THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, January 2, 1995 TAG: 9501030232
SECTION: BUSINESS WEEKLY PAGE: 8 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY CHRISTOPHER DINSMORE, BUSINESS WEEKLY STAFF
LENGTH: Long : 270 lines
Gary M. Bowers has another tough decision to make.
He's trying to get the naval ship repair company he founded in 1972 out of bankruptcy.
Jonathan Corp. and its steel-fabricating subsidiary Tidewater Steel Co. Inc. sought protection from their creditors under Chapter 11 of the U.S. Bankruptcy Code in December 1993.
Jonathan's third reorganization plan is under assault from disgruntled unsecured creditors.
And Bowers, Jonathan's president, has to decide whether to liquidate Tidewater Steel, a move that likely would upend the plan anyway.
What's happening at one of Hampton Roads' smaller shipyards illustrates the storms that arise during a bankruptcy reorganization. How Bowers has proceeded is a lesson in heavy-weather navigation.
Originally, Jonathan had filed a plan with the court to liquidate the steel subsidiary. It added $3.6 million worth of debt to the shipyard's books.
The likely sale of Jonathan's shipyard adjacent to Little Creek Naval Amphibious Base is what has Bowers thinking he wants to keep Tidewater Steel. Jonathan fabricates steel only at the Little Creek and Tidewater Steel sites.
While it will lease the steel shop at Little Creek back from the proposed buyer for four years, the company is worried about where it will fabricate steel after that, said C. Grigsby Scifres, Jonathan's bankruptcy attorney.
The potential fallout from the decision whether to keep Tidewater Steel adds to Bowers' difficulty in making it: Liquidating it would help pull the company out of bankruptcy, but could cause operating problems in the future.
``It's a very fluid situation,'' Scifres said.
It's especially fluid since the unsecured creditors formally objected to it Wednesday, saying they will reject the plan.
The filing in bankruptcy court says the plan is inequitable under the bankruptcy code. In other words, the unsecured creditors contend they are entitled to more compensation under the plan.
So the plan is probably heading back to the drawing board.
``It's not going to fly without some sort of compromise,'' said Jerrold G. Weinberg, attorney for the unsecured creditors' committee.
Trying to make a substantive business decision in a bankruptcy reorganization requires getting a lot of people to agree to it.
If anyone in a position of leverage - creditors with a security interest in property, for example - says no to a decision, the entire reorganization plan could have to be reworked.
Jonathan's reorganization plans must please NationsBank of Virginia, First Union National Bank of Virginia and a committee composed of representatives of more than 400 unsecured creditors.
Each in turn has leverage over the other - the banks as secured creditors over the unsecured creditors and the unsecured creditors over Jonathan's stockholders.
Meanwhile, Bowers is trying to figure out how to keep Jonathan afloat at a time when too many shipyards are chasing after too few Navy ship repair and overhaul contracts, which makes margins on the jobs razor-thin.
It all has Bowers working so hard, he said he was too busy to be interviewed for this story.
Jonathan's goal in the bankruptcy is to reduce its debt and overhead so it again can bid competitively against not only other shipyards, but also so-called down-river contractors, who can do ship repair work but don't have their own waterfront facilities, Scifres said.
``I don't think they can emerge,'' said an executive at a competing shipyard. ``They just don't have the volume of business.''
But first, a little history
Bowers, an electrical engineer by training, founded Jonathan as an electronics repair subcontractor to shipyards. The company blossomed, living up to its high-flying namesake, Jonathan Livingston Seagull.
It pioneered the development of the ``phased-maintenance'' contract, which involves mini-overhauls on vessels every 18 months or so instead of major overhauls every four or five years. As the Navy grew in the 1980s, so did Jonathan.
By 1989 Jonathan had developed into a $70 million-a-year firm with 900 employees.
It had two small shipyards in Hampton Roads, one on the Elizabeth River in Norfolk and the other between the east and west sides of Little Creek Naval Amphibious Base. It owned 80 percent of another small shipyard in Erie, Pa., as well as Tidewater Steel and an electronics repair subsidiary.
Along the way Jonathan and Bowers acquired the trappings of success.
There was a corporate airplane and a corporate condominium. Bowers had personally invested in Town Point Center, an 11-story office building in downtown Norfolk, which became Jonathan's corporate headquarters.
Then it all began to unravel. The Cold War ended. The Navy started retiring ships. And real estate values tanked.
Jonathan got stuck.
Throughout the defense buildup, Jonathan had invested in new facilities and added debt. Now those properties weren't being used enough to sustain them.
In court documents, Jonathan said: ``Unable to sell its underutilized facilities and hampered by excessive debt service, losses accumulated as Jonathan attempted to maintain a large volume of work. Due to increased competition from other yards, margins in the market dissipated faster than Jonathan could cut its expenses.''
Several other events also helped push Jonathan's head below water.
It lost a phased-maintenance contract for the carrier Forrestal that could have been worth $10 million when that ship was decommissioned.
It lost a substantial amount of money on three ships it repaired. When the Navy moved away from ``cost-plus'' contracts, which paid a yard's costs plus a fixed margin, and turned to fixed-price contracts, Jonathan found the transition difficult. The company bid less money than the repairs actually cost it.
Tidewater Steel lost several million dollars fabricating steel for the new Berkley Bridge over the Elizabeth River.
The shipyard is also fighting the Navy in court over disputed claims, one involving use of the corporate plane and another involving a change in labor payment rules.
On Dec. 10, 1993, Jonathan and Tidewater Steel declared bankruptcy.
What's happened since
First Jonathan had to get a line of credit that would give it the cash it needed to continue operating. Jonathan convinced NationsBank, its primary lender before the bankruptcy, to provide the loan.
NationsBank, which has a lien on nearly all of Jonathan's real estate and machinery, has tremendous power in the bankruptcy, Scifres said. ``It had no obligation to provide the working capital revolver.''
NationsBank and its attorney Monroe Kelly III declined to comment on the bankruptcy.
Besides initial meetings with creditors, Jonathan and its attorneys spent the first six months of the bankruptcy gathering data they needed to put together a reorganization plan and dealing with some smaller assets.
Jonathan returned the corporate jet to the lienholder. It tried to restructure its lease for the Town Point Center, but the restructuring was rejected and it moved its headquarters to a warehouse near the airport. The building was foreclosed on shortly thereafter.
After two delays Jonathan proposed an initial reorganization plan in September. That plan basically told creditors what the company thought it could do, Scifres said.
Then the creditors let Jonathan know what they wanted. The answer generally was ``more.''
So Jonathan filed a second plan in November, but NationsBank wanted even more assurances that what it was owed would be repaid.
Those assurances came at the expense of the unsecured creditors in the latest plan, filed in early December.
``NationsBank wanted more security, and they got it,'' said Weinberg, the unsecured creditors' attorney.
Under the third plan the unsecured creditors won't be repaid until Jonathan sells the Lafayette Yacht Club and the Little Creek shipyard, and until the credit line NationsBank has committed to providing Jonathan after it emerges from bankruptcy is paid off.
It also won't allow payments to the creditors unless Jonathan is in accord with all the provisions of the term loan from NationsBank.
The Lafayette property has been sold, and Little Creek is about to be sold.
Proceeds from those sales will substantially reduce NationsBank's long-term exposure to Jonathan by lowering the principal of NationsBank's post-bankruptcy term loan to Jonathan.
That appears to be what's driving the unsecured creditors' objections to the plan. They can argue that NationsBank should be assured it will be repaid and that they should get something more.
Weinberg declined to elaborate on his objections.
Unsecured creditors usually get the short end of the stick in any bankruptcy.
They have to stand in line behind the lawyers, who are paid first, the government, the bankruptcy lender and the secured creditors.
As the biggest secured creditor in this case, NationsBank wields the most power, but Jonathan can't emerge without the approval of the unsecured creditors either.
``It's been very difficult balancing the interests,'' Scifres said.
A decision to keep Tidewater Steel could sink the reorganization plan.
Keeping it would leave more than $3.6 million of debt in Jonathan's hands, and that could throw off the balance Scifres is trying to reach.
Jonathan had decided to let First Union take the 100-acre Tidewater Steel site on the Southern Branch of the Elizabeth River with its 160,000-square-foot building.
First Union would be happy to take the property back, said its attorney, Jonathan L. Hauser.
First Union was in the enviable position of being oversecured. The property is worth $5 million to $6 million, far more than the nearly $3.6 million the bank is owed.
The additional debt on Tidewater Steel could affect Jonathan's ability to meet the requirements of any reorganization plan.
But ultimately some reorganization plan, probably similar to the current one, should meet the approval of all the creditors.
If the company is forced to liquidate, the unsecured creditors probably would get nothing, Scifres said.
The unsecured creditors' best interests lie in getting Jonathan out of bankruptcy.
``From the unsecured creditors' point of view, we want them to make money,'' Weinberg said.
And the ship repair company has in the past few months, thanks to two jobs at Newport News Shipbuilding and a $1.5 million overhaul of the guided missile destroyer Scott.
It turned small profits in September, October and November, after losing money nearly every month since it entered bankruptcy.
``They've got good management, they're honest people and they're working hard,'' Weinberg said. MEMO: JONATHAN CORP.'S REORGANIZATION PLAN
Jonathan's third reorganization plan proposes to treat various
creditors in the following manner, in descending order of seniority:
1. NationsBank owed $5.25 million under the post-petition line of
credit will continue to provide that line for up to a year.
2. NationsBank, owed $7.45 million under four pre-bankruptcy loans
secured by most of Jonathan's real property, will consolidate those
loans under a new-term loan of the same amount.
3. W. McKenzie Jenkins, owed $950,240 under an industrial development
revenue bond secured by the Norfolk shipyard, will continue to be repaid
under the terms of that bond.
4. Virginia Beach Development Authority, owed $363,533 for a loan on
the Little Creek shipyard, will be repaid $150,000. If the Little Creek
property is sold before Jonathan emerges from bankruptcy, the authority
could be fully repaid.
5. Ford's Colony, owned $19,648 for property at the Williamsburg
resort, will be repaid under the terms of the original loan.
6. 88 unsecured creditors with claims under $1,000, owed a total of
$28,000, will be repaid 50 cents on the dollar.
7. 360 unsecured creditors owed $11.2 million - Jonathan is disputing
another $2.25 million of unsecured creditors' claims - will be repaid
under the following formula:
$1 million paid out over five years starting in the second year after
Jonathan emerges from bankruptcy, which translates to a recovery of 9
cents on the dollar.
55 percent of any recovery on claims being disputed with the
government, including $2.25 million for use of the corporate plane and
$3 million for labor costs.
25 percent of Jonathan's adjusted taxable income above $750,000 for
five years subject to restrictions on executive salaries and repayments
of principal on debt.
No money can be distributed to these unsecured creditors until the
following events happen:
Lafayette Yacht Club property is sold. (It was sold at auction Dec.
6.)
Little Creek property is sold. (Jonathan has petitioned the court to
sell it to the Chesapeake Bay Bridge and Tunnel Commission.)
NationsBank's revolving line of credit is taken out, either repaid
from operations by Jonathan or replaced by a revolver from another
bank.
None of the provisions of the term-loan from NationsBank are in
default.
8. The company's employee stock ownership plan will retain a 31.55
percent stake in Jonathan.
9. Jonathan's remaining stock will be distributed as follows: 61.12
percent to Gary M. Bowers, its president; 2.6 percent to James E. Newman
Jr.; 2.6 percent to Kenneth Smith; and 2.13 percent to the estate of
Vincent Lascara. Bowers is the only stockholder whose stake will change
as he takes over the shares owned by SBM Farms, a partnership controlled
by Bowers.
Tidewater Steel Co. Inc.'s proposed liquidation
Under the terms of the proposed plan of liquidation for Tidewater
Steel, First Union would take back the property on the Southern Branch
of the Elizabeth River for which it is still owed $3.6 million.
Jonathan would buy the company's equipment; and $100,000 from that
sale would be distributed to the 97 unsecured creditors owed $320,000.
ILLUSTRATION: [Cover]
[Color Photos]
NAVIGATING OUT OF BANKRUPTCY
Staff map
Jonathon Corp. President Gary M. Bowers
MARTIN SMITH-RODDEN (Above and far left)
The Norfolk Shipyard
Jonathon Corp.'s Tidewater Steel site in Chesapeake.
by CNB