THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, January 7, 1995 TAG: 9501070211
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: Long : 119 lines
Facing suit after suit from unpaid subcontractors and suppliers, and a major dispute with Newport News Shipbuilding, Marine Hydraulics International Inc. filed for bankruptcy protection from its creditors Friday.
The Chapter 11 filing, in Norfolk's federal bankruptcy court, gives the struggling shipyard on the eastern branch of the Elizabeth River an opportunity to postpone paying its creditors while it tries to reorganize its debts.
It's the second time the company has filed for bankruptcy.
``In the long-term, the filing is good for everybody, including the creditors because they're all going to be treated equally, and for the company because it will allow us to work without interruption,'' said James Hong, MHI's president and chief executive.
MHI's problems are just the latest sign of the shipyard shakeout taking place in Hampton Roads in the wake of the Navy's shrinking fleet and dwindling budgets. Another Norfolk shipyard, Jonathan Corp., filed 13 months ago.
Other Hampton Roads shipyards have been eking by on razor-thin profit margins as they scramble for both commercial and Navy work.
MHI's filing is also a blow to the companies - most of them local - that it owes money, either for work or supplies.
``It's not a good situation for the vendors,'' said C. Grigsby Scifres,MHI's bankruptcy attorney. ``A lot of the vendors are under the gun and this hurts them.''
MHI specializes in pierside overhaul and repairs of Naval auxiliary ships. It is working on a major conversion of the Navy auxiliary tanker Mount Washington and several smaller jobs. Employment at the shipyard in Norfolk's Berkley section ranges from 200 to 600 depending on its workload. It employed about 250 on Friday.
MHI did about $40 million of work in 1994 - almost all of it from the government. It has little other work scheduled, but has been informed by the Navy that it was the low bidder on a $5 million contract for work on the guided missile frigate Carr, Hong said.
``If we are able to get the Carr, our backlog will be very strong,'' Hong said.
The Navy has referred the contract to the Small Business Administration, which make a determination whether MHI is financially responsible, Scifres said.
The bankruptcy should help, Scifres said.
For MHI this bankruptcy amounts to a ``double dip,'' or what's becoming known as a ``Chapter 22.'' MHI first filed a Chapter 11 bankruptcy in 1983 and emerged within a year.
This time, MHI is claiming assets of $6.42 million and liabilities of $8.78 million. Its liabilities include $1.12 million of secured debt owed to its majority owner, Robert S. Walker Sr.; $5.05 million of unsecured debt owed to 650 creditors; and $2.6 million of disputed claims.
MHI says it was driven into bankruptcy by a series of events stemming from a dispute with Newport News Shipbuilding.
``They crossed swords with Newport News, and Newport News unleashed the dogs of war on them,'' said an executive at another Elizabeth River shipyard.
At first, relations between the giant yard and relatively small MHI were good. Starting in 1992, MHI used Newport News Shipbuilding's drydocks to do repair work it couldn't do at its pierside facility on the Elizabeth River. Newport News in turn relearned the Navy ship repair business, but turned on its smaller partner when it wasn't paid, suing last March for $3.1 million.
MHI countersued Newport News Shipbuilding for $7.5 million saying the big yard breached a contract causing MHI to lose work and money and making it difficult for the smaller yard to pay its vendors on time.
``It is the company's position that they don't owe Newport News any money.
As a result of losses stemming from its dealings with Newport News Shipbuilding, MHI lost its $2 million line of credit from First Union National Bank of Virginia in early 1994, Hong said.
About that time, Hong and other executives invested more than $400,000 in the company for a 40 percent stake. But the cash infusion failed to settle the nerves of MHI's creditors who began requiring it to pay cash for goods and services.
MHI was unable to pay its old accounts payable since it had to pay cash up front for everything, Hong said.
Since then, more than a dozen companies have sued MHI seeking payment for unpaid bills.
``It kind of brought us to our knees,'' Hong said.
Newport News sued MHI again Tuesday, saying the smaller yard fraudulently conveyed some property it owned to companies and partnerships owned by MHI's owners and executives, but unaffiliated with MHI.
The sale ``was made for the purpose of shielding the property from liens by (Newport News Shipbuilding) and other potential judgment creditors,'' the suit said.
MHI's attorneys deny Newport News Shipbuilding's allegations. ``The transactions that they are describing in (that suit) are legitimate,'' Scifres said.
Newport News Shipbuilding attorney Vann Lefcoe declined to elaborate on the suits, but said he's not surprised by MHI's bankruptcy filing.
The bankruptcy automatically stays all the lawsuits pending against MHI until its finances are worked out. It eliminates the expense of dealing with that litigation as well as the ability of creditors to interrupt MHI's cash flow with judgment liens against its bank accounts and property.
Hong and Scifres expect that the bankruptcy filing will enable MHI to strengthen it working capital base and to be able to attract a new credit line.
``We want to reorganize the company, to put the company back on a financially responsible basis and continue making money for everybody,'' Hong said.
Scifres expects MHI to be able to file a reorganization plan within the prescribed 120 days without asking for an extension. Since the only secured creditor, Walker, is a principal in MHI, the reorganization will primarily be negotiated between MHI and its unsecured creditors, he said.
But MHI's recovery is far from assured. The market for Navy ship repair is bad and is likely to get worse.
``This is just another one in a series of failures in the industry,'' said the executive at another local shipyard. ``The companies that have not diversified their workload away from the military are going out out of business.'' ILLUSTRATION: STAFF Map
KEYWORDS: SHIP REPAIR BANKRUPTCY MARINE HYDRAULICS INTERNATIONAL by CNB