NEWS

by Maureen Flanagan

The purchase of Borden Decorative Products (BDP) by American Capital Strategies (Nasdaq:ACAS) created a new company -- Decorative Surfaces International (DSI) - a top competitor in the vinyl and laminates industry. Yet, when Borden, Inc. put BDP up for sale, its future was far from certain. The company had been struggling with adversarial and acrimonious labor relations at its plant in Columbus, Ohio, and a change in environmental regulations gave its plant in St. Louis, Mo. a limited life expectancy. Added to this, a major competitor had almost purchased Borden's plants to absorb into its own operations, and the prospect of a plant shutdown seemed a very real possibility.

American Capital, however, saw an opportunity for BDP employees to save their jobs and to acquire an ownership stake in the company. The Bethesda, Md. Based buyout and specialty finance company brought to bear its experience in employee buyouts and labor relations to finance a $55 million buyout of BDP. The deal closed in late April 1998 after American Capital negotiated new labor agreements with UNITE, the Union of Needletrades Industrial and Textile Employees, at Borden's Columbus plant and with the newly created UNITE bargaining unit in St. Louis. American Capital put up $16 million of its own resources and secured a commitment from a senior lender for a $40 million credit facility for the new company. About half of the financing facility would finance construction of a new plant to replace the environmentally threatened St. Louis plant. The purchase saved some 700 jobs and created a new company that is owned 51% by its employees and 49% by American Capital and top management.

BDP was a leading manufacturer of decorative paper and vinyl surfacing materials used in industrial applications, with 1997 sales of about $105 million. The St. Louis plant manufactured products that were sold to industrial customers for laminates in furniture, cabinetry, floor tiles and wallboards. Major applications included manufactured housing and recreational vehicles; kitchen and bathroom fittings; ready-to-assemble and other laminated furniture; and residential and office flooring. The Columbus plant also made vinyl wallcovering sold directly or through representatives to decorators, contractors and hotel chains for use in offices, hotels and restaurants.

The two plants had different operational profiles. In Columbus, plant operations suffered from an antagonistic relationship between the union and management, resulting in below-capacity operations and persistent unprofitablilty. Its 1997 earnings (EBIT) were a negative $2.6 million. St. Louis, on the other hand, was efficient and profitable, although it faced closure for environmental reasons. The St. Louis plant produced a quality product and provided good service. In fact, its industrial products held a number one position in the market. Its 1997 earnings were $5.6 million.

For American Capital, a key component of this financing was to reduce costs at both plants to allow rapid amortization of the acquisition debt. To ensure a sound business plan, the workers needed to make concessions amounting to 12.5% of labor costs. The concessions could be accomplished by cutting back the number of employees, reducing benefits, suspending accrual of pensions, and reducing wages. In exchange, the salaried and union employees would gain majority ownership of the company over five years. American Capital successfully negotiated new labor contracts at both plants to implement these terms. Also, a new profit-sharing plan would offer employees an opportunity to recoup their sacrifices.

The financial plan American Capital devised for the new company was powerful enough to induce the top managers to invest $400,000 of their own money. Under the plan, which conservatively forecasts sales increases of only 2% a year, senior debt will be totally paid off after six years and the debt-equity ratio will reach one-to-one after five years.

The capital resources provided by American Capital have given DSI a new lease on life, according to American Capital Principal John Ireland. And, because the employees are invested in the company and its future, a new relationship has developed between management and labor. "DSI should now be one of the lowest cost, highest productivity manufacturers in the industry," Ireland says. "We believe enhanced quality will soon be evident to customers and will ultimately produce profits to be shared by investors and employees alike."

The uncertainty about the future of DSI, which made it difficult to make new sales, has now been removed. The sale recharged the marketing department, according to Ireland, and DSI can now forge ahead with ambitious new plans -- new products, new equipment and a new spirit of cooperation between labor and management. When completed in 1999, its St. Louis facility will be the newest and most modern in the industry.

The uncertainty about the future of DSI, which made it difficult to make new sales, has now been removed. The sale recharged the marketing department, according to Ireland, and DSI can now forge ahead with ambitious new plans -- new products, new equipment and a new spirit of cooperation between labor and management. When completed in 1999, its St. Louis facility will be the newest and most modern in the industry.

Another victory is the leadership from the new CEO, Stephen Walko, previously President and CEO of Textileather Corporation. Walko, in fact, led a 1989 employee buyout of his former company from GenCorp. This buyout produced dramatic improvements to productivity and profitability and profits for all the employees in the ESOP. Walko looks forward to the same mix of higher quality for customers and profits for the employee-owners at DSI.

The DSI purchase provided an opportunity for American Capital to demonstrate its unique multifaceted strengths. Fielding a broad range of people with different skills, American Capital transformed potential plant closures and loss of jobs into an employee-owned business with a solid business plan and bright prospects for the future.