/2002) • Over Extended: A provider of federal money says it might audit public KCTS. (12/18/2002) • S.O.S. at KCTS: 'Opaque' finances lead a production consultant to call for the CEO's resignation. (3/12/2003) • What's Wrong with Channel 9: Big ambitions, expanding overhead, shrinking local programming . . . does Channel 9 know what it's doing? (11/06/1996)
The money does not come from the mob. As Green confirms, it comes from an offshore bank based in the Caribbean called Omnicorp Financial Group (www.omnicorp.org). The company is on the brink of bankruptcy and has come under the authority of a controller at the request of regulators.
Raising even more questions is what seems to have led KCTS to this unusual source of funding in the first place. Public-TV stations nationwide are wrestling with the economic downturn to one degree or another, but Channel 9 is in the midst of a severe financial crisis that has some concerned about whether it can, in the words of Board of Directors member Don Nielsen, "sustain the operation." The individual support of viewers like you, so frequently encouraged by ubiquitous pledge-drive host George Ray, isn't enough to keep Channel 9 going.
A Seattle Weekly review of the station's financial audits, information from its president, and interviews with board members as well as current and former staffers reveal an array of perilous signs. The station ran an overall deficit in 1996, 1997, and 1998 and expects to log a deficit when the books close on the fiscal year that ended June 30. Its debt has grown, and it had to enter into a deferred-payment plan for $2.8 million worth of annual dues owed the Public Broadcasting Service (PBS). Meanwhile, donors and insiders wonder if money from a fund intended for production and program acquisition might have been used for basic operations.
Five months into its current fiscal year, KCTS has been operating without a budget. The board hasn't approved management's figures and has talked of cutting as much as half a million dollars, a significant chunk of a budget that in recent years has run around $20 million.
Meanwhile, the climate at and around the station is rife with a lethal combination of dissent, fear, and rumor-mongering. "I just think this place has been horribly mismanaged," says one staffer who, like many of the people interviewed for this article, pleaded for anonymity. Says another, in a reprise heard again and again: "The station has been in a lot of trouble over the years, and there have been a lot of scapegoats. But there's been one common denominator: the guy running the place." At least several staffers have written letters to the board questioning the leadership of president and CEO Burnill Clark, according to one board member. But many also are unhappy with a board they see as inexplicably in Clark's thrall.
Clark and KCTS' board members are striving to create an impression of normalcy, even while they admit they are taking unusual measures with this year's budget. "These are extraordinary times, and we are taking an extraordinary look at things," says board treasurer Jim Costello, a retired partner of the accounting giant then known as Price Waterhouse, now PricewaterhouseCoopers. Costello and board member Nielsen, the former Seattle School Board powerhouse, attribute KCTS' financial problems to the general effects of the economy and 9/11. "Like everywhere else, giving is down," Nielsen says. "The (Pacific) Science Center is facing it, the (Seattle) Symphony is facing it, you name it."
Yet the deficits at Channel 9 started as far back as 1996, when the economy was in fact booming, concedes Clark. (Clark refused to be interviewed in person but responded to written questions.) He ticks off a number of reasons for the fix KCTS is in, including declining support from the state and the Corporation for Public Broadcasting (CPB), as well as a nosedive in Canadian donations due, in part, to the loss of the station's Channel 9 designation on cable systems in British Columbia.
But for many, those explanations are getting old. "Clearly, things are not right," says Sturges Dorrance, a former KING-TV general manager who sits on the KCTS advisory board, which is separate from the main board and has no fiduciary responsibilities. "One year, two years—but we're looking at five or six years of continual red ink."
Dorrance's view of the problem echoes that of others. A variety of new media, most notably cable channels like the History Channel and A&E, is challenging public TV on its own turf. So, Dorrance says, "public TV is having a hard time figuring out what its niche is in this new world."
"Locally," Dorrance continues, "the strategy Channel 9 has followed is that it believes its current and future success is tied to being a supplier to other stations." So a lot of money and effort have gone into producing and acquiring national programs, which traditionally are the purview of PBS, WGBH-TV in Boston, WNET-TV in New York, and a handful of other public stations around the country.
KCTS has had a few successes, mainly the early Over videos featuring aerial tours of different regions across the country, including Over Washington. But, Dorrance says, "By and large the stuff has not gone anywhere." One of the most promising programs KCTS began, based on Microsoft's prestigious Web magazine Slate, fell apart when the station couldn't get full funding. A couple of other efforts disappeared with little to show for them. A London office was supposed to find British programs to sell domestically. A consortium of second-tier American public-TV stations was going to take on PBS. The station was an early adopter of costly equipment for digital and high-definition television—technology that, though now required, still is not widely embraced. Then there was the costly branding effort that sank like a stone. (Does Intris ring a bell? No? It once was intended to replace the call letters KCTS in the public's mind.)
If there is sin here, it would seem to be outsized ambition that some feel is fueled by Clark's outsized ego. As the financial picture worsened, Clark was in denial, according to a former manager. "Burnie didn't want to know what the financial realities were as long as he could convince the board" that the situation was in hand, the manager says. Says another manager who, with several top executives, including Chief Operating Officer Walter Parsons, left in 2000: "Every year they were sweating about how to make it look like there wasn't a loss." The financial situation, this former manager says, was "worse than I had ever seen it before. I thought, I'm not going to be around when it comes crashing down. To be honest, I can't figure out how they've survived these past two years."
THE PROGRAM FUND
It hasn't been easy, according to the station's annual financial audits by the accounting firm Ernst & Young. In the last fiscal year for which the station has released an audit, the one ending June 30, 2001, the station had a $1.7 million deficit in the "unrestricted fund" it uses for basic operating expenses such as overhead and administration—equal to nearly 10 percent of its total expenses for that year. The previous fiscal year was even worse, with a deficit of almost $2.8 million. Clark says the station expects to report an overall deficit for the fiscal year ending June 30, 2002, as well.
KCTS also took on more debt—more than $6 million as of the latest audit, about half of that from two loans in 2000. According to Clark, the loans have gone to finance the Channel 9 stores, one of which, in Redmond, will be closing in January as a budget cut. That debt doesn't count the $2.8 million the station owed for its 2000 and 2001 dues to PBS, which go for core national programming such as Masterpiece Theatre and Frontline.
Something else the auditors saw concerned them. In a separate letter to the board's finance and audit committee, they wrote of "certain matters resulting from our consideration of internal control that we believe should be brought to your attention." The details were spelled out in another, attached letter, which also went to station management and which KCTS has refused to give Seattle Weekly. The auditors sent another letter about internal control the previous fiscal year.
Without looking at the letters, it's impossible to say what the issues were. However, the latest audit and interviews of those in the KCTS sphere reveal at least one matter of concern. In the early 1990s, KCTS began approaching donors for contributions to a fund for national programming. Known as the Fund for Programming Excellence, or Program Fund, it was intended as a kind of bank that would lend productions money, eventually to be repaid when other financing came through. That way, the station wouldn't have to miss out on opportunities due to the vicissitudes of film financing, which frequently come through at the last minute.
The station raised some $3 million for the Program Fund and promised donors an annual report on how the money was used. No such annual report has been forthcoming, according to advisory board member Dorrance, who contributed money. He says he and others have asked but "never really got an answer."
It would be illegal for money raised by a nonprofit for one purpose to be used for another. According to the audit, nearly the entire Program Fund has been loaned to the General Fund. Clark says the money has gone for new projects and to acquire programs produced elsewhere for broadcast on KCTS, as it was intended. But he names only two KCTS productions, Over Florida and the local public-affairs show KCTS Connects. While the audit would seem to raise a red flag in showing that the Program Fund is co-mingled with the General Fund, Clark says that's how the money is supposed to get distributed.
All these questions about KCTS' finances were in the air when Jim Green and Omnicorp walked in. "KCTS was in such a desperate mode—it was grasping at straws," says an ex-staffer who was there at the time.
Green offered an appealing solution. With input from the station, he developed a marketing plan for nine new shows, most notably Eyes of Nye, an adult program from Bill Nye "the Science Guy." Nye is well known for his role on the KING-TV comedy show Almost Live! and hosted a national science show for kids in the 1990s. But in the several years that KCTS had been trying to get the new show off the ground, potential donors had doubted Nye's ability to transition to an adult audience. And the opportunities for what public television usually refers to as "partners"—for-profit companies who chip in production money in the hope of making money on foreign rights and spin-off products like videos—seemed limited, given the paltry sums earned by Nye's first show, notwithstanding its tremendous popular and critical success.
Green's argument was that Disney, which syndicated Bill Nye the Science Guy for PBS, didn't get everything it could out of the show: "Disney had Donald and Mickey. It didn't need a brand like Bill." He says that the new show could earn $3 million to $5 million in a few years through DVDs, CD-ROMs, sponsorships, outreach materials to colleges and universities, and foreign sales.
In making the rounds with his marketing plan, Green says he ran into a subsidiary of Omnicorp and met with representatives in Vancouver. KCTS also sat in on meetings, he says. And though he brokered the deal, he says that, as a small company, he relied on Channel 9's judgment, figuring that a public-television station would make sure its partners were trustworthy.
"KCTS assured me that they had checked out Omni before this was done," Green says.
"We had a legal firm check on it," confirms board member Nielsen. "We were initially suspect," he concedes. But he says the due diligence turned up "good work" the company had done in funding other film projects in Canada. "We got enough data to know they're legit."
Omnicorp is an offshore bank based on the Caribbean island of St. Vincent that overtly markets itself as a way to avoid government regulation and taxes. As its Web site (www.omnicorp.org) puts it: "We see that oppressive taxation, over- regulation, invasion of privacy, and excessive control have forced prudent investors to seek tax shelters and protection outside of their own jurisdictions. . . . We endeavor to make that transition simple and private." (Americans are supposed to pay tax on their worldwide income, but many who use offshore banks do not declare the interest on their deposits.)
That alone might have caused some stations to give Omnicorp a pass. Says Andrew Griffiths, the chief financial officer at public-broadcasting gem WGBH-TV in Boston: "I think it is a difficult issue. There's a line between being unethical and tax avoidance. But for an organization like public broadcasting that's depending on government money, I think we would be real leery" if offshore banking was a potential partner's primary business.
There is more to the Omnicorp story, however, though it is arguable whether KCTS should have divined that there would be a problem. The Offshore Financial Authority in St. Vincent stepped in last summer, at least in part because of concerns about solvency, according to Marcus Wide, the Nova Scotia-based controller who was appointed. He is a senior vice president of PricewaterhouseCoopers—the same firm where board treasurer Costello used to work and one that is frequently called on to scrutinize troubled offshore banks. Around the same time, according to Wide and filings with the U.S. Securities and Exchange Commission, the bank entered into an agreement with investors to convert their certificates of deposit into shares of another company that will function as a venture-capital fund—Vancouver-based Solara Ventures. The bank's clients, once promised interest rates as high as 60 percent, are now subject to the success or failure of this new company's investments.
"Omnicorp is a complete fraud," opines David Marchant, the Miami-based publisher of a muckraking newsletter called Offshore Alert. "The definition of fraud is taking money promising something you can't deliver," he says, and "anyone who's offering 60 percent interest is either a crook or a total idiot."
Omnicorp CEO Nelson Bayford could not be reached for an interview. But Wide, the controller, says of the bank: "This was a genuine effort to make money, both for the bank and its investors. It was not set up to be a scam." Frankly, he says, that's what differentiates Omnicorp from the vast majority of offshore banks, who offer outrageously high interest rates by operating as a Ponzi scheme, in which the money going out comes from new depositors rather than any generation of income.
Says Wide, "I'll tell you what I've been told, which in a funny way makes sense. This bank was not set up by bankers or people with a financial background." Wide says Bayford is a former investment broker from Vancouver who dealt in high-risk investments and was fairly successful. Then he hit upon the idea of running an offshore bank, and in order to be competitive, he started offering the same high interest rates that others did. To make money, he started investing in the same kind of ventures that he favored as a broker—only now he was running a bank with interest rates that he couldn't sustain.
Although Omnicorp's $3 million is behind more than a third of the 24 shows KCTS has in production and development, the implosion of Omnicorp might not be financially damaging for the station. Regulators have chosen to let the bank's investments, of which KCTS is one, mature rather than seeking an immediate return. Still, Omnicorp might be watching its investment with a closer eye. Broker Jim Green says that both he and his investors are concerned about what he says is KCTS' failure to deliver. He says the Nye show is way behind schedule and, in his view, unfunny.
Moreover, the station's relationship with the bank calls into question its judgment—the kind of judgment that has it hanging on by the skin of its teeth. "That's scary stuff," says Dorrance of the advisory board, when told about the extent of KCTS' financial problems.
In his written response to Seattle Weekly's questions, Clark expresses optimism: "The station has weathered down economies in the past. This is a team effort, and I'm confident in a strong future for KCTS."
Dorrance is more skeptical: "The thing about it that is crystal-clear is that the business needs to be refocused."