Lawsuits criticize Freeland company’s financial footing

After sending shock waves through the community Friday with the announcement that Nichols Brothers Boat Builders closed down, company officials now say there is a chance they will be back.

“We are planning on having crew back within eight weeks,” Nichols Brothers President Bryan Nichols said Tuesday. “We do have plans to continue this shipyard here. There are going to be challenges, but we’re going to work those out.”

The company sent home about 175 workers Friday morning after announcing its closure of both the Freeland and Langley facilities, citing financial problems and a pending lawsuit.

“It was very emotional meeting,” Nichols said of Friday’s meeting with workers. “For what we had to go through on Friday, the crew was just extraordinarily supportive.”

“It’s a very emotional time for everybody involved. The shipyard has been here for a long time. I grew up in the shipyard. I grew up with a lot of these guys as my mentors — teaching me how to build boats. These people are family, they’re not just employees.”

Nichols Brothers Boat Builders filed a four-week “stand-by order” with Washington Employment Securities, said Sheryl Hutchison, communications director for state employment security department.

“Worksource representatives met with the company this morning and the company is on a four-week stand-by till Nov. 30,” she said.

This means that Nichols employees can collect unemployment without having to apply for jobs like on regular unemployment. This service is normally used for temporary lay-offs.

But this doesn’t mean that it is a certainty that the company will continue operations in December, Hutchison said. If Nichols continues to be closed, employees simply have to switch to regular unemployment.

Eligible Nichols employees can only get eight weeks stand-by unemployment a year. That means those who collected during a six-week lay-off earlier this year have only two more weeks left, Hutchison said.

Employees can file for unemployment benefits online at www.go2ui.com or by phone at 1-800-318-6022.

Even if the company reopens in the future, it appears that the shipbuilder has some rough sailing ahead.

While the surprise closure of Nichols Brothers Boat Builders, Inc. on Friday left many on the South End wondering how much time will pass before the Freeland shipyard reopens, it’s still uncertain if a reorganized company will rebound or if Nichols Brothers is gone for good.

Last week, Nichols Brothers acknowledged “significant financial challenges” in recent years.

In a statement to the press, the shipyard said it had unsuccessfully tried to raise capital for a restructuring effort but said that pending litigation and “cash flow challenges” had forced the company to close its doors.

According to court records and other documents, however, the company’s financial condition has been tenuous in recent years. Nichols Brothers is currently delinquent in thousands of dollars of property tax it owes to Island County, and the company also reportedly struggled to pay $1.3 million in federal payroll taxes.

Nichols Brothers has been fighting two lawsuits in federal court this year from two of its customers.

In March, Expoships filed a breach-of-contract lawsuit against Nichols Brothers after the shipyard did not deliver the Grand Luxe, a

228-foot tour boat that would be used as a floating art gallery, on time.

Lawyers for Expoships said Nichols Brothers agreed to finish the $12.2 million ship by Oct. 1, 2006, but the shipyard spent the fall of 2005 building a large dump barge that wasn’t launched until spring of 2006. By March 2006, less than 10 percent of the Grand Luxe had been finished, even though 45 percent of the ship’s cost had already been paid to Nichols Brothers, according to court records. Adding to the delay, the shipyard also worked on a ferry project for Pierce County, which took up most of the boatyard’s resources and prevented Nichols Brothers from getting a full crew to work on the Grand Luxe until late December 2006.

In its lawsuit against the shipyard, Expoships also claimed Nichols Brothers was in “extreme financial distress” in 2006. It said the company did not have enough money to complete the Grand Luxe, and was also unable to pay $1.3 million in payroll taxes.

Expoships said it helped Nichols Brothers get financial help from a California company to complete the project after Nichols Brothers became “tapped out on their Frontier Bank loan.”

Expoships also said the ship was later put on another vessel to be shipped to Florida in March because the Grand Luxe could not pass sea trials.

When the vessel arrived in Florida, Expoships said Nichols Brothers told the company the ship still needed another 47,000 man hours to finish, or roughly $2.3 million worth of work.

“Upon arrival in Florida, representatives of Expoships were shocked to discover the poor condition the Grand Luxe was in. The vessel had not been properly sealed or protected for an ocean voyage, and there was a tremendous amount of damage due to water intrusion. Moreover, the electrical and other mechanical systems were a chaotic mess,” Expoships claimed in court papers.

Expoships filed suit soon after the Grand Luxe arrived in Florida.

The company said it lost millions of dollars in revenue because the inaugural tour for the vessel was pushed back, and lost approximately $3.1 million each month the ship was out of service.

The company said the ship needed $4 million worth of work to finish, and also accused Nichols Brothers of “defective workmanship.” The company claimed the hull paint was defective and said doors, lighting fixtures, marble and other materials had been paid for but not installed on the ship.

Kenneth Kagan, a Seattle attorney who represented Expoships in the lawsuit, said the company reached a settlement with Nichols Brothers earlier this year.

Kagan said he could not disclose details of the settlement.

Nichols Brothers fiscal health is a central issue in the ongoing federal lawsuit between the company and Hornbeck Offshore Services.

Hornbeck Offshore Services is based in Covington, La. The company operates a fleet of 80 vessels, including ocean-going tugs, off-shore supply vessels and tank barges, mostly used for deep water oil exploration and production in the Gulf of Mexico.

Hornbeck signed a $50 million-plus contract with Nichols Brothers in March 2006 for the construction of two 240-foot off-shore supply vessels with an option to buy two more.

The vessels were to be delivered in 2007 and 2008.

The company has said it needed the new supply ships “to meet a market window” that may be coming in March 2009. It raised $290 million for new ships in October 2005 to get ready for the expansion of its fleet.

Under the terms of the agreement, however, Nichols Brothers was required to post a $2 million letter of credit on April 2, 2006. The contract also said Nichols Brothers had to supply another letter of credit for $12.5 million. Though Hornbeck wanted a national bank to supply the letter, it later agreed it could come from Frontier Bank, the boat builder’s bank of choice, but was due by Jan. 15, 2007.

Under the contract, the $2 million letter of credit would be cancelled after the second mandatory letter.

Hornbeck, however, said in court papers that Nichols Brothers “more than once” sought extensions to the deadline for the original $2 million letter of credit soon after the contract was signed.

Even with the deadline pushed back, Nichols still could not post the letter.

Finally, Hornbeck said, it had to go to another boat yard to get the vessels built. The delay cost the company more than $20 million in damages due to higher construction costs.

In a July 2006 response to the lawsuit, Nichols Brothers said it could have completed the work in the contract, and that Hornbeck itself violated the agreement. Nichols Brothers also asked for a jury trial on the lawsuit.

In its response, however, Hornbeck asked the court to compel Nichols Brothers to release a long list of documents, including tax returns and quarterly financial statements from 2004 through 2006.

Nichols could not get the $2 million letter of credit, Hornbeck said, because of its “precarious financial condition.”

It accused the Freeland firm of “financial instability,” and said Nichols Brothers “financially fell behind in several prior construction projects” and wanted the contract with Hornbeck “to obtain a much-needed cash payment to cover its earlier shortages,” according to court records.

Last week, Nichols filed a motion to have $2 million liquidated damages claim dismissed.

Nichols has said that Hornbeck frustrated the shipyard’s ability to get the letter of credit, and then bought new vessels “at vastly higher prices” months after it ended the contract with the Freeland boatyard.

Nichols also said it was unjust to ask for $2 million in damages because the letter of credit was not delivered on time, because it was meant to be triggered by not meeting the delivery date for the vessel, and Hornbeck terminated the contract before construction began.

Nichols declined to talk about the lawsuits this week.

More details of the agreement came out two weeks ago.

Samuel Giberga, senior vice president and general counsel for Hornbeck, said in court papers that the company extended a deadline for Nichols Brothers even before its first contract with the company. He also detailed why the letter of credit became such a big issue for Hornbeck.

Giberga said his company asked Nichols for a proposal to build two supply vessels by Dec. 23, 2005, but gave the shipyard an extension until Jan. 11, 2006 to submit a proposal.

Nichols said it could build the first ship for $13.1 million and the second for $12.4 million. Giberga claimed the company’s bid was higher than a Louisiana-based bidder, but Nichols’ “substantially earlier delivery dates” fit with Hornbeck’s market projections for 2009.

“In light of their attractive pricing and delivery schedules, Hornbeck began negotiating win earnest with both Nichols and Leevac and ultimately contracted with both yards to build some of the vessels.”

Hornbeck said it reached an agreement with Leevac to build two 240-foot-long supply ships in February 2006 while it was also negotiating a contract with Nichols.

The Freeland boatyard’s financial footing was a big issue, Giberga said in court records.

“Hornbeck’s managers were particularly concerned about security for Nichols’ performance,” and added that prudent companies always guarded against paying more money if prices and construction costs change during a project – and being left with an unfinished ship in a distant yard – by requiring performance bonds or letters of credit. “Hornbeck, including myself, expressed these concerns to Nichols,” Giberga said.

The Lousiana company asked Nichols to post a letter of credit for $12.5 million, but, according to Giberga, Nichols asked that it be limited to a $2 million letter that would be increased to $12.5 million later.

Both sides later agreed. And on March 10, the companies signed a $25.9 million contract for two 240-foot-long supply ships.

Giberga also said Nichols asked for an extension in delivering the $2 million credit letter, saying he was still waiting for money from the Navy on the X-Craft project.

Giberga also alleged that on March 29, 2006, Nichols asked if subcontractor Todd Pacific Shipyards could put up the letter of credit instead. Hornbeck refused.

About two weeks later, Giberga said Nichols asked to have the deadline for the letter pushed back until April 17, and said he would receive payment on the X-Craft by May 19 and the extension was granted.

On May 2, however, Giberga claims Nichols still couldn’t give Hornbeck the letter because it had lost roughly $2 million on another project “and, even with the X-Craft payment, it still could not secure the $2 million letter of credit. Nichols’ bank would not issue the letter.”

According to court records, Giberga said Hornbeck management had a conference call with senior management at Nichols Brothers on May 10.

“During the call, Matt Nichols admitted that Nichols did not have the financial wherewithal to perform the contract as written. He stated that Nichols had underbid the job by approximately $1.5 million per vessel, that its actual costs now appeared to substantially exceed what Nichols had anticipated, and that contrary to Nichols’ prior statements, it was unlikely Nichols could obtain either the $2 million line of credit then due, or the $12.5 million letter of credit that would be due in January 2007.”

Giberga also said Nichols tried to retract his comments later in the day.

When Nichols again asked the Lousiana company to accept a letter of credit from Todd Pacific Shipyards, Giberga said Hornbeck realized “Nichols financial condition was precarious.” Hornbeck refused to grant another extension and demanded the letter by the end of the day.

It received an unsigned draft, and then, a letter detailing “various settlement options,” including one that had a “breakaway fee” to terminate the contract.

Hornbeck declared Nichols in default for not supplying the $2 million letter of credit on May 25 and terminated the contract with Nichols on June 9, according to court documents.

Company owes money to county

The shipyard’s financial troubles have not entirely passed.

Nichols Brothers is currently past due on taxes for its property in Freeland and Langley.

“We have about $37,000 in taxes owing,” said Island County Treasurer Linda Riffe.

A total of $12,325 in taxes were due on seven parcels in Freeland and Langley for the second half of 2007 and has not been paid.

Personal property taxes — taxes assessed on business equipment — totaling $10,733 are also delinquent for the second half of 2007.

The company also faces advance taxes of $14,915 on personal property that are due by Nov. 30. Riffe said a bill for those taxes would be mailed this week.

No contracts cancelled

An indication that Nichols may remain in Freeland is that as of Monday, Nichols Brothers had not pulled out of contracts with other shipyards to build vessels.

Nichols Brothers, Todd Pacific Shipyards and J.M. Martinac Shipbuilding submitted a proposal to build ferries for Washington State Ferries earlier this year.

The companies want to jointly build four 144-car, 1,500 passengers ferries for the state. The Legislature set aside nearly $348 million for the project and details were negotiated when Nichols announced its closure.

Todd Pacific is the prime contractor to build four auto ferries for Washington and had signed a letter of intent earlier this year with Nichols and J.R. Martinac Shipyard in Tacoma as sub-contractors.

“We’re in the process of negotiating the prime contract with the state right now,” said Mike Marsh, an attorney with Todd Pacific Shipyard. “How this affects Nichols is uncertain since everything is so new.”

Todd Shipyards had been floated as one of the candidates to buy Nichols Brothers. The Seattle-based shipyard would not deny or confirm the rumor.

Asked if Todd had any interest in buying or operating Nichols in the future, Marsh remained tightlipped.

“As a public traded company, we do not comment at any time about potential mergers and acquisitions,” he said.

Seattle-area shipyards were taken by surprise by Friday’s that Nichols had closed down.

“No one here had a clue things were so bad,” Marsh recalled. “It isn’t happy news and not good for the industry. We’ve always had great respect for the quality of the work Nichols does and certainly do not applaud their situation.”

Andrew Posewitz, Todd’s human resource director, said there may be jobs available for shipfitters, welders, sheet metal mechanics, pipe fitters, outside machinists, painters and abrasive blasters.

“We are constantly on the lookout for the best marine talent in the Northwest,” Posewitz said. “To the extent Nichols employees’ qualifications meet our current needs, we welcome those applicants.”

Baydelta Maritime in San Francisco runs a large tugboat operation in the Bay area. It, too, had contracted for two tugboats from Nichols Brothers, but President Jack Going refused to comment on any continuing negotiations or the deal’s current status.

The company’s outside salesman, Steve Ware, wasn’t so reticent.

“It’s a terrible thing what’s happening to American shipyards,” he said. “Matt (Nichols) ran a fine operation up there and I feel bad for him and his employees.”

Joe Martinac builds tugboats at his shipyard in Tacoma and has been both a partner and competitor of Nichols over the years.

“I have a great deal of respect for Matt and his people,” Martinac said. “They can be formidable competitors. But 10 years ago we worked together on a bid for Jumbo Mark II ferries and it was a positive experience.”

Currently, Martinac’s 100-man yard is working on two large tugs with three more in the pipeline. And the company is planning to subcontract with Nichols for Todd Pacific on the future contract for four Washington state ferries.

“I hope Nichols can overcome their problems and sort things out,” Martinac said. “We’ll just have to see what develops.”

He added that his company is always happy to accept applications from talented workers; he has a need for qualified welders at the moment.

Last April, Nichols Brothers and Kvichak Marine Industries reach agreement with the San Francisco Bay Area Water Transit Authority for the Freeland shipyard to build “green ferries” — two 149-passenger vessels, with first delivery in 2007.

Shirley Douglas, spokeswoman for the the San Francisco Bay Area Water Transit Authority, said the transit authority had just become aware of the situation at Nichols Brothers and she could not comment on the status of the project.

Sen. Mary Margaret Haugen, D-Camano Island was in Washington last week and was caught off guard by the closure of the Freeland shipyard.

“My husband gave me the news Friday night and I was shocked,” she said. “That shipyard is a vital component for Whidbey and the economic and personal impact goes well beyond the workers and their families.”

Haugen was heavily involved in forming a consortium with Nichols, J.M. Martinac of Tacoma and prime contractor Todd Pacific to build the four new ferries for the state.

“We must proceed with these ferries and Matt was a key part of putting that together. There’s not a lot the state can do at this point but I’ll be working with the governor, contractors and the ferry system to see what can be done.

“We need to keep that business on the island,” she said.

Community offers help

Meanwhile, the community rallied to help Nichols Brothers Boat Builder employees after the announcement of the closure.

However, Nichols Brothers Boat Builders told local organizations its workers did not need help.

“The company feels they have covered their employees. They said they talked to employees personally,” said Sharon Hart, executive director of the Island County Economic Development Council.

“The official line is they are on stay-down until they reorganize,” Hart added.

Bryan Nichols said Tuesday morning the outpour of support from the community was tremendous.

“We really appreciate all the support from the community. It’s been huge. People have been stopping by, saying ‘Don’t give up,’ ‘Go get ‘em,’ “We’re

praying for you.’ That means a lot to us, just to know that the majority of this community is behind us.”

Nichols said the company is covering the health benefits for workers and their families for the month of November. Employees are also on four weeks of standby for unemployment.

Others have also offered to help.

“We have had multiple calls from shipyards and manufacturers around Washington that have offered to put our employees to work on temporary basis,” Nichols said.

“Most of our employees we talked to want to come back here,” he added.

The Island County Economic development Council, Workforce Representatives, South End chambers of commerce, and the Center for Marine Excellence were planning a meeting Nov. 13 for employees and their families to help them with coping with unemployment benefits and getting through a tight spot.

However, the organizers put their plans on hold after Nichols Brothers officials requested not to hold the meeting.

Even Congressman Rick Larsen offered to pitch in. His office was trying to help displaced workers, he said.

“First of all, this is sad news not only for the workers who are losing their jobs but for the community as a whole,” said Rep. Larsen (D-2nd District).

“Matt and all the workers have consistently developed quality boats that are used all over the United States.

“I have asked my office to offer any assistance we can to help laid-off employees access the resources they need to find new jobs,” Larsen said.

Larsen’s office said it will help laid-off workers by directing them to a “community coordinating team” made up of the EDC, the NW Workforce Council, Workforce and the Employment Security Department to can help provide career counseling and temporary health care coverage.

“Several job fairs are being planned specifically for unemployed Nichols Bros. workers, and we’ll work to get the word out about those events,” added Amanda Mahnke, Larsen’s press secretary.

“Our office has spoken with the Economic Development Association of Skagit County and the NW Center of Excellence for Marine Manufacturing and Technology and asked them to help identify potential employment opportunities,” she added.

Organizations provide resources

A number of community service organizations quickly gathered information outlining resources for workers and their families covering everything from food needs to financial assistance with activities for kids.

Community organizations said they are ready to help if people want assistance.

At Langley’s Family Resource Center, Amanda Fisher said the phone began to ring not long after the official lay-off announcement was made.

“We started getting calls on Friday because we’re a main source of referrals for families facing tough times,” she said.

Fisher noted that a representative from the state’s Department of Human Services would be on hand every Wednesday from 9 a.m. to 4 p.m. to assist anyone who needs to sign up for food or medical coupons or to have childcare expenses paid through the state.

The FRC can help with fees for activities for kids such as after school clubs, sports, pay for school pictures and year books on a limited basis.

They also provide referral to help people figure out individual situations.

The Good Cheer Food Bank always sees an increase in when Nichols Brothers announces seasonal lay-offs, which is quite common, said Kathy McLaughlin, Good Cheer executive director.

It didn’t take long for the first calls to come in after workers were sent home Friday.

“On Friday we had a family that used the food bank in the past come in and say that they were going to have to use us again until her husband found something,” McLaughlin said. “She did say there was a possibility that Boeing was going to hire him so she was hoping it would be only a one month need.”

But also the community began to pitch in right away with donations.

“A check has already been dropped off and an e-mail saying a check is on the way,” McLaughlin said.

That’s a good thing, because Good Cheer is getting ready to order more food to address the increased need.

Good Cheer encourages anybody to stop by or call if they need help. The food bank staff wants people to come get free food, rather than to stop paying other necessities like rent or healthcare to buy food.

“That’s why we are here,” she said.

Since the food bank moved to it’s new location on Grimm Road in Bayview, Good Cheer also has the space to store more food.

“We’re ready now,” McLaughlin said.

Good Cheer quickly banded together with other organizations such as Learning and Community Engagement and the Family Resource Center to coordinate aid.

“We are putting together a packet of information that will be available for Nichols Brother employees,” she said.

The package may include a list of all of the South Whidbey resources, the United Way 2007 Family Resource Guide and other brochures that agencies/programs would like to provide.

Even if Nichols Brothers would re-open under the same or new leadership, it is likely that employees will feel the financial aftermath of the lay-off into the holidays.

The Family Resource Center puts on Holiday House to make sure everyone will have a merry Christmas this year and can help with gifts.

Gail LaVassar, director of Readiness To Learn, said there are many organizations that can help with cash.

Helping Hand will help with phone bills after a shut off notice is received. They could also be an organization to give money to help Nichols Brother families with utility and rent needs.

Opportunity Council often can help with utility bills after the bill is late. They can also sometimes help with rent on a one time basis

Friends of Friends are a resource for unpaid medical expenses, especially if lack of payment prevents further care.

Even some elected officials floated ideas to save the company.

Port of South Whidbey commissioner Rolf Seitle had considered the possibility of a public-private partnership to try and keep the yard going.

“But I’ve changed my mind,” he said Monday. “The closing is a bad thing for our community and very difficult to make sense of how it happened. To create 250 family-wage jobs would be an overwhelming task for any public agency, especially as we don’t know what liabilities are involved.”

Economic and community impact

The economic impact on the community, if Nichols was to close could be significant.

Hart said the company has a payroll of about $12 million that brings money to the local economy.

“Nichols is a vital part of the South End’s economy,” she said.

Nichols has launched 450 vessels over the past 40 years, and the shipyard works on two to 10 vessels every year. The company has built tug boats, barges, high-speed aluminum catamarans, ferries, cruise ships and other vessels at its Freeland facility. The company also has a outfitting yard in Langley; both facilities were shut down Friday.

The community continues to speculate what the future will hold for Nichols Brothers and the nearly 200 workers associated with the shipbuilder.

Paul Samuelson, Langley’s future mayor and a South End community activist for nearly 30 years, said it is difficult to evaluate the long-term impact for the community as there are still more questions than answers.

Nichols Brothers has provided much needed manufacturing job base on South Whidbey, but the company also provided much community support for events such as the Island County Fair and the Fourth of July Celebration in Freeland, Samuelson said.

“It’s not only the loss of jobs and the impact on economics, they also provided a tremendous community support,” he said.

Nichols Brothers has been a reliable source of help in the community, and has generously given to numerous fundraisers every year, from helping buy turkeys for shut-ins at Thanksgiving to supporting improvements at the county fair. Much of the work has been behind-the-scenes, such as how just weeks ago, Matt Nichols jumped in and offered a home to a handicapped man who was being evicted from public housing in Langley.

Critique from neighbors

It’s not always been easy on the South End for the boat builders.

Nichols Brothers has shown resilience during tough times, Samuelson said.

“They weathered a lot of hard times here,” Samuelson said. “They’ve taken a lot of heat from their community.”

Besides an economic blow in the early 1980s that almost caused Nichols Brothers Boat Builders to close, the company has faced criticism from neighbors as well.

Jay Hale has lived in Freeland within a stone’s throw of Nichols Brothers Boat Builders since 1958. Hale and his wife have been critical of the company’s adherence to Island County’s land-use and zoning regulations, and have held it to task with a number of lawsuits when the company operated without permits, or permits after the fact. Hale estimates that with time, fuel and legal fees, he has spent in excess of $250,000 trying to keep Nichols in line, winning some battles and losing others.

Despite the issues facing the shipyard, Hale is not overjoyed.

“This is hard. I have real strong feelings for the people who worked at Nichols and the people in the community who are affected by Nichols. I am not happy they are gone. I worried this would happen,” Hale said. “But I feel Nichols Brothers Boat Builders Inc. didn’t live up to their commitment to the community. Therefore, they have left the community stranded.”

Hale sees the county is just as culpable to the issues surrounding Nichols.

“The powers that be have let them operate as a heavy industrial activity in this wrong zone. They are enabling them to do that,” he said. “That is what I mean by commitment to the community. I think they should operate within the law. That is all the community asks that they do.”

All in one boat

Community leaders also worry about the social and emotional well-being of those affected.

At the Christian Missionary Alliance Church in Langley, Rev. Bob Welch noted several parishioners who work at Nichols were in attendance at Sunday’s service.

“We have a time for prayer and we prayed a lot together,” Welch recalled. “It’s a loss to the community and to the affected families. Remember, Matt Nichols has a lot at stake as well. The workers can move on and get another job but Matt took the risk and now he’s paying for it.”

Langley Mayor Neil Colburn said the company’s presence reaches far beyond Freeland’s borders and deeply into the greater South Whidbey Community.

“You can’t really talk to anybody or go anywhere without talking to somebody who has an uncle or a brother or a spouse who hasn’t worked for Nichols at some point,” Colburn said. “My heart goes out to the worker and the families and the members of the Nichols family.”