<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1998.
REGISTRATION NO. 333-51235
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DAL-TILE INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7834 HAWN FREEWAY 13-3548809
(State or other jurisdiction DALLAS, TEXAS 75217 (I.R.S. Employer
of incorporation or (214) 398-1411 Identification No.)
organization) (Address, including zip code,
and telephone number, including
area code, of registrant's
principal executive offices)
</TABLE>
------------------------
JACQUES R. SARDAS
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE BOARD
DAL-TILE INTERNATIONAL INC.
7834 HAWN FREEWAY
DALLAS, TEXAS 75217
(214) 398-1411
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
FREDERICK H. FOGEL, ESQ. JOHN M. BRANDOW, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & DAVIS POLK & WARDWELL
JACOBSON 450 LEXINGTON AVE.
ONE NEW YORK PLAZA NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10004 (212) 450-4000
(212) 859-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) a
prospectus (the "Prospectus") relating to the offer by the Selling Stockholder
(as defined in the Prospectus) of Common Stock of the Registrant and (ii) a
prospectus (the "Appendix Prospectus") relating to the shares of Common Stock of
the Registrant deliverable upon mandatory exchange pursuant to the terms of the
Participating Exchangeable Premium Securities-SM- ("PEPS") of Armstrong World
Industries, Inc. (which PEPS are separately registered pursuant to a
registration statement on Form S-3 (Registration No. 333-6333) declared
effective by the Securities and Exchange Commission on November 1, 1996) and
which will be attached as Appendix A to a prospectus and prospectus supplement
of Armstrong World Industries, Inc. The Prospectus and the Appendix Prospectus
are identical except that they contain different front cover pages, different
tables of contents, different information in the "Prospectus Summary" under the
captions "The Offering" and the "PEPS Offering" and different descriptions of
the plan of distribution (contained under the captions "Underwriters" and "Plan
of Distribution"). The form of the Prospectus is included herein and is followed
by pages to be used in the Appendix Prospectus which differ from, or are in
addition to, those in the Prospectus. Each of the pages for the Appendix
Prospectus included herein is labeled "Alternative Page for Appendix
Prospectus."
ii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JUNE , 1998
9,000,000 SHARES
DAL-TILE INTERNATIONAL INC.
COMMON STOCK
-----------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY ARMSTRONG
WORLD INDUSTRIES, INC., A PENNSYLVANIA CORPORATION, OR A SUBSIDIARY THEREOF
("AWI" OR THE "SELLING STOCKHOLDER"). IN A CONCURRENT TRANSACTION, AWI IS
OFFERING 7,000,000 % PARTICIPATING EXCHANGEABLE PREMIUM
SECURITIES-SM- DUE JULY 1, 2001 (THE "PEPS"), WHICH AWI MAY REDEEM AT
MATURITY BY DELIVERING UP TO 7,000,000 SHARES OF COMMON STOCK. THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE
SHARES OF COMMON STOCK OR THE SALE OF THE PEPS-SM-. THE
COMMON STOCK IS TRADED ON THE NYSE UNDER THE SYMBOL "DTL."
ON JUNE , 1998, THE REPORTED LAST SALE PRICE OF THE
COMMON STOCK ON THE NYSE WAS $
PER SHARE.
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR INFORMATION THAT SHOULD BE
CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDER(2)
-------------- -------------- --------------
<S> <C> <C> <C>
PER SHARE............................. $ $ $
TOTAL (3)............................. $ $ $
</TABLE>
- ---------
(1) DAL-TILE INTERNATIONAL INC. AND THE SELLING STOCKHOLDER HAVE AGREED TO
INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING
LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
(2) CERTAIN EXPENSES OF ISSUANCE AND DISTRIBUTION ESTIMATED AT $858,000 ARE
PAYABLE BY DAL-TILE INTERNATIONAL INC.
(3) THE SELLING STOCKHOLDER HAS GRANTED THE UNDERWRITERS AN OPTION,
EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN
AGGREGATE OF 1,315,822 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO
PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF
COVERING OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH
OPTION IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS AND PROCEEDS TO THE SELLING STOCKHOLDER WILL BE $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY DAVIS POLK
& WARDWELL, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE
SHARES WILL BE MADE ON OR ABOUT JULY , 1998 AT THE OFFICE OF MORGAN STANLEY &
CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY
AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER
LAZARD FRERES & CO. LLC
SALOMON SMITH BARNEY
JUNE , 1998
<PAGE>
Artwork appears here
The Company produces and distributes a broad line of high-quality ceramic wall
and floor tile products for both residential and commercial applications.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING STOCKHOLDER OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 11
Use of Proceeds................................ 19
Dividend Policy................................ 19
Price Range of Common Stock.................... 19
Capitalization................................. 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Ceramic Tile Industry.......................... 33
Business....................................... 35
Management..................................... 48
<CAPTION>
PAGE
---------
<S> <C>
Principal and Selling Stockholders............. 51
Description of Capital Stock................... 54
Description of Second Amended Credit
Agreement.................................... 56
Shares Eligible for Future Sale................ 58
Underwriters................................... 60
Legal Matters.................................. 61
Experts........................................ 61
Available Information.......................... 62
Incorporation of Certain Documents by
Reference.................................... 62
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
"PEPS" and "Participating Exchangeable Premium Securities" are service marks of
Morgan Stanley & Co. Incorporated
------------------------
This Prospectus contains or incorporates statements that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
subject to the safe harbor created by such sections. Such statements appear in a
number of places in this Prospectus and in the documents incorporated herein by
reference and may include statements regarding, among other matters, the intent,
belief or current expectations of the Company or its officers. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance, and involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements to differ materially from the future results, performance or
achievements expressed or implied in such forward-looking statements. Such
factors include, but are not limited to, the specific risk factors described
under the caption "Risk Factors."
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
1
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. DATA INCLUDED AND INCORPORATED BY REFERENCE IN
THIS PROSPECTUS REGARDING MARKET SHARE, COMPETITIVE POSITION, INDUSTRY AND
DEMOGRAPHIC TRENDS AND OTHER SIMILAR MATTERS ARE APPROXIMATIONS BASED ON THE
COMPANY'S ESTIMATES. ALTHOUGH THE COMPANY BELIEVES THAT SUCH DATA ARE GENERALLY
INDICATIVE OF THE MATTERS REFLECTED THEREIN, SUCH DATA ARE INHERENTLY IMPRECISE
AND INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY SUCH DATA.
REFERENCES HEREIN TO "FLOOR" AND "WALL" TILE SERVE TO IDENTIFY THE MOST COMMON
APPLICATION FOR THE SIZE AND VARIETY OF TILE IN QUESTION; TILE CONSUMERS EMPLOY
ALL SIZES AND VARIETIES OF THE PRODUCTS IN ALL TYPES OF APPLICATIONS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "DAL-TILE" HEREIN REFER TO
DAL-TILE INTERNATIONAL INC. AND ALL REFERENCES TO THE "COMPANY" HEREIN REFER
COLLECTIVELY TO DAL-TILE AND ITS SUBSIDIARIES, INCLUDING THE OPERATIONS OF
AMERICAN OLEAN TILE COMPANY, INC. WHICH WAS ACQUIRED ON DECEMBER 29, 1995.
REFERENCES HEREIN TO "FREE CASH FLOW" MEAN CASH PROVIDED BY OPERATIONS LESS CASH
USED IN INVESTING ACTIVITIES. AMERICAN OLEAN-REGISTERED TRADEMARK-, HOME
SOURCE-REGISTERED TRADEMARK- AND DAL-MONTE-REGISTERED TRADEMARK- ARE REGISTERED
TRADEMARKS, AND DALTILE-TM- IS AN UNREGISTERED TRADEMARK, OF THE COMPANY.
REFERENCES HEREIN TO FISCAL YEAR 1998 REFER TO THE FISCAL YEAR OF THE COMPANY
ENDING JANUARY 1, 1999, REFERENCES TO FISCAL YEAR 1997 REFER TO THE FISCAL YEAR
OF THE COMPANY ENDED JANUARY 2, 1998 AND REFERENCES TO FISCAL YEAR 1996 REFER TO
THE FISCAL YEAR OF THE COMPANY ENDED JANUARY 3, 1997.
THE COMPANY
The Company produces and distributes a broad line of high-quality ceramic
wall tile and floor tile products for both residential and commercial
applications, marketed primarily under its DALTILE, AMERICAN OLEAN and HOME
SOURCE brand names. The Company believes that it is the largest manufacturer,
distributor and marketer of ceramic tile in the United States, and one of the
largest in the world. The Company believes that it had an approximately 20% unit
share of the approximately 1.67 billion square feet of ceramic tile sold in the
United States in 1997, which is significantly greater than the Company's nearest
competitor.
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 December 29, 1995, the Company completed the
acquisition (the "AO Acquisition") of all of the issued and outstanding stock of
American Olean Tile Company, Inc. ("AO" or "American Olean") from AWI. The
principal executive offices of the Company are located at 7834 Hawn Freeway,
Dallas, Texas 75217. Its telephone number at that address is (214) 398-1411.
INDUSTRY OVERVIEW
Over the past five years U.S. ceramic tile unit sales are estimated to have
increased at a compound annual rate of 10.0%, from approximately 1.036 billion
square feet in 1992 to approximately 1.670 billion square feet in 1997. The
Company believes that ceramic tile consumption has increased due to (i)
increasing use of tile, particularly floor tile, in residential remodeling and
new home construction, (ii) the expansion of new uses for tile such as
countertops and back splashes, (iii) increasing use of tile in areas of the home
such as dens, patios, kitchens and foyers and (iv) increasing use of tile in
commercial applications such as restaurants, schools, hospitals, hotels,
airports and retail establishments. The Company expects these trends to continue
due to increasing consumer awareness of ceramic tile's aesthetic and utilitarian
advantages, as well as ceramic tile's relatively low cost over its useful life.
U.S. ceramic tile unit sales are estimated to have increased at a compound
annual rate of 10.0% from 1992 to 1996. During the same period, carpet, vinyl
flooring and wood flooring unit sales are estimated to have increased at a
compound annual rate of 2.6%, 3.2% and 8.6%, respectively (although wood
flooring experienced faster growth in 1996). Ceramic tile nevertheless comprised
only a small portion of the
3
<PAGE>
approximately 23 billion square feet of U.S. floor covering sales in 1997. In
addition, the Company believes that the United States continues to lag
significantly behind the per capita ceramic tile consumption in many Western
European countries, which the Company believes is an indication of growth
potential in the U.S. ceramic tile business.
COMPETITIVE STRENGTHS
The following attributes and operating strategies have enabled the Company
to achieve its current leading market presence and should serve as a basis for
the Company's future growth and profitability:
- INDUSTRY'S BROADEST DISTRIBUTION NETWORK. The Company's products are sold
through three separate distribution channels consisting of (i)
Company-operated sales centers, (ii) independent distributors and (iii)
home center retailers. DALTILE brand products are primarily sold through
the Company's network of approximately 223 Company-operated sales centers,
which is the largest manufacturer-operated wholesale distribution network
in the U.S. ceramic tile industry, serving customers in all 50 states and
parts of Canada. The sales centers function as a "one-stop" source for
ceramic tile, stone products and installation materials and tools, serving
tile contractors, architects, design professionals, builders, retail tile
and floor covering outlets and developers. The AMERICAN OLEAN brand is
primarily distributed through approximately 185 independent distributor
locations in the United States and Canada that service both residential
and commercial customers. In addition, the Company 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 through home center retailers such as
The Home Depot, Lowe's, and HomeBase, serving more than 1,200 home center
retail outlets nationwide. The home center retail channel has provided the
Company with new sources of sales over the past five years.
- LEADING BRAND NAMES MARKETED THROUGH TARGETED DISTRIBUTION CHANNELS. The
Company has two of the leading brand names in the U.S. ceramic tile
industry -- DALTILE and AMERICAN OLEAN, the roots of which date back
approximately 50 and 75 years, respectively. More recently, it has also
established the HOME SOURCE brand name. The Company's strategy is to
market independently each of its brands to create brand differentiation
within its respective customer segments. Company-operated sales centers
principally distribute the DALTILE brand, while the AMERICAN OLEAN brand
is principally marketed through independent distributors. The DALTILE and
AMERICAN OLEAN brands are also carried by certain major home center
retailers. The Company's HOME SOURCE brand is sold exclusively through
certain other home center retailers.
- NEW PRODUCT DEVELOPMENT. The Company believes that the U.S. ceramic tile
industry is increasing its fashion orientation, particularly in floor
tile, which is the largest and fastest growing ceramic tile product area.
The Company believes that its manufacturing capabilities offer competitive
advantages due to its ability to manufacture a broad product line of
colors, textures and finishes, including trim and angle pieces. In order
to capitalize on the increasing demand for fashion oriented tile products,
the Company has (i) increased the number of new floor tile product
introductions, (ii) focused on shortening product introduction cycle time,
(iii) expanded its relationship with leading glaze and equipment
manufacturers and (iv) focused on evolving consumer preferences to deliver
products consistent with current design trends.
- BROAD, DIFFERENTIATED PRODUCT LINE. The Company offers the most
comprehensive product line in the U.S. ceramic tile industry, including
glazed floor tile, glazed wall tile, glazed and unglazed mosaic tile,
porcelain tile, quarry tile, stone products and installation products. In
addition, the Company believes that it produces one of the industry's
largest offerings of colors, textures and finishes and that its ability to
efficiently manufacture an extensive array of trim and angle pieces
differentiates the Company from many of its competitors, particularly
foreign ceramic tile manufacturers. The Company also sells products
manufactured by third parties for resale, including ceramic tile and
installation products. The Company believes that "one-stop shopping,"
which requires a full
4
<PAGE>
product line at its Company-operated sales centers, is an important
competitive advantage in servicing its core customers, especially tile
contractors.
- EXTENSIVE, LOW-COST MANUFACTURING. The Company has annual manufacturing
capacity of approximately 352 million square feet, the largest ceramic
tile manufacturing capacity of any U.S.-based manufacturer. The Company's
manufacturing strategy is to maximize production at its lowest cost
manufacturing facilities, continue ongoing improvements by implementing
demonstrated best practices and continue to invest in manufacturing
technology to lower its costs and develop new capabilities. The Company's
lowest cost manufacturing facility is located in Monterrey, Mexico and
represents 44% of the Company's manufacturing capacity. In addition, the
Company has a contractual right to be supplied with up to approximately 25
million square feet of floor tile annually by its Mexican joint venture,
RISA (as defined). The Company recently completed the expansion of
capacity at its highly automated, state-of-the-art wall tile facility in
El Paso, Texas. In addition, the Dallas, Texas wall tile facility is
expected to be upgraded by the end of 1998 with the installation of modern
and more efficient equipment.
The Company has also rationalized production of the combined Dal-Tile and
American Olean manufacturing system by maximizing production at its lowest
cost facilities and closing a number of higher cost plants. The
rationalization steps included, in early 1996, the closure of the
Lansdale, Pennsylvania wall tile facility and wall tile production at the
Jackson, Tennessee facility and consolidation of a portion of mosaic tile
production in late 1996. In addition, in 1997, the Company began
consolidating a portion of its unglazed floor tile production by closing
the Coleman, Texas facility. The Company also suspended production at its
Mt. Gilead, North Carolina glazed floor tile facility during the fourth
quarter of 1997. The Company will continue to seek opportunities to
maximize production at its lowest cost facilities and to lower its
manufacturing costs through capital investments in state-of-the-art
facilities and equipment.
AMERICAN OLEAN INTEGRATION
The Company has experienced difficulties in the complex task of integrating
the American Olean operations, which were purchased in December 1995, with the
Dal-Tile operations (the "Integration"). Delays in bringing the combined
companies onto a common, fully integrated management information system affected
many aspects of the Company's operations, particularly the Company's logistics
systems. As a result, the Company overproduced some products and underproduced
others. Transportation costs increased because of the need to relocate inventory
to meet demand. Customer service was adversely affected, and the Company lost
sales. Accounts receivable and inventory increased significantly, which resulted
in a negative impact on the Company's cash flow in 1996 and 1997.
The difficulties associated with the Integration significantly affected the
Company's financial results as sales declined 6.1% in 1997 compared to 1996.
Excluding the charges described below and certain merger integration charges,
operating margin declined to 3.0% in 1997 from 14.8% in 1996 and operating
income declined $86.4 million to $20.5 million in 1997 from $106.9 million in
1996. The Company also experienced negative free cash flow of ($92.9) million in
1997 and ($60.7) million in 1996.
During the second and third quarters of 1997, the Company recorded charges
of $24.7 million and $65.4 million, respectively. These charges were principally
non-cash charges for the write-down of obsolete and slow moving inventories,
uncollectible trade accounts receivable and other non-productive assets, and
also included costs for restructuring of manufacturing, store operations and
corporate administrative functions.
Beginning in July 1997, the Company replaced its senior management team with
the hiring of a new President and Chief Executive Officer, Jacques ("Jack")
Sardas, and Chief Financial Officer, William ("Chris") Wellborn. The Company
also hired a new corporate controller, a new director of internal audit, a new
human resources vice president and a new general counsel. Under Mr. Sardas'
direction, the
5
<PAGE>
Company's new management team has made substantial progress towards completing
the conversion of the Company's information systems to a common platform, and
has developed a targeted operating plan to address the Integration difficulties
faced by the Company while taking advantage of the Company's competitive
strengths to further enhance its leading market position. This plan has already
produced positive results and is based on the following initiatives:
- IMPROVE CUSTOMER SERVICE. The Company has taken, and continues to take, a
number of actions to improve customer service, focusing on improved
product availability and order fill rates, on-time deliveries and accurate
and timely billing. The steps taken by the Company include (i) focusing on
enhancing the Company's management information systems to provide
management with the data necessary to deliver ordered product in the
quality, quantity, time and location requested by customers, (ii)
streamlining the Company's organizational structure, which allows the
Company to be more responsive to the market and the Company's customers
and (iii) increased coordination between the field offices and the
corporate billing department, which will result in more accurate and
timely billings to the Company's customers. In addition, the Company has
focused on improving its regional distribution centers in California,
Maryland and Texas to enhance customer service in each distribution
channel. The regional distribution centers also enhance the Company's
ability to plan and schedule production and to manage inventory
requirements. Although progress has been made, the Company will continue
its efforts in order to obtain further improvement in customer service.
- IMPROVE CASH FLOW. The Company has taken, and continues to take, steps to
improve cash flow by (i) reducing accounts receivable, (ii) reducing
inventory levels, (iii) controlling costs and (iv) improving management of
its capital expenditures. The Company is now focusing on improving its
sales, production and inventory information and internal accounting
procedures. The Company also modified the accounts receivable system for
invoice dating, receivables aging, statement timing and credit reporting.
Together with improved coordination between the field sales organization
and the corporate credit department, these efforts have enabled the
Company to reduce accounts receivable from $131.3 million on July 4, 1997
to $96.3 million at fiscal year end 1997 (including a $13.7 million
write-down). Primarily as a result of increased sales, accounts receivable
increased to $110.0 million at April 3, 1998.
In order to reduce its inventory levels, the Company decreased production
levels during the third and fourth quarters of 1997 in order to match
inventories more closely to current sales levels. This resulted in higher
per unit costs and lower gross margins during these periods. In addition,
the Company is initiating systems for enhanced inventory planning and
transportation cost management. The Company has been able to reduce
inventory levels from $179.3 million on July 4, 1997 to $130.7 million at
fiscal year end 1997 (including a $28.1 million write-down), and $123.7
million at April 3, 1998.
The Company has increasingly focused its capital expenditures on projects
that improve operational efficiency, overall performance and near term
profits and cash flow. Such projects include investments in highly
automated, state-of-the-art equipment for the El Paso and Dallas, Texas
facilities. Although progress has been made, the Company will continue its
efforts in order to obtain further improvement in cash flow.
- REDUCE COSTS. The Company has rationalized the combined Dal-Tile and
American Olean manufacturing network by suspending production at high-cost
manufacturing facilities and consolidating activity at lower-cost
facilities. The Company's continuing efforts in these areas are expected
to identify opportunities to increase productivity and efficiency. To
further reduce costs and improve service, the Company undertook a
systematic review of its product lines. Of its approximately 22,500
standard price book stock keeping units ("SKUs"), the Company identified
approximately 7,900 low-sales volume SKUs, which were discontinued at the
end of 1997. The
6
<PAGE>
Company has also achieved cost savings by renegotiating contracts for raw
materials, products and services.
- STREAMLINE THE COMPANY'S ORGANIZATIONAL STRUCTURE. During the second half
of 1997, the Company began to streamline its organizational structure to
make it more flexible and responsive to the market, as well as to reduce
costs. The Company flattened the sales organization, eliminating
management layers to bring experienced sales management closer to the
customers. The Company also reorganized the marketing department,
establishing product managers for each product category. This has enabled
Dal-Tile to focus more effectively on each product line, addressing
specific issues such as product mix, pricing, production, planning,
product availability, new products and product line simplifications.
The Company has also restructured its manufacturing organization, shifting
from multiple layers of operational management to a flatter, more
functional organization, and is restructuring its research and development
organization to better support the development of new product lines and
the efficiency of the manufacturing plants. As a result of these
initiatives and the lower production levels which occurred in the second
half of 1997, the Company has reduced overall head count by 563 (7.2%)
from 7,854 at March 31, 1997 to 7,291 at March 31, 1998.
The Company believes that the original rationale for the AO Acquisition
remains sound. The AO Acquisition allowed the Company to offer two of the
leading brands in the U.S. ceramic tile industry through distinct distribution
channels, to significantly increase participation in the independent distributor
channel and to enhance its geographic diversification and provided a foundation
for lowering operating costs. The combined Company has the competitive
advantages of the industry's largest distribution network, leading brand names
and extensive and modern manufacturing facilities. The Company is currently
focused on improving the effectiveness of its entire supply chain, including
sales forecasting, production planning, manufacturing and distribution. The
Company expects these efforts to ultimately improve customer service and lower
costs, allowing the Company to improve sales and profits and providing a
stronger foundation from which to participate in the growing market for ceramic
tile.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling
Stockholder....................... 9,000,000 shares(1)
Total Common Stock outstanding...... 53,435,101 shares
Selling Stockholder................. The Selling Stockholder is offering 9,000,000 shares
of Common Stock pursuant to certain registration
rights under the Shareholders Agreement (as defined).
The 18,365,822 shares beneficially owned by the
Selling Stockholder immediately preceding the
Offering represent 34.4% of the outstanding Common
Stock.
PEPS Offering....................... In a concurrent transaction, AWI is offering
7,000,000 PEPS (plus an additional 1,050,000 PEPS to
cover over-allotments, if any) which AWI may redeem
at maturity by delivering up to 7,000,000 shares of
Common Stock (plus up to an additional 1,050,000
shares if the over-allotment option is exercised in
full).
Common Stock beneficially owned by
the Selling Stockholder
immediately following the
Offering.......................... 9,365,822 shares or approximately 17.5% of the
outstanding Common Stock (or 8,050,000 shares,
representing 15.1% of the outstanding Common Stock,
if the over-allotment option is exercised in full).
Use of proceeds..................... The Company will not receive any of the proceeds of
the Offering or the PEPS Offering.
NYSE symbol for the Common Stock.... DTL
</TABLE>
- ------------------------
(1) Excludes up to 1,315,822 shares subject to an over-allotment option granted
by the Selling Stockholder to the Underwriters. See "Underwriters."
RISK FACTORS
See "Risk Factors" beginning on page 11 for information that should be
carefully considered by prospective investors.
8
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information was derived from the historical
consolidated financial information of the Company. The Consolidated Financial
Statements of the Company for the fiscal years 1993, 1994, 1995, 1996 and 1997
have been audited by Ernst & Young LLP, whose report for the fiscal years 1995,
1996 and 1997 appears elsewhere in this Prospectus. The summary financial
information for the three-month periods ended April 3, 1998 and April 4, 1997 is
unaudited, but, in the opinion of management, includes all adjustments necessary
for a fair presentation of the financial position and results of operations for
such periods. The results of operations for the three months ended April 3, 1998
are not necessarily indicative of the results for the entire year. The summary
financial information should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, including the notes thereto,
that appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------- THREE MONTHS ENDED
DECEMBER 31, --------------------
------------------------------- JANUARY 3, JANUARY 2, APRIL 4, APRIL 3,
1993 1994 1995 1997 1998 1997 1998
--------- --------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Net sales..................... $ 440,573 $ 506,309 $ 474,812 $ 720,236 $ 676,637 $ 167,409 $ 185,831
Cost of goods sold............ 239,379 268,272 225,364 369,731 404,728(2) 84,221 98,503
--------- --------- --------- ----------- ----------- --------- ---------
Gross profit.................. 201,194 238,037 249,448 350,505 271,909 83,188 87,328
Expenses:
Transportation............ 25,860 32,068 33,535 47,125 58,425(2) 11,490 14,533
Selling, general and
administrative.......... 120,748 132,887 134,193 190,911 277,515(2) 52,994 57,433
Provision for merger
integration charges..... -- -- 22,430(3) 9,000(4) -- -- --
Provision for special
charges................. 53,233(5) -- -- -- -- -- --
Amortization/write-down of
goodwill................ 224,941(6) 4,765 4,765 5,605 5,605 1,401 1,401
--------- --------- --------- ----------- ----------- --------- ---------
Total expenses................ 424,782 169,720 194,923 252,641 341,545 65,885 73,367
--------- --------- --------- ----------- ----------- --------- ---------
Operating income (loss)....... (223,588) 68,317 54,525 97,864 (69,636) 17,303 13,961
Interest expense.............. 46,746 53,542 55,453 46,338 40,649 8,079 11,604
Interest income............... 517 1,403 1,250 1,685 268 139 26
Other income (expense)........ (1,088) 1,341 2,994 129 1,220 681 (391)
--------- --------- --------- ----------- ----------- --------- ---------
Income (loss) before income
taxes and extraordinary
item........................ (270,905) 17,519 3,316 53,340 (108,797) 10,044 1,992
Income tax provision
(benefit)................... (3,225) 10,614 1,176 18,914 1,439 3,517 1,164
--------- --------- --------- ----------- ----------- --------- ---------
Income (loss) before
extraordinary item.......... (267,680) 6,905 2,140 34,426 (110,236) 6,527 828
Extraordinary item--loss on
early retirement of debt,
net of taxes................ -- -- -- (29,072) -- -- --
--------- --------- --------- ----------- ----------- --------- ---------
Net income (loss)............. $(267,680) $ 6,905 $ 2,140 $ 5,354 $(110,236) $ 6,527 $ 828
--------- --------- --------- ----------- ----------- --------- ---------
--------- --------- --------- ----------- ----------- --------- ---------
EARNINGS PER SHARE (7):
Income (loss) after
extraordinary item per
common share
Basic earnings (loss) per
common share............ $ (9.38) $ 0.24 $ 0.07 $ 0.11 $ (2.06) $ 0.12 $ 0.02
Diluted earnings (loss)
per common share........ $ (9.38) $ 0.23 $ 0.07 $ 0.11 $ (2.06) $ 0.12 $ 0.02
OTHER FINANCIAL DATA:
Gross margin.................. 45.7% 47.0% 52.5% 48.7% 45.6%(8) 49.7% 47.0%
Operating margin (9).......... 10.0% 13.5% 16.2% 14.8% 3.0% 10.3% 7.5%
Adjusted EBITDA (10).......... $ 64,358 $ 83,239 $ 92,041 $ 129,367 $ 44,099 $ 22,284 $ 20,826
Cash flows provided by (used
in):
Operating activities...... (6,193) 31,470 40,663 (18,684) (52,807) (41,291) 7,511
Investing activities...... (17,066) (14,160) (29,392) (42,039) (40,074) (13,888) 3,272
Financing activities...... 28,771 (8,434) 51,739 (2,163) 90,463 40,200 (17,887)
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- JANUARY 3, JANUARY 2, APRIL 4, APRIL 3,
1993 1994 1995 1997 1998 1997 1998
--------- --------- --------- ----------- ----------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (11):
Working capital............... $ 119,109 $ 115,717 $ 152,128 $ 180,819 $ 154,888 $ 214,685 $ 137,201
Total assets.................. 512,830 488,417 672,393 688,497 672,069 722,265 657,601
Long-term debt, including
current maturities.......... 492,137 492,753 527,816 465,858 557,091 506,062 539,445
Stockholders' equity
(deficit)................... (77,449) (103,823) 9,639 115,569 3,920 121,354 1,946
</TABLE>
- ------------------------
(1) Operating data for the fiscal year ended December 31, 1995 and prior years
excludes the results of operations of AO, as the AO Acquisition occurred on
December 29, 1995, and are not directly comparable to subsequent periods.
(2) Includes charges totaling $90.1 million recorded in fiscal year 1997
principally for the write-down of obsolete and slow-moving inventories,
uncollectible trade accounts receivable, other non-productive assets and
costs for restructuring of manufacturing, store operations and corporate
administrative functions. These charges are comprised of $36.5 million in
cost of goods sold, $3.5 million in transportation expenses and $50.1
million in selling, general and administrative expense.
(3) In the fourth quarter of fiscal year 1995, the Company recorded a pre-tax
$22.4 million merger integration charge for the revaluation of certain
assets in connection with the AO Acquisition.
(4) In the first quarter of fiscal year 1996, the Company recorded a pre-tax
$9.0 million merger integration charge for the closing of duplicative sales
centers and distribution centers, the closing of certain manufacturing
facilities and severance costs.
(5) In the fourth quarter of fiscal year 1993, the Company established
provisions for a distribution enhancement program, revaluation of certain
assets and severance costs for retiring employees. As a result, the Company
recorded a pre-tax $53.2 million special charge in the fourth quarter of
fiscal year 1993.
(6) In connection with a review of its operations during the fourth quarter of
fiscal year 1993, the Company wrote off $214.2 million of goodwill related
to the following business units: Dal-Tile of Mexico, S.A. de C.V., formerly
Ceramica Regiomontona, S.A. de C.V. ("Dal-Tile Mexico"), Materiales
Ceramicos, S.A. de C.V. ("Materiales"), Dal-Minerals Company
("Dal-Minerals") and R&M Supplies Inc. ("R&M").
(7) The earnings per share amounts prior to fiscal year 1997 have been restated
as required to comply with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). For further discussion of earnings
per share and the impact of SFAS 128, see the notes to the Consolidated
Financial Statements.
(8) Excludes charges totaling $36.5 million in cost of goods sold recorded in
fiscal year 1997 described in footnote (2) above.
(9) Excludes provision for special charges described in footnote (5) above,
write-down of goodwill described in footnote (6) above, provision for merger
integration charges described in footnotes (3) and (4) above, and charges
totaling $90.1 million described in footnote (2) above.
(10) Adjusted EBITDA is defined as the sum of (i) operating income (loss), (ii)
depreciation, (iii) amortization/write-down of goodwill, (iv) provision for
special charges described in footnote (5) above, (v) provision for merger
integration charges described in footnotes (3) and (4) above and (vi) the
charges described in footnote (2) above, less finance cost amortization.
Adjusted EBITDA is presented because (a) management believes that earnings
before interest, taxes, depreciation and amortization is a standard measure
commonly reported and widely used by analysts and other interested parties
that is helpful to investors, and (b) the adjustments made thereto to
account for the provisions for charges referred to in clauses (iv), (v) and
(vi) of the definition thereof are appropriate, in management's judgment, to
provide a more meaningful presentation of the Company's ability to service
debt and trends relating thereto. Adjusted EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of
operating performance or to cash flow as a measure of liquidity. For
information regarding management's analysis of trends in operating
performance and cash flow, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Adjusted EBITDA is not
necessarily comparable with other similarly titled measures for other
companies. Consolidated EBITDA as defined under the Second Amended Credit
Agreement (as defined) allows for certain additional adjustments to the
disclosed amounts (including (i) the exclusion of certain non-cash
compensation expenses, (ii) the exclusion of gains or losses from certain
asset dispositions, (iii) the exclusion of certain other non-recurring
charges, and (iv) the inclusion of amounts recorded under "Other income
(expense)") and was $54,275 for fiscal year 1997. A breach of the
Consolidated EBITDA test contained in the Second Amended Credit Agreement
could result in an event of default thereunder. In such event, the lenders
under the Second Amended Credit Agreement could elect to declare all amounts
borrowed under the Second Amended Credit Agreement, together with accrued
interest thereon, to be due and payable. See "Description of Second Amended
Credit Agreement--Covenants."
(11) Balance sheet data as of December 31, 1994 and December 31, 1993 exclude
the assets acquired and liabilities assumed pursuant to the AO Acquisition
and are not directly comparable to subsequent periods.
10
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER THE
SPECIFIC RISK FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
RISKS RELATED TO INTEGRATION OF AO; OPERATING LOSSES AND NEGATIVE CASH FLOW
The Company has experienced difficulties in the complex task of integrating
the American Olean operations, which were purchased in December 1995, with the
Company's operations. Delays in bringing the combined companies onto a common,
fully integrated management information system affected many aspects of the
Company's operations, particularly the Company's logistics systems. As a result,
the Company overproduced some products and underproduced others. Transportation
costs increased because of the need to relocate inventory to meet demand.
Customer service was adversely affected, and the Company lost sales. Accounts
receivable and inventory increased significantly, which resulted in a negative
impact to the Company's cash flow in 1996 and 1997.
The difficulties associated with the Integration significantly affected the
Company's financial results as sales declined 6.1% in 1997 compared to 1996.
Excluding the charges described below and certain merger integration charges,
operating margins declined to 3.0% in 1997 from 14.8% in 1996 and operating
income declined $86.4 million to $20.5 million in 1997 from $106.9 million in
1996. The Company also experienced negative free cash flow of ($92.9) million in
1997 and ($60.7) million in 1996. During the second and third quarters of 1997,
the Company recorded charges of $24.7 million and $65.4 million, respectively.
These charges were principally non-cash charges for the write-down of obsolete
and slow moving inventories, uncollectible trade accounts receivable, and other
non-productive assets, and also included costs for restructuring of
manufacturing, store operations and corporate administrative functions.
The Company has substantially completed the conversion of its management
information systems, primarily onto the platform used by AO. While the Company's
current information systems platform has allowed the Company to operate during
the Integration, the Company expects that it will be required to make additional
systems investments to optimize performance of its supply chain and to respond
to growth of its business and expanded customer service requirements.
The Company believes it has taken adequate charges for the expected costs
associated with the Integration, but can give no assurance that additional
charges will not be incurred. In addition, although the Company has taken a
number of actions to resolve the difficulties associated with completing the
Integration, there can be no assurance that the Company has or will be able to
take all steps necessary, or that the Company will return to, and then maintain,
profitability and positive cash flow in the future. Completion of the
Integration, and the realization of any costs savings and other benefits, could
be affected by a number of factors beyond the Company's control, such as general
economic conditions, increased operating costs, potential revenue instability
arising from cost savings initiatives or otherwise, response of competitors or
customers and further delays or difficulties in implementation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--American Olean Integration."
CYCLICAL BUSINESS
The U.S ceramic tile industry is highly dependent on residential and
commercial construction activity--new construction as well as remodeling--which
is cyclical in nature and is significantly affected by changes in general and
local economic conditions. These include interest rates, housing demand,
employment levels, financing availability, commercial rental vacancy rates and
consumer confidence. A prolonged recession in any of the residential or
commercial construction industries (new construction as well as remodeling)
could result in a significant decrease in the Company's operating performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
11
<PAGE>
SIGNIFICANT LEVERAGE; RESTRICTIONS IMPOSED UNDER THE SECOND AMENDED CREDIT
AGREEMENT
The Company is highly leveraged and, as a result, has significant debt
service obligations. At April 3, 1998, the Company's consolidated indebtedness
was $539.4 million (including the current portion of long-term debt) and its
stockholders' equity was $1.9 million. The degree to which the Company is
leveraged has important consequences to holders of Common Stock, including the
following: (i) a substantial portion of the Company's cash flow from operations
will be required to be dedicated to the payment of the Company's debt service
obligations; (ii) the Company's high degree of leverage will make it more
sensitive to a downturn in general economic conditions; (iii) the Company's
substantial indebtedness may limit its capacity to respond to market conditions
(including its ability to satisfy capital expenditure requirements) or to meet
its contractual or financial obligations; (iv) pursuant to the instruments
governing its indebtedness, the Company is subject to restrictive financial and
operating covenants that could limit its ability to conduct its business; and
(v) the Company may be more highly leveraged than other companies with which it
competes, which may place it at a competitive disadvantage. In addition, if and
to the extent the Company requires additional financing in the future for
working capital, capital expenditures or other purposes, the Company's leverage
may impair its ability to obtain such additional financing. See "Use of
Proceeds," "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Second Amended Credit Agreement."
Pursuant to the Second Amended Credit Agreement, the Company is required to
make quarterly amortization payments on the remaining portion of the $275
million Term A Loan (as defined) starting in the third quarter of fiscal year
1998 through December 31, 2002, at various scheduled amounts (including an
aggregate of $12.5 million in fiscal year 1998 and $40 million in fiscal year
1999). The Company is required to make quarterly amortization payments in
respect of the Term B Loan (as defined) through December 31, 2003 (including an
aggregate of $1 million in each of fiscal year 1998 and fiscal year 1999).
Borrowings under the $250 million Revolving Credit Facility (as defined) are
payable in full December 31, 2002. See "Description of Second Amended Credit
Agreement."
The Second Amended Credit Agreement contains a number of significant
covenants that, among other things, restrict the ability of the Company to
dispose of assets, incur additional indebtedness and other liabilities, pay
dividends, enter into sale and leaseback transactions, create liens, make
capital expenditures, make certain investments or acquisitions and otherwise
engage in corporate activities. Also, under the Second Amended Credit Agreement,
the Company will be required to satisfy specified financial tests, including
consolidated net worth, current ratio, consolidated interest coverage,
consolidated leverage ratio and Consolidated EBITDA (as defined) tests. While
the amendment that resulted in the Second Amended Credit Agreement provided the
Company with increased short-term flexibility with respect to the consolidated
interest coverage ratio and the consolidated leverage ratio test (the "Amended
Tests"), the Amended Tests and the Consolidated EBITDA test, which was added in
the Second Amended Credit Agreement, become significantly more stringent over
time, beginning in fiscal year 1998. A breach of any of the covenants could
result in an event of default under the Second Amended Credit Agreement. In such
event, the lenders under the Second Amended Credit Agreement could elect to
declare all amounts borrowed under the Second Amended Credit Agreement, together
with accrued interest thereon, to be due and payable. See "Description of Second
Amended Credit Agreement--Covenants."
As a result of increasingly stringent financial covenants under the Second
Amended Credit Agreement, the Company expects that it will be required to seek
to refinance its indebtedness or amend the terms thereof in 1999 and possibly
sooner. The Company's ability to amend or refinance its obligations with respect
to its indebtedness and to raise capital through alternative means such as
selling assets or raising equity capital, as well as its ability to comply with
its obligations under any new or amended debt facilities, depends on its
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to financial, business and other factors beyond its
control. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company's stockholders
12
<PAGE>
at that time would be diluted. Further, such equity securities may have rights,
preferences or privileges senior to those of the Common Stock. There can be no
assurance that future borrowing facilities will be available for the repayment
or refinancing of the Company's indebtedness, that the Company's existing
lenders will agree to any requested modification of the terms of its
indebtedness or that the Company's operating results will be sufficient for
compliance with its obligations under any new or amended debt facilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources," "Description of Second Amended
Credit Agreement" and "Description of Capital Stock." The Company expects that
debt incurred as part of a refinancing would involve higher borrowing costs.
COMPETITIVE INDUSTRY
The Company's products are sold in a highly competitive marketplace. In the
floor and wall covering businesses, the Company competes with vendors of carpet,
resilient flooring, wood flooring, laminates, stone, wallpaper, paint and other
products. With regard to ceramic tile sales, the Company faces extensive
competition from domestic and foreign manufacturers and independent
distributors. Although the Company believes that it is the largest manufacturer,
distributor and marketer of ceramic tile in the United States, certain of its
U.S. competitors are subsidiaries of publicly held companies that may have
greater resources and access to capital than the Company. In addition, some of
the Company's foreign competitors may be larger and have greater resources and
access to capital than the Company. In 1997, approximately 60% of U.S. ceramic
tile sales (by unit volume) consisted of imports, including the approximately 7%
of all 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 position with respect to its foreign
competitors. See "--Impact of Mexican Operations; Currency Fluctuations,"
"Ceramic Tile Industry" and "Business-- Competition."
MANAGEMENT TRANSITION
The Company is experiencing a period of management transition that has
placed, and may continue to place, a significant strain on its organizational
resources and personnel. Jacques R. Sardas was hired as President and Chief
Executive Officer in July 1997 and has assembled a new senior management team.
The Company's ability to successfully manage the Integration and future
initiatives will require its new management personnel to work together
effectively and will require the Company to improve its operational, management
and financial systems and controls. If Company management is unable to manage
this transition effectively, the Company's business, competitive position,
results of operations and financial condition will be materially and adversely
affected. See "--Dependence on Key Personnel."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of key
management employees and, in particular, upon Jacques R. Sardas, the Company's
Chairman, President and Chief Executive Officer. The Company has entered into an
agreement with Mr. Sardas providing for his employment as the Company's
President and Chief Executive Officer through December 31, 1999. The Company
does not maintain "key man" life insurance for any of its employees, including
Mr. Sardas. The loss of services of Mr. Sardas or any of the Company's other key
employees could have a material adverse effect on the Company. The Company's
success will depend in part on its ability to attract and retain highly skilled
technical, managerial, sales and marketing personnel. There can be no assurance
that the Company will be successful in retaining Mr. Sardas and its key
management employees and in attracting and retaining the personnel its
operations and strategy require. See "--Management Transition."
13
<PAGE>
IMPACT OF MEXICAN OPERATIONS; CURRENCY FLUCTUATIONS
Forty-four percent of the Company's manufacturing capacity is owned and
operated by its subsidiaries in Mexico (exclusive of manufacturing capacity
available from the Company's Mexican joint venture). Accordingly, an event that
has a material adverse impact on the Company's Mexican operations may have a
material adverse impact on the operations of the Company as a whole. The
marketing, manufacturing and regulatory environments in Mexico differ from those
in the United States.
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
fiscal year 1997, sales in Mexico represented approximately 3% of the Company's
consolidated net sales. The Company's sales in Mexico are peso-denominated and
primarily all of the Mexican facility's cost of sales and operating expenses are
peso-denominated. In fiscal year 1997, peso-denominated cost of sales and
operating expenses represented approximately 7% of the Company's consolidated
cost of sales and operating expenses. Exposure to exchange rate changes is
favorable to operating results when the peso devalues against the U.S. dollar,
since the Company's costs relating to its Mexican operations are primarily
denominated in pesos and the Company's revenues relating to its Mexican
operations are primarily denominated in dollars. As the peso appreciates against
the U.S. dollar, the effect is unfavorable to operating results. In addition to
exchange rate changes affecting operating results, foreign currency transaction
gains or losses are recognized in other income and expense. In fiscal year 1997,
the Company recorded a foreign currency transaction gain of approximately $0.6
million. In addition, non-cash increases or reductions to stockholders' equity
may occur as a result of translation of foreign assets and liabilities into
dollars. The Company did not enter into any peso currency forward contracts in
1996 and 1997.
The Mexican peso has been subject to large devaluations in the past, and may
be subject to significant fluctuations in the future. During 1996, the Mexican
peso devalued 2.24% and, during 1997, the peso devalued 2.65%. These
devaluations resulted in a reduction of stockholders' equity of approximately
$2.0 million and $1.4 million in 1996 and 1997, respectively, as a result of
translating peso-denominated assets and liabilities into dollars. Any future
devaluation of the peso against the U.S. dollar may affect the Company's results
of operations or financial condition and may affect the value of a holder's
investment in the Common Stock.
Over the last few years, a program of reform has begun to modify the nature
of the Mexican government's role in the Mexican economy. Nevertheless, the
Mexican government continues to exercise significant influence over many aspects
of the Mexican economy. Accordingly, Mexican government actions concerning the
economy could have significant effects on private sector entities, including the
Company. There can be no assurance that future Mexican governmental actions or
future developments in the Mexican economy, including a slowdown of the Mexican
economy or the development of any social unrest, over which the Company has no
control, will not impair the Company's operations or financial condition or
adversely affect the market price of the Common Stock.
TARIFFS AND CUSTOMS DUTIES
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
glazed ceramic tile imported from non-North American countries at approximately
15%, to be reduced ratably to 8 1/2% by 2004. 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
the effect that GATT may have on the Company's operations.
In 1993, Mexico, the United States and Canada approved the North American
Free Trade Agreement ("NAFTA"). NAFTA has, among other things, removed and will
continue to remove, over a transition period, most normal customs duties imposed
on goods traded among the three countries. In addition, NAFTA will remove or
limit many investment restrictions, liberalize trade in services, provide a
specialized
14
<PAGE>
means for settlement of, and remedies for, trade disputes arising thereunder,
and will result in new laws and regulations to further these goals. Although
NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in
Mexico and sold in the United States, it also may stimulate competition in the
United States and Canada from manufacturers located in Mexico. The United States
currently imposes import duties on glazed ceramic tile from Mexico of
approximately 13%, although these duties on imports from Mexico are being phased
out ratably under NAFTA by 2008. It is uncertain what ultimate effect NAFTA will
have on the Company's results of operations.
CONTROL BY CERTAIN STOCKHOLDERS
After giving effect to the sale of the shares of Common Stock offered hereby
(the "Offering"), DTI Investors LLC ("DTI Investors") (whose members include AEA
Investors Inc. ("AEA Investors"), certain current and former management
employees of AEA Investors, AEA Investors' current and former fund investors and
certain former members of Company management) will beneficially own 53.5% of the
outstanding shares of Common Stock, and AWI will beneficially own 17.5% of the
outstanding shares of Common Stock (or 15.1% if the underwriters' over-allotment
option with respect to the Offering is exercised in full). AEA Investors, a
privately held corporation headquartered in New York, is the managing member of
DTI Investors and, as such, has the power to control the business of DTI
Investors, including the power to vote shares of Common Stock owned by DTI
Investors. Pursuant to the Shareholders Agreement, dated as of December 29, 1995
(as amended as of July 16, 1996, the "Shareholders Agreement"), among Dal-Tile,
AEA Investors, DTI Investors, AWI, Armstrong Enterprises, Inc. ("AEI") and
Armstrong Cork Finance Corporation, each of DTI Investors and AWI is obligated
to vote the shares of Common Stock owned or controlled by it for (i) six
directors designated by DTI Investors, (ii) three directors designated by AWI
(subject to reduction as a result of the Offering), and (iii) the chief
executive officer of Dal-Tile. Acting pursuant to the Shareholders Agreement,
DTI Investors and AWI have sufficient voting power to control the election of
directors. Effective February 26, 1998, the three persons so designated by AWI
resigned as directors of the Company. The Company, DTI Investors and AWI are in
discussions regarding filling the three director vacancies. On March 13, 1998,
AWI notified the Company of its request, pursuant to the Shareholders Agreement,
that Dal-Tile register for sale under the Securities Act all of the 18,365,822
shares of Common Stock owned by AWI to enable AWI to make the Offering and offer
to sell the PEPS (the "PEPS Offering"). 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), certain
dispositions to third parties involving more than 20% of the total assets of the
Company on a cumulative basis, excluding, however, such dispositions in the
ordinary course of business, and excluding the sale of all or substantially all
of the stock or assets of the Company. DTI Investors has sufficient voting power
to decide the results of other matters submitted to a vote of stockholders.
Furthermore, such control could preclude any unsolicited acquisition of the
Company and, consequently, adversely affect the market price of the Common
Stock. See "Principal and Selling Stockholders--Shareholders Agreement."
The PEPS Offering will have no immediate effect on AWI's ownership of Common
Stock. In addition, AWI may pay cash in lieu of delivering Common Stock upon
maturity of the PEPS.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has not declared or paid dividends since the Company's initial
public offering of the Common Stock and intends to retain any future earnings
for use in its business. Additionally, payment of dividends by Dal-Tile on the
Common Stock currently is restricted under the Second Amended Credit Agreement.
As a result, Dal-Tile does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
Dal-Tile is a holding company with no operations or significant assets other
than its investment in its wholly owned subsidiary, Dal-Tile Group Inc.
("Dal-Tile Group"), and its 49.99% interest in
15
<PAGE>
Recumbriementos Interceramic, S.A. de C.V. ("RISA"), a Mexican joint venture
with Internacional de Ceramica, S.A. de C.V. ("Interceramic"). Dal-Tile Group is
the primary obligor under the Second Amended Credit Agreement and 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 Second Amended Credit Agreement 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 is 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 any such dividends, loans and other cash distributions in the foreseeable
future. If the need by Dal-Tile for cash distributions from Dal-Tile Group
should arise in the future (for example, to repay indebtedness), there can be no
assurance that Dal-Tile Group will be permitted to make such cash distributions.
See "Dividend Policy" and "Description of Second Amended Credit Agreement."
REGULATIONS AND ENVIRONMENTAL CONSIDERATIONS
The Company's operations are subject to various U.S. and Mexican
environmental statutes and regulations, including laws and regulations
addressing materials used in the Company's products. In addition, certain of the
Company's operations are subject to U.S. federal, state and local and Mexican
environmental laws and regulations that impose limitations on the discharge of
pollutants into the air and water and establish standards for the treatment,
storage and disposal of solid and hazardous wastes. Although the Company
believes that it has made sufficient capital expenditures to maintain compliance
with existing laws and regulations, future expenditures may be necessary as
compliance standards and technology change. Unforeseen significant expenditures
required to maintain such compliance, including unforeseen liabilities, could
have an adverse effect on the Company's business and financial condition.
The Company has from time to time been, and presently is, the subject of
administrative proceedings, litigation and investigations relating to
environmental and related matters. Although management does not believe that
such proceedings, litigation and investigations will have a material adverse
effect on the Company, based, among other factors, on certain indemnification
rights the Company enjoys, 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, or that indemnification
pursuant to such indemnification rights will be available. See
"Business--Environmental Regulation."
LIMITED TRADING MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's Common Stock is traded on the New York Stock Exchange
("NYSE"). Average daily trading volume for the Common Stock as reported by the
NYSE for the first quarter of 1998 was 44,974 shares. Despite the increase in
the number of shares of Common Stock to be publicly held as a result of the
Offering, there can be no assurance that a more active trading market in the
Common Stock will develop. The Company believes that variations in the Company's
results of operations and other factors, including analyst estimates and general
economic conditions, may cause the market price of the Common Stock to vary
significantly. In addition, from time to time in recent years, the securities
markets have experienced significant price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of
particular companies. Following the Offering, sales or the expectation of sales
of substantial amounts of Common Stock in the public market by the Company or
its stockholders could adversely affect the prevailing market prices for the
Common Stock. See "Shares Eligible for Future Sale."
It is not possible to predict how or whether any market that develops for
the PEPS will influence the market for the Common Stock. For example, the price
of the Common Stock could become more volatile and could be depressed by
investors' anticipation of the potential distribution into the market, upon
maturity of the PEPS, of up to 8,050,000 shares of Common Stock which may be
delivered by AWI upon
16
<PAGE>
the maturity of the PEPS (currently constituting 15.1% of the outstanding shares
of Common Stock). The price of the Common Stock could also be adversely affected
by the possible sales of shares of Common Stock by investors who view the PEPS
as a more attractive means of equity participation in the Company and by hedging
or arbitrage trading activity that may develop involving the PEPS and the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has, and upon completion of the Offering and the PEPS Offering,
the Company will have, 53,435,101 shares of Common Stock outstanding. All of
these shares of Common Stock are freely transferable without restriction or
further registration under the Securities Act, except for any shares held by
affiliates, including 28,604,811 shares held by DTI Investors and, to the extent
AWI is deemed an affiliate, 8,050,000 shares held by AWI following the Offering
(assuming the Underwriters' over-allotment option with respect to the Offering
is exercised in full). All of the shares sold in the Offering and any shares
delivered to holders of PEPS will be freely transferable and may be resold by
non-affiliates of the Company without further registration under the Securities
Act. Each of the Company, the Company's directors and executive officers (for so
long as they remain in such capacities), AWI and DTI Investors has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not, during the period ending 90 days after the date of this Prospectus (1)
offer, pledge, loan, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any securities are then
owned by such person or are thereafter acquired directly from the Company), (2)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of the ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) of this paragraph is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise, (3) in the case of AWI and DTI Investors, make any demand for, or
exercise any right with respect to, registration of any shares of Common Stock
or any securities convertible into, or exercisable or exchangeable for, Common
Stock or (4) in the case of Dal-Tile, file a registration statement with the
Securities and Exchange Commission (the "Commission") for an offering of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (other than a registration statement on Form S-8 or an equivalent
form), other than, with respect to clauses (1), (2), (3) and (4) above, (i) the
PEPS, (ii) the offer and sale of the shares of Common Stock made in connection
with the Offering and the PEPS Offering and (iii) options to purchase Common
Stock, or shares of Common Stock issued or issuable under the Company's existing
stock option and stock purchase plans. See "Underwriters." Following the
Offering and the PEPS Offering, sales or the expectation of sales of substantial
amounts of Common Stock in the public market could adversely affect the
prevailing market prices for the Common Stock. See "Shares Eligible for Future
Sale."
In addition, 7,836,425 shares of Common Stock are reserved for issuance
pursuant to the Company's stock option plans. At April 3, 1998, options for the
purchase of 6,647,371 shares of Common Stock were outstanding. These shares will
be available for sale in the public market from time to time upon registration
or pursuant to available exemptions from registration.
IMPACT OF YEAR 2000
Some of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company is continuing its efforts to modify or replace certain portions
of its software and hardware so that its computer systems will function properly
with respect to dates in the year 2000 and
17
<PAGE>
thereafter. The total Year 2000 project cost is estimated at approximately $7.0
million and will be expensed as incurred. To date, the Company has incurred
expenses primarily for assessment of the Year 2000 issue, the development of a
modification plan and initial date repair activities.
The project is estimated to be completed no later than April 2, 1999, which
is prior to any anticipated impact on the Company's operating systems. The
Company believes that with modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
adverse impact on operations.
The costs of the project and the date by which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, non-performance of key software and
hardware vendors and similar uncertainties.
In addition, material disruptions to the operations of the Company's major
customers and suppliers as a result of Year 2000 issues could also have a
material adverse impact on the Company's operations and financial condition.
ANTITAKEOVER PROVISIONS
Dal-Tile's Second Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws contain certain provisions that could have the
effect of discouraging or making more difficult the acquisition of Dal-Tile by
means of a tender offer, a proxy contest or otherwise, even though such an
acquisition might be economically beneficial to the Company's stockholders.
These provisions include advance notice procedures for stockholders to nominate
candidates for election as directors of Dal-Tile and for stockholders to submit
proposals for consideration at stockholders' meetings. The ability of Dal-Tile
to issue preferred stock, par value $.01 per share ("Preferred Stock"), in one
or more classes or series, with such powers, designations, preferences and
relative, participating, optional or special rights, qualifications, limitations
or restrictions as may be determined by the Board of Directors of Dal-Tile (the
"Board of Directors"), also could make such an acquisition more difficult. In
addition, these provisions may make the removal of management more difficult,
even in cases where such removal would be favorable to the interests of the
Company's stockholders.
Dal-Tile is subject to Section 203 of the Delaware General Corporation Law
(the "DGCL"), which limits transactions between a publicly held company and
"interested stockholders" (generally, those stockholders who, together with
their affiliates and associates, own 15% or more of a company's outstanding
capital stock). This provision of the DGCL also may have the effect of deterring
certain potential acquisitions of Dal-Tile. See "Description of Capital
Stock--Preferred Stock" and "Description of Capital Stock--Possible Antitakeover
Effect of Certain Charter and Bylaw Provisions."
18
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Offering or the PEPS
Offering.
DIVIDEND POLICY
The Company has not declared or paid dividends since the Company's initial
public offering of the Common Stock and intends to retain any future earnings
for use in its business. The Company is a holding company and its ability to pay
cash dividends is limited by its dependence upon the receipt of cash from its
subsidiaries to make such dividend payments. Additionally, the Second Amended
Credit Agreement 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. As a result, Dal-Tile does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future.
PRICE RANGE OF COMMON STOCK
Since August 14, 1996, the shares of Common Stock have been traded on the
NYSE. The table below shows, for the periods indicated, the high and low closing
sale prices for the shares of Common Stock as reported by the NYSE as of the end
of the regular session, as reported on the Consolidated Tape, Network A.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C> <C>
Fiscal Year ended January 3, 1997
Third Quarter (from August 14, 1996)............ $16 3/8 $13 7/8
Fourth Quarter.................................. 21 3/8 16 5/8
Fiscal Year ended January 2, 1998
First Quarter................................... 19 5/8 14 1/2
Second Quarter.................................. 18 7/8 12
Third Quarter................................... 18 3/8 14
Fourth Quarter.................................. 14 11/16 9 1/2
Fiscal Year ending January 1, 1999
First Quarter................................... 14 1/8 10 11/16
Second Quarter (through June 19, 1998).......... 14 7/16 10 1/2
</TABLE>
On June , 1998, the last sale price of the Common Stock on the NYSE was
$ .
19
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization of
the Company as of April 3, 1998. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of Second Amended Credit Agreement," "Description of
Capital Stock" and the Company's Consolidated Financial Statements, including
the notes thereto, that appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 3, 1998
--------------
<S> <C>
(IN THOUSANDS)
Long-term debt (including current portion):
Term A Loan..................................................................................... $ 217,500
Term B Loan..................................................................................... 124,750
Revolving Credit Facility....................................................................... 173,000
Other........................................................................................... 24,195
--------------
Total long-term debt.......................................................................... 539,445
--------------
Stockholders' equity:
Preferred Stock, $.01 par value per share; 11,100,000 shares authorized; no shares issued and
outstanding................................................................................... --
Common Stock, $.01 par value per share (200,000,000 shares authorized; 53,435,101 shares issued
and outstanding), and additional paid-in capital(1)........................................... 436,634
Accumulated deficit............................................................................. (370,058)
Currency translation adjustment................................................................. (64,630)
--------------
Total stockholders' equity.................................................................... 1,946
--------------
Total capitalization........................................................................ $ 541,391
--------------
--------------
</TABLE>
- ------------------------
(1) Excludes 7,836,425 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options granted to certain employees of the
Company pursuant to the Company's stock option plans. As of April 3, 1998,
options for the purchase of 6,647,371 shares of Common Stock were
outstanding.
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial information was derived from the historical
consolidated financial information of the Company. The Consolidated Financial
Statements of the Company for the fiscal years 1993, 1994, 1995, 1996 and 1997
have been audited by Ernst & Young LLP, whose report for the fiscal years 1995,
1996 and 1997 appears elsewhere in this Prospectus. The selected financial
information for the three-month periods ended April 3, 1998 and April 4, 1997 is
unaudited, but, in the opinion of management, includes all adjustments necessary
for a fair presentation of the financial position and results of operations for
such periods. The results of operations for the three months ended April 3, 1998
are not necessarily indicative of the results for the entire year. The selected
financial information should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, including the notes thereto,
that appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED
--------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31,
------------------------------- JANUARY 3, JANUARY 2, APRIL 4, APRIL 3,
1993 1994 1995 1997 1998 1997 1998
--------- --------- --------- ----------- ----------- --------- ---------
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Net sales......................... $ 440,573 $ 506,309 $ 474,812 $ 720,236 $ 676,637 $ 167,409 $ 185,831
Cost of goods sold................ 239,379 268,272 225,364 369,731 404,728(2) 84,221 98,503
--------- --------- --------- ----------- ----------- --------- ---------
Gross profit...................... 201,194 238,037 249,448 350,505 271,909 83,188 87,328
Expenses:
Transportation.................. 25,860 32,068 33,535 47,125 58,425(2) 11,490 14,533
Selling, general and
administrative................ 120,748 132,887 134,193 190,911 277,515(2) 52,994 57,433
Provision for merger integration
charges....................... -- -- 22,430(3) 9,000(4) -- -- --
Provision for special charges... 53,233(5) -- -- -- -- -- --
Amortization/write-down of
goodwill...................... 224,941(6) 4,765 4,765 5,605 5,605 1,401 1,401
--------- --------- --------- ----------- ----------- --------- ---------
Total expenses.................... 424,782 169,720 194,923 252,641 341,545 65,885 73,367
--------- --------- --------- ----------- ----------- --------- ---------
Operating income (loss)........... (223,588) 68,317 54,525 97,864 (69,636) 17,303 13,961
Interest expense.................. 46,746 53,542 55,453 46,338 40,649 8,079 11,604
Interest income................... 517 1,403 1,250 1,685 268 139 26
Other income (expense)............ (1,088) 1,341 2,994 129 1,220 681 (391)
--------- --------- --------- ----------- ----------- --------- ---------
Income (loss) before income taxes
and extraordinary item.......... (270,905) 17,519 3,316 53,340 (108,797) 10,044 1,992
Income tax provision (benefit).... (3,225) 10,614 1,176 18,914 1,439 3,517 1,164
--------- --------- --------- ----------- ----------- --------- ---------
Income (loss) before extraordinary
item............................ (267,680) 6,905 2,140 34,426 (110,236) 6,527 828
Extraordinary item--loss on early
retirement of debt, net of
taxes........................... -- -- -- (29,072) -- -- --
--------- --------- --------- ----------- ----------- --------- ---------
Net income (loss)................. $(267,680) $ 6,905 $ 2,140 $ 5,354 $(110,236) $ 6,527 $ 828
--------- --------- --------- ----------- ----------- --------- ---------
--------- --------- --------- ----------- ----------- --------- ---------
BASIC EARNINGS PER SHARE (7):
Income (loss) before extraordinary
item per common share........... $ (9.38) $ 0.24 $ 0.07 $ 0.71 $ (2.06) $ 0.12 $ 0.02
Extraordinary item................ -- -- -- (0.60) -- -- --
--------- --------- --------- ----------- ----------- --------- ---------
Net income (loss) per common
share........................... $ (9.38) $ 0.24 $ 0.07 $ 0.11 $ (2.06) $ 0.12 $ 0.02
--------- --------- --------- ----------- ----------- --------- ---------
--------- --------- --------- ----------- ----------- --------- ---------
Average outstanding common
shares.......................... 28,543 28,587 28,743 48,473 53,435 53,435 53,435
--------- --------- --------- ----------- ----------- --------- ---------
--------- --------- --------- ----------- ----------- --------- ---------
DILUTED EARNINGS PER SHARE (7):
Income (loss) before extraordinary
item per common share........... $ (9.38) $ 0.23 $ 0.07 $ 0.69 $ (2.06) $ 0.12 $ 0.02
Extraordinary item................ -- -- -- (0.58) -- -- --
--------- --------- --------- ----------- ----------- --------- ---------
Net income (loss) per common
share........................... $ (9.38) $ 0.23 $ 0.07 $ 0.11 $ (2.06) $ 0.12 $ 0.02
--------- --------- --------- ----------- ----------- --------- ---------
--------- --------- --------- ----------- ----------- --------- ---------
Average outstanding common and
equivalent shares (000)......... 28,543 29,664 29,668 50,053 53,435 55,443 54,149
--------- --------- --------- ----------- ----------- --------- ---------
--------- --------- --------- ----------- ----------- --------- ---------
<CAPTION>
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED
--------------------------------------------------------- --------------------
DECEMBER 31,
------------------------------- JANUARY 3, JANUARY 2, APRIL 4, APRIL 3,
1993 1994 1995 1997 1998 1997 1998
--------- --------- --------- ----------- ----------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Gross margin...................... 45.7% 47.0% 52.5% 48.7% 45.6%(8) 49.7% 47.0%
Operating margin (9).............. 10.0% 13.5% 16.2% 14.8% 3.0% 10.3% 7.5%
Adjusted EBITDA (10).............. $ 64,358 $ 83,239 $ 92,041 $ 129,367 $ 44,099 $ 22,284 $ 20,826
Cash flows provided by (used in):
Operating activities............ (6,193) 31,470 40,663 (18,684) (52,807) (41,291) 7,511
Investing activities............ (17,066) (14,160) (29,392) (42,039) (40,074) (13,888) 3,272
Financing activities............ 28,771 (8,434) 51,739 (2,163) 90,463 40,200 (17,887)
BALANCE SHEET DATA (AT END OF
PERIOD) (11):
Working capital................... $ 119,109 $ 115,717 $ 152,128 $ 180,819 $ 154,888 $ 214,685 137,201
Total assets...................... 512,830 488,417 672,393 688,497 672,069 722,265 657,601
Long-term debt, including current
maturities...................... 492,137 492,753 527,816 465,858 557,091 506,062 539,445
Stockholders' equity (deficit).... (77,449) (103,823) 9,639 115,569 3,920 121,354 1,946
</TABLE>
- ------------------------
(1) Operating data for the fiscal year ended December 31, 1995 and prior years
excludes the results of operations of AO, as the AO Acquisition occurred on
December 29, 1995, and are not directly comparable to subsequent periods.
(2) Includes charges totaling $90.1 million recorded in fiscal year 1997
principally for the write-down of obsolete and slow-moving inventories,
uncollectible trade accounts receivable, other non-productive assets and
costs for restructuring of manufacturing, store operations and corporate
administrative functions. These charges are comprised of $36.5 million in
cost of goods sold, $3.5 million in transportation expenses and $50.1
million in selling, general and administrative expense.
(3) In the fourth quarter of fiscal year 1995, the Company recorded a pre-tax
$22.4 million merger integration charge for the revaluation of certain
assets in connection with the AO Acquisition.
(4) In the first quarter of fiscal year 1996, the Company recorded a pre-tax
$9.0 million merger integration charge for the closing of duplicative sales
centers and distribution centers, the closing of certain manufacturing
facilities and severance costs.
(5) In the fourth quarter of fiscal year 1993, the Company established
provisions for a distribution enhancement program, revaluation of certain
assets and severance costs for retiring employees. As a result, the Company
recorded a pre-tax $53.2 million special charge in the fourth quarter of
fiscal year 1993.
(6) In connection with a review of its operations during the fourth quarter of
fiscal year 1993, the Company wrote off $214.2 million of goodwill related
to the following business units: Dal-Tile Mexico, Materiales, Dal-Minerals
and R&M.
(7) The earnings per share amounts prior to fiscal year 1997 have been restated
as required to comply with SFAS 128. For further discussion of earnings per
share and the impact of SFAS 128, see the notes to the Consolidated
Financial Statements.
(8) Excludes charges totaling $36.5 million in cost of goods sold recorded in
fiscal year 1997 described in footnote (2) above.
(9) Excludes provision for special charges described in footnote (5) above,
write-down of goodwill described in footnote (6) above, provision for merger
integration charges described in footnotes (3) and (4) above, and charges
totaling $90.1 million described in footnote (2) above.
(10) Adjusted EBITDA is defined as the sum of (i) operating income (loss), (ii)
depreciation, (iii) amortization/write-down of goodwill, (iv) provision for
special charges described in footnote (5) above, (v) provision for merger
integration charges described in footnotes (3) and (4) above and (vi) the
charges described in footnote (2) above, less finance cost amortization.
Adjusted EBITDA is presented because (a) management believes that earnings
before interest, taxes, depreciation and amortization is a standard measure
commonly reported and widely used by analysts and other interested parties
that is helpful to investors, and (b) the adjustments made thereto to
account for the provisions for charges referred to in clauses (iv), (v) and
(vi) of the definition thereof are appropriate, in management's judgment, to
provide a more meaningful presentation of the Company's ability to service
debt and trends related thereto. Adjusted EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of
operating performance or to cash flow as a measure of liquidity. For
information regarding management's analysis of trends in operating
performance and cash flow, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Adjusted EBITDA is not
necessarily comparable with other similarly titled measures for other
companies. Consolidated EBITDA as defined under the Second Amended Credit
Agreement allows for certain additional adjustments to the disclosed amounts
(including (i) the exclusion of certain non-cash compensation expenses, (ii)
the exclusion of gains or losses from certain asset dispositions, (iii) the
exclusion of certain other non-recurring charges, and (iv) the inclusion of
amounts recorded under "Other income (expense)") and was $54,275 for fiscal
year 1997. A breach of the Consolidated EBITDA test contained in the Second
Amended Credit Agreement could result in an event of default thereunder. In
such event, the lenders under the Second Amended Credit Agreement could
elect to declare all amounts borrowed under the Second Amended Credit
Agreement, together with accrued interest thereon, to be due and payable.
See "Description of Second Amended Credit Agreement--Covenants."
(11) Balance sheet data as of December 31, 1994 and December 31, 1993 exclude
the assets acquired and liabilities assumed pursuant to the AO Acquisition
and are not directly comparable to subsequent periods.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On December 29, 1995, the Company completed the AO Acquisition. Following
the acquisition, the Company was engaged in the complex task of integrating the
management information systems of Dal-Tile and American Olean. Delays in the
systems integration affected many areas of the Company, ultimately impacting
customer service. The systems integration was substantially completed during the
fiscal year ended January 2, 1998. Due to the unexpected timetable for
conversion, the Company incurred additional costs associated with the completion
of this project, and the delays negatively impacted revenues. During 1998, the
Company will continue to establish and enhance interfaces between individual
accounting and reporting systems modules.
For the fiscal year ended January 2, 1998, the Company's earnings were
negatively impacted due to the previously discussed conversion of its management
information systems, costs to consolidate eleven distribution centers to three
mega-distribution centers and overall restructuring and consolidation of
manufacturing and corporate functions. In an effort to manage inventories and
improve customer service, the Company incurred higher transportation costs
throughout the year related to movements of inventory between distribution
centers and sales centers. During the second half of the year, higher per unit
manufacturing costs were incurred as production levels were decreased in order
to reduce inventories to provide better alignment with sales.
During the second and third quarters of fiscal year 1997, the Company
recorded charges of $24.7 million and $65.4 million, respectively. These charges
were principally for the write-down of obsolete and slow-moving inventories,
uncollectible trade accounts receivable, other non-productive assets and costs
for restructuring of manufacturing, store operations and corporate
administrative functions. The charges are comprised of $36.5 million in cost of
goods sold, $3.5 million in transportation expenses and $50.1 million in
selling, general and administrative expenses.
The write-down of uncollectible trade accounts receivable related to
increases in receivables balances arising principally as a result of earlier
sales initiatives that included, among other things, extended credit terms and
efforts to expand the Company's customer base, and operational and systems
integration issues that resulted in limited access by sales center personnel to
certain account information. In addition, in an effort to improve customer
service, authority to extend credit was decentralized and assigned to management
at the retail sales centers. Sales resulting from these initiatives were a
result of products being shipped under defined terms to customers, with the full
expectation of invoiced amounts being paid in full within the terms of the sale.
In response to deterioration in the aging of the Company's accounts receivable,
primarily as a result of the sales initiatives and operational and systems
integration issues, the Company increased collection efforts and undertook
detailed reviews of collectibility, and subsequently recorded increases in the
reserve for doubtful accounts of $7.6 million in the second quarter of fiscal
year 1997, and $13.7 million as of the third quarter of fiscal year 1997. The
sales initiatives, which began in the fourth quarter of fiscal year 1996, were
discontinued by the end of the second quarter of fiscal year 1997. In addition,
by the end of the second quarter of fiscal year 1997, the Company moved to a
more centralized credit approval process and implemented more stringent credit
policies.
At the end of the second quarter of fiscal year 1997, the Company also
extensively reviewed its finished product inventories, including the various
patterns, shapes and sizes of finished product inventories. Based on this
analysis, an adjustment of approximately $8.4 million was recorded as of the end
of the second quarter of fiscal year 1997 to reflect the write-down of inventory
believed to be slow moving and/or obsolete, or out of balance with other related
products. Management believes that delays in systems integration resulted in
impaired inventory management, and, in particular, resulted in an imbalance in
inventory mix. During the third quarter of fiscal year 1997, the Company's new
management undertook an additional study of the business and its operations and
determined that it would reduce the number of
23
<PAGE>
SKU's offered for sale by the Company and would discontinue additional patterns.
These actions, coupled with the results of physical inventories and the delay in
systems integration, resulted in a need to record additional inventory
provisions of $28.1 million consisting of $14.2 million related to results of
physical inventories, $7.3 million of additional write-down for obsolete
inventory, $4.5 million write-down for certain other inventory accounts and $2.1
million write-down for raw materials. Management believes that progress in its
systems integration resulted in substantially improved inventory management by
the end of the third quarter of fiscal year 1997.
The balance of the charges recorded in the second quarter of fiscal year
1997 consisted of $2.5 million in respect of terminated employees and $6.2
million in respect of other charges, primarily related to liabilities incurred
for lease terminations, executive search fees, and other items. The balance of
the charges recorded in the third quarter of fiscal year 1997 consisted of $4.2
million in respect of terminated employees, $8.5 million in respect of accrued
expenses, primarily related to freight and insurance, $5.3 million in respect of
fixed asset impairment and $5.6 million in respect of other charges, primarily
related to write-down of notes, non-trade receivables and certain other assets.
The Company believes it has taken adequate charges for the expected costs
associated with the Integration but can give no assurance that additional
charges will not be incurred.
The second half of fiscal year 1997 was marked by significant challenges and
a period of transition as the Company focused on improving cash flows and
overall customer service. In addition, the Company has strengthened its
management team and taken steps to cut costs and streamline the organizational
structure. The Company has made progress toward its goals with substantial
increases to cash flows as accounts receivable collections increased and
improved inventory management procedures were implemented. Additionally, the
quality of customer service has been enhanced through substantial completion of
the systems integration. Costs savings have been realized through improved
internal controls and organizational changes.
During the first quarter of fiscal year 1998, the Company reported sales
growth in all distribution channels and a return to profitability.
Transportation costs remained high as the Company continued to focus on
improving customer service. For the remainder of fiscal year 1998, the Company
will continue efforts to improve its supply chain, reduce operating costs and
improve cash flow through better alignment of production requirements with
working capital.
The following is a discussion of the results of operations for the three
months ended April 3, 1998 compared with the three months ended April 4, 1997
and for the fiscal year ended January 2, 1998 compared with the fiscal year
ended January 3, 1997. Due to the Company's 52/53 week accounting cycle, the
first quarter of fiscal year 1998 ended April 3, 1998, the first quarter of
fiscal year 1997 ended April 4, 1997, the fiscal year 1997 ended January 2, 1998
and the fiscal year 1996 ended January 3, 1997.
Operating results for fiscal years 1997 and 1996 reflect the results of
operations of AO which was acquired on December 29, 1995. Because results for
the fiscal year ended December 31, 1995 do not reflect the AO Acquisition,
results for that period are not directly comparable with results for fiscal
years 1997 and 1996.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, JANUARY 3, JANUARY 2, APRIL 4, APRIL 3,
1995 1997 1998 1997 1998
--------------- ----------- ----------- ----------- -----------
Net sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................................... 47.5 51.3 59.8 50.3 53.0
----- ----- ----- ----- -----
Gross profit............................................ 52.5 48.7 40.2 49.7 47.0
Operating expenses...................................... 36.3 33.9 50.5 39.4 39.5
----- ----- ----- ----- -----
16.2 14.8 (10.3) 10.3 7.5
Non-recurring charges:
Provision for merger integration charges................ 4.7 1.2 -- -- --
----- ----- ----- ----- -----
Operating income (loss)................................. 11.5 13.6 (10.3) 10.3 7.5
Interest expense (net).................................. 11.4 6.2 6.0 4.7 6.2
Other income (expense).................................. 0.6 -- 0.2 0.4 (0.2)
----- ----- ----- ----- -----
Income (loss) before income taxes and extraordinary
item.................................................. 0.7 7.4 (16.1) 6.0 1.1
Income tax provision.................................... 0.2 2.6 0.2 2.1 0.6
----- ----- ----- ----- -----
Income (loss) before extraordinary item................. 0.5 4.8 (16.3) 3.9 0.5
Extraordinary item, net of taxes........................ -- (4.1) -- -- --
----- ----- ----- ----- -----
Net income (loss)....................................... 0.5% 0.7% (16.3)% 3.9% 0.5%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED APRIL 3, 1998 COMPARED TO THREE MONTHS ENDED APRIL 4, 1997
NET SALES. Net sales for the first quarter of fiscal year 1998 increased
$18.4 million, or 11.0%, to $185.8 million from $167.4 million in 1997. During
the first quarter of fiscal year 1998, sales increased 10% in the
Company-operated sales centers and 14% within the independent distributor
channel compared to the same period in 1997. The increase in net sales was due
principally to improved customer service in all distribution channels realized
through, among other things, substantial completion of the Company's management
information systems integration, better product availability and restructuring
of the sales force in late 1997.
Net sales in Mexico increased $3.4 million to $6.5 million in the first
quarter of fiscal year 1998 from $3.1 million in 1997. This increase in sales
occurred as the Company increased its utilization of United States manufacturing
capacity resulting in a larger availability of the Company's Mexican production
to be sold in Mexico.
GROSS PROFIT. Gross profit for the first quarter of fiscal year 1998
increased $4.1 million, or 4.9%, to $87.3 million from $83.2 million in 1997
principally as a result of the increase in sales. Gross margin decreased to
47.0% in the first quarter of fiscal year 1998 from 49.7% in the first quarter
of fiscal year 1997. The decrease in gross margin was primarily a result of
higher per unit manufacturing cost associated with reduced production levels
compared to the first quarter of fiscal year 1997.
EXPENSES. Expenses in the first quarter of fiscal year 1998 increased $7.5
million, or 11.4%, to $73.4 million from $65.9 million in the first quarter of
fiscal year 1997. Expenses as a percent of sales increased to 39.5% in the first
quarter of fiscal year 1998 from 39.4% in the first quarter of fiscal year 1997.
The increase was due primarily to increased transportation costs related to
continued transfer of inventories in
25
<PAGE>
order to improve customer service, higher fixed costs for information technology
and increased operating costs associated with higher revenues. These increases
were offset by reductions in staffing and lower professional fees.
OPERATING INCOME. Operating income in the first quarter of fiscal year 1998
decreased $3.3 million, or 19.1%, to $14.0 million from $17.3 million in the
first quarter of fiscal year 1997. Operating margin decreased to 7.5% from 10.3%
for the first quarter of fiscal year 1998 due primarily to increased
transportation and operating expenses offset by higher sales.
INTEREST EXPENSE (NET). Interest expense (net) in the first quarter of
fiscal year 1998 increased $3.7 million, or 46.8%, to $11.6 million from $7.9
million in the first quarter of fiscal year 1997. The increase was due to higher
fees and interest rates in connection with second and third quarter of fiscal
year 1997 amendments to the Company's credit facility and increased borrowing
requirements.
INCOME TAXES. The income tax provision reflects effective tax rates of
approximately 58% and 35% for the first quarter of fiscal years 1998 and 1997,
respectively. The effective rate for the first quarter of fiscal year 1997 was
based on the estimated annual income for 1997. Subsequent to the first quarter
of fiscal year 1997, the Company incurred significant U.S. losses which
eliminated U.S. federal and state income tax liability for that period and
generated substantial net operating loss carryforwards. A valuation allowance
was established in 1997 to offset any benefit from the net operating losses and
to reflect management's estimation as to the future utilization of the deferred
tax assets. A tax provision was recorded in 1997 for income taxes incurred on
Mexican earnings. The first quarter of fiscal year 1998 reflects expected
Mexican and U.S. state tax liabilities based on estimated income in those
jurisdictions.
NET INCOME. Net income in the first quarter of fiscal year 1998 decreased
to $0.8 million from $6.5 million in the first quarter of fiscal year 1997. Net
income decreased due to lower gross margins and higher operating and interest
expense.
YEAR ENDED JANUARY 2, 1998 COMPARED TO YEAR ENDED JANUARY 3, 1997
NET SALES. Net sales decreased $43.6 million, or 6.1%, to $676.6 million
for fiscal year 1997 from $720.2 million for fiscal year 1996. The decrease in
net sales was due principally to the negative impact on the Company-operated
sales centers caused by the delay in systems integration and the consolidation
throughout 1996 and into 1997 of redundant sales centers from the AO
Acquisition. Sales within the home center services channel decreased
approximately 10% compared to 1996 due to price concessions and certain large
customers working down their warehouse inventories. Additionally, net sales were
negatively impacted by one less week in fiscal year 1997 as compared to fiscal
year 1996. These decreases were offset by a 4% increase in same store sales in
the Company-operated sales centers and a 10% increase in sales within the
independent distributor channel due to the addition of 16 distributor locations.
During the year, the Company completed its sales center consolidation and
substantially completed its information systems integration. The Company
believes that continued improvements in supply chain management will provide
improved product availability and allow for sales growth opportunities.
GROSS PROFIT. Gross profit decreased $78.6 million, or 22.4%, to $271.9
million in fiscal year 1997 from $350.5 million in fiscal year 1996. The
decrease in gross profit was due in part to the 1997 second and third quarter
charges for obsolete and slow moving inventories. Sales declines and decreases
in production levels also adversely impacted gross profit.
Gross margin (excluding the 1997 second and third quarter charges) decreased
to 45.6% for fiscal year 1997 from 48.7% for fiscal year 1996. During the first
half of 1997, gross margin (excluding charges) was 48.4% and decreased to 42.7%
in the second half of fiscal year 1997 primarily as a result of higher per unit
manufacturing costs associated with reduced production levels. Additionally,
during 1997, gross margin decreased as a result of a higher percentage mix of
sales within the independent distributor business unit.
26
<PAGE>
Sales through this channel 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 $88.9 million, or 35.2%, to $341.5 million in
fiscal year 1997 from $252.6 million in fiscal year 1996. The increase was due
primarily to the second and third quarter charges, increased freight cost
associated with the consolidation of eleven distribution centers to three mega-
distribution centers, higher fixed costs for information technology and
additional expenses to complete the American Olean integration. Expenses as a
percent of sales (excluding 1997 second and third quarter charges and the 1996
merger integration charge) increased to 42.6% in fiscal year 1997 from 33.9% in
fiscal year 1996. These increases were the result of lower sales and the
increased expenses described above. During the fourth quarter of fiscal year
1997, the Company issued stock units under a stock appreciation rights agreement
to certain executives which permit the holders, upon the satisfaction of certain
conditions, to receive value in excess of the base price of the unit at the date
of grant. Payment of the excess will be in cash, stock, or a combination of cash
and stock at the discretion of the Board of Directors. In connection with this
agreement, non-cash expense of $5.9 million was recorded in the fourth quarter
of fiscal year 1997.
OPERATING INCOME (LOSS). Operating income (loss) decreased $167.5 million
to a loss of $69.6 million in fiscal year 1997 from income of $97.9 million in
fiscal year 1996. Operating margin (excluding 1997 second and third quarter
charges and the 1996 merger integration charge) decreased to 3.0% from 14.8% for
the previous fiscal period due primarily to reduced sales, decreased production
levels and increased expenses.
INTEREST EXPENSE (NET). Interest expense (net) decreased $4.3 million, or
9.6%, to $40.4 million in fiscal year 1997 from $44.7 million in fiscal year
1996. Interest expense (net) decreased due to interest savings from the
refinancing of debt concurrent with the Company's initial public offering in the
third quarter of 1996. The decrease was partially offset by increases in debt
levels and borrowing rates related to the second quarter amendment of the
existing credit agreement and increases in fees and higher borrowing rates
related to the third quarter 1997 amendment.
INCOME TAXES. The income tax provision for fiscal year 1997 represents
amounts related to income from Mexican operations. Due to the significant loss
in fiscal year 1997 and prior year tax loss carryforwards, a valuation allowance
has been recorded against the net Federal and State deferred tax asset. This
valuation allowance will be reassessed in future reporting periods.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income (loss) before extraordinary
item decreased $144.6 million to a loss of $110.2 million in fiscal year 1997
from income of $34.4 million in fiscal year 1996. The decrease was due primarily
to the second and third quarter charges and reductions in operating income
offset by lower interest and income tax expense.
PESO-U.S. 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 fiscal year 1997, domestic sales in Mexico
represented approximately 3% of consolidated net sales. These sales are peso-
denominated and the majority of the Mexican facility's cost of sales and
operating expenses are peso-denominated. In fiscal year 1997, peso-denominated
cost of sales and operating expenses represented approximately 7% of the
Company's consolidated cost of sales and expenses. Exposure to exchange rate
changes is favorable to operating results when the peso devalues against the
U.S. dollar, since the Company's costs relating to its Mexican operations are
primarily denominated in pesos and the Company's revenues relating to its
Mexican operations are primarily denominated in dollars. As the peso appreciates
against the U.S. dollar, the effect is unfavorable to operating results. In
addition to the effect of exchange rate changes on operating results, foreign
currency transaction gains or losses are recognized in other income and expense.
During fiscal year 1997, the Company recorded a transaction gain of
approximately $0.6 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.
27
<PAGE>
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 during fiscal years 1997 and 1996.
YEAR ENDED JANUARY 3, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for fiscal year 1996 increased $245.4 million, or
51.7%, to $720.2 million from $474.8 million in 1995. The increase in net sales
was due principally to the inclusion of AO's operations in fiscal year 1996 and
increased shipments to independent distributors and home center retailers.
During fiscal year 1996, a primary focus of management was to gain marketplace
acceptance of the Company's three principal brand names, DALTILE-TM-, AMERICAN
OLEAN-REGISTERED TRADEMARK- and HOME SOURCE-REGISTERED TRADEMARK-. During the
year, the Company concentrated on integrating the 61 sales centers acquired as
part of the AO Acquisition. A total of 51 sales centers were consolidated into
existing sales centers. Domestic sales in Mexico decreased to $17.9 million in
fiscal year 1996 from $23.0 million in 1995. Sales decreased due to a larger
allocation of Mexican production to distribution in the United States.
GROSS PROFIT. Gross profit increased $101.1 million, or 40.5%, to $350.5
million in fiscal year 1996 from $249.4 million in 1995. The increase in gross
profit was principally the result of the increase in net sales. Gross margin
decreased to 48.7% in fiscal year 1996 from 52.5% in 1995. The decrease in gross
margin was primarily due to production earlier in the year at higher cost
facilities acquired as part of the AO Acquisition. 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 fiscal year 1996, gross margins were 47.8% and increased to
49.5% in the second half of fiscal year 1996 primarily as a result of shifting
production to lower cost manufacturing plants. Gross margins also decreased in
fiscal year 1996 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 sales service centers, but due to lower
operating expense levels comparable operating margins are achieved.
EXPENSES. Expenses increased to $252.6 million in fiscal year 1996 from
$194.9 million in 1995, primarily as a result of the inclusion of AO's
operations. Expenses in fiscal years 1996 and 1995 include, respectively, a $9.0
million and $22.4 million merger integration charge. Expenses, excluding merger
integration charges, as a percentage of sales, decreased to 33.9% in fiscal year
1996 from 36.3% in 1995. The decrease in expenses as a percentage of sales,
excluding merger integration charges, was 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 system integration after the AO Acquisition. Additionally,
sales made to independent distributors and home center retailers require lower
operating expense levels which offset the lower gross margins generated through
this distribution channel.
MERGER INTEGRATION CHARGES. In the first quarter of fiscal year 1996, a
pre-tax merger integration charge of $9.0 million was recorded for the closings
of duplicative sales centers, duplicative distribution centers and certain
manufacturing facilities, as well as incurrence of severance costs 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 fiscal year 1995 associated with the
revaluation of certain assets in connection with the AO Acquisition. The
majority of the $22.4 million was a non-cash charge to write-down less efficient
and duplicative equipment not needed in the combined Company.
28
<PAGE>
OPERATING INCOME. Operating income increased to $97.9 million in fiscal
year 1996 from $54.5 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 fiscal year
1996 as compared to 16.2% in fiscal year 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 fiscal year 1996 from $54.2 million in 1995. The decrease was
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) 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 fiscal years 1996 (prior to the extraordinary charge) and 1995.
EXTRAORDINARY ITEM. In connection with the refinancing and early
extinguishment of debt, an extraordinary charge of $44.8 million ($29.1 million,
net of tax) was recorded during the third quarter of 1996. This charge consists
of prepayment premiums on certain debt repaid, the write-off of existing
deferred financing fees and a termination fee paid in connection with the
termination of the Company's management agreement with AEA Investors.
PESO-U.S. DOLLAR EXCHANGE RATE. In fiscal year 1996, domestic sales in
Mexico represented approximately 3% of the Company's consolidated net sales. In
fiscal year 1996, peso-denominated cost of sales and operating expenses
represented approximately 7% of the Company's consolidated cost of sales and
expenses. During fiscal year 1996, the Company recorded a transaction loss of
approximately $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and funds available under the Company's Second
Amended Credit Facility provide the Company with liquidity and capital resources
for working capital requirements, capital expenditures and debt service. Cash
provided by operating activities was $7.5 million in the first quarter of fiscal
year 1998 compared to cash usage of $41.3 million for the same period in fiscal
year 1997. The improvement in cash provided by operating activities resulted
from continued efforts to improve management of working capital. Cash used in
operating activities was $52.8 million in fiscal year 1997 and $18.7 million in
fiscal year 1996. For fiscal year 1997, cash was used primarily to fund
increases in inventory, trade accounts receivable and capital expenditures.
During the first quarter of fiscal year 1998, the Company continued to
reduce inventory levels to better align them with sales requirements.
Additionally, the Company continues to decrease accounts receivable days
outstanding through improved collection procedures implemented in late 1997.
During the first quarter of fiscal year 1998, the Company received net cash
proceeds of $8.1 million from the sale of its Lansdale, Pennsylvania
manufacturing facility contributing to cash provided by investing activities of
$3.3 million, as compared to cash used in investing activities of $13.9 million
during the same period in fiscal year 1997.
Trade accounts receivable, prior to charges, increased earlier in 1997 as a
result of extended terms granted to customers and limited access by sales center
personnel to certain account information. Trade accounts receivable decreased
during the second half of fiscal year 1997 due to improved collection efforts
and the write-down of uncollectible accounts. The Company has implemented more
stringent collection policies and a combination of centralized and decentralized
collection responsibilities. Inventories increased earlier in fiscal year 1997
due to delays in systems integration which impaired the management of
inventories. Inventories declined during the second half of fiscal year 1997 due
to temporary reductions in production levels and the write-down of slow-moving
or obsolete inventories. The second half of fiscal
29
<PAGE>
year 1997 showed marked improvements in inventory management due to completion
of the conversion to one fully integrated inventory system and increased
management focus.
During the second quarter of fiscal year 1997, the Company completed a new
$125 million Term B Loan which made certain modifications to the then existing
Credit Facility (as defined and as amended, the "First Amended Credit
Facility"). The proceeds of the Term B Loan were used to repay $50 million of
the Term A loan and $72 million of the existing Revolving Credit Facility. The
Company is required to make annual amortization payments in respect to the Term
B Loan starting in the first quarter of fiscal year 1998 with final maturity on
December 31, 2003. The First Amended Credit Facility is collateralized by
certain assets of the Company.
During the third quarter of fiscal year 1997, certain financial covenants of
the First Amended Credit Facility were amended (as amended, the "Second Amended
Credit Facility"). While the aforementioned amendment provided the Company with
increased short-term flexibility with respect to the consolidated interest
coverage and the consolidated leverage ratio tests, such financial tests and the
consolidated EBITDA test added as part of the Second Amended Credit Facility
become significantly more stringent over time, beginning in fiscal year 1998. In
connection with the Second Amended Credit Facility, the borrowing rate was
increased 50 basis points over the previously existing rates (which now range
from 2 to 2 1/2 percentage points over LIBOR). The borrowing rate is based on a
pricing grid which provides for reduced borrowing rates as certain financial
ratios improve. 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 is required to make quarterly amortization payments on the
remaining portion of the $275 million Term A Loan through December 31, 2002, at
various scheduled amounts. Borrowings under the $250 million Revolving Credit
Facility are payable in full December 31, 2002.
The Company periodically uses interest rate swap agreements to manage
exposure to fluctuations in interest rates. These agreements involve the
exchange of interest obligations on fixed and floating interest rate debt
without the exchange of the underlying principal amounts. The differential paid
or received on the agreements is recognized as an adjustment to interest expense
over the term of the underlying swap agreement. The book value of the interest
rate swap agreements represents the differential receivable or payable with a
swap counterparty since the last settlement date. The underlying notional amount
on which the Company has interest rate swap agreements outstanding was
$300,000,000 at January 9, 1998. These agreements are in effect for a term of
two years at an interest rate of approximately 5.7%. There were no interest rate
swap agreements in effect during fiscal years 1997 or 1996.
Expenditures for property, plant and equipment were $40.1 million for fiscal
year 1997. The expenditures were used to fund expansion in floor tile
production, routine capital improvements and the integration of management
information systems. During the remainder of 1998, the Company plans to expend
approximately $16 million for the completion of the expansion of its Dallas,
Texas plant, routine capital improvements and continued integration of
management information systems. The Company's ability to improve and expand
manufacturing facilities in the future will be dependent on cash generated from
operations and borrowings under the Revolving Credit Facility.
Cash used in financing activities was $17.9 million for the first quarter of
fiscal year 1998, which reflects repayments of $17.0 million on the revolver
portion of the Company's Second Amended Credit Facility and repayments of
various other debt. Cash provided by financing activities was $90.5 million for
fiscal year 1997, which reflects borrowings under the Revolving Credit Facility
and the $125 million Term B Loan, offset by debt repayments. Total availability
as of April 3, 1998 under the Second Amended Credit Facility was $63.7 million.
The Company believes cash flow from operating activities, together with
borrowings available under the Second Amended Credit Facility (or any amendment
or replacement thereof) will be sufficient to fund future working capital needs,
capital expenditures and debt service requirements. As a result of increasingly
stringent financial covenants under the Second Amended Credit
30
<PAGE>
Agreement, the Company expects that it will be required to seek to refinance its
indebtedness or amend the terms thereof in 1999 and possibly sooner. The
Company's ability to amend or refinance its obligations with respect to its
indebtedness and to raise capital through alternative means such as selling
assets or raising equity capital, as well as its ability to comply with its
obligations under any new or amended debt facilities, depends on its financial
and operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the Company's stockholders at that time would be
diluted. Further, such equity securities may have rights, preferences or
privileges senior to those of the Common Stock. There can be no assurance that
future borrowing facilities will be available for the repayment or refinancing
of the Company's indebtedness or that the Company's existing lenders will agree
to any requested modification of the terms of its indebtedness or that the
Company's operating results will be sufficient for compliance with its
obligations under any new or amended debt facilities. The Company expects that
debt incurred as part of a refinancing would involve higher borrowing costs.
The peso devaluation and economic uncertainties in Mexico are not expected
to have a significant impact on liquidity. Since the Company has no peso-based
borrowings, high interest rates in Mexico are not expected to directly affect
the Company.
The Company is involved in various proceedings relating to environmental
matters. The Company is currently engaged in environmental investigation and
remediation programs at certain sites. The Company has provided reserves for
remedial investigation and cleanup activities that the Company has determined to
be both probable and reasonably estimable. The Company is entitled to
indemnification with respect to certain expenditures incurred in connection with
such environmental matters and does not expect that the ultimate liability with
respect to such investigation and remediation activities will have a material
effect on the Company's liquidity and financial condition.
The United States is a party to GATT. Under GATT, the United States
currently imposes import duties on glazed ceramic tile from non-North American
countries at approximately 15% to be reduced ratably to 8 1/2% by 2004.
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 the effect that GATT may have on the
Company's operations.
In 1993, Mexico, the United States and Canada approved NAFTA. NAFTA has,
among other things, removed and will continue to remove, over a transition
period, most normal customs duties imposed on goods traded among the three
countries. In addition, NAFTA will remove or limit many investment restrictions,
liberalize trade in services, provide a specialized means for settlement of, and
remedies for, trade disputes arising thereunder, and will result in new laws and
regulations to further these goals. Although NAFTA lowers the tariffs imposed on
the Company's ceramic tile manufactured in Mexico and sold in the United States,
it also may stimulate competition in the United States and Canada from
manufacturers located in Mexico. The United States currently imposes import
duties on glazed ceramic tile from Mexico of approximately 13%, although these
duties on imports from Mexico are being phased out ratably under NAFTA by 2008.
It is uncertain what ultimate effect NAFTA will have on the Company's results of
operations.
EFFECTS OF INFLATION
The Company believes it has generally been able to 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 results of operations during the
first quarter of fiscal year 1998 or fiscal years 1997, 1996 or 1995.
Approximately 85% of 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
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significant impact on the first quarter of fiscal year 1998 or fiscal years
1997, 1996 or 1995 operating results; however, the future impact is uncertain at
this time.
IMPACT OF YEAR 2000
Some of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company is continuing its efforts to modify or replace certain portions
of its software and hardware so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $7.0 million and will be expensed as
incurred. To date, the Company has incurred expenses primarily for assessment of
the Year 2000 issue, the development of a modification plan and initial date
repair activities.
The project is estimated to be completed no later than April 2, 1999, which
is prior to any anticipated impact on the Company's operating systems. The
Company believes that, with modifications to existing software and conversions
to new software, the Year 2000 issue will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 issue could
have a material adverse impact on operations.
The costs of the project and the date by which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, non-performance of key software and
hardware vendors and similar uncertainties.
In addition, material disruptions to the operations of the Company's major
customers and suppliers as a result of Year 2000 issues could also have a
material adverse impact on the Company's operations and financial condition.
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CERAMIC TILE INDUSTRY
Since 1992, the U.S. ceramic tile industry has grown at a faster rate than
overall U.S. construction activity. The Company believes that such growth is
attributable primarily to ceramic floor tile's increasing share over other types
of floor coverings and expects this trend to continue. Within the U.S. floor
covering business, ceramic floor tile principally competes with carpet,
resilient flooring, wood flooring, marble and other stone products. Within the
U.S. wall covering business, ceramic tile principally competes with paint, wall
paper, laminates, fiberglass, marble, granite and wood paneling. Since 1992,
U.S. ceramic tile sales (by unit volume) are estimated to have increased at a
compound annual rate of 10.0%, from approximately 1.036 billion square feet in
1992 to approximately 1.670 billion square feet in 1997. From 1992 to 1996, the
U.S. new construction market increased at a compound annual rate of
approximately 5.9%. In addition, the Company believes that the United States
continues to lag significantly behind the per capita ceramic tile consumption in
many Western European countries, which the Company believes is an indication of
growth potential in the U.S. ceramic tile business.
The Company believes that a majority of U.S. ceramic tile sales (by unit
volume) in 1997 was comprised of floor tile and that floor tile has been
steadily increasing its share of U.S. ceramic tile sales since 1992. U.S.
ceramic tile unit sales are estimated to have increased at a compound annual
rate of 10.0% from 1992 to 1996. During the same period, carpet, vinyl flooring
and wood flooring unit sales are estimated to have increased at a compound
annual rate of 2.6%, 3.2% and 8.6%, respectively (although wood flooring
experienced faster growth in 1996). Ceramic tile nevertheless comprised only a
small portion of the approximately 23 billion square feet of U.S. floor covering
sales in 1997. A high percentage of U.S. ceramic floor tile sales are
contributed by imported products. The Company believes that the large percentage
of ceramic floor tile imports into the United States primarily is attributable
to the style and design innovation by European producers.
The U.S. wall tile segment consists primarily of 4-1/4 and 6 inch square
tile and a variety of complementary trim and angle pieces. Domestic tile
manufacturers represent the majority of the U.S. wall tile segment. Although
there is no technological or economic barrier to entry in the U.S. wall tile
segment, the Company believes that foreign manufacturers generally have not
offered the breadth of trim and angle pieces necessary for a competitive wall
tile product offering. Traditionally, foreign applications have not utilized the
breadth of trim and angle pieces of comparable U.S. applications. In addition,
wall tile manufacturers must develop capabilities to achieve consistent color
shades for both different production runs and the corresponding trim and angle
pieces to be utilized in a specific application. As the number of colors,
textures and finishes in a product offering increases, this manufacturing
process becomes more complex, particularly in terms of color shading
consistency.
Ceramic tile is used for residential and commercial applications (new
construction as well as remodeling). Glazed wall tile is used for interior
walls, shower walls, countertops, vanity tops, ceilings and kitchen
backsplashes, as well as light duty residential floors. Ceramic floor tile
(glazed and unglazed) is common in commercial and residential floors, walls,
countertops and patios. Unglazed mosaic tile typically is applied in commercial
walls and floors, as well as in decorative murals and logos. Glazed mosaics are
commonly used in light usage areas as a complement to the unglazed mosaic
products, kitchen backsplashes, shower walls, and as a decorative accent blended
into unglazed mosaics. Both glazed and unglazed mosaic tile are also commonly
used in bathrooms for residential and commercial purposes.
The U.S. ceramic tile industry is highly fragmented at both the
manufacturing and distribution levels. In 1997, approximately 60% of U.S.
ceramic tile sales consisted of imports, including the approximately 7% of all
ceramic tile sold in the United States that was manufactured by the Company in
Mexico. Historically, U.S. ceramic tile imports were principally from Italian
manufacturers, as well as from Mexican, Spanish and Brazilian manufacturers. In
recent years, Mexican manufacturers (including the Company) have increased their
export sales to the United States. The United States currently imposes import
duties on glazed ceramic tile from Mexico of approximately 13%, although these
duties on imports from Mexico are being phased out ratably under NAFTA by 2008.
Under GATT, the United States currently imposes import
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duties on glazed ceramic tile from non-North American countries at approximately
15%, to be reduced ratably to 8 1/2% by 2004.
The U.S. ceramic tile industry primarily distributes its products through
three distinct distribution channels. The industry's largest distribution
channel is the independent distributor channel consisting of both independent
ceramic tile wholesalers and floor covering wholesalers. The Company believes
that this channel represents approximately one-half of the U.S. ceramic tile
industry's unit volume sales and that this channel is highly fragmented,
consisting of more than 1,000 distributors, including many single store
operations. Foreign manufacturers primarily utilize this distribution channel to
access U.S. consumers of ceramic tile. The independent distributor's largest
selling product is typically floor tile and this channel primarily targets
residential remodeling and new residential construction applications. The
Company believes that the remainder of the U.S. ceramic tile industry's unit
volume sales are primarily distributed through manufacturer-operated sales
centers and home center retailers. Sales centers primarily serve residential new
construction applications, as well as commercial new construction and remodeling
applications. Home center retailers primarily serve residential remodeling
applications. In addition, the Company believes that home center retailers have
increased consumer awareness and accessibility of ceramic tile.
On large commercial and residential projects, ceramic tile manufacturers and
distributors often seek to work directly with architects, builders, developers
and design professionals on aesthetic, technical and service considerations in
an attempt to obtain specifications for use of their products. On smaller
residential and commercial projects, consumers typically contact tile
contractors or retail dealers for product and installation advice. Ceramic tile
contractors often influence purchasing decisions and, in the Company's opinion,
seek to purchase from a supplier with high quality standards, a broad product
line, local distribution and competitive prices.
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BUSINESS
GENERAL
The Company produces and distributes a broad line of high-quality ceramic
wall tile and floor tile products for both residential and commercial
applications, marketed primarily under its DALTILE, AMERICAN OLEAN and HOME
SOURCE brand names. The Company believes that it is the largest manufacturer,
distributor and marketer of ceramic tile in the United States, and one of the
largest in the world. The Company believes that it had an approximately 20% unit
share of the approximately 1.67 billion square feet of ceramic tile sold in the
United States in 1997, which is significantly greater than the Company's nearest
competitor.
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 arranged for
Dal-Tile to acquire all of the outstanding capital stock of Dal-Tile
Corporation, its affiliated companies and certain related assets (the "AEA
Acquisition"). On December 29, 1995, the Company completed the AO Acquisition.
COMPETITIVE STRENGTHS
The following attributes and operating strategies have enabled the Company
to achieve its current leading market presence and should serve as a basis for
the Company's future growth and profitability:
- INDUSTRY'S BROADEST DISTRIBUTION NETWORK. The Company's products are sold
through three separate distribution channels consisting of (i)
Company-operated sales centers, (ii) independent distributors and (iii)
home center retailers. DALTILE brand products are primarily sold through
the Company's network of approximately 223 Company-operated sales centers,
which is the largest manufacturer-operated wholesale distribution network
in the U.S. ceramic tile industry, serving customers in all 50 states and
parts of Canada. The sales centers function as a "one-stop" source for
ceramic tile, stone products and installation materials and tools, serving
tile contractors, architects, design professionals, builders, retail tile
and floor covering outlets and developers. The AMERICAN OLEAN brand is
primarily distributed through approximately 185 independent distributor
locations in the United States and Canada that service both residential
and commercial customers. In addition, the Company 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 through home center retailers such as
The Home Depot, Lowe's, and HomeBase, serving more than 1,200 home center
retail outlets nationwide. The home center retail channel has provided the
Company with new sources of sales over the past five years.
- LEADING BRAND NAMES MARKETED THROUGH TARGETED DISTRIBUTION CHANNELS. The
Company has two of the leading brand names in the U.S. ceramic tile
industry -- DALTILE and AMERICAN OLEAN, the roots of which date back
approximately 50 and 75 years, respectively. More recently, it has also
established the HOME SOURCE brand name. The Company's strategy is to
market independently each of its brands to create brand differentiation
within its respective customer segments. Company-operated sales centers
principally distribute the DALTILE brand, while the AMERICAN OLEAN brand
is principally marketed through independent distributors. The DALTILE and
AMERICAN OLEAN brands are also carried by certain major home center
retailers. The Company's HOME SOURCE brand is sold exclusively through
certain other home center retailers.
- NEW PRODUCT DEVELOPMENT. The Company believes that the U.S. ceramic tile
industry is increasing its fashion orientation, particularly in floor
tile, which is the largest and fastest growing ceramic tile product area.
The Company believes that its manufacturing capabilities offer competitive
advantages due to its ability to manufacture a broad product line of
colors, textures and finishes, including trim and angle pieces. In order
to capitalize on the increasing demand for fashion oriented tile products,
the Company has (i) increased the number of new floor tile product
introductions, (ii) focused on shortening product introduction cycle time,
(iii) expanded its
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relationship with leading glaze and equipment manufacturers and (iv)
focused on evolving consumer preferences to deliver products consistent
with current design trends.
- BROAD, DIFFERENTIATED PRODUCT LINE. The Company offers the most
comprehensive product line in the U.S. ceramic tile industry, including
glazed floor tile, glazed wall tile, glazed and unglazed mosaic tile,
porcelain tile, quarry tile, stone products and installation products. In
addition, the Company believes that it produces one of the industry's
largest offerings of colors, textures and finishes and that its ability to
efficiently manufacture an extensive array of trim and angle pieces
differentiates the Company from many of its competitors, particularly
foreign ceramic tile manufacturers. The Company also sells products
manufactured by third parties for resale, including ceramic tile and
installation products. The Company believes that "one-stop shopping,"
which requires a full product line at its Company-operated sales centers,
is an important competitive advantage in servicing its core customers,
especially tile contractors.
- EXTENSIVE, LOW-COST MANUFACTURING. The Company has annual manufacturing
capacity of approximately 352 million square feet, the largest ceramic
tile manufacturing capacity of any U.S.-based manufacturer. The Company's
manufacturing strategy is to maximize production at its lowest cost
manufacturing facilities, continue ongoing improvements by implementing
demonstrated best practices and continue to invest in manufacturing
technology to lower its costs and develop new capabilities. The Company's
lowest cost manufacturing facility is located in Monterrey, Mexico and
represents 44% of the Company's manufacturing capacity. In addition, the
Company has a contractual right to be supplied with up to approximately 25
million square feet of floor tile annually by its Mexican joint venture,
RISA. The Company recently completed the expansion of capacity at its
highly automated, state-of-the-art wall tile facility in El Paso, Texas.
In addition, the Dallas, Texas wall tile facility is expected to be
upgraded by the end of 1998 with the installation of modern and more
efficient equipment.
The Company has also rationalized production of the combined Dal-Tile and
American Olean manufacturing system by maximizing production at its lowest
cost facilities and closing a number of higher cost plants. The
rationalization steps included, in early 1996, the closure of the
Lansdale, Pennsylvania wall tile facility and wall tile production at the
Jackson, Tennessee facility and consolidation of a portion of mosaic tile
production in late 1996. In addition, in 1997, the Company began
consolidating a portion of its unglazed floor tile production by closing
the Coleman, Texas facility. The Company also suspended production at its
Mt. Gilead, North Carolina glazed tile floor facility during the fourth
quarter of fiscal year 1997. The Company will continue to seek
opportunities to maximize production at its lowest cost facilities and to
lower its manufacturing costs through capital investments in
state-of-the-art facilities and equipment.
AMERICAN OLEAN INTEGRATION
The Company has experienced difficulties in the complex task of integrating
the American Olean operations, which were purchased in December 1995, with the
Dal-Tile operations. Delays in bringing the combined companies onto a common,
fully integrated management information system affected many aspects of the
Company's operations, particularly the Company's logistics systems. As a result,
the Company overproduced some products and underproduced others. Transportation
costs increased because of the need to relocate inventory to meet demand.
Customer service was adversely affected, and the Company lost sales. Accounts
receivable and inventory increased significantly, which resulted in a negative
impact on the Company's cash flow in 1996 and 1997.
The difficulties associated with the Integration significantly affected the
Company's financial results as sales declined 6.1% in 1997 compared to 1996.
Excluding the charges described below and certain merger integration charges,
operating margin declined to 3.0% in 1997 from 14.8% in 1996 and operating
income declined $86.4 million to $20.5 million in 1997 from $106.9 million in
1996. The Company also experienced negative free cash flow of ($92.9) million in
1997 and ($60.7) million in 1996.
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During the second and third quarters of 1997, the Company recorded charges
of $24.7 million and $65.4 million, respectively. These charges were principally
non-cash charges for the write-down of obsolete and slow moving inventories,
uncollectible trade accounts receivable and other non-productive assets, and
also included costs for restructuring of manufacturing, store operations and
corporate administrative functions.
Beginning in July 1997, the Company replaced its senior management team with
the hiring of a new President and Chief Executive Officer, Jacques ("Jack")
Sardas, and Chief Financial Officer, William ("Chris") Wellborn. The Company
also hired a new corporate controller, a new director of internal audit, a new
human resources vice president and a new general counsel. Under Mr. Sardas'
direction, the Company's new management team has made substantial progress
towards completing the conversion of the Company's information systems to a
common platform, and has developed a targeted operating plan to address the
Integration difficulties faced by the Company, while taking advantage of the
Company's competitive strengths to further enhance its leading market position.
This plan has already produced positive results and is based on the following
initiatives:
- IMPROVE CUSTOMER SERVICE. The Company has taken, and continues to take, a
number of actions to improve customer service, focusing on improved
product availability and order fill rates, on-time deliveries and accurate
and timely billing. The steps taken by the Company include (i) focusing on
enhancing the Company's management information systems to provide
management with the data necessary to deliver ordered product in the
quality, quantity, time and location requested by customers, (ii)
streamlining the Company's organizational structure, which allows the
Company to be more responsive to the market and the Company's customers
and (iii) increased coordination between the field offices and the
corporate billing department, which will result in more accurate and
timely billings to the Company's customers. In addition, the Company has
focused on improving its regional distribution centers in California,
Maryland and Texas to enhance customer service in each distribution
channel. The regional distribution centers also enhance the Company's
ability to plan and schedule production and to manage inventory
requirements. Although progress has been made, the Company will continue
its efforts in order to obtain further improvement in customer service.
- IMPROVE CASH FLOW. The Company has taken and continues to take, steps to
improve cash flow by (i) reducing accounts receivable, (ii) reducing
inventory levels, (iii) controlling costs and (iv) improving management of
its capital expenditures. The Company is now focusing on improving its
sales, production and inventory information and its internal accounting
procedures. The Company also modified the accounts receivable system for
invoice dating, receivables aging, statement timing and credit reporting.
Together with improved coordination between the field sales organization
and the corporate credit department, these efforts have enabled the
Company to reduce accounts receivable from $131.3 million on July 4, 1997
to $96.3 million at fiscal year end 1997 (including a $13.7 million
write-down). Primarily as a result of increased sales, accounts receivable
increased to $110.0 million at April 3, 1998.
In order to reduce its inventory levels, the Company decreased production
levels during the third and fourth quarters of 1997 in order to match
inventories more closely to current sales levels. This resulted in higher
per unit costs and lower gross margins during these periods. In addition,
the Company is initiating systems for enhanced inventory planning and
transportation cost management. The Company has been able to reduce
inventory levels from $179.3 million on July 4, 1997 to $130.7 million at
fiscal year end 1997 (including a $28.1 million write-down), and $123.7
million at April 3, 1998.
The Company has increasingly focused its capital expenditures on projects
that improve operational efficiency, overall performance and near term
profits and cash flow. Such projects include investments in highly
automated, state-of-the-art equipment for the El Paso and Dallas, Texas
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facilities. Although progress has been made, the Company will continue its
efforts in order to obtain further improvement in cash flow.
- REDUCE COSTS. The Company has rationalized the combined Dal-Tile and
American Olean manufacturing network by suspending production at high-cost
manufacturing facilities and consolidating activity at lower-cost
facilities. The Company's continuing efforts in these areas are expected
to identify opportunities to increase productivity and efficiency. To
further reduce costs and improve service, the Company undertook a
systematic review of its product lines. Of its approximately 22,500
standard price book SKUs, the Company identified approximately 7,900 low-
sales volume SKUs, which were discontinued at the end of 1997. The Company
has also achieved cost savings by renegotiating contracts for raw
materials, products and services.
- STREAMLINE THE COMPANY'S ORGANIZATIONAL STRUCTURE. During the second half
of 1997, the Company began to streamline its organizational structure to
make it more flexible and responsive to the market, as well as to reduce
costs. The Company flattened the sales organization, eliminating
management layers to bring experienced sales management closer to the
customers. The Company also reorganized the marketing department,
establishing product managers for each product category. This has enabled
Dal-Tile to focus more effectively on each product line, addressing
specific issues such as product mix, pricing, production, planning,
product availability, new products and product line simplifications.
The Company has also restructured its manufacturing organization, shifting
from multiple layers of operational management to a flatter, more
functional organization, and is restructuring its research and development
organization to better support the development of new product lines and
the efficiency of the manufacturing plants. As a result of these
initiatives and the lower production levels which occurred during the
second half of 1997, the Company has reduced overall head count by 563
(7.2%) from 7,854 at March 31, 1997 to 7,291 at March 31, 1998.
The Company believes that the original rationale for the AO Acquisition
remains sound. The AO Acquisition allowed the Company to offer two of the
leading brands in the U.S. ceramic tile industry through distinct distribution
channels, to significantly increase participation in the independent distributor
channel and to enhance its geographic diversification and provided a foundation
for lowering operating costs. The combined Company has the competitive
advantages of the industry's largest distribution network, leading brand names
and extensive and modern manufacturing facilities. The Company is currently
focused on improving the effectiveness of its entire supply chain, including
sales forecasting, production planning, manufacturing and distribution. The
Company expects these efforts to ultimately improve customer service and lower
costs, allowing the Company to improve sales and profits and providing a
stronger foundation from which to participate in the growing market for ceramic
tile.
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.
The Company has three regional distribution centers strategically located in
California, Maryland and Texas 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 ability to plan and schedule production and to manage
inventory requirements.
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COMPANY-OPERATED SALES CENTERS
The Company primarily distributes its DALTILE brand products through a
network of 223 Company-operated sales centers in North America in 44 states and
three Canadian provinces, serving customers in all 50 states and parts of
Canada. For fiscal year 1997, approximately 70% 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 DALTILE brand also has a group
of over 30 sales representatives dedicated exclusively to 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 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 27,000 square feet, with an average size of approximately 11,000
square feet. The sales centers consist of a showroom dedicated to displaying the
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 sales centers generally are located in light
industrial areas rather than retail areas and generally occupy moderately priced
leased space under three to five year leases.
The Company has expanded its sales center distribution system from 195 sales
centers in 1993 to 223 sales centers at April 3, 1998. In the future, 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, sales
centers are closed in locations where economic and competitive conditions have
changed.
INDEPENDENT DISTRIBUTORS
The independent distributor channel is served by a dedicated business unit
that includes nine regional sales managers to serve the particular requirements
of its customers. The Company currently distributes the AMERICAN OLEAN brand
through approximately 185 independent distributor locations that service
residential and commercial customers. The Company's strategy is to increase its
presence among independent distributors, particularly in tile products that are
most commonly used in flooring applications.
Domestic sales within Mexico are made primarily through a network of
independent distributors are principally supplied by the Monterrey, Mexico
manufacturing facility.
HOME CENTER RETAILERS
The Company believes it is one of the U.S. ceramic tile industry's largest
suppliers to the do-it-yourself and buy-it-yourself markets through home center
retailers, such as The Home Depot, Lowe's and HomeBase, serving more than 1,200
home center retail outlets nationwide. The home center retailer channel has
provided the Company with new sources of sales over the past five years.
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. The roots of the DALTILE
and AMERICAN OLEAN brand names date back approximately 50 years and 75 years,
respectively. In 1996, the Company established the HOME SOURCE brand name to
cater specifically to the home center retail market.
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The Company-operated sales centers distribute the DALTILE brand. The product
offering is based on the Company's assessment of the needs of professional
installers, designers, architects, builders and consumers, as well as a review
of competitive product offerings. The marketing program includes public
relations support, displays, merchandising (sample boards, chip chests),
literature/catalogs and an Internet website.
The AMERICAN OLEAN brand consists of a full product offering and is
distributed through independent distributors. The brand is supported by a fully
integrated marketing program, including public relations support, displays,
merchandising (sample boards, chip chests), and literature/catalogs.
The DALTILE and AMERICAN OLEAN brands are also carried by certain major home
center retailers. The Company's HOME SOURCE brand is sold exclusively through
certain other home center retailers. The HOME SOURCE brand includes a targeted
product offering, customized point of sale displays and merchandising,
cooperative advertising support, literature and sampling materials.
The Company also has special marketing programs with
Kohler-Registered Trademark- for bathroom and kitchen fixture color coordination
and Laura Ashley-TM- for home furnishing accessories coordination. Through such
programs, the Company develops ceramic tile products and merchandising programs
to complement these other product lines.
PRODUCTS AND PRODUCT DEVELOPMENT
The Company manufactures and sells different types of tile in various sizes
and styles for commercial and residential use, as well as related trim and angle
pieces. The Company also sells stone, installation and ceramic tile products
purchased from third-party manufacturers. Management believes that "one-stop
shopping," which requires a full product line at its Company-operated sales
centers, is an important competitive advantage in servicing its core customers,
especially tile contractors.
For fiscal year 1997, approximately 72% of 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 and Mexico.
The Company believes that the U.S. ceramic tile industry is increasing its
fashion orientation, particularly in floor tile. The Company believes that its
manufacturing capabilities offer competitive advantages due to its ability to
manufacture a broad product line of colors, textures and finishes, including
trim and angle pieces. In order to capitalize on the increased demand for
fashion-oriented tile products, the Company has (i) increased the number of new
floor tile product introductions, (ii) focused on shortening product
introduction cycle time, (iii) expanded its relationships with leading glaze and
equipment manufacturers and (iv) focused on evolving consumer preferences to
deliver products consistent with current design trends.
CUSTOMERS
The Company's core customers consist of large and small tile contractors,
architects, design professionals, builders, developers, independent
distributors, ceramic specialty retailers and floor covering 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 and
HomeBase, and is a significant supplier to this channel. The Company has a broad
and diversified customer base, consisting of more than 36,000 active accounts in
the United States.
The Company also has sales to over 350 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, Texaco service stations and Homestad Village, a group
of extended-stay hotel facilities.
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The Company does not rely on any one customer or group of customers for a
material amount of its net sales. The largest customer for fiscal year 1997
accounted for less than 10% of net sales, and the ten largest customers
accounted for approximately 17% of net sales in the same period.
MANUFACTURING
The Company currently operates nine tile manufacturing facilities with an
aggregate annual manufacturing capacity of approximately 352 million square
feet. During the five-year period 1993-1997, approximately $143 million has been
invested in capital expenditures, principally for new plants and state-
of-the-art equipment to increase manufacturing capacity, improve efficiency and
develop new capabilities. Operating capacity has expanded from approximately 218
million square feet to approximately 352 million square feet during the same
period. The state-of-the-art wall tile facility in El Paso, Texas started
production in 1996. In May 1997, the annual production capacity of El Paso was
increased from 22 to 45 million square feet.
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. 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. This location is the
Company's largest and lowest cost manufacturing facility, representing 44% of
annual manufacturing capacity.
The Company also has a 49.99% interest in RISA, a Mexican joint venture with
Interceramic, a leading Mexican manufacturer. Pursuant to contractual
arrangements with RISA, the Company has the right to be supplied with up to
approximately 25 million additional square feet of floor tile annually.
Following the AO Acquisition, the Company consolidated wall tile production
in early 1996 by closing the Lansdale, Pennsylvania wall tile facility and the
wall tile production at the Jackson, Tennessee facility and consolidated a
portion of mosaic tile production in late 1996. In 1997, the Company began
consolidating a portion of unglazed floor tile production by closing the
Coleman, Texas facility. During the first quarter of fiscal year 1998, the
Company completed the sale of the Landsdale, Pennsylvania facility.
The Company believes that its manufacturing organization offers competitive
advantages 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. The Company's manufacturing strategy is to maximize production at
its lowest cost manufacturing facilities, continue ongoing improvements by
implementing demonstrated best practices and to continue to invest in
manufacturing technology to lower its costs and develop new capabilities. As a
result of this strategy, the Company suspended production at its Mt. Gilead,
North Carolina glazed tile floor facility during the fourth quarter of fiscal
year 1997. The Company has not made any decision regarding the resumption of
production at the Mt. Gilead facility. Any such decision will be dependent on
market demand and cost considerations.
41
<PAGE>
The following table summarizes the products currently manufactured at the
Company's facilities:
<TABLE>
<CAPTION>
FACILITY PRODUCT TYPE
- ------------------------------------- -------------------------------------
Fayette, AL.......................... Unglazed quarry tile
<S> <C>
Lewisport, KY........................ Unglazed quarry tile
Monterrey, Mexico.................... Glazed wall tile; glazed floor tile;
glazed mosaic 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
</TABLE>
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 in question.
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 requirement. The Company owns long-term clay mining rights
in Kentucky which satisfy nearly all 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 75% of its frit requirements.
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
The major activities associated with combining the information systems of
sales centers, regional distribution centers, manufacturing, transportation and
financial applications of American Olean and Dal-Tile have been completed. The
systems integration has provided the sales centers with improved access to
inventory and order status information. Additional enhancements were implemented
to support the management of accounts receivable. During 1998, the Company will
continue to focus on process
42
<PAGE>
refinements, establishment and enhancement of interfaces between individual
accounting and reporting systems modules and user training on the new systems
and data reporting. Priority will be given to supply chain management,
supporting customer service activities and Year 2000 software compliance.
While the Company's current information systems platform has allowed the
Company to operate during the Integration, the Company expects that it will be
required to make additional systems investments to optimize performance of its
supply chain and to respond to growth of its business and expanded customer
service requirements.
COMPETITION
Sales of the Company's products are made in a highly competitive
marketplace. The Company estimates that hundreds of tile manufacturers, many of
which are based outside 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 the United States, 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. Competition in the tile industry is based on design,
performance, price, customer service and quality. 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 fiscal year 1997, approximately 60% of ceramic tile
sales (by unit volume) in the United States consisted of imports, including
approximately 7% manufactured by the Company in Mexico. In general, the
proportion of U.S. ceramic tile sales attributable to imports has increased in
recent years.
The Company's products compete with numerous other wall and floor coverings
for residential and commercial uses. Among such floor coverings are carpet,
resilient flooring, wood flooring and stone products (such as marble, granite,
slate and limestone tile). Among such wall coverings are paint, wallpaper,
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 may be 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.
EMPLOYEES
At March 31, 1998, the Company employed approximately 7,300 persons,
approximately 2,900 of which were employed by its Mexican subsidiaries.
Approximately 10% of employees in the United States are represented by unions.
Approximately 90% of the employees in Mexico are represented by a union under a
collective bargaining agreement that was renewed January 20, 1998. The Company
has not experienced a significant work stoppage in Mexico in over 17 years and
experienced only one brief work stoppage in the United States over that period.
The collective bargaining agreements covering the Company's employees expire
between December 1998 and February 2001. The Company believes that relations
with its employees are good.
TRADEMARKS
The Company owns rights to certain material trademarks and trade names,
including DALTILE-TM-, AMERICAN OLEAN-Registered Trademark-, HOME
SOURCE-Registered Trademark- and DAL-MONTE-Registered Trademark-, 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.
43
<PAGE>
ENVIRONMENTAL REGULATION
The Company is subject to various 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 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 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 have been completed and a closure has been submitted for approval by
the TNRCC. To date, the Company has incurred costs of approximately $3,800,000
in connection with the closure. The Company expects to recover at least 50% of
such costs (a substantial portion of which has already been recovered) pursuant
to the Settlement Agreement (as defined) 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 has completed a remedial investigation with respect to the Walton site
subject to the approval of the TNRCC. 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
44
<PAGE>
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 estimates, that the remediation is reasonably likely to 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 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, and 100% of all such
expenditures in excess of the formula amount. The formula amount is based on
certain tax benefits realized by the Company in connection with the AEA
Acquisition and periods prior thereto, currently estimated to be approximately
$17 million. The Company's expendi tures 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). 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
45
<PAGE>
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's manufacturing facilities generate wastes regulated under the
Resource Conservation and Recovery Act 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.
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 contains silica, thereby requiring expenditures for capital equipment in
order to comply with Occupational Safety and Health Administration 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
use 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.
See "Risk Factors--Regulations and Environmental Considerations."
GEOGRAPHIC LOCATION
Financial information by geographic location for the three years ended
January 2, 1998 is set forth in Note 14 to the Consolidated Financial Statements
included elsewhere in this Prospectus. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
PROPERTIES
The Company owns or leases manufacturing, distribution, office and sales
facilities in the United States and Mexico, as described below.
46
<PAGE>
MANUFACTURING, DISTRIBUTION AND OFFICE FACILITIES
The Company owns or leases 13 manufacturing, distribution and office
facilities. The location, use and the floor area of such facilities are
described as follows:
<TABLE>
<CAPTION>
LOCATION USE SQ. FEET LEASED/OWNED
- ---------------------------------- ----------------------------------------- ---------- ---------------------
<S> <C> <C> <C>
Fayette, AL....................... Manufacturing 276,467 Owned
Lewisport, KY..................... Manufacturing 270,836 Owned
Baltimore, MD..................... Distribution 315,000 Leased(1)
Monterrey, Mexico................. Manufacturing, Distribution & Office 1,114,175 Owned
Mt. Gilead, NC.................... Manufacturing 250,000 Owned(2)
Olean, NY......................... Manufacturing 278,417 Owned
Gettysburg, PA.................... Manufacturing 218,609 Owned
Jackson, TN....................... Manufacturing 655,211 Owned
Conroe, TX........................ Manufacturing 208,059 Owned
Dallas, TX........................ Manufacturing, Distribution & Office 753,536 Owned
Dallas, TX........................ Distribution 472,500 Leased(1)
Los Angeles, CA................... Distribution 410,515 Leased(1)
El Paso, TX....................... Manufacturing 161,714 Ground Leased(3)
</TABLE>
- ------------------------
(1) The leases for the Baltimore, MD; Los Angeles, CA; and Dallas, TX facilities
expire on February 28, 2006, April 30, 2007 and January 30, 2003,
respectively, and are subject to renewal options.
(2) The Company suspended production at the Mt. Gilead, NC, facility in the
fourth quarter of 1997.
(3) The ground lease expires on November 21, 2034.
The Company closed its Coleman, Texas facility in late 1997. In addition,
the Company's Jacksonville, Florida facility (leased) was closed in 1997. The
lease for the Jacksonville facility expires on May 31, 1999. The Company is
subleasing a portion of this facility. The Company ceased production at its
Lansdale, Pennsylvania facility in 1996. The facility was sold on March 10,
1998.
SALES CENTERS
The Company owns three sales centers aggregating 53,340 square feet. Their
locations and floor areas are as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET
- --------------------------------------------------------------------------------- -----------
<S> <C>
Phoenix, AZ...................................................................... 15,320
Denver, CO....................................................................... 22,500
San Antonio, TX.................................................................. 15,520
</TABLE>
In addition, 220 sales centers were leased as of April 3, 1998 (aggregating
approximately 2.5 million square feet) pursuant to leases that extend for terms
on average of three to five years with expiration dates ranging primarily from
1998 to 2002.
For a description of aggregate rental expenses with respect to its operating
leases, see Note 13 to the Consolidated Financial Statements included elsewhere
in this Prospectus.
LEGAL PROCEEDINGS
In addition to the proceedings described under "--Environmental Regulation,"
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's business and
operations.
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are set forth below.
Certain of the executive officers hold positions with Dal-Tile Corporation or
Dal-Tile Mexico, each a subsidiary of the Company. 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.
<TABLE>
<CAPTION>
NAME AGE POSITION OR OFFICE HELD
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Jacques R. Sardas...................... 67 President, Chief Executive Officer and Chairman of the Board of
Directors
Charles J. Pilliod, Jr................. 79 Director
Douglas D. Danforth.................... 75 Director
Vincent A. Mai......................... 58 Director
Norman E. Wells, Jr.................... 49 Director
Henry F. Skelsey....................... 40 Director
John M. Goldsmith...................... 35 Director
William C. Wellborn.................... 43 Executive Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary
Mark A. Solls.......................... 42 Vice President, General Counsel and Secretary
Dan L. Cooke........................... 56 Vice President, Information Technology
James E. Eckelberger................... 59 Vice President, Logistics
William R. Hanks....................... 44 Vice President, Manufacturing
David F. Finnigan...................... 42 Vice President, Independent Distribution and Home Center Services
D.D. "Gus" Agostinelli................. 52 Vice President, Human Resources
Javier Eugenio Martinez Serna.......... 46 Vice President, Mexico Operations
Matthew J. Kahny....................... 36 Vice President, Marketing
Harold G. Turk......................... 52 Vice President, Sales Centers Operations
Silvano Cornia......................... 38 Vice President, Research and Development
</TABLE>
Effective February 26, 1998, George A. Lorch, Frank A. Riddick III, and Robert
J. Shannon, Jr. resigned as Directors of the Company.
JACQUES R. SARDAS, President, Chief Executive Officer and Chairman of the
Board of Directors -- Mr. Sardas has been President and Chief Executive Officer
of the Company since July 1997 and Chairman of the Board of Directors since
October 1997. Prior to joining the Company, Mr. Sardas was Chairman and Chief
Executive Officer of Sudbury, Inc. from 1992 to 1997. Prior to that, he spent 34
years at Goodyear Tire & Rubber Company, concluding as President of Goodyear
Worldwide.
CHARLES J. PILLIOD, JR., Director -- Mr. Pilliod has been a Director of the
Company since March 1990 and served as Chairman of the Board of Directors from
October 1993 through October 1997. From October 1993 through April 1994, Mr.
Pilliod also served as President and Chief Executive Officer of the Company. 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 Marvin & Palmer Associates, Inc.
DOUGLAS D. DANFORTH, Director -- Mr. Danforth has been a Director of the
Company since February 1997. He was Chairman and Chief Executive Officer of
Westinghouse Corporation from December 1983 to December 1987. Mr. Danforth is
also a director of Sola International Inc.
48
<PAGE>
VINCENT A. MAI, Director -- Mr. Mai has been a Director of the Company 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 Company) since April 1989 and Chairman of the Board of AEA
Investors since January 1998. For the preceding 15 years, he was a Managing
Director of Lehman Brothers Inc., an investment banking firm. Mr. Mai is also a
director of the Federal National Mortgage Association.
NORMAN E. WELLS, JR., Director -- Mr. Wells has been a Director of the
Company since December 1997. Mr. Wells joined Easco, Inc. as President and Chief
Executive Officer in November 1996. From March 1993 to November 1996, he was
President and Chief Executive Officer of CasTech Aluminum Group Inc.
HENRY F. SKELSEY, Director -- Mr. Skelsey has been a Director of the Company
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 Company) since March 1988. Prior to his association with AEA
Investors, Mr. Skelsey was a Vice President in the Merchant Banking division of
Lehman Brothers Inc., an investment banking firm.
JOHN M. GOLDSMITH, Director -- Mr. Goldsmith has been a Director of the
Company 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 Company), and has been associated with AEA Investors since 1989.
Previously, he was a member of the Financial Services practice of Ernst & Young
LLP, an independent accounting firm.
WILLIAM C. WELLBORN, Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary -- Mr. Wellborn has been Executive Vice
President, Chief Financial Officer, Treasurer and Assistant Secretary of the
Company since August 1997. Prior to joining the Company, Mr. Wellborn was Senior
Vice President and Chief Financial Officer of Lenox, Inc. Prior to his
employment at Lenox, he was Vice President and Chief Financial Officer of Grand
Metropolitan PLC's Alpo Pet Food Division.
MARK A. SOLLS, Vice President, General Counsel and Secretary -- Mr. Solls
has been Vice President, General Counsel and Secretary of the Company since
January 1998. Prior to joining Dal-Tile, he was Vice President and General
Counsel for ProNet Inc. Additionally, Mr. Solls has owned a private practice and
worked as Counsel for several national health care companies. He is a Certified
Mediator and a member of numerous legal associations.
DAN L. COOKE, Vice President, Information Technology -- Mr. Cooke has been
Vice President, Information Technology of the Company 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, Mr. Eckelberger 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.
49
<PAGE>
DAVID F. FINNIGAN, Vice President, Independent Distribution and Home Center
Services -- Mr. Finnigan has been Vice President, Independent Distribution and
Home Center Services since April 1998. Previously, Mr. Finnigan was Vice
President, Independent Distributor Operations of the Company since August 1997.
Previously, Mr. Finnigan held the position of Vice President, Sales Centers
Operations at the Company. Prior to the AO Acquisition, he held various
executive marketing positions with American Olean, Armstrong World Industries,
Inc. and Evans and Black.
D.D. "GUS" AGOSTINELLI, Vice President, Human Resources -- Mr. Agostinelli
joined the Company as the Vice President, Human Resources in January 1998. Prior
to joining Dal-Tile, he worked for Alcoa Fujikura Ltd. as Vice President, Human
Resources. Additionally, Mr. Agostinelli held various Human Resource positions
within PPG Industries.
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 Company, 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.
MATTHEW J. KAHNY, Vice President, Marketing -- Mr. Kahny has been Vice
President, Marketing of the Company since August 1997. From January 1996 until
July 1997, Mr. Kahny was Vice President, Independent Distributor Operations.
From July 1983 through December 1995, he served at AO, then a subsidiary of AWI,
where he became Business Team Manager, Floor Tile Products.
HAROLD G. TURK, Vice President, Sales Centers Operations -- Mr. Turk has
been Vice President, Sales Centers Operations of the Company since January 1997.
From January 1996 to December 1996, Mr. Turk was Vice President, Home Center
Services of the Company. In 1995, Mr. Turk was Executive Vice President of Field
Operations of the Company. In 1994, he was Executive Vice President of Marketing
of the Company. From April 1991 through 1993, Mr. Turk 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.
SILVANO CORNIA, Vice President, Research and Development -- Mr. Cornia has
been Vice President, Research and Development of the Company since January 1994.
Since July 1984, he has held various positions at the Company.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of April 3, 1998
regarding the beneficial ownership of Common Stock (i) immediately prior to the
Offering and the PEPS Offering and (ii) as adjusted to reflect the sale of the
shares of Common Stock pursuant to the Offering, by (a) each person or entity
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock (based solely on a review of available public
filings with the Commission), including the Selling Stockholder, (b) each of the
Company's directors, (c) each of the executive officers named in the executive
compensation table of the Proxy (as defined) and (d) all directors and executive
officers of the Company as a group. Unless otherwise noted in the footnotes to
the table, the persons named in the table have sole voting and investing power
with respect to all shares of Common Stock indicated as being beneficially owned
by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR
TO THE OFFERING AND THE SHARES AFTER THE OFFERING AND
PEPS BEING THE
OFFERING OFFERED PEPS OFFERING (16)(17)
------------------------- IN THE -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER(1) PERCENT OFFERING(16) NUMBER PERCENT
- ----------------------------------------------------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
DTI Investors LLC.................................. 28,604,811 53.5% -- 28,604,811 53.5%
c/o AEA Investors Inc.
65 East 55th Street
New York, NY 10022
AEA Investors Inc.(2).............................. 28,604,811 53.5 -- 28,604,811 53.5
65 East 55th Street
New York, NY 10022
Armstrong Enterprises, Inc.(3)..................... 18,365,822 34.4 10,315,822 8,050,000 15.1
Liberty and Charlotte Streets
P.O. Box 3001
Lancaster, PA 17604
Armstrong World Industries, Inc.(3)................ 18,365,822 34.4 10,315,822 8,050,000 15.1
Liberty and Charlotte Streets
P.O. Box 3001
Lancaster, PA 17604
DIRECTORS AND EXECUTIVE OFFICERS
Charles J. Pilliod, Jr. (4)(5)..................... 311,000 * -- 311,000 *
Howard I. Bull (5)(6).............................. 503,013 * -- 503,013 *
Dan L. Cooke (7)................................... 25,000 * -- 25,000 *
Douglas D. Danforth (5)............................ -- -- -- -- --
Vincent A. Mai (5)(8).............................. 30,000 * -- 30,000 *
Henry F. Skelsey (5)(9)............................ 23,000 * -- 23,000 *
John M. Goldsmith (5)(10).......................... 8,000 * -- 8,000 *
Barry J. Kulpa (11)................................ 312,936 * -- 312,936 *
Jacques R. Sardas (12)............................. 1,000,000 1.8 -- 1,000,000 1.8
Javier Eugenio Martinez Serna (13)................. 115,372 * -- 115,372 *
Harold G. Turk (14)................................ 202,974 * -- 202,974 *
William C. Wellborn (15)........................... 77,500 * -- 77,500 *
Norman E. Wells, Jr................................ -- -- -- -- --
All directors and executive officers as a group (18
persons)......................................... 2,213,707 4.0 -- 2,213,707 4.0
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
51
<PAGE>
- ------------------------------
* Less than 1%.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person
has the right to acquire within 60 days after such date. For purposes of
computing the percentage of outstanding shares held by each person or group
of persons named above on a given date, any shares that such person or
persons have the right to acquire within 60 days after such date is deemed
to be outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
(2) AEA Investors is the managing member of DTI Investors and accordingly may be
deemed to beneficially own such shares.
(3) Based on information supplied to the Company by AEI, which is a wholly owned
subsidiary of AWI.
(4) Consists of 311,000 shares subject to options. 111,000 shares are held in
nominee name, Hertrus and Company.
(5) Such director is a member of DTI Investors. Under the rules of the
Commission, as such director does not have voting or investment power over
the shares of Common Stock owned by DTI Investors, such director does not
have beneficial ownership of such shares. Such director's membership
interest in DTI Investors represents a less than 1% indirect interest in the
Common Stock of the Company, which interest is in addition to any stock
options held, or shares of Common Stock identified herein as beneficially
owned, by such director.
(6) Consists of 502,913 shares subject to options and 100 shares. Mr. Bull
resigned from his position with the Company in fiscal year 1997.
(7) Consists of 25,000 shares subject to options.
(8) Excludes 28,604,811 shares owned by DTI Investors, the managing member of
which is AEA Investors. Mr. Mai is a member of DTI Investors, and serves as
an officer and director of AEA Investors. Mr. Mai disclaims beneficial
ownership of the shares beneficially owned by DTI Investors and AEA
Investors.
(9) Excludes 28,604,811 shares owned by DTI Investors, the managing member of
which is AEA Investors. Mr. Skelsey is a member of DTI Investors and serves
as an officer of AEA Investors. Mr. Skelsey disclaims beneficial ownership
of the shares beneficially owned by DTI Investors and AEA Investors.
(10) Excludes 28,604,811 shares owned by DTI Investors, the managing member of
which is AEA Investors. Mr. Goldsmith serves as an officer of AEA Investors.
Mr. Goldsmith disclaims beneficial ownership of the shares beneficially
owned by DTI Investors and AEA Investors.
(11) Consists of 312,936 shares subject to options. Mr. Kulpa resigned from his
position with the Company in fiscal year 1997.
(12) Consists of 1,000,000 shares subject to options.
(13) Consists of 115,372 shares subject to options.
(14) Consists of 202,974 shares subject to options.
(15) Consists of 77,500 shares subject to options.
(16) Assumes that the Underwriters' over-allotment option with respect to the
Offering is exercised in full.
(17) Concurrently with the Offering, AWI is offering PEPS, which at maturity are
mandatorily exchangeable for up to 7,000,000 shares of Common Stock (up to
8,050,000 shares if the Underwriters' over-allotment option with respect to
the PEPS Offering is exercised in full) owned by AWI, subject to adjustment
under certain circumstances and to AWI's option to pay an amount in cash in
lieu of such mandatory exchange. The PEPS Offering will have no immediate
effect on AWI's ownership of the Common Stock.
52
<PAGE>
RELATIONSHIP BETWEEN THE COMPANY AND AWI; SHAREHOLDERS AGREEMENT
On December 29, 1995, AWI acquired 37% of the then outstanding capital stock
of the Company in connection with the AO Acquisition. In connection with the AO
Acquisition, the Company also entered into the Shareholders Agreement and
agreements with AWI relating to (i) the use by the Company of certain trademarks
owned by AWI, and (ii) certain transition services (including computer services
and the supply of certain raw materials produced by a mine operated by AWI) to
be supplied by AWI or its affiliates to the Company. The Company also leases
certain computer services from AWI for approximately $7 million per year through
May 31, 1999.
Pursuant to the Shareholders Agreement, DTI Investors, AWI and the Company
have agreed to cause the Board of Directors of Dal-Tile to be comprised of (i)
six individuals designated by DTI Investors, (ii) three individuals designated
by AWI, and (iii) the Chief Executive Officer of Dal-Tile. The rights 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. As of April 3, 1998, DTI Investors and AWI beneficially
owned approximately 87.9% of the outstanding Common Stock and, as such, have the
voting power to effect the election of the nominees. As a result of the sale of
Common Stock by AWI pursuant to the Offering, the number of individuals that AWI
may nominate to the Board of Directors will be ratably reduced.
Effective February 26, 1998, George A. Lorch, Frank A. Riddick III, and
Robert J. Shannon, Jr., the three individuals designated as directors of
Dal-Tile by AWI, resigned from their positions as directors of Dal-Tile. The
Company, DTI Investors and AWI are in discussions regarding filling the three
director vacancies. On March 13, 1998, AWI notified the Company of its request,
pursuant to the Shareholders Agreement, that Dal-Tile register for sale under
the Securities Act all of the 18,365,822 shares of Common Stock owned by AWI to
enable AWI to make the Offering and the PEPS Offering.
The Shareholders Agreement, among other things, contains provisions (A)
providing for registration rights under certain circumstances under the
Securities Act, 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 (or its predecessor) and certain members of the Company's 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.
The Company and AWI are involved in a dispute regarding amounts allegedly
owed by the Company in connection with the raw material supply agreement entered
into by the parties in connection with the AO Acquisition (the "Mine
Agreement"). In addition to amounts of approximately $480,000 claimed by AWI in
connection with mining operations during the term of the Mine Agreement, AWI has
alleged that the Company may owe it up to approximately $1 million for costs
that may be incurred by AWI in connection with the closure of its mining
operation. The parties have not reached agreement on amounts that may be owed by
the Company for mine operations during the term of the Mine Agreement, and the
Company believes that it has no liability for any costs associated with the
closure of the mine. AWI has reserved its right to pursue legal action if the
dispute is not resolved amicably. Other than the dispute in connection with the
Mine Agreement, the Company is not aware of any disputes between the Company and
AWI.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following brief description of Dal-Tile's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Second Amended and Restated Certificate of Incorporation
and the Amended and Restated Bylaws, copies of which have been filed with the
Commission.
The authorized capital stock of Dal-Tile consists of 200,000,000 shares of
Common Stock, $.01 par value per share, and 11,100,000 shares of Preferred
Stock, par value $.01 per share. As of April 3, 1998, there were 53,435,101
shares of Common Stock outstanding, no shares of Preferred Stock outstanding and
6,647,371 shares of Common Stock will be issuable upon exercise of outstanding
options.
COMMON STOCK
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.
Holders of the 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. See "Dividend Policy" and "Description
of Second Amended Credit Agreement." 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. All the outstanding
shares of Common Stock are validly issued, fully paid and nonassessable.
The Common Stock is listed on the NYSE under the symbol "DTL."
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services L.L.C.
PREFERRED STOCK
The Board of Directors is authorized without further stockholder action to
provide for the issuance from time to time of up to 11,100,000 shares of
Preferred Stock, in one or more series, with such powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions as will be set forth in the
resolutions providing for the issue of such series of Preferred Stock adopted by
the Board of Directors. The holders of Preferred Stock will have no preemptive
rights (unless otherwise provided in the applicable certificate of designation)
and will not be subject to future assessments by Dal-Tile. Such Preferred Stock
may have voting or other rights which could adversely affect the rights of
holders of the Common Stock. In addition, the issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, under certain circumstances, make it more difficult
for a third party to gain control of Dal-Tile, discourage bids for the Common
Stock at a premium, or otherwise adversely affect the market price of the Common
Stock. On the date of this Prospectus, there are no shares of Preferred Stock
issued and outstanding.
POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The DGCL and certain provisions of the Second Amended and Restated
Certificate of Incorporation and the Amended and Restated Bylaws could have the
effect of discouraging or making more difficult the acquisition of Dal-Tile by
means of a tender offer, a proxy contest or otherwise, even though such an
54
<PAGE>
acquisition might be economically beneficial to Dal-Tile's stockholders. In
addition, these provisions may make the removal of management more difficult,
even in cases where such removal would be favorable to the interests of
Dal-Tile's stockholders.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Amended and Restated Bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for election as directors at an
annual meeting or a special meeting or to bring other business before an annual
meeting of stockholders of Dal-Tile (the "Stockholder Notice Procedure"). The
Stockholder Notice Procedure provides that only persons who are nominated by, or
at the direction of, the Board of Directors, or by a stockholder who has given
timely written notice to the Secretary of Dal-Tile prior to the meeting at which
directors are to be elected, will be eligible for election as directors of
Dal-Tile. The Stockholder Notice Procedure provides that at an annual meeting
only such business may be conducted as has been specified in the notice of the
meeting given by, or at the direction of, the Board of Directors (or any duly
authorized committee thereof) or brought before the meeting by, or at the
direction of, the Board of Directors (or any duly authorized committee thereof)
or by a stockholder who has given timely written notice to the Secretary of
Dal-Tile of such stockholder's intention to bring such business before such
meeting.
Under the Stockholder Notice Procedure, a stockholder's notice of
nominations of candidates for election as directors or business to be conducted
at an annual meeting will be timely only if it is received by Dal-Tile not less
than 60 days nor more than 90 days prior to the date of the annual meeting or,
in the event that less than 70 days' notice or prior public disclosure of the
date of the annual meeting is given or made to stockholders, not later than the
close of business on the tenth day following the day on which such notice was
mailed or such public disclosure was made, whichever first occurs. Under the
Stockholder Notice Procedure, for notice of a stockholder nomination to be made
at a special meeting at which directors are to be elected to be timely, such
notice must be received by Dal-Tile not later than the close of business on the
tenth day following the day on which such notice of the date of the special
meeting was mailed or public disclosure of the date of the special meeting was
made, whichever first occurs.
In addition, under the Stockholder Notice Procedure, a stockholder's notice
to Dal-Tile proposing to nominate a person for election as a director at an
annual meeting or a special meeting or conduct certain business at an annual
meeting must contain certain specified information. If the Chairman of the Board
of Directors presiding at a meeting determines that a person was not nominated
or other business was not brought before the meeting in accordance with the
Stockholder Notice Procedure, such person will not be eligible for election as a
director or such business will not be conducted at such meeting, as the case may
be.
DIRECTOR'S LIABILITY
The Second Amended and Restated Certificate of Incorporation provides that
to the fullest extent permitted by the DGCL as it currently exists or may be
amended, a director of Dal-Tile shall not be liable to Dal-Tile or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Under current Delaware law, liability of a director may not be limited (i) for
any breach of the director's duty of loyalty to Dal-Tile or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases, and (iv) for any
transaction from which the director derives an improper personal benefit. The
effect of this provision of the Second Amended and Restated Certificate of
Incorporation is to eliminate the rights of Dal-Tile and its stockholders
(through stockholders' derivative suits on behalf of Dal-Tile) to recover
monetary damages from a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of Dal-Tile or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Amended and
Restated Bylaws provide that Dal-
55
<PAGE>
Tile shall indemnify its directors and executive officers to the extent stated
therein. Insofar as limitations of, or indemnification for, liabilities arising
under the Securities Act may be permitted for directors and executive officers
pursuant to the foregoing provisions, the Company understands that, in the
opinion of the Commission, such limitations of, and indemnification for,
liabilities is against public policy as expressed in the Securities Act and is
therefore unenforceable.
SECTION 203 OF THE DGCL
Dal-Tile is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined as a
person who is the owner of 15% or more of a corporation's voting stock, or who,
as an affiliate or associate of a corporation, was the owner of 15% or more of
that corporation's voting stock within the prior three years and the affiliates
and associates of such person) from engaging in a "business combination" (as
defined under the DGCL) with a Delaware corporation for three years following
the date such person became an interested stockholder unless: (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction or the business combination in which the
interested stockholder became an interested stockholder; (ii) upon consummation
of the transaction that resulted in the interested stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding shares owned by persons who are both officers and directors
of the corporation and shares held by certain employee stock ownership plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) following the transaction in which such person became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
stock of the corporation not owned by the "interested stockholder." A "business
combination" generally includes mergers, stock or asset sales and other
transactions resulting in a financial benefit to the "interested stockholders."
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
As of April 3, 1998, Dal-Tile's authorized but unissued capital stock
consisted of 146,564,899 shares of Common Stock and 11,100,000 shares of
Preferred Stock. All the foregoing authorized but unissued shares of capital
stock will be available for future issuance without stockholder approval. These
additional shares may be utilized for a variety of corporate purposes, including
issuance pursuant to employee stock options and other employee plans, director
stock options and future public offerings to raise additional capital or to
facilitate corporate acquisitions.
Dal-Tile does not presently have any plans to issue additional shares of
Common Stock other than shares of Common Stock that may be issued upon exercise
of existing options or options which may be granted in the future to Dal-Tile's
directors or employees.
DESCRIPTION OF SECOND AMENDED CREDIT AGREEMENT
Concurrent with the initial public offering of the Common Stock, Dal-Tile
Group entered into a Credit and Guarantee Agreement, dated August 14, 1996 with
several banks, financial institutions and other entities, Credit Suisse, Goldman
Sachs Credit Partners L.P. and The Chase Manhattan Bank (the "Credit and
Guarantee Agreement"), which provided for a term loan facility (the "Term A
Loan") and a revolving credit facility (the "Revolving Credit Facility" and,
together with the Term A Loan, the "Credit Facility"). During the second quarter
of 1997, the Credit and Guarantee Agreement was amended to add a new tranche of
term loan facility (the "Term B Loan") and to make certain modifications to the
existing agreement (as amended, the "First Amended Credit Agreement"). During
the third quarter of 1997, the First Amended Credit Agreement was amended (as
amended, the "Second Amended Credit Agreement"). The following summary of
certain provisions of the Second Amended Credit Agreement does not purport
56
<PAGE>
to be complete and is qualified in its entirety by the provisions of such
agreement, a copy of which has been filed with the Commission. All terms defined
in the Second Amended Credit Agreement and not otherwise defined herein are used
in this section with meanings set forth in such agreement.
TERM A LOAN. The Term A Loan was in the initial amount of $275 million. The
Term A Loan is repayable in 24 consecutive quarterly installments which
commenced on March 31, 1997 and ends on December 31, 2002, in aggregate amounts
for each of the following periods as follows (with the installments within each
year being equal):
<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 7,500,000
1998........................................................................... 12,500,000
1999........................................................................... 40,000,000
2000........................................................................... 50,000,000
2001........................................................................... 50,000,000
2002........................................................................... 65,000,000
</TABLE>
Proceeds of $50 million from the First Amended Credit Agreement were used to
prepay payments on the Term A Loan to the third quarter of 1998.
TERM B LOAN. The Term B Loan is in the amount of $125 million, the proceeds
of which were used to prepay $72 million of the Revolving Credit Facility and,
then, to prepay $50 million of the Term A Loan. The prepayment of the Term A
Loan consisted of $22.5 million of remaining 1997 scheduled payments and $27.5
million of 1998 scheduled payments.
The Term B Loan is repayable in consecutive quarterly installments
commencing on March 31, 1998, in aggregate amounts for each of the following
years as follows (with the installments in each year being equal in amount
except that the installments due in March and June 2003 are in an amount equal
to $0.25 million and the installments due in September and December 2003 are in
an amount equal to $59.75 million):
<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNT
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $ 1,000,000
1999.......................................................................... 1,000,000
2000.......................................................................... 1,000,000
2001.......................................................................... 1,000,000
2002.......................................................................... 1,000,000
2003.......................................................................... 120,000,000
</TABLE>
REVOLVING CREDIT FACILITY. The Revolving Credit Facility is in the amount
of $250 million. The Revolving Credit Facility is inclusive of a $35 million
letter of credit subfacility and a $25 million swing line loan subfacility, and
will be available on a revolving basis until December 31, 2002.
INTEREST RATE. The loans under the Second Amended Credit Agreement bear
interest at a rate equal to, at the Company's option, (i) the ABR rate plus, (a)
with respect to Term A Loan and Revolving Credit Facility, an amount which will
vary between zero and 1% based upon certain performance criteria and, (b) with
respect to Term B Loan, an amount which will vary between 0.75% (0.50% after
June 19, 1998) and 1.50% based upon certain performance criteria or (ii) the
Eurodollar Rate plus (x) with respect to the Term A Loan and the Revolving
Credit Facility, an amount that will vary between 0.375% and 2.00% based upon
certain performance criteria and, (y) with respect to Term B Loan, an amount
that will vary between 1.75% (1.50% after June 19, 1998) and 2.50% based upon
certain performance criteria. Interest on ABR loans are payable quarterly in
arrears. Interest on Eurodollar loans are payable on the last date of each
57
<PAGE>
relevant interest period and, in the case of any interest period longer than
three months, on each successive date three months after the first day of such
interest period.
GUARANTEES AND SECURITY. Indebtedness of Dal-Tile Group under the Second
Amended Credit Agreement is guaranteed by Dal-Tile and by Dal-Tile Group's
domestic Material Subsidiaries and is secured by (i) a first priority security
interest in all of Dal-Tile Group's and its domestic subsidiaries' tangible and
intangible assets, whether owned as of the date of the initial funding or
thereafter acquired and (ii) a first priority perfected pledge of 100% of the
capital stock of Dal-Tile Group and certain of its domestic subsidiaries and 65%
of the capital stock of certain first-tier foreign subsidiaries owned by Dal-
Tile Group.
COVENANTS. The Second Amended Credit Agreement requires the Company to meet
certain financial tests, including net worth, current ratio, consolidated
interest coverage, consolidated leverage ratio and Consolidated EBITDA tests.
While the amendment to the First Amended Credit Agreement in the third quarter
of fiscal year 1997 provided the Company with increased short-term flexibility
with respect to the consolidated interest coverage ratio and the consolidated
leverage test (the "Amended Tests"), the Amended Tests and the Consolidated
EBITDA test, which was added in the Second Amended Credit Agreement, become
significantly more stringent over time, beginning in fiscal 1998. The increased
short-term flexibility provided by the Second Amended Credit Agreement included
(a) suspending the application of the minimum interest coverage test during the
third and fourth quarter of fiscal year 1997, and setting such test at 0.20 to 1
in the first quarter of fiscal year 1998, and (b) changing the maximum leverage
ratio test from 4.75 to 1 to 7.50 to 1 in the third quarter of fiscal year 1997
and 13.00 to 1 in the fourth quarter of fiscal year 1997 and first quarter of
fiscal year 1998. Going forward, the minimum interest coverage ratio increases
incrementally to 2.25 to 1 by the fourth quarter of fiscal year 1999 and to 3.00
to 1 by the fourth quarter of fiscal year 2001. The maximum leverage ratio
decreases incrementally to 4.00 to 1 by the fourth quarter of fiscal year 1999
and to 3.00 to 1 by the fourth quarter of fiscal year 2002. In addition, the
Consolidated EBITDA test is $43 million for the first quarter of fiscal year
1998 and increases incrementally to $100 million by the fourth quarter of fiscal
year 1999 and to $110 million by the first quarter of fiscal year 2000 and
thereafter. The Second Amended Credit Agreement also contains a number of other
covenants that, among other things, restrict the ability of the Company to (i)
dispose of assets, (ii) incur additional indebtedness and other liabilities,
(iii) pay dividends, (iv) enter into sale and leaseback transactions, (v) create
liens, (vi) make capital expenditures, (vii) make certain investments or
acquisitions and (viii) take certain other corporate actions that are
customarily restricted in such agreements.
OTHER TERMS. The Second Amended Credit Agreement contains customary events
of default, including payment defaults, breach of representations and
warranties, covenant defaults, cross-default to certain other indebtedness,
certain events of bankruptcy and insolvency, certain ERISA-related events,
judgment defaults, failure of any guaranty or security agreement supporting the
Second Amended Credit Agreement to be in full force and effect, a change of
control of the Company and a Termination Event.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has, and upon completion of the Offering and the PEPS Offering,
the Company will have, 53,435,101 shares of Common Stock outstanding. All of
these shares of Common Stock are freely tradeable without restriction or
limitation under the Securities Act, except for any shares held by "affiliates,"
as that term is defined under the Securities Act, of the Company, including
28,604,811 shares held by DTI Investors and, to the extent AWI is deemed an
affiliate, 8,050,000 shares held by AWI following the Offering (assuming the
Underwriters' over-allotment option with respect to the Offering is exercised in
full). All of the shares sold in the Offering and any shares delivered to
holders of PEPS will be freely transferable and may be resold by non-affiliates
of the Company without further registration under the Securities Act. The shares
held by affiliates may only be sold if they are registered under the Securities
Act or under an exemption from registration, such as the exemption provided by
Rule 144 under the Securities Act ("Rule 144").
58
<PAGE>
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction) for
at least one year, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the outstanding Common
Stock or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale is filed pursuant
to Rule 144. Sales under Rule 144 also are subject to certain provisions
regarding the manner of sale, notice requirements and the availability of
current public information about the Company. A stockholder (or stockholders
whose shares are aggregated) who is not an affiliate of the Company for at least
90 days prior to a proposed transaction and who has beneficially owned
"restricted securities" for at least two years is entitled to sell such shares
under Rule 144 without regard to the limitations described above.
In addition, 7,836,425 shares of Common Stock are reserved for issuance
pursuant to the Company's stock option plans. At April 3, 1998, options for the
purchase of 6,647,371 shares of Common Stock were outstanding. These shares will
be available for sale in the public market from time to time upon registration
or pursuant to available exemptions from registration.
Each of the Company, the Company's directors and executive officers (for so
long as they remain in such capacities), AWI and DTI Investors has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not, during the period ending 90 days after the date of this Prospectus (1)
offer, pledge, loan, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any securities are then
owned by such person or are thereafter acquired directly from the Company), (2)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of the ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) of this paragraph is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise, (3) in the case of AWI and DTI Investors, make any demand for, or
exercise any right with respect to, registration of any shares of Common Stock
or any securities convertible into, or exercisable or exchangeable for, Common
Stock or (4) in the case of Dal-Tile, file a registration statement with the
Commission for an offering of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (other than a registration
statement on Form S-8 or an equivalent form), other than, with respect to
clauses (1), (2), (3) and (4) above, (i) the PEPS, (ii) the offer and sale of
the shares of Common Stock made in connection with the Offering and the PEPS
Offering and (iii) options to purchase Common Stock, or shares of Common Stock
issued or issuable under the Company's existing stock option and stock purchase
plans. Following the expiration of such agreements, these shares will be
eligible for sale in the public market subject to the restrictions described
above. See "Underwriters."
As a result of increasingly stringent financial covenants under the Second
Amended Credit Agreement, the Company expects that it will be required to seek
to refinance its indebtedness or amend the terms thereof in 1999 and possibly
sooner. The Company's ability to amend or refinance its obligations with respect
to its indebtedness and to raise capital through alternative means such as
selling assets or raising equity capital, as well as its ability to comply with
its obligations under any new or amended debt facilities, depends on its
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to financial, business and other factors beyond its
control. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company's stockholders at that time
would be diluted. Further, such equity securities may have rights, preferences
or privileges senior to those of the Common Stock. The Company expects that debt
incurred as part of a refinancing would involve higher borrowing costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of Second Amended
Credit Agreement" and "Description of Capital Stock."
59
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below, for whom Morgan Stanley & Co. Incorporated, Lazard Freres & Co. LLC
and Smith Barney Inc. are serving as Representatives, have severally agreed to
purchase, and AWI has agreed to sell to them, the number of shares of Common
Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Morgan Stanley & Co. Incorporated..................................................................
Lazard Freres & Co. LLC............................................................................
Smith Barney Inc. .................................................................................
-------------
Total........................................................................................ 9,000,000
-------------
-------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby if any are taken.
The Underwriters propose to offer part of the shares of Common Stock offered
hereby directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After
the initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
Dal-Tile, the Selling Stockholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
AWI has granted to the Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 1,315,822 additional shares of
Common Stock at the price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, incurred in
the sale of the Common Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of Common Stock set
forth next to the names of all Underwriters in the preceding table.
In a concurrent transaction, AWI is offering 7,000,000 PEPS (plus an
additional 1,050,000 PEPS to cover over-allotments, if any) which AWI may redeem
at maturity by delivering up to 7,000,000 shares of Common Stock (plus up to an
additional 1,050,000 shares if the over-allotment option is exercised in full).
Each of the Company, the Company's directors and executive officers (for so
long as they remain in such capacities), AWI and DTI Investors has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not, during the period ending 90 days after the date of this Prospectus (1)
offer, pledge, loan, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any securities are then
owned by such person or are thereafter acquired directly from the Company), (2)
enter into any swap or other arrangement that transfers to
60
<PAGE>
another, in whole or in part, any of the economic consequences of the ownership
of the Common Stock, whether any such transaction described in clause (1) or (2)
of this paragraph is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, (3) in the case of AWI and DTI Investors, make
any demand for, or exercise any right with respect to, registration of any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock or (4) in the case of Dal-Tile, file a
registration statement with the Commission for an offering of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
(other than a registration statement on Form S-8 or an equivalent form), other
than, with respect to clauses (1), (2), (3) and (4) above, (i) the PEPS, (ii)
the offer and sale of the shares of Common Stock made in connection with the
Offering and the PEPS Offering and (iii) options to purchase Common Stock, or
shares of Common Stock issued or issuable under the Company's existing stock
option and stock purchase plans.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
From time to time, one or more of the Underwriters has provided, and may
continue to provide, investment banking services to Dal-Tile and AWI.
More than 10% of the net proceeds of the offering may be paid to affiliates
of certain of the Underwriters. Accordingly, the offering is being made pursuant
to the provisions of section (c)(8) of Rule 2710 of the NASD Conduct Rules.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations),
New York, New York, for the Underwriters by Davis Polk & Wardwell, New York, New
York, and for the Selling Stockholder by Buchanan Ingersoll Professional
Corporation, Pittsburgh, Pennsylvania.
EXPERTS
The Consolidated Financial Statements (including the related schedule
incorporated by reference herein) of Dal-Tile International Inc. at January 2,
1998 and January 3, 1997 and for each of the three years in the period ended
January 2, 1998, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere or incorporated by reference herein, and are
included or incorporated in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
61
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Reports, proxy and information statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549; and at the Commission's regional offices at Suite
1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511,
and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can also be obtained from the Commission at prescribed rates
through its Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company at (http://www.sec.gov). Such materials may also be inspected and copied
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act, with respect to the
Common Stock offered hereby. This Prospectus, which forms a part of the
Registration Statement on Form S-3, does not contain all the information set
forth in the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement. Statements contained in this Prospectus as to the
contents of certain documents are not necessarily complete, and, in each
instance, reference is made to the copy of the document filed as an exhibit to
the applicable Registration Statement. The Registration Statement (and the
exhibits and schedules thereto) may be inspected and copied at the public
reference facilities maintained by the Commission at its offices and at the
Commission's regional offices at the locations listed above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are incorporated by reference and made
a part of this Prospectus: (i) the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1998 (as amended on June 23, 1998); (ii) all other
reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act since
January 2, 1998, including the Company's Quarterly Report on Form 10-Q for the
quarter ended April 3, 1998; (iii) the Company's Proxy Statement dated April 3,
1998 relating to the 1998 Annual Meeting of Stockholders to be held April 30,
1998 (the "Proxy"); and (iv) the description of the Common Stock contained in
the Company's registration statement on Form 8-A dated July 16, 1996, all of
which have been filed with the Commission (File No. 1-11939).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document or information incorporated or
deemed to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that also is, or is
deemed to be, incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The making of a modifying or superseding statement shall not be deemed an
admission that the modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an omission to
state a material fact that is required to be stated or that is necessary to make
a statement not misleading in light of the circumstances in which it was made.
62
<PAGE>
The Company undertakes to provide, without charge, to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
or information referred to above that has been or may be incorporated by
reference in this Prospectus (excluding exhibits to such documents unless such
exhibits are specifically incorporated by reference). Requests should be
directed to Mark A. Solls, Secretary, Dal-Tile International Inc., 7834 Hawn
Freeway, Dallas, Texas 75217, telephone: (214) 398-1411.
63
<PAGE>
DAL-TILE INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Consolidated Statements of Operations for the three months ended April 3, 1998 and
April 4, 1997 (Unaudited).......................................................... F-2
Consolidated Balance Sheets at April 3, 1998 (Unaudited) and January 2, 1998......... F-3
Consolidated Statement of Stockholders' Equity at April 3, 1998 (Unaudited).......... F-4
Consolidated Statement of Cash Flows for the three months ended April 3, 1998 and
April 4, 1997 (Unaudited).......................................................... F-5
Notes to Condensed Consolidated Financial Statements................................. F-6
Report of Independent Auditors....................................................... F-8
Consolidated Balance Sheets at January 2, 1998 and January 3, 1997................... F-9
Consolidated Statements of Operations for each of the three years in the period ended
January 2, 1998.................................................................... F-10
Consolidated Statements of Stockholders' Equity for each of the three years in the
period
ended January 2, 1998.............................................................. F-11
Consolidated Statements of Cash Flows for each of the three years in the period ended
January 2, 1998.................................................................... F-12
Notes to Consolidated Financial Statements........................................... F-13
</TABLE>
F-1
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 4, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
APRIL 3, APRIL 4,
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Net sales................................................................................. $ 185,831 $ 167,409
Cost of goods sold........................................................................ 98,503 84,221
---------- ----------
Gross profit.............................................................................. 87,328 83,188
Expenses:
Transportation.......................................................................... 14,533 11,490
Selling, general and administrative..................................................... 57,433 52,994
Amortization of intangibles............................................................. 1,401 1,401
---------- ----------
Total expenses............................................................................ 73,367 65,885
---------- ----------
Operating income.......................................................................... 13,961 17,303
Interest expense.......................................................................... 11,604 8,079
Interest income........................................................................... 26 139
Other income (expense).................................................................... (391) 681
---------- ----------
Income before income taxes................................................................ 1,992 10,044
Income tax provision...................................................................... 1,164 3,517
---------- ----------
Net income................................................................................ $ 828 $ 6,527
---------- ----------
---------- ----------
BASIC EARNINGS PER SHARE
Net income per common share............................................................... $ 0.02 $ 0.12
---------- ----------
---------- ----------
Average shares............................................................................ 53,435 53,435
---------- ----------
---------- ----------
DILUTED EARNINGS PER SHARE
Net income per common share............................................................... $ 0.02 $ 0.12
---------- ----------
---------- ----------
Average shares............................................................................ 54,149 55,443
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-2
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
APRIL 3, 1998 AND JANUARY 2, 1998
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1998 1998
----------- ----------
<S> <C> <C>
(IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................................. $ 399 $ 7,488
Trade accounts receivable............................................................. 110,017 96,296
Inventories........................................................................... 123,720 130,747
Prepaid expenses...................................................................... 3,268 3,120
Other current assets.................................................................. 16,761 18,438
----------- ----------
Total current assets.................................................................... 254,165 256,089
Property, plant, and equipment, at cost................................................. 293,079 299,232
Less accumulated depreciation........................................................... 76,065 71,547
----------- ----------
217,014 227,685
Goodwill, net of amortization........................................................... 151,370 152,560
Finance costs, net of amortization...................................................... 6,298 6,599
Tradename and other assets.............................................................. 28,754 29,136
----------- ----------
Total assets............................................................................ $ 657,601 $ 672,069
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable................................................................ $ 19,430 $ 18,231
Accrued expenses...................................................................... 59,496 55,043
Accrued interest payable.............................................................. 1,363 2,287
Current portion of long-term debt..................................................... 29,754 19,261
Income taxes payable.................................................................. 1,162 801
Deferred income taxes................................................................. 1,066 863
Other current liabilities............................................................. 4,693 4,715
----------- ----------
Total current liabilities............................................................... 116,964 101,201
Long-term debt.......................................................................... 509,691 537,830
Other long-term liabilities............................................................. 27,097 27,230
Deferred income taxes................................................................... 1,903 1,888
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 200,000,000; issued and outstanding shares - 53,435,101......... 534 534
Additional paid-in capital............................................................ 436,100 436,100
Accumulated deficit................................................................... (370,058) (370,886)
Accumulated other comprehensive loss.................................................. (64,630) (61,828)
----------- ----------
Total stockholders' equity 1,946 3,920
----------- ----------
Total liabilities and stockholders' equity.............................................. $ 657,601 $ 672,069
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-3
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
APRIL 3, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
----------- --------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at January 2, 1998..... $ 534 $ 436,100 $ (370,886) $ (61,828) $ 3,920
---------
Comprehensive loss
Net income................... -- -- 828 -- 828
Foreign currency translation
adjustments................ -- -- -- (2,802) (2,802)
---------
Total Comprehensive loss....... (1,974)
----- --------- -------------- --------------- ---------
Balance at April 3, 1998....... $ 534 $ 436,100 $ (370,058) $ (64,630) $ 1,946
----- --------- -------------- --------------- ---------
----- --------- -------------- --------------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-4
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 4, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
APRIL 3, APRIL 4,
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
(UNAUDITED)
OPERATING ACTIVITIES
Net income................................................................................ $ 828 $ 6,527
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................................................... 7,165 5,134
Deferred income tax provision........................................................... 547 1,937
Foreign currency transaction loss (gain)................................................ (398) (144)
Changes in operating assets and liabilities:
Trade accounts receivable............................................................. (13,936) (8,548)
Inventories........................................................................... 6,218 (20,353)
Other assets.......................................................................... 1,557 (4,764)
Trade accounts payable and accrued expenses........................................... 5,866 (20,140)
Accrued interest payable.............................................................. (847) 124
Other liabilities..................................................................... 511 (1,064)
---------- ----------
Net cash provided by (used in) operating activities....................................... 7,511 (41,291)
INVESTING ACTIVITIES
Proceeds from sale of (expenditures for) property,
plant, and equipment, net............................................................... 3,272 (13,888)
FINANCING ACTIVITIES
Repayments of long-term debt.............................................................. (44,650) (7,800)
Borrowings under long-term debt........................................................... 27,004 48,000
Fees and expenses associated with debt refinancing........................................ (241) --
---------- ----------
Net cash (used in) provided by financing activities....................................... (17,887) 40,200
Effect of exchange rate changes on cash................................................... 15 7
---------- ----------
Net decrease in cash...................................................................... (7,089) (14,972)
Cash at beginning of period............................................................... 7,488 9,999
---------- ----------
Cash at end of period..................................................................... $ 399 $ (4,973)
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-5
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The operating results of Dal-Tile International Inc. and its consolidated
subsidiaries (the "Company") for the three months ended April 3, 1998 reflect
the results of operations of Dal-Tile International Inc. and its consolidated
subsidiaries. Due to the Company's 52/53 week accounting cycle, the first
quarter of 1998 ended on April 3, 1998.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring adjustments
considered necessary for a fair presentation of the financial position, results
of operations, and cash flow have been included. The results of operations for
the three months ended April 3, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending January 1, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the January 2, 1998 annual report on Form 10-K of
the Company.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
2. EARNINGS PER SHARE
Earnings per share are presented on both the basic and diluted methods.
Basic earnings per share are based on the average number of shares outstanding
during each period presented. Diluted earnings per share are based on the
average number of shares outstanding including any dilutive effects of options,
warrants and convertible securities.
3. COMPREHENSIVE INCOME
As of January 3, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS 130 had no impact on the Company's
net income or shareholders' equity. SFAS 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to the requirements of SFAS 130.
During the first quarter of 1998 and 1997, total comprehensive (loss) income
amounted to ($1,974,000) and $5,785,000, respectively.
4. INVENTORIES
Inventories consist of the following at April 3, 1998 and January 2, 1998
(In Thousands):
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1998 1998
----------- ----------
<S> <C> <C>
(UNAUDITED)
Raw materials........................................................................... $ 8,417 $ 9,891
Work-in-process......................................................................... 4,279 3,960
Finished goods.......................................................................... 111,024 116,896
----------- ----------
$ 123,720 $ 130,747
----------- ----------
----------- ----------
</TABLE>
F-6
<PAGE>
5. LONG-TERM DEBT
Long-term debt consists of the following at April 3, 1998 and January 2,
1998 (In Thousands):
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1998 1998
----------- ----------
<S> <C> <C>
(UNAUDITED)
Term A Loan............................................................................. $ 217,500 $ 217,500
Term B Loan............................................................................. 124,750 125,000
Revolving Credit Loan................................................................... 173,000 190,000
Other................................................................................... 24,195 24,591
----------- ----------
539,445 557,091
Less current portion.................................................................... 29,754 19,261
----------- ----------
$ 509,691 $ 537,830
----------- ----------
----------- ----------
</TABLE>
6. INCOME TAXES
The income tax provision reflects effective tax rates of 58% and 35% for the
three months ended April 3, 1998 and April 4, 1997, respectively. The tax
provision for the first quarter of 1998 reflects expected Mexican and U.S. state
tax liabilities based on estimated income in those jurisdictions.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to federal, state, local and foreign 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.
The Company is involved in various 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 probable and estimable liabilities of the Company
with respect to such investigations and cleanup activities, taking into account
currently available information and the Company's 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, the scope of contamination of such sites, the allocation of costs
among other potentially responsible parties with respect to any such sites and
the ability of such parties to satisfy their share of liability. 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 or liquidity.
F-7
<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. as of January 2, 1998 and January 3, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 2, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 2, 1998 and January 3, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 2, 1998, in conformity with generally accepted
accounting principles.
/S/ ERNST & YOUNG LLP
Dallas, Texas
February 16, 1998
F-8
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash.................................................................................... $ 7,488 $ 9,999
Trade accounts receivable............................................................... 96,296 123,586
Inventories............................................................................. 130,747 142,413
Prepaid expenses........................................................................ 3,120 3,186
Other current assets.................................................................... 18,438 15,132
---------- ----------
Total current assets................................................................ 256,089 294,316
Property, plant and equipment, at cost:
Land.................................................................................... 17,205 17,403
Leasehold improvements.................................................................. 11,067 10,347
Buildings............................................................................... 75,134 78,360
Machinery and equipment................................................................. 183,806 126,830
Construction in process................................................................. 12,020 29,036
---------- ----------
299,232 261,976
Accumulated depreciation.................................................................. 71,547 58,350
---------- ----------
227,685 203,626
Goodwill, net of amortization............................................................. 152,560 157,251
Finance costs, net of amortization........................................................ 6,599 3,683
Tradename and other assets................................................................ 29,136 29,621
---------- ----------
Total assets........................................................................ $ 672,069 $ 688,497
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................................................. $ 18,231 $ 38,827
Accrued expenses........................................................................ 55,043 27,809
Accrued interest payable................................................................ 2,287 3,293
Current portion of long-term debt....................................................... 19,261 32,823
Income taxes payable.................................................................... 801 2,342
Deferred income taxes................................................................... 863 1,367
Other current liabilities............................................................... 4,715 7,036
---------- ----------
Total current liabilities........................................................... 101,201 113,497
Long-term debt............................................................................ 537,830 433,035
Other long-term liabilities............................................................... 27,230 24,369
Deferred income taxes..................................................................... 1,888 2,027
Commitments and contingencies
Stockholders' equity:
Common stock............................................................................ 534 534
Additional paid-in capital.............................................................. 436,100 436,100
Accumulated deficit..................................................................... (370,886) (260,650)
Currency translation adjustment......................................................... (61,828) (60,415)
---------- ----------
Total stockholders' equity.......................................................... 3,920 115,569
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 672,069 $ 688,497
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-9
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ---------- ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................................. $ 676,637 $ 720,236 $ 474,812
Cost of goods sold........................................................ 404,728 369,731 225,364
----------- ---------- ------------
271,909 350,505 249,448
Operating expenses:
Transportation.......................................................... 58,425 47,125 33,535
Selling, general and administrative..................................... 277,515 190,911 134,193
Provision for merger integration charges................................ -- 9,000 22,430
Amortization of goodwill and tradename.................................. 5,605 5,605 4,765
----------- ---------- ------------
Total expenses............................................................ 341,545 252,641 194,923
----------- ---------- ------------
Operating income (loss)................................................... (69,636) 97,864 54,525
Interest expense.......................................................... 40,649 46,338 55,453
Interest income........................................................... 268 1,685 1,250
Other income.............................................................. 1,220 129 2,994
----------- ---------- ------------
Income (loss) before income taxes and extraordinary item.................. (108,797) 53,340 3,316
Income tax provision...................................................... 1,439 18,914 1,176
----------- ---------- ------------
Income (loss) before extraordinary item................................... (110,236) 34,426 2,140
Extraordinary item--loss on early retirement of debt, net of taxes........ -- (29,072) --
----------- ---------- ------------
Net income (loss)......................................................... $ (110,236) $ 5,354 $ 2,140
----------- ---------- ------------
----------- ---------- ------------
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary item per common share.................. $ (2.06) $ 0.71 $ 0.07
Extraordinary item........................................................ -- (0.60) --
----------- ---------- ------------
Net income (loss) per common share........................................ $ (2.06) $ 0.11 $ 0.07
----------- ---------- ------------
----------- ---------- ------------
Average outstanding common shares......................................... 53,435 48,473 28,743
----------- ---------- ------------
----------- ---------- ------------
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item per common share.................. $ (2.06) $ 0.69 $ 0.07
Extraordinary item........................................................ -- (0.58) --
----------- ---------- ------------
Net income (loss) per common share........................................ $ (2.06) $ 0.11 $ 0.07
----------- ---------- ------------
----------- ---------- ------------
Average outstanding common and equivalent shares.......................... 53,435 50,053 29,668
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes.
F-10
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
A B C D E F
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1994..................................... $ 10 $ -- $ 3 $ 10 $ 1 $ 1
Net income....................................................... -- -- -- -- -- --
Stock issued in connection with the AO Acquisition............... 6 -- 2 6 1 1
Currency translation adjustment.................................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995..................................... 16 -- 5 16 2 2
Net income....................................................... -- -- -- -- -- --
Stock conversion................................................. (16) -- (5) (16) (2) (2)
Proceeds from AWI in connection with the AO Acquisition.......... -- -- -- -- -- --
Stock issued in connection with the Initial Public Offering...... -- -- -- -- -- --
Currency translation adjustment.................................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at January 3, 1997....................................... -- -- -- -- -- --
Net loss......................................................... -- -- -- -- -- --
Currency translation adjustment.................................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at January 2, 1998....................................... $ -- $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
CONVERTED
COMMON
STOCK
-----------
Balance at December 31, 1994..................................... $ --
Net income....................................................... --
Stock issued in connection with the AO Acquisition............... --
Currency translation adjustment.................................. --
-----
Balance at December 31, 1995..................................... --
Net income....................................................... --
Stock conversion................................................. 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
Net loss......................................................... --
Currency translation adjustment.................................. --
-----
Balance at January 2, 1998....................................... $ 534
-----
-----
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.................................. $ 200,475 $ (268,144) $ (36,179) $ (103,823)
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, 1995.................................. 334,035 (266,004) (58,433) 9,639
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
Net loss...................................................... -- (110,236) -- (110,236)
Currency translation adjustment............................... -- -- (1,413) (1,413)
---------- ------------ ----------- -----------
Balance at January 2, 1998.................................... $ 436,100 $ (370,886) $ (61,828) $ 3,920
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-11
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ----------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................ $ (110,236) $ 5,354 $ 2,140
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization.......................................... 24,543 24,017 17,164
Extraordinary loss..................................................... -- 29,072 --
Provision for losses on accounts receivable............................ 27,805 5,781 5,111
Merger integration reserve............................................. -- -- 22,430
Foreign exchange transaction (gain) loss............................... 339 (59) (6,067)
Zero coupon notes interest expense..................................... -- -- 10,899
Deferred income tax provision (benefit)................................ (475) 13,539 (3,088)
Changes in operating assets and liabilities, net of assets and
liabilities of business acquired:
Trade accounts receivable............................................ (688) (25,752) 3,470
Inventories.......................................................... 10,845 (39,607) (3,580)
Other assets......................................................... (7,420) 217 (5,754)
Trade accounts payable and accrued expenses.......................... 4,442 6,854 12,371
Accrued interest payable............................................. (1,004) (14,105) 354
Other liabilities.................................................... (958) (23,995) (14,787)
----------- ----------- ------------
Net cash provided by (used in) operating activities...................... (52,807) (18,684) 40,663
INVESTING ACTIVITIES
Expenditures for property, plant and equipment, net...................... (40,074) (42,039) (29,392)
FINANCING ACTIVITIES
Borrowings under long-term debt.......................................... 111,007 451,000 --
Borrowings under Term B loan............................................. 125,000 -- --
Borrowings under previous bank credit facility........................... -- 63,723 46,702
Repayment of long-term debt.............................................. (19,968) (576,679) (22,538)
Repayment of long-term debt from Term B loan............................. (122,000) -- --
Fees and expenses associated with debt refinancing....................... (3,576) (42,765) --
Proceeds from issuance of common stock................................... -- 102,558 27,575
----------- ----------- ------------
Net cash provided by (used in) financing activities...................... 90,463 (2,163) 51,739
Effect of exchange rate changes on cash.................................. (93) (80) (3,022)
----------- ----------- ------------
Net increase (decrease) in cash.......................................... (2,511) (62,966) 59,988
Cash at beginning of year................................................ 9,999 72,965 12,977
----------- ----------- ------------
Cash at end of year...................................................... $ 7,488 $ 9,999 $ 72,965
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes.
F-12
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1998
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 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. The
statement of operations excludes the results of operations of AO for the year
ended December 31, 1995, as the acquisition occurred on December 29, 1995.
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
Tileways, Inc.......................................................................... U.S. Corporation
DTM/CM Holdings, Inc................................................................... U.S. Corporation
R&M Supplies, Inc...................................................................... U.S. Corporation
Dal-Minerals Company................................................................... 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.
F-13
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less 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.
DEPRECIATION
Depreciation for financial reporting purposes is determined using the
straight-line method. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
---------------
<S> <C>
Leasehold improvements....................................................... Life of lease
Buildings.................................................................... 20-30
Machinery and equipment...................................................... 3-20
</TABLE>
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 2, 1998 and January
3, 1997 was $61,890,000 and $57,125,000, respectively. The carrying value of
goodwill and other long-lived assets is reviewed periodically 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 financings are being amortized
over the term of the related debt on a straight-line basis. Accumulated
amortization at January 2, 1998 and January 3, 1997 was approximately $1,112,000
and $205,000, respectively.
ADVERTISING EXPENSES
Advertising and promotion expenses are charged to income during the period
in which they are incurred. Advertising and promotion expenses incurred for the
years ended January 2, 1998, January 3, 1997 and December 31, 1995 amounted to
$16,722,000, $14,627,000 and $7,566,000, 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 accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting
F-14
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, no compensation expense is recognized because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant.
RETIREMENT PLANS
The Company 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 the Company 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 6% 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 $558,000, ($80,000) and $4,100,000 for the years ended January
2, 1998, January 3, 1997 and December 31, 1995, 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 such 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 periodically 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.
Trade accounts receivable are net of an allowance for losses from
uncollectible accounts of $13,160,000 and $12,750,000 at January 2, 1998 and
January 3, 1997, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
diluted effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to SFAS 128 requirements.
F-15
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options to purchase 6,597,371 shares of common stock at prices ranging from
$9.01 to $13.75 per share were outstanding at January 2, 1998, but were not
included in the computation of earnings per share for 1997. Due to the Company's
net loss for the year, these options would have had an antidilutive effect on
earnings per share.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 3, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
BASIC EARNINGS PER SHARE
Income before extraordinary item available to common stockholders........ $ 34,426 48,473 $ 0.71
EFFECT OF DILUTIVE SECURITIES
Stock options............................................................ -- 1,580 --
------------ ------ -----
DILUTED EARNINGS PER SHARE
Income available to common stockholders plus assumed conversion.......... $ 34,426 50,053 $ 0.69
------------ ------ -----
------------ ------ -----
</TABLE>
Options to purchase 50,000 shares of common stock at $19.75 per share were
outstanding during the fourth quarter of 1996 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares. The options,
which expire January 2, 2007, were still outstanding at the end of 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
BASIC EARNINGS PER SHARE
Income before extraordinary item available to common stockholders........ $ 2,140 28,743 $ 0.07
EFFECT OF DILUTIVE SECURITIES
Stock options............................................................ -- 925 --
------ ------ -----
DILUTED EARNINGS PER SHARE
Income available to common stockholders plus assumed conversion.......... $ 2,140 29,668 $ 0.07
------ ------ -----
------ ------ -----
</TABLE>
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes rules for reporting and displaying comprehensive
income. The Company intends to adopt this statement, as required, for fiscal
year 1998. When adopted, the Company has elected to display comprehensive income
and its components in the Statement of Stockholders' Equity. Adoption of this
statement is not expected to have an effect on the financial statements.
F-16
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Finished products in U.S. ................................................................ $ 110,323 $ 118,823
Finished products in Mexico............................................................... 4,307 3,690
Finished products in Canada............................................................... 2,266 3,724
Goods-in-process.......................................................................... 3,960 3,516
Raw materials............................................................................. 9,891 12,660
---------- ----------
Total inventories......................................................................... $ 130,747 $ 142,413
---------- ----------
---------- ----------
</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 $2,200,000 higher and $8,200,000 lower than reported at January 2,
1998 and January 3, 1997, respectively.
During 1997, inventory quantities in three of the Company's LIFO pools were
reduced. This reduction resulted in the liquidation of LIFO inventory quantities
carried at higher costs prevailing in prior years as compared with the 1997
costs, the effect of which decreased net income by approximately $691,000, or
$0.01 per share (basic and diluted).
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 (basic and diluted).
4. INITIAL PUBLIC OFFERING
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.
F-17
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Term A Loan, interest due quarterly at LIBOR plus 2% (approximately 7.8% at January 2,
1998), principal due in variable quarterly installments through December 31, 2002,
collateralized by certain assets of the Company......................................... $ 217,500 $ 275,000
Term B Loan, interest due quarterly at LIBOR plus 2- 1/2% (approximately 8.3% at January
2, 1998), principal due in variable quarterly installments through December 31, 2003,
collateralized by certain assets of the Company......................................... 125,000 --
Revolving line of credit, interest due quarterly at LIBOR plus 2% (approximately 7.8% at
January 2, 1998), principal due December 31, 2002, collateralized by certain assets of
the Company............................................................................. 190,000 176,000
Other, principally borrowings to fund capital additions................................... 24,591 14,858
---------- ----------
557,091 465,858
Less current portion...................................................................... 19,261 32,823
---------- ----------
$ 537,830 $ 433,035
---------- ----------
---------- ----------
</TABLE>
Concurrent with the Offering, the 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. The New Bank Credit Agreement included a term loan of
$275,000,000 ("Term A Loan") and a revolving line of credit of $250,000,000.
During the second quarter of 1997, the Company completed a new $125,000,000
Term B loan facility which made certain modifications to the New Bank Credit
Agreement (the "Amended Credit Facility"). The proceeds of the Term B loan were
used to repay $50,000,000 of the Term A Loan and $72,000,000 of the existing
revolving line of credit. The Amended Credit Facility did not modify the Term A
Loan amortization schedule.
During the third quarter of 1997, the Company amended certain financial
covenants to provide increased flexibility under the Amended Credit Facility (as
amended, the "Second Amended Credit Facility"). In connection with the Second
Amended Credit Facility, the Company's borrowing rate was increased 50 basis
points over the previously existing rates (which now range from 2 to 2- 1/2
percentage points over LIBOR). Under the Second Amended Credit Facility, 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 2, 1998.
A commitment fee at a rate per annum based on a pricing grid is payable
quarterly.
F-18
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT -- (CONTINUED)
As of January 2, 1998, the Company had availability of approximately
$48,600,000 on the revolving line of credit. The availability is net of
$11,448,526 in letters of credit for foreign inventory purchases and industrial
revenue bond financing transactions.
The Company periodically uses interest rate swap agreements to manage
exposure to fluctuations in interest rates. These agreements involve the
exchange of interest obligations on fixed and floating interest rate debt
without the exchange of the underlying principal amounts. The differential paid
or received on the agreements is recognized as an adjustment to interest expense
over the term of the underlying swap agreement. The book value of the interest
rate swap agreements represents the differential receivable or payable with a
swap counterparty since the last settlement date. The underlying notional
amounts on which the Company has interest rate swap agreements outstanding was
$300,000,000 at January 9, 1998. These agreements are in effect for a term of
two years at an interest rate of approximately 5.7%. There were no interest rate
swap agreements at or during the years ended January 2, 1998 or January 3, 1997.
Aggregate maturities of long-term debt for the five years subsequent to
January 2, 1998 (in thousands) are:
<TABLE>
<S> <C>
1998.............................................. $ 19,261
1999.............................................. 46,144
2000.............................................. 56,148
2001.............................................. 55,684
2002.............................................. 258,615
</TABLE>
Total interest cost incurred for the years ended January 2, 1998, January 3,
1997 and December 31, 1995 amounted to approximately $41,817,000, $47,706,000
and $56,699,000, respectively, of which approximately $1,168,000, $1,368,000 and
$1,246,000, respectively, was capitalized to property, plant and equipment.
Total interest paid, net of interest received, was $41,899,000, $52,857,000 and
$43,460,000 for the years ended January 2, 1998, January 3, 1997 and December
31, 1995, respectively.
6. EXTRAORDINARY ITEM
In connection with the refinancing and early extinguishment of debt during
the year ended January 3, 1997, 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 a termination fee
paid in connection with the termination of the Company's management agreement
with AEA Investors.
7. CAPITAL STRUCTURE
Common stock consists of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1998 1997
--------------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Common stock, $0.01 par value--authorized shares-- 200,000,000,
issued and outstanding shares--53,435,101 at January 2, 1998 and
January 3, 1997................................................. $ 534 $ 534
----- -----
----- -----
</TABLE>
F-19
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL STRUCTURE -- (CONTINUED)
At January 2, 1998, the Company has authorized 11,100,000 shares of
preferred stock, none of which were outstanding. 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.
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 the Company, 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 the Company.
8. PROVISION FOR MERGER INTEGRATION CHARGE--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 completed these actions during
1997. The primary components of the charge were $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 were primarily associated
with sales centers that closed during the first half of 1997 and expire over the
next two to four 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. 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 has combined two independent systems
into one system. The operating leases related to such software will expire over
the next two years. In addition, the Company has recorded a charge of $5,400,000
for inventory revaluation as a result of the elimination of product lines
discontinued as a result of the AO Acquisition, as well as a general stock
keeping unit reduction that occurred in 1996. The Company recorded a charge of
$1,280,000 in connection with the closure of certain duplicative sales service
centers. The Company completed its sales centers consolidation during the first
half of 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-20
<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
--------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ----------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................................. $ (116,249) $ 45,812 $ (4,100)
Mexico.................................................................... 7,879 7,603 7,754
Other..................................................................... (427) (75) (338)
----------- ----------- ------------
$ (108,797) $ 53,340 $ 3,316
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The components of the provision for income taxes include the following:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. state--current........................................................ $ -- $ 3,060 $ 2,179
U.S. deferred.............................................................. -- (1,590) --
----------- ----------- ------
-- 1,470 2,179
Mexico--current............................................................ 2,082 1,716 1,471
Mexico--deferred........................................................... (643) -- (2,474)
----------- ----------- ------
1,439 1,716 (1,003)
----------- ----------- ------
Total with extraordinary item.............................................. 1,439 3,186 1,176
Tax effect of extraordinary item........................................... -- 15,728 --
----------- ----------- ------
Total before extraordinary item............................................ $ 1,439 $ 18,914 $ 1,176
----------- ----------- ------
----------- ----------- ------
</TABLE>
Principal reconciling items from income tax provision (benefit) computed at
the U.S. statutory rate of 35% and the provision for income taxes for the years
ended January 2, 1998, January 3, 1997 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) at statutory rate...................................... $ (37,958) $ 2,989 $ 1,161
Amortization of goodwill................................................... 1,668 1,668 1,668
State income tax........................................................... (5,489) 3,751 1,416
Foreign loss not benefited................................................. 149 26 1,436
Difference between U.S. and Mexico statutory rate.......................... (1,319) (945) (4,106)
Valuation allowance........................................................ 44,107 (10,134) --
Non-Permanently reinvested foreign earnings................................ -- 5,571 --
Other...................................................................... 281 260 (399)
----------- ----------- ------
$ 1,439 $ 3,186 $ 1,176
----------- ----------- ------
----------- ----------- ------
</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 2, JANUARY 3,
1998 1997
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Book basis of property, plant and equipment over tax...................................... $ 18,707 $ 16,324
Book basis of inventories over tax........................................................ -- 1,367
Book basis of other assets over tax....................................................... 10,640 14,513
Other, net................................................................................ 6,983 7,055
----------- -----------
Total deferred tax liabilities........................................................ 36,330 39,259
----------- -----------
Deferred tax assets:
Tax basis of inventories over book........................................................ 5,519 --
Tax basis of other assets over book....................................................... 1,325 210
Net operating loss carryforwards.......................................................... 52,518 23,465
Expenses not yet deductible for tax....................................................... 18,324 12,190
----------- -----------
Total deferred tax assets............................................................. 77,686 35,865
Valuation allowance for deferred tax assets............................................... (44,107) --
----------- -----------
Net deferred tax assets................................................................... 33,579 35,865
----------- -----------
Net deferred tax liabilities.............................................................. $ 2,751 $ 3,394
----------- -----------
----------- -----------
</TABLE>
Total income tax payments, net of refunds received, during the years ended
January 2, 1998, January 3, 1997 and December 31, 1995 were $3,206,000,
$1,989,000 and $6,145,000, respectively. The Company has U.S. net operating loss
carryforwards of approximately $138,000,000 which expire in the years
2008--2012. The net operating loss carryforwards will be available to offset
regular U.S. taxable income during the carryforward period.
Deferred tax assets are required to be reduced by a valuation allowance if
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Realization of the future benefits related to the deferred
tax assets is dependent on many factors, including the Company's ability to
generate U.S. taxable income within the near to medium term. Management has
considered these factors in determining the valuation allowance recorded in
1997.
U.S. tax rules impose limitations on the use of net operating loss
carryforwards following certain changes in ownership. If such a change were to
occur with respect to the Company, the limitation could reduce the amount of
deductions that would be available to offset future taxable income each year,
starting with the year of the ownership change.
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
fiscal years ended January 2, 1998, January 3, 1997 and December 31, 1995 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
F-22
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
amounted to approximately $327,000, $390,000 and $1,500,000 for the years ended
January 2, 1998, January 3, 1997 and December 31, 1995, respectively.
11. RELATED PARTY TRANSACTIONS
AEA Investors Inc., a majority stockholder, previously provided management,
consulting and financial services to the Company for fees and expenses. The
Company incurred fees and expenses for such services of $485,000 and $991,000
for the years ended January 3, 1997 and December 31, 1995, 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. The 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.
During 1996, the Company entered into an agreement with AWI to provide
mainframe data processing services. The agreement expires on May 31, 1999.
Payments made under this agreement were $6,147,000 and $2,549,000 for the years
ended January 2, 1998 and January 3, 1997, respectively.
12. STOCK PLANS
The Company has a stock option plan (the "Plan") that provides for the
granting of options for up to 7,836,425 shares of its common stock to key
employees of the Company. 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.
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>
TOTAL OPTION WEIGHTED AVERAGE
NUMBER OF SHARES PRICE EXERCISE PRICE
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
Granted................................................. 3,215,174 43,123,573 13.41
Canceled................................................ (723,637) (7,556,083) 10.44
----------------- ----------------- ------
Outstanding at January 2, 1998............................ 6,597,371 $ 74,576,494 $ 11.30
----------------- ----------------- ------
----------------- ----------------- ------
</TABLE>
The Company has reserved 7,836,425 shares of common stock for options,
1,239,054 of which are ungranted at January 2, 1998 and are for future issuance
under the Plan.
F-23
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK PLANS -- (CONTINUED)
At January 2, 1998, January 3, 1997 and December 31, 1995, there were
4,200,159 options exercisable at a weighted average exercise price of $10.07,
2,986,372 options exercisable at a weighted average exercise price of $9.30 and
2,128,436 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 2, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE OPTIONS CONTRACTUAL
PRICE OUTSTANDING LIFE
- --------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
$9.01.......................................................... 2,441,202 3.56 years
9.91.......................................................... 1,113,169 8.00 years
12.63.......................................................... 106,000 9.95 years
13.69.......................................................... 2,837,000 9.78 years
13.75.......................................................... 100,000 9.30 years
</TABLE>
In accordance with the provisions of SFAS 123, the Company applies APB 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 123, net income (loss) and earnings (loss) per
share would have been reduced to the pro forma amounts indicated in the table
below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ----------- -------------
<S> <C> <C> <C>
Net income (loss)--as reported............................................ $ (110,236) $ 5,354 $ 2,140
Net income (loss)--pro forma.............................................. (112,150) 3,827 2,088
Earnings (loss) per share (basic and diluted)--as reported................ (2.06) 0.11 0.07
Earnings (loss) per share (basic and diluted)--pro forma.................. (2.10) 0.08 0.07
</TABLE>
The pro forma effects on net income (loss) for the years ended January 2,
1998, January 3, 1997 and December 31, 1995 are not representative of the pro
forma effect on net income (loss) 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 2, 1998, January 3, 1997 and December 31, 1995 was
$5.62, $2.93 and $3.38 per option, respectively. The fair
F-24
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK PLANS -- (CONTINUED)
value of the options at the date of grant was estimated using the binomial model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
------------- ------------- ---------------
Expected life (years).................................. 3 3 4
Interest rate.......................................... 5.96% 5.08% 7.52%
Volatility............................................. 53.5% 33.6% 33.6%
Dividend yield......................................... 0.00% 0.00% 0.00%
</TABLE>
The Company has issued stock units under a stock appreciation rights
agreement to certain executives which permit the holders to receive value in
excess of the base price of the unit at the date of grant. Payment of the excess
will be in cash, stock or a combination of cash and stock at the discretion of
the Board of Directors. The total value to be received is subject to a ceiling.
During the fourth quarter of 1997, the Company granted 2,710,000 stock units at
a base price of $9.01 per unit. These stock units vest at various dates through
fiscal year 2000 provided certain conditions are met. The Company has recorded
compensation expense of approximately $5,900,000 during the fourth quarter of
1997 in respect of these stock units.
13. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its sales service centers and
various distribution, manufacturing and transportation equipment under terms of
noncancelable operating leases. Certain leases contain escalation charges. The
minimum aggregate annual lease payments subsequent to January 2, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 27,797
1999............................................................... 21,769
2000............................................................... 14,379
2001............................................................... 10,679
2002............................................................... 8,141
Thereafter......................................................... 17,119
---------
$ 99,884
---------
---------
</TABLE>
Rental expense amounted to approximately $31,075,000, $24,166,000 and
$16,427,000 for the years ended January 2, 1998, January 3, 1997 and December
31, 1995, respectively.
The Company is subject to federal, state, local and foreign 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.
The Company is involved in various 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
F-25
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
have been incurred and when they can be reasonably estimated. The Company has
provided reserves which management believes are adequate to cover probable and
estimable liabilities of the Company with respect to such investigations and
cleanup activities, taking into account currently available information and the
Company's 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, the scope of contamination
of such sites, the allocation of costs among other potentially responsible
parties with respect to any such sites and the ability of such parties to
satisfy their share of liability. 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 or 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-26
<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>
YEAR ENDED
------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
---------- ---------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Consolidated revenue:
Unaffiliated customers:
United States............................................................ $ 648,529 $ 695,532 $ 446,323
Mexico................................................................... 18,533 17,927 23,012
Other.................................................................... 9,575 6,777 5,477
---------- ---------- ------------
Total consolidated revenues from unaffiliated customers.............. 676,637 720,236 474,812
---------- ---------- ------------
Intercompany revenue:
United States............................................................ 4,348 4,057 3,174
Mexico................................................................... 71,802 61,526 43,109
Eliminations............................................................. (76,150) (65,583) (46,283)
---------- ---------- ------------
Total consolidated revenue........................................... $ 676,637 $ 720,236 $ 474,812
---------- ---------- ------------
---------- ---------- ------------
Consolidated operating income (loss):
United States............................................................ $ (76,686) $ 90,175 $ 48,874
Mexico................................................................... 7,508 7,339 6,120
Eliminations/other....................................................... (458) 350 (469)
---------- ---------- ------------
Total consolidated operating income (loss)........................... $ (69,636) $ 97,864 $ 54,525
---------- ---------- ------------
---------- ---------- ------------
Consolidated identifiable assets:
United States............................................................ $ 613,882 $ 623,444 $ 618,328
Mexico................................................................... 53,637 54,889 38,585
Eliminations/other....................................................... 4,550 10,164 15,480
---------- ---------- ------------
Total consolidated identifiable assets............................... $ 672,069 $ 688,497 $ 672,393
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-27
<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 fiscal year ended on December 31 (and 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.:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1998 1997
----------- ----------
<S> <C> <C>
(IN THOUSANDS)
Condensed balance sheets:
Cash.................................................................................... $ 59 $ 97
Other assets............................................................................ 9,151 8,286
Investment in Dal-Tile Group Inc., net of accumulated losses............................ -- 108,507
----------- ----------
$ 9,210 $ 116,890
----------- ----------
----------- ----------
Senior secured zero coupon notes.......................................................... $ 157 $ 140
Other liabilities......................................................................... 1,232 1,181
Accumulated losses, net of investment in Dal-Tile Group Inc............................... 3,901 --
Stockholders' equity...................................................................... 3,920 115,569
----------- ----------
$ 9,210 $ 116,890
----------- ----------
----------- ----------
</TABLE>
F-28
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
<S> <C> <C> <C>
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ----------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Condensed statements of operations:
Equity in net income (loss) of Dal-Tile Group Inc....................... $ (110,739) $ 11,841 $ 14,125
Other expense (income).................................................. (520) (511) 450
Interest income......................................................... -- 921 142
Interest expense........................................................ 17 7,919 11,677
----------- ----------- ------------
Net income (loss)....................................................... $ (110,236) $ 5,354 $ 2,140
----------- ----------- ------------
----------- ----------- ------------
Condensed statements of cash flows:
Cash flow used in operating activities.................................. $ (129) $ (6,303) $ (687)
Financing activities:
Proceeds from sale of stock and equity infusion......................... -- 102,558 27,575
Investment in Dal-Tile Group Inc........................................ 91 (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......................................... (38) (30,274) 26,888
Cash at beginning of period............................................. 97 30,371 3,483
----------- ----------- ------------
Cash at end of period............................................... $ 59 $ 97 $ 30,371
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
F-29
<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 2, 1998 and January 3, 1997:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended January 2, 1998:
Net sales...................................................... $ 167,409 $ 173,742 $ 177,731 $ 157,755
Gross profit................................................... 83,188 73,609 46,270 68,842
Operating income (loss)........................................ 17,303 (11,891) (64,675) (10,373)
Net income (loss).............................................. 6,527 (13,803) (80,939) (22,021)
Per share:
Net income (loss)--basic................................... 0.12 (0.25) (1.51) (0.41)
--assuming dilution......................... 0.12 (0.25) (1.51) (0.41)
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............................................... 14,224 21,927 31,072 30,641
Income before extraordinary item............................... 930 4,889 13,175 15,432
Extraordinary item............................................. -- -- (29,072) --
Net income (loss).............................................. 930 4,889 (15,897) 15,432
Per share:
Income before extraordinary item--basic...................... 0.02 0.11 0.27 0.29
--assuming dilution............. 0.02 0.10 0.26 0.28
Extraordinary item--basic.................................... -- -- (0.59) --
--assuming dilution.......................... -- -- (0.57) --
Net income (loss)--basic..................................... 0.02 0.11 (0.32) 0.29
--assuming dilution........................... 0.02 0.10 (0.31) 0.28
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with SFAS 128.
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 in August 1996.
During the second quarter of 1997, the Company recorded charges of
$24,700,000 primarily for the write-down of trade accounts receivable and
inventories. The charge is comprised of $8,400,000 in cost of sales and
$16,300,000 in selling, general and administrative expenses.
During the third quarter of 1997, the Company recorded charges of
$65,400,000 primarily for the write-down of obsolete and slow-moving
inventories, uncollectible trade accounts receivable, other non-productive
assets and costs for restructuring manufacturing, store operations and corporate
administrative functions. The charge is comprised of $28,100,000 in cost of
sales, $3,500,000 in transportation expense and $33,800,000 in selling, general
and administrative expenses.
F-30
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) -- (CONTINUED)
The write-down of uncollectible trade accounts receivable related to
increases in receivables balances arising principally as a result of earlier
sales initiatives that included, among other things, extended credit terms and
efforts to expand the Company's customer base, and operational and systems
integration issues that resulted in limited access by sales center personnel to
certain account information. In addition, in an effort to improve customer
service, authority to extend credit was decentralized and assigned to management
at the retail sales centers. Sales resulting from these initiatives were a
result of products being shipped under defined terms to customers, with the full
expectation of invoiced amounts being paid in full within the terms of the sale.
In response to deterioration in the aging of the Company's accounts receivable,
primarily as a result of the sales initiatives and operational and systems
integration issues, the Company increased collection efforts and undertook
detailed reviews of collectibility, and subsequently recorded increases in the
reserve for doubtful accounts of $7,600,000 in the second quarter of fiscal year
1997, and $13,700,000 as of the third quarter of fiscal year 1997. The sales
initiatives, which began in the fourth quarter of fiscal year 1996, were
discontinued by the end of the second quarter of fiscal year 1997. In addition,
by the end of the second quarter of fiscal year 1997, the Company moved to a
more centralized credit approval process and implemented more stringent credit
policies.
At the end of the second quarter of fiscal year 1997, the Company also
extensively reviewed its finished product inventories, including the various
patterns, shapes and sizes of finished product inventories. Based on this
analysis, an adjustment of approximately $8,400,000 was recorded as of the end
of the second quarter of fiscal year 1997 to reflect the write-down of inventory
believed to be slow moving and/or obsolete, or out of balance with other related
products. Management believes that delays in systems integration resulted in
impaired inventory management, and, in particular, resulted in an imbalance in
inventory mix. During the third quarter of fiscal year 1997, the Company's new
management undertook an additional study of the business and its operations and
determined that it would reduce the number of SKU's offered for sale by the
Company and would discontinue additional patterns. These actions, coupled with
the results of physical inventories and the delay in systems integration,
resulted in a need to record additional inventory provisions of $28,100,000
consisting of $14,200,000 related to results of physical inventories, $7,300,000
of additional write-down for obsolete inventory, $4,500,000 write-down for
certain other inventory accounts and $2,100,000 write-down for raw materials.
Management believes that progress in its systems integration resulted in
substantially improved inventory management by the end of the third quarter of
fiscal year 1997.
The balance of the charges recorded in the second quarter of fiscal year
1997 consisted of $2,500,000 in respect of terminated employees and $6,200,000
in respect of other charges, primarily related to liabilities incurred for lease
terminations, executive search fees, and other items. The balance of the charges
recorded in the third quarter of fiscal year 1997 consisted of $4,200,000 in
respect of terminated employees, $8,500,000 million in respect of accrued
expenses, primarily related to freight and insurance, $5,300,000 in respect of
fixed asset impairment and $5,600,000 in respect of other charges, primarily
related to write-down of notes, non-trade receivables and certain other assets.
F-31
<PAGE>
[Artwork appears here]
The Company produces and distributes a broad line of high-quality ceramic wall
and floor tile products for both residential and commercial applications.
<PAGE>
[ALTERNATIVE PAGE FOR APPENDIX PROSPECTUS]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JUNE , 1998
UP TO 7,000,000 SHARES
DAL-TILE INTERNATIONAL INC.
COMMON STOCK
-----------------
THIS PROSPECTUS RELATES TO UP TO 7,000,000 SHARES OF COMMON STOCK OF DAL-TILE
INTERNATIONAL INC., PLUS UP TO AN ADDITIONAL 1,050,000 SHARES OF COMMON STOCK
WITH RESPECT TO OVER-ALLOTMENTS, IF ANY, WHICH MAY BE DELIVERED BY ARMSTRONG
WORLD INDUSTRIES, INC. OR A SUBSIDIARY THEREOF ("AWI"), AT ITS OPTION,
PURSUANT TO THE TERMS OF THE % PARTICIPATING EXCHANGEABLE PREMIUM
SECURITIES-SM- DUE JULY 1, 2001 (THE "PEPS") OF AWI. THIS PROSPECTUS IS
BEING DELIVERED AS APPENDIX A TO THE AWI PROSPECTUS DATED THE DATE
HEREOF COVERING THE SALE OF 7,000,000 PEPS-SM- PLUS UP TO AN
ADDITIONAL 1,050,000 PEPS SOLELY TO COVER OVER-ALLOTMENTS, AND MAY
NOT BE DELIVERED UNLESS ACCOMPANIED BY AND AS AN APPENDIX TO THE
AWI PROSPECTUS. THE AWI PROSPECTUS DOES NOT CONSTITUTE A PART OF
THIS PROSPECTUS AND IS NOT INCORPORATED HEREIN BY REFERENCE.
DAL-TILE INTERNATIONAL INC. WILL HAVE NO OBLIGATIONS WITH
RESPECT TO THE PEPS. FOR A DETAILED DESCRIPTION OF THE PEPS,
SEE THE AWI PROSPECTUS.
ALL OF THE SHARES OF COMMON STOCK COVERED HEREBY ARE BENEFICIALLY OWNED BY AWI.
DAL-TILE WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE PEPS OR THE
DELIVERY THEREUNDER OF SHARES OF COMMON STOCK COVERED HEREBY. IN A
CONCURRENT TRANSACTION, AWI IS OFFERING 9,000,000 SHARES OF COMMON STOCK
PURSUANT TO A SEPARATE PROSPECTUS OF DAL-TILE. DAL-TILE WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SUCH SHARES OF COMMON
STOCK BY AWI. THE COMMON STOCK IS TRADED ON THE NYSE UNDER THE
SYMBOL "DTL." ON JUNE , 1998, THE REPORTED LAST SALE PRICE
OF COMMON STOCK ON THE NYSE WAS $ PER SHARE.
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR INFORMATION THAT SHOULD BE
CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
-SM-SERVICE MARK OF MORGAN STANLEY & CO. INCORPORATED
JUNE , 1998
<PAGE>
[ALTERNATIVE PAGE FOR APPENDIX PROSPECTUS]
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING STOCKHOLDER OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 11
Use of Proceeds................................ 19
Dividend Policy................................ 19
Price Range of Common Stock.................... 19
Capitalization................................. 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Ceramic Tile Industry.......................... 33
Business....................................... 35
Management..................................... 48
<CAPTION>
PAGE
---------
<S> <C>
Principal and Selling Stockholders............. 51
Description of Capital Stock................... 54
Description of Second Amended Credit
Agreement.................................... 56
Shares Eligible for Future Sale................ 58
Plan of Distribution........................... 60
Legal Matters.................................. 61
Experts........................................ 61
Available Information.......................... 62
Incorporation of Certain Documents by
Reference.................................... 62
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
This Prospectus contains or incorporates statements that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
subject to the safe harbor created by such sections. Such statements appear in a
number of places in this Prospectus and in the documents incorporated herein by
reference and may include statements regarding, among other matters, the intent,
belief or current expectations of the Company or its officers. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance, and involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements to differ materially from the future results, performance or
achievements expressed or implied in such forward-looking statements. Such
factors include, but are not limited to, the specific risk factors described
under the caption "Risk Factors."
1
<PAGE>
[ALTERNATIVE PAGE FOR APPENDIX PROSPECTUS]
THE PEPS OFFERING
<TABLE>
<S> <C>
PEPS Offering..................... AWI is offering 7,000,000 PEPS which AWI may redeem at
maturity by delivering up to 7,000,000 shares of Common
Stock.
Concurrent Offering............... In a concurrent transaction, the Selling Stockholder is
offering 9,000,000 shares of Common Stock (the
"Offering") pursuant to certain registration rights
under the Shareholders Agreement (plus an additional
1,315,822 shares to cover over-allotments, if any). The
18,365,822 shares beneficially owned by the Selling
Stockholder immediately preceding the Offering represent
34.4% of the outstanding Common Stock. Immediately
following the Offering, the Selling Stockholder will
beneficially own 9,365,822 shares, or approximately
17.5% of the outstanding Common Stock (or 8,050,000
shares, representing 15.1% of the outstanding Common
Stock, if the over-allotment option is exercised in
full).
Use of proceeds................... The Company will not receive any of the proceeds of the
PEPS Offering or the Offering.
NYSE symbol for Common Stock...... DTL
</TABLE>
RISK FACTORS
See "Risk Factors" beginning on page 11 for information that should be
carefully considered by prospective investors.
8
<PAGE>
[ALTERNATIVE PAGE FOR APPENDIX PROSPECTUS]
PLAN OF DISTRIBUTION
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below have severally agreed to purchase, and AWI has agreed to sell to
them, the number of PEPS set forth opposite the names of such Underwriters
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME PEPS
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Morgan Stanley & Co. Incorporated...................................................................
Smith Barney Inc....................................................................................
------------
Total............................................................................................... 7,000,000
------------
------------
</TABLE>
The Company has been advised by the Underwriters that they propose to offer
part of the PEPS directly to the public at the public offering price set forth
on the cover page of the AWI Prospectus and part to certain dealers at a price
that represents a concession not in excess of % of the public offering price
of the PEPS. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of % of the public offering price of the PEPS to
other Underwriters or to certain dealers. After the initial offering of the
PEPS, the offering price and other selling terms may from time to time be varied
by the Underwriters.
The Company is advised that under the terms of the PEPS, AWI is obligated to
deliver to holders thereof at maturity a number of shares of Common Stock or
other Reference Property per PEPS (as defined in the AWI Prospectus) at
specified rates or cash in lieu thereof. For a description of the PEPS, see the
AWI Prospectus. The Company has no obligations under or with respect to the
PEPS, which are securities of AWI and are not securities of the Company.
Dal-Tile, the Selling Stockholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
In a concurrent transaction, AWI is offering 9,000,000 shares of Common
Stock (plus an additional 1,315,822 shares to cover over-allotments, if any)
pursuant to a separate prospectus of Dal-Tile. Dal-Tile will not receive any of
the proceeds from the sale of such shares of Common Stock by AWI.
The Company has been advised that AWI has granted to the Underwriters an
option, exercisable for 30 days from the date of the AWI Prospectus, to purchase
up to 1,050,000 additional PEPS from AWI at the public offering price set forth
on the cover page of the AWI Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, incurred in the sale of the PEPS offered
pursuant to the AWI Prospectus. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional PEPS as the number set
forth next to such Underwriter's name in the preceding table bears to the total
number of PEPS set forth next to the names of all Underwriters in the preceding
table.
Each of the Company, the Company's directors and executive officers (for so
long as they remain in such capacities), DTI Investors and AWI has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not, during the period ending 90 days after the date of the AWI Prospectus (1)
offer, pledge, loan, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any securities are then
owned by such person or are thereafter acquired directly from the Company), (2)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of the ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) of this paragraph is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise,
60
<PAGE>
[ALTERNATIVE PAGE FOR APPENDIX PROSPECTUS]
(3) in the case of AWI and DTI Investors, make any demand for, or exercise any
right with respect to, registration of any shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for, Common Stock or
(4) in the case of Dal-Tile, file a registration statement with the Commission
for an offering of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (other than a registration
statement on Form S-8 or an equivalent form), other than, with respect to
clauses (1), (2), (3) and (4) above, (i) the PEPS, (ii) the offer and sale of
the shares of Common Stock made in connection with the Offering and the PEPS
Offering and (iii) options to purchase Common Stock, or shares of Common Stock
issued or issuable under the Company's existing stock option and stock purchase
plans.
The PEPS will be a new issue of securities with no established trading
market and will not be listed on any national securities exchange or admitted to
trading in any automated securities quotation system. The Underwriters intend to
make a market in the PEPS, subject to applicable laws and regulations. The
Underwriters are not obligated to do so, however, and any such market-making may
be discontinued at any time at the sole discretion of the Underwriters without
notice. Accordingly, no assurance can be given as to the liquidity of the market
for the PEPS.
From time to time, one or more of the Underwriters has provided, and may
continue to provide, investment banking services to Dal-Tile and AWI.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations),
New York, New York, for the Underwriters by Davis Polk & Wardwell, New York, New
York, and for the Selling Stockholder by Buchanan Ingersoll Professional
Corporation, Pittsburgh, Pennsylvania.
EXPERTS
The Consolidated Financial Statements (including the related schedule
incorporated by reference herein) of Dal-Tile International Inc. at January 2,
1998 and January 3, 1997 and for each of the three years in the period ended
January 2, 1998, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere or incorporated by reference herein, and are
included or incorporated in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
61
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The following table sets forth the estimated expenses to be borne by the
Company, in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting and commissions.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 38,511
NASD filing fee................................................... 13,555
Accounting fees and expenses...................................... 250,000
Legal fees and expenses........................................... 300,000
Blue Sky expenses and counsel fees................................ 3,000
Printing and engraving expenses................................... 250,000
Transfer Agent and Registrar's fees and expenses.................. 2,500
Miscellaneous expenses............................................ 434
---------
Total....................................................... $ 858,000
---------
---------
</TABLE>
- ------------------------
* Except for the SEC registration fee and the NASD filing fee, all the
foregoing expenses have been estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of the Second Amended and Restated Certificate of
Incorporation of Dal-Tile provides as follows:
"To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, a Director of the Corporation shall
not be liable to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a Director."
Section 145 of the General Corporation Law of the State of Delaware provides
as follows:
Under certain circumstances a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at its request in such
capacity in another corporation or business association, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
In a derivative action, I.E., one by or in the right of the corporation,
indemnification may be made only for expenses actually and reasonably incurred
by a director, officer, employee or agent of the corporation, or a person who is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or business association in connection
with the defense or settlement of an action or suit, if such person has acted in
good faith and in a manner that he or she reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made if such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court in which the action or
suit was brought shall determine upon application that the defendant is fairly
and reasonably entitled to indemnity for such expenses despite such adjudication
of liability.
II-1
<PAGE>
The Company has entered into agreements to provide indemnification for its
directors in addition to the indemnification provided for in the Restated Bylaws
of the Company. These agreements, among other things, indemnify the directors,
to the fullest extent provided by Delaware law, for certain expenses (including
attorney's fees), losses, claims, liabilities, judgments, fines and settlement
amounts incurred by such indemnitee in any action or proceeding, including any
action by or in the right of the Company, on account of services as a director
or officer of any affiliate of the Company, or as a director or officer of any
other company or enterprise that the indemnitee provides services to at the
request of the Company.
Insofar as limitations of, or indemnification for, liabilities arising under
the Securities Act may be permitted for directors and executive officers
pursuant to the foregoing provisions, the Company understands that, in the
opinion of the Commission, such limitations of, and indemnification for,
liabilities is against public policy as expressed in the Securities Act and is
therefore unenforceable.
The form of Indemnification Agreement filed as Exhibit 1.1 provides for the
indemnification of the Company, its controlling persons, its directors and
certain of its officers by the Underwriters against certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1. Form of Indemnification Agreement.
1.2. Form of Underwriting Agreement, among the Underwriters and AWI.
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 Company's Current Report on Form 8-K filed on January 16, 1996 and
incorporated herein by reference.)
4.1. Specimen form of certificate for Common Stock. (Filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (No. 333-5069) and incorporated herein by reference.)
5.1. Opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel to the Company, as to the legality of the
securities being offered.
23.1. Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1).
23.2. Consent of Ernst & Young LLP.
24.1. Powers of Attorney.*
</TABLE>
- ------------------------
*Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that:
II-2
<PAGE>
(1) For purposes of determining any liability under the Securities Act,
each filing of the Company's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT ON FORM S-3 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS ON THE 23RD DAY OF JUNE,
1998.
<TABLE>
<S> <C> <C>
DAL-TILE INTERNATIONAL INC.
/s/ JACQUES R. SARDAS
-----------------------------------------
By: Name: Jacques R. Sardas
Title: President, Chief Executive Officer
and Chairman of the Board of Directors
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE FIRST ABOVE INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S> <C>
/s/ JACQUES R. SARDAS President, Chief Executive
- ------------------------------ Officer and Chairman of
Jacques R. Sardas the Board of Directors
* Executive Vice President,
- ------------------------------ Chief Financial Officer,
William C. Wellborn Treasurer and Assistant
Secretary (Principal
Financial and Accounting
Officer)
* Director
- ------------------------------
John M. Goldsmith
* Director
- ------------------------------
Charles J. Pilliod, Jr.
* Director
- ------------------------------
Henry F. Skelsey
* Director
- ------------------------------
Douglas D. Danforth
* Director
- ------------------------------
Vincent A. Mai
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S> <C>
* Director
- ------------------------------
Norman E. Wells, Jr.
</TABLE>
<TABLE>
<S> <C> <C>
/s/ JACQUES R. SARDAS
*By: ----------------------------------------
Jacques R. Sardas
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1. Form of Indemnification Agreement.
1.2 Form of Underwriting Agreement, among the Underwriters and AWI.
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 Company's Current Report on Form 8-K filed on January 16, 1996 and
incorporated herein by reference.)
4.1. Specimen form of certificate for Common Stock. (Filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (No. 333-5069) and incorporated herein by reference.)
5.1. Opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel to the Company, as to the legality of the
securities being offered.
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1).
23.2. Consent of Ernst & Young LLP.
24.1. Powers of Attorney.*
</TABLE>
- ------------------------
*Previously filed.
<PAGE>
Exhibit 1.1
DAL-TILE INTERNATIONAL INC.
Shares of Common Stock, Par Value $.01 per Share
of Dal-Tile International Inc.
INDEMNIFICATION AGREEMENT
<PAGE>
June __, 1998
The Underwriters named on
Schedules I and II hereto
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
In order to induce the several Underwriters named on Schedule I hereto (the
"SECONDARY SHARES UNDERWRITERS") and the several Underwriters named on Schedule
II hereto (the "PEPS UNDERWRITERS," and together with the Secondary Shares
Underwriters, the "UNDERWRITERS") to enter into the Underwriting Agreement with
Armstrong World Industries, Inc. ("AWI") dated May __, 1998 (the "UNDERWRITING
AGREEMENT"), and in consideration of good and valuable consideration, receipt of
which is hereby acknowledged, and pursuant to the Shareholders Agreement dated
December 29, 1995 (as amended July 15, 1996, the "SHAREHOLDERS AGREEMENT") by
and among Dal-Tile International Inc., a Delaware corporation ("DAL-TILE"), AEA
Investors Inc., DTI Investors LLC ("DTI Investors"), AWI, Armstrong Enterprises,
Inc. and Armstrong Cork Finance Corporation, Dal-Tile enters into this Agreement
with the Underwriters in connection with the filing for registration under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), of up to ___ shares
(which number includes up to ______ shares to cover over-allotments) of Common
Stock, par value $.01, of Dal-Tile ("COMMON STOCK"). Of these shares of Common
Stock, (i) up to ________ shares (which number includes up to ______ shares to
cover over-allotments) are being offered for sale by AWI as selling shareholder
in connection with the offer and sale of its ____________ __% Participating
Exchangeable Premium Securities due _______, 2001 (the "PEPS") (in exchange for
which PEPS, the holders of such PEPS at maturity thereof may receive Common
Stock pursuant to the terms of the PEPS) (such shares, the "PEPS SHARES"), and
(ii) ________ shares (which number includes up to ______ shares to cover
over-allotments) are being offered for sale by AWI as selling shareholder (such
shares the "SECONDARY SHARES," and together with the PEPS Shares, the "SHARES").
<PAGE>
Pursuant to the Shareholders Agreement, Dal-Tile has filed with the
Securities and Exchange Commission (the "COMMISSION") a registration statement,
including a prospectus, relating to the Shares. The registration statement as
amended at the time it becomes effective, including the information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Securities Act, is hereinafter referred to as
the "DAL-TILE REGISTRATION STATEMENT" and the prospectus in the form first used
to confirm sales of Secondary Shares (the "SECONDARY SHARES PROSPECTUS") and the
prospectus (the "PEPS SHARES PROSPECTUS") in the form included as an exhibit in
the AWI Prospectus first used to confirm sales of PEPS is hereinafter referred
to as a "DAL-TILE PROSPECTUS." The term "Dal-Tile preliminary prospectus" means
a preliminary prospectus relating to either the Secondary Shares or the PEPS
Shares. As used herein, the terms "Dal-Tile Prospectus" and "Dal-Tile
preliminary prospectus" shall include in each case the documents, if any,
incorporated by reference therein. If Dal-Tile has filed an abbreviated
registration statement to register additional shares of Common Stock pursuant to
Rule 462(b) under the Securities Act (the "RULE 462 DAL-TILE REGISTRATION
STATEMENT"), then any reference herein to the term "DAL-TILE REGISTRATION
STATEMENT" shall be deemed to include such Rule 462 Dal-Tile Registration
Statement.
AWI has filed with the Commission, and the Commission has declared
effective, a registration statement, including a prospectus, relating to, among
other securities, certain debt securities of AWI and has filed with, or
transmitted for filing to, or shall promptly hereafter file with or transmit for
filing to, the Commission a prospectus supplement (the "AWI PROSPECTUS
SUPPLEMENT") specifically relating to the PEPS pursuant to Rule 424 under the
Securities Act. The term "AWI REGISTRATION STATEMENT" means the registration
statement, including the exhibits thereto, as amended to the date of this
Agreement. The term "BASIC AWI PROSPECTUS" means the prospectus included in the
AWI Registration Statement. The term "AWI PROSPECTUS" means the Basic AWI
Prospectus together with the AWI Prospectus Supplement. The term "preliminary
prospectus" means a preliminary prospectus supplement specifically relating to
the PEPS, together with the Basic AWI Prospectus. As used herein, the terms
"Basic AWI Prospectus," "AWI Prospectus" and "the AWI preliminary prospectus"
shall include in each case the documents, if any, incorporated by reference
therein.
The terms "supplement," "amendment" and "amend" as used herein shall
include all documents subsequently filed by AWI or Dal-Tile with the Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")
that are deemed to be incorporated by reference in the AWI Prospectus or either
Dal-Tile Prospectus, respectively.
2
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF DAL-TILE. Dal-Tile represents and
warrants to and agrees with each of the Underwriters that:
(a) The Dal-Tile Registration Statement has become effective; no stop
order suspending the effectiveness of the Dal-Tile Registration Statement
is in effect, and no proceedings for such purpose are pending before or, to
the knowledge of Dal-Tile, threatened by the Commission.
(b) (i)Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in each Dal-Tile Prospectus
complied or will comply when so filed in all material respects with the
Exchange Act and the applicable rules and regulations of the Commission
thereunder,(ii) the Dal-Tile Registration Statement, when it became
effective, did not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading,(iii) the Dal-Tile Registration Statement
and each Dal-Tile Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder and
(iv) each Dal-Tile Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set
forth in this paragraph do not apply to statements or omissions in the
Dal-Tile Registration Statement or either Dal-Tile Prospectus based upon
information relating to any Underwriter furnished to Dal-Tile in writing by
such Underwriter through you expressly for use therein.
(c) Dal-Tile has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in each Dal-Tile Prospectus and is
duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on Dal-Tile and its subsidiaries, taken as a whole.
(d) (i) Each "significant subsidiary" (as that term is used in Rule
1.02(w) of Regulation S-X under the Securities Act) of Dal-Tile, which for
purposes of this Agreement shall be deemed to include, without limitation,
3
<PAGE>
Dal-Tile Group Inc., Dal-Tile Corporation, Inc. and Dal-Tile Mexico S.A. de
C.V., (each a "MATERIAL SUBSIDIARY") has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in each Dal-Tile
Prospectus and, to the extent applicable under foreign law, is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on Dal-Tile and its subsidiaries, taken as a whole;(ii) all of the
issued shares of capital stock of each Material Subsidiary of Dal-Tile (x)
have been duly and validly authorized and issued, are fully paid and
non-assessable and (y) except as provided by the Bank Credit Agreement
dated August 14, 1996 and as amended June 19, 1997 and September 30, 1997,
among Dal-Tile and the banks signatory thereto (the "Credit Agreement"),
are owned directly or indirectly by Dal-Tile, free and clear of all liens,
encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and delivered
by Dal-Tile.
(f) The authorized capital stock of Dal-Tile conforms as to legal
matters to the description thereof contained in each Dal-Tile Prospectus.
(g) The outstanding shares of Common Stock (including the Shares)
have been duly authorized and are validly issued, fully paid and
non-assessable and are not subject to any preemptive or similar rights.
(h) The execution and delivery by Dal-Tile of, and the performance by
Dal-Tile of its obligations under, this Agreement will not contravene any
provision of (i) applicable law or (ii) the certificate of incorporation or
by-laws of Dal-Tile or (iii) any agreement or other instrument binding upon
Dal-Tile or any of its subsidiaries, or (iv) any judgment, order or decree
of any governmental body, agency or court having jurisdiction over Dal-Tile
or any subsidiary, except where, in the case of clauses (i), (iii) and
(iv), such contravention would not, individually or in the aggregate, have
a material adverse effect on Dal-Tile and its subsidiaries, taken as a
whole, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by Dal-Tile of its obligations under this Agreement, except
such as have been obtained under the Securities
4
<PAGE>
Act and as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares.
(i) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of Dal-Tile and its subsidiaries, taken as a whole, from that
set forth in each Dal-Tile Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(j) Other than as set forth in each of the Dal-Tile Prospectuses,
there are no legal or governmental proceedings pending or, to the knowledge
of Dal-Tile, threatened to which Dal-Tile or any of its subsidiaries is a
party or to which any of the properties of Dal-Tile or any of its
subsidiaries is subject that are required to be described in the Dal-Tile
Registration Statement or either Dal-Tile Prospectus and are not so
described or any contracts or other documents that are required to be
described in the Dal-Tile Registration Statement or either Dal-Tile
Prospectus or to be filed as exhibits to the Dal-Tile Registration
Statement that are not described or filed as required.
(k) Each preliminary prospectus filed as part of the Dal-Tile
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, complied
when so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(l) Dal-Tile is not an "investment company" as such term is defined
in the Investment Company Act of 1940, as amended.
(m) Dal-Tile and its subsidiaries are in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL
LAWS"), have received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and are in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have
a material adverse effect on Dal-Tile and its subsidiaries, taken as a
whole.
5
<PAGE>
To the best of Dal-Tile's knowledge, there are no costs or liabilities
associated with Environmental Laws (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have
a material adverse effect on Dal-Tile and its subsidiaries, taken as a
whole.
(n) Except as described in the Dal-Tile Registration Statement and
each Dal-Tile Prospectus (including the description of the Shareholders
Agreement), there are no contracts, agreements or understandings between
Dal-Tile and any person granting such person the right to require Dal-Tile
to file a registration statement under the Securities Act with respect to
any securities of Dal-Tile or to require Dal-Tile to include such
securities with the Shares registered pursuant to the Dal-Tile Registration
Statement. No such rights, if any, were exercised in connection with the
sale of the Shares except by AWI.
(o) Except as disclosed in the Dal-Tile Registration Statement and
each Dal-Tile Prospectus, subsequent to the respective dates as of which
information is given in the Dal-Tile Registration Statement and each
Dal-Tile Prospectus,(i) Dal-Tile and its subsidiaries have not incurred any
liability or obligation, direct or contingent that is material to Dal-Tile
and its subsidiaries, taken as a whole, nor entered into any material
transaction not in the ordinary course of business that is material to
Dal-Tile and its subsidiaries, taken as a whole;(ii) Dal-Tile has not
purchased any of its outstanding capital stock, nor declared, paid or
otherwise made any dividend or distribution of any kind on its capital
stock other than ordinary and customary dividends;(iii) there has not been
any material change in the capital stock, short-term debt or long-term debt
of Dal-Tile and its consolidated subsidiaries; and (iv) there has not been
any development having or which could reasonably be expected to have a
material adverse effect on Dal-Tile and its subsidiaries, taken as a whole.
(p) Dal-Tile and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as do not materially adversely affect
Dal-Tile and its subsidiaries, taken as a whole, and do not interfere with
the use made and proposed to be made of such property by Dal-Tile and its
subsidiaries taken as a whole; and any real property and buildings
6
<PAGE>
held under lease by Dal-Tile and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by Dal-Tile and its subsidiaries.
(q) No material labor dispute with the employees of Dal-Tile or any
of its subsidiaries exists, or, to the knowledge of Dal-Tile, is imminent;
and Dal-Tile is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could result in any material adverse
effect on Dal-Tile and its subsidiaries, taken as a whole.
(r) Dal-Tile and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities ("PERMITS") necessary to conduct their
respective businesses, and neither Dal-Tile nor any such subsidiary has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
Dal-Tile and its subsidiaries, taken as a whole.
(s) Dal-Tile maintains with respect to itself and each of its
subsidiaries a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations;(ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability;(iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(t) All of the outstanding shares of capital stock of Dal-Tile Group
have been duly authorized and validly issued, are fully paid and
non-assessable and are owned directly or indirectly by Dal-Tile, free and
clear of all liens, encumbrances, equities or claims;
2. AGREEMENTS OF DAL-TILE (CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS
UNDER THE UNDERWRITING AGREEMENT).
(a) Dal-Tile agrees that it will not, for a period of 90 days
following the date of this Agreement, without the prior written consent of
7
<PAGE>
Morgan Stanley & Co. Incorporated,(i) offer, pledge, loan, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for shares of Common Stock (except through gifts to persons
who agree in writing to be bound by the restrictions of this paragraph), or
(ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of the ownership of
shares of Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of shares of Common Stock or
such other securities, in cash or otherwise. The foregoing sentence shall
not apply to the issuance by Dal-Tile of shares of Common Stock or options
to purchase Common Stock under existing stock option and stock purchase
plans. Dal-Tile agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated (which consent shall not be unreasonably
withheld), during the period ended 90 days after the date following this
Agreement it will not file a registration statement with the Commission for
an offering of Common Stock or any securities convertible into, or
exercisable or exchangeable for Common Stock other than the filing of a
registration statement on Form S-8 or an equivalent form.
(b) Dal-Tile shall deliver to the Underwriters on the Closing Date
(as defined in the Underwriting Agreement) a certificate, dated the Closing
Date and signed by an executive officer of Dal-Tile, to the effect that the
representations and warranties of Dal-Tile contained in this Agreement are
true and correct as of the Closing Date and that Dal-Tile has complied with
all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date (with such
exceptions and modifications as such officer may deem appropriate).
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) Dal-Tile shall use reasonable efforts to ensure that the
Underwriters shall have received on the Closing Date an opinion of Fried,
Frank, Harris, Shriver & Jacobson, counsel for Dal-Tile, dated the Closing
Date, to the effect that:
(i) Dal-Tile is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
8
<PAGE>
the corporate power and authority to own its property and to conduct
its business as described in each Dal-Tile Prospectus;
(ii) Dal-Tile Group Inc., a Delaware corporation ("Dal-Tile
Group"), is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the corporate
power and authority to own its property and to conduct its business as
described in each Dal-Tile Prospectus;
(iii) the authorized capital stock of Dal-Tile is as set forth
in each Dal-Tile Prospectus under the caption, "Capitalization";
(iv) the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) all of the outstanding shares of capital stock of
Dal-Tile Group have been duly authorized and validly issued, are fully
paid and non-assessable and are owned directly or indirectly by
Dal-Tile;
(vi) this Agreement has been duly authorized, executed and
delivered by Dal-Tile;
(vii) the execution and delivery by Dal-Tile of, and the
performance by Dal-Tile of its obligations under, this Agreement do
not and will not (a) contravene any provision of the Restated
Certificate of Incorporation or Restated By-Laws of Dal-Tile or
Dal-Tile Group Inc., (b) contravene, result in a breach of or
constitute a default under the Credit Agreement or any other agreement
or instrument binding upon Dal-Tile (or any of its Subsidiaries) (1)
that is listed as an exhibit to the Dal-Tile Registration Statement or
Dal-Tile's Annual Report on Form 10-K for the fiscal year ended
January 3, 1998 or (2) that is listed as an exhibit to any document
filed with the Commission subsequent to January 3, 1998 and prior to
the date of this opinion that is incorporated or deemed to be
incorporated in the Registration Statement or (c) violate (1) any
present statute, rule or regulation of any governmental agency or
authority of the United States of America or the State of New York or
any present provision of the General Corporation Law of the State of
Delaware (the "DGCL") applicable to Dal-Tile, or (2) any judgment,
decree or order of any court or governmental agency or body of the
United States of America or the State of New York or of the State of
Delaware
9
<PAGE>
pursuant to the DGCL set forth in the Officers' Certificate to be
attached to such opinion; PROVIDED, HOWEVER, that such counsel need
express no opinion with respect to any violation, breach or default
not ascertainable from the face of any such agreement, instrument,
judgment, decree or order, or arising under or based upon any
cross-default provision insofar as such violation relates to a default
under an agreement that is not referred to in subclause (1) or (2) of
clause (b) above or arising under or based upon any covenant of a
financial or numerical nature or which requires arithmetic
computation.
(viii) No consent, approval, authorization, order, qualification
of or registration with any court or government agency of the United
States of America or the States of New York or Delaware (as it relates
to the General Corporation Law of the State of Delaware) is required
for the performance by Dal-Tile of its obligations hereunder (except
such as have been obtained under the Securities Act and such as may be
required under state securities or Blue Sky laws) in connection with
the sale of the Shares;
(ix) the statements (A) in each Dal-Tile Prospectus under the
captions ["Principal and Selling Shareholders--Shareholders
Agreement,"] "Description of Capital Stock," "Description of Second
Amended Credit Agreement,"and (B) [in the Dal-Tile Registration
Statement in Item 15] in each case insofar as such statements
constitute summaries of the legal matters and documents referred to
therein, fairly present the information disclosed therein in all
material respects;
(x) Dal-Tile is not an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended and;
(xi) (a) The Dal-Tile Registration Statement and each of the
Dal-Tile Prospectuses (in each case excluding the documents
incorporated or deemed to be incorporated by reference therein), as of
their respective effective or issue dates (other than the financial
statements, the notes and schedules thereto and the other financial
information included therein or omitted therefrom, as to which we
express no opinion), each appeared on its face to be responsive as to
form in all material respects to the requirements of the Securities
Act and the rules and regulations of the Commission thereunder
10
<PAGE>
and (b) the documents incorporated or deemed to be incorporated by
reference in the Dal-Tile Prospectus (other than the financial
statements, the notes and schedules thereto and the other financial
information included therein or omitted therefrom, as to which we
express no opinion), when they were filed with the Commission, each
appeared on its face to be responsive as to form in all material
respects to the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
In addition, such counsel shall state that in the course of the
preparation by Dal-Tile of the Dal-Tile Registration Statement and each
Dal-Tile Prospectus, such counsel participated in conferences with certain
of the officers and representatives of, and the independent public
accountants for, Dal-Tile, at which the contents of the Dal-Tile
Registration Statement and each Dal-Tile Prospectus were discussed.
Between the date of the effectiveness of the Dal-Tile registration
Statement and the time of delivery of such opinion, such counsel attended
additional conferences with certain of the officers and representatives of
Dal-Tile, at which the contents of each Dal-Tile Prospectus were discussed
to a limited extent. Such counsel shall state that, given the limitations
inherent in the independent verification of factual matters and the
character of determinations involved in the registration process, such
counsel shall not pass upon or assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Dal-Tile
Registration Statement or the Dal-Tile Prospectuses, except as set for the
in paragraph (ix) above. Subject to the foregoing and on the basis of the
information gained in the performance of the services referred to above,
including information obtained from officers and other representatives of,
and the independent public accountants for, Dal-Tile, such counsel shall
state that no facts have come to their attention that have caused them to
believe that the Dal-Tile Registration Statement, as of its effective date,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein not misleading, or that either Dal-Tile Prospectus,
as of [insert pricing date], 1998, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. Also,
subject to the foregoing, such counsel shall state that no facts have come
to their attention in the course of the procedures described in the second
sentence of this paragraph that cause them to believe that each Dal-Tile
Prospectus, as of the date and time of delivery of this letter, contains an
untrue statement of a material fact or omits to state a material fact
required to be
11
<PAGE>
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
Such counsel shall state that they express no view or belief, however, with
respect to financial statements, the notes or schedules thereto or other
financial information included in or incorporated by reference into or
omitted from the Dal-Tile Registration Statement or each Dal-Tile
Prospectus.
(d) Dal-Tile shall use reasonable efforts to ensure that the
Underwriters shall have received on the Closing Date an opinion of Mark A.
Solls, Esq.,Vice-President, Secretary and General Counsel of Dal-Tile,
dated the Closing Date, to the effect that:
(i) Dal-Tile is duly qualified to transact business and is in
good standing in each jurisdiction listed on the attached Schedule
III;
(ii) Dal-Tile Group is duly qualified to transact business and
is in good standing in each jurisdiction listed on the attached
Schedule IV; and
(iii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which
Dal-Tile or any of its subsidiaries is a party or to which any of the
properties of Dal-Tile or any of its subsidiaries is subject that are
required to be described in the Dal-Tile Registration Statement or
either the Dal-Tile Prospectus and are not so described or of any
contracts or other documents that are required to be described in the
Dal-Tile Registration Statement or either Dal-Tile Prospectus or to be
filed as exhibits to the Dal-Tile Registration Statement that are not
described or filed as required.
(e) Dal-Tile shall use reasonable efforts to ensure that the
Underwriters shall have received on the Closing Date an opinion of
Consultoria Juridicia Mercantil, S.A. de C.V., counsel for Materiales
Ceramicos, S.A. de C.V. and Dal-Tile Mexico, S.A. de C.V., dated the
Closing Date, to the effect that:
(i) each of Dal-Tile Mexico, S.A. de C.V. and Materiales
Ceramicos, S.A. de C.V. (the "MEXICAN SUBSIDIARIES") is a corporation
duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, with full corporate power
and authority to own, lease, and operate its
12
<PAGE>
properties and to conduct its business as described in the Dal-Tile
Registration Statement and each Dal-Tile Prospectus; and (x) all the
outstanding shares of capital stock of each of the Mexican
Subsidiaries have been duly authorized and validly issued, are fully
paid and non-assessable, and (y) all the outstanding shares of capital
stock of each of the Mexican Subsidiaries are owned by Dal-Tile
directly or indirectly (except for directors' qualifying shares in the
case of the Mexican Subsidiaries), free and clear of any lien,
encumbrances, claim or equity;
(ii) none of the Mexican Subsidiaries is (A) in violation of
its respective certificate of incorporation or bylaws or other
organizational documents, or (B) to the best knowledge of such counsel
after reasonable inquiry, is in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness, except as may be
disclosed in the Dal-Tile Prospectuses;
(iii) neither the execution, delivery or performance by
Dal-Tile of this Agreement conflicts or will conflict with or
constitutes or will constitute a breach of, or default under, the
certificate of incorporation or bylaws or other organizational
documents of any of the Mexican Subsidiaries or any agreement,
indenture, lease or other instrument to which any of the Mexican
Subsidiaries is a party or by which any of them or any of their
respective properties is bound that is an exhibit to the Dal-Tile
Registration Statement, or is known to such counsel after reasonable
inquiry, or will result in the creation or imposition of any lien,
encumbrance, equity or claim upon any property or assets of any of the
Mexican Subsidiaries, nor will any such action result in any violation
of any existing Mexican rule, law, regulation, ruling, judgment,
injunction, order or decree known to such counsel after reasonable
inquiry, and applicable to any of the Mexican Subsidiaries, or any of
their respective properties;
(iv) to the best knowledge of such counsel after reasonable
inquiry, other than as described or contemplated in the Dal-Tile
Prospectuses, there are no legal or governmental proceedings pending
or threatened against any of the Mexican Subsidiaries, or to which any
of the Mexican Subsidiaries, or any of their respective property, is
subject;
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<PAGE>
(v) to the best knowledge of such counsel after reasonable
inquiry, (A) none of the Mexican Subsidiaries is in violation of any
law, ordinance, administrative or governmental rule or regulation
applicable to any of the Mexican Subsidiaries or of any decree of any
Mexican court or governmental agency or body having jurisdiction over
any of the Mexican Subsidiaries and (B) each of the Mexican
Subsidiaries has such Permits as are necessary to own their respective
properties and to conduct their respective business in the manner
described in the Dal-Tile Prospectuses; and each of the Mexican
Subsidiaries has fulfilled and performed all its material obligations
with respect to such Permits and no event has occurred that allows, or
after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of
the holder of any such Permit;
(vi) each of the Mexican Subsidiaries has good and marketable
title to all property (real and personal) described in the Dal-Tile
Prospectuses as being owned by it, free and clear of all liens,
claims, security interests or other encumbrances, except such as are
described in the Dal-Tile Registration Statement and the Dal-Tile
Prospectuses or in a document filed as an exhibit to the Dal-Tile
Registration Statement and all the property described in the Dal-Tile
Prospectuses as being held under lease by each of the Mexican
Subsidiaries is held by it under valid, subsisting and enforceable
leases;
(vii) each of the Mexican Subsidiaries has filed all material
tax returns required by Mexican law to be filed, which returns are
true, complete and correct, and no such Mexican Subsidiary is in
default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto; and
(viii) except as described in the Dal-Tile Registration
Statement and Dal-Tile Prospectuses, the Mexican Subsidiaries (i) are
in compliance in all material respects with Mexican Environmental Laws
(as hereinafter defined) and (ii) have received, and are in compliance
in all material respects with all terms and conditions of, all
material permits, licenses, authorizations or other approvals required
of them under Mexican Environmental Laws to conduct their respective
businesses; and
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(ix) except as described in the Dal-Tile Registration
Statement and Dal-Tile Prospectuses, there are no past or present
actions (including on-site and off-site disposal of Mexican Hazardous
Substances (as hereinafter defined)), omissions or conditions
regarding the Mexican Subsidiaries or any real property upon which any
of them conduct their respective business operations that have formed,
or are reasonably likely to form, the basis of any material claim or
violation against any of the Mexican Subsidiaries (including releases
or discharges of Mexican Hazardous Substances) under Mexican
Environmental Laws.
As used herein, "Mexican Environmental Laws" means any and all
applicable Mexican laws, regulations, rules, ordinances, judgments or
decrees relating to the protection of human health, safety or the
environment, the preservation of natural resources, or to Hazardous
Substances. As used herein, "Mexican Hazardous Substances" means any
and all explosive, radioactive, hazardous, toxic or otherwise
dangerous materials, pollutants, contaminants or wastes regulated
pursuant to Mexican Environmental Laws.
(x) to the best knowledge of such counsel, no labor problem
exists with employees of any Mexican Subsidiary or is imminent that
could adversely affect the Mexican Subsidiaries.
The opinions of Fried, Frank, Harris, Shriver & Jacobson, Mark A.
Solls and Consultoria Juridicia Mercantil, S.A. de C.V. described in
Sections 2(c) and 2(e) above shall be rendered to the Underwriters at the
request of Dal-Tile (and of Materiales Ceramicos, S.A. de C.V. and Dal-Tile
Mexico, S.A. de C.V., in the case of the opinion of Consultoria Juridicia
Mercantil, S.A. de C.V.), and shall so state therein.
(f) Dal-Tile shall use reasonable efforts to ensure that the
Underwriters shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from
Ernst & Young LLP, independent public accountants, containing statements
and information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in each Dal-Tile Registration
Statement and the Dal-Tile Prospectus; PROVIDED that the letter delivered
on the Closing Date shall use a "cut-off date" not earlier than the date
hereof.
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<PAGE>
(g) Dal-Tile shall use reasonable efforts to ensure that the
"lock-up" agreements, each substantially in the form of Exhibit A hereto,
between you and certain stockholders, officers and directors of Dal-Tile
relating to sales and certain other dispositions of shares of Common Stock
or certain other securities, be delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
(h) Dal-Tile shall use reasonable efforts to ensure that the
Underwriters shall have received on each Option Closing Date (as defined in
the Underwriting Agreement) such documents as you may reasonably request
with respect to the good standing of Dal-Tile, the due authorization and
issuance of the Additional Secondary Shares (as defined in the Underwriting
Agreement) and the Shares underlying the Additional PEPS (as defined in the
Underwriting Agreement), as the case may be, and other matters related to
the offering of the Additional Secondary Shares and the Additional PEPS, as
the case may be.
3. ADDITIONAL COVENANTS OF DAL-TILE. In further consideration of the
agreements of the Underwriters herein contained, Dal-Tile further covenants with
each Underwriter as follows:
(a) To furnish to you, without charge, 4 signed copies of the
Dal-Tile Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a conformed copy of the Dal-Tile
Registration Statement (without exhibits thereto) and to furnish to you in
New York City, without charge, prior to 5:00 p.m., New York City time, on
the business day next succeeding the date of this Agreement and during the
period mentioned in Section 3(c) below, as many copies of each Dal-Tile
Prospectus and any supplements and amendments thereto or to the Dal-Tile
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Dal-Tile Registration
Statement or either Dal-Tile Prospectus, to furnish to you a copy of each
such proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file with
the Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such
Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
either Dal-Tile Prospectus is required by law to be delivered in connection
with sales by an Underwriter or dealer, any event shall occur or condition
exist as a
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<PAGE>
result of which it is necessary to amend or supplement such Dal-Tile
Prospectus in order to make the statements therein, in the light of the
circumstances when such Dal-Tile Prospectus is delivered to a purchaser,
not misleading, or if, in the reasonable judgment of the Company or in the
opinion of counsel for the Underwriters, it is necessary to amend or
supplement such Dal-Tile Prospectus to comply with applicable law,
forthwith to prepare, file with the Commission and furnish, at its own
expense, to the Underwriters and to the dealers (whose names and addresses
you will furnish to Dal-Tile) to which Secondary Shares or PEPS may have
been sold by you on behalf of the Underwriters and to any other dealers
upon request, either amendments or supplements to such Dal-Tile Prospectus
so that the statements in such Dal-Tile Prospectus as so amended or
supplemented will not, in the light of the circumstances when such Dal-Tile
Prospectus is delivered to a purchaser, be misleading or so that such
Dal-Tile Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to Dal-Tile's security holders and to
you as soon as practicable an earning statement covering the twelve-month
period beginning on the first day of the first full fiscal quarter after
the Closing Date that satisfies the provisions of Section 11(a) of the
Securities Act and the rules and regulations of the Commission thereunder.
4. EXPENSES. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, Dal-Tile agrees
to pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements
and expenses of accountants and counsel for Dal-Tile and counsel for AWI in
connection with the registration and delivery of the Secondary Shares under
the Securities Act and all other fees or expenses in connection with the
preparation and filing of the Dal-Tile Registration Statement, any Dal-Tile
preliminary prospectus, each Dal-Tile Prospectus and amendments and
supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof to
the Underwriters and dealers, in the quantities hereinabove specified, (ii)
the cost of printing or producing any Blue Sky or Legal Investment
memorandum in connection with the offer and sale of the Shares under state
securities laws and all expenses in
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<PAGE>
connection with the qualification of the Shares for offer and sale under
state securities laws as provided in Section 3(d) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with
the Blue Sky or Legal Investment memorandum, (iii) all filing fees and the
reasonable fees and disbursements of counsel to the Underwriters incurred
in connection with the review and qualification of the offering of the
Shares by the National Association of Securities Dealers, Inc., (iv) all
costs and expenses incident to listing the Shares on the NYSE, (v) the
costs and charges of any transfer agent, registrar or depositary for the
Shares, (vi) the costs and expenses of Dal-Tile relating to investor
presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation,
expenses associated with the production of road show slides and graphics,
fees and expenses of any consultants engaged in connection with the road
show presentations with the prior approval of Dal-Tile, travel and lodging
expenses of the representatives and officers of Dal-Tile and any such
consultants, and the cost of any aircraft chartered in connection with the
road show, and (vii) all other costs and expenses incident to the
performance of the obligations of Dal-Tile hereunder for which provision is
not otherwise made in this Section. It is understood, however, that except
as provided in this Section, Section 5 and the last paragraph of Section 7
below, the Underwriters will pay all of their costs and expenses, including
fees and disbursements of their counsel, stock transfer taxes payable on
resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect
any agreement that Dal-Tile and AWI may otherwise have for the allocation
of such expenses among themselves.
5. INDEMNITY AND CONTRIBUTION.(a) Dal-Tile agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act, from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal
or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Dal-Tile
Registration Statement or any amendment thereof, any Dal-Tile preliminary
prospectus or any Dal-Tile Prospectus (as amended or supplemented if
Dal-Tile shall have furnished any amendments or supplements thereto) or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not
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<PAGE>
misleading, except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Underwriter
furnished to Dal-Tile in writing by such Underwriter through you expressly
for use therein; PROVIDED, HOWEVER, that the foregoing indemnity agreement
with respect to any preliminary prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented
if Dal-Tile shall have furnished any amendments or supplements thereto) was
not sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such losses, claims, damages or liabilities, unless such
failure is the result of noncompliance by Dal-Tile's [failure to promptly
deliver any supplement or amendment to either Dal-Tile Prospectus or the
Dal-Tile Registration Statement].[DISCUSS].
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless Dal-Tile, the directors of Dal-Tile, the officers of
Dal-Tile who sign the Dal-Tile Registration Statement and each person, if
any, who controls Dal-Tile within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and
all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Dal-Tile Registration Statement or any amendment thereof, any Dal-Tile
preliminary prospectus or any Dal-Tile Prospectus (as amended or
supplemented if Dal-Tile shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to information
relating to such Underwriter furnished to Dal-Tile in writing by such
Underwriter through you expressly for use therein.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to Section 5(a) or 5(b), such person (the "INDEMNIFIED
PARTY") shall promptly notify the person against whom such indemnity may be
sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party,
upon request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified
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<PAGE>
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the named parties
to any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for (i) the fees and expenses of more
than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act and (ii) the fees and expenses of more than one separate firm
(in addition to any local counsel) for Dal-Tile, its directors, its
officers who sign the Dal-Tile Registration Statement and each person, if
any, who controls Dal-Tile within the meaning of either such Section, and
that all such fees and expenses shall be reimbursed as they are incurred.
In the case of any such separate firm for the Underwriters and such control
persons of any Underwriters, such firm shall be designated in writing by
Morgan Stanley & Co. Incorporated. In the case of any such separate firm
for Dal-Tile, and such directors, officers and control persons of Dal-Tile,
such firm shall be designated in writing by Dal-Tile. The indemnifying
party shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if there
be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by the second and third sentences of this
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than 90 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement (other than with respect
to requests for reimbursement of an indemnified party contested in good
faith). No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been
a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such proceeding.
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(d) To the extent the indemnification provided for in Section 5(a) or
5(b) is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party or parties on the other hand from the
offering of the Secondary Shares or PEPS, as the case may be, or (ii) if
the allocation provided by clause 5(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause 5(d)(i) above but also the
relative fault of the indemnifying party or parties on the one hand and of
the indemnified party or parties on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by Dal-Tile on the one hand and the Underwriters
on the other hand in connection with the offering of the Secondary Shares
or PEPS, as the case may be, shall be deemed to be in the same respective
proportions as the net proceeds from the offering (before deducting
expenses) of the Secondary Shares or the PEPS, as the case may be, received
by AWI and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of the
Secondary Shares Prospectus or the AWI Prospectus, bear to the aggregate
public offering price of the Dal-Tile Shares or the PEPS, as the case may
be. The relative fault of Dal-Tile on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by Dal-Tile or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Underwriters'
respective obligations to contribute pursuant to this Section 5 are several
in proportion to the respective number of Secondary Shares or PEPS, as the
case may be, they have agreed to purchase under the Underwriting Agreement,
and not joint.
(e) Dal-Tile and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 5 were determined by PRO
RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 5(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such
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action or claim. Notwithstanding the provisions of this Section 5, no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Secondary Shares or PEPS, as
the case may be, underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The remedies provided for
in this Section 5 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law
or in equity.
(f) The indemnity and contribution provisions contained in this
Section 5 and the representations, warranties and other statements of
Dal-Tile contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement,(ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, or Dal-Tile, its officers or directors or any
person controlling Dal-Tile and (iii) acceptance of and payment for any of
the Secondary Shares or PEPS.
6. TERMINATION. This Agreement shall be subject to termination by
notice given by you to Dal-Tile, if you elect to terminate the Underwriting
Agreement pursuant to Section 8 thereof.
7. EFFECTIVENESS. This Agreement shall become effective upon the
execution and delivery hereof by the parties hereto.
If the Underwriting Agreement shall be terminated by the Underwriters,
or any of them, because of any failure or refusal on the part of Dal-Tile
to comply with the terms or to fulfill any of the conditions of this
Agreement, or if for any reason Dal-Tile shall be unable to perform its
obligations under this Agreement, Dal-Tile will reimburse the Underwriters
or such Underwriters as have so terminated the Underwriting Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including
the fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement, the Underwriting Agreement
or the offerings contemplated hereunder or thereunder.
8. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
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9. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
10. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
DAL-TILE INTERNATIONAL INC.
By:
-------------------------------
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Acting on behalf of itself and the
several Underwriters named in
Schedule I and Schedule II hereto.
MORGAN STANLEY & CO. INCORPORATED
By:
------------------------------
Name:
Title:
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<PAGE>
SCHEDULE I
UNDERWRITER
- -------------------------------------------
Morgan Stanley & Co. Incorporated . . . . .
Lazard Freres & Co. LLC . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . .
[NAMES OF OTHER UNDERWRITERS] . . . . . . .
<PAGE>
SCHEDULE II
UNDERWRITER
- -------------------------------------------
Morgan Stanley & Co. Incorporated . . . . .
Lazard Freres & Co. LLC . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . .
[NAMES OF OTHER UNDERWRITERS] . . . . . . .
<PAGE>
SCHEDULE III
<PAGE>
SCHEDULE IV
2
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
____________, 1998
The Underwriters named in Schedules I
and II to the Indemnification Agreement
(as defined below)
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("MORGAN
STANLEY") together with the several Underwriters (the "UNDERWRITERS") named in
the schedules to the Indemnification Agreement (as defined below) propose to
enter into an Indemnification Agreement (the "INDEMNIFICATION AGREEMENT") with
Dal-Tile International Inc., a Delaware corporation ("DAL-TILE"), relating to
the public offering by Armstrong World Industries, Inc. ("AWI") of up to __
shares of the Common Stock, $.01 par value, of Dal-Tile ("COMMON STOCK")
deliverable upon maturity of AWI's __% Premium Exchangeable Participating
Securities due ____ 2001, and up to ______ shares of Common Stock (the
"SECONDARY SHARES") to be sold by AWI in a concurrent public offering
(collectively, the "PUBLIC OFFERINGS").
To induce the Underwriters that may participate in the Public Offerings to
continue their efforts in connection with the Public Offerings, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley, [it]
[he] will not, during the period ending 90 days after the date of the final
prospectuses relating to the Public Offerings (the "DAL-TILE PROSPECTUSES"),
[for so long as he remains a director or executive officer of Dal-Tile,] (1)
offer, pledge, loan, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of (each, a "TRANSFER"),
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such shares or any
such securities all then owned by the undersigned or are thereafter acquired
directly from Dal-Tile), or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Stock, whether any
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such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley, [it] [he] will not, during the period commencing on the date
hereof and ending 90 days after the date of the Dal-Tile Prospectuses, make any
demand for or exercise any right with respect to, the registration of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock. Notwithstanding anything to the contrary in the foregoing,
the consent of Morgan Stanley shall not be required for (i) any Transfer by the
undersigned to (A) any affiliate of the undersigned, or (B) any member of the
undersigned's immediate family, or to a trust for the benefit of the undersigned
or any member of the undersigned's immediate family, provided that any such
transferee shall agree in writing, prior to or contemporaneously with such
Transfer, to be bound by the provisions of this agreement to the same extent as
the undersigned, and (ii) any pledge by the undersigned of shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
Common Stock, to secure indebtedness, provided that the pledgee shall agree in
writing, prior to or contemporaneously with such pledge, to be bound by the
provisions of this agreement to the same extent as the undersigned. The
undersigned further agrees that Dal-Tile may note such restrictions on the books
and records of Dal-Tile.
Whether or not the Public Offerings actually occur depends on a number of
factors, including market conditions. Each Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between AWI and the Underwriters.
Very truly yours,
----------------------------------------
(Name)
----------------------------------------
(Address)
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Exhibit 1.2
ARMSTRONG WORLD INDUSTRIES, INC.
7,000,000
__% Participating Exchangeable Premium Securities-SM-
due July 1, 2001
(Payable in Shares of Common Stock,
Par Value $.01 per Share, of Dal-Tile International Inc.)
9,000,000
Shares of Common Stock, Par Value $.01 per Share
of Dal-Tile International Inc.
UNDERWRITING AGREEMENT
<PAGE>
June __, 1998
The Underwriters named on Schedules I and II hereto
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
Armstrong World Industries, Inc., a Pennsylvania corporation ("AWI"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "PEPS UNDERWRITERS") an aggregate of __________ of its __%
Participating Exchangeable Premium Securities due _________, 2001 (the "FIRM
PEPS") to be issued pursuant to the provisions of the Indenture dated as of
August 6, 1996 (as supplemented by the First Supplemental Indenture dated as of
June __, 1998, the "INDENTURE"), by and between AWI and Chase Manhattan, N.A.,
as Trustee (the "TRUSTEE") relating to Senior Debt Securities (as such term is
defined in the Indenture) of AWI.
AWI also proposes to issue and sell to the several PEPS Underwriters not
more than an additional 1,050,000 __% Participating Exchangeable Premium
Securities due 2001 (the "ADDITIONAL PEPS") if and to the extent that you, as
the Managers of the offering, shall have determined to exercise, on behalf of
the PEPS Underwriters, the right to purchase such securities granted to the
Underwriters in Section 2(a) hereof. The Firm PEPS and the Additional PEPS are
hereinafter collectively referred to as the "PEPS." At maturity the principal
amount of each PEPS will be mandatorily exchanged by AWI into shares of the
Common Stock, par value $.01 (the "COMMON STOCK"), of Dal-Tile International
Inc. ("DAL-TILE"), subject to AWI's right to pay cash in lieu of delivering such
shares.
AWI has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to,
among other securities, senior debt securities of AWI of which the PEPS will
represent a class, and has filed with, or transmitted for filing to, or shall
promptly hereafter file with or transmit for filing to, the Commission a
prospectus supplement (the "AWI PROSPECTUS SUPPLEMENT") specifically relating to
the PEPS pursuant to Rule 424 under the Securities Act of 1933, as amended (the
"SECURITIES ACT"). The term "AWI REGISTRATION STATEMENT" means the registration
statement filed on Form S-3 and declared effective on November 1, 1996,
including the exhibits thereto, as amended to the date of this Agreement.
<PAGE>
The term "BASIC AWI PROSPECTUS" means the prospectus included in the AWI
Registration Statement. The term "AWI PROSPECTUS" means the Basic AWI
Prospectus together with the AWI Prospectus Supplement. The term "AWI
PRELIMINARY PROSPECTUS" means a preliminary prospectus supplement specifically
relating to the PEPS, together with the Basic AWI Prospectus. As used herein,
the terms "Basic AWI Prospectus," "AWI Prospectus" and "AWI preliminary
prospectus" shall include in each case the documents, if any, incorporated by
reference therein.
Additionally, AWI and Armstrong Enterprises, Inc., a Vermont corporation
("AEI") and a direct wholly-owned subsidiary of AWI (AEI and AWI, collectively
being referred to as the "SELLERS"), jointly and severally propose to sell to
the several Underwriters named in Schedule II hereto (the "Secondary Shares
Underwriters," and together with the PEPS Underwriters, the "UNDERWRITERS") an
aggregate 9,000,000 shares (the "FIRM SHARES") of Common Stock. The Sellers
also propose to sell to the several Secondary Shares Underwriters not more than
an additional 1,315,822 shares of Common Stock (the "ADDITIONAL SHARES") if and
to the extent that you, as the Managers of the offering, shall have determined
to exercise, on behalf of the Secondary Shares Underwriters, the right to
purchase such shares of Common Stock granted to the Secondary Shares
Underwriters in Section 2(b) hereof. The Firm Shares and the Additional Shares
are hereinafter collectively referred to as the "SECONDARY SHARES."
In connection with the foregoing and pursuant to the Shareholders Agreement
dated December 29, 1995 (as amended July 15, 1996, the "SHAREHOLDERS AGREEMENT")
by and among Dal-Tile International Inc., AEA Investors Inc. DTI Investors LLC,
AWI, AEI and Armstrong Cork Finance Corporation, Dal-Tile has filed with the
Commission a registration statement, including, (i) a prospectus relating to
AWI's offer for sale of 7,000,000 shares (the "PEPS SHARES") of Common Stock
deliverable to holders of the PEPS at the maturity thereof and (ii) a prospectus
relating to the Secondary Shares. The registration statement as amended at the
time it becomes effective, including the information (if any) deemed to be part
of the registration statement at the time of effectiveness pursuant to Rule 430A
under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is
hereinafter referred to as the "DAL-TILE REGISTRATION STATEMENT"; each of the
prospectus in the form first used to confirm sales of Secondary Shares (the
"SECONDARY SHARES PROSPECTUS") and the prospectus in the form first used to
confirm sales of PEPS Shares deliverable upon mandatory exchange of the PEPS
(the "PEPS SHARES PROSPECTUS") is hereinafter referred to as a "DAL-TILE
PROSPECTUS." The term "DAL-TILE PRELIMINARY PROSPECTUS" means a preliminary
prospectus relating to either the Secondary Shares or the PEPS Shares. As used
herein, the terms "Dal-Tile Prospectus" and "Dal-Tile
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<PAGE>
preliminary prospectus" shall include in each case the documents, if any,
incorporated by refinance therein. If Dal-Tile has filed an abbreviated
registration statement to register additional shares of Common Stock pursuant to
Rule 462(b) under the Securities Act (the "RULE 462 DAL-TILE REGISTRATION
STATEMENT"), then any reference herein to the term "DAL-TILE REGISTRATION
STATEMENT" shall be deemed to include such Rule 462 Dal-Tile Registration
Statement.
The terms "SUPPLEMENT," "AMENDMENT" and "AMEND" as used herein shall
include all documents subsequently filed by AWI or Dal-Tile with the Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that are deemed to be incorporated by reference in the AWI Prospectus or
either Dal-Tile Prospectus, respectively.
Pursuant to the Shareholders Agreement, Dal-Tile has also entered into an
indemnification agreement (the "DAL-TILE INDEMNIFICATION AGREEMENT") dated as of
the date hereof with the Underwriters, relating to the offering of the PEPS and
the Secondary Shares and the above-referenced registration statement filed by
Dal-Tile.
1. REPRESENTATIONS AND WARRANTIES OF SELLERS. (a) AWI represents and
warrants to and agrees with each of the Underwriters that:
(i) The AWI Registration Statement became effective on
November 1, 1996; no stop order suspending the effectiveness of the
AWI Registration Statement is in effect and, no proceedings for such
purpose are pending before, or to AWI's knowledge after reasonable
investigation, threatened by the Commission.
(ii) (A)Each document, if any, filed or to be filed pursuant
to the Exchange Act and incorporated by reference in the AWI
Prospectus complied or will comply when so filed in all material
respects with the Exchange Act and the applicable rules and
regulations of the Commission thereunder,(B) each part of the AWI
Registration Statement, when such part became effective, did not
contain, and each such part, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading,(C) the AWI
Registration Statement and the AWI Prospectus comply, and, as amended
or supplemented, if applicable, will comply in all material respects
with the Securities Act and the applicable rules and regulations of
the Commission thereunder and (D) the AWI Prospectus does not contain
and, as amended or supplemented, if
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<PAGE>
applicable, will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, except that the representations and warranties set
forth in this Section 1(a)(ii) do not apply (1) to statements or
omissions in the AWI Registration Statement or the AWI Prospectus
based upon information relating to any PEPS Underwriter furnished to
AWI in writing by any such PEPS Underwriter through the Managers
expressly for use therein or (2) to that part of the AWI Registration
Statement that constitutes the Statement of Eligibility (Form T-1)
under the Trust Indenture Act of 1939, as amended (the "TRUST
INDENTURE ACT"), of the Trustee.
(iii) AWI has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the AWI
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or to be in
good standing would not have a material adverse effect on AWI and its
subsidiaries, taken as a whole.
(iv) Each "significant subsidiary" (as that term is used in
Rule 1-02(w) of Regulation S-X under the Securities Act), which shall
include, without limitation, AEI, Armstrong World Industries
(Delaware), Inc., Armstrong World Industries Ltd., Armstrong World
Industries GmbH, Armstrong Cork Finance Corporation, (each, a
"MATERIAL SUBSIDIARY") of AWI has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the AWI Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or to be in good standing would not have a material adverse
effect on AWI and its subsidiaries, taken as a whole. All of the
issued shares of capital stock of each Material Subsidiary of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and are
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<PAGE>
owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(v) The Indenture has been duly qualified under the Trust
Indenture Act and has been duly authorized, executed and delivered by
AWI and is a valid and binding agreement of AWI, enforceable in
accordance with its terms except as (A) the enforceability thereof may
be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (B) rights of acceleration and the
availability of equitable remedies may be limited by equitable
principles of general applicability.
(vi) The PEPS have been duly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Underwriters in accordance with the
terms of this Agreement, will be entitled to the benefits of the
Indenture and will be valid and binding obligations of AWI enforceable
in accordance with their terms except as (A) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and (B) rights of acceleration
and the availability of equitable remedies may be limited by equitable
principles of general applicability.
(vii) There has not occurred any material adverse change, or
any development involving a prospective material adverse change, in
the condition, financial or otherwise, or in the earnings, business or
operations of AWI and its subsidiaries, taken as a whole, from that
set forth in the AWI Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(viii) There are no legal or governmental proceedings pending
or, to the best of AWI's knowledge, threatened to which AWI or any of
its subsidiaries is a party or to which any of the properties of AWI
or any of its subsidiaries is subject that are required to be
described in the AWI Registration Statement or the AWI Prospectus and
are not so described or any statutes, regulations, contracts or other
documents that are required to be described in the AWI Registration
Statement or the AWI Prospectus or to be filed or incorporated by
reference as exhibits to the AWI Registration Statement that are not
described, filed or incorporated as required.
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<PAGE>
(ix) Each preliminary prospectus filed as part of the AWI
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities
Act and the applicable rules and regulations of the Commission
thereunder.
(x) AWI and its subsidiaries (A) are in compliance with any
and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"),(B) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (C) are
in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on AWI and its subsidiaries,
taken as a whole.
(xi) To the best of AWI's knowledge, there are no costs or
liabilities associated with Environmental Laws (including, without
limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws
or any permit, license or approval, any related constraints on
operating activities and any potential liabilities to third parties)
which would, singly or in the aggregate, in AWI's judgment reasonably
be expected to have a material adverse effect on AWI and its
subsidiaries, taken as a whole.
(b) Each of the Sellers represents and warrants to and agrees with
each of the Underwriters that:
(i) This Agreement has been duly authorized, executed and
delivered by AWI and AEI.
(ii) AEI has, and immediately prior to any delivery of the
PEPS Shares pursuant to the terms of the PEPS, AWI will have valid
title to such PEPS Shares and the legal right and power to sell,
transfer and deliver such PEPS Shares, and delivery of such PEPS
Shares pursuant to the terms of the PEPS will pass title to
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<PAGE>
such PEPS Shares free and clear of any security interests, claims,
liens, equities and other encumbrances.
(iii) Each of AWI and AEI is not, and after giving effect to
the offering and sale of the PEPS and the Secondary Shares and the
application of the proceeds thereof as described in the AWI Prospectus
or the Secondary Shares Prospectus, as the case may be, will not be an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(iv) AEI has, and on the Closing Date will have, valid title
to the Secondary Shares and the legal right and power to sell,
transfer and deliver such Secondary Shares, and delivery of the
Secondary Shares to be sold by the Sellers pursuant to this Agreement
will pass title to such Secondary Shares free and clear of any
security interests, claims, liens, equities and other encumbrances.
(v) The execution and delivery by AWI of, and the performance
by AWI of its obligations under, this Agreement, the Indenture and the
PEPS and the execution and delivery by AEI of, and the performance by
AEI of its obligations under, this Agreement will not contravene any
provision of applicable law or the articles of incorporation or
by-laws of AWI or any of its subsidiaries or any agreement or other
instrument binding upon AWI or any of its subsidiaries, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over AWI or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by AWI of
its obligations under this Agreement, the Indenture or the PEPS or by
AEI of its obligations under this Agreement.
2. AGREEMENTS TO SELL AND PURCHASE. (a) AWI hereby agrees to sell to the
several PEPS Underwriters, and each PEPS Underwriter upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from AWI at
$______ per PEPS (the "PEPS PURCHASE PRICE") the number of Firm PEPS set forth
in Schedule I hereto opposite the name of such PEPS Underwriter.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, AWI agrees to sell to the
Underwriters the Additional PEPS, and the PEPS Underwriters shall have a
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<PAGE>
one-time right to purchase, severally and not jointly, up to 1,050,000
Additional PEPS at the PEPS Purchase Price. If Morgan Stanley & Co.
Incorporated and Smith Barney Inc., as representatives of the PEPS Underwriters
(the "PEPS MANAGERS"), on behalf of the PEPS Underwriters, elect to exercise
such option, the PEPS Managers shall so notify AWI in writing not later than 30
days after the date of this Agreement, which notice shall specify the number of
Additional PEPS to be purchased by the PEPS Underwriters and the date on which
such Additional PEPS are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional PEPS may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm PEPS. If any
Additional PEPS are to be purchased, each PEPS Underwriter agrees, severally and
not jointly, to purchase the number of Additional PEPS (subject to such
adjustments to eliminate fractional PEPS as the PEPS Managers may determine)
that bears the same proportion to the total number of Additional PEPS to be
purchased as the number of Firm PEPS set forth in Schedule I hereto opposite the
name of such PEPS Underwriter bears to the total number of Firm PEPS.
(b) The Sellers hereby jointly and severally agree to sell to the
several Secondary Shares Underwriters, and each Secondary Shares
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees,
severally and not jointly, to purchase from the Sellers at $______ a share
(the "SECONDARY SHARES PURCHASE PRICE") the number of Firm Shares set forth
in Schedule II hereto opposite the name of such Secondary Shares
Underwriter.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Sellers jointly and
severally agree to sell to the Secondary Shares Underwriters the Additional
Shares, and the Secondary Shares Underwriters shall have a one-time right
to purchase, severally and not jointly, up to 1,315,822 Additional Shares
at the Secondary Shares Purchase Price. If Morgan Stanley & Co.
Incorporated, Smith Barney Inc. and Lazard Freres & Co., LLC, as
representatives of the Secondary Shares Underwriters (the "SECONDARY
MANAGERS"), on behalf of the Secondary Shares Underwriters, elect to
exercise such option, the Secondary Managers shall so notify AWI in writing
not later than 30 days after the date of this Agreement, which notice shall
specify the number of Additional Shares to be purchased by the Secondary
Shares Underwriters and the date on which such shares are to be purchased.
Such date may be the same as the Closing Date but not earlier than the
Closing Date nor later than ten business days after the date of such
notice. Additional Shares may be purchased as provided in Section 4 hereof
solely for the purpose of covering over-allotments made in connection with
the offering of the
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Firm Shares. If any Additional Shares are to be purchased, each Secondary
Shares Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the Managers may determine) that bears the same
proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule II hereto opposite the name of
such Secondary Shares Underwriter bears to the total number of Firm Shares.
(c) Each of AWI and AEI agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated, it will not, during the
period ending 90 days after the date of this Agreement, (i) offer, pledge,
loan, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock or (ii) enter into
any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of the ownership of shares of Common
Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of shares of Common Stock or such other
securities, in cash or otherwise; PROVIDED that the prohibitions contained
in (i) and (ii) above shall not apply to transfers between AWI and AEI. In
addition, each of AWI and AEI agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated, it will not, during the
period ending 90 days after the date of this Agreement make any demand for
or exercise any right with respect to the registration of any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock. The foregoing sentence shall not apply to
(A) the PEPS and the Secondary Shares to be sold hereunder or (B) the PEPS
Shares offered hereunder.
3. TERMS OF PUBLIC OFFERING. (a) AWI is advised by the PEPS Managers
that the PEPS Underwriters propose to make a public offering of their respective
portions of the PEPS as soon after this Agreement has become effective as in the
PEPS Managers' judgment is advisable. The terms of the public offering of the
PEPS are set forth in the AWI Prospectus. AWI is further advised by the PEPS
Managers that the PEPS are to be offered to the public initially at a purchase
price per PEPS of $___ (the "PEPS PUBLIC OFFERING PRICE") and to certain dealers
selected by the PEPS Managers at a price that represents a concession not in
excess of $___ per PEPS under the PEPS Public Offering Price, and that the PEPS
Managers may allow, and such dealers may reallow, a concession, not in excess of
$___ per PEPS, to certain dealers.
(b) The Sellers are advised by the Secondary Managers that the
Secondary Shares Underwriters propose to make a public offering of their
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<PAGE>
respective portions of the Secondary Shares as soon after the Dal-Tile
Registration Statement and this Agreement have become effective as in the
Secondary Managers' judgment is advisable. AWI is further advised by the
Secondary Managers that the Secondary Shares are to be offered to the
public initially at $___ a share (the "SECONDARY SHARES PUBLIC OFFERING
PRICE") and to certain dealers selected by the Secondary Managers at a
price that represents a concession not in excess of $____ a share under the
Secondary Shares Public Offering Price, and that any Secondary Shares
Underwriter may allow, and such dealers may reallow, a concession, not in
excess of $___ a share, to any Secondary Shares Underwriter or to certain
other dealers.
4. PAYMENT AND DELIVERY. (a) (i) Payment for the Firm PEPS to be sold by
AWI shall be made to AWI in Federal or other funds immediately available in New
York City against delivery of such Firm PEPS for the respective accounts of the
several PEPS Underwriters on the Closing Date at 10:00 A.M., New York City time,
on July __, 1998, or at such other time on the same or such other date, not
later than July __, 1998, as shall be designated in writing by the PEPS
Managers. The time and date of such payment are hereinafter referred to as the
"CLOSING DATE."
(ii) Payment for any Additional PEPS shall be made to AWI in
Federal or other funds immediately available in New York City against
delivery of such Additional PEPS for the respective accounts of the
several PEPS Underwriters at 10:00 A.M., New York City time, on the
date specified in the notice described in Section 2(a) or at such
other time on the same or on such other date, in any event not later
than July __, 1998, as shall be designated in writing by the PEPS
Managers. The time and date of such payment are hereinafter referred
to as the "ADDITIONAL PEPS CLOSING DATE."
(iii) Certificates for the Firm PEPS and Additional PEPS shall
be in definitive form and registered in such names and in such
denominations as the PEPS Managers shall request in writing not later
than one full business day prior to the Closing Date or the Additional
PEPS Closing Date, as the case may be. The certificates evidencing
the Firm PEPS and Additional PEPS shall be delivered to the PEPS
Managers on the Closing Date or the Additional PEPS Closing Date, as
the case may be, for the respective accounts of the several PEPS
Underwriters, with any transfer taxes payable in connection with the
transfer of the PEPS to the PEPS Underwriters duly paid, against
payment of the PEPS Purchase Price therefor.
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(b) (i) Payment for the Firm Shares to be sold by the Sellers shall
be made to AEI in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of
the several Secondary Shares Underwriters at 10:00 A.M., New York City
time, on the Closing Date.
(ii) Payment for any Additional Shares shall be made to AEI in
Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the
several Secondary Shares Underwriters at 10:00 A.M., New York City
time, on the date specified in the notice described in Section 2(b) or
at such other time on the same or on such other date, in any event not
later than July __, 1998, as shall be designated in writing by the
Secondary Managers. The time and date of such payment are hereinafter
referred to as the "ADDITIONAL SHARES CLOSING DATE."
(iii) Certificates for the Firm Shares and Additional Shares
shall be in definitive form and registered in such names and in such
denominations as the Secondary Managers shall request in writing not
later than one full business day prior to the Closing Date or the
Additional Shares Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to
the Secondary Managers on the Closing Date or the Additional Shares
Closing Date, as the case may be, for the respective accounts of the
several Secondary Shares Underwriters, with any transfer taxes payable
in connection with the transfer of the Secondary Shares to the
Secondary Shares Underwriters duly paid, against payment of the
Secondary Shares Purchase Price therefor.
The term "ADDITIONAL SHARES CLOSING DATE" as used herein shall mean
the Additional PEPS Closing Date or the Additional Shares Closing Date, in
each case as the context shall require.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. (i) The obligation of
AWI to sell the PEPS to the PEPS Underwriters and the several obligations of the
PEPS Underwriters to purchase and pay for the PEPS and (ii) the obligation of
the Sellers to sell the Secondary Shares to the Secondary Shares Underwriters
and the several obligations of the Secondary Shares Underwriters to purchase and
pay for the Secondary Shares are subject to the respective conditions that (x)
the AWI Registration Statement and the Dal-Tile Registration Statement, in the
case of clause (i), and the Dal-Tile Registration Statement, in the case of
clause (ii), shall have become effective not later than 5:00 P.M. (New York City
time) on the date hereof.
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The several obligations of the PEPS Underwriters to purchase the PEPS
and the several obligations of the Secondary Shares Underwriters to
purchase the Secondary Shares are each subject to the following further
conditions:
(a) Subsequent to the execution and delivery of this Underwriting
Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of AWI's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of
each of AWI or Dal-Tile and its respective subsidiaries, taken as a
whole, from that set forth in the AWI Prospectus or the Dal-Tile
Prospectuses, as the case may be (in either case, exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), that, in the judgment of the PEPS Managers or the
Secondary Managers, as the case may be, is material and adverse and
that makes it, in the judgment of the PEPS Managers, impracticable (i)
with respect only to the several obligations of the PEPS Underwriters,
to market the PEPS on the terms and in the manner contemplated in the
AWI Prospectus or (ii) with respect only to the several obligations of
the Secondary Shares Underwriters, to market the Secondary Shares on
the terms and in the manner contemplated in the Secondary Shares
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
AWI, to the effect set forth in clause 5(a)(i) above and to the effect that
the representations and warranties of AWI contained in this Agreement are
true and correct as of the Closing Date and that each of the Sellers has
complied with all of the agreements and satisfied all of the conditions on
its part to be performed or satisfied hereunder on or before the Closing
Date. The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
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(c) The Underwriters shall have received on the Closing Date an
opinion of Buchanan Ingersoll Professional Corporation, counsel for AWI,
dated the Closing Date, to the effect that:
(i) AWI is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the AWI Prospectus.
(ii) this Agreement has been duly authorized, executed and
delivered by AWI and AEI;
(iii) the Indenture has been duly qualified under the Trust
Indenture Act and has been duly authorized, executed and delivered by
AWI and is a valid and binding agreement of AWI, enforceable in
accordance with its terms except as (a) the enforceability thereof may
be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (b) rights of acceleration and the
availability of equitable remedies may be limited by equitable
principles of general applicability;
(iv) the PEPS have been duly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Underwriters in accordance with the
terms of this Agreement, will be entitled to the benefits of the
Indenture, will conform to the description thereof contained in the
AWI Prospectus and will be valid and binding obligations of AWI
enforceable in accordance with their terms except as (a) the
enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (b) rights of
acceleration and the availability of equitable remedies may be limited
by equitable principles of general applicability;
(v) the statements in the AWI Prospectus under the captions,
"Relationship between Armstrong and Dal-Tile," "Description of Debt
Securities," Description of Capital Stock," "Description of Depositary
Shares" and "Description of the PEPS," insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for and
fairly summarize the matters referred to therein, and the statements
in the AWI Prospectus under the captions "Prospectus Supplement
Summary -- The PEPS
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Offering -- United States Taxation" and "United States Taxation"
fairly present, subject to the limitations expressed therein, the
principal United States federal income tax consequences of an
investment in the PEPS;
(vi) the execution and delivery by AWI of, and the performance
by each of AWI and AEI of its respective obligations under, this
Agreement, and the performance by AWI of its obligations under the
Indenture and the PEPS will not contravene any provision of applicable
law (except to the extent that the federal securities laws may limit
or restrict any indemnification provisions set forth in this
Agreement) or the articles of incorporation or by-laws of AWI or AEI,
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance
by AWI or AEI of its obligations under this Agreement, or the
performance by AWI of its obligations under the Indenture or the PEPS;
(vii) delivery of the Secondary Shares to be sold by AEI
pursuant to this Agreement will pass title to such Secondary Shares
free and clear of any security interests, claims, liens, equities and
other encumbrances to each of the several Underwriters who have
purchased such Secondary Shares without notice of an "adverse claim"
thereto (as defined in Section 8-102 of the UCC);
(viii) upon delivery of the PEPS Shares pursuant to the terms of
the PEPS, registration of the transfer of the PEPS Shares to, and
registration of the PEPS Shares in the name of, Cede & Co. ("Cede") or
such other nominee as may be designated by the Depository Trust
Company ("DTC") and crediting of the PEPS Shares on the books of DTC
to securities accounts (the "Securities Accounts") of the various
beneficial owners of the PEPS who are direct participants in DTC
(assuming that each of such beneficial owners, DTC and Cede (or such
other nominee as may be designated by DTC) lacks notice of any
"adverse claim" (as defined in Section 8-102 of the Uniform Commercial
Code as in effect in the State of New York (the "UCC")) to the PEPS
Shares), (A) Cede or such other nominee designated by DTC will be a
"protected purchaser" of the PEPS Shares within the meaning of Section
8-303 of the UCC, (B) the beneficial owners of the PEPS Shares who are
direct participants in DTC will acquire valid "security entitlements"
in respect of the PEPS Shares within the meaning of Section 8-102 of
the UCC and (C) no action based on
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any "adverse claim" (within the meaning of Section 8-102 of the UCC)
to the PEPS Shares may be asserted against such beneficial owners with
respect to such security entitlements (assuming that such beneficial
owners lack notice of any such adverse claim);
(ix) each of AWI and AEI is not, and after giving effect to
the offering and sale of the PEPS and the Secondary Shares and the
application of the proceeds thereof as described in the AWI Prospectus
or the Secondary Shares Prospectus, as the case may be, will not be an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended;
(x) Dal-Tile Corporation is validly existing as a corporation
in good standing under the laws of the Commonwealth of Pennsylvania
and has the corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the
Dal-Tile Registration Statement and each Dal-Tile Prospectus; and
(xi) such counsel is of the opinion that (A)each document, if
any, filed pursuant to the Exchange Act and incorporated by reference
in the AWI Prospectus (except for financial statements and related
schedules and other financial data included therein as to which such
counsel need not express any opinion) complied when so filed as to
form in all material respects with the Exchange Act and the applicable
rules and regulations of the Commission thereunder and (B) the AWI
Registration Statement and the AWI Prospectus comply as to form in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder; PROVIDED, HOWEVER, that such
counsel need not express any opinion or belief as to, with respect to
clause (B) above, the financial statements, including the notes and
schedules thereto, and financial or statistical data contained or
referred to in, or incorporated by reference to in, or incorporated by
reference in, the AWI Registration Statement or the AWI Prospectus.
Such counsel shall also state in such opinion that such counsel has no
reason to believe that (A) each part of the AWI Registration Statement, at
the time it became effective, and as of the date such opinion is delivered,
contains any untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or necessary to make
the statements
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therein not misleading; and (B) the AWI Prospectus, as of the date of the
AWI Prospectus and as of the date such opinion is delivered, contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that such counsel need not express any opinion or belief as to (1)
with respect to clause (A) above, that part of the AWI Registration
Statement which constitutes the Statement of Eligibility (Form T-1 under
the Trust Indenture Act) of the Trustee or (2) with respect to clauses (A)
and (B) above, the financial statements, including the notes and schedules
thereto, and any financial or statistical data contained or referred to in,
or incorporated by reference in, the AWI Registration Statement or the AWI
Prospectus.
In rendering its opinion, Buchanan Ingersoll Professional Corporation
may rely (i) as to matters of New York law, on the opinion of Davis Polk &
Wardwell referred to in Section 5(e) hereof, and (ii) as to factual
matters, on certificates of officers of AWI and its subsidiaries and on
certificates of public officials. With respect to matters of Vermont law,
Buchanan Ingersoll Professional Corporation may state that in rendering
their opinion they have assumed that there are no differences material to
such opinion between the laws of the State of Vermont and the laws of the
Commonwealth of Pennsylvania. With respect to Section 5(c)(xi) and the
immediately preceding paragraph Buchanan Ingersoll Professional Corporation
may state that their opinion and belief are based upon their participation
in the preparation of the AWI Registration Statement and AWI Prospectus and
any amendments or supplements thereto and documents incorporated therein by
reference and review and discussion of the contents thereof, but are
without independent check or verification, except as specified.
The opinion of Buchanan Ingersoll Professional Corporation described
in this Section 5(c) shall be rendered to the Underwriters at the request
of AWI and shall so state therein.
(d) The Underwriters shall have received on the Closing Date an
opinion of Deborah K. Owen, General Counsel of AWI, dated the Closing Date,
to the effect that:
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(i) each Material Subsidiary is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the AWI
Prospectus; and each of AWI and each of its Material Subsidiaries is
duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on AWI and its subsidiaries, taken as a
whole;
(ii) the statements (A) in the AWI Registration Statement
under Item 15,(B) in "Item 3 - Legal Proceedings" of AWI's most recent
annual report on Form 10-K incorporated by reference in the AWI
Prospectus and (C) in "Item 1 - Legal Proceedings" of Part II of AWI's
quarterly reports on Form 10-Q filed since such annual report, in each
case insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, and, in each
case, as modified by any subsequently filed Current Report on Form
8-K, and in the AWI Prospectus under "Recent Developments," fairly
present the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters referred to
therein;
(iii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which AWI
or any of its Material Subsidiaries is a party or to which any of the
properties of AWI or any of its Material Subsidiaries is subject that
are required to be described in the AWI Registration Statement or the
AWI Prospectus and are not so described, or of any statutes,
regulations, contracts or other documents that are required to be
described in the AWI Registration Statement or the AWI Prospectus or
to be filed or incorporated by reference as exhibits to the AWI
Registration Statement that are not described, filed or incorporated
as required;
(iv) to the best of AWI's knowledge, after due inquiry, AWI
and its Subsidiaries (i) are in compliance with any and all applicable
Environmental Laws, (ii) have received all material permits, licenses
or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions
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of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on AWI and
its subsidiaries, taken as a whole;
(v) to the best of AWI's knowledge, after due inquiry, there
are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to
third parties) which would, singly or in the aggregate, in AWI's
judgment reasonably be expected to have a material adverse effect on
AWI and its subsidiaries, taken as a whole, and which have not been
previously disclosed in the AWI Registration Statement;
(vi) the execution and delivery by AWI of, and the performance
by AWI of its obligations under, this Agreement, the Indenture and the
PEPS will not contravene any provision of the articles of
incorporation or by-laws of AWI or, to the best of such counsel's
knowledge, any agreement or other instrument binding upon AWI or any
of its subsidiaries that is material to AWI and its subsidiaries,
taken as a whole, or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over AWI or any subsidiary;
(vii) AEI has valid title to the Secondary Shares and AWI will
have, upon settlement of the PEPS title to the PEPS Shares and the
legal right and power to sell, transfer and deliver the Secondary
Shares and the PEPS Shares;
(e) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 5(c)(ii),
5(c)(iii), 5(c)(iv) and 5(c)(v) (but only as to the statements under
"Description of the PEPS" and "Underwriters") and clause (A) of the
antepenultimate paragraph of Section 5(c) (but only as of the date such
opinion is delivered) and clauses, 5(c)(xi)(A) and 5(c)(xi)(B) above, in
each case subject to the applicable clauses of the provisos contained in
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Section 5(c)(xi) and the antepenultimate paragraph of Section 5(c) . In
rendering such opinion, Davis Polk & Wardwell may rely as to all matters of
Pennsylvania law upon the opinion of Buchanan Ingersoll referred to in
Section 5(c) above. With respect to clause (A) of the antepenultimate
paragraph of Section 5(c) and clauses 5(c)(xi)(A) and 5(c)(xi)(B) above,
Davis Polk & Wardwell may state that their opinion and belief are based
upon their participation in the preparation of the AWI Registration
Statement and AWI Prospectus and any amendments or supplements thereto (but
not including documents incorporated therein by reference) and review and
discussion of the contents thereof (including documents incorporated
therein by reference), but are without independent check or verification,
except as specified.
(f) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 2(c)(vi),
2(c)(xii) (but only as to the statements in each Dal-Tile Prospectus under
"Description of Capital Stock," in the Secondary Shares Prospectus under
"Underwriting" and in the PEPS Shares Prospectus under "Plan of
Distribution") and 2(c)(xii) of the Dal-Tile Indemnification Agreement.
With respect to such Section 2(c)(xii) of the Dal-Tile Indemnification
Agreement, Davis Polk & Wardwell may state that their opinion and belief
are based upon its participation in the preparation of the Dal-Tile
Registration Statement and each Dal-Tile Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but
are without independent check or verification, except as specified.
(g) The Underwriters shall have received on each of the date hereof
and the Closing Date letters dated the date hereof or the Closing Date, as
the case may be, in form and substance satisfactory to the Underwriters,
from AWI's and Triangle Pacific Corp.'s respective independent public
accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in or
incorporated by reference into the AWI Prospectus; PROVIDED that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier than
the date hereof.
(h) The "lock-up" agreements between the you and certain
shareholders, officers and directors of each of AWI and AEI relating to
sales and certain other dispositions of shares of Common Stock and certain
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other securities, delivered to you on or before the date hereof, shall be
in full force and effect on the Closing Date.
(i) The Dal-Tile Indemnification Agreement shall be in effect as of
the Closing Date; the representations and warranties of Dal-Tile contained
in the Dal-Tile Indemnification Agreement shall be true and correct as of
the date hereof and as of the Closing Date; Dal-Tile shall have complied
with all of the agreements and satisfied all of the conditions on its part
to be performed or satisfied under the Dal-Tile Indemnification Agreement
on or before the Closing Date; the Underwriters shall have received on the
Closing Date the certificates, opinions and letters described in Sections
2(c), 2(d), 2(e) and 2(f) of the Dal-Tile Indemnification Agreement; and
the Underwriters shall have received on the Closing Date a certificate,
dated the Closing Date and signed by an executive officer of Dal-Tile, to
the effect that the representations and warranties of Dal-Tile contained in
the Dal-Tile Indemnification Agreement are true and correct as of the
Closing Date and that Dal-Tile has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
thereunder on or before the Closing Date.
(j) The Shares shall have been listed or approved for listing on the
New York Stock Exchange.
The several obligations of the Underwriters to purchase Additional Shares
or Additional PEPS hereunder are subject to the delivery to you on the
Additional Shares Closing Date and Additional PEPS Closing Date, respectively,
of such documents as you may reasonably request with respect to the good
standing of AWI, AEI and/or Dal-Tile, the due authorization and issuance of the
Additional Shares or Additional PEPS, as the case may be, and other matters
related to the issuance of the Additional Shares or Additional PEPS, as the case
may be.
6. COVENANTS OF AWI. In further consideration of the agreements of the
Underwriters herein contained, AWI covenants with each Underwriter as follows:
(a) To furnish the PEPS Managers, without charge, 5 signed copies of
the AWI Registration Statement (including exhibits thereto) and 5 copies of
the AWI Prospectus and for delivery to each other PEPS Underwriter a
conformed copy of the AWI Registration Statement (without exhibits thereto)
and a copy of the AWI Prospectus in each case not later than 10:00 A.M. on
the day following the date hereof and, during the period mentioned in
paragraph 6(c) below, as many copies of the AWI Prospectus, any documents
incorporated by reference therein and any
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supplements and amendments thereto or to the AWI Registration Statement as
the PEPS Managers may reasonably request.
(b) Before amending or supplementing the AWI Registration Statement
or the AWI Prospectus with respect to the PEPS, to furnish to the PEPS
Managers a copy of each such proposed amendment or supplement and not to
file any such proposed amendment or supplement to which the PEPS Managers
reasonably object.
(c) If, during such period after the first date of the public
offering of the PEPS as, in the opinion of counsel for the Underwriters,
the AWI Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition exist
as a result of which it is necessary to amend or supplement the AWI
Prospectus in order to make the statements therein, in the light of the
circumstances when the AWI Prospectus is delivered to a purchaser, not
misleading, or if, in the reasonable judgment of AWI or in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
AWI Prospectus to comply with applicable law, AWI will forthwith prepare
and file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses the PEPS
Managers will furnish to AWI) to which PEPS may have been sold by the PEPS
Managers on behalf of the Underwriters and to any other dealers upon
request, either amendments or supplements to the AWI Prospectus so that the
statements in the AWI Prospectus as so amended or supplemented will not, in
the light of the circumstances when the AWI Prospectus is delivered to a
purchaser, be misleading or so that the AWI Prospectus, as amended or
supplemented, will comply with applicable law.
(d) To cooperate with Underwriter's counsel to qualify the PEPS for
offer and sale under the securities or Blue Sky laws of such jurisdictions
as the PEPS Managers shall reasonably request and to maintain such
qualification for as long as the PEPS Managers shall reasonably request;
PROVIDED that in connection therewith AWI shall not be required to qualify
as a foreign corporation or file a general consent to service of process in
any jurisdiction.
(e) To make generally available to AWI's security holders and to the
PEPS Managers as soon as practicable an earnings statement covering a
twelve month period beginning on the first day of the first full fiscal
quarter after the date of this Agreement, which earning statement shall
satisfy the provisions of Section 11(a) of the Securities Act and the rules
and regulations of the Commission thereunder. If such fiscal quarter is
the
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last fiscal quarter of AWI's fiscal year, such earning statement shall be
made available not later than 90 days after the close of the period covered
thereby and in all other cases shall be made available not later than 45
days after the close of the period covered thereby.
(f) To pay all expenses incident to the performance of its
obligations under this Agreement, including: (i) the preparation and
filing of the AWI Prospectus and all amendments and supplements thereto;
(ii) the preparation, issuance and delivery of the PEPS; (iii) the fees and
disbursements of AWI's counsel and accountants and of the Trustee and its
counsel; (iv) the qualification of the PEPS and the Shares under state
securities or Blue Sky laws in accordance with the provisions of Section
6(d) and Section 3(d) of the Dal-Tile Indemnification Agreement, including
filing fees and the fees and disbursements of counsel for the Underwriters
in connection therewith and in connection with the preparation of any Blue
Sky or Legal Investment Memoranda (the cost of which shall not exceed
$3,000); (v) the printing and delivery to the Underwriters in quantities as
herein above stated of copies of, and all amendments thereto of any
preliminary prospectus and the AWI Prospectus; (vi) the printing and
delivery to the Underwriters of copies of any Blue Sky or Legal Investment
Memoranda; (vii) any fees charged by rating agencies for the rating of the
PEPS; (viii) the filing fees and expenses, if any, incurred with respect to
any filing with the National Association of Securities Dealers, Inc. made
in connection with the PEPS; (ix) all document production charges and
expenses of counsel to the Underwriters incurred in connection with the
preparation of this Agreement, the Indemnification Agreement and the
Indenture; (x) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon; (xi) any expenses incurred by AWI in connection with a
"road show" presentation to potential investors, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with
the road show presentations with the prior approval of AWI, travel and
lodging expenses of the representatives and officers of AWI and any such
consultants, and the cost of any aircraft chartered in connection with the
road show; and (xii) all other costs and expenses incident to the
performance of the obligations of AWI hereunder for which provision is not
otherwise made in this Section.
The provisions of this Section shall not supersede or otherwise affect any
agreement that Dal-Tile and AWI may otherwise have for the allocation of such
expenses among themselves.
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7. INDEMNIFICATION AND CONTRIBUTION. (a) AWI agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred by any Underwriter or any such controlling person in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the AWI Registration Statement or any amendment thereof, any preliminary
prospectus of AWI or the AWI Prospectus (as amended or supplemented if AWI shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, (A) except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to AWI in writing by such
Underwriter through the Managers expressly for use therein, or (B) except that
AWI shall not be liable to any Underwriter under this Section 7 to the extent
that any such loss, claim, liability or judgment results solely from an untrue
statement of a material fact contained in, or the omission of a material fact
from, an AWI preliminary prospectus if such untrue statement or omission was
completely corrected in the applicable AWI Prospectus Supplement prior to the
written confirmation of the sale of the PEPS or Shares, as the case may be,
giving rise to such loss, claim, liability or judgment if AWI shall sustain the
burden of proving (x) that such Underwriter sold the PEPS or Shares, as the case
may be, to the person alleging such loss, claim, damage or liability without
sending or giving the applicable AWI Prospectus Supplement or applicable
Dal-Tile Prospectus, as the case may be, to such person at or prior to the time
of written confirmation of the sale of the PEPS or Shares, as the case may be,
giving rise to such loss, claim, liability or judgment and that such delivery to
such person was required by law, (y) that AWI had furnished copies of the
applicable AWI Prospectus Supplement or applicable Dal-Tile Prospectus, as the
case may be, to such Underwriter reasonably prior to the written confirmation of
such sale, and (z) such Underwriter would not have been subject to such
liability if it had delivered the applicable AWI Prospectus Supplement or
applicable Dal-Tile Prospectus, as the case may be, to such person at or prior
to the time of written confirmation of such sale.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless AWI, its directors, its officers who sign the AWI
Registration Statement and each person, if any, who controls AWI within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from AWI to such
Underwriter, but only with reference to information relating
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to such Underwriter furnished to AWI in writing by such Underwriter through
the Managers expressly for use in any preliminary prospectus, the AWI
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to either paragraph (a) or (b) of this Section 7, such
person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and
the indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless
(i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impeded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for the fees and expenses of more than
one separate firm (in addition to any local counsel) for all such
indemnified parties and that all such fees and expenses shall be reimbursed
as they are incurred. Such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated, in the case of parties indemnified pursuant to
paragraph 7(a) above, and by AWI, in the case of parties indemnified
pursuant to paragraph 7(b) above. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of
the aforesaid request and (ii) such indemnifying party shall not have
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reimbursed the indemnified party in accordance with such request prior to
the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in paragraph 7(a)
or 7(b) of this Section is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph, in
lieu of indemnifying such indemnified party thereunder, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by AWI on the one
hand and the Underwriters on the other hand from the offering of the PEPS
or the Shares, as the case may be, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of AWI on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by AWI on the one hand and the Underwriters on the other hand in
connection with the offering of the PEPS (or the Shares, as the case may
be) shall be deemed to be in the same respective proportions as the net
proceeds from the offering of such PEPS (or the Shares, as the case may be)
(before deducting expenses) received by AWI and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the AWI Prospectus Supplement (or
Dal-Tile Prospectus, as the case may be), bear to the aggregate public
offering price of the PEPS (or the Shares, as the case may be). The
relative fault of AWI on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by AWI or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the
25
<PAGE>
respective principal amounts of PEPS they have purchased hereunder, and not
joint.
(e) AWI and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 7 were determined by PRO
RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph 7(d) of
this Section. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the PEPS
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The remedies provided for in this
Section 7 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any indemnified party at law or in
equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of AWI
contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or AWI, its officers or directors or any person
controlling AWI and (iii) acceptance of and payment for any of the PEPS or
Shares.
8. TERMINATION. This Agreement shall be subject to termination by notice
given by Morgan Stanley & Co. Incorporated to AWI, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange or the
National Association of Securities Dealers, Inc., (ii) trading of any securities
of AWI or Dal-Tile shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
26
<PAGE>
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in the judgment of Morgan Stanley & Co. Incorporated, is material and
adverse and (b) in the case of any of the events specified in clauses (a)(i)
through (iv), such event, singly or together with any other such event, makes
it, in the judgment of Morgan Stanley & Co. Incorporated, impracticable to
market the PEPS on the terms and in the manner contemplated in the AWI
Prospectus or the Secondary Shares on the terms and in the manner contemplated
in the Secondary Shares Prospectus.
9. DEFAULTING UNDERWRITERS. If, on the Closing Date or the applicable
Option Closing Date, as the case may be, any one or more of the Underwriters
shall fail or refuse to purchase PEPS (or Shares) that it has or they have
agreed to purchase hereunder on such date, and the aggregate number of PEPS (or
Shares) which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of the
PEPS (or Shares) to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm PEPS (or Firm
Shares) set forth opposite their respective names in Schedule I (or, in the case
of Shares, Schedule II) to this Agreement bears to the aggregate principal
amount of PEPS (or Shares) set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as Morgan Stanley &
Co. Incorporated may specify, to purchase the PEPS (or Shares) which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; provided that in no event shall the number of PEPS (or Shares)
that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of PEPS (or Shares) without the written consent of such Underwriter. If,
on the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm PEPS (or Firm Shares) and the aggregate principal amount of PEPS
(or Shares) with respect to which such default occurs is more than one-tenth of
the aggregate principal amount of PEPS (or Shares) to be purchased on such date,
and arrangements satisfactory to Morgan Stanley & Co. Incorporated and AWI for
the purchase of such PEPS (or Shares) are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or AWI. In any such case either Morgan Stanley & Co.
Incorporated or AWI shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any, in
the AWI Registration Statement and in the AWI Prospectus (or the Dal-Tile
Registration Statement and in the Dal-Tile Prospectus) or in any other documents
or arrangements may be effected. Any action taken under this paragraph shall
not relieve any defaulting Underwriter from liability in respect of any default
of such Underwriter under this Agreement.
27
<PAGE>
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of AWI to comply with the terms or
to fulfill any of the conditions of this Agreement, or if for any reason AWI
shall be unable to perform its obligations under this Agreement, AWI will
reimburse the Underwriters or such Underwriters as have so terminated this
Agreement with respect to themselves, severally, for all out-of-pocket expenses
(including the fees and disbursements of their counsel) reasonably incurred by
such Underwriters in connection with this Agreement or the offering contemplated
hereunder.
10. EFFECTIVENESS. This Agreement shall become effective upon the
execution and delivery hereof by the parties hereto.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
13. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
28
<PAGE>
Please confirm your agreement by having an authorized officer sign a copy
of this Agreement in the space set forth below.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
Acting on behalf of itself and
the several Underwriters named herein
By: MORGAN STANLEY & CO. INCORPORATED
By:
---------------------------
Name:
Title:
Accepted:
ARMSTRONG WORLD INDUSTRIES, INC.
By:
-----------------------------
Name:
Title:
ARMSTRONG ENTERPRISES, INC.
By:
-----------------------------
Name:
Title:
29
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
FIRM PEPS SHARES
UNDERWRITER TO BE PURCHASED
- -------------------------------------------------- -------------------------
<S> <C>
Morgan Stanley & Co. Incorporated . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . .
-------------------------
Total: . . . . . . . . . . . . . . . . . . .
=========================
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
- -------------------------------------------------- -------------------------
<S> <C>
Morgan Stanley & Co. Incorporated . . . . . . . .
Lazard Freres & Co LLC. . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . .
[NAMES OF OTHER UNDERWRITERS] . . . . . . . . . .
-------------------------
Total: . . . . . . . . . . . . . . . . . . .
=========================
</TABLE>
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF FRIED, FRANK, HARRIS, SHRIVER & JACOBSON]
212-859-8000
June 23, 1998 (FAX: 212-859-4000)
Dal-Tile International Inc.
7834 Hawn Freeway
Dallas, Texas 75217
Ladies and Gentlemen:
We have acted as special counsel for Dal-Tile International
Inc., a Delaware corporation (the "Company"), in connection with (i) the
underwritten public offering by Armstrong World Industries, Inc., a Pennsylvania
corporation, or a subsidiary thereof ("AWI") of shares (the "Offering Shares")
of common stock, par value $.01 per share (the "Common Stock"), of the Company,
including Offering Shares which may be offered and sold upon the exercise of
overallotment options granted to the underwriters, and (ii) certain shares (the
"PEPS Shares" and, together with the Offering Shares, the "Shares") of Common
Stock which may be delivered by AWI, at its option, pursuant to the terms of the
___% Participating Exchangeable Premium Securities due July 1, 2001 of AWI.
With your permission, all assumptions and statements of
reliance herein have been made without any independent investigation or
verification on our part except to the extent otherwise expressly stated, and we
express no opinion with respect to the subject matter or accuracy of such
assumptions or items relied upon.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company, such certificates of public officials and such other documents, and
(iii) received such information from officers and representatives of the Company
as we have deemed necessary or appropriate for the purposes of this opinion. In
all examinations, we have assumed the legal capacity of all natural persons
executing documents, the genuineness of all signatures, the authenticity of
original and certified documents and the conformity to original or certified
copies of all copies
<PAGE>
June 23, 1998
2
submitted to us as conformed or reproduction copies. As to
various questions of fact relevant to the opinions expressed herein, we have
relied upon, and assume the accuracy of, representations and warranties
contained in the documents and certificates and oral or written statements and
other information of or from representatives of the Company and others and
assume compliance on the part of all parties to the documents with their
convenants and agreements contained therein.
Based upon the foregoing and subject to the limitations,
qualifications and assumptions set forth herein, we are of the opinion that the
Shares are duly authorized, validly issued, fully paid and non-assessable.
The opinion expressed herein is limited to the General
Corporation Law of the State of Delaware, as currently in effect.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to this firm under the
caption "Validity of Common Stock" in the Prospectus forming part of the
Registration Statement. In giving such consent, we do not hereby admit that we
are in the category of such persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/ Frederick H. Fogel
-------------------------------------
Frederick H. Fogel
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 16, 1998, in the Registration Statement
(Form S-3 No. 333-51235, Amendment No. 2) dated June 23, 1998 and related
Prospectus of Dal-Tile International Inc.
/s/ Ernst & Young LLP
Dallas, Texas
June 23, 1998
