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He played by the book; Indiana's largest homebuilder liquidates: the tale of a failed Florida S&L, a DuPont heir and Jonathan Livingston seagull.

He Played by the Book

Bad things happen to good people. Nobody knows that better than Tom Rush. He had to stop taking new orders a month ago and is liquidating his business.

This sounds like the sad story of a lot of good people around the country, but Rush's situation is different. He was a success. He was the founder and president of Jonathan Homes of Indianapolis, the biggest homebuilder in Indiana for the past three years. He put up 374 houses and had sales of more than $40 million in 1990. His profit was $2.4 million. Then in January--Zap! Eight hundred miles away in Orlando, Fla., the rug got pulled and Jonathan Homes toppled.

It was a no-fault failure. Everybody in the Jonathan shop was doing everything right when disaster struck. The story is worth a replay because there are some lessons here that could apply to any company.

Go back a few years. In 1986, the late Al Savill, an Indianapolis investor who once was part-owner of the Pittsburgh Penguins hockey team, had deals going in Orlando. One was Catalina Homes Inc. Savill had bought a 51 percent interest in the builder back in 1981. Another of his investments was the American Pioneer Savings Bank of Orlando, of which he was a board member.

Savill sold Catalina to the bank and the firm was a winner. This whetted American Pioneer's appetite for more homebuilding properties. Savill knew the Indianapolis market and thought it was the place to expand. He told Richard W. Swann, chairman of the board of American Pioneer, about The Jonathan Group Inc. It would be easier, they reasoned, to pick up a growing company with a great reputation, rather than to start putting a newcomer together from scratch.

They checked the company out as an acquisition candidate. Both men were impressed. Naturally, they nodded approvingly over the healthy financial records, but they were equally attracted by the winning spirit of the Indianapolis corporation and its owner.

History told them that Tom Rush christened his firm nearly two decades ago in Lafayette. Rush and his partners gathered one night in 1974. On the agenda was, "What'll we name the company?" A few ideas were doodled on yellow pads. None grabbed anybody. Then Tom looked down into his open briefcase and saw the title of a popular book he was reading.

There in the night sky was the highflying, chalky shadow of Jonathan Livingston Seagull. Jonathan was persevering, different from others in the "Flock" and determined to have his own identity. That was the image Rush and his partners wanted to create. In homebuilding terms their adopted mission was: "Take a selection of basic plans for homes and offer buyers a variety of customized features." Individuality and choices would set Jonathan Homes apart. "At the time," Rush remembers, "we were practically the only ones who were customizing."

That idea worked. Over the years, Jonathan built more than 2,000 houses, an average of about 125 annually. But the first year, Tom Rush built only three homes. This was a dribble compared with the flood the partners envisioned. They intended to take over the Midwest. They wanted to fly Jonathan to Indianapolis, Cincinnati, Columbus and Dayton, Ohio, Louisville, Ky., Chicago and on to St. Louis. The recession of '75 halted those plans and perhaps saved the company, Rush recalls. He says with a chuckle, "If it hadn't been for the soft market we would have been overextended and gone bankrupt."

They proceeded cautiously but, even so, hard times split the partners in 1977. They divided the assets. Tom Rush took his share, which included Jonathan, and moved to Indianapolis.

The energetic seagull thrived. His image and bold spirit flew over the "O" in the company's logotype, on the letterhead, in advertisements, on posters, brochures, folders, keychains and signs. Rush struggled at first, but fortunately the market turned healthy. Middle-income, double-earner families with toddlers were looking for basic living space, but they wanted their own imprint on the plans. Rush developed a sensitivity to the individual touches they demanded. "Design, style and amenities were important," Rush recalls, "with special emphasis on the kitchen, entertainment and master bath areas."

American Pioneer's background check on Rush would also reveal that he was born and grew up in Lafayette, graduated with a master's degree in business from the Indiana University School of Business in 1963 and immediately went to work for the Cummins Engine Co. in Columbus. For two years he was a financial analyst, then was promoted and transferred to manage the Cummins distributorship in Cincinnati. There he got a taste of running a small business and relished it.

After five years with Cummins, Tom moved back to Lafayette and joined the National Homes Corp. There, for another five years, he helped establish a building subsidiary for the manufacturing organization. His financial background was an asset. He identified tracts where panels or packages could be erected to create multifamily homes that could be turned over to investors at a profit.

When Al Savill contacted Rush in 1986 to see if he would consider selling Jonathan, Rush's reaction was, "'No, absolutely not! I have no interest at all.' But as we discussed it further I felt differently." Savill got Dick Swann and Tom Rush together. "We negotiated and I thought it was a good idea. I got my cash and I was also able to stay on under a five-year management agreement, remained president and had the understanding that I would have complete autonomy. They lived up to their word. I lived up to mine and made them money. They left me alone and we rolled along fine." In the next four years Jonathan's business went soaringly. They kept on building away.

The bad-things-happen-to-good-people scenario began two years ago.

The savings and loan scandal started to rumble. There was consternation at American Pioneer when the government issued its edict: All S&Ls will meet certain increased capital requirements or be taken over by the Resolution Trust Corp., the federal agency charged with solving the festering S&L crisis. Among many others, the RTC turned its eye toward American Pioneer.

Back then Swann juggled a number of hats. Chairman of American Pioneer, where he called the shots, was only one of them. He was also a founding partner in the law firm of Swann & Haddock, whose largest client was, not incidentally, American Pioneer. The law firm was a tenant in the First F.A. Building, second-highest skyscraper in downtown Orlando and the key structure in the DuPont Center skyline. Catch the name DuPont; it is rightfully impressive.

William duPont III is an heir to the family fortune of those chemical manufacturing people in Delaware. He wore more hats than his friend Swann. And, suddenly, one looked as if it were very white. The man obviously controlled enough of the center to get it named after himself. He was a big operator in commercial real estate around Florida. He was a major owner in the Orlando Magic, an NBA expansion basketball team. He owned an interest in a minor-league baseball team and was angling for a major-league franchise, much to the delight of many Orlando citizens. A marina project and large hunks of acreage in Orange County were in his portfolio. Not incidentally, Bill had a piece of American Pioneer, so, naturally, wished it well. He put on his white hat to generate some cash by buying Jonathan and Catalina.

Rush found out and told American Pioneer that if his company was in play he would make a bid to take it back. But American Pioneer wanted to sell both operations as a package and did not consider his offer seriously. A DuPont partnership was picked to take some heat off the nervous S&L. It made a deal with a New York investment firm for $20 million in equity financing. In early 1990 the deal was done. The Jonathan/Catalina package was transferred to DuPont's partnership for $65.7 million in cash, secured notes and assumption of some debt. In effect, duPont was both the buyer and the seller, as one Orlando financial reporter pointed out. That's the way Rush sees it, too.

Every month Rush happily shipped money south. The idea was that both Jonathan and Catalina would sell lots and the cash would go to American Pioneer to pay down the principal on duPont's debt. Also in the arrangement was a revolving credit line with American Pioneer that both builders could draw on to pay for construction. There it sat. Rush did not need the money because Indianapolis banks, Bank One Indianapolis NA and INB National Bank, were providing construction funding for Jonathan.

Rush said at the time that the new ownership would have no effect on Jonathan operations other than to enhance its financial base. Everybody was happy. It looked like a sure save.

Now the dominoes start to fall.

The New York investment firm backed out of the $20 million deal with duPont. The credit market tightened. The commercial real-estate market softened. duPont's partnership was caught in a hellish, high-leverage bind and substitute financing could not be found. duPont was smothered under a $200 million debt racked up over the past decade.

Although American Pioneer had neatly sloughed off its house-building firms, that was not enough. The thrift still could not raise enough cash to meet government reserve standards. It collapsed in May and the Resolution Trust Corp. moved in from Washington. Federal lawyers sued the duPont partnership for non-payment of the debt used to acquire the homebuilding companies from the S&L.

Swann was released as chairman. Then, without its largest client, the law firm of Swann and Haddock folded.

Then, duPont sued the firm for malpractice, saying it gave him bad advice and had conflicts of interest that cost him $40 million.

Meanwhile, Catalina dived into receivership. Its model centers closed, 39 employees were dismissed, and it operated with a skeleton staff to complete homes that had been started.

In October of last year, Rush asked again if he could buy his company back, but the answer was negative. duPont's partnership said his offer was unfair. It was only unfair compared with what duPont paid some months ago. Rush opened his books to local investors to see what they would offer. They said the price he had on the table with duPont was fair.

Unfazed, Rush and his team went right along being more successful every day. That is, until November, when Rush tried to tap his revolving line of credit to buy more land to build more houses. The RTC said, "No way!" The RTC is not in the business of making loansf it's in the business of liquidating.

The relentless clock ticked on.

On Feb. 1, Tom Rush held a news conference. With obvious emotion he shot down the seagull. "Jonathan is not bankrupt. Jonathan has no plans to file bankruptcy," he said. "After many weeks of conversation with our owners and the RTC, it is clear to me that the necessary financing to sustain our operation will not be available. It is with great despair and regret that I have no choice but to announce that Jonathan has been forced by its current ownership to close its sales offices to future sales and begin the process of an orderly liquidation.

"Jonathan will complete all houses currently under construction. Jonathan will honor its warranty obligations to existing homeowners."

Rush spoke of "the many loyal and dedicated people who will be adversely affected by this decision." His reference was to 50 people in the organization who would lose their jobs over the next few months. He was also concerned about the impact on dozens of subcontractors, hundreds of employees, and suppliers.

As reporters questioned, Rush pointed to a picture on the wall and said, "That's where it all began, folks." It was the view of a tri-level house, the first he build under the Jonathan banner in 1975 at Hunter's Ridge. Previously he had commented, "I remember distinctly how careful we were then to make sure it was under $40,000. It was simple and a real value." Seventeen years later he was building and selling homes in Zionsville for $165,000 to $250,000.

"Once this gets completed and my contractual obligations are fulfilled to Bill duPont, then I'll take a look at where I am and what my interests are, and probably somehow, someway find my way back into the homebuilding business. I love it. I love it."

Asked if there is a lesson in all of this, Rush answered, "Know who your owner is."

Although his wings are clipped, Jonathan--the determined, persevering, different little seagull with an identity of his own--will always be proud of his partner.
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Title Annotation:Tom Rush, Jonathan Homes of Indianapolis
Author:Johnson, J. Douglas
Publication:Indiana Business Magazine
Article Type:Cover Story
Date:Mar 1, 1991
Previous Article:How jolly was the holiday?
Next Article:Residential real estate around the state; an update for Evansville, Fort Wayne, Indianapolis, Lafayette, Northwest Indiana and South Bend.

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