I managed to solve the problem on my own! In case anyone else is interested, this is what I did:
(1) Open the SFC3 shipnames.txt in Wordpad (not Notepad);
(2) Remove all extraneous data, like squares, additional space, so that a block finally reads like this, for example (from the official file that ships with the game): -
|Fed-Destroyer|USS Norway
||USS Iowa
||USS Missouri
||USS Kortenauer
||USS De Ruyter
... and so on.
Be sure to remove all spaces before and after the | symbol. Class names appear between two of these symbols, as shown above ("Fed-destroyer" -- DD is Norway class). Check the file itself to understand the data, it's simple enough. You can remove all excess spaces, symbols, and so on using the FIND AND REPLACE function.
(3) Save the file as a UNICODE text document. This is probably the most important step. This will allow you to edit the file at a later date--using Wordpad--and it should load without any problems. If you open the file using Notepad it looks like spaghetti, so always use Wordpad.
Hope that helps.