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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
COMMISSION FILE NUMBER 33-64140
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DAL-TILE INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3548809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7834 HAWN FREEWAY
DALLAS, TEXAS 75217
(Address of principal executive offices) (Zip Code)
(214) 398-1411
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
As of March 25, 1997, there were 53,435,101 shares of the Registrant's
Common Stock outstanding. The aggregate market value of Common Stock held by
nonaffiliates of the Registrant at March 25, 1997, was $148,767,728 (based on
the closing sale price of the Common Stock on March 25, 1997). This calculation
does not reflect a determination that persons are affiliates for any other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
PART OF FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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Proxy Statement for 1997 Annual Meeting Part III
of Stockholders
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DAL-TILE INTERNATIONAL INC.
FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 11
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 14
Item 6. Selected Financial Data........................................ 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 17
Item 8. Financial Sttements and Supplementary Data..................... 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant............. 29
Item 11. Executive Compensation......................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 33
Item 13. Certain Relationships and Related Transactions................. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 34
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PART I
ITEM 1. BUSINESS
GENERAL
Dal-Tile International Inc., a Delaware corporation formed in 1987 (the
"Registrant"), believes that it is the largest manufacturer, distributor and
marketer of ceramic tile in North America, and one of the largest in the world.
Unless the context otherwise requires, references herein to the "Company" and
"Dal-Tile" shall refer to the Registrant and its consolidated subsidiaries. The
Registrant is a holding company and conducts all its operations through its
subsidiaries. References herein to the fiscal year 1996 refer to the fiscal year
ended January 3, 1997.
The Company currently conducts its business in one industry segment,
engaging in the manufacturing, distribution and marketing of wall, floor and
mosaic tile. The Company operates with a significant level of vertical
integration, combining what it believes to be North America's largest volume
distribution system with modern manufacturing facilities. At its manufacturing
facilities in the United States and Mexico, Dal-Tile produces a wide variety of
tile products. The Company offers a full range of tile and stone products, as
well as installation materials and tools designed to appeal to a broad range of
customers for both residential and commercial applications (new construction as
well as remodeling). The Company's products are sold through its network of
approximately 222 Company-operated sales centers to tile contractors,
architects, design professionals, builders, developers and individual consumers.
The Company is also a significant supplier to the do-it-yourself and
buy-it-yourself market by supplying home center retailers, such as The Home
Depot, Lowe's, Menards and Payless Cashways, as well as flooring dealers. As a
result of the AO Acquisition, the Company has expanded its presence in all tile
applications through sales centers, home center retailers and a network of
independent distributors. The Company's manufactured products are marketed under
the names Daltile/TM/, American Olean/R/ and Homesource/TM/. In addition, the
Company resells other manufacturers' products under the respective
manufacturers' trade names.
The Company commenced operations in 1947 as the Dallas Ceramic Company
and established its first wall tile manufacturing facility and corporate
headquarters in Dallas, Texas. On January 9, 1990, AEA Investors Inc., a
privately held corporation headquartered in New York ("AEA Investors"), arranged
for Dal-Tile to acquire (the "AEA Acquisition") all the outstanding capital
stock of Dal-Tile Corporation, its affiliated companies and certain related
assets.
On December 29, 1995, the Company acquired American Olean Tile Company,
Inc. ("AO") and certain related assets of the ceramic tile business (the "AO
Acquisition") of Armstrong World Industries, Inc. ("AWI").
DISTRIBUTION, SALES AND MARKETING
The Company distributes its products through three separate distribution
channels consisting of (i) Company-operated sales centers, (ii) independent
distributors, and (iii) home center retailers. The Company has organized its
business into three strategic business units to address the specific customer
needs of each distribution channel. Each strategic business unit is supported by
a dedicated sales force.
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The Company has a network of regional distribution centers located
strategically throughout the United States in order to improve customer service
in each distribution channel through shorter lead times, increased order fill
rates and improved on-time deliveries to its customers. In addition, the
regional distribution centers enhance the Company's ability to plan and schedule
production and to manage its inventory requirements.
COMPANY-OPERATED SALES CENTERS
The Company primarily distributes its Daltile brand products through its
network of approximately 218 (excluding four sales centers which distribute the
American Olean brand) Company-operated sales centers in North America in 44
states, serving customers in all 50 states. For the fiscal year ended January 3,
1997, approximately 72% of the Company's net sales were made through its
Company-operated sales center distribution system in the United States and
Canada.
In addition to sales center staff, this distribution channel is
supported by a dedicated sales force of over 100 people. The Company's Daltile
brand also has a dedicated group of over 40 sales representatives for the
architectural community. The architectural community exercises significant
influence over the specification of products utilized in commercial
applications.
The Company has designed each sales center to serve as a "one-stop"
source that provides its customers with one of the ceramic tile industry's
broadest product lines--a complete selection of glazed floor tile, glazed wall
tile, glazed and unglazed mosaic tile, porcelain tile, quarry tile and stone
products, as well as installation materials and tools ("allied products"). In
addition to products manufactured by the Company, the sales centers carry a
selection of purchased products to provide customers with a broader product
line. The sales centers generally range in size from 4,000 to 30,000 square
feet, with a typical center occupying approximately 12,000 square feet. The
sales centers consist of a showroom dedicated to displaying the Company's
product offerings together with office space and a warehouse in which inventory
is stocked. Sales center displays and inventories are designed to reflect local
consumer preferences. The Company's sales centers generally are located in light
industrial areas rather than retail areas and generally occupy moderately priced
leased space under short-to medium-term leases.
The Company has expanded its sales center distribution system from 155
sales centers in 1991 to approximately 218 sales centers. Beginning in 1997, the
Company may open additional sales centers in areas where factors such as
population, construction activity, local economic conditions and usage of tile
create an attractive environment for a sales center. From time to time, the
Company closes centers in locations where economic and competitive conditions
have changed.
INDEPENDENT DISTRIBUTORS
As a result of the AO Acquisition, the Company significantly expanded
its presence in the independent distributor channel. The Company believes that
this channel represents approximately one-half of the ceramic tile industry's
unit volume sales in the United States. The Company has a dedicated business
unit, which includes 10 regional sales managers, to serve the particular
requirements of this channel. The Company currently distributes the American
Olean brand through approximately 170 independent distributor locations who
service retail outlets as well as through four Company-operated
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sales centers. The Company's strategy is to increase its presence in the
independent distributor channel, particularly in tile products that are most
commonly used in flooring applications.
Sales within Mexico are made primarily through a network of independent
retailers who are principally supplied by the Company's Monterrey, Mexico
manufacturing facility.
HOME CENTER RETAILERS
The Company also believes that it is one of the U.S. ceramic tile
industry's largest suppliers to the do-it-yourself and buy-it-yourself markets
by supplying home center retailers, such as The Home Depot, Lowe's, Menards and
Payless Cashways, serving more than 1,000 home center retail outlets nationwide.
The home center retailer channel has provided the Company with new sources of
sales over the past five years and is expected to continue presenting
significant growth opportunities for the Company.
ESTABLISHED BRANDS AND SPECIAL MARKETING PROGRAMS
The Company believes that it has two of the leading brand names in the
U.S. ceramic tile industry--Daltile and American Olean--and established in 1996
the new Homesource brand name. The roots of the Daltile and American Olean brand
names date back approximately 50 years and 75 years, respectively.
The Company-operated sales centers distribute the Daltile brand, which
was repositioned in the marketplace in 1996. This repositioning included the
introduction of an updated product array, a new logo, new sampling materials and
a fully integrated marketing program, all emphasizing a new focus on fashion.
The product offering was streamlined based on the Company's assessment of the
needs of professional installers, designers, architects and builders, as well as
a review of competitive product offerings. The marketing program includes
advertising to targeted customer segments, public relations support,
merchandising (displays/sample boards, chip chests), literature/catalogs and an
Internet website.
The American Olean brand consists of a full product offering and is
distributed primarily through independent distributors. The brand is supported
by a fully integrated marketing program, including trade publication
advertising, consumer advertising, public relations efforts, cooperative
advertising programs for dealers and distributors, displays, merchandising
(sample boards, chip chests), and literature/catalogs.
In addition to distributing the Daltile and American Olean brands, home
center retailers distribute a home center brand--Homesource. The Homesource
brand includes a targeted product offering, customized point of sale displays
and merchandising, cooperative advertising support, literature/catalogs and
sampling materials.
The Company also has special marketing programs with Kohler/R/ for
bathroom and kitchen fixture color coordination and Laura AshleyAE for home
furnishing accessories coordination. Through such programs, the Company develops
ceramic tile products and merchandising programs to complement these other
product lines.
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PRODUCTS AND PRODUCT DEVELOPMENT
Dal-Tile manufactures and sells different types of tiles in various
sizes and styles for commercial and residential use, as well as related trim and
angle pieces. The Company also sells stone and quarry-related products and
allied products purchased from third-party manufacturers. Management believes
that "one-stop shopping," which requires a full product line at its Dal-Tile
operated sales centers, is an important competitive advantage in servicing its
core customers, especially tile contractors.
For the fiscal year ended January 3, 1997, approximately 71% of the
Company's net sales were Company-manufactured products, with the remainder being
provided by other domestic manufacturers, as well as foreign manufacturers,
located principally in Italy, Spain, Mexico and Japan. The Company intends to
increase the amount of Company-manufactured products as a percentage of net
sales.
The Company believes that, due to technological innovations, the U.S.
ceramic tile industry is increasing its fashion orientation, particularly in
tiles used in flooring applications. The Company has developed capabilities to
produce fashionable and innovative tile products and to simulate natural
products such as stone, marble and wood. In order to capitalize on the increased
demand for, and higher margins available from, fashion-oriented tile products,
the Company has (i) increased the number of new tile product introductions, (ii)
focused on shortening product introduction cycle time, (iii) expanded its
relationships with leading glaze and raw material manufacturers, (iv) focused on
consumer preferences to deliver products consistent with current design trends,
and (v) increased its investment in research and development to further develop
new products and manufacturing capabilities.
CUSTOMERS
The Company's core customers consist of large and small tile
contractors, architects, design professionals, builders, developers, and
independent distributors and flooring dealers. The Company also sells to the
do-it-yourself and buy-it-yourself market through relationships with home center
retailers, such as The Home Depot, Lowe's, Menards and Payless Cashways, and is
a significant supplier to this channel. The Company has a broad and diversified
customer base, consisting of more than 30,000 active accounts in the United
States.
The Company also has sales to over 250 national accounts, including
recognized national restaurant chains, such as McDonald's, Wendy's, Taco Bell
and Denny's, and other national chain stores, such as Barnes & Noble book
stores, Wal Mart stores, and Exxon service stations.
The Company does not rely on any one customer or group of customers for
a material amount of its net sales. The Company's largest customer for the
fiscal year ended January 3, 1997 accounted for less than 10% of net sales, and
the Company's ten largest customers accounted for approximately 17% of net sales
in such period.
MANUFACTURING
The Company operates 11 manufacturing facilities with an aggregate
annual manufacturing capacity of 343 million square feet. Since 1991, the
Company has invested approximately $130 million
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in capital expenditures, including approximately $85 million in new plants and
state-of-the-art equipment to increase manufacturing capacity, improve
efficiency and develop new capabilities. Manufacturing capacity has expanded
from 203 million square feet in 1991 to 343 million square feet currently. As a
result of the AO Acquisition, the Company also has a 49.99% interest in
Recumbrimientos Interceramic, S.A. de C.V. ("RISA"), a Mexican joint venture
with Interceramic, a leading Mexican manufacturer, which, pursuant to
contractual arrangements, will supply the Company, at the Company's option, with
up to 25 million additional square feet of floor tile annually. In the third
quarter of the fiscal year ended January 3, 1997, the Company acquired a floor
tile facility with an annual manufacturing capacity of approximately 10 million
square feet in Mt. Gilead, North Carolina.
The Company's largest and lowest cost manufacturing facility, which
represents approximately 45% of the Company's annual manufacturing capacity, is
located in Monterrey, Mexico. The Company's state-of-the-art wall tile facility
in El Paso, Texas started production in 1996 with annual production capacity of
22 million square feet. The Company believes that its manufacturing organization
also offers additional competitive advantages for the Company due to its ability
to manufacture a differentiated product line consisting of one of the industry's
broadest product offerings of colors, textures and finishes, as well as the
industry's largest offering of trim and angle pieces and in its ability to
utilize the industry's newest technology. The Company's manufacturing strategy
is to maximize production at its lowest cost manufacturing facilities, continue
ongoing improvements by implementing demonstrated best practices, seek
opportunities to specialize its factories by product line and continue to invest
in manufacturing technology to lower its costs, develop new capabilities and
expand capacity.
The following table summarizes the products currently manufactured at
the Company's facilities:
FACILITY PRODUCT TYPE
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Fayette, AL ............................ Unglazed quarry tile
Lewisport, KY .......................... Unglazed quarry tile
Monterrey, Mexico ...................... Glazed wall tile; glazed floor tile;
glazed mosaic tile
Mt. Gilead, NC ......................... Glazed floor tile
Olean, NY .............................. Unglazed mosaic tile
Gettysburg, PA ......................... Glazed and unglazed mosaic tile
Jackson, TN ............................ Glazed and unglazed mosaic tile
Conroe, TX ............................. Glazed floor tile
Dallas, TX ............................. Glazed wall tile
El Paso, TX ............................ Glazed wall tile
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Coleman, TX ............................ Unglazed quarry tile
While certain of the manufacturing facilities are described above as
producing either "floor" or "wall" tile, tile consumers employ all sizes and
varieties of tile products in all types of applications. The references to
"floor" and "wall" serve to identify the most common application for the size
and variety of tile in question.
The Company commenced operations in Mexico at its Monterrey facility in
1955 and, since then, has been manufacturing products at this facility for U.S.
and Mexican consumption. Throughout its history, the Monterrey facility has
produced ceramic tiles which meet U.S. quality standards as defined by the
American National Standards Institute. The Monterrey location contains five
distinct manufacturing facilities, three of which produce ceramic tile, one of
which produces frit (ground glass) and one of which produces refractories.
As a result of the AO Acquisition, the Company has evaluated all of its
manufacturing facilities and consolidated its manufacturing network. The Company
consolidated its wall tile production at the end of the first quarter of the
fiscal year ended January 3, 1997 by closing its Lansdale and Jackson wall tile
facilities. In addition, the Company consolidated a portion of its mosaic tile
production in late 1996.
RAW MATERIALS
The Company manufactures (i) wall tile primarily from talc and clay,
(ii) floor tile and glazed mosaic tile primarily from impure nepheline syenite
and clay, (iii) unglazed ceramic mosaic tile primarily from pure nepheline
syenite and clay, and (iv) unglazed quarry tile from clay.
The Company owns long-term talc mining rights in Texas which satisfy
nearly all of the Company's talc requirements. Talc represents the Company's
largest tonnage raw material requirements. The Company owns long-term clay
mining rights in Kentucky which satisfy nearly all of the Company's clay
requirements for producing unglazed quarry tile.
The Company purchases a number of different grades of clay for the
manufacture of its non-quarry tile. Management believes that there is an
adequate supply of all grades of clay and that all are readily available from a
number of independent sources.
The Company purchases all of its impure nepheline syenite requirements
from Minnesota Mining and Manufacturing Company; however, management believes
that there is an adequate supply of impure nepheline syenite which can be
obtained from other sources. The Company purchases pure nepheline syenite from
Unimin Corporation, which is the only major supplier of this raw material in
North America. Management believes that if there were a supply interruption of
pure nepheline syenite, the Company could use feldspar in its production of
mosaic tile, which can be purchased from a number of sources at comparable cost.
The Company uses glazes on a significant percentage of its manufactured
tile. Glazes consist of a mixture of frit (ground glass), zircon, stains and
other materials, with frit representing the largest ingredient. The Company
manufactures approximately 64% of its frit requirements.
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The Company reviews its sources of raw materials periodically and may
eliminate or reduce the use of certain raw materials based on the cost and
chemical composition of alternative sources.
MANAGEMENT INFORMATION SYSTEMS
As a result of the AO Acquisition, the Company is in the process of
combining two management information systems into one fully integrated
information system. This process of converting the combined companies to a
common system has proven to be more complex and time consuming than initially
projected. As a result, the Company is behind schedule in completing the
integration. Until the integration is completed, the Company expects to
experience higher operating expenses, as well as service level impairment in the
Company-operated sales centers. To facilitate the integration of the two
systems, the Company has engaged a leading consulting firm to assist in its
systems implementation. In addition, the Company recently hired a new Chief
Information Officer to lead its information systems group. The fully integrated
information system will encompass purchasing, manufacturing, distribution, sales
and finance. The integration is anticipated to be completed in the second half
of 1997.
COMPETITION
Sales of the Company's products are made in a highly competitive
marketplace. The Company estimates that over 100 tile manufacturers, more than
half of which are based outside of the United States, compete for sales of
ceramic tile to customers located in the United States. Although the U.S.
ceramic tile industry is highly fragmented at both the manufacturing and
distribution levels, the Company believes that it is the largest manufacturer,
distributor and marketer of ceramic tile in North America, and one of the
largest in the world. In addition to competition from domestic and foreign tile
manufacturers, the Company encounters competition from manufacturers of products
which serve as an alternative to tile. Certain of the Company's domestic
competitors are subsidiaries of publicly held companies that may have greater
resources than the Company. Competition in the tile industry is based on price,
customer service, quality and design. The Company believes that it has a
favorable competitive position as a result of its extensive North American
distribution system and manufacturing capacity, together with its vertically
integrated operations. In the fiscal year ended January 3, 1997, approximately
54% of ceramic tile sales (by unit volume) in the United States consisted of
imports, including the approximately 8% of ceramic tile sold in the United
States that was manufactured by the Company in Mexico. In general, the
proportion of U.S. ceramic tile sales attributable to imports has increased in
recent years. Consequently, changes in exchange rates could affect the Company's
competitive position with respect to foreign competitors.
The Company's products compete with numerous other wall and floor
coverings for residential and commercial uses. Among such floor coverings are
carpet, wood flooring, resilient flooring and stone products (such as marble,
granite, slate and limestone tile). Among such wall coverings are paint,
wallpaper, porcelain, laminates and wood paneling. Ceramic tile products compete
effectively as to price with carpeting, wood flooring and vinyl flooring, and
are generally cheaper than natural stone products. Although the cost of
installation of ceramic tile is higher than the cost of installation of carpet,
wood flooring and some wall coverings, it is generally believed that ceramic
tile has a lower cost over its useful life, primarily due to ceramic tile's
durability.
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EMPLOYEES
At January 3, 1997, the Company employed approximately 7,600 persons. At
January 3, 1997, approximately 2,900 of the Company employees were employed by
its Mexican subsidiaries. Approximately 7% of the Company's employees in the
United States are represented by unions. Approximately 88% of the Company's
employees in Mexico are represented by a union under a collective bargaining
agreement, which expires in 1998. The Company has not experienced a significant
work stoppage in Mexico in over 16 years and experienced only one brief work
stoppage in the United States over the past 16 years. The Company believes that
relations with its employees are good.
TRADEMARKS
The Company owns rights to certain material trademarks and trade names,
including Daltile, American Olean, Homesource and Dal-Monte/TM/, which are used
in the marketing of its products. The Company believes that breadth of product
line, customer service and price are important in tile selection and that the
trademarks and trade names themselves are important as source identifiers that
help differentiate Company product lines from those of competitors.
ENVIRONMENTAL REGULATION
The Company is subject to various U.S. federal, state, local and foreign
environmental laws and regulations, including those governing air emissions,
wastewater discharges, the use, storage, treatment and disposal of solid and
hazardous materials, and the remediation of contamination associated with such
disposal. Because of the nature of its business, the Company has incurred, and
will continue to incur, costs relating to compliance with such laws and
regulations. A number of the Company's facilities have conducted tile
manufacturing operations for many years and have used lead compounds and other
hazardous materials in its glazing operations. The Company's facilities located
in the United States have discontinued the use of lead compounds in glaze
materials. The Texas environmental proceedings discussed below arose principally
in connection with the Company's disposal of waste materials containing lead
compounds prior to the AEA Acquisition. The Company also is involved in the
remediation of historic contamination at certain of its other present and former
facilities, as well as at other locations in the United States.
The Company is involved in environmental remediation programs with
respect to two sites near its Dallas facility, which are proceeding under the
oversight of the Texas Natural Resource Conservation Commission ("TNRCC"). In
March 1991, the Company and the predecessor to the TNRCC agreed to an
administrative order (the "1991 Order") relating to past waste disposal
activities conducted prior to the AEA Acquisition. The 1991 Order related
principally to the disposal by the Company of waste materials containing lead
compounds in a gravel pit ("Elam") near the City of Mesquite's landfill in
Dallas County during a period from 1980 to 1987, and the disposal of
miscellaneous solid wastes that were contaminated by lead compounds at a
Company-operated landfill located on Pleasant Run Road ("Pleasant Run") in
Dallas County from 1986 to May of 1990. Pursuant to the 1991 Order, the Company
paid a non-deferred assessed penalty of $350,000 and contributed another
$350,000 to a fund dedicated to environmental enhancement activities in Dallas
County. An additional $300,000 of assessed penalties under the 1991 Order has
been deferred pending the timely and satisfactory completion of the technical
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requirements in the 1991 Order. The Company's closure plan for Elam was approved
by the TNRCC, remediation and other activities associated with the closure has
been completed and a closure certificate is currently being prepared for
submission to the TNRCC. To date, the Company has incurred costs of
approximately $3,000,000 in connection with the closure. The Company expects to
recover at least 50% of such costs pursuant to the Settlement Agreement with two
of the former owners of the Company described below, and the Company believes
that any amounts not recovered pursuant to the Settlement Agreement will not
have a material adverse effect on the Company. Pleasant Run has been remediated
in accordance with a TNRCC-approved closure plan. In 1993 and 1994, the Company
settled tort actions alleging personal injury and property damage filed on
behalf of certain residents and owners of property near Elam and Pleasant Run
for an aggregate amount of approximately $1.4 million.
The remediation described above followed a related criminal
investigation which led to the indictments and, in 1993, the convictions of a
former owner and a former senior executive officer of the Company on federal
charges of violating environmental laws. The U.S. Attorney's Office for the
Northern District of Texas (the "U.S. Attorney's Office"), which obtained the
indictments, informed the Company in writing on April 22, 1992 that, based on
information in the possession of the U.S. Attorney's Office, it had decided not
to prosecute the Company for violations of environmental criminal statutes.
The Company is involved in an environmental remediation program with
respect to the disposal of hazardous wastes prior to the AEA Acquisition at a
third site near its Dallas facility. In October 1994, the Company, Master-Halco,
Inc. (a manufacturing company not affiliated with the Company), certain third
party individuals and the TNRCC agreed to an administrative order (the "1994
Order") relating to, among other things, the alleged disposal of waste materials
containing lead compounds generated by the Company and others at a gravel pit on
Kleburg Road ("Walton") in Dallas prior to 1980. Pursuant to the 1994 Order, the
Company currently is in the process of completing a remedial investigation with
respect to the Walton site. In addition, pursuant to the 1994 Order, among other
things, an administrative penalty of $213,200 assessed against the individuals
has been deferred pending timely and satisfactory completion of the technical
requirements in the 1994 Order. The Company has agreed to indemnify such
individuals against any costs relating to the disposal of industrial solid waste
at the site. Although the cost to remediate the Walton site cannot be predicted
with certainty at this time, the Company believes, based on current preliminary
estimates, that the remediation may cost between approximately $10 million and
$15 million. The Company expects to recover at least 50% of the foregoing costs
pursuant to the Settlement Agreement with two of the former owners of the
Company described below, and the Company believes that any amounts not recovered
pursuant to the Settlement Agreement will not have a material adverse effect on
the Company. In 1994, an action alleging personal injury and property damage was
filed against the Company and others on behalf of certain residents and owners
of property near such site. In 1994, the Company settled this action by agreeing
to remediate soil contamination on the plaintiffs' property and agreeing to pay
approximately $538,000.
On May 20, 1993, the Company entered into an agreement with Robert M.
Brittingham and John G. Brittingham, two of the former owners of the Company
(the "Settlement Agreement"), pursuant to which substantially all of the costs
incurred to the date thereof by the Company (approximately $12 million) in
respect of the 1991 Order, the three Dallas area sites described above and
certain related matters, including certain of the notices of violation referred
to above, have been repaid to the Company. Such former owners are also
obligated, pursuant to the terms of the Settlement Agreement, to indemnify
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the Company against 50% of all expenditures incurred in connection with various
environmental violations relating to the Company's U.S. operations occurring
prior to the AEA Acquisition in excess of the $12 million already paid, until
such total excess expenditures reach a formula amount (currently estimated to be
approximately $18 million), and 100% of all such expenditures in excess of the
formula amount. The Company's expenditures to date in respect of the matters
described above have been or are expected to be indemnified in accordance with
the terms of the Settlement Agreement (subject to the percentage limitations
described above). The Company believes that it has established adequate reserves
in its Consolidated Financial Statements in connection with these matters.
Accordingly, the Company believes (taking into account the indemnification
rights referred to above and the reserves it has established) that its liability
for environmental violations occurring prior to the AEA Acquisition will not
have a material adverse effect on the Company. The Company believes that these
two former owners currently have assets far in excess of their potential
liability under the Settlement Agreement, and, accordingly, the Company believes
that they will be able to satisfy all of their obligations pursuant to their
agreement with the Company. Future events, which cannot be predicted could
affect the ability of these former owners to satisfy their obligations.
Therefore, no assurance can be given that they will be able to meet their
obligations when they arise.
Under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and similar state statutes, regardless of fault or the
legality of original disposal, certain classes of persons, including generators
of hazardous substances, are subject to claims for response costs by federal and
state agencies. Such persons may be held jointly and severally liable for any
such claims. The Company has been named as a potentially responsible party
("PRP") under CERCLA and similar state statutes with respect to the historic
disposal of certain hazardous substances at various other sites in the United
States. With respect to certain of these sites, the Company has entered into de
minimis settlements; at certain other sites, the liability of the Company
remains pending. Based on currently available information, the Company believes
that its ultimate allocation of costs associated with the investigation and
remediation of these pending sites will not, in the aggregate, have a material
adverse effect on the Company's financial condition. In addition, subject to the
terms of the Stock Purchase Agreement, dated as of December 21, 1995 (the "AO
Acquisition Agreement"), pursuant to which the Company acquired AO, AWI agreed
to indemnify the Company for various costs and expenses that may be incurred in
the future by the Company arising out of pre-closing environmental conditions
and activities with respect to AO. The Company believes that, based on currently
available information and the terms and conditions of AWI's indemnification
obligations under the AO Acquisition Agreement, any liability of AO that is
reasonably likely to arise out of any of the sites at which AO has been named as
a PRP as a result of pre-closing activities would not result in a material
adverse effect on the Company.
The Company believes that its manufacturing facilities are in
substantial compliance with current environmental laws and regulations. The
Company's manufacturing facilities generate wastes regulated under the Resource
Conservation and Recovery Act ("RCRA") and other U.S. federal and state laws.
The Company also generates non-hazardous wastes and is engaged in recycling and
pollution prevention programs. Compliance with current laws and regulations has
not had, and is not expected to have, a material adverse effect on the Company,
including with respect to its capital expenditures, earnings and competitive
position. The Company in its ordinary course of business treats its costs
incurred in connection with on-going environmental compliance matters as
ordinary expenses.
-10-
<PAGE>
Numerous aspects of the manufacture of ceramic tile currently require
expenditures for environmental compliance. For example, the mixing of raw
materials, preparation of glazes, and pressing, drying and firing of tile all
are sources of air emissions that require expenditures for compliance with laws
and regulations governing air emissions, including the purchase, operation and
maintenance of control equipment to prevent or limit air emissions. Many of
these manufacturing processes also currently result in the accumulation of dust
that may contain silica, thereby requiring expenditures for capital equipment in
order to comply with Occupational Safety and Health Administration ("OSHA")
regulations with respect to potential employee exposure to such dust. In
addition, the rinsing of spray dryers and containers used for the preparation of
glaze and tile body results in wastewater discharges that require expenditures
for compliance with laws and regulations governing water pollution. Finally,
certain of the Company's manufacturing processes, including the preparation of
glaze, the assembly of certain tiles and the operation and maintenance of
equipment, at times result in the generation of solid and hazardous waste that
require expenditures in connection with the appropriate handling, treatment,
storage and disposal of such waste.
In addition, in light of the lengthy manufacturing history of the
Company's facilities, it is possible that additional environmental issues and
related matters may arise relating to past activities which the Company cannot
now predict, including tort liability and liability under environmental laws. In
particular, a number of the Company's facilities located in the United States
used lead compounds in glaze materials. The Company's Mexican facilities
continue to use lead compounds in their glaze materials on certain specially
ordered tiles. Significant exposure to lead compounds may have adverse health
effects. Although it is impossible to quantify the Company's liability, if any,
in respect of these matters, including liability to individuals exposed to lead
compounds, no claims relating to its use of lead compounds or waste disposal
matters have been made against the Company except as set forth above. In
addition, it is impossible to predict the effect which future environmental
regulation in the United States, Mexico and Canada could have on the Company.
The Company has established an environmental compliance group reporting
directly to the Chief Executive Officer to help ensure the Company remains in
compliance with environmental laws and regulations and to oversee remediation
activities.
GEOGRAPHIC LOCATION
Financial information by geographic location for the three years ended
January 3, 1997 is set forth in Note 14 to the Consolidated Financial Statements
included in this report. See also Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources", below in this report.
ITEM 2. PROPERTIES
The Company owns or leases manufacturing, distribution, office and sales
facilities in the United States and Mexico, as described below.
-11-
<PAGE>
MANUFACTURING, DISTRIBUTION AND OFFICE FACILITIES
The Company owns or leases 16 manufacturing, distribution and office
facilities. The location of, use of, and the floor area of, such facilities are
described as follows:
<TABLE>
<CAPTION>
LEASED/
LOCATION USE SQ. FEET OWNED
- -------- --- -------- -----
<S> <C> <C> <C>
Fayette, AL........... Manufacturing 276,467 Owned
Jacksonville, FL...... Distribution Center 104,000 Leased(1)
Lewisport, KY......... Manufacturing 270,836 Owned
Baltimore, MD......... Distribution Center 315,000 Leased(1)
Monterrey, Mexico..... Manufacturing, Distribution &
Office 1,114,175 Owned
Mt. Gilead, NC........ Manufacturing 250,000 Owned
Olean, NY............. Manufacturing 278,417 Owned
Gettysburg, PA........ Manufacturing 218,609 Owned
Lansdale, PA.......... Distribution Center & Office 1,196,051 Owned
Jackson, TN........... Manufacturing & Distribution 655,211 Owned
Coleman, TX........... Manufacturing 62,603 Owned
Conroe, TX............ Manufacturing 208,059 Owned
Dallas, TX............ Manufacturing, Distribution &
Office 753,536 Owned
Dallas, TX............ Distribution 472,500 Leased(1)
El Paso, TX........... Manufacturing 161,714 Ground
Leased(2)
Los Angeles, CA....... Distribution Center 410,515 Leased(1)
</TABLE>
- --------------------
(1) The leases for the Jacksonville, FL; Baltimore, MD; Los Angeles, CA; and
Dallas, TX facilities expire on May 31, 1999, February 28, 2007, February
28, 2007 and January 30, 2003, respectively, and are subject to renewal
options. The Company intends to close the Jacksonville, FL facility in 1997.
(2) The ground lease expires on November 21, 2034.
The Company closed four leased facilities totaling approximately 452,180
square feet in the fiscal year ended January 3, 1997. The leases for these
facilities expire on various dates, with the latest being on March 31, 2002. The
Company intends to sublease these facilities.
-12-
<PAGE>
SALES CENTERS
The Company owns eight sales centers aggregating 156,386 square feet.
Their location and floor area are as follows:
SQUARE
LOCATION FEET
- -------- ------
Phoenix, AZ...................................... 15,320
Escondido, CA.................................... 14,207
Denver, CO....................................... 22,500
St. Louis, MO.................................... 17,375
Houston, TX...................................... 21,250
Richardson, TX................................... 15,520
San Antonio, TX.................................. 15,520
Salt Lake City, UT............................... 26,437
In addition, the Company leased 214 sales centers (after giving effect
to the anticipated closing of two remaining redundant sales centers to be closed
in the first quarter of 1997) as of January 3, 1997 aggregating approximately
2.3 million square feet pursuant to leases that extend for terms on average of
three-to-five years with expiration dates primarily from 1997-2001.
For a description of the Company's aggregate rental expenses with
respect to its operating leases, see Note 13 to the Consolidated Financial
Statements included herein relating to commitments and contingencies.
ITEM 3. LEGAL PROCEEDINGS
In addition to the proceedings described under Item 1,
"Business--Environmental Regulation", above in this report, the Company is
involved in various lawsuits arising in the normal course of business. In the
opinion of management, the ultimate outcome of these lawsuits will not have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in Item 10 hereof under the caption "Directors
and Executive Officers of the Registrant" is incorporated by reference herein.
-13-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's Common Stock, par value $.01 per share (the "Common
Stock"), is listed on the New York Stock Exchange under the symbol "DTL". The
following table sets forth the high and low sale prices for the Common Stock as
reported by the New York Stock Exchange from August 14, 1996, the first day the
Common Stock began trading on the New York Stock Exchange through January 3,
1997.
HIGH LOW
---- ---
August 14, 1996 to September 30, 1997 .................. 16-3/8 13-7/8
October 1, 1996 to January 3, 1997 ..................... 21-1/4 16-5/8
HOLDERS
At March 25, 1997, there were 31 holders of record of Common Stock and
53,435,101 shares of Common Stock outstanding.
DIVIDEND POLICY
The Company has not paid cash dividends on the Common Stock for the last
three years. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
Moreover, the Company is a holding company with no operations or
significant assets other than its investment in Dal-Tile Group Inc. ("Dal-Tile
Group") and its 49.99% interest in RISA. Dal-Tile Group is a separate and
distinct legal entity and has no obligation, contingent or otherwise, to make
funds available to Dal-Tile, whether in the form of loans, dividends or other
cash distributions. The Bank Credit Agreement (defined below) limits dividends,
loans and other cash distributions from Dal-Tile Group to Dal-Tile, so that
profits generated by Dal-Tile Group may not be available to Dal-Tile to pay cash
dividends or repay indebtedness or otherwise. In light of these limitations,
Dal-Tile Group will be prohibited from making such dividends, loans and other
cash distributions and Dal-Tile does not believe that Dal-Tile Group will be
able to make such dividends, loans and other cash distributions in the
foreseeable future.
SHAREHOLDERS AGREEMENT
Pursuant to a certain shareholders agreement (the "Shareholders
Agreement"), each of DTI Investors LLC ("DTI Investors"), which owns
approximately 54% of the Common Stock outstanding on March 25, 1997, and AWI,
which owns approximately 33% of the Common Stock outstanding on March 25, 1997,
has agreed to vote the shares of common stock owned or controlled by it to
effectuate the provisions of the Shareholders Agreement, including for the
election as directors of Dal-Tile of (i) six individuals designated by DTI
Investors, (ii) three individuals designated by AWI, and (iii) the Chief
Executive Officer of Dal-Tile. The managing member of DTI Investors is AEA
Investors. The rights
-14-
<PAGE>
and obligations of DTI Investors and AWI to designate directors are subject to
change in the event of certain circumstances, more particularly described in the
Shareholders Agreement. The Shareholders Agreement, among other things, contains
provisions (A) providing for registration rights under certain circumstances
under the Securities Act of 1933, as amended, and (B) prohibiting the parties
from acquiring additional shares of common stock until the earlier to occur of
(x) the fourth anniversary of the initial public offering of the Common Stock
and (y) the sale by DTI Investors or AWI or its subsidiaries of 25% or more of
the common stock owned by DTI Investors and certain members of the Company
management or AWI and its subsidiaries, as the case may be, as of December 31,
1995.
Pursuant to the Shareholders Agreement, the Company is prohibited from
engaging in, without the approval of a majority of the Board of Directors
(including at least one AWI designee), any sale or transfer to a third party by
merger or otherwise by the Company or any of its subsidiaries (in one
transaction or a series of related transactions) of any subsidiary of the
Company or assets of the Company or a subsidiary thereof which involves more
than 20% of the total assets of the Company and its subsidiaries taken as a
whole on a cumulative basis, excluding, however, such dispositions in the
ordinary course of business (including, but not limited to, sales of inventory
and finished goods), and excluding the sale of all or substantially all of the
stock or assets of the Company.
AWI has also agreed that it, or one or more of its subsidiaries, will
purchase, from time to time, shares of the Common Stock in open market
transactions at their prevailing market prices having an aggregate purchase
price (exclusive of broker commissions) of $15.0 million, by June 15, 1998 (the
"Open Market Purchases"). As of March 25, 1997, based on information available
to the Company, AWI has purchased $8.1 million of the Common Stock pursuant to
such agreement. The parties to the Shareholders Agreement have agreed to waive
the restrictions contained therein to the extent necessary to permit AWI or its
subsidiaries to effect the Open Market Purchases.
-15-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented for fiscal years 1992
through 1996 are derived from the Consolidated Financial Statements of the
Company for such period, and should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements including the related
notes thereto included elsewhere herein. The Company's Consolidated Financial
Statements were audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
Year Ended,
----------------------------------------------------------
JANUARY 3, DECEMBER 31,
----------- ---------------------------------------------
1997 1995 1994 1993 1992
----------- -------- -------- -------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:(1)
Net sales ....................... $ 720,236 $ 474,812 $ 506,309 $ 440,573 $398,017
Cost of goods sold .............. 369,731 225,364 268,272 239,379 210,121
--------- --------- --------- --------- --------
Gross profit .................... 350,505 249,448 238,037 201,194 187,896
Expenses:
Transportation ................ 47,125 33,535 32,068 25,860 21,284
Selling, general and
administrative .............. 190,911 134,193 132,887 120,748 106,462
Provision for merger
integration charges ......... 9,000 22,430 -- -- --
Provision for special charges . -- -- -- 53,233 --
Amortization/Write-down of
goodwill .................... 5,605 4,765 4,765 224,941 10,721
--------- --------- --------- --------- --------
Total expenses .................. 252,641 194,923 169,720 424,782 138,467
--------- --------- --------- --------- --------
Operating income (loss) ......... 97,864 54,525 68,317 (223,588) 49,429
Interest expense ................ 46,338 55,453 53,542 46,746 44,456
Interest income ................. 1,685 1,250 1,403 517 885
Other (income) expense .......... (129) (2,994) (1,341) 1,088 653
--------- --------- --------- --------- --------
Income (loss) before income taxes
and extraordinary item ........ 53,340 3,316 17,519 (270,905) 5,205
Income tax provision (benefit) .. 18,914 1,176 10,614 (3,225) 5,179
--------- --------- --------- --------- --------
Income (loss)
before extraordinary item ..... 34,426 $ 2,140 $ 6,905 $(267,680) $ 26
Extraordinary item - loss of
early extinguishment of debt .. (29,072) -- -- -- --
--------- --------- --------- --------- --------
Net income (loss) ............... 5,354 $ 2,140 $ 6,905 $(267,680) $ 26
========= ========= ========= ========= ========
BALANCE SHEET DATA
(AT END OF PERIOD):(2)
Working capital ................. 180,819 $ 152,128 $ 115,717 $ 119,109 $116,840
Total assets ................... 688,497 672,393 488,417 512,830 718,987
Total debt ...................... 465,858 527,816 492,753 492,137 456,003
Long-term debt .................. 433,035 480,769 489,404 490,506 455,144
Stockholders' (deficit) equity .. 115,569 9,639 (103,823) (77,449) 189,515
</TABLE>
- ----------------
-16-
<PAGE>
(1) The Company's operating data for the fiscal year ended December 31, 1995
and prior years exclude the results of operations of AO as the AO
Acquisition occurred on December 29, 1995.
(2) The Company's historical balance sheet data for the fiscal years ended
December 31, 1 January 3, 1997 include the assets acquired and
liabilities assumed from the AO Acquisition and therefore are not
comparable to prior years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Historically, the Company has pursued a growth strategy focused on
enhancing its level of vertical integration through opening Company-operated
sales centers in the United States as outlets for Company-manufactured products
and products purchased for resale and increasing manufacturing capacity. In
addition, the Company has benefited from low-cost manufacturing facilities in
Mexico and the United States.
The Company has employed various manufacturing and distribution
strategies to further improve efficiencies, including: (i) investing in
technologically advanced manufacturing equipment; (ii) utilizing fast-fire kiln
technology; (iii) establishing a network of regional distribution centers
("RDC's") to improve customer service; (iv) reducing the number of stock keeping
units; (v) increasing plant specialization by product line; (vi) improving
production planning and logistics; and (vii) investing in management information
systems. The Company believes these steps have enabled the Company to streamline
distribution, improve customer service and maintain attractive margins.
On December 29, 1995, the Company completed the AO Acquisition. As a
result of the AO Acquisition, the Company has increased its presence in all
ceramic tile applications channels and has achieved cost savings by
consolidating manufacturing facilities, restructuring its sales organizations
and eliminating duplicative administrative functions. The Company has also
increased its sales to independent distributors as a result of the AO
Acquisition. Sales through this channel carry lower gross margins than sales
made through the Company's sales centers, but due to lower operating expense
levels, comparable operating margins are achieved.
As part of the AO Acquisition, AWI paid $28.2 million in cash to the
Company. The AO Acquisition was accounted for under the purchase method of
accounting. In exchange for the stock, cash and assets contributed as part of
the AO Acquisition, AWI received 37% of the then issued and outstanding capital
stock of the Company. In connection with the AO Acquisition, the Company
recorded pre-tax merger integration charges of $9.0 million in the year ended
January 3, 1997 and $22.4 million in the year ended December 31, 1995. These
charges were taken principally to write-down less efficient and duplicative
manufacturing equipment not needed in the combined Company, write-down
duplicative management information systems (including future lease commitments
on system hardware), reserve for closings for duplicative sales centers and
distribution centers, and provide for severance costs associated with the
elimination of overlapping positions.
-17-
<PAGE>
The Company is behind its originally anticipated timetable in completing
the integration of its information systems to one operating system following the
AO Acquisition. As a result, the Company will incur additional costs associated
with the completion of this project as well as higher distribution and operating
costs in the first half of the fiscal year ended January 2, 1998. The additional
operating costs are estimated at approximately $4.5 million per quarter in each
of the first two quarters of the fiscal year ended January 2, 1998. In addition,
the Company has seen a negative impact on revenues in the Company-operated
sales centers. This distribution channel carries a more extensive product
offering and has more complex service requirements. As a result, service in this
distribution channel has been most notably affected by the delay in the systems
integration. As sales centers migrate to the integrated system, the difficulties
encountered during the first quarter of the fiscal year ended January 2, 1998
are expected to lessen and service is expected to improve. The delay in
completing systems integration is expected to have a negative impact on full
year 1997 results. The Company continues to make progress in the systems
integration and anticipates substantial completion of the sales centers
conversion by the second half of 1997.
During the third quarter of the fiscal year ended January 3, 1997, the
Company completed its initial public offering of its Common Stock (the "Public
Offering") and a concurrent private placement of its Common Stock to a
subsidiary of AWI (the "Private Placement") at a per share price equal to
$14.00. The Public Offering of 7,316,343 shares of Common Stock, including the
underwriters' over allotment, raised $102.4 million of gross proceeds with net
proceeds, after underwriters' commission and expenses, amounting to $92.6
million. The Private Placement of 714,286 shares of Common Stock raised $10.0
million of proceeds with total net proceeds from the Public Offering and Private
Placement amounting to $102.6 million. In connection with the Public Offering
and Private Placement, the Company effected a recapitalization of its capital
stock. Pursuant to a common stock conversion, all of the classes of the
Company's previously outstanding common stock were converted into 45,404,472
shares of a single class of Common Stock. Concurrently with the Public Offering,
the Company entered into a new bank credit agreement (the "Bank Credit
Agreement") which, along with the proceeds from the Public Offering and Private
Placement, were used to repay substantially all of the Company's then existing
debt (collectively, the "Refinancing"). In connection with the Refinancing, the
Company recorded in the third quarter of the fiscal year ended January 3, 1997
an extraordinary charge of $29.1 million, net of tax, for prepayment premiums on
certain debt repaid and for the write off of existing deferred financing fees
and termination fees paid by the Company in connection with the termination of
its management agreement with AEA Investors (the "Termination Fee").
The following is a discussion of the results of operations for the
fiscal year ended January 3, 1997 compared with the fiscal year ended December
31, 1995. Due to the Company's 52/53 week accounting cycle, the year end for
fiscal year 1996 is on January 3, 1997.
The Company's operating results for the fiscal year ended January 3,
1997 reflect the results of operations of AO and certain related assets of the
ceramic tile business of AWI, which were acquired by the Company from AWI on
December 29, 1995. Because the Company's results for the fiscal year ended
December 31, 1995 do not reflect the AO Acquisition, the results for such
periods are not directly comparable.
-18-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data of the Company as
a percentage of net sales for the periods indicated below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED DECEMBER 31,
JANUARY 3,1997 1995 1994
-------------- ---- ----
<S> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 100.0%
Cost of goods sold .......................... 51.3 47.5 53.0
----- ----- -----
Gross profit ................................ 48.7 52.5 47.0
Operating expenses .......................... 33.9 36.4 33.5
----- ----- -----
14.8 16.1 13.5
Non-recurring charges:
Provision for merger integration charges .... 1.2 4.7 --
----- ----- -----
Operating income ............................ 13.6 11.4 13.5
Interest expense (net) ...................... 6.2 11.4 10.3
Other (income) expense ...................... 0.0 (0.6) (0.3)
----- ----- -----
Income before income taxes and
extraordinary item .......................... 7.4 0.6 3.5
Income Tax Provision ........................ 2.6 0.2 2.1
----- ----- -----
Income before extraordinary item ............ 4.8 0.4 1.4
Extraordinary item, net of taxes ............ 4.1 -- --
----- ----- -----
Net Income .................................. 0.7% 0.4% 1.4%
===== ===== =====
</TABLE>
YEAR ENDED JANUARY 3, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES
Net sales for the fiscal year ended January 3, 1997 increased to $720.2
million from $474.8 million in 1995, an increase of $245.4 million, or 51.7%.
The increase in net sales was due principally to the inclusion of AO's
operations in the fiscal year ended January 3, 1997 and increased shipments to
independent distributors and home center retailers. During the fiscal year ended
January 3, 1997, a primary focus of management was to gain marketplace
acceptance of the Company's three principal brand names, Daltile, American Olean
and Homesource. The Company believes that its strategy of establishing and
differentiating its three brand names through separate distribution channels has
been successful. During the year, management temporarily suspended its sales
center expansion program to concentrate its efforts on integrating the 61 sales
centers acquired as part of the AO acquisition. A total of 51 sales centers have
been consolidated into existing sales centers. During the first quarter of 1997,
the Company will consolidate an additional six locations to complete the sales
center consolidation. In fiscal year 1997, the Company intends to resume its
sales center expansion program by opening 10 to 15 new sales centers.
-19-
<PAGE>
Sales in Mexico decreased to $17.9 million in the fiscal year ended
January 3, 1997 from $23.0 million in 1995. Sales decreased due to a larger
allocation of the Company's Mexican production to distribution in the United
States. The demand for ceramic tile products remains weak in Mexico due to the
economic conditions in Mexico.
GROSS PROFIT
Gross profit increased $101.1 million, or 40.5%, to $350.5 million in
the fiscal year ended January 3, 1997 from $249.4 million in 1995. The increase
in gross profit is principally the result of the increase in net sales. Gross
margin decreased to 48.7% in the fiscal year ended January 3, 1997 from 52.5% in
1995. The decrease in gross margin is primarily due to production earlier in the
year at higher cost facilities acquired as part of the AO Acquisition, which
historically resulted in AO generating lower gross margins than the Company.
These facilities were closed in March 1996 and production shifted to lower cost
manufacturing plants. This higher cost production negatively impacted gross
margins as the inventory was sold in the second quarter and to a lesser extent
in the third quarter. During the first half of the fiscal year ended January 3,
1997, gross margins were 47.8% and increased to 49.5% in the second half of the
fiscal year ended January 3, 1997 primarily as a result of shifting production
to lower cost manufacturing plants. Gross margins have also decreased in the
fiscal year ended January 3, 1997 as the Company significantly increased its
presence in the independent distributor channel, as a result of the AO
Acquisition, and increased sales to home centers. Sales through these channels
carry lower gross margins than sales made through the Company's sales service
centers, but due to lower operating expense levels, comparable operating margins
are achieved.
EXPENSES
Expenses increased to $252.6 million in the fiscal year ended January 3,
1997 from $194.9 million in 1995, primarily as a result of the inclusion of AO's
operations. Expenses in the fiscal years ended January 3, 1997 and December 31,
1995 include, respectively, a $9.0 million and $22.4 million merger integration
charge. Excluding merger integration charges, expenses were $243.6 million in
the fiscal year ended January 3, 1997, as compared to $172.5 million in 1995, an
increase of $71.1 million or 41.2%. Expenses, excluding merger integration
charges, as a percentage of sales, decreased to 33.8% in the fiscal year ended
January 3, 1997 from 36.4% in 1995. The decrease in expenses as a percentage of
sales, excluding merger integration charges, is due to consolidation savings
achieved by integrating sales forces, closing duplicative sales service centers
and consolidating administrative functions. These savings were offset in part by
increased transportation costs, increased advertising and sample costs to
increase brand name recognition and increased information systems costs
resulting from the Company's system integration after the acquisition of AO.
Additionally, sales made to independent distributors and home centers require
lower operating expense levels which offset the lower gross margins generated
through this distribution channel.
MERGER INTEGRATION CHARGES
In the first quarter of the fiscal year ended January 3, 1997, the
Company recorded a pre-tax merger integration charge of $9.0 million for the
closings of duplicative sales centers, duplicative distribution centers and
certain manufacturing facilities, as well as incurrence of severance costs
-20-
<PAGE>
associated with the elimination of overlapping positions. The majority of the
$9.0 million is a cash charge related to lease commitments on closed facilities
and severance costs.
The 1995 merger integration charge represents a $22.4 million pre-tax
merger integration charge in the fourth quarter of 1995 associated with the
revaluation of certain assets in connection with the AO Acquisition. The
majority of the $22.4 million is a non-cash charge to write-down less efficient
and duplicative equipment not needed in the combined Company.
OPERATING INCOME
Operating income increased to $97.9 million in the fiscal year ended
January 3, 1997 from $54.5 million in 1995. Operating income, excluding merger
integration charges, increased $29.9 million, or 38.8%, to $106.9 million in the
fiscal year ended January 3, 1997 from $77.0 million in 1995. Operating income,
excluding merger integration charges, increased as a result of the AO
Acquisition and related cost savings, but was offset in part by lower gross
margins. The operating margin, excluding merger integration charges, decreased
to 14.8% in the fiscal year ended January 3, 1997 as compared to 16.2% in 1995
due to the decrease in gross margins as a result of the higher cost
manufacturing facilities.
INTEREST EXPENSE (NET)
Interest expense (net) decreased $9.5 million to $44.7 million in the
fiscal year ended January 3, 1997 from $54.2 million in 1995. The decrease is
due to reduced debt levels as a result of the third quarter Public Offering and
Private Placement whose proceeds were used to reduce debt. Interest expense
(net) has also decreased as a result of lower borrowing rates from the
Refinancing.
INCOME TAXES
The income tax provision reflects an effective tax rate of 35.5% for the
fiscal year ended January 3, 1997 (prior to the extraordinary charge) and 1995.
INCOME BEFORE EXTRAORDINARY ITEM
Income before extraordinary item increased to $34.4 million in the
fiscal year ended January 3, 1997 from $2.1 million in 1995. Income before
extraordinary item, excluding merger integration charges, increased $23.6
million to $40.2 million in the fiscal year ended January 3, 1997, from $16.6
million in 1995. The increase in income before extraordinary item, excluding
merger integration charges, is due to the increase in operating income, and the
decrease in interest expense (net) is offset in part by transaction gain
reductions in the fiscal year ended January 3, 1997 as a result of a stable peso
during the fiscal year ended January 3, 1997.
EXTRAORDINARY ITEM
In connection with the Refinancing and early extinguishment of debt, the
Company recorded an extraordinary charge of $44.8 million ($29.1 million, net of
tax) for prepayment premiums on certain debt repaid, the write-off of existing
deferred financing fees and the Termination Fee.
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<PAGE>
NET INCOME
Net income increased to $5.4 million in the fiscal year ended January 3,
1997 from $2.1 million in 1995. Net income, excluding merger integration charges
and extraordinary item, increased $23.6 million, to $40.2 million in the fiscal
year ended January 3, 1997 from $16.6 million in 1995.
PESO-US. DOLLAR EXCHANGE RATE
The Company's Mexican facility is primarily a provider of ceramic tile
to the Company's U.S. operations and in addition sells ceramic tile in Mexico.
In the fiscal year ended January 3, 1997, sales in Mexico represented
approximately 3% of the Company's consolidated net sales. The Company's sales in
Mexico are peso-denominated and the majority of the Mexican facility's cost of
sales and operating expenses are peso-denominated. In the fiscal year ended
January 3, 1997, peso-denominated cost of sales and operating expenses
represented approximately 9% of the Company's consolidated cost of sales and
expenses. The Company's exposure to exchange rate changes is favorable to
operating results when the peso devalues against the U.S. dollar, since peso
costs exceed peso revenues. As the peso appreciates against the U.S. dollar, the
effect is unfavorable to the Company's operating results. In addition to
exchange rate changes on operating results, foreign currency transaction gains
or losses are recognized in other income and expense. During the fiscal year
ended January 3, 1997, the Company recorded an insignificant transaction loss of
approximately $0.1 million. Except for peso transactions, management utilizes
foreign currency forward contracts to offset exposure to exchange rate changes,
although the number and amount of such contracts are not significant. Since the
exposure to exchange rate change is favorable when the peso devalues against the
U.S. dollar and management does not expect the peso to appreciate significantly
against the U.S. dollar in the near term, management has not entered into peso
currency-forward contracts.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES
Net sales for the year ended December 31, 1995 decreased to $474.8
million from $506.3 million in 1994, a decrease of $31.5 million, or 6.2%. The
consolidated decrease of $31.5 million is primarily the result of the Mexican
sales decline of $25.6 million as a result of translating peso revenues at
devalued exchange rates and economic uncertainties in Mexico. Sales in the
United States, which represented 94.0% of total Company sales, decreased $6.6
million, or 1.5%, and sales to Canada, which represented 1% of total Company
sales, increased $0.7 million, or 13%. U.S. sales declined primarily as a result
of decreases in the new residential housing sector of tile applications. Same
store sales (those sales centers open at least one full year) decreased 2.7%.
Although the Company's sales were affected by the decline in the residential
sector of tile applications, the 1.5% U.S. sales decline is less than the 8%
decline in residential housing due to increased shipments to home center
retailers, price increases, the opening of 12 new sales centers in 1995, the
introduction of new high-end floor tile products, and increased sales in the
commercial sector of tile applications.
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GROSS PROFIT
Gross profit increased $11.4 million, or 4.8%, to $249.4 million in 1995
from $238.0 million in 1994. The $31.5 million decrease in net sales was more
than offset by the $42.9 million decrease in cost of sales resulting in the
$11.4 million gross profit increase. Gross profit as a percentage of sales
increased to 52.5% in 1995 from 47.0% in 1994. In 1995, the increases in gross
profit and gross profit margin reflect the benefits of a new sales commission
program which emphasized high margin products and new products in high-end floor
tile applications. Additionally, the Company benefited from price increases in
the United States, manufacturing efficiencies and the favorable impact on
manufacturing costs resulting from the devaluation of the peso.
EXPENSES
Total expenses in 1995 were $194.9 million, which included $22.4 million
for merger integration charges described below as compared to $169.7 million in
1994. Excluding merger integration charges, 1995 expenses were $172.5 million as
compared to $169.7 million in 1994, an increase of 1.6%. Expenses (excluding
merger integration charges), as a percentage of sales, increased to 36.3% in
1995 from 33.5% in 1994. The increase of $2.8 million is the result of a $5.5
million increase in the first quarter offset by total reductions of $2.7 million
in the final three quarters. In the first quarter, the Company was temporarily
incurring excess costs to support duplicate distribution functions until the
RDC's and related system were fully implemented. Additionally, expenses
increased in the first quarter due to new marketing programs and the start-up of
ten sales centers opened in the first quarter of 1995. During the second
quarter, management implemented a cost-reduction program, which resulted in
decreased expenses in the final three quarters of 1995 compared to the final
three quarters in 1994.
MERGER INTEGRATION CHARGES
In the fourth quarter of 1995, the Company recorded a pre-tax merger
integration charge of $22.4 million for the revaluation of certain assets in
connection with the AO Acquisition. Also, in connection with the AO Acquisition
and the Company's merger integration plans, the Company will close certain
manufacturing facilities, as well as duplicative sale service centers, and will
discontinue the use of certain equipment. The non-cash portion of the merger
integration charges is approximately $20.2 million and represents the write-down
of less efficient and duplicate equipment not needed in the combined Company.
The cash portion of the merger integration charges is approximately $2.2 million
which primarily consists of leasehold commitments on equipment.
OPERATING INCOME
Operating income decreased $13.8 million, or 20.2%, to $54.5 million in
1995 from $68.3 million in 1994. The decrease is primarily due to the merger
integration charges of $22.4 million. Operating income, excluding merger
integration charges, increased to $77 million, or 12.7%, in 1995 from $68.3
million in 1994 resulting in an increase in operating margin, excluding merger
integration charges, to 16.2% in 1995 from 13.5% in 1994. The operating margin
increased as a result of improvements in gross profit reflecting new high-end
products, price increases, manufacturing
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efficiencies, new commission structure and the favorable effects on costs
resulting from the devaluation of the Mexican peso.
INTEREST EXPENSE
Interest expense increased by 3.7% to $55.5 million in 1995 from $53.5
million in 1994 due to an increase in debt levels during the year to finance the
construction of the El Paso facility and other expansion.
INCOME TAX PROVISION
In 1995 and 1994, income tax provision reflects an effective tax rate of
35.5% and 60.6% respectively. Inflationary accounting required by Mexican tax
law as a result of the 1995 peso devaluation significantly reduced the effective
tax rate in Mexico. This reduction in the effective tax rate was offset
primarily by the nondeductibility for U.S. tax purposes of the Company's
goodwill amortization resulting in an effective tax rate of 35.5%.
The income tax provision for 1994 reflects a high effective tax rate due
primarily to the non-deductibility for tax purposes of the Company's goodwill
amortization. Although the accreted interest on the Zero Coupon Notes is not
payable until their maturity date of July 15, 1998, the interest expense is
deductible for tax purposes.
NET INCOME
Net income decreased $4.8 million, or 69%, to $2.1 million in 1995 from
$6.9 million in 1994 due to merger integration charges. Excluding merger
integration charges, net income increased to $16.6 million (or 140.5%) in 1995
from $6.9 million in 1994. The increase, excluding merger integration charges,
is primarily a result of the improved gross margins and to a lesser extent the
reduction in the effective, tax rate in 1995 as compared to 1994.
EXCHANGE RATE
During 1995, the Mexican peso devalued 36%. Since the Company incurs
more peso-denominated costs than revenues generated in pesos, the effect on
income from operations was favorable to the Company. Additionally, a foreign
transaction gain of $4.1 million was realized due to settling of
peso-denominated monetary liabilities in the United States after devaluation.
The devaluation also resulted in a non-cash reduction in stockholders' equity of
approximately $22.3 million.
AO ACQUISITION
On December 29, 1995, the Company completed the AO Acquisition. As part
of the AO Acquisition, AWI paid $28.2 million cash to the Company. In exchange
for the stock, cash and assets, AWI received 37% of the then issued and
outstanding capital stock of the Company. AO is a leading manufacturer,
distributor and marketer of glazed and unglazed tile in North America.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and funds available under the Bank Credit
Agreement continue to provide the Company with liquidity and capital resources
for working capital requirements, capital expenditures, expansion and debt
service.
Cash used in operating activities was $18.7 million in the fiscal year
ended January 3, 1997 and cash provided by operating activities was $40.7
million in the fiscal year ended December 31, 1995. For the fiscal year ended
January 3, 1997, cash was used primarily to fund inventory increases.
Additionally, cash was also used primarily to pay accrued interest in connection
with the Refinancing and integration costs associated with the AO Acquisition.
Expenditures for property, plant and equipment were $42.0 million for
the year ended January 3, 1997. The expenditures were used to fund expansion of
the floor and mosaic production lines in Monterrey, Mexico; to purchase a floor
tile plant in Mt. Gilead, North Carolina, for $3.5 million; routine capital
improvements and the integration of management information systems after the AO
Acquisition. During the fiscal year ended January 2, 1998 the Company plans to
spend approximately $60 million to expand its manufacturing capacity, improve
manufacturing efficiencies, continue integration of management information
systems, leasehold improvements for new sales centers, expansion of a regional
distribution center, and routine capital improvements. As of January 3, 1997,
the Company had entered into commitments of approximately $10 million for these
expansion plans.
During the third quarter, the Company completed the Refinancing as
discussed above. The Refinancing provides the Company with financial and
operating flexibility to extend the amortization of its indebtedness and to
significantly reduce its interest expense.
In connection with the Refinancing, the Company paid $27.6 million out
of the cash proceeds from the AO Acquisition to redeem $32.6 million aggregate
principal amount at maturity ($26.0 million aggregate accreted value at the
Redemption Date) of the Zero Coupon Notes at a redemption price of 106% of their
accreted value on the Redemption Date.
The Company used the net proceeds of the Refinancing: (i) to repay
substantially all of its outstanding Zero Coupon Notes at a tender price of
approximately 110% of their accreted value, the Company having previously called
for redemption of approximately 25% of its then outstanding Zero Coupon Notes;
(ii) to repay in full outstanding borrowings by Dal-Tile's wholly-owned
subsidiary, Dal-Tile Group, under the previous bank credit agreement; (iii) to
repay $176.0 million of its Series A Notes and $100 million of its Series B
Notes; and (iv) to pay accrued interest and prepayment premiums on certain debt
to be repaid, a $4 million termination fee in connection with the termination of
the Company's management agreement with AEA and fees and expenses associated
with the Refinancing.
In connection with its tender for substantially all of its Zero Coupon
Notes not otherwise called for redemption, the Company solicited sufficient
consents to amend the indenture pursuant to which the Zero Coupon Notes were
issued. Among other things, such amendments eliminated substantially all of the
restrictive covenants in such indenture and terminated the pledge agreement
pursuant to which all of the outstanding stock of Dal-Tile Group had been
pledged.
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In connection with the Refinancing, the Company recorded an
extraordinary charge of $44.8 million ($29.1 million net of tax) for the
prepayment premiums on certain debt repaid, write-off of existing deferred
financing fees and the Termination Fee.
Cash used in financing activities was $2.2 million in the fiscal year
ended January 3, 1997. A summary of financing activities is as follows (in
millions):
Net borrowings under the existing credit facilities 11.8
Debt repayment at date of refinancing (80.8)
Borrowings after the Refinancing under the new
credit facility 7.0
Net reduction in debt (62.0)
Proceeds from issuance of common stock 102.6
Fees and expenses associated with Refinancing (42.8)
Net cash used in financing activities (2.2)
Cash provided by the Public Offering, Private Placement and borrowings
under the Bank Credit Agreement were used to repay substantially all of the
Company's existing debt, fees and expenses associated with the Refinancing.
Borrowings under the credit facilities were used to fund interest payments,
capital expenditures and working capital. Total outstanding debt at January 3,
1997 amounted to $465.8 million as compared to $527.8 million at December 31,
1995, a net reduction in debt of $62.0 million.
The Bank Credit Agreement includes a term loan of $275.0 million and a
revolving credit facility of $250.0 million. The Company will be required to
make quarterly amortization payments on the term loan commencing March 31, 1997
through December 31, 2002, at various scheduled amounts. Borrowings under the
revolving credit facility are payable in full on December 31, 2002. Borrowings
under the Bank Credit Agreement bear interest at variable rates based on
Eurodollar rates or prime rate and are secured by the capital stock of each
Material Subsidiary (as defined in the Bank Credit Agreement). Under the Bank
Credit Agreement, the Company is required, among other things, to maintain
certain financial covenants and has restrictions on incurring additional debt
and limitations on cash dividends. The Company was in compliance with such
covenants at January 3, 1997. A commitment fee at a rate per annum based on a
pricing grid is payable quarterly.
The Company believes that existing cash balances and cash flow from
operating activities together with borrowings available under the Bank Credit
Agreement will be sufficient to fund future working capital needs, capital
spending requirements, expansion plans and debt service requirements of the
Company in the foreseeable future. Additional availability under the revolving
credit facility was $74.0 million at January 3, 1997.
The Company incurred total cash AO merger integration costs in the
fiscal year ended January 3, 1997 of $29.5 million pertaining to severance,
lease commitments and shut-down costs for manufacturing, distribution and
corporate facility consolidations, as well as elimination of duplicate and
overlapping positions.
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The peso devaluation and economic uncertainties in Mexico are not
expected to have a significant impact on the Company's liquidity. Since the
Company has no peso-based borrowings, high interest rates in Mexico are not
expected to directly affect the Company. The Company may encounter changes in
its credit terms to Mexican customers; however, the consolidated impact is not
expected to be material. Since the Company's Mexican subsidiaries incur more
peso-denominated costs than revenues generated in pesos, the effect of any peso
devaluation on income from operations has been favorable to the Company.
The Company is involved in various judicial and administrative
proceedings relating to environmental matters. The Company is currently engaged
in environmental investigation and remediation programs at certain sites
relating to activities prior to the AEA Acquisition and AO Acquisition,
respectively. The Company maintains a reserve for remediation relating to
environmental conditions and activities prior to the AEA Acquisition, and is
entitled to indemnification with respect to certain expenditures incurred in
connection with environmental matters. It does not expect the ultimate liability
with respect to such investigation and remediation activities to have a material
effect on the Company's liquidity and financial condition. In addition, with
respect to the investigation and remediation programs relating to environmental
conditions and activities prior to the AO Acquisition, the Company believes
that, based on currently available information and the terms and conditions of
AWI's indemnification obligations under the AO Acquisition Agreement (as
defined), any liability of AO that is reasonably likely to arise with respect to
such sites would not result in a material adverse effect on the Company.
The United States is a party to the General Agreement on Tariffs and
Trade ("GATT"). Under GATT, the United States currently imposes import duties on
ceramic tile from non-North American countries at 17%, to be reduced ratably to
8(OMEGA)% by 2005. Accordingly, GATT may stimulate competition from non-North
American manufacturers who now export, or who may seek to export, ceramic tile
to the United States. The Company cannot predict with certainty the effect that
GATT may have on the Company's operations.
EFFECTS OF INFLATION
The Company believes it has generally been able to increase selling
prices and enhance productivity to offset increases in costs resulting from
inflation in the U.S. and Mexico. Inflation has not had a material impact on the
Company's results of operations for the fiscal year ended January 3, 1997 and
the fiscal years ended December 31, 1995 and 1994. Approximately 80% of the
Company's inventory is valued using the LIFO inventory accounting method.
Therefore, current costs are reflected in cost of sales rather than in inventory
balances. The impact of inflation in Mexico has not had a significant impact on
the fiscal year 1996, 1995 and 1994 operating results; however, the future
impact is uncertain at this time.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to risks,
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<PAGE>
uncertainties and other factors which could cause actual results to differ
materially from future results expressed or implied by such forward looking
statements. Potential risks and uncertainties include, but are not limited to,
integration issues following the AO Acquisition, the impact of competitive
pressures and changing economic conditions on the Company's business and its
dependence on residential and commercial construction activity, the fact that
the Company is highly leveraged, currency fluctuations and other factors
relating to the Company's foreign manufacturing operations, the impact of
pending reductions in tariffs and custom duties and environmental laws and other
regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages
F-1 through F-31 below and the related financial statement schedule is set forth
on page S-1 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Dal-Tile are set forth below.
Certain of the executive officers hold positions with Dal-Tile Corporation or
Dal-Tile Mexico, each a subsidiary of Dal-Tile. All directors hold office until
the annual meeting of stockholders following their election or until their
successors are duly elected and qualified. Officers are appointed by the Board
of Directors and serve at the discretion thereof.
Name Age Position or Office Held
---- --- -----------------------
Charles J. Pilliod, Jr..... 78 Chairman of the Board of Directors
Howard I. Bull............. 56 President and Chief Executive Officer
of the Registrant and Director
Douglas D. Danforth........ 74 Director
Drew Lewis................. 65 Director
George A. Lorch............ 55 Director
Vincent A. Mai............. 56 Director
Frank A. Riddick III....... 40 Director
Robert J. Shannon, Jr...... 48 Director
Henry F. Skelsey........... 38 Vice President and Director
John M. Goldsmith.......... 33 Vice President and Director
William R. Bronson......... 54 Vice President, Strategic Planning
Dan L. Cooke............... 55 Vice President, Information Technology
James E. Eckelberger....... 58 Vice President, Logistics
William R. Hanks........... 43 Vice President, Manufacturing
Matthew J. Kahny........... 35 Vice President, Independent Distributor
Operations
Barry J. Kulpa............. 49 Executive Vice President and Chief
Operating Officer
Marc Powell................ 41 Vice President, Home Center Services
Carlos E. Sala................ 37 Executive Vice President, Chief
Financial Officer and Treasurer
Javier Eugenio Martinez Serna. 45 Vice President, Mexico Operations
Thomas Scott Smith............ 49 Vice President, Human Resources
Harold G. Turk................ 50 Vice President, Sales Centers Operations
Charles J. Pilliod, Jr., Chairman of the Board of Directors--Mr. Pilliod
has been the Chairman of the Board of Directors since October 1993 and a
Director since March 1990. From October 1993 through April 1994, he also served
as President and Chief Executive Officer of the Registrant. Mr. Pilliod served
as U.S. Ambassador to Mexico from 1986 to 1989. Prior to that, he was the
Chairman and Chief Executive Officer of Goodyear Tire & Rubber Company. Mr.
Pilliod is also a director of A. Schulman Inc. and Marvin & Palmer Associates,
Inc.
Howard I. Bull, President and Chief Executive Officer and Director--Mr.
Bull has been President and Chief Executive Officer and a Director of the
Registrant since April, 1994. Prior to joining the
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<PAGE>
Company, Mr. Bull spent 10 years with Baker Hughes Incorporated, a worldwide
diversified oil services company, where he became Chief Executive Officer for
Baker Hughes Drilling Equipment Company. Additionally, he served York
International Corporation, a worldwide manufacturer and distributor of air
conditioner and refrigeration equipment, as President of its Applied Systems
Division and Air Conditioning Business Group. Mr. Bull is a director of Marine
Drilling Companies, Inc. and National-Oilwell, Inc.
Douglas D. Danforth, Director--Mr. Danforth has been a Director of the
Registrant since February 1997. He was Chairman and Chief Executive Officer of
Westinghouse Corporation from December 1983 to December 1987. Mr. Danforth is a
director of Travelers Group Inc. and Sola International Inc.
Drew Lewis, Director--Mr. Lewis has been a Director of the Registrant since
March 1990. Mr. Lewis retired as Chairman, President and Chief Executive Officer
of Union Pacific Corp., a transportation company, in January 1997. He served as
President of Union Pacific Corp. from April 1986 to May 1994 and as U.S.
Secretary of Transportation between 1981 and 1983. Mr. Lewis is also a director
of Ford Motor Company, American Express Co., FPL Group Inc., Gannett Co., Inc.,
Union Pacific Resources Group Inc., Lucent Technologies, Inc., Mafeo
Consolidated Group and Gulfstream Aerospace Corporation.
George A. Lorch, Director--Mr. Lorch has been a Director of the Registrant
since December 1995. Mr. Lorch has been Chairman and Chief Executive Officer of
AWI, a stockholder of the Registrant, since April 1994. Mr. Lorch was an
Executive Vice President of AWI from March 1988 to September 1993 and served as
President and Chief Executive Officer of AWI from September 1993 to April 1994.
Mr. Lorch is also a director of Stanley Works, Household International and R.R.
Donnelley & Sons Company.
Vincent A. Mai, Director--Mr. Mai has been a Director of the Registrant
since October 1989. Mr. Mai has been the President and Chief Executive Officer
of AEA Investors (the managing member of DTI Investors, which is a beneficial
owner of Common Stock of the Registrant), since April 1989. For the preceding 15
years, he was a Managing Director of Lehman Brothers Inc., an investment banking
firm. Mr. Mai also is a director of the Federal National Mortgage Association.
Frank A. Riddick III, Director--Mr. Riddick has been a Director of the
Registrant since December 1995. Mr. Riddick has been Senior Vice President,
Finance and Chief Financial Officer of AWI, a stockholder of the Registrant,
since April 1995. Previously, he held the following positions with FMC
Corporation, a chemicals and machinery company: Controller, May 1993-March 1995
and Treasurer, December 1990-May 1993.
Robert J. Shannon, Jr., Director--Mr. Shannon has been a Director of the
Registrant since December 1995. Mr. Shannon currently is President, Worldwide
Floor Products Operations of AWI, a stockholder of the Registrant. From March
1992 through December 1995, Mr. Shannon was President of AO, then a subsidiary
of AWI. During 1991, Mr. Shannon was General Manager, Worldwide Gasket Products,
of AWI.
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<PAGE>
Henry F. Skelsey, Vice President and Director--Mr. Skelsey has been a Vice
President and a Director of the Registrant since October 1989. Mr. Skelsey has
been a Managing Director of AEA Investors (the managing member of DTI Investors,
which is a beneficial owner of Common Stock of the Registrant), since March
1988. Prior to his association with AEA Investors, Mr. Skelsey was a Vice
President in the Merchant Banking division of Shearson Lehman Brothers Inc., an
investment banking firm.
John M. Goldsmith, Vice President and Director--Mr. Goldsmith has been a
Vice President and a Director of the Registrant since April 1996. Mr. Goldsmith
is a Managing Director of AEA Investors (the managing member of DTI Investors,
which is a beneficial owner of Common Stock of the Registrant), and has been
associated with AEA Investors since 1989. Previously, he was a member of the
Financial Services practice of Ernst & Young, an independent accounting firm.
William R. Bronson, Vice President, Strategic Planning--Mr. Bronson has
been Vice President, Strategic Planning, of the Company since January 1997. Mr.
Bronson was Vice President, Information Systems, for the Company from January
1996 to December 1996. From July 1994 to January 1996 he was Vice President,
Logistics, for the Company. From August 1990 to July 1994 he was a Business Unit
Manager for Tandem Computers, Inc., a manufacturer and distributor of computer
systems.
Dan L. Cooke, Vice President, Information Technology--Mr. Cooke has been
Vice President, Information Technology, of the Registrant since January 1997.
From 1982 to 1996, he held various positions with PepsiCo in the Frito-Lay and
Pizza Hut divisions, most recently as Pizza Hut Vice President, Information
Technology. Prior to that, Mr. Cooke spent 17 years with IBM in sales and
systems engineering management.
James E. Eckelberger, Vice President, Logistics--Mr. Eckelberger has been
Vice President, Logistics, of the Company since February 1996. From March 1994
until February 1996, Mr. Eckelberger was Vice President, Logistics, of B.J.'s
Wholesale Club, a wholesale retail membership club for consumer goods. From
September 1992 until January 1994 he was the Vice President, Logistics, for Pace
Membership Warehouse, a wholesale-retail membership club for consumer goods.
Between 1988 and 1991, he was Commanding Officer (CEO) of the U.S. Navy's
Aviation Supply Office.
William R. Hanks, Vice President, Manufacturing--Mr. Hanks has been Vice
President, Manufacturing, of the Company since February 1994. He has been with
the Company since March 1985 and prior to 1994 served as General Manager,
Assistant Plant Manager and Vice President, Manufacturing, of one of the
Company's floor tile facilities.
Matthew J. Kahny, Vice President, Independent Distributor Operations--Mr.
Kahny has been Vice President, Independent Distributor Operations, of the
Company since January 1996. From July 1983 through December 1995, Mr. Kahny
served at AO, then a subsidiary of AWI, where he became Business Team Manager,
Floor Tile Products.
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<PAGE>
Barry J. Kulpa, Executive Vice President and Chief Operating
Officer--Mr. Kulpa has been an Executive Vice President since April 1996 and the
Chief Operating Officer of the Registrant since July 1994. Prior to joining the
Company, Mr. Kulpa was Chief Financial Officer for David Weekley Homes, a
national homebuilder in Houston, Texas. Prior to that, Mr. Kulpa spent 10 years
with Baker Hughes Incorporated, a worldwide diversified oil services company,
where he held various Vice President positions, concluding with Vice President,
Operations, of Hughes Tool.
Marc Powell, Vice President, Home Center Services--Mr. Powell has been Vice
President, Home Center Services, of the Registrant since February 1997. From
April 1995 to August 1996, he was Vice President, Consumer Sales, of the
Company. From 1978 to 1994, Mr. Powell worked in various divisions of the
Company.
Carlos E. Sala, Executive Vice President, Chief Financial Officer and
Treasurer--Mr. Sala has been an Executive Vice President since April 1996 and
the Chief Financial Officer of the Company since March 1991. Since March 1990,
Mr. Sala was Vice President of International Operations of Dal-Tile Corporation.
Prior to his association with the Company, he was a Mergers & Acquisitions
Manager at Ernst & Young, an independent accounting firm, from 1988 to 1990. Mr.
Sala is a certified public accountant.
Javier Eugenio Martinez Serna, Vice President, Mexico Operations--Mr.
Martinez has been Vice President, Mexico Operations, of the Company, since
August 1995. Prior to August 1995, he was a managing director of Materiales
Ceramicos S.A. de C.V, a subsidiary of the Registrant, since December 1985.
Prior to joining the Company, Mr. Martinez was Vice President of Strategic
Planning and Business Diversification of the food division of Protexa, a
diversified oil services, construction and food products company in Monterrey,
Mexico from 1980 to 1985.
Thomas Scott Smith, Vice President, Human Resources--Mr. Smith has been
Vice President, Human Resources, of the Company since January 1996. From October
1993 to December 1995 Mr. Smith was President, Grant T.F.W. Industries of Energy
Ventures, a tubular goods manufacturer for the oil and gas drilling industry.
For 21 years prior to October 1993, he was at Baker Hughes, Incorporated, a
worldwide diversified oil services company, where he served as a Vice President
- - Manufacturing, a General Manager and the Director of Human Resources.
Harold G. Turk, Vice President, Sales Centers Operations--Mr. Turk has
been Vice President, Sales Centers Operations, of the Registrant since January
1997. From January 1996 to December 1996 he was Vice President, Home Center
Services, of the Company. In 1995, he was Executive Vice President of Field
Operations of the Company. In 1994, he was Executive Vice President of Marketing
of the Company. Since April 1991, he was Executive Vice President of Sales and
Marketing, Western Region of the Company. Mr. Turk was a Vice President of
Warehouse Administration and Sales of the Company from 1976 to 1991.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the sections captioned "Directors'
Compensation", "Executive Compensation" and "Compensation Committee Interlocks
and Insider Participation" in the Company's
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Proxy Statement for the 1997 Annual Meeting of Stockholders (the "1997 Proxy
Statement") is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the section "Principal Stockholders" in the
1997 Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the section captioned "Certain
Transactions" in the 1997 Proxy Statement is incorporated by reference herein.
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PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents to be filed as part of this report:
--------------------------------------------
1. Financial statements under Item 8:
See Index to Consolidated Financial Statements and Financial Statement
Schedule included on page F-1 below in this report.
2. Financial Statement Schedule filed herewith:
See Index to Consolidated Financial Statements and Financial Statement
Schedule included on page F-1 below in this report.
All other schedules are omitted either because they are not required or
because the required information is included in the financial statements and
notes thereto included herein. See Index to Consolidated Financial Statements
and Financial Statement Schedule included on page F-1 below in this report.
3. List of Exhibits. Each management contract or compensatory plan or
arrangement required to be filed as an Exhibit to this Form 10-K pursuant to
Item 14(c) of this report is identified with an asterisk (*).
EXHIBIT
NO.
- -------
2.1 Stock Purchase Agreement, dated as of December 21, 1995, by and among
Dal-Tile International, Inc., Armstrong Enterprises, Inc., Armstrong
Cork Finance Corporation and Armstrong World Industries, Inc. (Filed as
Exhibit 2 to the Registrant's Current Report on Form 8-K filed on
January 16, 1996 and incorporated herein by reference.)
2.2 Agreement and Plan of Merger among Dal-Tile International, Inc., DTI
Investors LLC and DTI Merger Company, dated as of August 7, 1996 (Filed
as Exhibit 2.1 to the Registrant's Form 10-Q filed on November 7, 1996
and incorporated herein by reference.)
3.1 Second Amended and Restated Certificate of Incorporation of the Company.
(Filed as Exhibit 3.1 to the Registrant's Form 10-Q filed on November 7,
1996 and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company. (Filed as Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 (No. 333-5069) and
incorporated herein by reference.)
-34-
<PAGE>
4.1 Specimen form of certificate for Common Stock. (Filed as Exhibit 4.1
to the Registrant's Registration Statement on Form S-1 (No. 333-5069)
and incorporated herein by reference.)
10.1 Dal-Tile International Inc. 1996 Amended and Restated Stock Option Plan.
(Filed as Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1 (No. 333-5069) and incorporated herein by reference.)
*10.2 Consulting Agreement dated as of August 1, 1995, among Harold L. Turk,
Dal-Tile International, Inc., Dal-Tile Corporation, DTM/CM Holdings
Inc., Dal-Minerals Company, Ceramica Regiomontana S.A. de C.V. and
Materiales Ceramicos, S.A. de C.V. (Filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1 (No. 333-5069) and
incorporated herein by reference.)
*10.3 Amended and Restated Employment Agreement, dated June 7, 1993, between
Dal-Tile Corporation and Harold G. Turk. (Filed as Exhibit 10.2.3 to the
Registrant's Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)
*10.4 Employment Agreement, dated February 5, 1990, between Dal-Tile
Corporation and Carlos E. Sala. (Filed as Exhibit 10.2.4 to the
Registrant's Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)
*10.5 Employment Agreement, dated April 15, 1994, between Dal-Tile Corporation
and Howard I. Bull. (Filed as Exhibit 10.2.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.)
10.6 Indenture dated as of August 11, 1993, between Dal-Tile International
Inc. and Citibank, N.A., as trustee relating to the Zero Coupon Notes.
(Filed as Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference.)
10.7 First Supplemental Indenture dated as of August 1, 1996 between Dal-Tile
International Inc. and Citibank, N.A., as trustee, relating to the Zero
Coupon Notes.
10.8 Credit and Guarantee Agreement, dated August 14, 1996 among Dal-Tile
International Inc., Dal-Tile Group Inc., the several banks, financial
institutions and other entities from time-to-time party thereto, Credit
Suisse, as Documentation Agent, Goldman Sachs Credit Partners L.P., as
Syndication Agent, and The Chase Manhattan Bank, as Administrative
Agent. (Filed as Exhibit 10.1 to the Registrant's Form 10-Q filed on
November 7, 1996 and incorporated herein by reference.)
10.9 Pledge Agreement dated as of October 4, 1996, made by Dal-Tile Group
Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
relating to the pledge of Common Stock of Dal-Tile Mexico, S.A. de C.V.
(Filed as Exhibit 10.2 to the Registrant's Form 10-Q filed on November
7, 1996 and incorporated herein by reference.)
-35-
<PAGE>
10.10 Pledge Agreement dated as of August 14, 1996, made by Dal-Tile
International Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent, relating to the pledge of common stock of Dal-Tile
Group Inc. (Filed as Exhibit 10.3 to the Registrant's Form 10-Q filed on
November 7, 1996 and incorporated herein by reference.)
10.11 Pledge Agreement dated as of August 14, 1996 made by Dal-Tile Group Inc.
in favor of The Chase Manhattan Bank, as Administrative Agent, relating
to the pledge of common stock of Dal-Tile Corporation (Filed as Exhibit
10.4 to the Registrant's Form 10-Q filed on November 7, 1996 and
incorporated herein by reference.)
10.12 Pledge Agreement dated as of October 4, 1996, made by Dal-Tile Group
Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
relating to the pledge of common stock of Dal-Tile Mexico, S.A. de C.V.
(Filed as Exhibit 10.2 to the Registrant's Form 10-Q filed on November
7, 1996 and incorporated herein by reference.)
10.13 Form of Indemnification Agreement between the Dal-Tile International
Inc. and its directors. (Filed as Exhibit 10.4 to the Registrant's
Registration Statement on FormS-1 (No. 33-64140) and incorporated
herein by reference.)
10.14 Settlement Agreement dated as of May 20, 1993, among AEA Investors Inc.,
DTM Investors Inc., Dal-Tile Group Inc., Dal-Tile Corporation, Dal-
Minerals Company and Robert M. Brittingham and John G. Brittingham.
(Filed as Exhibit 10.5 to the Registrant's Registration Statement on
Form S-1 (No. 33-64140) and incorporated herein by reference.)
10.15 Shareholders Agreement, dated December 29, 1995, among Dal-Tile
International Inc., AEA Investors Inc., Armstrong World Industries,
Inc., Armstrong Enterprises, Inc. and Armstrong Cork Finance
Corporation. (Filed as Exhibit 10.6 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated herein
by reference.)
10.16 Agreement, dated July 15, 1996, among Dal-Tile International Inc., AEA
Investors Inc., DTI Investors LLC, Armstrong World Industries, Inc.,
Armstrong Enterprises, Inc. and Armstrong Cork Finance Corporation.
(Filed as Exhibit 10.17 to the Registrant's Registration Statement on
Form S-1 (No. 333-5069) and incorporated herein by reference.)
+21.1 List of subsidiaries of the Dal-Tile International Inc.
+27.1 Financial Data Schedule
- --------------------
+ Filed herewith.
-----------------------------------------
(b) Reports on Form 8-K:
-------------------
None.
(c) Exhibits:
--------
-36-
<PAGE>
See Item 14(a) above.
(d) Financial Statement Schedule
----------------------------
See Item 14(a) above
-37-
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Jurisdiction of
Name of Subsidiary Incorporation
------------------ -------------
Dal-Tile Group Inc. Delaware
Dal-Tile Corporation Pennsylvania
R&M Supplies, Inc. Delaware
Tileways, Inc. Delaware
DTM/CM Holdings Inc. Delaware
Dal-Minerals Company Delaware
Dal-Tile of Canada Inc. Ontario
Materials Ceramicos, S.A. de C.V. Mexico
Dal-Tile Mexico, S.A. de C.V. Mexico
-38-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March 1997.
DAL-TILE INTERNATIONAL INC.
By: /s/ Howard I. Bull
-------------------------
Howard I. Bull
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Charles J. Pilliod Chairman of the Board of March 26, 1997
- --------------------------- Directors
Charles J. Pilliod, Jr.
/s/ Howard I. Bull President and Chief March 26, 1997
- --------------------------- Executive Officer and
Howard I. Bull Director (Principal
Executive Officer)
/s/ Carlos E. Sala Executive Vice President March 26, 1997
- --------------------------- and Chief Financial
Carlos E. Sala Officer (Principal
Financial and Accounting
Officer)
/s/ John M. Goldsmith Vice President and Director March 26, 1997
- ---------------------------
John M. Goldsmith
/s/ Henry F. Skelsey Vice President and Director March 26, 1997
- ---------------------------
Henry F. Skelsey
-39-
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Douglas D. Danforth Director March 26, 1997
- ----------------------------
Douglas D. Danforth
/s/ Drew Lewis Director March 26, 1997
- ----------------------------
Drew Lewis
/s/ Vincent A. Mai Director March 26, 1997
- ----------------------------
Vincent A. Mai
/s/ George A. Lorch Director March 26, 1997
- ----------------------------
George A. Lorch
/s/ Frank A. Riddick III Director March 26, 1997
- ----------------------------
Frank A. Riddick III
/s/ Robert J. Shannon, Jr. Director March 26, 1997
- ----------------------------
Robert J. Shannon, Jr.
-40-
<PAGE>
Dal-Tile International Inc.
Item 14(a) - Index to Consolidated Financial
Statements and Financial Statement Schedule
Years ended January 3, 1997 and December 31, 1995 and 1994
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets at January 3, 1997 and December 31, 1995............. F-3
Consolidated Statements of Operations for each of the three years in the period
ended January 3, 1997........................................................... F-5
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended January 3, 1997.......................... F-6
Consolidated Statements of Cash Flows for each of the three years in the period
ended January 3, 1997........................................................... F-7
Notes to Consolidated Financial Statements....................................... F-8
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.................................. S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Dal-Tile International Inc.
We have audited the accompanying consolidated balance sheets of Dal-Tile
International Inc. (the Company) as of January 3, 1997 and December 31, 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended January 3, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dal-
Tile International Inc. at January 3, 1997 and December 31, 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 3, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernest & Young LLP
Dallas, Texas
February 21, 1997
F-2
<PAGE>
Dal-Tile International Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31,
1997 1995
-------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 9,999 $ 72,965
Trade accounts receivable 123,586 103,909
Inventories 142,413 109,444
Prepaid expenses 2,838 3,872
Other current assets 15,480 17,898
-------------------------
Total current assets 294,316 308,088
Property, plant, and equipment, at cost:
Land 17,403 19,444
Leasehold improvements 10,347 8,567
Buildings 78,360 63,065
Machinery and equipment 126,830 104,520
Construction in process 29,036 14,400
-------------------------
261,976 209,996
Accumulated depreciation 58,350 42,073
-------------------------
203,626 167,923
Goodwill, net of amortization 157,251 162,016
Finance costs, net of amortization 3,683 6,432
Tradename and other assets 29,621 27,934
-------------------------
Total assets $688,497 $672,393
=========================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31,
1997 1995
-------------------------
(In Thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 38,827 $ 38,755
Accru expenses 27,809 27,983
Accrued interest payable 3,293 17,398
Current portion of long-term debt 32,823 47,047
Income taxes payable 2,342 -
Deferred income taxes 1,367 3,981
Other current liabilities 7,036 20,796
-------------------------
Total current liabilities 113,497 155,960
Long-term debt 433,035 480,769
Other long-term liabilities 24,369 25,023
Deferred income taxes 2,027 1,002
Commitments and contingencies
Stockholders' equity:
Common stock 534 41
Additional paid-in capital 436,100 334,035
Accumulated deficit (260,650) (266,004)
Currency translation adjustment (60,415) (58,433)
-------------------------
Total stockholders' equity 115,569 9,639
-------------------------
Total liabilities and stockholders'
equity $ 688,497 $ 672,393
=========================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Dal-Tile International Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1997 1995 1994
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net sales $720,236 $474,812 $506,309
Cost of goods sold 369,731 225,364 268,272
-----------------------------------------
350,505 249,448 238,037
Operating expenses:
Transportation 47,125 33,535 32,068
Selling, general and
administrative 190,911 134,193 132,887
Provision for merger integration
charges 9,000 22,430 -
Amortization of goodwill and
tradename 5,605 4,765 4,765
-----------------------------------------
Total expenses 252,641 194,923 169,720
-----------------------------------------
Operating income 97,864 54,525 68,317
Interest expense 46,338 55,453 53,542
Interest income 1,685 1,250 1,403
Other income 129 2,994 1,341
-----------------------------------------
Income before income taxes and
extraordinary item 53,340 3,316 17,519
Income tax provision 18,914 1,176 10,614
-----------------------------------------
Income before extraordinary item 34,426 2,140 6,905
Extraordinary item - loss on early
retirement of debt, net of taxes (29,072) - -
-----------------------------------------
Net income $ 5,354 $ 2,140 $ 6,905
=========================================
Income before extraordinary item per
common share $0.69 $0.07 $0.23
Extraordinary item (0.58) - -
-----------------------------------------
Net income per common share $0.11 $0.07 $0.23
=========================================
Average outstanding common and
equivalent shares 50,053 30,174 30,170
=========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Dal-Tile International Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------------ CONVERTED
CLASS CLASS BCLASS CLASS CLASS CLASS COMMON
A C D E F STOCK
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Balance at December 31, $ 10 $ - $ 3 $ 10 $ 1 $ 1 -
1993
Net income - - - - - - -
Proceeds from sale of stock - - - - - - -
Currency translation
adjustment - - - - - - -
----------------------------------------------------------------
Balance at December 31, 10 - 3 10 1 1 -
1994
Net income - - - - - - -
Stock issued in connection
with the AO Acquisition 6 - 2 6 1 1 -
Currency translation
adjustment - - - - - - -
----------------------------------------------------------------
Balance at December 31, 16 - 5 16 2 2 -
1995
Net income - - - - - - -
Stock conversion (16) - (5) (16) (2) (2) 454
Proceeds from AWI in
connection with the AO
Acquisition - - - - - - -
Stock issued in connection
with the Initial Public
Offering - - - - - - 80
Currency translation
adjustment - - - - - - -
----------------------------------------------------------------
Balance at January 3, 1997 $ - $ - $ - $ - $ - $ - $534
================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT TOTAL
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, $199,975 $(275,049) $ (2,400) $ (77,449)
1993
Net income - 6,905 - 6,905
Proceeds from sale of stock 500 - - 500
Currency translation
adjustment - - (33,779) (33,779)
-------------------------------------------------
Balance at December 31, 200,475 (268,144) (36,179) (103,823)
1994
Net income - 2,140 - 2,140
Stock issued in connection
with the AO Acquisition 133,560 - - 133,576
Currency translation
adjustment - - (22,254) (22,254)
-------------------------------------------------
Balance at December 31, 334,035 (266,004) (58,433) 9,639
1995
Net income - 5,354 - 5,354
Stock conversion (413) - - -
Proceeds from AWI in
connection with the AO
Acquisition 650 - - 650
Stock issued in connection
with the Initial Public
Offering 101,828 - - 101,908
Currency translation
adjustment - - (1,982) (1,982)
-------------------------------------------------
Balance at January 3, 1997 $436,100 $(260,650) $(60,415) $ 115,569
==================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Dal-Tile International Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1996 1995 1994
--------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,354 $ 2,140 $ 6,905
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 24,017 17,164 17,020
Extraordinary loss 29,072 - -
Merger integration reserve - 22,430 -
Foreign exchange transaction gain (59) (6,067) (6,564)
Zero Coupon Notes interest expense - 10,899 9,700
Deferred income tax provision
(benefit) 13,539 (3,088) 763
Changes in operating assets and
liabilities, net of assets and
liabilities of business acquired:
Trade accounts receivable (19,971) 8,581 (13,726)
Inventories (39,607) (3,580) 1,911
Other assets 217 (5,754) 1,695
Trade accounts payable and
accrued expenses 6,854 12,371 14,890
Accrued interest payable (14,105) 354 307
Other liabilities (23,995) (14,787) (1,431)
--------------------------------------------
Net cash provided by (used in)
operating activities (18,684) 40,663 31,470
INVESTING ACTIVITIES
Expenditures for property, plant, and
equipment, net (42,039) (29,392) (14,160)
FINANCING ACTIVITIES
Repayment of previous long-term debt (51,922) (22,538) (36,934)
Borrowings under previous long-term debt 63,723 46,702 28,000
Repayment of previous debt at time of
refinancing (524,757) - -
Borrowings of new debt at time of
refinancing 444,000 - -
Borrowings under new debt after
refinancing 7,000 - -
Fees and expenses associated with debt
refinancing (42,765) - -
Proceeds from sale of stock and equity
infusion 102,558 27,575 500
--------------------------------------------
Net cash provided by (used in)
financing activities (2,163) 51,739 (8,434)
Effect of exchange rate changes on cash (80) (3,022) (4,694)
--------------------------------------------
Net increase (decrease) in cash (62,966) 59,988 4,182
Cash at beginning of year 72,965 12,977 8,795
--------------------------------------------
Cash at end of year $ 9,999 $ 72,965 $ 12,977
============================================
See accompanying notes.
</TABLE>
F-7
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements
January 3, 1997
1. ORGANIZATION
Dal-Tile International Inc. (the "Company"), a holding company, owns the
outstanding capital stock of its sole direct subsidiary, Dal-Tile Group Inc.
(the "Group"), and conducts its operations through the Group. The Group also
conducts substantially all of its operations through its subsidiaries. Dal-Tile
International Inc., as a stand-alone holding company, has no operations (see
Note 17).
The Group is a multinational manufacturing and distribution company operating in
the United States, Mexico, and Canada. The Group offers a full range of glazed
and unglazed ceramic tile products and accessories. The Group's products are
sold principally through its extensive network of company-operated sales
centers. The Group also distributes products through independent distributors as
a result of the 1995 acquisition and sells to home center retailers and flooring
dealers.
ACQUISITION
On December 29, 1995, the Company completed the acquisition of all of the issued
and outstanding stock of American Olean Tile Company, Inc. ("AO"), a wholly
owned subsidiary of Armstrong World Industries, Inc. ("AWI") and certain related
assets of the Ceramic Tile Operations of AWI (the "AO Acquisition"). The AO
Acquisition was accounted for under the purchase method of accounting. As part
of the AO Acquisition, AWI paid $28,225,000 in cash to the Company.
In exchange for the stock and assets contributed as part of the AO Acquisition,
AWI received 1,513,483 shares of Common Stock of the Company, representing,
after giving effect to such issuance, 37% of the then issued and outstanding
capital stock of the Company. The fair value of the capital stock issued in
connection with the AO Acquisition and the related cash contribution by AWI was
approximately $134,225,000 for both financial reporting and income tax purposes.
The determination of the fair value of the Company's stock was based on arms'-
length negotiations between the Company and AWI. The Company obtained an
independent appraisal of the value of the ceramic tile operations acquired from
AWI. The financial statements include the assets acquired and liabilities
assumed and exclude the results of operations for the year ended December 31,
1995, as the acquisition occurred on December 29, 1995.
F-8
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION (CONTINUED)
AO manufactures and markets commercial and residential glazed and unglazed tile
for sale to contractors, distributors and home improvement centers in the United
States and Canada. The allocation of the purchase price and liabilities assumed
is based on an appraisal. Such allocation is as follows:
(IN THOUSANDS)
Cash contribution received................ $ 28,225
Trade accounts receivable................. 32,443
Prepaid expenses.......................... 4,920
Inventories............................... 32,653
Property, plant and equipment............. 65,304
Trade name................................ 21,100
Investment in RISA........................ 7,000
Trade accounts payable and accrued........ 23,546
expenses
Other liabilities......................... 33,874
---------------
Total purchase price...................... $134,225
===============
The summarized unaudited pro forma results of operations of the Company for the
year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-----------------------
(In Thousands, except
per share data)
<S> <C>
Net revenues $724,446
Net income 42,614
Net income per share 0.91
</TABLE>
The unaudited pro forma results do not necessarily represent results which would
have occurred if the AO Acquisition had taken place on January 1, 1995 nor are
they necessarily indicative of the results of future operations. The pro forma
results for 1995 reflect cost savings of $24,800,000 resulting from the
consolidation of the two companies, but do not reflect $22,430,000 of non-
recurring merger integration charges recorded in 1995 in connection with the AO
Acquisition.
F-9
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements reflect the consolidation of all accounts
of the Company, which includes the Group and the Group's wholly owned
subsidiaries:
<TABLE>
<CAPTION>
FORM OF ENTITY
<S> <C>
Dal-Tile Group Inc. U.S. corporation
Dal-Tile Corporation U.S. corporation
R&M Supplies, Inc. ("R&M") U.S. corporation
Dal-Minerals Company ("Dal-Minerals") U.S. corporation
Dal-Tile Mexico, S.A. de C.V.
("Dal-Tile Mexico") Mexican corporation
Materiales Ceramicos, S.A. de C.V.
("Materiales") Mexican corporation
Dal-Tile of Canada Inc. Canadian corporation
</TABLE>
Significant intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments to be cash equivalents.
INVENTORIES
U.S. finished products inventories are valued at the lower of cost (last-in,
first-out ("LIFO")) or market, while U.S. raw materials and goods-in-process
inventories are valued at the lower of cost (first-in, first-out ("FIFO")) or
market. Mexican and Canadian inventories are valued at the lower of cost (FIFO)
or market.
F-10
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Depreciation for financial reporting purposes is determined using the straight-
line method. Estimated useful lives are as follows:
YEARS
-------------
Leasehold improvements life of lease
Buildings 20 - 30
Machinery and equipment 3 - 20
GOODWILL
Goodwill, which represents the excess cost over the fair value of net assets
acquired, is amortized on a straight-line basis over the expected period to be
benefited of 40 years. Accumulated amortization at January 3, 1997 and
December 31, 1995, was $57,125,000 and $52,360,000, respectively. The carrying
value of goodwill and other long-lived assets is reviewed to determine whether
it may be impaired. If an impairment exists, the impairment loss is measured by
comparing the fair value of the business unit's long-lived assets to their
carrying amount.
FINANCE COSTS
Finance costs incurred in connection with financing are being amortized over the
term of the related debt on a straight-line basis. Accumulated amortization at
January 3, 1997 and December 31, 1995, was approximately $205,000 and
$8,963,000, respectively.
ADVERTISING EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred. Advertising and promotion expenses incurred for the
years ended January 3, 1997 and December 31, 1995 and 1994 amounted to
$14,627,000, $7,566,000, and $7,473,000, respectively.
STOCK OPTIONS
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the underlying common stock at the
date of grant. The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in
F-11
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting for its employee stock options because the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equal the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
RETIREMENT PLANS
Dal-Tile Corporation maintains a defined contribution 401(k) plan for eligible
employees. A participant may contribute up to 15% of his total annual
compensation (annual base pay for union participants) to the plan. Contributions
by Dal-Tile Corporation to the plan are at the discretion of its Board of
Directors. Currently, the Company matches 50% of any non-union participant's
contribution to the plan up to 3% of the employee's total annual compensation.
Dal-Tile Mexico and Materiales maintain defined benefit plans for eligible
employees with funding policies based on local statutes.
FOREIGN CURRENCY TRANSLATION
The Company's Mexican operations use the Mexican peso as their functional
currency. Assets and liabilities are translated from the functional currency
into the U.S. dollar using the period-end exchange rates. Income and expense
accounts are translated from the functional currency into the U.S. dollar using
the average exchange rate for the period. Translation gains or losses are
included as a component of stockholders' equity. Gains and losses resulting
from foreign currency transactions are reflected currently in the consolidated
statements of operations. The Company experienced foreign currency transaction
gains (losses) of ($80,000), $4,100,000, and $2,300,000 for the years ended
January 3, 1997 and December 31, 1995, and 1994, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company is engaged in the manufacturing and distribution of glazed and
unglazed ceramic tile products and accessories in the United States and Mexico
and the distribution of manufactured products in Canada. The Company grants
credit to customers, substantially all of whom are dependent upon the
construction economic sector. The Company continuously evaluates its customers'
financial condition and often requires payments to its customers to be issued on
behalf of the customer and the Company. In addition, the Company frequently
obtains liens on property to secure accounts receivable. Credit losses have been
within management's expectation. Trade accounts receivable are
F-12
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
net of an allowance for losses from uncollectible accounts of $12,750,000 and
$9,389,000 at January 3, 1997 and December 31, 1995, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during each respective
period. Common stock equivalents result from outstanding options to purchase
common stock. Pursuant to the requirements of the Securities and Exchange
Commission, common stock options granted during the 12-month period immediately
prior to the initial public offering of the Company's common stock have been
included in the calculation of shares used in computing earnings per share as if
they were outstanding for all periods presented (using the treasury stock method
in calculating equivalent shares).
PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Pro forma net income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period, and gives effect of the shares issued in connection with the AO
Acquisition as discussed more fully in Note 1. Common stock equivalents result
from outstanding options to purchase common stock. Pursuant to the requirements
of the Securities and Exchange Commission, common stock options granted during
the 12-month period immediately prior to the initial public offering of the
Company's common stock have been included in the calculation of shares used in
computing earnings per share as if they were outstanding for all periods
presented (using the treasury stock method in calculating equivalent shares).
F-13
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31,
1997 1995
---------- ------------
<S> <C> <C>
(In Thousands)
Finished products in U.S. $118,823 $ 85,988
Finished products in Mexico 3,690 4,303
Finished products in Canada 3,724 3,362
Goods-in-process 3,516 3,567
Raw materials 12,660 12,224
--------------------------
Total inventories $142,413 $109,444
==========================
</TABLE>
If U.S. finished products inventories were shown at current costs (approximating
the FIFO method) rather than at LIFO values, inventories would have been
$8,200,000 lower and $2,500,000 lower than reported at January 3, 1997 and
December 31, 1995, respectively.
During 1996, inventory quantities in three of the Company's LIFO pools were
reduced. This reduction resulted in the liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years as compared with the
1996 costs, the effect of which increased net income by approximately $493,000,
or $0.01 per share.
4. OFFERING AND REFINANCING
During the third quarter of 1996, the Company completed an initial public
offering (the "Offering") of its common stock and a concurrent private placement
of its common stock to a subsidiary of AWI (the "Private Placement"). The
Offering of 7,316,343 shares of common stock, including the underwriter over
allotment, raised $102,428,802 of gross proceeds with net proceeds, after
underwriting commission and expenses, amounting to $92,557,930. The Private
Placement of 714,286 shares of common stock raised $10,000,000 of proceeds with
total net proceeds from the Offering and Private Placement amounting to
$102,557,930. In connection with the Offering and Private Placement, the
Company effected a recapitalization of its capital stock. Pursuant to a common
stock conversion, all of the classes of the Company's previously outstanding
common stock were converted into 45,404,472 shares of a single class of common
stock. In addition, all outstanding options to purchase Dal-Tile's capital
stock were converted into options to purchase 4,204,747 shares of Common Stock.
Concurrently with the Offering, the
F-14
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
4. OFFERING AND REFINANCING (CONTINUED)
Company entered into a new bank credit agreement (the "New Bank Credit
Agreement") which along with the proceeds from the Offering and Private
Placement were used to repay substantially all of the Company's debt
(collectively, the "Refinancing"). The New Bank Credit Agreement includes a term
loan of $275,000,000 and a revolving credit facility of $250,000,000. Had the
Offering and Refinancing occurred on January 1, 1996, pro forma net income and
earnings per share for the year ended January 3, 1997 would be $15,020,000 and
$0.27, respectively. The calculation of pro forma net income and earnings per
share takes into account (a) the elimination of historical interest expense on
the repaid debt from the beginning of the year to the actual date of the
Refinancing, (b) the inclusion of estimated interest expense on the new debt
from the beginning of the year to the actual date of the Refinancing, and (c)
the amortization of debt issuance fees incurred in the Refinancing over the
entire year.
The Company used the net proceeds of the Refinancing: (i) to repay substantially
all of its outstanding Zero Coupon Notes at a tender price of approximately 110%
of their accreted value, (the Company having previously called for redemption
approximately 25% of its then outstanding Zero Coupon Notes); (ii) to repay in
full outstanding borrowings by the Group under a previous bank credit agreement
(the "Previous Bank Credit Agreement"); (iii) to repay $176,000,000 of its
Series A Notes and $100,000,000 of its Series B Notes; and (iv) to pay accrued
interest and prepayment premiums on certain debt to be repaid, a $4,000,000
termination fee in connection with the termination of the Company's management
agreement with AEA Investors Inc. (the "Termination Fee") and fees and expenses
associated with the Refinancing. AEA Investors Inc. is the managing member of
DTI Investors LLC, which is a beneficial owner of Common Stock of the Company.
F-15
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the
following:
JANUARY 3, DECEMBER 31,
1997 1995
--------------------------
(IN THOUSANDS)
<S> <C> <C>
Dal-Tile International Term Loan,
interest due quarterly at LIBOR plus
1% (approximately 6.6% at January 3,
1997), principal due in variable
quarterly installments through
December 31, 2002, secured by 100% of
the capital stock of each material
subsidiary $275,000 $ --
Dal-Tile International new revolving
line of credit, interest due quarterly
at LIBOR plus 1% (approximately 6.6%
at January 3, 1997), principal due
December 31, 2002, secured by the
capital stock of each material
subsidiary 176,000 --
Dal-Tile Corporation Series 1987 and
1986 Industrial Development Refunding
and Revenue Bonds, interest due
monthly at a variable rate not to
exceed 15% (approximately 4.2% at
January 3, 1997), bonds redeemable in
variable annual installments through
March 1, 2004, secured by certain
manufacturing facilities 5,800 6,500
Dal-Tile International Senior Secured
Zero Coupon Notes 140 99,078
Dal-Tile Group unsecured Series A Notes -- 220,000
Dal-Tile Group unsecured Series B Notes -- 100,000
Dal-Tile Group unsecured revolving line
of credit -- 91,197
Other 8,918 11,041
--------------------------
465,858 527,816
Less current portion 32,823 47,047
--------------------------
$433,035 $480,769
==========================
</TABLE>
During the third quarter of 1996, the Company paid $27,558,410 out of the cash
proceeds from the AO Acquisition to redeem $32,600,000 aggregate principal
amount at maturity
F-16
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
($25,998,392 aggregated accreted value at the redemption date) of the Zero
Coupon Notes at a redemption price of 106% of their accreted value on the
redemption date.
Under the New Bank Credit Agreement, the Company is required, among other
things, to maintain certain financial covenants and has restrictions on
incurring additional debt and limitations on cash dividends. The Company was in
compliance with such covenants at January 3, 1997. A commitment fee at a rate
per annum based on a pricing grid is payable quarterly.
On December 27, 1996, Chase Manhattan Bank of Delaware issued a standby letter
of credit in the amount of $1,450,655 under the New Bank Credit Agreement for
worker's compensation insurance.
Under the terms of the Industrial Development Refunding and Revenue Bonds, Dal-
Tile Corporation is required to maintain certain minimum levels on net worth,
current ratio and debt coverage.
Aggregate maturities of long-term debt for the five years subsequent to January
3, 1997 (in thousands), are:
<TABLE>
<CAPTION>
<S> <C>
1997 $32,823
1998 42,600
1999 42,451
2000 52,451
2001 51,992
</TABLE>
Total interest cost incurred for the years ended January 3, 1997 and December
31, 1995, and 1994, amounted to approximately $47,706,000, $56,699,000, and
$54,208,000, respectively, of which approximately $1,368,000, $1,246,000, and
$666,000, respectively, was capitalized to property, plant and equipment. Total
interest paid, net of interest received, was $52,857,000, $43,460,000, and
$42,446,000 for the years ended January 3, 1997 and December 31, 1995, and 1994,
respectively.
F-17
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
6. EXTRAORDINARY ITEM
In connection with the refinancing and early extinguishment of debt, the Company
recorded an extraordinary charge of $44,800,000 ($29,072,000, net of tax), for
prepayment premiums on certain debt repaid, the write-off of existing deferred
financing fees and the Termination Fee.
7. CAPITAL STRUCTURE
Common stock consists of the following:
JANUARY 3, DECEMBER 31,
1997 1995
------------------------
(In Thousands)
Common stock, $0.01 par value
(post-common stock conversion) -
authorized shares - 200,000,000,
issued and outstanding shares -
53,435,101 at January 3, 1997 $ 534 $ -
Common stock, $0.01 par value
(pre-common stock conversion) -
authorized shares - 6,584,207, issued
and outstanding shares - 4,090,493 at
December 31, 1995 - 41
--------------------------
$ 534 $ 41
==========================
Holders of common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders, including the election of directors. Holders of
common stock do not have cumulative voting rights and, therefore, holders of a
majority of the shares voting for the election of directors can elect all the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors. At January 3, 1997, the Company has authorized
11,100,000 shares of preferred stock.
Holders of common stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, after payment of dividends required to be paid on
outstanding preferred stock, if any, and subject to the terms of the agreements
governing the Company's long-term debt. In the event of the liquidation,
dissolution, or winding up of Dal-Tile, the holders of common stock are entitled
to share pro rata in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock then outstanding, if any. The
common stock has no preemptive, conversion or redemption rights and is not
subject to further calls or assessments by Dal-Tile.
F-18
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
8. PROVISION FOR MERGER INTEGRATION CHARGES - YEAR ENDED JANUARY 3, 1997
In the first quarter of 1996, the Company recorded an integration charge of
$9,000,000 in connection with the AO Acquisition and the Company's merger
integration plan. The charge was for closings of duplicative sales centers,
duplicative distribution centers, elimination of overlapping positions and the
closing of a manufacturing facility. The Company expects to complete these
actions during 1997. The primary components of the charge are $7,400,000 for
lease commitments, $1,300,000 for severance and employee contracts and $300,000
for shut down costs of the closed facilities. The leases are primarily
associated with sales centers that are expected to close by the first quarter of
fiscal year 1997 and expire over the next three-to-five years.
9. PROVISION FOR MERGER INTEGRATION CHARGES - YEAR ENDED DECEMBER 31, 1995
In the fourth quarter of 1995, the Company recorded a pre-tax charge of
$22,430,000 for the revaluation of certain assets in connection with the AO
Acquisition and the Company's merger integration plan (Note 1). The primary
component of the charge was a write down of duplicate management information
systems, including future lease commitments on system hardware of $15,750,000.
As a result of the AO Acquisition, the Company is combining two independent
systems into one fully integrated system, utilizing the management information
system of AO. The Company will discontinue the use of its current information
system during 1997. The operating leases related to such software will expire
over the next three years. In addition, the Company has recorded a charge of
$5,400,000 for inventory revaluation as a result of the elimination of certain
product lines that will be discontinued as a result of the AO Acquisition, as
well as a general SKU reduction that occurred in 1996. The Company recorded a
charge of $1,280,000 in connection with closure of certain duplicative sales
service centers. The Company expects to complete its sales centers
consolidation by the first quarter of fiscal year 1997. The noncash portion of
the charge, $20,200,000, represents the write-down of certain equipment and the
revaluation of inventory. The cash portion of the merger integration charge is
$2,230,000 which primarily consists of leasehold commitments on equipment.
F-19
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
Income (loss) before income taxes and extraordinary items relating to operations
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1997 1995 1994
------------------------------------------
<S> <C> <C> <C>
(In Thousands)
United States $45,812 $(4,100) $ (645)
Mexico 7,603 7,754 18,261
Other (75) (338) (97)
------------------------------------------
$53,340 $ 3,316 $17,519
==========================================
The components of the provision for
income taxes include the following for:
YEAR ENDED
------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1997 1995 1994
------------------------------------------
(In Thousands)
U.S. federal - current $ - $ - $ -
U.S. state - current 3,060 2,179 2,474
U.S. deferred (1,590) - -
------------------------------------------
1,470 2,179 2,474
Mexico - current 1,716 1,471 6,615
Mexico - deferred - (2,474) 1,525
------------------------------------------
1,716 (1,003) 8,140
------------------------------------------
Total with extraordinary item 3,186 1,176 10,614
Tax effect of extraordinary item 15,728 - -
------------------------------------------
Total before extraordinary item $18,914 $ 1,176 $10,614
==========================================
</TABLE>
F-20
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Principal reconciling items from income tax computed at the U.S. statutory rate
of 35% for the years ended January 3, 1997 and December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1997 1995 1994
------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Provision at statutory rate $ 2,989 $ 1,161 $ 6,132
Amortization of goodwill 1,668 1,668 1,668
State income tax 3,751 1,416 1,676
Loss not benefited (utilized) 26 1,436 (672)
Other 260 (399) 1,462
Difference between U.S. and
Mexico statutory rate (945) (4,106) 348
Valuation allowance (10,134) - -
Non-repatriated earnings 5,571 - -
------------------------------------------
$ 3,186 $ 1,176 $10,614
==========================================
</TABLE>
F-21
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31,
1997 1995
--------------------------
<S> <C> <C>
(In Thousands)
Deferred tax liabilities:
Book basis of PP&E over tax $16,324 $ 10,847
Book basis of inventories over tax 1,367 3,981
Book basis of other assets over tax 14,513 1,756
Other, net 7,055 8
--------------------------
Total deferred tax liabilities 39,259 16,592
--------------------------
Deferred tax assets:
Tax basis of other assets over book 210 -
Reserve for merger integration charges - 10,818
Net operating loss carryforwards 23,465 5,425
Expenses not yet deductible for tax 12,190 5,500
--------------------------
Total deferred tax assets 35,865 21,743
Valuation allowance for deferred tax - (10,134)
assets
--------------------------
Net deferred tax assets 35,865 11,609
--------------------------
Net deferred tax liabilities $ 3,394 $ 4,983
==========================
</TABLE>
The change in the valuation allowance during the year ended January 3, 1997 was
a decrease of $10,134,000. The Company expects to have sufficient taxable
earnings in the future to realize its net deferred tax assets recorded as of
January 3, 1997. Accordingly, the Company believes that a deferred tax
valuation allowance is not required at January 3, 1997.
The Company has a U.S. loss carryforward for regular tax purposes of
approximately $67,042,000, which expires in 2008-2010.
Total income tax payments, net of refunds received, during the years ended
January 3, 1997 and December 31, 1995 and 1994 were $1,989,000, $6,145,000, and
$5,842,000, respectively.
F-22
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
A company operating in Mexico is generally required by law to contribute 10% of
pre-tax profits (subject to certain adjustments) directly to employees. These
mandatory charges were not deductible for Mexican income tax purposes during the
years ended January 3, 1997 and December 31, 1995 and 1994 and, for financial
statement presentation purposes, have been classified as components of income
tax expense. Total tax provision amounts accrued by Dal-Tile Mexico and
Materiales for this obligation amounted to approximately $1,716,000, $1,500,000,
and $2,200,000 for the years ended January 3, 1997 and December 31, 1995 and
1994, respectively.
11. RELATED PARTY TRANSACTIONS
AEA Investors Inc., provided management, consulting, and financial services to
the Company for fees and expenses. The Company has incurred fees and expenses
for such services of $485,000, $991,000, and $1,015,000 for the three years
ended January 3, 1997 and December 31, 1995, and 1994, respectively. Such
services included, but were not necessarily limited to, advice and assistance
concerning the strategy, planning, and financing of the Company, as needed from
time to time. Such management arrangement was terminated during 1996, and AEA
Investors was paid a termination fee of $4,000,000 in connection therewith.
Certain directors and officers of the Company also serve as officers of AEA
Investors Inc.
12. STOCK OPTION PLAN
The Company has a stock option plan (the "Plan") that provides for the granting
of options for up to 4,836,425 shares of its common stock to key employees of
Dal-Tile Corporation and its subsidiaries and affiliates. As stated previously
in Note 4, pursuant to a common stock conversion, all outstanding options to
purchase Dal-Tile's capital stock (378,806 outstanding options at the time of
the conversion) were converted into options to purchase 4,204,747 shares of
Common stock. Options granted under the Plan prior to January 1, 1996 vest 20%
at the date of the grant and 20% on each successive anniversary of the date of
the grant until fully vested. Options granted on or after January 1, 1996 vest
25% at the date of the grant and 25% on each successive anniversary of the date
of the grant until fully vested. In each case, the options expire on the tenth
anniversary of the date of the grant; however, these terms may be modified on an
individual grant basis at the discretion of the Company's Board of Directors.
F-23
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTION PLAN (CONTINUED)
Stock option activity under the Plan is summarized as follows (option data shown
below is after giving effect to the Company's options conversion):
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL OPTION PRICE WTD. AVG.
EXERCISE PRICE
--------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 2,499,420 $22,517,300 $ 9.01
Granted 555,000 5,000,000 9.01
Canceled (33,300) (300,000) 9.01
--------------------------------------------------------
Outstanding at December 31, 1994 3,021,120 27,217,300 9.01
Granted 61,050 550,000 9.01
Canceled (486,823) (4,385,800) 9.01
--------------------------------------------------------
Outstanding at December 31, 1995 2,595,347 23,381,500 9.01
Granted 1,695,535 17,294,604 10.20
Canceled (185,048) (1,667,100) 9.01
--------------------------------------------------------
Outstanding at January 3, 1997 4,105,834 $39,009,004 $ 9.50
========================================================
</TABLE>
The Company has reserved 4,836,425 shares of Common Stock for options, 730,591
of which are ungranted at January 3, 1997, and are for future issuance under the
Plan.
At January 3, 1997 and December 31, 1995 and 1994, there were 2,986,372 options
exercisable at a weighted average exercise price of $9.30, 2,128,436 options
exercisable at a weighted average exercise price of $9.01, and 2,344,653 options
exercisable at a weighted average exercise price of $9.01, respectively.
The following table summarizes information with regard to stock options
outstanding at January 3, 1997:
<TABLE>
<CAPTION>
WTD. AVG.
EXERCISE OPTIONS REMAINING
PRICE OUTSTANDING CONTRACTUAL LIFE
-----------------------------------------
<S> <C> <C>
$ 9.01 2,410,299 4.80 years
9.91 1,645,535 9.01 years
19.75 50,000 10.00 years
</TABLE>
F-24
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTION PLAN (CONTINUED)
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plan, and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 3, DECEMBER 31,
1997 1995
--------------------------
<S> <C> <C>
Net income - as reported $5,354 $2,140
Net income - pro forma 3,827 2,088
Earnings per share - as reported 0.11 0.07
Earnings per share - pro forma 0.08 0.07
</TABLE>
The pro forma effects on net income for the years ended January 3, 1997 and
December 31, 1995 are not representative of the pro forma effect on net income
in future years because they do not take into consideration pro forma
compensation expense related to grants made prior to 1995.
The weighted average fair value at date of grant for options granted during the
years ended January 3, 1997 and December 31, 1995 was $2.93 and $3.38 per
option, respectively. The fair value of the options at the date of grant was
estimated using the Binomial model with the following weighted average
assumptions:
F-25
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 3, DECEMBER 31,
1997 1995
---------------------------
<S> <C> <C>
Expected life (years) 3 4
Interest rate 5.08% 7.52%
Volatility 33.6% 33.6%
Dividend yield 0.00% 0.00%
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Dal-Tile Corporation leases substantially all of its sales service centers and
various warehouse, manufacturing, and transportation equipment under terms of
noncancelable operating leases. The minimum aggregate annual lease payments
subsequent to January 3, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $16,084
1998 12,991
1999 9,905
2000 6,528
2001 3,086
Thereafter 5,305
---------
$53,899
=========
</TABLE>
Rental expense amounted to approximately $24,166,000, $16,427,000, and
$14,603,000 for the years ended January 3, 1997 and December 31, 1995 and 1994,
respectively.
The Company is subject to federal, state, and local laws and regulations
relating to the environment and to work places. Laws that affect or could affect
the Group's United States operations include, among others, the Clean Air Act,
the Clean Water Act, the Resource Conservation and Recovery Act, and the
Occupational Safety and Health Act. The Company believes that it is currently in
substantial compliance with such laws and the regulations promulgated
thereunder.
F-26
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in various judicial and administrative proceedings
relating to environmental matters. The Company, in the past, has disposed or
arranged for the disposal, of substances which are now characterized as
hazardous, and currently is engaged in the cleanup of hazardous substances at
certain sites. It is the Company's policy to accrue liabilities for remedial
investigations and cleanup activities when it is probable that such liabilities
have been incurred and when they can be reasonably estimated. The Company has
provided reserves which management believes are adequate to cover liabilities
the Company is likely to incur with respect to such investigations and cleanup
activities, taking into account current information available to the contractual
rights of indemnification. However, estimates of future response costs are
necessarily imprecise due to, among other things, the possible identification of
presently unknown sites and the allocation of costs among potentially
responsible parties with respect to any such sites. Accordingly, there can be
no assurance that the Company will not become involved in future litigation or
other proceedings or, if the Company were found to be responsible or liable in
any litigation or proceeding, that such costs would not be material to the
Company.
The Company is also a defendant in various lawsuits arising from normal business
activities.
In the opinion of management, the ultimate liability likely to result from the
contingencies described above is not expected to have a material adverse effect
on the Company's consolidated financial condition, results of operations and
liquidity.
14. GEOGRAPHIC AREA OPERATIONS
The Company currently conducts its business in one industry segment, engaging in
the manufacturing and distribution of glazed and unglazed ceramic tile products
and accessories. The Company operates manufacturing facilities in the United
States and Mexico and distributes products through wholly owned sales service
centers in the United States and Canada and nonaffiliated distributors in the
United States and Mexico. Intercompany sales between geographic areas are
accounted for at amounts that are generally above cost and in compliance with
rules and regulations of governing tax authorities. Such intercompany sales are
eliminated in the consolidated financial statements.
F-27
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
14. GEOGRAPHIC AREA OPERATIONS (CONTINUED)
Financial information by geographical area is summarized below:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31, DECEMBER 31,
1997 1995 1994
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Consolidated revenue:
Unaffiliated customers:
United States $695,532 $446,323 $452,903
Mexico 17,927 23,012 48,594
Other 6,777 5,477 4,812
------------------------------------------
Total consolidated revenues from
unaffiliated customers 720,236 474,812 506,309
Intercompany revenue:
United States 4,057 3,174 3,041
Mexico 61,526 43,109 55,245
Eliminations (65,583) (46,283) (58,286)
------------------------------------------
Total consolidated revenue $720,236 $474,812 $506,309
==========================================
Consolidated operating income (loss):
United States $ 90,175 $ 48,874 $ 52,507
Mexico 7,339 6,120 16,283
Eliminations/other 350 (469) (473)
------------------------------------------
Total consolidated operating income $ 97,864 $ 54,525 $ 68,317
==========================================
Consolidated identifiable assets:
United States $623,444 $618,328 $412,292
Mexico 54,889 38,585 65,955
Eliminations/other 10,164 15,480 10,170
------------------------------------------
Total consolidated identifiable assets $688,497 $672,393 $488,417
==========================================
</TABLE>
F-28
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
15. FINANCIAL INSTRUMENTS
The carrying amounts of cash, trade accounts receivable and trade accounts
payable approximate fair value because of the short maturity of those
instruments. The carrying amount of the Company's long-term debt approximates
its fair value, which the Company estimates based on incremental rates of
comparable borrowing arrangements.
16. CHANGE IN FISCAL YEAR
During 1996, the Company changed its fiscal year end from December 31 to a 52 or
53-week year ending on the Friday nearest December 31. Accordingly, the 1996
fiscal year ended on January 3, 1997 (and included 53 weeks) whereas the
previous two fiscal years ended on December 31 (and each included 52 weeks).
The change was made to help facilitate the financial closing process.
The effect of the change was to increase net sales for 1996 by approximately
$ 6,000,000 . The impact of the change on net income for fiscal year 1996
was not material.
17. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
Provided below are the condensed unconsolidated financial statements of Dal-Tile
International Inc.
JANUARY 3, DECEMBER 31,
1997 1995
------------------------
(In Thousands)
Condensed balance sheets:
Cash $ 97 $ 30,371
Other assets 8,286 3,027
Investment in Dal-Tile Group Inc., net
of accumulated losses 108,507 79,343
--------------------------
$116,890 $112,741
==========================
Senior Secured Zero Coupon Notes $ 140 $ 99,078
Other liabilities 1,181 4,024
Stockholder's equity 115,569 9,639
--------------------------
$116,890 $112,741
==========================
F-29
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
17. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1997 1995 1994
------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Condensed statements of income:
Equity in net income of Dal-Tile Group
Inc. $ 11,841 $14,125 $17,855
Other expense (income) (511) 450 566
Interest income 921 142 98
Interest expense 7,919 11,677 10,482
------------------------------------------
Net income $ 5,354 $ 2,140 $ 6,905
==========================================
YEAR ENDED
------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1997 1995 1994
------------------------------------------
Condensed statements of cash flows:
Cash flow used in operating activities
$ (6,303) $ (687) $ (327)
Financing activities:
Proceeds from sale of stock and equity
infusion 102,558 27,575 500
Investment in the Group (18,134) - -
Fees and expenses incurred in debt
refinancing (9,457) - -
Repayment of long-term debt at time of
refinancing (98,938) - -
------------------------------------------
Net increase (decrease) in cash (30,274) 26,888 173
Cash at beginning of period 30,371 3,483 3,310
------------------------------------------
Cash at end of period $ 97 $30,371 $ 3,483
==========================================
</TABLE>
F-30
<PAGE>
Dal-Tile International Inc.
Notes to Consolidated Financial Statements (continued)
18. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the years ended January 3, 1997 and December 31, 1995:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-----------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Year ended January 3, 1997:
Net sales $170,674 $180,849 $184,386 $184,327
Gross profit 82,734 85,334 90,602 91,835
Operating income before non-recurring
charges 23,224 21,927 31,072 30,641
Income before extraordinary item 930 4,889 13,175 15,432
Extraordinary item, net of taxes - - (29,072) -
Net income (loss) 930 4,889 (15,897) 15,432
Per share:
Income before extraordinary item 0.02 0.10 0.26 0.28
Extraordinary item - - (0.57) -
Net income (loss) 0.02 0.10 (0.31) 0.28
Year ended December 31, 1995:
Net sales $119,353 $116,602 $117,991 $120,866
Gross profit 61,243 61,414 62,570 64,221
Operating income before non-recurring
charges 16,577 19,380 20,493 20,505
Net income (loss) 826 4,481 6,171 (9,338)
Net income (loss) per share 0.03 0.15 0.21 (0.31)
</TABLE>
The sum of quarterly per share amounts does not necessarily equal the annual
amount reported, as per share amounts are computed separately for each quarter
and the full year based on respective weighted average of common and common
equivalent shares outstanding. Share amounts used in the calculation of net
income (loss) per share amounts above are after giving effect to the Company's
common stock conversion.
F-31
<PAGE>
SCHEDULE II
DAL-TILE INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended January 3, 1997 and December 31, 1995 and 1994
Allowance for losses from Uncollectible Accounts:
<TABLE>
<CAPTION>
(c)
Additions DTI (b) (c)
Balance at Charged to (without AO) AO DTI
Beginning Costs and (a) Balance at Balance at Balance at
of Period Expenses Deductions December 31, 1995 December 31, 1995 End of Period
--------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
1996 $9,389 $5,781 $2,420 - - $12,750
1995 3,892 5,111 4,374 $4,629 $4,760 9,389
1994 2,351 6,294 4,753 - - 3,892
</TABLE>
- ----------
(a) Uncollectible accounts written off, net of recoveries.
(b) American Olean's Bad Debt Allowance at 12/31/95.
(c) "DTI" means Dal-Tile International Inc. "AO" means American Olean Tile
Company, Inc.
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> JAN-03-1997
<CASH> 9,999
<SECURITIES> 0
<RECEIVABLES> 123,586
<ALLOWANCES> 12,750
<INVENTORY> 142,413
<CURRENT-ASSETS> 294,316
<PP&E> 203,626
<DEPRECIATION> 58,350
<TOTAL-ASSETS> 688,497
<CURRENT-LIABILITIES> 113,497
<BONDS> 0
0
0
<COMMON> 534
<OTHER-SE> 115,035
<TOTAL-LIABILITY-AND-EQUITY> 688,497
<SALES> 720,236
<TOTAL-REVENUES> 720,236
<CGS> 369,731
<TOTAL-COSTS> 622,372
<OTHER-EXPENSES> (129)
<LOSS-PROVISION> 5,781
<INTEREST-EXPENSE> 46,338
<INCOME-PRETAX> 53,340
<INCOME-TAX> 18,914
<INCOME-CONTINUING> 53,340
<DISCONTINUED> 0
<EXTRAORDINARY> 29,072
<CHANGES> 0
<NET-INCOME> 5,354
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
