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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 33-64140
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DAL-TILE INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3548809
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7834 HAWN FREEWAY, DALLAS, TEXAS 75217
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(214) 398-1411
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 10, 1998, there were 53,435,101 shares of the Registrant's Common
Stock outstanding. The aggregate market value of Common Stock held by
nonaffiliates of the Registrant at March 10, 1998 was $71,917,207 (based on
the closing sale price of the Common Stock on March 10, 1998). This calculation
does not reflect a determination that persons are affiliates for any other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K
-------- INTO WHICH INCORPORATED
PROXY STATEMENT FOR 1998 ------------------------
ANNUAL MEETING OF STOCKHOLDERS PART III
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DAL-TILE INTERNATIONAL INC.
FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 26
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PART I
ITEM 1. BUSINESS
General
Dal-Tile International Inc., a Delaware corporation formed in 1987 (the
"Registrant"), believes that it is the largest manufacturer, distributor and
marketer of ceramic tile in North America, and one of the largest in the world.
Unless the context otherwise requires, references herein to the "Company" and
"Dal-Tile" shall refer to the Registrant and its consolidated subsidiaries. The
Registrant is a holding company and conducts all its operations through its
subsidiaries. References herein to fiscal year 1997 refer to the fiscal year
ended January 2, 1998.
The Company currently conducts its business in one industry segment, engaging in
the manufacturing, distribution and marketing of wall, floor and mosaic tile.
The Company operates with a significant level of vertical integration, combining
what it believes to be North America's largest volume distribution system with
modern manufacturing facilities located in the United States and Mexico. The
Company offers a full range of tile and stone products, as well as installation
materials and tools ("allied products") designed to appeal to a broad range of
customers for both residential and commercial applications (new construction as
well as remodeling). The Company's products are sold through its network of 223
Company-operated sales centers to tile contractors, architects, design
professionals, builders, developers and individual consumers. The Company is
also a significant supplier to the do-it-yourself and buy-it-yourself market by
supplying home center retailers, such as The Home Depot, Lowe's and HomeBase,
and flooring dealers. The Company's manufactured products are marketed under
the names DALTILE-TM-, AMERICAN OLEAN-Registered Trademark- and HOME
SOURCE-TM-. In addition, the Company resells other manufacturers' products
under the respective manufacturers' trade names.
The Company commenced operations in 1947 as the Dallas Ceramic Company and
established its first wall tile manufacturing facility and corporate
headquarters in Dallas, Texas. On January 9, 1990, AEA Investors Inc., a
privately held corporation headquartered in New York ("AEA Investors"), arranged
for Dal-Tile to acquire all 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 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").
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.
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
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all 50 states and portions 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
allied products. In addition to products manufactured by the Company, the sales
centers carry a selection of purchased products to provide customers with a
broader product line. The sales centers generally range in size from 4,000 to
30,000 square feet, with a typical center occupying approximately 12,000 square
feet. The sales centers consist of a showroom dedicated to displaying the
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 January 2, 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 a dedicated business unit which includes
10 regional sales managers to serve the particular requirements of its
customers. The Company currently distributes the AMERICAN OLEAN brand through
approximately 186 independent distributor locations who service retail outlets.
The Company's strategy is to increase its presence in the independent
distributor channel, particularly in tile products that are most commonly used
in flooring applications.
Domestic sales within Mexico are made primarily through a network of independent
retailers who 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 and is
expected to continue presenting significant growth opportunities.
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
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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.
The Company-operated sales centers distribute the DALTILE brand, which includes
a fully integrated marketing program, emphasizing a focus on fashion. The
product offering is based on the Company's assessment of the needs of
professional installers, designers, architects and builders, as well as a review
of competitive product offerings. The marketing program includes public
relations support, merchandising (displays/sample boards, chip chests),
literature/catalogs and an Internet website.
The AMERICAN OLEAN brand consists of a full product offering and is distributed
through independent distributors. The brand is supported by a fully integrated
marketing program, including public relations efforts, cooperative advertising
programs for dealers and distributors, displays, merchandising (sample boards,
chip chests), and literature/catalogs.
In addition to distributing the DALTILE and AMERICAN OLEAN brands, home center
retailers distribute a home center brand--HOME SOURCE. The HOME SOURCE brand
includes a targeted product offering, customized point of sale displays and
merchandising, cooperative advertising support, literature/catalogs and sampling
materials.
The Company also has special marketing programs with Kohler-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 and quarry-related products and allied
products purchased from third-party manufacturers. Management believes that
"one-stop shopping," which requires a full product line at its 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, Mexico and
Japan. The Company intends to increase the amount of Company-manufactured
products as a percentage of net sales.
The Company believes that, due to technological innovations, the U.S. ceramic
tile industry is increasing its fashion orientation, particularly in tile used
in flooring applications. The Company has developed capabilities to produce
fashionable and innovative tile products and to simulate natural products such
as stone, marble and wood. In order to capitalize on the increased demand for,
and higher margins available from, fashion-oriented tile products, the Company
has (i) increased the number of new tile product introductions, (ii) focused on
shortening product introduction cycle time, (iii) expanded its relationships
with leading glaze and raw material manufacturers, (iv) focused on consumer
preferences to deliver products consistent with current design trends, and (v)
continued its investment in research and development to further develop new
products and manufacturing capabilities.
CUSTOMERS
The Company's core customers consist of large and small tile contractors,
architects, design professionals, builders, developers, independent distributors
and ceramic specialty retailers. The Company also sells to the do-it-yourself
and buy-it-yourself market through relationships with home center retailers,
such as The
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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 and Exxon service stations.
The Company does not rely on any one customer or group of customers for a
material amount of its net sales. The largest customer for fiscal year 1997
accounted for less than 10% of net sales, and the 10 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 323 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 218 million square feet to
323 million square feet during the same period. The newest state-of-the-art wall
tile facility in El Paso, Texas started production in 1996. During 1997, the
annual production capacity of El Paso was doubled from 22 to 44 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
approximately 41% of annual manufacturing capacity.
The Company also has a 49.99% interest in Recumbrimientos Interceramic, S.A. de
C.V. ("RISA"), a Mexican joint venture with Interceramic, a leading Mexican
manufacturer, which, pursuant to contractual arrangements, has agreed to supply
the Company, at the Company's option, with up to 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 and Jackson wall tile facilities and
consolidated a portion of mosaic tile production in late 1996. In 1997, the
Company initiated the process of consolidating a portion of unglazed floor tile
production by closing the Coleman 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 and in its ability to utilize the industry's newest technology.
The Company's manufacturing strategy is to maximize production at its lowest
cost manufacturing facilities, continue ongoing improvements by implementing
demonstrated best practices, seek opportunities to specialize its factories by
product line and continue to invest in manufacturing technology to lower its
costs and develop new capabilities. As a result of this strategy, the Company
suspended production at its Mt. Gilead facility during the fourth quarter of
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.
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The following table summarizes the products currently manufactured at the
Company's facilities:
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FACILITY PRODUCT TYPE
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Fayette, AL . . . . . . . . . . . . . . Unglazed quarry tile
Lewisport, KY . . . . . . . . . . . . . Unglazed quarry tile
Monterrey, Mexico . . . . . . . . . . . Glazed wall tile; glazed floor tile; glazed mosaic tile
Olean, NY . . . . . . . . . . . . . . . Unglazed mosaic tile
Gettysburg, PA. . . . . . . . . . . . . Glazed and unglazed mosaic tile
Jackson, TN . . . . . . . . . . . . . . Glazed and unglazed mosaic tile
Conroe, TX. . . . . . . . . . . . . . . Glazed floor tile
Dallas, TX. . . . . . . . . . . . . . . Glazed wall tile
El Paso, TX . . . . . . . . . . . . . . Glazed wall tile
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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.
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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 refinements, 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.
COMPETITION
Sales of the Company's products are made in a highly competitive marketplace.
The Company estimates that over 100 tile manufacturers, more than half of which
are based outside the United States, compete for sales of ceramic tile to
customers located in the United States. Although the U.S. ceramic tile industry
is highly fragmented at both the manufacturing and distribution levels, the
Company believes that it is the largest manufacturer, distributor and marketer
of ceramic tile in North America, and one of the largest in the world. In
addition to competition from domestic and foreign tile manufacturers, the
Company encounters competition from manufacturers of products which serve as an
alternative to tile. Competition in the tile industry is based on design, 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 59% 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, wood
flooring, resilient flooring and stone products (such as marble, granite, slate
and limestone tile). Among such wall coverings are paint, wallpaper, porcelain,
laminates and wood paneling. Ceramic tile products compete effectively as to
price with carpeting, wood flooring and vinyl flooring, and are generally
cheaper than natural stone products. Although the cost of installation of
ceramic tile is higher than the cost of installation of carpet, wood flooring
and some wall coverings, it is generally believed that ceramic tile has a lower
cost over its useful life primarily due to ceramic tile's durability.
EMPLOYEES
At January 2, 1998, the Company employed approximately 6,800 persons,
approximately 2,500 of which were employed by its Mexican subsidiaries.
Approximately 10% of employees in the United States are represented by unions.
Approximately 89% of the employees in Mexico are represented by a union under a
collective bargaining agreement which 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 Company believes that relations with its employees are good.
TRADEMARKS
The Company owns rights to certain material trademarks and trade names,
including DALTILE, AMERICAN OLEAN, HOME SOURCE and DAL-MONTE-TM-, which are used
in the marketing of its products. The Company believes that breadth of product
line, customer service and price are important in tile selection and that the
trademarks and trade names themselves are important as source identifiers that
help differentiate Company product lines from those of competitors.
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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 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
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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 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 Company's expenditures to
date in respect of the matters described above have been or are expected to be
indemnified in accordance with the terms of the Settlement Agreement (subject to
the percentage limitations described above). 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
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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 ("RCRA") and other U.S. federal and state
laws. The Company also generates non-hazardous wastes and is engaged in
recycling and pollution prevention programs. Compliance with current laws and
regulations has not had, and is not expected to have, a material adverse effect
on the Company, including with respect to its capital expenditures, earnings and
competitive position.
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 ("OSHA")
regulations with respect to potential employee exposure to such dust. In
addition, the rinsing of spray dryers and containers used for the preparation of
glaze and tile body results in wastewater discharges that require expenditures
for compliance with laws and regulations governing water pollution. Finally,
certain of the Company's manufacturing processes, including the preparation of
glaze, the assembly of certain tiles and the operation and maintenance of
equipment, at times result in the generation of solid and hazardous waste that
require expenditures in connection with the appropriate handling, treatment,
storage and disposal of such waste.
In addition, in light of the lengthy manufacturing history of the Company's
facilities, it is possible that additional environmental issues and related
matters may arise relating to past activities which the Company cannot now
predict, including tort liability and liability under environmental laws. In
particular, a number of the Company's facilities located in the United States
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.
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 in this report. See also Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources," below in this report.
ITEM 2. PROPERTIES
The Company owns or leases manufacturing, distribution, office and sales
facilities in the United States and Mexico, as described below.
-9-
<PAGE>
MANUFACTURING, DISTRIBUTION AND OFFICE FACILITIES
The Company owns or leases 13 manufacturing, distribution and office facilities.
The location of, use of, and the floor area of, such facilities are described as
follows:
<TABLE>
LEASED/
LOCATION USE SQ. FEET 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 (3)
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)
El Paso, TX.................. Manufacturing 161,714 Ground
Leased(2)
Los Angeles, CA.............. Distribution 410,515 Leased(1)
</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 ground lease expires on November 21, 2034.
(3) The Company suspended production at the Mt. Gilead facility in the
fourth quarter of 1997.
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 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
location and floor area are as follows:
<TABLE>
SQUARE
LOCATION 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 January 2, 1998 (aggregating
approximately 2.6 million square feet) pursuant to leases that extend for terms
on average of three to five years with expiration dates primarily from
1998-2002.
For a description of aggregate rental expenses with respect to its operating
leases, see Note 13 to the Consolidated Financial Statements included herein
relating to commitments and contingencies.
-10-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In addition to the proceedings described under Item 1, "Business-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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in Item 10 hereof under the caption "Directors and
Executive Officers of the Registrant" is incorporated by reference herein.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's Common Stock, par value $.01 per share (the "Common Stock"), is
listed on the New York Stock Exchange under the symbol "DTL". The following
table sets forth the high and low sale prices for the Common Stock as reported
by the New York Stock Exchange from August 14, 1996, the first day the Common
Stock began trading on the New York Stock Exchange, through January 2, 1998.
<TABLE>
HIGH LOW
---- ---
<S> <C> <C>
August 14, 1996 to September 30, 1996 16-3/8 13-7/8
October 1, 1996 to January 3, 1997 21-1/4 16-5/8
January 4, 1997 to April 4, 1997 19-3/4 14-1/2
April 5, 1997 to July 4, 1997 18-7/8 12
July 5, 1997 to October 3, 1997 18-3/8 13-5/8
October 4, 1997 to January 2, 1998 14-11/16 9-1/2
</TABLE>
HOLDERS
At March 10, 1998, there were 52 holders of record of Common Stock and
53,435,101 shares of Common Stock outstanding.
DIVIDEND POLICY
The Company has not paid cash dividends on the Common Stock for the last three
years. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
Moreover, the Company is a holding company with no operations or significant
assets other than its investment in Dal-Tile Group Inc. ("Dal-Tile Group") and
its 49.99% interest in RISA. Dal-Tile Group is a separate and distinct legal
entity and has no obligation, contingent or otherwise, to make funds available
to Dal-Tile, whether in the form of loans, dividends or other cash
distributions. The Bank Credit Agreement (defined below) limits dividends,
loans and other cash distributions from Dal-Tile Group to Dal-Tile, so that
profits generated by Dal-Tile Group may not be available to Dal-Tile to pay
cash dividends or repay indebtedness or otherwise. In light of these
limitations, Dal-Tile Group will be
-11-
<PAGE>
prohibited from making such dividends, loans and other cash distributions, and
Dal-Tile does not believe that Dal-Tile Group will be able to make such
dividends, loans and other cash distributions in the foreseeable future.
STOCKHOLDERS AGREEMENT
Pursuant to a certain Stockholders agreement (the "Stockholders Agreement"),
each of DTI Investors LLC ("DTI Investors"), which owns approximately 54% of the
Common Stock outstanding on March 10, 1998, and AWI, which owns approximately
34% of the Common Stock outstanding on March 10, 1998, has agreed to vote the
shares of Common Stock owned or controlled by it to effectuate the provisions of
the Stockholders Agreement, including for the election as directors of Dal-Tile
of (i) six individuals designated by DTI Investors, (ii) three individuals
designated by AWI, and (iii) the Chairman and Chief Executive Officer of
Dal-Tile. The managing member of DTI Investors is AEA Investors. 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
Stockholders Agreement. The Stockholders Agreement, among other things,
contains provisions (A) providing for registration rights under certain
circumstances under the Securities Act of 1933, as amended, and (B) prohibiting
the parties from acquiring additional shares of Common Stock until the earlier
to occur of (i) the fourth anniversary of the initial public offering of the
Common Stock and (ii) the sale by DTI Investors or AWI or its subsidiaries of
25% or more of the Common Stock owned by DTI Investors and certain members of
the Company management or AWI and its subsidiaries, as the case may be, as of
December 31, 1995.
Pursuant to the Stockholders 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.
Effective February 26, 1998, George A. Lorch, Frank A. Riddick III, and
Robert J. Shannon, Jr., the three individuals designated as Company directors
by AWI, resigned from their positions with the Company. On March 13, 1998,
AWI notified the Company of its request, pursuant to the Stockholders
Agreement, that Dal-Tile register for sale under the Securities Act of 1933
all of the 18,365,822 shares of Dal-Tile common stock owned by AWI. AWI
informed the Company that AWI was contemplating an underwritten secondary
offering of Company common stock and an offering of AWI debt that would be
mandatorily exchangeable into Company common stock owned by AWI.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented for fiscal years 1993 through
1997 are derived from the Consolidated Financial Statements of the Company for
such period, and should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Consolidated Financial Statements including the related notes thereto
included elsewhere herein.
-12-
<PAGE>
<TABLE>
YEAR ENDED
-----------------------------------------------------------------
DECEMBER 31,
JANUARY 2, JANUARY 3, -------------------------------------
1998 1997 1995 1994 1993
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA: (2)
Net sales $ 676,637 $ 720,236 $ 474,812 $ 506,309 $ 440,573
Cost of goods sold 404,728 369,731 225,364 268,272 239,379
--------- --------- --------- --------- ---------
Gross profit 271,909 350,505 249,448 238,037 201,194
Expenses:
Transportation 58,425 47,125 33,535 32,068 25,860
Selling, general and administrative 277,515 190,911 134,193 132,887 120,748
Provision for merger integration charges - 9,000 22,430 - -
Provision for special charges - - - - 53,233
Amortization/Write-down of goodwill 5,605 5,605 4,765 4,765 224,941
--------- --------- --------- --------- ---------
Total expenses 341,545 252,641 194,923 169,720 424,782
--------- --------- --------- --------- ---------
Operating income (loss) (69,636) 97,864 54,525 68,317 (223,588)
Interest expense 40,649 46,338 55,453 53,542 46,746
Interest income 268 1,685 1,250 1,403 517
Other income (expense) 1,220 129 2,994 1,341 (1,088)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item (108,797) 53,340 3,316 17,519 (270,905)
Income tax provision (benefit) 1,439 18,914 1,176 10,614 (3,225)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item (110,236) 34,426 2,140 6,905 (267,680)
Extraordinary item - loss on early
retirement of debt, net of taxes - (29,072) - - -
--------- --------- --------- --------- ---------
Net income (loss) $(110,236) $ 5,354 $ 2,140 $ 6,905 $(267,680)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BASIC EARNINGS PER SHARE (1)
Income (loss) before extraordinary item
per common share $ (2.06) $ 0.71 $ 0.07 $ 0.24 $ (9.38)
Extraordinary item - (0.60) - - -
--------- --------- --------- --------- ---------
Net income (loss) per common share $ (2.06) $ 0.11 $ 0.07 $ 0.24 $ (9.38)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average outstanding common shares 53,435 48,473 28,743 28,587 28,543
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DILUTED EARNINGS PER SHARE (1)
Income (loss) before extraordinary item
per common share $ (2.06) $ 0.69 $ 0.07 $ 0.23 $ (9.38)
Extraordinary item - (0.58) - - -
--------- --------- --------- --------- ---------
Net income (loss) per common share $ (2.06) $ 0.11 $ 0.07 $ 0.23 $ (9.38)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average outstanding common and
equivalent shares 53,435 50,053 29,668 29,664 28,543
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD): (3)
Working capital $ 154,888 $ 180,819 $ 152,128 $ 115,717 $ 119,109
Total assets 672,069 688,497 672,393 488,417 512,830
Total debt 557,091 465,858 527,816 492,753 492,137
Long-term debt 537,830 433,035 480,769 489,404 490,506
Stockholders' equity (deficit) 3,920 115,569 9,639 (103,823) (77,449)
</TABLE>
-13-
<PAGE>
(1) 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.
(2) 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.
(3) Balance sheet data for January 2, 1998, January 3, 1997 and December
31, 1995 include the assets acquired and liabilities assumed from the
AO Acquisition and are not directly comparable to prior years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On December 29, 1995, the Company completed its acquisition of American Olean
(the "AO Acquisition"). Following the acquisition, the Company was engaged in
the complex task of integrating the 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
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 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 sales, $3.5 million in
transportation expenses and $50.1 million in selling, general and administrative
expenses. The Company believes it has taken adequate charges for the expected
costs associated with its realignment efforts but can give no assurance that
additional charges will not be incurred.
The second half of 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.
-14-
<PAGE>
The following is a discussion of the results of operations 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 year end for fiscal year 1997
was January 2, 1998 and for fiscal year 1996 was 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 year ended December 31, 1995 do not reflect the AO Acquisition, results for
that period are not directly comparable.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
<TABLE>
YEAR ENDED
-----------------------------------------------------
JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 31, 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold. . . . . . . . . . . . . . 59.8 51.3 47.5
----- ----- -----
Gross profit. . . . . . . . . . . . . . . . . 40.2 48.7 52.5
Operating expenses. . . . . . . . . . . . . . 50.5 33.9 36.3
----- ----- -----
(10.3) 14.8 16.2
Non-recurring charges:
Provision for merger integration charges. . . - 1.2 4.7
----- ----- -----
Operating income (loss) . . . . . . . . . . . (10.3) 13.6 11.5
Interest expense (net). . . . . . . . . . . . 6.0 6.2 11.4
Other income. . . . . . . . . . . . . . . . . 0.2 - 0.6
----- ----- -----
Income (loss) before income taxes and
extraordinary item. . . . . . . . . . . . . (16.1) 7.4 0.7
Income tax provision. . . . . . . . . . . . . 0.2 2.6 0.2
----- ----- -----
Income (loss) before extraordinary item . . . (16.3) 4.8 0.5
Extraordinary item, net of taxes. . . . . . . - (4.1) -
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . (16.3)% 0.7% 0.5%
----- ----- -----
----- ----- -----
</TABLE>
-15-
<PAGE>
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 availibility 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 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. 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 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 1997.
-16-
<PAGE>
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
peso costs exceed peso revenues. 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. 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.
-17-
<PAGE>
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,
AMERICAN OLEAN and HOME SOURCE. 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.
-18-
<PAGE>
The 1995 merger integration charge represents a $22.4 million pre-tax merger
integration charge in the fourth quarter of 1995 associated with the revaluation
of certain assets in connection with the AO Acquisition. The majority of the
$22.4 million was a non-cash charge to write-down less efficient and duplicative
equipment not needed in the combined Company.
OPERATING INCOME
Operating income increased to $97.9 million in 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 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 9% 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
Funds available under the Company's bank credit agreement (the "Credit
Facility") provided liquidity and capital resources for working capital
requirements, capital expenditures, expansion and debt service. 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.
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 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 1997 due to
delays in systems integration which impaired the management of inventories.
Inventories
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<PAGE>
declined during the second half of 1997 due to temporary reductions in
production levels and the write-down of slow-moving or obsolete inventories.
The second half of 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 1997, the Company completed a new $125 million
Term B loan facility ("Term B Loan") which made certain modifications to its
then existing Credit Facility (as amended, the "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 1998 with final maturity on December
31, 2003. The Amended Credit Facility is collateralized by certain assets of
the Company.
During the third quarter of 1997, certain financial covenants were amended 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 borrowing rate was increased 50 basis points over the
previously existing rates (which now range from 2 to 2-1/2 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 at or 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. 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. During
fiscal year 1998, the Company plans to expend approximately $15-20 million to
complete its Dallas plant expansion and fund routine capital improvements.
Total availability as of January 2, 1998 on the revolving portion of the
Second Amended Credit Facility was $48.6 million. The Company believes cash
flow from operating activities, together with borrowings available under the
Second Amended Credit Facility, will be sufficient to fund future working
capital needs, capital expenditures and debt service requirements. Given its
capital needs and debt service and other obligations under its Credit
Facility, the Company expects to seek to refinance its debt in 1999, although
there can be no assurance that the Company will be able to do so. 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 debt facility.
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
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<PAGE>
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 the General Agreement on Tariffs and Trade
("GATT"). Under GATT, the United States currently imposes import duties on
ceramic tile from non-North American countries at 17% to be reduced ratably
to 10% by 2005. Accordingly, GATT may stimulate competition from non-North
American manufacturers who now export, or who may seek to export, ceramic tile
to the United States. The Company cannot predict with certainty the effect
that GATT may have on the Company's operations.
EFFECTS OF INFLATION
The Company believes it has generally been able to 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 for
fiscal years 1997, 1996 and 1995. Approximately 84% 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 significant impact on fiscal years 1997,
1996 and 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 has completed an assessment and will have to modify or replace
portions of its software 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 that will be expensed
as incurred. To date, the Company has incurred minimal expenses, primarily
for assessment of the Year 2000 issue and the development of a modification
plan.
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 impact on operations.
The costs of the project and the date 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
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<PAGE>
correct all relevant computer codes, and similar uncertainties.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks, uncertainties and other factors which
could cause actual results to differ materially from future results expressed
or implied by such forward-looking statements. Potential risks and
uncertainties include, but are not limited to, the impact of competitive
pressures and changing economic conditions on the Company's business and its
dependence on residential and commercial construction activity, the fact that
the Company is highly leveraged, currency fluctuations and other factors
relating to the Company's foreign manufacturing operations, the impact of
pending reductions in tariffs and custom duties and environmental laws and
other regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages F-1
through F-24 below and the related financial statement schedule is set forth
on page S-1 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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>
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..... . . . . . . . . 57 Director
Norman E. Wells, Jr.. . . . . . . . 49 Director
Henry F. Skelsey. . . . . . . . . . 39 Director
John M. Goldsmith . . . . . . . . . 34 Director
William C. Wellborn . . . . . . . . 42 Executive Vice President, Chief
Financial Officer, Treasurer and
Assistant Secretary
Mark A. Solls . . . . . . . . . . . 41 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 . . . . . . . . . 41 Vice President, Independent
Distributor Operations
D.D. "Gus" Agostinelli. . . . . . . 52 Vice President, Human Resources
Marc Powell . . . . . . . . . . . . 42 Vice President, Home Center
Services
Javier Eugenio Martinez Serna . . . 46 Vice President, Mexico Operations
Matthew J. Kahny. . . . . . . . . . 36 Vice President, Marketing
Harold G. Turk. . . . . . . . . . . 51 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 Registrant since July 1997 and Chairman of the Board of Directors
since September 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 and Rubber Company, concluding as
President of Goodyear Worldwide.
CHARLES J. PILLIOD, JR., Director-Mr. Pilliod has been a Director of the
Registrant since March 1990 and served as Chairman of the Board of Directors
from October 1993 through September 1997. From October 1993 through April
1994, Mr. Pilliod also served as President and Chief Executive Officer of the
Registrant. Mr. Pilliod served as U.S. Ambassador to Mexico from 1986 to
1989. Prior to that, he was the Chairman and Chief Executive Officer of
Goodyear Tire & Rubber Company. Mr. Pilliod is also a director of A. Schulman
Inc. and Marvin & Palmer Associates, Inc.
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<PAGE>
DOUGLAS D. DANFORTH, Director-Mr. Danforth has been a Director of the
Registrant since February 1997. He was Chairman and Chief Executive Officer
of Westinghouse Corporation from December 1983 to December 1987. Mr.
Danforth is also a director of Travelers Group Inc. and Sola International
Inc.
VINCENT A. MAI, Director-Mr. Mai has been a Director of the Registrant since
October 1989. Mr. Mai has been the President and Chief Executive Officer of
AEA Investors (the managing member of DTI Investors, which is a beneficial
owner of Common Stock of the Registrant), since April 1989. For the
preceding 15 years, he was a Managing Director of Lehman Brothers Inc., an
investment banking firm. Mr. Mai is also a director of the Federal National
Mortgage Association.
NORMAN E. WELLS, JR., Director-Mr. Wells has been a Director of the
Registrant 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 Registrant
since October 1989. Mr. Skelsey has been a Managing Director of AEA
Investors (the managing member of DTI Investors, which is a beneficial owner
of Common Stock of the Registrant), since March 1988. Prior to his
association with AEA Investors, Mr. Skelsey was a Vice President in the
Merchant Banking division of Shearson Lehman Brothers Inc., an investment
banking firm.
JOHN M. GOLDSMITH, Director-Mr. Goldsmith has been a Director of the
Registrant since April 1996. Mr. Goldsmith is a Managing Director of AEA
Investors (the managing member of DTI Investors, which is a beneficial owner
of Common Stock of the Registrant), and has been associated with AEA
Investors since 1989. Previously, he was a member of the Financial Services
practice of Ernst & Young, an independent accounting firm.
WILLIAM 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
Registrant since August 1997. Prior to joining the Company, Mr. Wellborn was
Senior Vice President and Chief Financial Officer of Lenox, Inc. Prior to
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 Registrant 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 Registrant since January 1997. From
1982 to 1996, he held various positions with PepsiCo in the Frito-Lay and
Pizza Hut divisions, most recently as Pizza Hut Vice President, Information
Technology. Prior to that, Mr. Cooke spent 17 years with IBM in sales and
systems engineering management.
JAMES E. ECKELBERGER, Vice President, Logistics-Mr. Eckelberger has been Vice
President, Logistics of the Registrant 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.
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<PAGE>
WILLIAM R. HANKS, Vice President, Manufacturing-Mr. Hanks has been Vice
President, Manufacturing of the Registrant 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.
DAVID F. FINNIGAN, Vice President, Independent Distributor Operations-Mr.
Finnigan has been Vice President, Independent Distributor Operations of the
Registrant 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, and Evans and Black.
D.D. "GUS" AGOSTINELLI, Vice President, Human Resources-Mr. Agostinelli
joined the Registrant 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.
MARC POWELL, Vice President, Home Center Services-Mr. Powell has been Vice
President, Home Center Services of the Registrant since February 1997. From
April 1995 to August 1996, he was Vice President, Consumer Sales of the
Company. From 1978 to 1994, Mr. Powell worked in various divisions of the
Company.
JAVIER EUGENIO MARTINEZ SERNA, Vice President, Mexico Operations-Mr. Martinez
has been Vice President, Mexico Operations of the Registrant since August
1995. Prior to August 1995, he was a managing director of Materiales
Ceramicos S.A. de C.V., a subsidiary of the Registrant, since December 1985.
Prior to joining the Company, Mr. Martinez was Vice President of Strategic
Planning and Business Diversification of the food division of Protexa, a
diversified oil services, construction and food products company in
Monterrey, Mexico from 1980 to 1985.
MATTHEW J. KAHNY, Vice President, Marketing-Mr. Kahny has been Vice
President, Marketing of the Registrant 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 Registrant 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 Registrant since January
1994. Since July 1984, he has held various positions at the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the sections captioned "Directors'
Compensation", "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement") is
incorporated by reference herein.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information appearing in the section "Principal Stockholders" in the 1998
Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the section captioned "Certain Transactions" in
the 1998 Proxy Statement is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) DOCUMENTS TO BE FILED AS PART OF THIS REPORT:
1. Financial statements under Item 8:
See Index to Consolidated Financial Statements and Financial Statement
Schedule included on page F-1 below in this report.
2. Financial Statement Schedule filed herewith:
See Index to Consolidated Financial Statements and Financial Statement
Schedule included on page F-1 below in this report.
All other schedules are omitted either because they are not required or
because the required information is included in the financial statements and
notes thereto included herein. See Index to Consolidated Financial
Statements and Financial Statement Schedule included on page F-1 below in
this report.
3. List of Exhibits. Each management contract or compensatory plan
or arrangement required to be filed as an Exhibit to this Form
10-K pursuant to Item 14(c) of this report is identified with an
asterisk (*).
EXHIBIT
NO.
- -------
2.1 Stock Purchase Agreement, dated as of December 21, 1995, by and among
Dal-Tile International Inc., Armstrong Enterprises, Inc., Armstrong
Cork Finance Corporation and Armstrong World Industries, Inc. (Filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K filed on
January 16, 1996 and incorporated herein by reference.)
2.2 Agreement and Plan of Merger among Dal-Tile International Inc., DTI
Investors LLC and DTI Merger Company, dated as of August 7, 1996
(Filed as Exhibit 2.1 to the Registrant's Form 10-Q filed on
November 7, 1996 and incorporated herein by reference.)
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<PAGE>
EXHIBIT
NO.
- -------
3.1 Second Amended and Restated Certificate of Incorporation of the
Company. (Filed as Exhibit 3.1 to the Registrant's Form 10-Q filed on
November 7, 1996 and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company. (Filed as Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 (No. 333-5069) and
incorporated herein by reference.)
4.1 Specimen form of certificate for Common Stock. (Filed as Exhibit 4.1
to the Registrant's Registration Statement on Form S-1 (No. 333-5069)
and incorporated herein by reference.)
10.1 Dal-Tile International Inc. 1996 Amended and Restated Stock Option
Plan. (Filed as Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 (No. 333-5069) and incorporated herein by
reference.)
*10.2 Consulting Agreement dated as of August 1, 1995, among Harold L. Turk,
Dal-Tile International Inc., Dal-Tile Corporation, DTM/CM Holdings
Inc., Dal-Minerals Company, Ceramica Regiomontana S.A. de C.V. and
Materiales Ceramicos, S.A. de C.V. (Filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1 (No. 333-5069) and
incorporated herein by reference.)
*10.3 Amended and Restated Employment Agreement, dated June 7, 1993, between
Dal-Tile Corporation and Harold G. Turk. (Filed as Exhibit 10.2.3 to
the Registrant's Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)
*10.4 Employment Agreement, dated February 5, 1990, between Dal-Tile
Corporation and Carlos E. Sala. (Filed as Exhibit 10.2.4 to the
Registrant's Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)
*10.5 Employment Agreement, dated April 15, 1994, between Dal-Tile
Corporation and Howard I. Bull. (Filed as Exhibit 10.2.5 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference.)
10.6 Indenture dated as of August 11, 1993, between Dal-Tile International
Inc. and Citibank, N.A., as trustee relating to the Zero Coupon Notes.
(Filed as Exhibit 4.1 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.)
10.7 First Supplemental Indenture dated as of August 1, 1996 between
Dal-Tile International Inc. and Citibank, N.A., as trustee, relating
to the Zero Coupon Notes.
10.8 Credit and Guarantee Agreement, dated August 14, 1996 among Dal-Tile
International Inc., Dal-Tile Group Inc., the several banks, financial
institutions and other entities from time-to-time party thereto,
Credit Suisse, as Documentation Agent, Goldman Sachs Credit Partners
L.P., as Syndication Agent, and The Chase Manhattan Bank, as
Administrative Agent. (Filed as Exhibit 10.1 to the Registrant's Form
10-Q filed on November 7, 1996 and incorporated herein by reference.)
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<PAGE>
EXHIBIT
NO.
- -------
10.9 Pledge Agreement dated as of October 4, 1996, made by Dal-Tile Group
Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
relating to the pledge of Common Stock of Dal-Tile Mexico, S.A. de
C.V. (Filed as Exhibit 10.2 to the Registrant's Form 10-Q filed on
November 7, 1996 and incorporated herein by reference.)
10.10 Pledge Agreement dated as of August 14, 1996, made by Dal-Tile
International Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent, relating to the pledge of common stock of
Dal-Tile Group Inc. (Filed as Exhibit 10.3 to the Registrant's Form
10-Q filed on November 7, 1996 and incorporated herein by reference.)
10.11 Pledge Agreement dated as of August 14, 1996 made by Dal-Tile Group
Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
relating to the pledge of common stock of Dal-Tile Corporation (Filed
as Exhibit 10.4 to the Registrant's Form 10-Q filed on November 7,
1996 and incorporated herein by reference.)
10.12 Pledge Agreement dated as of October 4, 1996, made by Dal-Tile Group
Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
relating to the pledge of common stock of Dal-Tile Mexico, S.A. de
C.V. (Filed as Exhibit 10.2 to the Registrant's Form 10-Q filed on
November 7, 1996 and incorporated herein by reference.)
10.13 Form of Indemnification Agreement between Dal-Tile International
Inc. and its directors and officers. (Filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)
10.14 Settlement Agreement dated as of May 20, 1993, among AEA Investors
Inc., DTM Investors Inc., Dal-Tile Group Inc., Dal-Tile Corporation,
Dal-Minerals Company and Robert M. Brittingham and John G.
Brittingham. (Filed as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No. 33-64140) and incorporated herein by
reference.)
10.15 Stockholders Agreement, dated December 29, 1995, among Dal-Tile
International Inc., AEA Investors Inc., Armstrong World Industries,
Inc., Armstrong Enterprises, Inc. and Armstrong Cork Finance
Corporation. (Filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference.)
10.16 Agreement, dated July 15, 1996, among Dal-Tile International Inc., AEA
Investors Inc., DTI Investors LLC, Armstrong World Industries, Inc.,
Armstrong Enterprises, Inc. and Armstrong Cork Finance Corporation.
(Filed as Exhibit 10.17 to the Registrant's Registration Statement on
Form S-1 (No. 333-5069) and incorporated herein by reference.)
*10.17 Employment Agreement, dated as of June 13, 1997, and amended as of
October 10,1997 between Dal-Tile International Inc. and Jacques R.
Sardas.
*10.18 Employment Agreement, dated as of August 25, 1997, and amended October
10, 1997, between Dal-Tile International Inc. and William C. Wellborn.
+10.19 Stock Appreciation Rights Agreements, dated as of October 10, 1997,
and amended February 20, 1998, between Dal-Tile International Inc. and
each of Jacques R. Sardas, William C.
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<PAGE>
EXHIBIT
NO.
- -------
Wellborn, Dan L. Cooke, Marc Powell, and David F. Finnigan.
10.20 First Amendment, dated as of June 19, 1997, to the Credit and
Guarantee Agreement (filed as Exhibit 10.1 to the Registrant's Form
10-Q filed on November 17, 1997 and incorporated herein by reference).
10.21 Second Amendment, dated as of September 30, 1997, to the Credit and
Guarantee Agreement (filed as Exhibit 10.2 to the Registrant's Form
10-Q filed on November 17, 1997 and incorporated herein by reference).
+10.22 Collateral Agreement, dated as of June 19, 1997, made by Dal-Tile
Group Inc. and certain of its subsidiaries in favor of the Chase
Manhattan Bank, as Administration Agent.
+10.23 Dal-Tile International Inc. 1997 Amended and Restated Stock Option
Plan
+21.1 List of subsidiaries of Dal-Tile International Inc.
+27.1 Financial Data Schedule
+ Filed herewith.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
See Item 14(a) above.
(d) Financial Statement Schedule
See Item 14(a) above.
-29-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 30TH DAY OF
MARCH 1998.
DAL-TILE INTERNATIONAL INC.
By: /s/ Jacques R. Sardas
------------------------------------------
JACQUES R. SARDAS
President, Chief Executive Officer and
Chairman of the Board of Directors
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jacques R. Sardas President, Chief Executive March 30, 1998
- --------------------------- Officer and Chairman of
JACQUES R. SARDAS the Board of Directors
/s/ William C. Wellborn Executive Vice President, March 30, 1998
- --------------------------- Chief Financial Officer,
WILLIAM C. WELLBORN Treasurer and Assistant
Secretary (Principal
Financial and Accounting
Officer)
/s/ John M. Goldsmith Director March 30, 1998
- ---------------------------
JOHN M. GOLDSMITH
/s/ Charles J. Pilliod, Jr. Director March 30, 1998
- ---------------------------
CHARLES J. PILLIOD, JR.
/s/ Henry F. Skelsey Director March 30, 1998
- ---------------------------
HENRY F. SKELSEY
30
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Douglas D. Danforth Director March 30, 1998
- ---------------------------
DOUGLAS D. DANFORTH
/s/ Vincent A. Mai Director March 30, 1998
- ---------------------------
VINCENT A. MAI
/s/ Norman E. Wells, Jr. Director March 30, 1998
- ---------------------------
NORMAN E. WELLS, JR.
31
<PAGE>
DAL-TILE INTERNATIONAL INC.
ITEM 14(A)-INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 31, 1995
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . .F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 2, 1998 and January 3, 1997 . . . . .F-3
Consolidated Statements of Operations for each of the
three years in the period ended January 2, 1998. . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended January 2, 1998. . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended January 2, 1998. . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and Qualifying Accounts. . . . . . . . . . . . . . . .S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Dal-Tile International Inc.
We have audited the accompanying consolidated balance sheets of Dal-Tile
International Inc. 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. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Dal-Tile International Inc. at January 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. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 16, 1998
F-2
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
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-3
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- ---------- ------------
(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-4
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
COMMON STOCK
--------------------------------------------------------------
CONVERTED
CLASS CLASS CLASS CLASS CLASS CLASS COMMON
A B C D E F STOCK
----- ----- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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) 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>
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-5
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
YEAR ENDED
----------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
---------- ---------- ------------
(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-6
<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>
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.
F-7
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments 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>
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.
F-8
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-9
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
FOR THE YEAR ENDED JANUARY 3, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
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.
F-10
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
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 financal
statements.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
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).
F-11
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
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>
F-12
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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>
F-13
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
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>
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
F-14
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
10. INCOME TAXES
Income (loss) before income taxes and extraordinary items relating to
operations is as follows:
<TABLE>
YEAR ENDED
-------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
----------- --------- ------------
(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>
F-15
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for income taxes include the following:
<TABLE>
YEAR ENDED
-------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
---------- ---------- ------------
(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>
YEAR ENDED
-------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
---------- ---------- ------------
(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-16
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
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-17
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
WEIGHTED AVERAGE
NUMBER OF SHARES TOTAL OPTION 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-18
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
WEIGHTED AVERAGE
EXERCISE OPTIONS REMAINING
PRICE OUTSTANDING CONTRACTUAL 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>
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
F-19
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of the options at the date of grant was estimated using the
binomial model with the following weighted average assumptions:
<TABLE>
YEAR ENDED
----------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
---------- ---------- ------------
<S> <C> <C> <C>
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
F-20
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-21
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by geographical area is summarized below:
<TABLE>
YEAR ENDED
-------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
---------- ---------- ------------
(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>
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.
F-22
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
Provided below are the condensed unconsolidated financial statements of
Dal-Tile International Inc.:
<TABLE>
JANUARY 2, JANUARY 3,
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
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>
<TABLE>
YEAR ENDED
----------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1998 1997 1995
---------- ---------- ------------
(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-23
<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>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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-24
<PAGE>
SCHEDULE II
DAL-TILE INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 31, 1995
Allowance for losses from Uncollectible Accounts:
<TABLE>
(b)
ADDITIONS DTI (b) DTI
BALANCE AT CHARGED TO (WITHOUT AO) AO BALANCE
BEGINNING COSTS AND (a) BALANCE AT BALANCE AT AT END
OF PERIOD EXPENSES DEDUCTIONS DECEMBER 31, 1995 DECEMBER 31, 1995 OF PERIOD
--------- -------- ---------- ----------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
1997. . . . $12,750 $27,805 $27,395 -- -- $13,160
1996. . . . 9,389 5,781 2,420 -- -- 12,750
1995. . . . 3,892 5,111 4,374 $4,629 $4,760 9,389
</TABLE>
- ---------
(a) Uncollectible accounts written off, net of recoveries.
(b) "DTI" means Dal-Tile International Inc. "AO" means American Olean Tile
Company, Inc.
S-1
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of June 13, 1997, and amended as of
October 10, 1997, by and between Dal-Tile International Inc., a Delaware
corporation (the "Company"), and Jacques Sardas (the "Executive").
The Company is engaged in the business of the manufacture,
distribution and marketing of glazed and unglazed tile. The Company desires
to employ the Executive and the Executive desires to accept such employment
on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and
agreements herein contained, and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereby
agree as follows:
1. TERM OF EMPLOYMENT. The term of the Executive's employment
under this Agreement (the "Term") shall commence on July 1, 1997 and continue
through and expire on December 31, 1999 unless earlier terminated as herein
provided.
2. DUTIES OF EMPLOYMENT. The Executive hereby agrees for the Term
to render his exclusive services to the Company as its President and Chief
Executive Officer, and in connection therewith, to perform such duties
commensurate with his office as he shall reasonably be directed by the Board
of Directors of the Company (the "Board") to perform. The Executive shall
devote during the Term all of his business time, energy and skill to his
executive duties hereunder and perform such duties faithfully and
efficiently, except for reasonable vacations and except for periods of
illness or incapacity. When and if requested to do so by the Board, the
Executive shall serve as a director of the Company and a director and officer
of any subsidiary or affiliate of the Company provided, that the Executive
shall be indemnified for liabilities incurred by him in his capacity as a
Director or an Officer in accordance with an Indemnification
<PAGE>
Agreement in the form attached hereto as Exhibit A and as provided in the
Company's Certificate of Incorporation and By-Laws as in effect from time to
time.
3. COMPENSATION AND OTHER BENEFITS.
3.1 SALARY. As compensation for all services to be rendered by
the Executive during the Term, the Company shall pay to the Executive a
salary at the annual rate of $600,000 per year (which may be increased from
time to time by the Board (the "Annual Salary")), payable in accordance with
the Company's usual payroll practices for executives. The Executive shall be
eligible to receive annual salary reviews and salary increases as authorized
by the Board.
3.2 BONUS. In addition to his Annual Salary, the Executive
shall be eligible to be paid a bonus in respect of each fiscal year of the
Company (the "Annual Bonus") in accordance with the Company's bonus plan (the
"Plan"), subject to approval of the material terms of the Plan by the
Company's shareholders in accordance with Section 162(m) of the Code, which
Annual Bonus shall be determined by the Compensation Committee of the Board
and which bonus shall be paid not later than 120 days after the end of such
fiscal year. The Company shall use its best efforts to obtain such
shareholder approval promptly. The amount of the bonus opportunity shall be
100% of the amount of the Annual Salary upon attainment of the "target"
performance goal. For the full fiscal year ending December 31, 1997, the
Company and the Executive have mutually agreed that the Annual Bonus shall be
$600,000, which shall be PRO-RATED for 1997 (I.E., $300,000).
3.3 STOCK SUBSCRIPTION AGREEMENT. The Executive shall be entitled
to purchase from the Company shares of common stock of the Company ("Common
Stock") at a per share price equal to the closing price on the day of purchase
(the "Shares") on the terms and conditions set forth in the Management
Subscription Agreement to be entered into in the form attached hereto as
Exhibit B. The Company
<PAGE>
agrees to lend the Executive 50% of the amount needed to purchase the Shares
up to a maximum of $1,500,000 on the terms set forth on Exhibit C.
3.4 STOCK OPTION AGREEMENT. The Company shall simultaneously
herewith, subject to approval by its shareholders of the Dal-Tile
International Inc. 1997 Amended and Restated Stock Option Plan in accordance
with Section 162(m) of the Code (the "Option Plan"), grant Executive options
(the "Options") to purchase 2,000,000 shares of Common Stock at an exercise
price per share equal to the fair market value of the Common Stock on the
date hereof on the terms and conditions set forth in the Option Plan and a
Stock Option Agreement to be entered into (the "Stock Option Agreement") in
the form attached hereto as Exhibit D, provided that the Company shall not be
obligated to issue options at an exercise price lower than the fair market
value of the Common Stock on the date of grant. The Company shall use its
best efforts to obtain such shareholder approval promptly. If Executive's
employment with the Company is terminated by the Company without Cause or by
the Executive with Good Reason (i) on or prior to June 30, 1998, the Options
shall be 50% vested and shall remain exercisable throughout their term and
(ii) after July 1, 1998 but prior to December 31, 1999, the Options shall be
100% vested and shall remain exercisable throughout their term.
3.5 PARTICIPATION IN EMPLOYEE BENEFIT PLANS. During the Term, the
Executive shall be permitted to participate in any group life, hospitalization
or disability insurance plan, health program, pension plan, similar benefit
plan or other so-called "fringe benefit programs" of the Company as now
existing or as may hereafter be revised or adopted.
4. COVENANTS AGAINST COMPETITION. In order to induce the Company to
enter into this Agreement, the Stock Option Agreement and the Management
Subscription Agreement, the Executive hereby agrees as follows:
4.1 ACKNOWLEDGMENTS OF EXECUTIVE. The Executive acknowledges that
(i) the Company and any affiliates or subsidiaries thereof that are currently
existing
<PAGE>
or are acquired or formed during the Restricted Period, as hereinafter
defined (collectively, the "Companies"), are and will be engaged primarily in
the business of the manufacture, distribution and marketing of glazed and
unglazed tile (the "Company Business"); (ii) his work for the Companies will
give him access to trade secrets of and confidential information concerning
the Companies, including, without limitation, information concerning its
organization, business and affairs, organization and operations, "know-how",
customer lists, details of client or consultant contracts, pricing policies,
financial information, operational methods, marketing plans or strategies,
business acquisition plans, new personnel acquisition plans, technical
processes, projects of the Companies, financing projections, budget
information and procedures, marketing plans or strategies, and research
products (collectively, the "Trade Secrets"); and (iii) the agreements and
covenants contained in this Section 4 are essential to protect the Company
Business and goodwill of the Companies.
4.2 RESTRICTIONS ON COMPETITION. During the Term and for a two-
year period after the end of the Term (the "Restricted Period") unless this
Agreement is terminated in accordance with the provisions of Section 5.4, the
Executive shall not, in any place where the Company Business is now or
hereafter conducted by any of the Companies while the Executive is an employee,
agent, officer, director or shareholder of the Companies, directly or
indirectly (a) engage in the Company Business for his own account; (b) enter
the employ of, or render any services to any person or entity engaged in the
Company Business; or (c) become interested in any such person or entity in any
capacity, including, without limitation, as an individual, partner,
shareholder, officer, director, principal, agent, trustee or consultant;
provided, however, that the Executive may own, directly or indirectly, solely
as an investment, securities of any entity traded on any national securities
exchange or registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934 if the Executive is not a controlling person of, or a member of a group
which controls, such entity and does not, directly or indirectly, own 3% or
more of
<PAGE>
any class of securities of such entity. The Company shall notify the
Executive of any additional entities which may hereafter become "Companies"
within the meaning of this Agreement.
4.3 CONFIDENTIAL INFORMATION; PERSONAL RELATIONSHIPS. During
the Restricted Period, the Executive shall keep secret and retain in
strictest confidence, and shall not use for the benefit of himself or others,
all confidential matters and Trade Secrets of the Companies.
4.4 PROPERTY OF THE COMPANIES. All memoranda, notes, lists,
records and other documents or papers, (and all copies thereof), including such
items stored in computer memories, on microfiche or by any other means, made or
compiled by or on behalf of the Executive, or made available to the Executive
relating to the Companies are and shall be the Companies' property and shall be
delivered to the Companies upon the expiration of the Term unless requested
earlier by the Companies.
4.5 EMPLOYEES OF THE COMPANIES. The Executive acknowledges that
any attempt on the part of the Executive to induce any employee of any of the
Companies to leave any of the Companies' employ, would be harmful and damaging
to the Companies. During the Restricted Period, the Executive will not without
the prior agreement of the Companies, in any way, directly or indirectly: (i)
induce or attempt to induce any employee to terminate employment with the
Companies; (ii) disrupt the Companies' relationship with any employee; or (iii)
solicit or entice any person employed by the Companies.
4.6 BUSINESS OPPORTUNITIES. The Executive acknowledges that the
Companies have been considering, and during the Term may consider, the
acquisition of various entities engaged in the Company Business and that it
would be harmful and damaging to the Companies if he were to become interested
in any such entity without the Company's prior consent. During the Restricted
Period, the Executive will not, without the Company's prior consent, become
interested in any such entity in any
<PAGE>
capacity, including, without limitation, as an individual, partner,
shareholder, officer, director, principal, agent, trustee or consultant, if
the Executive was aware at any time during the Term that the Companies had
been considering the acquisition of such entity.
4.7 RESTRICTIVE COVENANTS. For the purposes of this Agreement all
matters discussed in Sections 4.1, 4.2, 4.3, 4.4, 4.5 and 4.6 of this Agreement
shall be referred to as the "Restrictive Covenants."
4.8 RIGHTS AND REMEDIES UPON BREACH. If the Executive breaches,
or threatens to commit a breach of, any of the provisions of the Restrictive
Covenants, the Company shall have the following rights and remedies with
respect to the Executive, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity.
4.8.1 SPECIFIC PERFORMANCE. The right and remedy to have
the Restrictive Covenants specifically enforced, it being agreed that any
breach or threatened breach of the Restrictive Covenants would cause
irreparable injury to the Company and money damages will not provide an
adequate remedy to the Company.
4.8.2 ACCOUNTING. The right and remedy to require the
Executive to account for and pay over to the Company all compensation, profits,
monies, accruals, increments or other benefits derived or received by him as a
result of any transactions constituting a breach of the Restrictive Covenants.
4.8.3 SEVERABILITY OF COVENANTS. The Executive acknowledges
and agrees that the Restrictive Covenants are reasonable and valid in
geographical and moral scope and in all other respects. If any court
determines that any of the Restrictive Covenants, or any part thereof, are
invalid or unenforceable, the remainder of the Restrictive Covenants shall not
thereby be affected and shall be given full effect, without regard to the
invalid portions.
<PAGE>
4.8.4 BLUE-PENCILLING. If it is determined that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, the duration or scope of such
provision, as the case may be, shall be reduced so that such provisions becomes
enforceable and, in its reduced form, such provision shall then be enforceable.
4.9 ENFORCEABILITY IN JURISDICTION. The Company and the Executive
intend to and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the states or county which the
Company does business. If the courts of any one or more of such jurisdictions
hold the Restrictive Covenants unenforceable by reason of the breadth of such
scope or otherwise, it is the intention of the Company and the Executive that
such determination not bar or in any way affect the Company's right to relief
provided above in the courts of any other jurisdiction within the geographical
scope of the Restrictive Covenants, as to breaches of such Restrictive
Covenants in such other respective jurisdictions, such Restrictive Covenants as
they relate to each jurisdiction being, for this purpose, severable into
diverse and independent covenants.
5. TERMINATION.
5.1 TERMINATION UPON DEATH. If the Executive dies during the
Term, this Employment Agreement shall terminate immediately, except that the
Executive's legal representatives shall be entitled to receive any Annual
Salary to the extent such Annual Salary has accrued and remains payable up to
the date of the Executive's death (to be paid in accordance with the Company's
usual payroll practices for executives), plus a portion of the Executive's
Annual Bonus, as set forth in Section 3.2 computed on a pro rata basis based on
the performance of the Company from the beginning of such bonus period to the
date of Executive's death (to be paid as promptly as practicable, but no later
than 10 days after the determination thereof), and any benefits to which the
Executive, his heirs or legal representatives may be entitled under and in
<PAGE>
accordance with the terms of any employee benefits plan or program maintained
by the Company.
5.2 TERMINATION UPON DISABILITY. If the Executive becomes
disabled during his employment hereunder so that he is unable substantially to
perform his services hereunder for 180 consecutive days, then the term of this
Agreement may be terminated by resolution of the Board sixty days after the
expiration of such 180 days, such termination to be effective upon delivery of
written notice to the Executive of the adoption of such resolution; provided,
that the Executive shall be entitled to receive any accrued and unpaid Annual
Salary through such effective date of termination (to be paid in accordance
with the Company's usual payroll practices for executives), plus a portion of
the Executive's Annual Bonus, as set forth in Section 3.2 computed on a pro
rata basis based on the performance of the Company from the beginning of such
bonus period to the date of termination (to be paid as promptly as practicable,
but no later than 10 days after the determination thereof), and any benefits to
which the Executive may be entitled under and in accordance with the terms of
any employee benefits plan or program maintained by the Company.
5.3 TERMINATION FOR CAUSE. The Company has the right, at any time
during the Term, subject to all of the provisions hereof, exercisable by
serving notice, effective in accordance with its terms, to terminate the
Executive's employment under this Agreement and discharge the Executive for
"Cause" (as defined below). If such right is exercised, the Executive shall be
entitled to receive unpaid and accrued base salary prorated through the date of
such termination, any benefits vested as of the date of such termination and
any other compensation or benefits otherwise required to be paid under
applicable law. Except for such payments, the Company shall be under no
further obligation to the Executive. As used in this Section 5, the term
"Cause" shall mean (i) the conviction of or plea of guilty by the Executive of
any felony or other serious crime involving the Company, or (ii) gross or
willful misconduct by the Executive in the
<PAGE>
performance of his duties hereunder; provided however, that no act shall be
considered gross or willful misconduct if the Executive believes he was
acting in good faith or in a manner not opposed to the interests of the
Company. The Company shall be entitled to terminate the Executive for Cause
only upon approval of a resolution adopted by the affirmative vote of not
less than two-thirds of the membership of the Board (excluding Executive).
The Company agrees to provide to the Executive prior written notice (the
"Notice") of its intention to terminate Executive's employment for Cause,
such notice to state in detail the particular acts or failures to act which
constitute grounds for the termination. The Executive shall be entitled to a
hearing before the Board to contest the Board's findings, and to be
accompanied by counsel. Such hearing shall be held within 15 days of the
request thereof to the Company by the Executive, provided that such request
must be made within 15 days of delivery of the Notice. If, following any
such hearing, the Board maintains its determination to terminate the
Executive's employment for Cause, the effective date of such termination
shall be as specified in the Notice.
5.4 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. The Company
shall have the right at any time during the Term to terminate the Executive's
employment hereunder without Cause. Upon such a termination or the termination
by the Executive for Good Reason, the Company's sole obligation hereunder,
except as otherwise provided in Section 3.4, shall be to pay to the Executive
(i) an amount equal to any Annual Salary accrued and due and payable to the
Executive hereunder on the date of termination (to be paid in accordance with
the Company's usual payroll practices for executives), (ii) thereafter all
Annual Salary for the remainder of the Term, in accordance with the Company's
usual payroll practices for executives, and (iii) in a lump sum payment (to be
paid as promptly as practicable, but no later than 10 days after the
determination thereof), the greater of (A) a portion of the Executive's Annual
Bonus as set forth in Section 3.2 computed on a pro rated basis based on the
performance of the Company from the beginning of the bonus period to the date
of termination and (B) an
<PAGE>
amount equal to the amount of the Annual Bonus for the fiscal year preceding
the fiscal year in which the date of termination occurs, pro rated based on
the number of days elapsed in the year of termination. For purposes of this
Agreement, "Good Reason" shall mean (i) a reduction in the Annual Salary or
maximum bonus opportunity as specified in Section 3.2, (ii) a relocation of
the Company's headquarters more than 100 miles outside of the Dallas/Fort
Worth Metropolitan area, (iii) a material diminution in the Executive's
duties or responsibilities, or (iv) an adverse change in the Executive's
title, (vi) assignment to Executive of duties and responsibilities that are
inconsistent with his position in any material respect, or (vii) failure of
the Board to nominate Executive for election to the Board, or removal of the
Executive from the Board without his consent.
5.5 OTHER. Except as otherwise provided herein, upon the
expiration or other termination of this Agreement, including the resignation of
Executive, all obligations of the Company shall forthwith terminate, except as
to any stock option rights as provided in the Stock Option Agreement and the
Right (as defined below) as provided in the SAR Agreement (as defined below)
and except as otherwise required by applicable law.
6. EXPENSES.
6.1 GENERAL. During the Term, the Executive will be reimbursed
for his reasonable professional and personal expenses incurred for the benefit
of the Company in accordance with the general policy of the Company or
directives and guidelines established by management of the company and upon
submission of documentation satisfactory to the Company. Such expenses shall
include, but shall not be limited to, travel, entertainment, club dues and
promotional expenses and transportation expenses. With respect to any expenses
which are to be reimbursed by the Company to the Executive, the Executive shall
be reimbursed upon his presenting to the Company an itemized expense voucher.
<PAGE>
6.2 RELOCATION. Executive shall be reimbursed for reasonable
expenses incurred by him to relocate from Ohio to Dallas, Texas, plus
reasonable living expenses and reasonable expenses for commuting until the
earlier of (i) the relocation of his residence to Dallas or (ii) July 1, 1998.
7. OTHER PROVISIONS.
7.1 NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, five days after the date of deposit in the United
States mail, as follows:
(i) if to the Company, to:
Dal-Tile International Inc.
c/o AEA Investors Inc.
65 East 55 Street
New York, NY 10022
Attention: Christine J. Smith
(ii) if to the Executive, to:
Jacques Sardas
1287 Country Club Road
Akron, Ohio 44313
with a copy to:
Ira C. Kaplan, Esq.
Benesch, Friedlander, Coplan & Aronoff, LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
Any party may change its address for notice hereunder by notice to the
other parties hereto.
7.2 ENTIRE AGREEMENT. This Agreement, the Management
Subscription Agreement, the SAR Agreement and the Option Agreement contain
the
<PAGE>
entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements, written or oral, with respect
thereto.
7.3 WAIVERS AND AGREEMENTS. This Agreement may be amended,
modified, superseded, cancelled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder, nor any single or
partial exercise of any right, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege hereunder.
7.4 GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware applicable to agreements
made and to be performed entirely within such State.
7.5 ASSIGNMENT. Executive may not delegate the performance of any
of his duties hereunder. Neither party hereto may assign any rights hereunder
without the written consent of the other party hereto. Subject to the
foregoing, this Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns.
7.6 COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original but both of which
together shall constitute one and the same instrument.
7.7 HEADINGS. The headings in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
8. ARBITRATION. In the event of a dispute between the Company and
the Executive over the terms of this Agreement which is not settled by the
parties, then the
<PAGE>
Company and the Executive agree to settle any and all such disputed issues by
arbitration in accordance with the then-existing rules of the American
Arbitration Association. The Company and the Executive shall jointly appoint
one person to act as the arbitrator. In the event the Company and the
Executive cannot agree to an arbitrator within 30 days, the arbitrator shall
be chosen by the President of the American Arbitration Association. The
decision of the arbitrator shall be binding upon the parties and there shall
be no appeal therefrom other than for bias, fraud or misconduct. The costs
of the arbitration, including the fees and expenses of the arbitrator, shall
be borne fifty percent by the Company, on the one hand, and fifty percent by
the Executive, on the other, but each party shall pay its own attorneys'
fees; provided, however, that if the arbitrator shall rule for the Executive,
the Company shall pay or reimburse the Executive's reasonable attorneys' fees
and the Executive's share of the arbitration costs incurred in connection
with such arbitration. Notwithstanding the foregoing, it is specifically
understood that Executive shall remain free to assert and enforce in any
court of competent jurisdiction such rights, if any, as Executive may have
under federal law, including without limitation, rights arising under Title
VII of the Civil Rights Act of 1964, as amended, the Age Discrimination and
Employment Act of 1967, as amended, and/or the Americans With Disabilities
Act of 1990.
9. STOCK OPTIONS; REGISTRATION.
(a) The Company agrees, upon the occurrence of a Filing Event (as
defined below), as promptly as practicable but not later than 45 days after
such occurrence, to (i) file with the Securities and Exchange Commission (the
"SEC"), at the Company's cost and expense, a Registration Statement on Form S-8
(or similar form) with respect to the shares of Common Stock issuable upon
exercise of the Options and the Right (as defined in the Stock Appreciation
Rights Agreement, dated as of October 10, 1997, between the Company and
Executive (the "SAR Agreement)) (ii) maintain the effectiveness of such
Registration Statement (subject to the other provisions of this
<PAGE>
Section 9) until all of the Options and the Right shall have been exercised
in full or shall have expired, whichever shall first occur, and (iii)
provide to Executive copies of the Registration Statement and all amendments,
if any, thereto. The Company further agrees to cause any Registration
Statement on Form S-8 filed by the Company on behalf of its other employees
to cover the Options and the Right held by the Executive.
(b) If the Company proposes to effect an underwritten secondary
registration on behalf of DTI Investors LLC or its members, the Company will
provide prompt notice to the Executive thereof and will permit the Executive to
include in such registration shares of Common Stock owned by him with respect
to which the Company has received written request for inclusion therein within
20 days after the receipt of the Company's notice. Common Stock requested by
the Executive to be included in such registration will be included pro rata on
the basis of the number of shares of Common Stock held by the Executive and the
other participants in such registration, subject to reduction, if necessary, if
the managing underwriter for the offering advises the Company that such
reduction is advisable in order to avoid an adverse effect on the proposed
offering. The Company shall bear all expenses in connection with such
registration, other than underwriting discounts and commissions and transfer
taxes, if any, and fees and expenses of the Executive's legal and other
advisers, attributable to the inclusion in such registration of Common Stock
owned by Executive.
(c) The obligations of the Company contained in this Section 9 are
subject to (i) requirements of applicable law, (ii) restrictions that may be
imposed by the Company's underwriters, and (iii) Executive cooperating and
providing any needed consents, agreements (including any required "lock up" or
customary indemnity agreements, to the extent such arrangements are requested
of members of Company management or significant shareholders, generally) and
information. Executive agrees that he will discontinue any exercise of Options
or Rights or sale of shares of Common Stock upon notice from the Company that
an event or development makes amendment or
<PAGE>
supplement of any Registration Statement of the Company (or suspension of
effectiveness thereof) necessary, and will not resume such exercise or sale
until the Company informs Executive he may do so (provided that the Company
shall not require such discontinuance for more than 90 days in any 360-day
period). Executive specifically agrees that, in connection with a Filing
Event described in clause (i) of the definition thereof, he will not sell,
transfer or otherwise dispose of any shares of Common Stock, for a period of
180 days following such event, unless the underwriters for the relevant
public offering determine a shorter period to be appropriate.
(d) For the purpose of this Section 9, "Filing Event" shall mean the
earliest to occur of the following events: (i) the sale in a registered public
offering of at least 10% of the shares of Common Stock held at such time by DTI
Investors LLC or its members (taken as a group), (ii) the termination or
liquidation of DTI Investors LLC; and (iii) the date of termination of the
Executive's employment (A) by the Company without Cause or by reason of
disability or by the Executive for Good Reason, (B) as a result of the
expiration of the original Term of this Agreement (December 31, 1999) or (C)
by reason of the Executive's death.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
DAL-TILE INTERNATIONAL INC.
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
-----------------------------------
Jacques Sardas
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of August 25, 1997, and amended as of
October 10, 1997, by and between Dal-Tile International Inc., a Delaware
corporation (the "Company"), and Christopher Wellborn (the "Executive").
The Company is engaged in the business of the manufacture,
distribution and marketing of glazed and unglazed tile. The Company desires
to employ the Executive and the Executive desires to accept such employment
on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and
agreements herein contained, and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereby
agree as follows:
1. TERM OF EMPLOYMENT. The term of the Executive's employment
under this Agreement (the "Term") shall commence on August 25, 1997 and
continue through and expire on August 25, 2000 unless earlier terminated as
herein provided.
2. DUTIES OF EMPLOYMENT. The Executive hereby agrees for the Term
to render his exclusive services to the Company as its Chief Financial
Officer, and in connection therewith, to perform such duties commensurate
with his office as he shall reasonably be directed by the Chief Executive
Officer of the Company (the "CEO") to perform. The Executive shall devote
during the Term all of his business time, energy and skill to his executive
duties hereunder and perform such duties faithfully and efficiently, except
for reasonable vacations and except for periods of illness or incapacity.
When and if requested to do so by the Board of Directors of the Company (the
"Board"), the Executive shall, for no additional compensation, serve as a
director of the Company and a director and officer of any subsidiary or
affiliate of the Company provided that the Executive shall be indemnified for
liabilities incurred by him in his capacity as a director or an officer in
accordance with an Indemnification Agreement in the form attached
<PAGE>
hereto as Exhibit A and as provided in the Company's Certificate of
Incorporation and By-Laws as in effect from time to time.
3. COMPENSATION AND OTHER BENEFITS.
3.1 SALARY. As compensation for all services to be rendered by
the Executive during the Term, the Company shall pay to the Executive a
salary at the rate of $300,000 per year (which may be increased from time to
time by the Board (the "Annual Salary")), payable in accordance with the
Company's usual payroll practices for executives. The Executive shall be
eligible to receive annual salary reviews and salary increases as authorized
by the Board.
3.2 BONUS. In addition to his Annual Salary, the Executive
shall be eligible to be paid a bonus in respect of each fiscal year of the
Company (the "Annual Bonus") in accordance with the Company's bonus plan (the
"Plan"), which Annual Bonus shall be determined by the Compensation Committee
of the Board. The amount of the Annual Bonus shall be up to 100% of the
amount of the Annual Salary upon attainment of the "target" performance goal
established under the Plan as determined by the Compensation Committee of the
Board and the Board. For the full fiscal year ending December 31, 1997, the
Company and the Executive have mutually agreed that the Annual Bonus shall be
50% of the Annual Salary, which shall be prorated for 1997 and which shall be
paid not later than January 31, 1998. In addition, the Company shall pay
Executive a sign-on bonus, which shall be payable on execution of this
Agreement. The sign-on bonus amount shall be equal to $140,000, subject to
the provisions of Section 6.3 hereof.
3.3 STOCK OPTION AGREEMENT. The Company shall, subject to
approval by its shareholders of the Dal-Tile International Inc. 1997 Amended
and Restated Stock Option Plan in accordance with Section 162(m) of the Code
(the "Option Plan"), grant options (the "Options") to purchase 310,000 shares
of its Common Stock at an exercise price per share equal to the fair market
value of the Common Stock on the
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<PAGE>
date hereof on the terms and conditions set forth in the Option Plan and a
Stock Option Agreement to be entered into (the "Stock Option Agreement") in
the form attached hereto as Exhibit B. If Executive's employment with the
Company is terminated by the Company without Cause (as defined herein) or
upon the occurrence of a Transaction (as defined in the Stock Option Plan),
the Options shall be 100% vested.
3.4 PARTICIPATION IN EMPLOYEE BENEFIT PLANS. Commencing on the
respective eligibility dates of the employee benefit plans, during the Term,
the Executive shall be permitted to participate in any group life,
hospitalization or disability insurance plan, health program, pension plan,
similar benefit plan or other so-called "fringe benefit programs" of the
Company as now existing or as may hereafter be revised or adopted. In
addition, for the 90-day period commencing on the date hereof, the Executive
shall be reimbursed for the expense incurred by him to maintain his existing
medical insurance coverage under COBRA in an amount not to exceed $450.00 per
month.
3.5 VACATION. The Executive shall be entitled to three (3)
weeks vacation per annum.
4. COVENANTS AGAINST COMPETITION. In order to induce the Company
to enter into this Agreement and the Stock Option Agreement, the Executive
hereby agrees as follows:
4.1 ACKNOWLEDGMENTS OF EXECUTIVE. The Executive acknowledges
that (i) the Company and any affiliates or subsidiaries thereof that are
currently existing or are acquired or formed during the Restricted Period, as
hereinafter defined (collectively, the "Companies"), are and will be engaged
primarily in the business of the manufacture of glazed and unglazed tile, for
which marketing and distribution is a primary business (the "Company
Business"); (ii) his work for the Companies will give him access to trade
secrets of and confidential information concerning the Companies, including,
without limitation, information concerning its organization, business and
affairs, organization and operations, "know-how", customer lists, details of
client or
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<PAGE>
consultant contracts, pricing policies, financial information, operational
methods, marketing plans or strategies, business acquisition plans, new
personnel acquisition plans, technical processes, projects of the Companies,
financing projections, budget information and procedures, marketing plans or
strategies, and research products (collectively, the "Trade Secrets"); and
(iii) the agreements and covenants contained in this Section 4 are essential
to protect the Company Business and goodwill of the Companies.
4.2 RESTRICTIONS ON COMPETITION. During the Term and for a
two-year period after the end of the Term (the "Restricted Period") unless
this Agreement is terminated in accordance with the provisions of Section
5.4, the Executive shall not, in any place where the Company Business is now
or hereafter conducted by any of the Companies while the Executive is an
employee, agent, officer, director or shareholder of the Companies, directly
or indirectly (a) engage in the Company Business for his own account; (b)
enter the employ of, or render any services to any person or entity engaged
in the Company Business; or (c) become interested in any such person or
entity in any capacity, including, without limitation, as an individual,
partner, shareholder, officer, director, principal, agent, trustee or
consultant; provided, however, that the Executive may own, directly or
indirectly, solely as an investment, securities of any entity traded on any
national securities exchange or registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934 if the Executive is not a controlling person
of, or a member of a group which controls, such entity and does not, directly
or indirectly, own 3% or more of any class of securities of such entity. The
Company shall notify the Executive of any additional entities which may
hereafter become "Companies" within the meaning of this Agreement.
4.3 CONFIDENTIAL INFORMATION; PERSONAL RELATIONSHIPS. During
the Restricted Period, the Executive shall keep secret and retain in
strictest confidence, and shall not use for the benefit of himself or others,
all confidential matters and Trade Secrets of the Companies.
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<PAGE>
4.4 PROPERTY OF THE COMPANIES. All memoranda, notes, lists,
records and other documents or papers, (and all copies thereof), including
such items stored in computer memories, on microfiche or by any other means,
made or compiled by or on behalf of the Executive, or made available to the
Executive relating to the Companies are and shall be the Companies' property
and shall be delivered to the Companies upon the expiration of the Term
unless requested earlier by the Companies.
4.5 EMPLOYEES OF THE COMPANIES. The Executive acknowledges that
any attempt on the part of the Executive to induce any employee of any of the
Companies to leave any of the Companies' employ, or any efforts by the
Executive to interfere with the Companies' relationship with other employees,
would be harmful and damaging to the Companies. During the Restricted
Period, the Executive will not without the prior agreement of the Companies,
in any way, directly or indirectly: (i) induce or attempt to induce any
employee to terminate employment with the Companies; (ii) interfere with or
disrupt the Companies' relationship with any employee; or (iii) solicit or
entice any person employed by the Companies.
4.6 BUSINESS OPPORTUNITIES. The Executive acknowledges that the
Companies have been considering, and during the Term may consider, the
acquisition of various entities engaged in the Company Business and that it
would be harmful and damaging to the Companies if he were to become
interested in any such entity without the Company's prior consent. During
the Restricted Period, the Executive will not, without the Company's prior
consent, become interested in any such entity in any capacity, including,
without limitation, as an individual, partner, shareholder, officer,
director, principal, agent, trustee or consultant, if the Executive was aware
at any time during the Term that the Companies had been considering the
acquisition of such entity.
4.7 RESTRICTIVE COVENANTS. For the purposes of this Agreement
all matters discussed in Sections 4.1, 4.2, 4.3, 4.4, 4.5 and 4.6 of this
Agreement shall be referred to as the "Restrictive Covenants."
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<PAGE>
4.8 RIGHTS AND REMEDIES UPON BREACH. If the Executive breaches,
or threatens to commit a breach of, any of the provisions of the Restrictive
Covenants, the Company shall have the following rights and remedies with
respect to the Executive, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to
the Company under law or in equity.
4.8.1 SPECIFIC PERFORMANCE. The right and remedy to have
the Restrictive Covenants specifically enforced, it being agreed that any
breach or threatened breach of the Restrictive Covenants would cause
irreparable injury to the Company and money damages will not provide an
adequate remedy to the Company.
4.8.2 ACCOUNTING. The right and remedy to require the
Executive to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits derived or received
by him as a result of any transactions constituting a breach of the
Restrictive Covenants.
4.8.3 SEVERABILITY OF COVENANTS. The Executive
acknowledges and agrees that the Restrictive Covenants are reasonable and
valid in geographical and moral scope and in all other respects. If any
court determines that any of the Restrictive Covenants, or any part thereof,
are invalid or unenforceable, the remainder of the Restrictive Covenants
shall not thereby be affected and shall be given full effect, without regard
to the invalid portions.
4.8.4 BLUE-PENCILLING. If it is determined that any of
the Restrictive Covenants, or any part thereof, is unenforceable because of
the duration or geographic scope of such provision, the duration or scope of
such provision, as the case may be, shall be reduced so that such provisions
becomes enforceable and, in its reduced form, such provision shall then be
enforceable.
4.9 ENFORCEABILITY IN JURISDICTION. The Company and the
Executive intend to and hereby confer jurisdiction to enforce the Restrictive
Covenants upon the
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<PAGE>
courts of any jurisdiction within the states or county which the Company does
business. If the courts of any one or more of such jurisdictions hold the
Restrictive Covenants unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the Company and the Executive that such
determination not bar or in any way affect the Company's right to relief
provided above in the courts of any other jurisdiction within the
geographical scope of the Restrictive Covenants, as to breaches of such
Restrictive Covenants in such other respective jurisdictions, such
Restrictive Covenants as they relate to each jurisdiction being, for this
purpose, severable into diverse and independent covenants.
5. TERMINATION.
5.1 TERMINATION UPON DEATH. If the Executive dies during the
Term, this Employment Agreement shall terminate immediately, except that the
Executive's legal representatives shall be entitled to receive any Annual
Salary to the extent such Annual Salary has accrued and remains payable up to
the date of the Executive's death (to be paid in accordance with the
Company's usual payroll practices for executives), plus a portion of the
Executive's Annual Bonus, as set forth in Section 3.2 computed on a pro rata
basis based on the performance of the Company from the beginning of such
bonus period to the date of Executive's death, and any benefits to which the
Executive, his heirs or legal representatives may be entitled under and in
accordance with the terms of any employee benefits plan or program maintained
by the Company.
5.2 TERMINATION UPON DISABILITY. If the Executive becomes
disabled during his employment hereunder so that he is unable substantially
to perform his services hereunder for 180 days during any 365 day period,
then the term of this Agreement may be terminated by resolution of the Board
sixty days after the expiration of such 180 days, such termination to be
effective upon delivery of written notice to the Executive of the adoption of
such resolution; provided, that the Executive shall be
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<PAGE>
entitled to receive any accrued and unpaid Annual Salary through such
effective date of termination (to be paid in accordance with the Company's
usual payroll practices for executives), plus a portion of the Executive's
Annual Bonus, as set forth in Section 3.2 computed on a pro rata basis based
on the performance of the Company from the beginning of such bonus period to
the date of termination, and any benefits to which the Executive may be
entitled under and in accordance with the terms of any employee benefits plan
or program maintained by the Company.
5.3 TERMINATION FOR CAUSE. The Company has the right, at any
time during the Term, subject to all of the provisions hereof, exercisable by
serving notice, effective in accordance with its terms, to terminate the
Executive's employment under this Agreement and discharge the Executive for
"Cause" (as defined below). If such right is exercised, the Executive shall
be entitled to receive unpaid and accrued base salary prorated through the
date of such termination, any benefits vested as of the date of such
termination and any other compensation or benefits otherwise required to be
paid under applicable law. Except for such payments, the Company shall be
under no further obligation to the Executive. As used in this Section 5, the
term "Cause" shall mean and include (i) the conviction of or plea of guilty
by the Executive of any felony or other serious crime involving the Company,
or (ii) gross or willful misconduct by the Executive in the performance of
his duties hereunder; provided however, that no act shall be considered gross
or willful misconduct if the Executive believes he was acting in good faith
or in a manner not opposed to the interests of the Company. The Company
shall be entitled to terminate the Executive for Cause only upon approval of
a resolution adopted by the affirmative vote of not less than two-thirds of
the membership of the Board (excluding Executive). The Company agrees to
provide to the Executive prior written notice (the "Notice") of its intention
to terminate Executive's employment for Cause, such notice to state in detail
the particular acts or failures to act which constitute grounds for the
termination. The Executive shall be entitled to a hearing before the Board
to
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<PAGE>
contest the Board's findings, and to be accompanied by counsel. Such hearing
shall be held within 15 days of the request thereof to the Company by the
Executive, provided that such request must be made within 15 days of delivery
of the Notice. If, following any such hearing, the Board maintains its
determination to terminate the Executive's employment for Cause, the
effective date of such termination shall be as specified in the Notice.
5.4 TERMINATION WITHOUT CAUSE. The Company shall have the right
at any time during the Term to terminate the Executive's employment
hereunder, without Cause, at which time the Company's sole obligation
hereunder shall be to (i) pay to the Executive an amount equal to any Annual
Salary accrued and due and payable to the Executive hereunder on the date of
termination (to be paid in accordance with the Company's usual payroll
practices for executives), (ii) thereafter, pay to the Executive all Annual
Salary for the remainder of the Term to be paid in accordance with the
Company's usual payroll practices for executives and (iii) provide to the
Executive for the remainder of the Term any benefits to which the Executive
may be entitled under and in accordance with the terms of any employee
benefits plan or program maintained by the Company. Effective as of the date
of such termination, accrual of vacation time shall be discontinued.
Notwithstanding the foregoing provisions of this Section 5.4, in no event
shall Annual Salary be provided for less than one (1) year from the date of
such termination.
5.5. NON-RENEWAL OF EMPLOYMENT AGREEMENT. If the Company
shall not renew this Agreement at the end of the Term, the Company's sole
obligation hereunder shall be to (i) pay to the Executive an amount equal to
any Annual Salary accrued and due and payable to the Executive hereunder on
the effective date of non-renewal (to be paid in accordance with the
Company's usual payroll practices for executives), (ii) thereafter, pay to
the Executive an amount equal to a maximum of Annual Salary payable for one
year to be paid in accordance with the Company's usual
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<PAGE>
payroll practices for executives and (iii) provide to the Executive for a
maximum period of one year commencing on the effective date of non-renewal
any benefits to which the Executive may be entitled under and in accordance
with the terms of any employee benefits plan or program maintained by the
Company. As of the effective date of such non-renewal, accrual of vacation
time shall be discontinued. Upon acceptance by Executive of an employment
opportunity other than with the Company, payments by the Company pursuant to
clauses (ii) and (iii) of this Section 5.5 shall terminate.
5.6 OTHER. Except as otherwise provided herein, upon the
expiration or other termination of this Agreement, including the resignation
of Executive, all obligations of the Company shall forthwith terminate,
except as to any stock option rights as provided in the Stock Option
Agreement and the Right (as defined in the Stock Appreciation Rights
Agreement, dated as of October 10, 1997, between the Executive and the
Company (the "SAR Agreement")) and except as otherwise required by applicable
law.
6. EXPENSES.
6.1 GENERAL. During the Term, the Executive will be reimbursed
for his reasonable expenses incurred for the benefit of the Company in
accordance with the general policy of the Company or directives and
guidelines established by management of the Company and upon submission of
documentation satisfactory to the Company. With respect to any expenses
which are to be reimbursed by the Company to the Executive, the Executive
shall be reimbursed upon his presenting to the Company an itemized expense
voucher.
6.2 RELOCATION. Executive shall be reimbursed for reasonable
expenses incurred by him to relocate from Pennsylvania to Dallas, Texas, plus
reasonable living expenses for the 90-day period commencing on the date
hereof. Relocation expenses shall include (i) normal and customary closing
costs in connection with the sale of Executive's Pennsylvania residence (the
"Pennsylvania Residence") and the purchase
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<PAGE>
of Executive's residence in Texas and (ii) moving expenses. The Company and
the Executive have mutually agreed that the Company shall arrange the
movement of Executive's household items from Pennsylvania to Dallas, Texas.
In addition, the Company shall pay to the Executive an amount equal to the
Federal tax liability (based on a 28% income tax rate) incurred by Executive
in connection with the expenses set forth in this Section 6.2.
6.3 PRICE PROTECTION. Executive shall be responsible for the
sale of the Pennsylvania Residence. In connection therewith, if Executive
sells the Pennsylvania Residence for an amount equal to or less than
$390,000, the Company shall pay Executive an amount equal to $40,000 (the
"Price Protection Amount"), which Price Protection Amount has been included
in Executive's sign-on bonus. If Executive sells the Pennsylvania Residence
for an amount greater than $390,000 but less than $430,000, Executive shall
repay to the Company the difference between the price at which the
Pennsylvania Residence is sold and $390,000. If Executive sells the
Pennsylvania Residence for an amount equal to or greater than $430,000,
Executive shall repay $40,000 to the Company.
7. OTHER PROVISIONS.
7.1 NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, five days after the date of deposit in the United
States mail, as follows:
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(i) if to the Company, to:
Dal-Tile International Inc.
c/o AEA Investors Inc.
65 East 55 Street
New York, NY 10022
Attention: Christine J. Smith
(ii) if to the Executive, to:
Christopher Wellborn
13 Highview Lane
Yardley, PA 19067
Any party may change its address for notice hereunder by notice to the
other parties hereto.
7.2 ENTIRE AGREEMENT. This Agreement, the Option Agreement and
the SAR Agreement contains the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements,
written or oral, with respect thereto.
7.3 WAIVERS AND AGREEMENTS. This Agreement may be amended,
modified, superseded, cancelled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder, nor any single or
partial exercise of any right, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege hereunder.
7.4 GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such State.
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<PAGE>
7.5 ASSIGNMENT. Executive may not delegate the performance of
any of his duties hereunder. Neither party hereto may assign any rights
hereunder without the written consent of the other party hereto.
7.6 COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original but both of which
together shall constitute one and the same instrument.
7.7 HEADINGS. The headings in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation
of this Agreement.
8. ARBITRATION. In the event of a dispute between the Company and
the Executive over the terms of this Agreement which is not settled by the
parties, then the Company and the Executive agree to settle any and all such
disputed issues by arbitration in accordance with the then-existing rules of
the American Arbitration Association. The Company and the Executive shall
jointly appoint one person to act as the arbitrator. In the event the
Company and the Executive cannot agree to an arbitrator within 30 days, the
arbitrator shall be chosen by the President of the American Arbitration
Association. The decision of the arbitrator shall be binding upon the
parties and there shall be no appeal therefrom other than for bias, fraud or
misconduct. The costs of the arbitration, including the fees and expenses of
the arbitrator, shall be borne fifty percent by the Company, on the one hand,
and fifty percent by the Executive, on the other, but each party shall pay
its own attorneys' fees; provided, however, that if the arbitrator shall rule
for the Executive, the Company shall pay or reimburse the Executive's
reasonable attorneys' fees and the Executive's share of the arbitration costs
incurred in connection with such arbitration. Notwithstanding the foregoing,
it is specifically understood that Executive shall remain free to assert and
enforce in any court of competent jurisdiction such rights, if any, as
Executive may have under federal law, including without limitation, rights
arising under Title VII of the Civil Rights Act of 1964, as amended, the Age
Discrimination and
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<PAGE>
Employment Act of 1967, as amended, and/or the Americans With Disabilities
Act of 1990.
9. PIGGYBACK RIGHTS.
(a) If the Company proposes to effect an underwritten
secondary registration on behalf of DTI Investors LLC or its members, the
Company will provide prompt notice to the Executive thereof and will permit
the Executive to include in such registration shares of Common Stock owned by
him with respect to which the Company has received written request for
inclusion therein within 20 days after the receipt of the Company's notice.
Common Stock requested by the Executive to be included in such registration
will be included pro rata on the basis of the number of shares of Common
Stock held by the Executive and the other participants in such registration,
subject to reduction, if necessary, if the managing underwriter for the
offering advises the Company that such reduction is advisable in order to
avoid an adverse effect on the proposed offering. The Company shall bear all
expenses in connection with such registration, other than underwriting
discounts and commissions and transfer taxes, if any, and fees and expenses
of the Executive's legal and other advisers, attributable to the inclusion in
such registration of Common Stock owned by Executive.
(b) The obligations of the Company contained in this Section 9 are
subject to (i) requirements of applicable law, (ii) restrictions that may be
imposed by the Company's underwriters, and (iii) Executive cooperating and
providing any needed consents, agreements (including any required "lock up"
or customary indemnity agreements, to the extent such arrangements are
requested of members of Company management or significant shareholders,
generally) and information. Executive agrees that he will discontinue any
exercise of Options or Rights or sale of shares of Common Stock upon notice
from the Company that an event or development makes amendment or supplement
of any Registration Statement of the Company (or suspension of effectiveness
thereof) necessary, and will not resume such exercise or sale until the
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Company informs Executive he may do so (provided that the Company shall not
require such discontinuance for more than 90 days in any 360-day period).
Executive specifically agrees that, in connection with a Filing Event
described in clause (i) of the definition thereof, he will not sell, transfer
or otherwise dispose of any shares of Common Stock, for a period of 180 days
following such event, unless the underwriters for the relevant public
offering determine a shorter period to be appropriate.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
DAL-TILE INTERNATIONAL INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
Christopher Wellborn
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STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT, made as of the 20th day of February, 1998 (the
"Grant Date"), between Dal-Tile International Inc., a Delaware corporation
("Dal-Tile"), and Jacques Sardas, 6031 Orchid Lane, Dallas, Texas 75230 (the
"Grantee").
The parties hereto agree as follows:
1. GRANT OF STOCK APPRECIATION RIGHT.
Dal-Tile hereby grants to the Grantee a Stock Appreciation
Right (the "Right") with respect to 2,000,000 shares of the common stock, par
value $.01 per share (the "Common Stock"), of Dal-Tile (the "Shares") on the
terms and conditions set forth in this Agreement. The base price for each
Share covered by this Right shall be $9.01, as adjusted pursuant to this
Agreement (the "Base Price").
2. AMOUNT AND FORM OF PAYMENT UPON EXERCISE OF RIGHT.
2.1 Upon exercise of all or any portion of the Right, the
Grantee shall be entitled to receive the amount determined by multiplying (i)
the excess (the "Single Share Excess") of the Fair Market Value of a Share on
the date of exercise over the Base Price; by (ii) the number of Shares in
respect of which the Right is being exercised; PROVIDED, HOWEVER, that for
purposes of determining the Single Share Excess, no amount of Fair Market
Value of a Share in excess of $11.94 (the "Ceiling Price") shall be taken
into account. Payment of the amount determined under this Section 2 shall,
in the sole discretion of the Committee, be made: (i) in cash; (ii) by
delivery of Shares having an aggregate Fair Market Value on the date of such
delivery equal to the amount of such payment (a "Payment-In-Kind"); or (iii)
by a combination of the foregoing (a "Mixed Payment"), and shall be paid
within ten (10) business days after the date of exercise. In the event that
such payment is made as: (x) a Payment-In-Kind; or (y) a Mixed Payment, and
the sum of the federal, state and other governmental income tax incurred by
Grantee with respect to the payment exceeds the cash portion, if any, of such
payment, the Committee shall make one or more interest-bearing loans (each
loan, a "Loan," and, collectively, the "Loans") to the Grantee in an amount
equal to such excess; PROVIDED, HOWEVER, that Dal-Tile shall have no
obligation to make a Loan in the event the Grantee's employment by Dal-Tile
has been terminated by Dal-Tile with Cause (as defined in the Employment
Agreement) or by the Grantee without Good Reason (as defined in the
Employment Agreement).
2.2 Each Loan shall bear interest at the lowest rate permitted by
the Internal Revenue Service without the imputation of interest. The
principal amount and accrued interest on each Loan shall be due and payable
on June 13, 2007; PROVIDED, HOWEVER, that (a) the Grantee shall pay to
Dal-Tile promptly, as repayment of the outstanding principal amount and
accrued interest of the Loans, the after-tax proceeds received by the Grantee
from any disposition of Common Stock, or options to acquire Common Stock,
held from time to time by the Grantee, and (b) the outstanding principal
amount and accrued interest of all the Loans shall be immediately payable in
the event the Grantee's employment by Dal-Tile is terminated by Dal-Tile with
"Cause" (as defined in the Employment Agreement) or by the Grantee without
Good Reason (as defined in the Employment Agreement). Repayments shall be
applied first to the Loan which was most recently made. Each Loan shall be
secured by such number of shares of Common Stock
<PAGE>
issued pursuant to the Right that from time to time have a Fair Market Value
equal to the outstanding principal amount and accrued interest of all of the
Loans.
3. VESTING; EXERCISABILITY; DURATION.
3.1 VESTING.
(a) Subject to Sections 6.2 and 6.3 hereof, the Grantee shall
vest in the cumulative number of Shares under the Right, at the times
provided in the following schedule:
APPLICABLE DATE CUMULATIVE NUMBER OF SHARES
--------------- ---------------------------
On the Grant Date 500,000
On June 13, 1998 1,000,000
On June 13, 1999 1,500,000
On December 31, 1999 2,000,000
(b) The unvested portion of the Right shall be forfeited upon
the termination of the Grantee's employment with Dal-Tile for any reason,
subject to Section 6.3 hereof.
3.2 EXERCISABILITY.
Subject to Sections 6.2 and 6.3 hereof, the Grantee shall be
entitled to exercise the Right, with respect to the cumulative number of
Shares in which the Grantee may then be, or thereafter become, vested, only
if Dal-Tile reports, pursuant to its audited financial statements, positive
net income ("Net Income") for either its fiscal year ending December 31, 1998
or its fiscal year ending December 31, 1999 (the "Performance Target"). The
Right shall not be exercisable prior to the vesting thereof and the time the
Committee certifies that the Performance Target has been satisfied. The
Committee shall act within seven days with respect to certification following
the availability of the relevant audited financial statements. For purposes
of this Agreement, Net Income shall be calculated without taking into account
any charge against income which may arise as a result of the Right granted
pursuant to this Agreement or any other stock appreciation right which may,
from time to time, be granted by Dal-Tile.
3.3 DURATION.
Unless earlier terminated in accordance with the terms of this
Agreement, the Right shall terminate on June 13, 2007.
4. MANNER OF EXERCISE OF RIGHT.
Subject to the terms and conditions of this Agreement, the Right
may be exercised only by giving written notice (the "Exercise Notice") to
Dal-Tile in the form of Exhibit A attached hereto, at its principal executive
office. Such notice shall state that the Grantee is electing to exercise the
Right, and the number of Shares in respect of which the Right is being
exercised, and shall be signed by the person or persons exercising the Right.
The date of exercise for purposes of this Agreement shall be the date
Dal-Tile receives the Exercise Notice. If requested by Dal-Tile, such person
or persons shall: (i) deliver this Agreement to the Secretary of Dal-Tile who
shall endorse
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<PAGE>
thereon a notation of such exercise; and (ii) provide satisfactory proof as
to the right of such person or persons to exercise the Right.
5. NONASSIGNABILITY.
Neither the Right granted to the Grantee under this Agreement nor any
portion thereof shall be assignable or transferable (whether by operation of law
or otherwise, and whether voluntarily or involuntarily), other than by will or
by the laws of descent and distribution. The Right granted to the Grantee under
this Agreement shall be exercisable only by the Grantee or his estate, heirs or
personal representatives.
6. ADJUSTMENTS TO RIGHTS UPON CERTAIN EVENTS.
6.1 ADJUSTMENTS TO NUMBER OF SHARES AND CEILING AND BASE PRICES.
The number of Shares subject to this Right, the Ceiling Price and the
Base Price shall be equitably adjusted for any increase or decrease in the
number of issued Shares resulting from: (i) the subdivision or combination of
Shares or other capital adjustments; (ii) the payment of a stock dividend or
extraordinary cash dividend after the Grant Date; or (iii) any other increase or
decrease in the number of such Shares effected without receipt of consideration
by Dal-Tile; PROVIDED, HOWEVER, that any fractional Shares resulting from any
such adjustment shall be eliminated. Adjustments under this Section 6.1 shall
be made by the Committee, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding, and conclusive.
6.2 CHANGE OF CONTROL.
Notwithstanding anything contained in this Agreement to the
contrary:
(a) the Grantee shall be vested in, and shall be entitled to
exercise the Right with respect to, 100% of the Shares subject to the Right upon
the occurrence of any transaction or series of related transactions as a result
of which any person or "group" of persons (as such expression is used under the
1934 Act, and the rules thereunder) other than DTI Investors LLC or its members
or any of their affiliates or successors (collectively, an "Acquiring Person"):
(i) becomes the owner of a greater number of Shares than are then owned by DTI
Investors LLC or its members or former members (taken as a group), provided that
the Acquiring Person owns at least 40% of the issued and outstanding Shares; or
(ii) has the power to elect a majority of the Board; and
(b) in the event of a "Transaction" that does not also
constitute a "Non-Control Transaction" (each, as defined in the Non-Qualified
Stock Option Agreement, dated as of February 20, 1998, between the Grantee and
Dal-Tile), the Right shall, unless the Grantee and Dal-Tile shall otherwise
agree, automatically be converted into the right to receive, with respect to
each Share subject to the Right, at the consummation of such Transaction, a
payment of the same amount and kind of stock, securities, cash, property or
other consideration that each holder of a Share was entitled to receive in such
Transaction in respect of a Share, less the Base Price; PROVIDED, HOWEVER, that
the fair market value of such stock, securities, cash, property or other
consideration shall not exceed the Ceiling Price less the Base Price. If more
than one (1) form of consideration is included in such Transaction, the various
components thereof shall be appropriately prorated; and
3
<PAGE>
(c) in the event of a Non-Control Transaction, the Grantee shall
continue to vest in the Right only in accordance with Section 3.1 hereof, which
Right shall remain exercisable only in accordance with Section 3.2 hereof, and,
the number of Shares subject to the Right, the Ceiling Price and the Base Price
shall be equitably adjusted by the Committee for any change in the Shares
resulting from a merger involving the Company. Adjustments under this Section
6.2(c) shall be made by the Committee, whose determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding, and
conclusive.
6.3 TERMINATION OF EMPLOYMENT.
The Right (whether vested or unvested) shall terminate and
expire on the effective date of the termination of the Grantee's employment
by Dal-Tile with "Cause." In the event of the termination of the Grantee's
employment by Dal-Tile without Cause or by the Grantee with "Good Reason":
(i) on or prior to June 30, 1998, the Grantee shall be vested in 50% of the
Shares subject to the Right, which Right shall, notwithstanding such vesting,
become exercisable only in accordance with Section 3.2 hereof; and (ii) after
June 30 , 1998, the Grantee shall be vested in 100% of the Shares subject to
the Right, which Right shall, notwithstanding such vesting, become
exercisable only in accordance with Section 3.2 hereof. In the event of the
termination of the Grantee's employment by the Grantee without Good Reason,
the Right, to the extent then vested, shall become exercisable only in
accordance with Section 3.2 hereof and shall terminate on the earliest to
occur of: (i) the tenth anniversary of the Grant Date; and (ii) the date
which is ten (10) days after the later of: (A) such termination of the
Grantee's employment; and (B) the date that achievement of the Performance
Target is certified, and the unvested portion of the Right shall be
forfeited. In the event of the termination of the Grantee's employment by
reason of the Grantee's death or "disability" (as such term is used under the
Employment Agreement), the Right, to the extent then vested, shall be
exercisable until the tenth anniversary of the Grant Date, and the unvested
portion of the Right shall be forfeited on the effective date of such
termination.
7. MISCELLANEOUS.
7.1 RULES OF CONSTRUCTION.
(a) In this Agreement, unless the context otherwise requires,
words in the singular number or in the plural number shall each include the
singular number and the plural number, words of the masculine gender shall
include the feminine and the neuter, and, when the sense so indicates, words
of the neuter gender may refer to any gender.
(b) The term "affiliate" shall mean any person directly or
indirectly controlling, controlled by, or under common control with the
person of which it is an affiliate.
(c) The term "Board" shall mean the Board of Directors of
Dal-Tile.
(d) The term "Code" shall mean the Internal Revenue Code of
1986, as amended.
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<PAGE>
(e) The term "Committee" shall mean the Committee of the
Board appointed to administer the Stock Option Plan in accordance with the
terms of such plan.
(f) The term "control" shall mean with respect to any person,
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of equity interests, by contract or otherwise.
(g) The term "Employment Agreement" shall mean the Employment
Agreement, dated as of June 13, 1997, and as amended from time to time, by
and between Dal-Tile and the Grantee.
(h) The term "Fair Market Value" per Share as of a particular
date shall mean: (i) the closing sales price of a Share on the national
securities exchange on which the Shares are principally traded for the last
date (including the date of exercise of the Right) on which there was a sale
of the Shares on such exchange; or (ii) if the Shares are not then traded on
a national securities exchange, the average of the closing bid and asked
prices for the Shares in the over-the-counter market on which the Shares are
principally traded for the last date (including the date of exercise of the
Right) on which there was a sale of the Shares in such market; or (iii) if
the Shares are not then listed on a national securities exchange or traded in
an over-the-counter market, such value as the Committee, in its sole
discretion, shall determine.
(i) The term "person" shall mean an individual, a
corporation, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
(j) The Term "Stock Option Plan" shall mean the Dal-Tile
International Inc. 1997 Amended and Restated Stock Option Plan.
(k) The term "1934 Act" shall mean the Securities Exchange
Act of 1934, as amended.
(l) There shall be included within the term "Dal-Tile" any
successor to Dal-Tile by merger, consolidation, acquisition of substantially
all the assets thereof, or otherwise.
(m) There shall be included within the term "Shares" any
Common Stock, and any and all securities of any kind whatsoever of Dal-Tile
which may be issued after the date hereof in respect of, or in exchange for,
shares of Common Stock pursuant to a merger, consolidation, stock split,
stock dividend, recapitalization of Dal-Tile or otherwise.
7.2 FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done and
performed all further acts and things and shall execute and deliver all other
agreements, certificates, instruments, and documents as any other party
hereto reasonably may request in order to carry out the intent and accomplish
the purposes of this Agreement, and the consummation of the transactions
contemplated hereby.
5
<PAGE>
7.3 GOVERNING LAW.
This Agreement and the rights and obligations of the parties
hereto shall be governed by, and construed and enforced in accordance with,
the laws of the State of Delaware, without giving effect to the principles of
conflicts of law thereof.
7.4 INVALIDITY OF PROVISION.
The invalidity or unenforceability of any provision of this
Agreement in any jurisdiction shall not affect the validity or enforceability
of the remainder of this Agreement in that jurisdiction or the validity or
enforceability of this Agreement, including that provision, in any other
jurisdiction. If any provision of this Agreement is held unlawful or
unenforceable in any respect, such provision shall be revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
7.4 NOTICE.
Any notice or other communication required or permitted
hereunder shall be writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission
or, if mailed, 5 days after the date of deposit in the United States mail, as
follows:
(i) if to Dal-Tile, to:
Dal-Tile International Inc.
C.F. Hawn Freeway
Dallas, Texas 75217
Attention: Mark A. Solls
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Frederick H. Fogel, Esq.
(ii) if to the Grantee, to:
Jacques Sardas
6031 Orchid Lane
Dallas, Texas 75230
with a copy to:
Ira C. Kaplan, Esq.
Benesch, Friedlander, Coplan & Aronoff, LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
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<PAGE>
Any party may change its address for notice hereunder by
notice to the other parties hereto.
7.6 BINDING EFFECT.
This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective heirs, legal
representatives, successors and assigns.
7.7 AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or supplemented only
by written agreement of the party against whom enforcement of such amendment,
modification or supplement is sought.
7.8 HEADING; EXECUTION IN COUNTERPARTS.
The headings and captions contained herein are for convenience
only and shall not control or affect the meaning or construction of any
provision hereof. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and which
together shall constitute one and the same instrument.
7.9 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement, and
supersedes all prior agreements and understandings, oral and written, between
the parties hereto with respect to the subject matter hereof.
7.10 RIGHT OF DISCHARGE RESERVED.
Nothing contained in this Agreement shall confer upon the
Grantee any right to continue in the employ or service of Dal-Tile or affect
any right which Dal-Tile may have to terminate the employment or services of
the Grantee.
7.11 WITHHOLDING.
The Company shall be entitled to withhold from any payments to
the Grantee an amount sufficient to satisfy any federal, state, and other
governmental tax required to be withheld in connection with any exercise of
the Right.
7.12 INTERPRETATION AND STOCKHOLDER APPROVAL.
(a) The Right granted under this Agreement is intended to be
performance-based compensation within the meaning of Section 162(m)(4)(C) of
the Code and the Committee shall interpret this Agreement accordingly.
(b) This Agreement and the grant of the Right hereunder is
subject to approval by Dal-Tile's stockholders in accordance with Section 162(m)
of the Code.
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<PAGE>
7.13 NO RIGHTS AS A STOCKHOLDER.
Neither the Grantee nor any person succeeding to the Grantee's
rights hereunder shall have any rights as a stockholder with respect to any
Shares subject to the Right. Except for adjustments which the Committee may
make pursuant to Section 6.1 hereof, no adjustment shall be made for
dividends, distributions or other rights (whether ordinary or extraordinary,
and whether in cash, securities or other property). Neither the Grantee nor
any person succeeding to the Grantee's rights hereunder shall have any rights
as a stockholder with respect to any Shares issuable in connection with a
Payment-In-Kind or a Mixed Payment until the date of the issuance of a stock
certificate to him or her for any such Shares. No adjustment shall be made
for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property) for which
the record date is prior to the date such stock certificate is issued.
7.14 GRANTEE'S ACKNOWLEDGMENTS.
The Grantee agrees and acknowledges that no member of the
Committee shall be liable for any action or determination made in good faith
with respect to this Agreement. The Committee shall have the right to make
all determinations in respect of this Agreement, which determinations shall
be final, conclusive and binding on the Grantee.
7.15 RESTRICTIONS.
(a) If the Committee shall at any time determine based on the
advice of counsel that any Consent (as hereinafter defined) is necessary or
desirable as a condition of, or in connection with, the issuance of Shares
hereunder, then such issuance shall not be taken, in whole or in part, unless
and until such Consent shall have been effected or obtained to the full
satisfaction of the Committee. Dal-Tile shall use its reasonable best
efforts to effect or obtain such Consent. If such Consent cannot be effected
or obtained within three months of exercise of the Right, payment of the
amount determined under Section 2 hereof will be made in cash.
(b) The term "Consent" as used herein with respect to the
issuance of Shares means: (i) any and all listings, registrations or
qualifications in respect thereof upon any securities exchange or under any
federal, state or local law, rule or regulation; (ii) any and all written
agreements and representations by the Grantee or any person succeeding to the
Grantee's rights hereunder, as the case may be, with respect to the
disposition of the Shares, or with respect to any other matter, which the
Committee shall deem necessary or desirable to comply with the terms of any
such listing, registration or qualification or to obtain an exemption from
the requirement that any such listing, qualification or registration be made;
and (iii) any and all consents, clearances and approvals in respect of the
issuance of the Shares by any governmental or other regulatory bodies.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf
of each of the parties hereto, all as of the date first above written.
DAL-TILE INTERNATIONAL INC.
By:
Name:_________________________
Title:________________________
______________________________
Jacques R. Sardas
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<PAGE>
EXHIBIT A
EXERCISE NOTICE
[TO BE EXECUTED UPON EXERCISE OF STOCK APPRECIATION RIGHT]
To Dal-Tile International Inc.
The undersigned hereby irrevocable elects to exercise the Right
represented by the attached Stock Appreciation Rights Agreement (the
"Agreement"), dated as of the 10th day of October, 1998, with respect to
Shares, as provided for therein.
The undersigned represents and warrants to you that, with respect
to any amount paid to the undersigned by delivery of Shares:
ACQUISITION FOR OWN ACCOUNT. The undersigned is acquiring such
Shares for his/her own account for investment and not with a view to the sale
or distribution thereof or with any present intention of distributing or
selling the same.
SECURITIES ACT RESTRICTIONS. The undersigned covenants and agrees
that he/she will not sell, assign, transfer, pledge or otherwise dispose of
any of the Shares acquired by the undersigned hereunder unless and until they
are registered under the Securities Act of 1933, as amended (the "Securities
Act"), or unless an exemption from such registration is available and until
the undersigned shall have delivered to Dal-Tile International Inc. a written
opinion of counsel reasonably satisfactory to Dal-Tile International Inc.
that the disposition is in compliance with the requirements of the Securities
Act. The undersigned acknowledges that he/she understands that the Shares are
not so registered.
Please pay all cash to, and issue any certificate or certificates
for any Shares in the name of:
Name:______________________________________________
Address:___________________________________________
Social Security or Tax I.D. Number:________________
(Please print)
Signature______________________________
Dated____________________ , 199____.
<PAGE>
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT, made as of the 20th day of February, 1998 (the
"Grant Date"), between Dal-Tile International Inc., a Delaware corporation
("Dal-Tile"), and Jacques Sardas, 6031 Orchid Lane, Dallas, Texas 75230 (the
"Grantee").
The parties hereto agree as follows:
1. GRANT OF STOCK APPRECIATION RIGHT.
Dal-Tile hereby grants to the Grantee a Stock Appreciation Right (the
"Right") with respect to 250,000 shares of the common stock, par value $.01 per
share (the "Common Stock"), of Dal-Tile (the "Shares") on the terms and
conditions set forth in this Agreement. The base price for each Share covered
by this Right shall be $9.01, as adjusted pursuant to this Agreement (the "Base
Price").
2. AMOUNT AND FORM OF PAYMENT UPON EXERCISE OF RIGHT.
2.1 Upon exercise of all or any portion of the Right, the Grantee
shall be entitled to receive the amount determined by multiplying (i) the
excess (the "Single Share Excess") of the Fair Market Value of a Share on the
date of exercise over the Base Price; by (ii) the number of Shares in respect
of which the Right is being exercised; PROVIDED, HOWEVER, that for purposes
of determining the Single Share Excess, no amount of Fair Market Value of a
Share in excess of $13.69 (the "Ceiling Price") shall be taken into account.
Payment of the amount determined under this Section 2 shall, in the sole
discretion of the Committee, be made: (i) in cash; (ii) by delivery of
Shares having an aggregate Fair Market Value on the date of such delivery
equal to the amount of such payment (a "Payment-In-Kind"); or (iii) by a
combination of the foregoing (a "Mixed Payment"), and shall be paid within
ten (10) business days after the date of exercise. In the event that such
payment is made as: (x) a Payment-In-Kind; or (y) a Mixed Payment, and the
sum of the federal, state and other governmental income tax incurred by
Grantee with respect to the payment exceeds the cash portion, if any, of such
payment, the Committee shall make one or more interest-bearing loans (each
loan, a "Loan," and, collectively, the "Loans") to the Grantee in an amount
equal to such excess; PROVIDED, HOWEVER, that Dal-Tile shall have no
obligation to make a Loan in the event the Grantee's employment by Dal-Tile
has been terminated by Dal-Tile with Cause (as defined in the Employment
Agreement) or by the Grantee without Good Reason (as defined in the
Employment Agreement).
2.2 Each Loan shall bear interest at the lowest rate permitted by the
Internal Revenue Service without the imputation of interest. The principal
amount and accrued interest on each Loan shall be due and payable on June 13,
2007; PROVIDED, HOWEVER, that (a) the Grantee shall pay to Dal-Tile promptly, as
repayment of the outstanding principal amount and accrued interest of the Loans,
the after-tax proceeds received by the Grantee from any disposition of Common
Stock, or options to acquire Common Stock, held from time to time by the
Grantee, and (b) the outstanding principal amount and accrued interest of all
the Loans shall be immediately payable in the event the Grantee's employment by
Dal-Tile is terminated by Dal-Tile with "Cause" (as defined in the Employment
Agreement) or by the Grantee without Good Reason (as defined in the Employment
Agreement). Repayments shall be applied first to the Loan which was most
recently made. Each Loan shall be secured by such number of shares of Common
Stock
<PAGE>
issued pursuant to the Right that from time to time have a Fair Market
Value equal to the outstanding principal amount and accrued interest of all of
the Loans.
3. VESTING; EXERCISABILITY; DURATION.
3.1 VESTING.
(a) Subject to Sections 6.2 and 6.3 hereof, the Grantee shall
vest in the cumulative number of Shares under the Right, at the times provided
in the following schedule:
<TABLE>
APPLICABLE DATE CUMULATIVE NUMBER OF SHARES
--------------- ---------------------------
<S> <C>
On the Grant Date 62,500
On June 13, 1998 125,000
On June 13, 1999 187,500
On December 31, 1999 250,000
</TABLE>
(b) The unvested portion of the Right shall be forfeited upon
the termination of the Grantee's employment with Dal-Tile for any reason,
subject to Section 6.3 hereof.
3.2 EXERCISABILITY.
Subject to Sections 6.2 and 6.3 hereof, the Grantee shall be
entitled to exercise the Right, with respect to the cumulative number of
Shares in which the Grantee may then be, or thereafter become, vested, only
if Dal-Tile reports, pursuant to its audited financial statements, positive
net income ("Net Income") for either its fiscal year ending December 31, 1998
or its fiscal year ending December 31, 1999 (the "Performance Target"). The
Right shall not be exercisable prior to the vesting thereof and the time the
Committee certifies that the Performance Target has been satisfied. The
Committee shall act within seven days with respect to certification following
the availability of the relevant audited financial statements. For purposes
of this Agreement, Net Income shall be calculated without taking into account
any charge against income which may arise as a result of the Right granted
pursuant to this Agreement or any other stock appreciation right which may,
from time to time, be granted by Dal-Tile.
3.3 DURATION.
Unless earlier terminated in accordance with the terms of this
Agreement, the Right shall terminate on June 13, 2007.
4. MANNER OF EXERCISE OF RIGHT.
Subject to the terms and conditions of this Agreement, the Right
may be exercised only by giving written notice (the "Exercise Notice") to
Dal-Tile in the form of Exhibit A attached hereto, at its principal executive
office. Such notice shall state that the Grantee is electing to exercise the
Right, and the number of Shares in respect of which the Right is being
exercised, and shall be signed by the person or persons exercising the Right.
The date of exercise for purposes of this Agreement shall be the date
Dal-Tile receives the Exercise Notice. If requested by Dal-Tile, such person
or persons shall: (i) deliver this Agreement to the Secretary of Dal-Tile who
shall endorse
2
<PAGE>
thereon a notation of such exercise; and (ii) provide satisfactory proof as
to the right of such person or persons to exercise the Right.
5. NONASSIGNABILITY.
Neither the Right granted to the Grantee under this Agreement nor
any portion thereof shall be assignable or transferable (whether by operation
of law or otherwise, and whether voluntarily or involuntarily), other than by
will or by the laws of descent and distribution. The Right granted to the
Grantee under this Agreement shall be exercisable only by the Grantee or his
estate, heirs or personal representatives.
6. ADJUSTMENTS TO RIGHTS UPON CERTAIN EVENTS.
6.1 ADJUSTMENTS TO NUMBER OF SHARES AND CEILING AND BASE PRICES.
The number of Shares subject to this Right, the Ceiling Price and
the Base Price shall be equitably adjusted for any increase or decrease in
the number of issued Shares resulting from: (i) the subdivision or
combination of Shares or other capital adjustments; (ii) the payment of a
stock dividend or extraordinary cash dividend after the Grant Date; or (iii)
any other increase or decrease in the number of such Shares effected without
receipt of consideration by Dal-Tile; PROVIDED, HOWEVER, that any fractional
Shares resulting from any such adjustment shall be eliminated. Adjustments
under this Section 6.1 shall be made by the Committee, whose determination as
to what adjustments shall be made, and the extent thereof, shall be final,
binding, and conclusive.
6.2 CHANGE OF CONTROL.
Notwithstanding anything contained in this Agreement to the
contrary:
(a) the Grantee shall be vested in, and shall be entitled to
exercise the Right with respect to, 100% of the Shares subject to the Right
upon the occurrence of any transaction or series of related transactions as a
result of which any person or "group" of persons (as such expression is used
under the 1934 Act, and the rules thereunder) other than DTI Investors LLC or
its members or any of their affiliates or successors (collectively, an
"Acquiring Person"): (i) becomes the owner of a greater number of Shares than
are then owned by DTI Investors LLC or its members or former members (taken
as a group), provided that the Acquiring Person owns at least 40% of the
issued and outstanding Shares; or (ii) has the power to elect a majority of
the Board; and
(b) in the event of a "Transaction" that does not also
constitute a "Non-Control Transaction" (each, as defined in the Non-Qualified
Stock Option Agreement, dated as of February 20, 1998, between the Grantee
and Dal-Tile), the Right shall, unless the Grantee and Dal-Tile shall
otherwise agree, automatically be converted into the right to receive, with
respect to each Share subject to the Right, at the consummation of such
Transaction, a payment of the same amount and kind of stock, securities,
cash, property or other consideration that each holder of a Share was
entitled to receive in such Transaction in respect of a Share, less the Base
Price; PROVIDED, HOWEVER, that the fair market value of such stock,
securities, cash, property or other consideration shall not exceed the
Ceiling Price less the Base Price. If more than one (1) form of
consideration is included in such Transaction, the various components thereof
shall be appropriately prorated; and
3
<PAGE>
(c) in the event of a Non-Control Transaction, the Grantee
shall continue to vest in the Right only in accordance with Section 3.1
hereof, which Right shall remain exercisable only in accordance with Section
3.2 hereof, and, the number of Shares subject to the Right, the Ceiling Price
and the Base Price shall be equitably adjusted by the Committee for any
change in the Shares resulting from a merger involving the Company.
Adjustments under this Section 6.2(c) shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding, and conclusive.
6.3 TERMINATION OF EMPLOYMENT.
The Right (whether vested or unvested) shall terminate and
expire on the effective date of the termination of the Grantee's employment
by Dal-Tile with "Cause." In the event of the termination of the Grantee's
employment by Dal-Tile without Cause or by the Grantee with "Good Reason":
(i) on or prior to June 30, 1998, the Grantee shall be vested in 50% of the
Shares subject to the Right, which Right shall, notwithstanding such vesting,
become exercisable only in accordance with Section 3.2 hereof; and (ii) after
June 30 , 1998, the Grantee shall be vested in 100% of the Shares subject to
the Right, which Right shall, notwithstanding such vesting, become
exercisable only in accordance with Section 3.2 hereof. In the event of the
termination of the Grantee's employment by the Grantee without Good Reason,
the Right, to the extent then vested, shall become exercisable only in
accordance with Section 3.2 hereof and shall terminate on the earliest to
occur of: (i) the tenth anniversary of the Grant Date; and (ii) the date
which is ten (10) days after the later of: (A) such termination of the
Grantee's employment; and (B) the date that achievement of the Performance
Target is certified, and the unvested portion of the Right shall be
forfeited. In the event of the termination of the Grantee's employment by
reason of the Grantee's death or "disability" (as such term is used under the
Employment Agreement), the Right, to the extent then vested, shall be
exercisable until the tenth anniversary of the Grant Date, and the unvested
portion of the Right shall be forfeited on the effective date of such
termination.
7. MISCELLANEOUS.
7.1 RULES OF CONSTRUCTION.
(a) In this Agreement, unless the context otherwise requires,
words in the singular number or in the plural number shall each include the
singular number and the plural number, words of the masculine gender shall
include the feminine and the neuter, and, when the sense so indicates, words
of the neuter gender may refer to any gender.
(b) The term "affiliate" shall mean any person directly or
indirectly controlling, controlled by, or under common control with the
person of which it is an affiliate.
(c) The term "Board" shall mean the Board of Directors of
Dal-Tile.
(d) The term "Code" shall mean the Internal Revenue Code of
1986, as amended.
4
<PAGE>
(e) The term "Committee" shall mean the Committee of the
board appointed to administer the Stock Option Plan in accordance with the
terms of such plan.
(f) The term "control" shall mean with respect to any person,
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of equity interests, by contract or otherwise.
(g) The term "Employment Agreement" shall mean the Employment
Agreement, dated as of June 13, 1997, and as amended from time to time, by
and between Dal-Tile and the Grantee.
(h) The term "Fair Market Value" per Share as of a particular
date shall mean: (i) the closing sales price of a Share on the national
securities exchange on which the Shares are principally traded for the last
date (including the date of exercise of the Right) on which there was a sale
of the Shares on such exchange; or (ii) if the Shares are not then traded on
a national securities exchange, the average of the closing bid and asked
prices for the Shares in the over-the-counter market on which the Shares are
principally traded for the last date (including the date of exercise of the
Right) on which there was a sale of the Shares in such market; or (iii) if
the Shares are not then listed on a national securities exchange or traded in
an over-the-counter market, such value as the Committee, in its sole
discretion, shall determine.
(i) The term "person" shall mean an individual, a
corporation, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
(j) The Term "Stock Option Plan" shall mean the Dal-Tile
International Inc. 1997 Amended and Restated Stock Option Plan.
(k) The term "1934 Act" shall mean the Securities Exchange
Act of 1934, as amended.
(l) There shall be included within the term "Dal-Tile" any
successor to Dal-Tile by merger, consolidation, acquisition of substantially
all the assets thereof, or otherwise.
(m) There shall be included within the term "Shares" any
Common Stock, and any and all securities of any kind whatsoever of Dal-Tile
which may be issued after the date hereof in respect of, or in exchange for,
shares of Common Stock pursuant to a merger, consolidation, stock split,
stock dividend, recapitalization of Dal-Tile or otherwise.
7.2 FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done and
performed all further acts and things and shall execute and deliver all other
agreements, certificates, instruments, and documents as any other party
hereto reasonably may request in order to carry out the intent and accomplish
the purposes of this Agreement, and the consummation of the transactions
contemplated hereby.
5
<PAGE>
7.3 GOVERNING LAW.
This Agreement and the rights and obligations of the parties hereto
shall be governed by, and construed and enforced in accordance with, the laws
of the State of Delaware, without giving effect to the principles of
conflicts of law thereof.
7.4 INVALIDITY OF PROVISION.
The invalidity or unenforceability of any provision of this
Agreement in any jurisdiction shall not affect the validity or enforceability
of the remainder of this Agreement in that jurisdiction or the validity or
enforceability of this Agreement, including that provision, in any other
jurisdiction. If any provision of this Agreement is held unlawful or
unenforceable in any respect, such provision shall be revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
7.4 NOTICE.
Any notice or other communication required or permitted
hereunder shall be writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission
or, if mailed, 5 days after the date of deposit in the United States mail, as
follows:
(i) if to Dal-Tile, to:
Dal-Tile International Inc.
C.F. Hawn Freeway
Dallas, Texas 75217
Attention: Mark A. Solls
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Frederick H. Fogel, Esq.
(ii) if to the Grantee, to:
Jacques Sardas
6031 Orchid Lane
Dallas, Texas 75230
with a copy to:
Ira C. Kaplan, Esq.
Benesch, Friedlander, Coplan & Aronoff, LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
6
<PAGE>
Any party may change its address for notice hereunder by
notice to the other parties hereto.
7.6 BINDING EFFECT.
This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective heirs, legal
representatives, successors and assigns.
7.7 AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or supplemented only
by written agreement of the party against whom enforcement of such amendment,
modification or supplement is sought.
7.8 HEADING; EXECUTION IN COUNTERPARTS.
The headings and captions contained herein are for convenience
only and shall not control or affect the meaning or construction of any
provision hereof. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and which
together shall constitute one and the same instrument.
7.9 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement, and
supersedes all prior agreements and understandings, oral and written, between
the parties hereto with respect to the subject matter hereof.
7.10 RIGHT OF DISCHARGE RESERVED.
Nothing contained in this Agreement shall confer upon the
Grantee any right to continue in the employ or service of Dal-Tile or affect
any right which Dal-Tile may have to terminate the employment or services of
the Grantee.
7.11 WITHHOLDING.
The Company shall be entitled to withhold from any payments to
the Grantee an amount sufficient to satisfy any federal, state, and other
governmental tax required to be withheld in connection with any exercise of
the Right.
7.12 INTERPRETATION AND STOCKHOLDER APPROVAL.
(a) The Right granted under this Agreement is intended to be
performance-based compensation within the meaning of Section 162(m)(4)(C) of
the Code and the Committee shall interpret this Agreement accordingly.
(b) This Agreement and the grant of the Right hereunder is
subject to approval by Dal-Tile's stockholders in accordance with Section
162(m) of the Code.
7
<PAGE>
7.13 NO RIGHTS AS A STOCKHOLDER.
Neither the Grantee nor any person succeeding to the Grantee's
rights hereunder shall have any rights as a stockholder with respect to any
Shares subject to the Right. Except for adjustments which the Committee may
make pursuant to Section 6.1 hereof, no adjustment shall be made for
dividends, distributions or other rights (whether ordinary or extraordinary,
and whether in cash, securities or other property). Neither the Grantee nor
any person succeeding to the Grantee's rights hereunder shall have any rights
as a stockholder with respect to any Shares issuable in connection with a
Payment-In-Kind or a Mixed Payment until the date of the issuance of a stock
certificate to him or her for any such Shares. No adjustment shall be made
for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property) for which
the record date is prior to the date such stock certificate is issued.
7.14 GRANTEE'S ACKNOWLEDGMENTS.
The Grantee agrees and acknowledges that no member of the
Committee shall be liable for any action or determination made in good faith
with respect to this Agreement. The Committee shall have the right to make
all determinations in respect of this Agreement, which determinations shall
be final, conclusive and binding on the Grantee.
7.15 RESTRICTIONS.
(a) If the Committee shall at any time determine based on the
advice of counsel that any Consent (as hereinafter defined) is necessary or
desirable as a condition of, or in connection with, the issuance of Shares
hereunder, then such issuance shall not be taken, in whole or in part, unless
and until such Consent shall have been effected or obtained to the full
satisfaction of the Committee. Dal-Tile shall use its reasonable best
efforts to effect or obtain such Consent. If such Consent cannot be effected
or obtained within three months of exercise of the Right, payment of the
amount determined under Section 2 hereof will be made in cash.
(b) The term "Consent" as used herein with respect to the
issuance of Shares means: (i) any and all listings, registrations or
qualifications in respect thereof upon any securities exchange or under any
federal, state or local law, rule or regulation; (ii) any and all written
agreements and representations by the Grantee or any person succeeding to the
Grantee's rights hereunder, as the case may be, with respect to the
disposition of the Shares, or with respect to any other matter, which the
Committee shall deem necessary or desirable to comply with the terms of any
such listing, registration or qualification or to obtain an exemption from
the requirement that any such listing, qualification or registration be made;
and (iii) any and all consents, clearances and approvals in respect of the
issuance of the Shares by any governmental or other regulatory bodies.
8
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each
of the parties hereto, all as of the date first above written.
DAL-TILE INTERNATIONAL INC.
By:____________________________________
Name:__________________________________
Title:_________________________________
_______________________________________
Jacques R. Sardas
9
<PAGE>
EXHIBIT A
EXERCISE NOTICE
[TO BE EXECUTED UPON EXERCISE OF STOCK APPRECIATION RIGHT]
To Dal-Tile International Inc.
The undersigned hereby irrevocable elects to exercise the Right
represented by the attached Stock Appreciation Rights Agreement (the
"Agreement"), dated as of the 10th day of October, 1998, with respect
to Shares, as provided for therein.
The undersigned represents and warrants to you that, with respect
to any amount paid to the undersigned by delivery of Shares:
ACQUISITION FOR OWN ACCOUNT. The undersigned is acquiring such
Shares for his/her own account for investment and not with a view to the sale
or distribution thereof or with any present intention of distributing or
selling the same.
SECURITIES ACT RESTRICTIONS. The undersigned covenants and agrees
that he/she will not sell, assign, transfer, pledge or otherwise dispose of
any of the Shares acquired by the undersigned hereunder unless and until they
are registered under the Securities Act of 1933, as amended (the "Securities
Act"), or unless an exemption from such registration is available and until
the undersigned shall have delivered to Dal-Tile International Inc. a written
opinion of counsel reasonably satisfactory to Dal-Tile International Inc.
that the disposition is in compliance with the requirements of the Securities
Act. The undersigned acknowledges that he/she understands that the Shares are
not so registered.
Please pay all cash to, and issue any certificate or certificates
for any Shares in the name of:
Name:___________________________________________________________
Address:________________________________________________________
Social Security or Tax I.D. Number:_____________________________
(Please print)
Signature____________________________
Dated _______________, 199__.
<PAGE>
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT, made as of the 20th day of February, 1998 (the "Grant
Date"), between Dal-Tile International Inc., a Delaware corporation
("Dal-Tile"), and Christopher Wellborn, 908 Suffolk Court, Southlake, Texas
76902 (the "Grantee").
The parties hereto agree as follows:
1. GRANT OF STOCK APPRECIATION RIGHT.
Dal-Tile hereby grants to the Grantee a Stock Appreciation Right (the
"Right") with respect to 300,000 shares of the common stock, par value $.01 per
share (the "Common Stock") of Dal-Tile (the "Shares") on the terms and
conditions set forth in this Agreement. The base price for each Share covered
by this Right shall be $9.01 as adjusted pursuant to this Agreement (the "Base
Price").
2. AMOUNT AND FORM OF PAYMENT UPON EXERCISE OF RIGHT.
2.1 Upon exercise of all or any portion of the Right, the Grantee
shall be entitled to receive the amount determined by multiplying (i) the
excess (the "Single Share Excess") of the Fair Market Value of a Share on the
date of exercise, over the Base Price by (ii) the number of Shares in respect
of which the Right is being exercised; PROVIDED, HOWEVER, that for purposes
of determining the Single Share Excess, no amount of Fair Market Value of a
Share in excess of $11.94 (the "Ceiling Price") shall be taken into account.
Payment of the amount determined under this Section 2 shall, in the sole
discretion of the Committee, be made: (i) in cash; (ii) by delivery of
Shares having an aggregate Fair Market Value on the date of such delivery
equal to the amount of such payment (a "Payment-In-Kind"); or (iii) by a
combination of the foregoing (a "Mixed Payment"), and shall be paid within
ten (10) business days after the date of exercise. In the event that such
payment is made as: (x) a Payment-In-Kind; or (y) a Mixed Payment, and the
sum of the federal, state and other governmental income tax incurred by
Grantee with respect to the payment exceeds the cash portion, if any, of such
payment, the Committee shall make one or more interest-bearing loans (each
loan, a "Loan," and, collectively, the "Loans") to the Grantee in an amount
equal to such excess; PROVIDED, HOWEVER, that Dal-Tile shall have no
obligation to make a Loan in the event the Grantee's employment by Dal-Tile
has been terminated by Dal-Tile with Cause (as defined in the Employment
Agreement) or by the Grantee.
2.2 Each Loan shall bear interest at the lowest rate permitted by the
Internal Revenue Service without the imputation of interest. The principal
amount and accrued interest on each Loan shall be due and payable on August 25,
2007; provided, however, that (a) the Grantee shall pay to Dal-Tile promptly, as
repayment of the outstanding principal amount and accrued interest of the Loans,
the after-tax proceeds received by the Grantee from any disposition of Common
Stock, or options to acquire Common Stock, held from time to time by the
Grantee, and (b) the outstanding principal amount and accrued interest of all
the Loans shall be immediately payable in the event the Grantee's employment by
Dal-Tile is terminated by Dal-Tile with "Cause" (as defined in the Employment
Agreement) or by the Grantee. Repayments shall be applied first to the Loan
which was most recently made. Each Loan shall be secured by any and all shares
of Common Stock and options to acquire Common Stock held by the Grantee and by
the Right.
<PAGE>
3. VESTING; EXERCISABILITY; DURATION.
3.1 VESTING.
(a) Subject to Sections 6.2 and 6.3 hereof, the Grantee shall
vest in the cumulative percentage of Shares under the Right, at the times
provided in the following schedule:
<TABLE>
APPLICABLE DATE CUMULATIVE PERCENTAGE OF SHARES
--------------- -------------------------------
<S> <C>
On the Grant Date 25%
On August 25, 1998 50%
On August 25, 1999 75%
On August 25, 2000 100%
</TABLE>
(b) The unvested portion of the Right shall be forfeited upon
the termination of the Grantee's employment with Dal-Tile for any reason,
subject to Section 6.3 hereof.
3.2 EXERCISABILITY.
Subject to Sections 6.2 and 6.3 hereof, the Grantee shall be
entitled to exercise the Right, with respect to the cumulative number of Shares
in which the Grantee may then be, or thereafter become, vested, only if Dal-Tile
reports, pursuant to its audited financial statements, positive net income ("Net
Income") for either its fiscal year ending December 31, 1998 or its fiscal year
ending December 31, 1999 (the "Performance Target"). The Right shall not be
exercisable prior to the vesting thereof and the time the Committee certifies
that the Performance Target has been satisfied. The Committee shall act within
seven days with respect to certification following the availability of the
relevant audited financial statements. For purposes of this Agreement, Net
Income shall be calculated without taking into account any charge against income
which may arise as a result of the Right granted pursuant to this Agreement or
any other stock appreciation right which may, from time to time, be granted by
Dal-Tile.
3.3 DURATION.
Unless earlier terminated in accordance with the terms of this
Agreement, the Right shall terminate on August 25, 2007.
4. MANNER OF EXERCISE OF RIGHT.
Subject to the terms and conditions of this Agreement, the Right may
be exercised only by giving written notice (the "Exercise Notice") to Dal-Tile
in the form of Exhibit A attached hereto, at its principal executive office.
Such notice shall state that the Grantee is electing to exercise the Right, and
the number of Shares in respect of which the Right is being exercised, and shall
be signed by the person or persons exercising the Right. The date of exercise
for purposes of this Agreement shall be the date Dal-Tile receives the Exercise
Notice. If requested by Dal-Tile, such person or persons shall: (i) deliver
this Agreement to the Secretary of Dal-Tile who shall endorse thereon a notation
of such exercise; and (ii) provide satisfactory proof as to the right of such
person or persons to exercise the Right.
-2-
<PAGE>
5. NONASSIGNABILITY.
Neither the Right granted to the Grantee under this Agreement nor any
portion thereof shall be assignable or transferable (whether by operation of law
or otherwise, and whether voluntarily or involuntarily), other than by will or
by the laws of descent and distribution. The Right granted to the Grantee under
this Agreement shall be exercisable only by the Grantee or his estate, heirs or
personal representatives.
6. ADJUSTMENTS TO RIGHTS UPON CERTAIN EVENTS.
6.1 ADJUSTMENTS TO NUMBER OF SHARES AND CEILING AND BASE PRICES.
The number of Shares subject to this Right, the Ceiling Price and the
Base Price shall be equitably adjusted for any increase or decrease in the
number of issued Shares resulting from: (i) the subdivision or combination of
Shares or other capital adjustments; (ii) the payment of a stock dividend or
extraordinary cash dividend after the Grant Date; or (iii) any other increase or
decrease in the number of such Shares effected without receipt of consideration
by Dal-Tile; PROVIDED, HOWEVER, that any fractional Shares resulting from any
such adjustment shall be eliminated. Adjustments under this Section 6.1 shall
be made by the Committee, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding, and conclusive.
6.2 CHANGE OF CONTROL.
Notwithstanding anything contained in this Agreement to the
contrary:
(a) in the event of a "Transaction" that does not also
constitute a "Non-Control Transaction" (each, as defined in the Stock Option
Plan), the Right shall, unless the Grantee and Dal-Tile shall otherwise agree,
automatically be converted into the right to receive, with respect to each Share
subject to the Right, at the consummation of such Transaction, a payment of the
same amount and kind of stock, securities, cash, property or other consideration
that each holder of a Share was entitled to receive in such Transaction in
respect of a Share, less the Base Price; PROVIDED, HOWEVER, that the fair market
value of such stock, securities, cash, property or other consideration shall not
exceed the Ceiling Price less the Base Price. If more than one (1) form of
consideration is included in such Transaction, the various components thereof
shall be appropriately prorated; and
(b) in the event of a Non-Control Transaction, the Grantee shall
continue to vest in the Right only in accordance with Section 3.1 hereof, which
Right shall remain exercisable only in accordance with Section 3.2 hereof, and,
the number of Shares subject to the Right, the Ceiling Price and the Base Price
shall be equitably adjusted by the Committee for any change in the Shares
resulting from a merger involving the Company. Adjustments under this Section
6.2(b) shall be made by the Committee, whose determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding, and
conclusive.
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<PAGE>
6.3 TERMINATION OF EMPLOYMENT.
The Right (whether vested or unvested) shall terminate and expire
on the effective date of the termination of the Grantee's employment by Dal-Tile
with "Cause" (as such term is defined in the Employment Agreement). In the
event of the termination of the Grantee's employment by Dal-Tile without Cause,
the Grantee shall be vested in 100% of the Shares subject to the Right, which
Right shall, notwithstanding such vesting, become exercisable only in accordance
with Section 3.2 hereof. In the event of the termination of the Grantee's
employment by the Grantee, the Right, to the extent then vested, shall become
exercisable only in accordance with Section 3.2 hereof and shall terminate on
the earliest to occur of: (i) the tenth anniversary of the Grant Date; and (ii)
the date which is ten (10) days after the later of: (A) such termination of the
Grantee's employment; and (B) the date that achievement of the Performance
Target is certified, and the unvested portion of the Right shall be forfeited.
In the event of the termination of the Grantee's employment by reason of the
Grantee's death or "disability" (as such term is used under the Employment
Agreement), the Right, to the extent then vested, shall be exercisable until
August 25, 2007, and the unvested portion of the Right shall be forfeited on the
effective date of such termination.
7. MISCELLANEOUS.
7.1 RULES OF CONSTRUCTION.
(a) In this Agreement, unless the context otherwise requires,
words in the singular number or in the plural number shall each include the
singular number and the plural number, words of the masculine gender shall
include the feminine and the neuter, and, when the sense so indicates, words of
the neuter gender may refer to any gender.
(b) The term "affiliate" shall mean any person directly or
indirectly controlling, controlled by, or under common control with the person
of which it is an affiliate.
(c) The term "Board" shall mean the Board of Directors of
Dal-Tile.
(d) The term "Code" shall mean the Internal Revenue Code of
1986, as amended.
(e) The term "Committee" shall mean the Committee of the Board
appointed to administer the Stock Option Plan in accordance with the terms of
such plan.
(f) The term "control" shall mean with respect to any person,
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of equity interests, by contract or otherwise.
(g) The term "Employment Agreement" shall mean the Employment
Agreement, dated as of August 25, 1997, and as amended from time to time, by and
between Dal-Tile and the Grantee.
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<PAGE>
(h) The term "Fair Market Value" per Share as of a particular
date shall mean: (i) the closing sales price of a Share on the national
securities exchange on which the Shares are principally traded for the last date
(including the date of exercise of the Right) on which there was a sale of the
Shares on such exchange; or (ii) if the Shares are not then traded on a national
securities exchange, the average of the closing bid and asked prices for the
Shares in the over-the-counter market on which the Shares are principally traded
for the last date (including the date of exercise of the Right) on which there
was a sale of the Shares in such market; or (iii) if the Shares are not then
listed on a national securities exchange or traded in an over-the-counter
market, such value as the Committee, in its sole discretion, shall determine.
(i) The term "person" shall mean an individual, a corporation, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
(j) The Term "Stock Option Plan" shall mean the Dal-Tile
International Inc. 1997 Amended and Restated Stock Option Plan.
(k) The term "1934 Act" shall mean the Securities Exchange Act
of 1934, as amended.
(l) There shall be included within the term "Dal-Tile" any
successor to Dal-Tile by merger, consolidation, acquisition of substantially all
the assets thereof, or otherwise.
(m) There shall be included within the term "Shares" any Common
Stock, and any and all securities of any kind whatsoever of Dal-Tile which may
be issued after the date hereof in respect of, or in exchange for, shares of
Common Stock pursuant to a merger, consolidation, stock split, stock dividend,
recapitalization of Dal-Tile or otherwise.
7.2 FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done and
performed all further acts and things and shall execute and deliver all other
agreements, certificates, instruments, and documents as any other party hereto
reasonably may request in order to carry out the intent and accomplish the
purposes of this Agreement, and the consummation of the transactions
contemplated hereby.
7.3 GOVERNING LAW.
This Agreement and the rights and obligations of the parties
hereto shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware, without giving effect to the principles of
conflicts of law thereof.
7.4 INVALIDITY OF PROVISION.
The invalidity or unenforceability of any provision of this
Agreement in any jurisdiction shall not affect the validity or enforceability of
the remainder of this Agreement in that jurisdiction or the validity or
enforceability of this Agreement, including that provision, in any other
jurisdiction. If any provision of this Agreement is held unlawful or
unenforceable in any respect, such provision shall be revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
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<PAGE>
7.5 NOTICE.
Any notice or other communication required or permitted hereunder
shall be writing and shall be delivered personally, telegraphed, telexed, sent
by facsimile transmission or sent by certified, registered or express mail,
postage prepaid. Any such notice shall be deemed given when so delivered
personally, telegraphed, telexed or sent by facsimile transmission or, if
mailed, 5 days after the date of deposit in the United States mail, as follows:
(i) if to Dal-Tile, to:
Dal-Tile International Inc.
7834 C.F. Hawn Freeway
Dallas, Texas 75217
Attention: Mark A. Solls
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Frederick H. Fogel, Esq.
(ii) if to the Grantee, to:
Christopher Wellborn
908 Suffolk Court
Southlake, Texas 76902
Any party may change its address for notice hereunder by
notice to the other parties hereto.
7.6 BINDING EFFECT.
This Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, legal representatives,
successors and assigns.
7.7 AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or supplemented only by
written agreement of the party against whom enforcement of such amendment,
modification or supplement is sought.
7.8 HEADING; EXECUTION IN COUNTERPARTS.
The headings and captions contained herein are for convenience
only and shall not control or affect the meaning or construction of any
provision hereof. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, and which together shall
constitute one and the same instrument.
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<PAGE>
7.9 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement, and supersedes
all prior agreements and understandings, oral and written, between the parties
hereto with respect to the subject matter hereof.
7.10 RIGHT OF DISCHARGE RESERVED.
Nothing contained in this Agreement shall confer upon the Grantee
any right to continue in the employ or service of Dal-Tile or affect any right
which Dal-Tile may have to terminate the employment or services of the Grantee.
7.11 WITHHOLDING.
The Company shall be entitled to withhold from any payments to
the Grantee an amount sufficient to satisfy any federal, state, and other
governmental tax required to be withheld in connection with any exercise of
the Right.
7.12 INTERPRETATION AND STOCKHOLDER APPROVAL.
(a) The Right granted under this Agreement is intended to be
performance-based compensation within the meaning of Section 162(m)(4)(C) of the
Code and the Committee shall interpret this Agreement accordingly.
(b) This Agreement and the grant of the Right hereunder is
subject to approval by Dal-Tile's stockholders in accordance with Section 162(m)
of the Code.
7.13 NO RIGHTS AS A STOCKHOLDER.
Neither the Grantee nor any person succeeding to the Grantee's
rights hereunder shall have any rights as a stockholder with respect to any
Shares subject to the Right. Except for adjustments which the Committee may
make pursuant to Section 6.1 hereof, no adjustment shall be made for
dividends, distributions or other rights (whether ordinary or extraordinary,
and whether in cash, securities or other property). Neither the Grantee nor
any person succeeding to the Grantee's rights hereunder shall have any rights
as a stockholder with respect to any Shares issuable in connection with a
Payment-In-Kind or a Mixed Payment until the date of the issuance of a stock
certificate to him or her for any such Shares. No adjustment shall be made
for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property) for which
the record date is prior to the date such stock certificate is issued.
7.14 GRANTEE'S ACKNOWLEDGMENTS.
The Grantee agrees and acknowledges that no member of the
Committee shall be liable for any action or determination made in good faith
with respect to this Agreement. The Committee shall have the right to make
all determinations, in respect of this Agreement, which determinations shall
be final, conclusive and binding on the Grantee.
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<PAGE>
7.15 RESTRICTIONS.
(a) If the Committee shall at any time determine based on the
advice of counsel that any Consent (as hereinafter defined) is necessary or
desirable as a condition of, or in connection with, the issuance of Shares
hereunder, then such issuance shall not be taken, in whole or in part, unless
and until such Consent shall have been effected or obtained to the full
satisfaction of the Committee. Dal-Tile shall use its reasonable best
efforts to effect or obtain such Consent. If such Consent cannot be effected
or obtained within three months of exercise of the Right, payment of the
amount determined under Section 2 hereof will be made in cash.
(b) The term "Consent" as used herein with respect to the
issuance of Shares means: (i) any and all listings, registrations or
qualifications in respect thereof upon any securities exchange or under any
federal, state or local law, rule or regulation; (ii) any and all written
agreements and representations by the Grantee or any person succeeding to the
Grantee's rights hereunder, as the case may be, with respect to the
disposition of the Shares, or with respect to any other matter, which the
Committee shall deem necessary or desirable to comply with the terms of any
such listing, registration or qualification or to obtain an exemption from
the requirement that any such listing, qualification or registration be made;
and (iii) any and all consents, clearances and approvals in respect of the
issuance of the Shares by any governmental or other regulatory bodies.
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of
each of the parties hereto, all as of the date first above written.
DAL-TILE INTERNATIONAL INC.
By: ________________________________
____________________________________
Christopher Wellborn
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<PAGE>
EXHIBIT A
EXERCISE NOTICE
[TO BE EXECUTED UPON EXERCISE OF STOCK APPRECIATION RIGHT]
To Dal-Tile International Inc.
The undersigned hereby irrevocable elects to exercise the Right
represented by the attached Stock Appreciation Rights Agreement (the
"Agreement"), dated as of the 10th day of October, 1997, with respect to
_____ Shares, as provided for therein.
The undersigned represents and warrants to you that, with respect to
any amount paid to the undersigned by delivery of Shares:
ACQUISITION FOR OWN ACCOUNT. The undersigned is acquiring such Shares
for his/her own account for investment and not with a view to the sale or
distribution thereof or with any present intention of distributing or selling
the same.
SECURITIES ACT RESTRICTIONS. The undersigned covenants and agrees
that he/she will not sell, assign, transfer, pledge or otherwise dispose of
any of the Shares acquired by the undersigned hereunder unless and until they
are registered under the Securities Act of 1933, as amended (the "Securities
Act"), or unless an exemption from such registration is available and until
the undersigned shall have delivered to Dal-Tile International Inc. a written
opinion of counsel reasonably satisfactory to Dal-Tile International Inc.
that the disposition is in compliance with the requirements of the Securities
Act. The undersigned acknowledges that he/she understands that the Shares are
not so registered.
Please pay all cash to, and issue any certificate or certificates for
any Shares in the name of:
Name: __________________________________________________________
Address: _______________________________________________________
Social Security or Tax I.D. Number: ____________________________
(Please print)
Signature ________________________
Dated _____________________, 199__.
<PAGE>
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT, made as of the 20th day of February, 1998 (the "Grant
Date"), between Dal-Tile International Inc., a Delaware corporation
("Dal-Tile"), and Dan L. Cooke, 5501 Windmier Circle, Dallas, TX 75275 (the
"Grantee").
The parties hereto agree as follows:
1. GRANT OF STOCK APPRECIATION RIGHT.
Dal-Tile hereby grants to the Grantee a Stock Appreciation Right
(the "Right") with respect to 50,000 shares of the common stock, par value
$.01 per share (the "Common Stock") of Dal-Tile (the "Shares") on the terms
and conditions set forth in this Agreement. The base price for each Share
covered by this Right shall be $9.01 as adjusted pursuant to this Agreement
(the "Base Price").
2. AMOUNT AND FORM OF PAYMENT UPON EXERCISE OF RIGHT.
2.1 Upon exercise of all or any portion of the Right, the
Grantee shall be entitled to receive the amount determined by multiplying (i)
the excess (the "Single Share Excess") of the Fair Market Value of a Share on
the date of exercise, over the Base Price by (ii) the number of Shares in
respect of which the Right is being exercised; PROVIDED, HOWEVER, that for
purposes of determining the Single Share Excess, no amount of Fair Market Value
of a Share in excess of $11.94 (the "Ceiling Price") shall be taken into
account. Payment of the amount determined under this Section 2.1 shall, in the
sole discretion of the Committee, be made: (i) in cash; (ii) by delivery of
Shares having an aggregate Fair Market Value on the date of such delivery equal
to the amount of such payment (a "Payment-In-Kind"); or (iii) by a combination
of the foregoing (a "Mixed Payment"), and shall be paid within ten (10) business
days after the date of exercise. In the event that such payment is made as:
(x) a Payment-In-Kind; or (y) a Mixed Payment, and the sum of the federal, state
and other governmental income tax incurred by the Grantee with respect to the
payment exceeds the cash portion, if any, of such payment, the Committee shall
make one or more interest-bearing loans (each loan, a "Loan," and, collectively,
the "Loans") to the Grantee in an amount equal to such excess; provided,
however, that Dal-Tile shall have no obligation to make a loan in the event of
the "Termination With Cause" (as defined in the Stock Option Plan) of the
Grantee's employment by Dal-Tile or the termination of the Grantee's employment
voluntarily by the Grantee.
2.2 Each Loan shall bear interest at the lowest rate permitted
by the Internal Revenue Service without the imputation of interest. The
principal amount and accrued interest on each Loan shall be due and payable on
April 18, 2007; provided, however, that (a) the Grantee shall pay to Dal-Tile
promptly, as repayment of the outstanding principal amount and accrued interest
of the Loans, the after-tax proceeds received by the Grantee from any
disposition of Common Stock, or options to acquire Common Stock, held from time
to time by the Grantee, and (b) the outstanding principal amount and accrued
interest of all the Loans shall be immediately payable in the event of the
Termination With Cause of the Grantee's employment by Dal-Tile or the
termination of the Grantee's employment voluntarily by the Grantee. Repayments
shall be applied first to the Loan which was most recently made. Each Loan
shall be secured by any and all shares of Common Stock and options to acquire
Common Stock held by the Grantee and by the Right.
<PAGE>
3. VESTING; EXERCISABILITY; DURATION.
3.1 VESTING.
(a) Subject to Sections 6.2 and 6.3 hereof, the Grantee
shall vest in the cumulative percentage of Shares under the Right, at the
times provided in the following schedule:
<TABLE>
APPLICABLE DATE CUMULATIVE PERCENTAGE OF SHARES
--------------- -------------------------------
<S> <C>
On the Grant Date 25%
April 18, 1998 50%
April 18, 1999 75%
April 18, 2000 100%
</TABLE>
(b) The unvested portion of the Right shall be forfeited
upon the termination of the Grantee's employment with Dal-Tile for any
reason.
3.2 EXERCISABILITY.
Subject to Sections 6.2 and 6.3 hereof, the Grantee shall
be entitled to exercise the Right, with respect to the cumulative percentage
of Shares subject to the Right in which the Grantee may then be, or
thereafter become, vested, only if Dal-Tile reports, pursuant to its audited
financial statements, positive net income ("Net Income") for either its
fiscal year ending December 31, 1998 or its fiscal year ending December 31,
1999 (the "Performance Target"). The Right shall not be exercisable prior to
the vesting thereof and the time the Committee certifies that the Performance
Target has been satisfied. The Committee shall act within seven days with
respect to certification following the availability of the relevant audited
financial statements. For purposes of this Agreement, Net Income shall be
calculated without taking into account any charge against income which may
arise as a result of the Right granted pursuant to this Agreement or any
other stock appreciation right which may, from time to time, be granted by
Dal-Tile.
3.3 DURATION.
Unless earlier terminated in accordance with the terms of
this Agreement, the Right shall terminate on April 18, 2007.
4. MANNER OF EXERCISE OF RIGHT.
Subject to the terms and conditions of this Agreement, the Right
may be exercised only by giving written notice (the "Exercise Notice") to
Dal-Tile in the form of Exhibit A attached hereto, at its principal executive
office. Such notice shall state that the Grantee is electing to exercise the
Right, and the number of Shares in respect of which the Right is being
exercised, and shall be signed by the person or persons exercising the Right.
The date of exercise for purposes of this Agreement shall be the date
Dal-Tile receives the Exercise Notice. If requested by Dal-Tile, such person
or persons shall: (i) deliver this Agreement to the Secretary of Dal-Tile who
shall endorse thereon a notation of such exercise; and (ii) provide
satisfactory proof as to the right of such person or persons to exercise the
Right.
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<PAGE>
5. NONASSIGNABILITY.
Neither the Right granted to the Grantee under this Agreement nor
any portion thereof shall be assignable or transferable (whether by operation of
law or otherwise, and whether voluntarily or involuntarily), other than by will
or by the laws of descent and distribution. The Right granted to the Grantee
under this Agreement shall be exercisable only by the Grantee or his estate,
heirs or personal representatives.
6. ADJUSTMENTS TO RIGHTS UPON CERTAIN EVENTS.
6.1 ADJUSTMENTS TO NUMBER OF SHARES AND CEILING AND BASE PRICES.
The number of Shares subject to this Right, the Ceiling
Price and the Base Price shall be equitably adjusted for any increase or
decrease in the number of issued Shares resulting from: (i) the subdivision or
combination of Shares or other capital adjustments; (ii) the payment of a stock
dividend or extraordinary cash dividend after the Grant Date; or (iii) any other
increase or decrease in the number of such Shares effected without receipt of
consideration by Dal-Tile; PROVIDED, HOWEVER, that any fractional Shares
resulting from any such adjustment shall be eliminated. Adjustments under this
Section 6.1 shall be made by the Committee, whose determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding, and
conclusive.
6.2 CHANGE OF CONTROL.
Notwithstanding anything contained in this Agreement to the
contrary:
(a) upon the consummation of a "Transaction" that does not
also constitute a "Non-Control Transaction" (each, as defined in the Stock
Option Plan), the Grantee shall, unless the Grantee and Dal-Tile shall
otherwise agree, be vested in, and shall be entitled to exercise the Right
with respect to, 100% of the Right, and the Grantee shall be entitled to
receive, with respect to each Share subject to the Right, upon exercise of
all or any portion of the Right, a payment of the same amount and kind of
stock, securities, cash, property or other consideration that each holder of
a Share was entitled to receive in such Transaction in respect of a Share,
less the Base Price; PROVIDED, HOWEVER, that the fair market value of such
stock, securities, cash, property or other consideration shall not exceed the
Ceiling Price less the Base Price. If more than one (1) form of
consideration is included in such Transaction, the various components thereof
shall be appropriately prorated; and
(b) in the event of a Non-Control Transaction, the Grantee
shall continue to vest in the Right only in accordance with Section 3.1 hereof,
which Right shall remain exercisable only in accordance with Section 3.2 hereof,
and, the number of Shares subject to the Right, the Ceiling Price and the Base
Price shall be equitably adjusted by the Committee for any changes in the Shares
resulting from a merger involving Dal-Tile. Adjustments under this Section
6.2(b) shall be made by the Committee, whose determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding, and
conclusive.
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<PAGE>
6.3 TERMINATION OF EMPLOYMENT.
The Right (whether vested or unvested) shall terminate and
expire on the effective date of the Termination With Cause of the Grantee's
employment by Dal-Tile. Unless the Committee determines otherwise, in the event
of the termination of the Grantee's employment for any reason other than a
Termination With Cause by Dal-Tile, the Right, to the extent then vested, shall
become exercisable only in accordance with Section 3.2 hereof and shall
terminate on the earliest to occur of: (i) April 18, 2007; and (ii) the date
which is ten (10) days (one (1) year in the case of a termination by reason of
death, disability or retirement on or after the Grantee's sixty-fifth birthday
or such earlier retirement age as may be approved by the Committee) after the
later of: (A) such termination of the Grantee's employment; and (B) the date
that achievement of the Performance Target is certified, and the unvested
portion of the right shall be forfeited
7. MISCELLANEOUS.
7.1 RULES OF CONSTRUCTION.
(a) In this Agreement, unless the context otherwise
requires, words in the singular number or in the plural number shall each
include the singular number and the plural number, words of the masculine gender
shall include the feminine and the neuter, and, when the sense so indicates,
words of the neuter gender may refer to any gender.
(b) The term "affiliate" shall mean any person directly or
indirectly controlling, controlled by, or under common control with the person
of which it is an affiliate.
(c) The term "Board" shall mean the Board of Directors of
Dal-Tile.
(d) The term "Code" shall mean the Internal Revenue Code of
1986, as amended.
(e) The term "Committee" shall mean the Committee of the
Board appointed to administer the Stock Option Plan in accordance with the terms
of such plan.
(f) The term "control" shall mean with respect to any
person, the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such person, whether through the
ownership of equity interests, by contract or otherwise.
(g) The term "Fair Market Value" per Share as of a
particular date shall mean: (i) the closing sales price of a Share on the
national securities exchange on which the Shares are principally traded for the
last date (including the date of exercise of the Right) on which there was a
sale of the Shares on such exchange; or (ii) if the Shares are not then traded
on a national securities exchange, the average of the closing bid and asked
prices for the Shares in the over-the-counter market on which the Shares are
principally traded for the last date (including the date of exercise of the
Right) on which there was a sale of the Shares in such market; or (iii) if the
Shares are not then listed on a national securities exchange or traded in an
over-the-counter market, such value as the Committee, in its sole discretion,
shall determine.
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<PAGE>
(h) The term "person" shall mean an individual, a
corporation, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
(i) The Term "Stock Option Plan" shall mean the Dal-Tile
International Inc. 1997 Amended and Restated Stock Option Plan.
(j) The term "1934 Act" shall mean the Securities Exchange
Act of 1934, as amended.
(k) There shall be included within the term "Dal-Tile" any
successor to Dal-Tile by merger, consolidation, acquisition of substantially all
the assets thereof, or otherwise.
(l) There shall be included within the term "Shares" any
Common Stock, and any and all securities of any kind whatsoever of Dal-Tile
which may be issued after the date hereof in respect of, or in exchange for,
shares of Common Stock pursuant to a merger, consolidation, stock split, stock
dividend, recapitalization of Dal-Tile or otherwise.
7.2 FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done
and performed all further acts and things and shall execute and deliver all
other agreements, certificates, instruments, and documents as any other party
hereto reasonably may request in order to carry out the intent and accomplish
the purposes of this Agreement, and the consummation of the transactions
contemplated hereby.
7.3 GOVERNING LAW.
This Agreement and the rights and obligations of the parties
hereto shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware, without giving effect to the principles of
conflicts of law thereof.
7.4 INVALIDITY OF PROVISION.
The invalidity or unenforceability of any provision of this
Agreement in any jurisdiction shall not affect the validity or enforceability of
the remainder of this Agreement in that jurisdiction or the validity or
enforceability of this Agreement, including that provision, in any other
jurisdiction. If any provision of this Agreement is held unlawful or
unenforceable in any respect, such provision shall be revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
7.5 NOTICE.
Any notice or other communication required or permitted
hereunder shall be writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission or,
if mailed, 5 days after the date of deposit in the United States mail, as
follows:
(i) if to Dal-Tile, to:
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<PAGE>
Dal-Tile International Inc.
7834 C.F. Hawn Freeway
Dallas, Texas 75217
Attention: Mark A. Solls
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Frederick H. Fogel, Esq.
(ii) if to the Grantee, to:
Dan L. Cooke
5501 Windmier Circle
Dallas, TX 75275
Any party may change its address for notice hereunder by
notice to the other parties hereto.
7.6 BINDING EFFECT.
This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective heirs, legal
representatives, successors and assigns.
7.7 AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or supplemented only
by written agreement of the party against whom enforcement of such amendment,
modification or supplement is sought.
7.8 HEADING; EXECUTION IN COUNTERPARTS.
The headings and captions contained herein are for
convenience only and shall not control or affect the meaning or construction of
any provision hereof. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and which
together shall constitute one and the same instrument.
7.9 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement, and
supersedes all prior agreements and understandings, oral and written, between
the parties hereto with respect to the subject matter hereof.
7.10 RIGHT OF DISCHARGE RESERVED.
Nothing contained in this Agreement shall confer upon the
Grantee any right to continue in the employ or service of Dal-Tile or affect any
right which Dal-Tile may have to terminate the employment or services of the
Grantee.
7.11 WITHHOLDING.
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<PAGE>
The Company shall be entitled to withhold from any payments to
the Grantee an amount sufficient to satisfy any federal, state, and other
governmental tax required to be withheld in connection with any exercise of the
Right.
7.12 INTERPRETATION AND STOCKHOLDER APPROVAL.
(a) The Right granted under this Agreement is intended to
be performance-based compensation within the meaning of Section 162(m)(4)(C) of
the Code and the Committee shall interpret this Agreement accordingly.
(b) This Agreement and the grant of the Right hereunder is
subject to approval by Dal-Tile's stockholders in accordance with Section 162(m)
of the Code.
7.13 NO RIGHTS AS A STOCKHOLDER.
Neither the Grantee nor any person succeeding to the
Grantee's rights hereunder shall have any rights as a stockholder with
respect to any Shares subject to the Right. Except for adjustments which the
Committee may make pursuant to Section 6.1 hereof, no adjustment shall be
made for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property). Neither
the Grantee nor any person succeeding to the Grantee's rights hereunder shall
have any rights as a stockholder with respect to any Shares issuable in
connection with a Payment-In-Kind or a Mixed Payment until the date of the
issuance of a stock certificate to him or her for any such Shares. No
adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities or other
property) for which the record date is prior to the date such stock
certificate is issued.
7.14 GRANTEE'S ACKNOWLEDGMENTS.
The Grantee agrees and acknowledges that no member of the
Committee shall be liable for any action or determination made in good faith
with respect to this Agreement. The Committee shall have the right to make all
determinations, in respect of this Agreement, which determinations shall be
final, conclusive and binding on the Grantee.
7.15 RESTRICTIONS.
(a) If the Committee shall at any time determine based on
the advice of counsel that any Consent (as hereinafter defined) is necessary or
desirable as a condition of, or in connection with, the issuance of Shares
hereunder, then such issuance shall not be taken, in whole or in part, unless
and until such Consent shall have been effected or obtained to the full
satisfaction of the Committee. Dal-Tile shall use its reasonable best efforts
to effect or obtain such Consent. If such Consent cannot be effected or
obtained within three (3) months of exercise of the Right, payment of the amount
determined under Section 2.1 hereof will be made in cash.
(b) The term "Consent" as used herein with respect to the
issuance of Shares means: (i) any and all listings, registrations or
qualifications in respect thereof upon any securities exchange or under any
federal, state or local law, rule or regulation; (ii) any and all written
agreements and representations by the Grantee or any person succeeding to the
Grantee's rights hereunder, as the case may be, with respect to the disposition
of the Shares, or with respect to any other matter, which the Committee
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<PAGE>
shall deem necessary or desirable to comply with the terms of any such
listing, registration or qualification or to obtain an exemption from the
requirement that any such listing, qualification or registration be made; and
(iii) any and all consents, clearances and approvals in respect of the
issuance of the Shares by any governmental or other regulatory bodies.
-8-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of
each of the parties hereto, all as of the date first above written.
DAL-TILE INTERNATIONAL INC.
By: ________________________________
Name: ______________________________
Title: _____________________________
____________________________________
Dan L. Cooke
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<PAGE>
EXHIBIT A
EXERCISE NOTICE
[TO BE EXECUTED UPON EXERCISE OF STOCK APPRECIATION RIGHT]
To Dal-Tile International Inc.
The undersigned hereby irrevocable elects to exercise the Right
represented by the attached Stock Appreciation Rights Agreement (the
"Agreement"), dated as of the 10th day of October, 1997, with respect to
______ Shares, as provided for therein.
The undersigned represents and warrants to you that, with respect to
any amount paid to the undersigned by delivery of Shares:
ACQUISITION FOR OWN ACCOUNT. The undersigned is acquiring such Shares
for his/her own account for investment and not with a view to the sale or
distribution thereof or with any present intention of distributing or selling
the same.
SECURITIES ACT RESTRICTIONS. The undersigned covenants and agrees
that he/she will not sell, assign, transfer, pledge or otherwise dispose of
any of the Shares acquired by the undersigned hereunder unless and until they
are registered under the Securities Act of 1933, as amended (the "Securities
Act"), or unless an exemption from such registration is available and until
the undersigned shall have delivered to Dal-Tile International Inc. a written
opinion of counsel reasonably satisfactory to Dal-Tile International Inc.
that the disposition is in compliance with the requirements of the Securities
Act. The undersigned acknowledges that he/she understands that the Shares are
not so registered.
Please pay all cash to, and issue any certificate or certificates for
any Shares in the name of:
Name: ______________________________________________________________
Address: ___________________________________________________________
Social Security or Tax I.D. Number: ________________________________
(Please print)
Signature ______________________________________
Dated ______________________, 199____.
<PAGE>
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT, made as of the 20th day of February, 1998 (the "Grant
Date"), between Dal-Tile International Inc., a Delaware corporation
("Dal-Tile"), and Marc Powell, 205 White Chapel Court, Southlake, Texas
76092 (the "Grantee").
The parties hereto agree as follows:
1. GRANT OF STOCK APPRECIATION RIGHT.
Dal-Tile hereby grants to the Grantee a Stock Appreciation Right
(the "Right") with respect to 50,000 shares of the common stock, par value $.01
per share (the "Common Stock") of Dal-Tile (the "Shares") on the terms and
conditions set forth in this Agreement. The base price for each Share covered
by this Right shall be $9.01 as adjusted pursuant to this Agreement (the "Base
Price").
2. AMOUNT AND FORM OF PAYMENT UPON EXERCISE OF RIGHT.
2.1 Upon exercise of all or any portion of the Right, the
Grantee shall be entitled to receive the amount determined by multiplying (i)
the excess (the "Single Share Excess") of the Fair Market Value of a Share on
the date of exercise, over the Base Price by (ii) the number of Shares in
respect of which the Right is being exercised; PROVIDED, HOWEVER, that for
purposes of determining the Single Share Excess, no amount of Fair Market Value
of a Share in excess of $11.94 (the "Ceiling Price") shall be taken into
account. Payment of the amount determined under this Section 2.1 shall, in the
sole discretion of the Committee, be made: (i) in cash; (ii) by delivery of
Shares having an aggregate Fair Market Value on the date of such delivery equal
to the amount of such payment (a "Payment-In-Kind"); or (iii) by a combination
of the foregoing (a "Mixed Payment"), and shall be paid within ten (10) business
days after the date of exercise. In the event that such payment is made as:
(x) a Payment-In-Kind; or (y) a Mixed Payment, and the sum of the federal, state
and other governmental income tax incurred by the Grantee with respect to the
payment exceeds the cash portion, if any, of such payment, the Committee shall
make one or more interest-bearing loans (each loan, a "Loan," and, collectively,
the "Loans") to the Grantee in an amount equal to such excess; provided,
however, that Dal-Tile shall have no obligation to make a loan in the event of
the "Termination With Cause" (as defined in the Stock Option Plan) of the
Grantee's employment by Dal-Tile or the termination of the Grantee's employment
voluntarily by the Grantee.
2.2 Each Loan shall bear interest at the lowest rate permitted
by the Internal Revenue Service without the imputation of interest. The
principal amount and accrued interest on each Loan shall be due and payable on
April 18, 2007; provided, however, that (a) the Grantee shall pay to Dal-Tile
promptly, as repayment of the outstanding principal amount and accrued interest
of the Loans, the after-tax proceeds received by the Grantee from any
disposition of Common Stock, or options to acquire Common Stock, held from time
to time by the Grantee, and (b) the outstanding principal amount and accrued
interest of all the Loans shall be immediately payable in the event of the
Termination With Cause of the Grantee's employment by Dal-Tile or the
termination of the Grantee's employment voluntarily by the Grantee. Repayments
shall be applied first to the Loan which was most recently made. Each Loan
shall be secured by any and all shares of Common Stock and options to acquire
Common Stock held by the Grantee and by the Right.
<PAGE>
3. VESTING; EXERCISABILITY; DURATION.
3.1 VESTING.
(a) Subject to Sections 6.2 and 6.3 hereof,
the Grantee shall vest in the cumulative percentage of Shares under the
Right, at the times provided in the following schedule:
<TABLE>
Applicable Date Cumulative Percentage of Shares
--------------- -------------------------------
<S> <C>
On the Grant Date 25%
April 18, 1998 50%
April 18, 1999 75%
April 18, 2000 100%
</TABLE>
(b) The unvested portion of the Right shall be
forfeited upon the termination of the Grantee's employment with Dal-Tile for
any reason.
3.2 EXERCISABILITY.
Subject to Sections 6.2 and 6.3 hereof, the
Grantee shall be entitled to exercise the Right, with respect to the
cumulative percentage of Shares subject to the Right in which the Grantee may
then be, or thereafter become, vested, only if Dal-Tile reports, pursuant to
its audited financial statements, positive net income ("Net Income") for
either its fiscal year ending December 31, 1998 or its fiscal year ending
December 31, 1999 (the "Performance Target"). The Right shall not be
exercisable prior to the vesting thereof and the time the Committee certifies
that the Performance Target has been satisfied. The Committee shall act
within seven days with respect to certification following the availability of
the relevant audited financial statements. For purposes of this Agreement,
Net Income shall be calculated without taking into account any charge against
income which may arise as a result of the Right granted pursuant to this
Agreement or any other stock appreciation right which may, from time to time,
be granted by Dal-Tile.
3.3 DURATION.
Unless earlier terminated in accordance with
the terms of this Agreement, the Right shall terminate on April 18, 2007.
4. MANNER OF EXERCISE OF RIGHT.
Subject to the terms and conditions of this Agreement, the Right
may be exercised only by giving written notice (the "Exercise Notice") to
Dal-Tile in the form of Exhibit A attached hereto, at its principal executive
office. Such notice shall state that the Grantee is electing to exercise the
Right, and the number of Shares in respect of which the Right is being
exercised, and shall be signed by the person or persons exercising the Right.
The date of exercise for purposes of this Agreement shall be the date
Dal-Tile receives the Exercise Notice. If requested by Dal-Tile, such person
or persons shall: (i) deliver this Agreement to the Secretary of Dal-Tile who
shall endorse thereon a notation of such exercise; and (ii) provide
satisfactory proof as to the right of such person or persons to exercise the
Right.
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<PAGE>
5. NONASSIGNABILITY.
Neither the Right granted to the Grantee under this
Agreement nor any portion thereof shall be assignable or transferable
(whether by operation of law or otherwise, and whether voluntarily or
involuntarily), other than by will or by the laws of descent and
distribution. The Right granted to the Grantee under this Agreement shall be
exercisable only by the Grantee or his estate, heirs or personal
representatives.
6. ADJUSTMENTS TO RIGHTS UPON CERTAIN EVENTS.
6.1 ADJUSTMENTS TO NUMBER OF SHARES AND CEILING AND
BASE PRICES.
The number of Shares subject to this Right, the
Ceiling Price and the Base Price shall be equitably adjusted for any increase
or decrease in the number of issued Shares resulting from: (i) the
subdivision or combination of Shares or other capital adjustments; (ii) the
payment of a stock dividend or extraordinary cash dividend after the Grant
Date; or (iii) any other increase or decrease in the number of such Shares
effected without receipt of consideration by Dal-Tile; PROVIDED, HOWEVER,
that any fractional Shares resulting from any such adjustment shall be
eliminated. Adjustments under this Section 6.1 shall be made by the
Committee, whose determination as to what adjustments shall be made, and the
extent thereof, shall be final, binding, and conclusive.
6.2 CHANGE OF CONTROL.
Notwithstanding anything contained in this
Agreement to the contrary:
(a) upon the consummation of a "Transaction"
that does not also constitute a "Non-Control Transaction" (each, as defined
in the Stock Option Plan), the Grantee shall, unless the Grantee and Dal-Tile
shall otherwise agree, be vested in, and shall be entitled to exercise the
Right with respect to, 100% of the Right, and the Grantee shall be entitled
to receive, with respect to each Share subject to the Right, upon exercise of
all or any portion of the Right, a payment of the same amount and kind of
stock, securities, cash, property or other consideration that each holder of
a Share was entitled to receive in such Transaction in respect of a Share,
less the Base Price; PROVIDED, HOWEVER, that the fair market value of such
stock, securities, cash, property or other consideration shall not exceed the
Ceiling Price less the Base Price. If more than one (1) form of
consideration is included in such Transaction, the various components thereof
shall be appropriately prorated; and
(b) in the event of a Non-Control Transaction,
the Grantee shall continue to vest in the Right only in accordance with
Section 3.1 hereof, which Right shall remain exercisable only in accordance
with Section 3.2 hereof, and, the number of Shares subject to the Right, the
Ceiling Price and the Base Price shall be equitably adjusted by the Committee
for any changes in the Shares resulting from a merger involving Dal-Tile.
Adjustments under this Section 6.2(b) shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding, and conclusive.
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<PAGE>
6.3 TERMINATION OF EMPLOYMENT.
The Right (whether vested or unvested) shall
terminate and expire on the effective date of the Termination With Cause of
the Grantee's employment by Dal-Tile. Unless the Committee determines
otherwise, in the event of the termination of the Grantee's employment for
any reason other than a Termination With Cause by Dal-Tile, the Right, to the
extent then vested, shall become exercisable only in accordance with Section
3.2 hereof and shall terminate on the earliest to occur of: (i) April 18,
2007; and (ii) the date which is ten (10) days (one (1) year in the case of a
termination by reason of death, disability or retirement on or after the
Grantee's sixty-fifth birthday or such earlier retirement age as may be
approved by the Committee) after the later of: (A) such termination of the
Grantee's employment; and (B) the date that achievement of the Performance
Target is certified, and the unvested portion of the right shall be forfeited
7. MISCELLANEOUS.
7.1 RULES OF CONSTRUCTION.
(a) In this Agreement, unless the context otherwise
requires, words in the singular number or in the plural number shall each
include the singular number and the plural number, words of the masculine
gender shall include the feminine and the neuter, and, when the sense so
indicates, words of the neuter gender may refer to any gender.
(b) The term "affiliate" shall mean any person
directly or indirectly controlling, controlled by, or under common control
with the person of which it is an affiliate.
(c) The term "Board" shall mean the Board of
Directors of Dal-Tile.
(d) The term "Code" shall mean the Internal Revenue
Code of 1986, as amended.
(e) The term "Committee" shall mean the Committee
of the Board appointed to administer the Stock Option Plan in accordance with
the terms of such plan.
(f) The term "control" shall mean with respect to
any person, the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such person, whether
through the ownership of equity interests, by contract or otherwise.
(g) The term "Fair Market Value" per Share as of a
particular date shall mean: (i) the closing sales price of a Share on the
national securities exchange on which the Shares are principally traded for
the last date (including the date of exercise of the Right) on which there
was a sale of the Shares on such exchange; or (ii) if the Shares are not then
traded on a national securities exchange, the average of the closing bid and
asked prices for the Shares in the over-the-counter market on which the
Shares are principally traded for the last date (including the date of
exercise of the Right) on which there was a sale of the Shares in such
market; or (iii) if the Shares are not then
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<PAGE>
listed on a national securities exchange or traded in an over-the-counter
market, such value as the Committee, in its sole discretion, shall determine.
(h) The term "person" shall mean an
individual, a corporation, a partnership, an association, a trust or any
other entity or organization, including a government or political subdivision
or an agency or instrumentality thereof.
(i) The Term "Stock Option Plan" shall mean
the Dal-Tile International Inc. 1997 Amended and Restated Stock Option Plan.
(j) The term "1934 Act" shall mean the
Securities Exchange Act of 1934, as amended.
(k) There shall be included within the term
"Dal-Tile" any successor to Dal-Tile by merger, consolidation, acquisition of
substantially all the assets thereof, or otherwise.
(l) There shall be included within the term
"Shares" any Common Stock, and any and all securities of any kind whatsoever
of Dal-Tile which may be issued after the date hereof in respect of, or in
exchange for, shares of Common Stock pursuant to a merger, consolidation,
stock split, stock dividend, recapitalization of Dal-Tile or otherwise.
7.2 FURTHER ASSURANCES.
Each party hereto shall do and perform or cause
to be done and performed all further acts and things and shall execute and
deliver all other agreements, certificates, instruments, and documents as any
other party hereto reasonably may request in order to carry out the intent
and accomplish the purposes of this Agreement, and the consummation of the
transactions contemplated hereby.
7.3 GOVERNING LAW.
This Agreement and the rights and obligations
of the parties hereto shall be governed by, and construed and enforced in
accordance with, the laws of the State of Delaware, without giving effect to
the principles of conflicts of law thereof.
7.4 INVALIDITY OF PROVISION.
The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or
the validity or enforceability of this Agreement, including that provision,
in any other jurisdiction. If any provision of this Agreement is held
unlawful or unenforceable in any respect, such provision shall be revised or
applied in a manner that renders it lawful and enforceable to the fullest
extent possible under law.
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<PAGE>
7.5 NOTICE.
Any notice or other communication required or
permitted hereunder shall be writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, 5 days after the date of deposit in the United
States mail, as follows:
(i) if to Dal-Tile, to:
Dal-Tile International Inc.
7834 C.F. Hawn Freeway
Dallas, Texas 75217
Attention: Mark A. Solls
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Frederick H. Fogel, Esq.
(ii) if to the Grantee, to:
Marc Powell
205 White Chapel Court
Southlake, Texas 76902
Any party may change its address for notice
hereunder by notice to the other parties hereto.
7.6 BINDING EFFECT.
This Agreement shall inure to the benefit of
and shall be binding upon the parties hereto and their respective heirs,
legal representatives, successors and assigns.
7.7 AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or
supplemented only by written agreement of the party against whom enforcement
of such amendment, modification or supplement is sought.
7.8 HEADING; EXECUTION IN COUNTERPARTS.
The headings and captions contained herein are
for convenience only and shall not control or affect the meaning or
construction of any provision hereof. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and
which together shall constitute one and the same instrument.
-6-
<PAGE>
7.9 ENTIRE AGREEMENT.
This Agreement constitutes the entire
agreement, and supersedes all prior agreements and understandings, oral and
written, between the parties hereto with respect to the subject matter hereof.
7.10 RIGHT OF DISCHARGE RESERVED.
Nothing contained in this Agreement shall
confer upon the Grantee any right to continue in the employ or service of
Dal-Tile or affect any right which Dal-Tile may have to terminate the
employment or services of the Grantee.
7.11 WITHHOLDING.
The Company shall be entitled to withhold from
any payments to the Grantee an amount sufficient to satisfy any federal,
state, and other governmental tax required to be withheld in connection with
any exercise of the Right.
7.12 INTERPRETATION AND STOCKHOLDER APPROVAL.
(a) The Right granted under this Agreement is
intended to be performance-based compensation within the meaning of Section
162(m)(4)(C) of the Code and the Committee shall interpret this Agreement
accordingly.
(b) This Agreement and the grant of the Right
hereunder is subject to approval by Dal-Tile's stockholders in accordance
with Section 162(m) of the Code.
7.13 NO RIGHTS AS A STOCKHOLDER.
Neither the Grantee nor any person succeeding
to the Grantee's rights hereunder shall have any rights as a stockholder with
respect to any Shares subject to the Right. Except for adjustments which the
Committee may make pursuant to Section 6.1 hereof, no adjustment shall be
made for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property). Neither
the Grantee nor any person succeeding to the Grantee's rights hereunder shall
have any rights as a stockholder with respect to any Shares issuable in
connection with a Payment-In-Kind or a Mixed Payment until the date of the
issuance of a stock certificate to him or her for any such Shares. No
adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities or other
property) for which the record date is prior to the date such stock
certificate is issued.
7.14 GRANTEE'S ACKNOWLEDGMENTS.
The Grantee agrees and acknowledges that no
member of the Committee shall be liable for any action or determination made
in good faith with respect to this Agreement. The Committee shall have the
right to make all determinations, in respect of this Agreement, which
determinations shall be final, conclusive and binding on the Grantee.
-7-
<PAGE>
7.15 RESTRICTIONS.
(a) If the Committee shall at any time
determine based on the advice of counsel that any Consent (as hereinafter
defined) is necessary or desirable as a condition of, or in connection with,
the issuance of Shares hereunder, then such issuance shall not be taken, in
whole or in part, unless and until such Consent shall have been effected or
obtained to the full satisfaction of the Committee. Dal-Tile shall use its
reasonable best efforts to effect or obtain such Consent. If such Consent
cannot be effected or obtained within three (3) months of exercise of the
Right, payment of the amount determined under Section 2.1 hereof will be made
in cash.
(b) The term "Consent" as used herein with
respect to the issuance of Shares means: (i) any and all listings,
registrations or qualifications in respect thereof upon any securities
exchange or under any federal, state or local law, rule or regulation; (ii)
any and all written agreements and representations by the Grantee or any
person succeeding to the Grantee's rights hereunder, as the case may be, with
respect to the disposition of the Shares, or with respect to any other
matter, which the Committee shall deem necessary or desirable to comply with
the terms of any such listing, registration or qualification or to obtain an
exemption from the requirement that any such listing, qualification or
registration be made; and (iii) any and all consents, clearances and
approvals in respect of the issuance of the Shares by any governmental or
other regulatory bodies.
-8-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or
on behalf of each of the parties hereto, all as of the date first above
written.
DAL-TILE INTERNATIONAL INC.
By: _____________________________
Name: ___________________________
Title: __________________________
_________________________________
Marc Powell
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<PAGE>
EXHIBIT A
EXERCISE NOTICE
[TO BE EXECUTED UPON EXERCISE OF STOCK APPRECIATION RIGHT]
To Dal-Tile International Inc.
The undersigned hereby irrevocable elects to exercise the
Right represented by the attached Stock Appreciation Rights Agreement (the
"Agreement"), dated as of the 10th day of October, 1997, with respect
to Shares, as provided for therein.
The undersigned represents and warrants to you that, with
respect to any amount paid to the undersigned by delivery of Shares:
ACQUISITION FOR OWN ACCOUNT. The undersigned is
acquiring such Shares for his/her own account for investment and not with a
view to the sale or distribution thereof or with any present intention of
distributing or selling the same.
SECURITIES ACT RESTRICTIONS. The undersigned covenants
and agrees that he/she will not sell, assign, transfer, pledge or otherwise
dispose of any of the Shares acquired by the undersigned hereunder unless and
until they are registered under the Securities Act of 1933, as amended (the
"Securities Act"), or unless an exemption from such registration is available
and until the undersigned shall have delivered to Dal-Tile International Inc.
a written opinion of counsel reasonably satisfactory to Dal-Tile
International Inc. that the disposition is in compliance with the
requirements of the Securities Act. The undersigned acknowledges that he/she
understands that the Shares are not so registered.
Please pay all cash to, and issue any certificate or
certificates for any Shares in the name of:
Name: _____________________________________________________
Address: __________________________________________________
Social Security or Tax I.D. Number:________________________
(Please print)
Signature_____________________________
Dated __________, 199__.
<PAGE>
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT, made as of the 20th day of February, 1998 (the "Grant
Date"), between Dal-Tile International Inc., a Delaware corporation
("Dal-Tile"), David F. Finnigan, 5744 Meadow Haven Drive, Plano, TX 75093
(the "Grantee").
The parties hereto agree as follows:
1. GRANT OF STOCK APPRECIATION RIGHT.
Dal-Tile hereby grants to the Grantee a Stock Appreciation Right
(the "Right") with respect to 60,000 shares of the common stock, par value
$.01 per share (the "Common Stock") of Dal-Tile (the "Shares") on the terms
and conditions set forth in this Agreement. The base price for each Share
covered by this Right shall be $9.01 as adjusted pursuant to this Agreement
(the "Base Price").
2. AMOUNT AND FORM OF PAYMENT UPON EXERCISE OF RIGHT.
2.1 Upon exercise of all or any portion of the Right, the
Grantee shall be entitled to receive the amount determined by multiplying (i)
the excess (the "Single Share Excess") of the Fair Market Value of a Share on
the date of exercise, over the Base Price by (ii) the number of Shares in
respect of which the Right is being exercised; PROVIDED, HOWEVER, that for
purposes of determining the Single Share Excess, no amount of Fair Market
Value of a Share in excess of $11.94 (the "Ceiling Price") shall be taken
into account. Payment of the amount determined under this Section 2.1 shall,
in the sole discretion of the Committee, be made: (i) in cash; (ii) by
delivery of Shares having an aggregate Fair Market Value on the date of such
delivery equal to the amount of such payment (a "Payment-In-Kind"); or (iii)
by a combination of the foregoing (a "Mixed Payment"), and shall be paid
within ten (10) business days after the date of exercise. In the event that
such payment is made as: (x) a Payment-In-Kind; or (y) a Mixed Payment, and
the sum of the federal, state and other governmental income tax incurred by
the Grantee with respect to the payment exceeds the cash portion, if any, of
such payment, the Committee shall make one or more interest-bearing loans
(each loan, a "Loan," and, collectively, the "Loans") to the Grantee in an
amount equal to such excess; provided, however, that Dal-Tile shall have no
obligation to make a loan in the event of the "Termination With Cause" (as
defined in the Stock Option Plan) of the Grantee's employment by Dal-Tile or
the termination of the Grantee's employment voluntarily by the Grantee.
2.2 Each Loan shall bear interest at the lowest rate permitted
by the Internal Revenue Service without the imputation of interest. The
principal amount and accrued interest on each Loan shall be due and payable
on September 1, 2007; provided, however, that (a) the Grantee shall pay to
Dal-Tile promptly, as repayment of the outstanding principal amount and
accrued interest of the Loans, the after-tax proceeds received by the Grantee
from any disposition of Common Stock, or options to acquire Common Stock,
held from time to time by the Grantee, and (b) the outstanding principal
amount and accrued interest of all the Loans shall be immediately payable in
the event of the Termination With Cause of the Grantee's employment by
Dal-Tile or the termination of the Grantee's employment voluntarily by the
Grantee. Repayments shall be applied first to the Loan which was most
recently made. Each Loan shall be secured by any and all shares of Common
Stock and options to acquire Common Stock held by the Grantee and by the
Right.
<PAGE>
3. VESTING; EXERCISABILITY; DURATION.
3.1 VESTING.
(a) Subject to Sections 6.2 and 6.3 hereof, the Grantee
shall vest in the cumulative percentage of Shares under the Right, at the
times provided in the following schedule:
<TABLE>
APPLICABLE DATE CUMULATIVE PERCENTAGE OF SHARES
--------------- -------------------------------
<S> <C>
On the Grant Date 25%
September 1, 1998 50%
September 1, 1999 75%
September 1, 2000 100%
</TABLE>
(b) The unvested portion of the Right shall be forfeited
upon the termination of the Grantee's employment with Dal-Tile for any reason.
3.2 EXERCISABILITY.
Subject to Sections 6.2 and 6.3 hereof, the Grantee shall be
entitled to exercise the Right, with respect to the cumulative percentage of
Shares subject to the Right in which the Grantee may then be, or thereafter
become, vested, only if Dal-Tile reports, pursuant to its audited financial
statements, positive net income ("Net Income") for either its fiscal year
ending December 31, 1998 or its fiscal year ending December 31, 1999 (the
"Performance Target"). The Right shall not be exercisable prior to the
vesting thereof and the time the Committee certifies that the Performance
Target has been satisfied. The Committee shall act within seven days with
respect to certification following the availability of the relevant audited
financial statements. For purposes of this Agreement, Net Income shall be
calculated without taking into account any charge against income which may
arise as a result of the Right granted pursuant to this Agreement or any
other stock appreciation right which may, from time to time, be granted by
Dal-Tile.
3.3 DURATION.
Unless earlier terminated in accordance with the terms of
this Agreement, the Right shall terminate on September 1, 2007.
4. MANNER OF EXERCISE OF RIGHT.
Subject to the terms and conditions of this Agreement, the Right
may be exercised only by giving written notice (the "Exercise Notice") to
Dal-Tile in the form of Exhibit A attached hereto, at its principal executive
office. Such notice shall state that the Grantee is electing to exercise the
Right, and the number of Shares in respect of which the Right is being
exercised, and shall be signed by the person or persons exercising the Right.
The date of exercise for purposes of this Agreement shall be the date
Dal-Tile receives the Exercise Notice. If requested by Dal-Tile, such person
or persons shall: (i) deliver this Agreement to the Secretary of Dal-Tile who
shall endorse thereon a notation of such exercise; and (ii) provide
satisfactory proof as to the right of such person or persons to exercise the
Right.
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<PAGE>
5. NONASSIGNABILITY.
Neither the Right granted to the Grantee under this Agreement nor
any portion thereof shall be assignable or transferable (whether by operation
of law or otherwise, and whether voluntarily or involuntarily), other than by
will or by the laws of descent and distribution. The Right granted to the
Grantee under this Agreement shall be exercisable only by the Grantee or his
estate, heirs or personal representatives.
6. ADJUSTMENTS TO RIGHTS UPON CERTAIN EVENTS.
6.1 ADJUSTMENTS TO NUMBER OF SHARES AND CEILING AND BASE PRICES.
The number of Shares subject to this Right, the Ceiling
Price and the Base Price shall be equitably adjusted for any increase or
decrease in the number of issued Shares resulting from: (i) the subdivision
or combination of Shares or other capital adjustments; (ii) the payment of a
stock dividend or extraordinary cash dividend after the Grant Date; or (iii)
any other increase or decrease in the number of such Shares effected without
receipt of consideration by Dal-Tile; PROVIDED, HOWEVER, that any fractional
Shares resulting from any such adjustment shall be eliminated. Adjustments
under this Section 6.1 shall be made by the Committee, whose determination as
to what adjustments shall be made, and the extent thereof, shall be final,
binding, and conclusive.
6.2 CHANGE OF CONTROL.
Notwithstanding anything contained in this Agreement to the
contrary:
(a) upon the consummation of a "Transaction" that does not
also constitute a "Non-Control Transaction" (each, as defined in the Stock
Option Plan), the Grantee shall, unless the Grantee and Dal-Tile shall
otherwise agree, be vested in, and shall be entitled to exercise the Right
with respect to, 100% of the Right, and the Grantee shall be entitled to
receive, with respect to each Share subject to the Right, upon exercise of
all or any portion of the Right, a payment of the same amount and kind of
stock, securities, cash, property or other consideration that each holder of
a Share was entitled to receive in such Transaction in respect of a Share,
less the Base Price; PROVIDED, HOWEVER, that the fair market value of such
stock, securities, cash, property or other consideration shall not exceed the
Ceiling Price less the Base Price. If more than one (1) form of
consideration is included in such Transaction, the various components thereof
shall be appropriately prorated; and
(b) in the event of a Non-Control Transaction, the Grantee
shall continue to vest in the Right only in accordance with Section 3.1
hereof, which Right shall remain exercisable only in accordance with Section
3.2 hereof, and, the number of Shares subject to the Right, the Ceiling Price
and the Base Price shall be equitably adjusted by the Committee for any
changes in the Shares resulting from a merger involving Dal-Tile.
Adjustments under this Section 6.2(b) shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding, and conclusive.
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6.3 TERMINATION OF EMPLOYMENT.
The Right (whether vested or unvested) shall terminate and
expire on the effective date of the Termination With Cause of the Grantee's
employment by Dal-Tile. Unless the Committee determines otherwise, in the
event of the termination of the Grantee's employment for any reason other
than a Termination With Cause by Dal-Tile, the Right, to the extent then
vested, shall become exercisable only in accordance with Section 3.2 hereof
and shall terminate on the earliest to occur of: (i) September 1, 2007; and
(ii) the date which is ten (10) days (one (1) year in the case of a
termination by reason of death, disability or retirement on or after the
Grantee's sixty-fifth birthday or such earlier retirement age as may be
approved by the Committee) after the later of: (A) such termination of the
Grantee's employment; and (B) the date that achievement of the Performance
Target is certified, and the unvested portion of the right shall be forfeited
7. MISCELLANEOUS.
7.1 RULES OF CONSTRUCTION.
(a) In this Agreement, unless the context otherwise
requires, words in the singular number or in the plural number shall each
include the singular number and the plural number, words of the masculine
gender shall include the feminine and the neuter, and, when the sense so
indicates, words of the neuter gender may refer to any gender.
(b) The term "affiliate" shall mean any person directly or
indirectly controlling, controlled by, or under common control with the
person of which it is an affiliate.
(c) The term "Board" shall mean the Board of Directors of
Dal-Tile.
(d) The term "Code" shall mean the Internal Revenue Code of
1986, as amended.
(e) The term "Committee" shall mean the Committee of the
Board appointed to administer the Stock Option Plan in accordance with the
terms of such plan.
(f) The term "control" shall mean with respect to any
person, the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such person, whether
through the ownership of equity interests, by contract or otherwise.
(g) The term "Fair Market Value" per Share as of a
particular date shall mean: (i) the closing sales price of a Share on the
national securities exchange on which the Shares are principally traded for
the last date (including the date of exercise of the Right) on which there
was a sale of the Shares on such exchange; or (ii) if the Shares are not then
traded on a national securities exchange, the average of the closing bid and
asked prices for the Shares in the over-the-counter market on which the
Shares are principally traded for the last date (including the date of
exercise of the Right) on which there was a sale of the Shares in such
market; or (iii) if the Shares are not then listed on a national securities
exchange or traded in an over-the-counter market, such value as the
Committee, in its sole discretion, shall determine.
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<PAGE>
(h) The term "person" shall mean an individual, a
corporation, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
(i) The Term "Stock Option Plan" shall mean the Dal-Tile
International Inc. 1997 Amended and Restated Stock Option Plan.
(j) The term "1934 Act" shall mean the Securities Exchange
Act of 1934, as amended.
(k) There shall be included within the term "Dal-Tile" any
successor to Dal-Tile by merger, consolidation, acquisition of substantially
all the assets thereof, or otherwise.
(l) There shall be included within the term "Shares" any
Common Stock, and any and all securities of any kind whatsoever of Dal-Tile
which may be issued after the date hereof in respect of, or in exchange for,
shares of Common Stock pursuant to a merger, consolidation, stock split,
stock dividend, recapitalization of Dal-Tile or otherwise.
7.2 FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done
and performed all further acts and things and shall execute and deliver all
other agreements, certificates, instruments, and documents as any other party
hereto reasonably may request in order to carry out the intent and accomplish
the purposes of this Agreement, and the consummation of the transactions
contemplated hereby.
7.3 GOVERNING LAW.
This Agreement and the rights and obligations of the parties
hereto shall be governed by, and construed and enforced in accordance with,
the laws of the State of Delaware, without giving effect to the principles of
conflicts of law thereof.
7.4 INVALIDITY OF PROVISION.
The invalidity or unenforceability of any provision of this
Agreement in any jurisdiction shall not affect the validity or enforceability
of the remainder of this Agreement in that jurisdiction or the validity or
enforceability of this Agreement, including that provision, in any other
jurisdiction. If any provision of this Agreement is held unlawful or
unenforceable in any respect, such provision shall be revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
7.5 NOTICE.
Any notice or other communication required or permitted
hereunder shall be writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission or,
if mailed, 5 days after the date of deposit in the United States mail, as
follows:
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<PAGE>
(i) if to Dal-Tile, to:
Dal-Tile International Inc.
7834 C.F. Hawn Freeway
Dallas, Texas 75217
Attention: Mark A. Solls
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Frederick H. Fogel, Esq.
(ii) if to the Grantee, to:
David F. Finnigan
5744 Meadow Haven Drive
Plano, TX 75093
Any party may change its address for notice hereunder by
notice to the other parties hereto.
7.6 BINDING EFFECT.
This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective heirs, legal
representatives, successors and assigns.
7.7 AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or supplemented only
by written agreement of the party against whom enforcement of such amendment,
modification or supplement is sought.
7.8 HEADING; EXECUTION IN COUNTERPARTS.
The headings and captions contained herein are for
convenience only and shall not control or affect the meaning or construction
of any provision hereof. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and which
together shall constitute one and the same instrument.
7.9 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement, and
supersedes all prior agreements and understandings, oral and written, between
the parties hereto with respect to the subject matter hereof.
7.10 RIGHT OF DISCHARGE RESERVED.
Nothing contained in this Agreement shall confer upon the
Grantee any right to continue in the employ or service of Dal-Tile or affect
any right which Dal-Tile may have to terminate the employment or services of
the Grantee.
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<PAGE>
7.11 WITHHOLDING.
The Company shall be entitled to withhold from any payments
to the Grantee an amount sufficient to satisfy any federal, state, and other
governmental tax required to be withheld in connection with any exercise of
the Right.
7.12 INTERPRETATION AND STOCKHOLDER APPROVAL.
(a) The Right granted under this Agreement is intended to
be performance-based compensation within the meaning of Section 162(m)(4)(C)
of the Code and the Committee shall interpret this Agreement accordingly.
(b) This Agreement and the grant of the Right hereunder is
subject to approval by Dal-Tile's stockholders in accordance with Section
162(m) of the Code.
7.13 NO RIGHTS AS A STOCKHOLDER.
Neither the Grantee nor any person succeeding to the
Grantee's rights hereunder shall have any rights as a stockholder with
respect to any Shares subject to the Right. Except for adjustments which the
Committee may make pursuant to Section 6.1 hereof, no adjustment shall be
made for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property). Neither
the Grantee nor any person succeeding to the Grantee's rights hereunder shall
have any rights as a stockholder with respect to any Shares issuable in
connection with a Payment-In-Kind or a Mixed Payment until the date of the
issuance of a stock certificate to him or her for any such Shares. No
adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities or other
property) for which the record date is prior to the date such stock
certificate is issued.
7.14 GRANTEE'S ACKNOWLEDGMENTS.
The Grantee agrees and acknowledges that no member of the
Committee shall be liable for any action or determination made in good faith
with respect to this Agreement. The Committee shall have the right to make
all determinations, in respect of this Agreement, which determinations shall
be final, conclusive and binding on the Grantee.
7.15 RESTRICTIONS.
(a) If the Committee shall at any time determine based on
the advice of counsel that any Consent (as hereinafter defined) is necessary
or desirable as a condition of, or in connection with, the issuance of Shares
hereunder, then such issuance shall not be taken, in whole or in part, unless
and until such Consent shall have been effected or obtained to the full
satisfaction of the Committee. Dal-Tile shall use its reasonable best
efforts to effect or obtain such Consent. If such Consent cannot be effected
or obtained within three (3) months of exercise of the Right, payment of the
amount determined under Section 2.1 hereof will be made in cash.
(b) The term "Consent" as used herein with respect to the
issuance of Shares means: (i) any and all listings, registrations or
qualifications in respect thereof upon any securities exchange or under any
federal, state or local law, rule or regulation; (ii) any and all written
agreements and representations by the Grantee or
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<PAGE>
any person succeeding to the Grantee's rights hereunder, as the case may be,
with respect to the disposition of the Shares, or with respect to any other
matter, which the Committee shall deem necessary or desirable to comply with
the terms of any such listing, registration or qualification or to obtain an
exemption from the requirement that any such listing, qualification or
registration be made; and (iii) any and all consents, clearances and
approvals in respect of the issuance of the Shares by any governmental or
other regulatory bodies.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on
behalf of each of the parties hereto, all as of the date first above written.
DAL-TILE INTERNATIONAL INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
________________________________________
David F. Finnigan
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<PAGE>
EXHIBIT A
EXERCISE NOTICE
[TO BE EXECUTED UPON EXERCISE OF STOCK APPRECIATION RIGHT]
To Dal-Tile International Inc.
The undersigned hereby irrevocable elects to exercise the Right
represented by the attached Stock Appreciation Rights Agreement (the
"Agreement"), dated as of the 10th day of October, 1997, with respect
to ______ Shares, as provided for therein.
The undersigned represents and warrants to you that, with respect
to any amount paid to the undersigned by delivery of Shares:
ACQUISITION FOR OWN ACCOUNT. The undersigned is acquiring such
Shares for his/her own account for investment and not with a view to the sale
or distribution thereof or with any present intention of distributing or
selling the same.
SECURITIES ACT RESTRICTIONS. The undersigned covenants and
agrees that he/she will not sell, assign, transfer, pledge or otherwise
dispose of any of the Shares acquired by the undersigned hereunder unless and
until they are registered under the Securities Act of 1933, as amended (the
"Securities Act"), or unless an exemption from such registration is available
and until the undersigned shall have delivered to Dal-Tile International Inc.
a written opinion of counsel reasonably satisfactory to Dal-Tile
International Inc. that the disposition is in compliance with the
requirements of the Securities Act. The undersigned acknowledges that he/she
understands that the Shares are not so registered.
Please pay all cash to, and issue any certificate or certificates
for any Shares in the name of:
Name:_____________________________________
Address:__________________________________
Social Security or Tax I.D. Number:__________________
(Please print)
Signature_______________________________
Dated ___________________, 199____.
<PAGE>
EXECUTION COPY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COLLATERAL AGREEMENT
made by
DAL-TILE GROUP INC.
and certain of its Subsidiaries
in favor of
THE CHASE MANHATTAN BANK,
as Administrative Agent
Dated as of June 19, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
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SECTION 1. DEFINED TERMS. . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . 1
1.2 Other Definitional Provisions. . . . . . . . . . . . 4
SECTION 2. GRANT OF SECURITY INTEREST . . . . . . . . . . . . 5
SECTION 3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 5
3.1 Representations in Credit Agreement. . . . . . . . . 6
3.2 Title; No Other Liens. . . . . . . . . . . . . . . . 6
3.3 Perfected First Priority Liens . . . . . . . . . . . 6
3.4 Chief Executive Office . . . . . . . . . . . . . . . 6
3.5 Inventory and Equipment. . . . . . . . . . . . . . . 6
3.6 Farm Products. . . . . . . . . . . . . . . . . . . . 6
3.7 Pledged Securities . . . . . . . . . . . . . . . . . 6
3.8 Receivables. . . . . . . . . . . . . . . . . . . . . 7
3.9 Intellectual Property. . . . . . . . . . . . . . . . 7
SECTION 4. COVENANTS. . . . . . . . . . . . . . . . . . . . . 8
4.1 Covenants in Credit Agreement. . . . . . . . . . . . 8
4.2 Delivery of Instruments and Chattel Paper. . . . . . 8
4.3 Maintenance of Insurance . . . . . . . . . . . . . . 8
4.4 Payment of Obligations . . . . . . . . . . . . . . . 8
4.5 Maintenance of Perfected Security Interest;
Further Documentation. . . . . . . . . . . . . . . . 9
4.6 Changes in Locations, Name, etc. . . . . . . . . . . 9
4.7 Notices. . . . . . . . . . . . . . . . . . . . . . . 9
4.8 Pledged Securities . . . . . . . . . . . . . . . . . 9
4.9 Receivables. . . . . . . . . . . . . . . . . . . . . 11
4.10 Intellectual Property. . . . . . . . . . . . . . . . 11
SECTION 5. REMEDIAL PROVISIONS. . . . . . . . . . . . . . . . 12
5.2 Communications with Obligors; Grantors Remain
Liable . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 Pledged Stock. . . . . . . . . . . . . . . . . . . . 14
5.4 Proceeds to be Turned Over To Administrative Agent . 14
5.5 Application of Proceeds. . . . . . . . . . . . . . . 15
5.6 Code and Other Remedies. . . . . . . . . . . . . . . 15
5.7 Registration Rights. . . . . . . . . . . . . . . . . 16
5.8 Waiver; Deficiency . . . . . . . . . . . . . . . . . 17
i
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Page
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SECTION 6. THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . 17
6.1 Administrative Agent's Appointment as
Attorney-in-Fact, etc. . . . . . . . . . . . . . . . 17
6.2 Duty of Administrative Agent . . . . . . . . . . . . 19
6.3 Execution of Financing Statements. . . . . . . . . . 19
6.4 Authority of Administrative Agent. . . . . . . . . . 19
SECTION 7. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . 19
7.1 Amendments in Writing. . . . . . . . . . . . . . . . 19
7.2 Notices. . . . . . . . . . . . . . . . . . . . . . . 19
7.3 No Waiver by Course of Conduct; Cumulative
Remedies . . . . . . . . . . . . . . . . . . . . . . 20
7.4 Enforcement Expenses; Indemnification. . . . . . . . 20
7.5 Successors and Assigns . . . . . . . . . . . . . . . 20
7.6 Set-Off. . . . . . . . . . . . . . . . . . . . . . . 20
7.7 Counterparts . . . . . . . . . . . . . . . . . . . . 21
7.8 Severability . . . . . . . . . . . . . . . . . . . . 21
7.9 Section Headings . . . . . . . . . . . . . . . . . . 21
7.10 Integration . . . . . . . . . . . . . . . . . . . . 21
7.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . 21
7.12 Submission To Jurisdiction; Waivers . . . . . . . . 21
7.13 Acknowledgements. . . . . . . . . . . . . . . . . . 22
7.14 WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . 22
7.15 Additional Grantors . . . . . . . . . . . . . . . . 22
7.16 Releases. . . . . . . . . . . . . . . . . . . . . . 22
ii
<PAGE>
COLLATERAL AGREEMENT, dated as of June 19, 1997, made by each of
the signatories hereto (together with any other entity that may become a
party hereto as provided herein, the "GRANTORS"), in favor of THE CHASE
MANHATTAN BANK, as administrative agent (in such capacity, the
"ADMINISTRATIVE AGENT") for the several banks, financial institutions and
other entities (the "LENDERS") from time to time parties to the Credit and
Guarantee Agreement, dated as of August 14, 1996 (as amended pursuant to the
First Amendment thereto, dated as of June 19, 1997 (the "FIRST AMENDMENT"),
and as the same may be further amended, supplemented or otherwise modified
from time to time, the "CREDIT AGREEMENT"), among Dal-Tile International
Inc., a Delaware corporation, Dal-Tile Group Inc. (the "BORROWER"), the
Lenders and the Administrative Agent.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have
severally agreed to make extensions of credit to the Borrower upon the terms
and subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of
companies that includes each other Grantor;
WHEREAS, in connection with the Credit Agreement, each Grantor
(other than the Borrower) become a party to that certain Subsidiaries
Guarantee, dated as of August 14, 1996 (the "GUARANTEE");
WHEREAS, the Grantors have requested that the Lenders amend the
Credit Agreement pursuant to the First Amendment, among other things, to
provide for the making of $125,000,000 in Tranche B Term Loans (as defined in
the Credit Agreement);
WHEREAS, the Borrower and the other Grantors are engaged in related
businesses, and each Grantor will derive substantial direct and indirect
benefit from the making of the extensions of credit under the Credit
Agreement; and
WHEREAS, it is a condition precedent to the effectiveness of the
First Amendment and the obligation of the Lenders to make the Tranche B Term
Loans to the Borrower under the Credit Agreement that the Grantors shall have
executed and delivered this Agreement to the Administrative Agent for the
ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the First Amendment and to
induce the Lenders to make their respective extensions of credit to the
Borrower thereunder and under the Credit Agreement, each Grantor hereby
agrees with the Administrative Agent, for the ratable benefit of the Lenders,
as follows:
SECTION 1. DEFINED TERMS
1.1 DEFINITIONS. (a) Unless otherwise defined herein, terms
defined in the Credit Agreement and used herein shall have the meanings given
to them in the Credit Agreement, and the following terms which are defined in
the Uniform Commercial Code in effect in the State of New York on the date
hereof are used herein as so defined: Accounts, Chattel Paper, Documents,
Equipment, Farm Products, Instruments and Inventory.
<PAGE>
2
(b) The following terms shall have the following meanings:
"AGREEMENT": this Collateral Agreement, as the same may be amended,
supplemented or otherwise modified from time to time.
"COLLATERAL": as defined in Section 2.
"COLLATERAL ACCOUNT": any collateral account established by the
Administrative Agent as provided in Section 5.1 or 5.4.
"COPYRIGHTS": (i) all copyrights arising under the laws of the United
States, any other country or any political subdivision thereof, whether
registered or unregistered and whether published or unpublished (including,
without limitation, those listed in SCHEDULE 6), all registrations and
recordings thereof, and all applications in connection therewith,
including, without limitation, all registrations, recordings and
applications in the United States Copyright Office, and (ii) the right to
obtain all renewals thereof.
"COPYRIGHT LICENSES": any written agreement naming any Grantor as
licensor or licensee (including, without limitation, those listed in
SCHEDULE 6), granting any right under any Copyright, including, without
limitation, the grant of rights to manufacture, distribute, exploit and
sell materials derived from any Copyright.
"DEFAULT NOTICE": as defined in Section 5.1(c)(ii).
"DEPOSITORY BANK": as defined in Section 5.1(c)(i).
"GENERAL INTANGIBLES": all "general intangibles" as such term is
defined in Section 9-106 of the Uniform Commercial Code in effect in the
State of New York on the date hereof and, in any event, including, without
limitation, with respect to any Grantor, all contracts, agreements,
instruments and indentures in any form, and portions thereof, to which such
Grantor is a party or under which such Grantor has any right, title or
interest or to which such Grantor or any property of such Grantor is
subject, as the same may from time to time be amended, supplemented or
otherwise modified, including, without limitation, (i) all rights of such
Grantor to receive moneys due and to become due to it thereunder or in
connection therewith, (ii) all rights of such Grantor to damages arising
thereunder and (iii) all rights of such Grantor to perform and to exercise
all remedies thereunder, in each case to the extent the grant by such
Grantor of a security interest pursuant to this Agreement in its right,
title and interest in such contract, agreement, instrument or indenture is
not prohibited by such contract, agreement, instrument or indenture without
the consent of any other party thereto, would not give any other party to
such contract, agreement, instrument or indenture the right to terminate
its obligations thereunder, or is permitted with consent if all necessary
consents to such grant of a security interest have been obtained from the
other parties thereto (it being understood that the foregoing shall not be
deemed to obligate such Grantor to obtain such consents); PROVIDED, that
the foregoing limitation shall not affect, limit, restrict or impair the
grant by such Grantor of a security interest pursuant to this Agreement in
any Receivable or any money or other amounts due or to become due under any
such contract, agreement, instrument or indenture.
"GUARANTOR OBLIGATIONS": with respect to any Guarantor, the collective
reference to (i) the Obligations and (ii) all obligations and liabilities
of such Guarantor which may arise under or
<PAGE>
3
in connection with this Agreement or any other Loan Document to which
such Guarantor is a party, in each case whether on account of guarantee
obligations, reimbursement obligations, fees, indemnities, costs,
expenses or otherwise (including, without limitation, all fees and
disbursements of counsel to the Administrative Agent or to the Lenders
that are required to be paid by such Guarantor pursuant to the terms of
this Agreement or any other Loan Document).
"GUARANTORS": the collective reference to each Grantor other than the
Borrower.
"HEDGE AGREEMENTS": as to any Person, all interest rate swaps, caps
or collar agreements or similar arrangements entered into by such Person
providing for protection against fluctuations in interest rates or currency
exchange rates or the exchange of nominal interest obligations, either
generally or under specific contingencies.
"INTELLECTUAL PROPERTY": the collective reference to all rights,
priorities and privileges relating to intellectual property, whether
arising under United States, multinational or foreign laws or otherwise,
including, without limitation, the Copyrights, the Copyright Licenses, the
Patents, the Patent Licenses, the Trademarks and the Trademark Licenses,
and all rights to sue at law or in equity for any infringement or other
impairment thereof, including the right to receive all proceeds and damages
therefrom.
"INTERCOMPANY NOTE": any promissory note evidencing loans made by any
Grantor to the Borrower or any of its Subsidiaries.
"ISSUERS": the collective reference to each issuer of a Pledged
Security.
"LOCKBOX DEPOSIT ACCOUNT": as defined in Section 5.1(c)(i).
"LOCKBOX SYSTEM": as defined in Section 5.1(c)(i).
"NEW YORK UCC": the Uniform Commercial Code as from time to time in
effect in the State of New York.
"PATENTS": (i) all letters patent of the United States, any other
country or any political subdivision thereof, all reissues and extensions
thereof and all goodwill associated therewith, including, without
limitation, any of the foregoing referred to in SCHEDULE 6, (ii) all
applications for letters patent of the United States or any other country
and all divisions, continuations and continuations-in-part thereof,
including, without limitation, any of the foregoing referred to in SCHEDULE
6, and (iii) all rights to obtain any reissues or extensions of the
foregoing.
"PATENT LICENSE": all agreements, whether written or oral, providing
for the grant by or to any Grantor of any right to manufacture, use or sell
any invention covered in whole or in part by a Patent, including, without
limitation, any of the foregoing referred to in SCHEDULE 6.
"PLEDGED NOTES": all promissory notes listed on SCHEDULE 2, all
Intercompany Notes at any time issued to any Grantor and all other
promissory notes issued to or held by any Grantor (other than promissory
notes issued in connection with extensions of trade credit by any Grantor
in the ordinary course of business).
"PLEDGED SECURITIES": the collective reference to the Pledged Notes
and the Pledged Stock.
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4
"PLEDGED STOCK": the shares of Capital Stock listed on SCHEDULE 2,
together with any other shares, stock certificates, options or rights of
any nature whatsoever in respect of the Capital Stock of any Person that
may be issued or granted to, or held by, any Grantor while this Agreement
is in effect.
"PROCEEDS": all "proceeds" as such term is defined in Section
9-306(1) of the Uniform Commercial Code in effect in the State of New York
on the date hereof and, in any event, shall include, without limitation,
all dividends or other income from the Pledged Securities, collections
thereon or distributions or payments with respect thereto.
"RECEIVABLE": any right to payment for goods sold or leased or for
services rendered, whether or not such right is evidenced by an Instrument
or Chattel Paper and whether or not it has been earned by performance
(including, without limitation, any Account).
"SECURED OBLIGATIONS": (a) in the case of the Borrower, the
Obligations and (b) in the case of any Guarantor, its Guarantor
Obligations.
"SECURITIES ACT": the Securities Act of 1933, as amended.
"TRADEMARKS": (i) all trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers, and all
goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State
thereof or any other country or any political subdivision thereof, or
otherwise, and all common-law rights related thereto, including, without
limitation, any of the foregoing referred to in SCHEDULE 6, and (ii) the
right to obtain all renewals thereof.
"TRADEMARK LICENSE": any agreement, whether written or oral,
providing for the grant by or to any Grantor of any right to use any
Trademark, including, without limitation, any of the foregoing referred to
in SCHEDULE 6.
1.2 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof," "herein",
"hereto" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement, and Section and Schedule references are to this Agreement unless
otherwise specified.
(b) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the Collateral or
any part thereof, when used in relation to a Grantor, shall refer to such
Grantor's Collateral or the relevant part thereof.
SECTION 2. GRANT OF SECURITY INTEREST
Each Grantor hereby assigns and transfers to the Administrative Agent,
and hereby grants to the Administrative Agent, for the ratable benefit of the
Lenders, a security interest in, all of the following property now owned or at
any time hereafter acquired by such Grantor or in which such
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5
Grantor now has or at any time in the future may acquire any right, title or
interest (collectively, the "COLLATERAL"), as collateral security for the
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or otherwise) of such Grantor's Secured Obligations:
(a) all Accounts;
(b) all Chattel Paper;
(c) all Documents;
(d) all Equipment;
(e) all General Intangibles;
(f) all Instruments;
(g) all Intellectual Property;
(h) all Inventory;
(i) all Pledged Securities;
(j) all books and records pertaining to the Collateral; and
(k) to the extent not otherwise included, all Proceeds and products of
any and all of the foregoing and all collateral security and guarantees
given by any Person with respect to any of the foregoing.
SECTION 3. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into the
First Amendment and to induce the Lenders to make their respective extensions of
credit to the Borrower thereunder and under the Credit Agreement, each Grantor
hereby represents and warrants to the Administrative Agent and each Lender that:
3.1 REPRESENTATIONS IN CREDIT AGREEMENT. In the case of each
Guarantor, the representations and warranties set forth in subsection 5 of the
Credit Agreement as they relate to such Guarantor or to the Loan Documents to
which such Guarantor is a party, each of which is hereby incorporated herein by
reference, are true and correct, and the Administrative Agent and each Lender
shall be entitled to rely on each of them as if they were fully set forth
herein, PROVIDED that each reference in each such representation and warranty to
the Borrower's knowledge shall, for the purposes of this Section 4.1, be deemed
to be a reference to such Guarantor's knowledge.
3.2 TITLE; NO OTHER LIENS. Except for the security interest granted
to the Administrative Agent for the ratable benefit of the Lenders pursuant to
this Agreement and the other Liens permitted to exist on the Collateral by the
Credit Agreement, such Grantor owns each item of the Collateral free and clear
of any and all Liens or claims of others. No financing statement or other
public notice with respect to all or any part of the Collateral is on file or of
record in any public office, except such as have been filed in favor of the
Administrative Agent, for the ratable benefit of the Lenders, pursuant to this
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6
Agreement or as are permitted by the Credit Agreement.
3.3 PERFECTED FIRST PRIORITY LIENS. The security interests granted
pursuant to this Agreement (a) upon completion of the filings and other actions
specified on SCHEDULE 3 (which, in the case of all filings and other documents
referred to on said Schedule, have been delivered to the Administrative Agent in
completed and duly executed form) will constitute valid perfected security
interests in all of the Collateral in favor of the Administrative Agent, for the
ratable benefit of the Lenders, as collateral security for such Grantor's
Secured Obligations, enforceable in accordance with the terms hereof against all
creditors of such Grantor and any Persons purporting to purchase any Collateral
from such Grantor and (b) are prior to all other Liens on the Collateral in
existence on the date hereof except for (i) unrecorded Liens permitted by the
Credit Agreement which have priority over the Liens on the Collateral by
operation of law and (ii) Liens described on SCHEDULE 7.
3.4 CHIEF EXECUTIVE OFFICE. On the date hereof, such Grantor's
jurisdiction of organization and the location of such Grantor's chief executive
office or sole place of business are specified on SCHEDULE 4.
3.5 INVENTORY AND EQUIPMENT. On the date hereof, such Grantor's
Inventory and the Equipment (other than mobile goods) are kept at the locations
listed on SCHEDULE 5.
3.6 FARM PRODUCTS. None of the Collateral constitutes, or is the
Proceeds of, Farm Products.
3.7 PLEDGED SECURITIES. (a) The shares of Pledged Stock pledged by
such Grantor hereunder constitute all (or, in the case of an Issuer which is a
foreign subsidiary, 65% of) the issued and outstanding shares of all classes of
the Capital Stock of each Issuer.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) Each of the Pledged Notes constitutes the legal, valid and binding
obligation of each Loan Party party thereto and, to the best knowledge of such
Grantor, each other obligor with respect thereto, in each case enforceable in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
(d) Such Grantor is the record and beneficial owner of, and has good
and marketable title to, the Pledged Securities pledged by it hereunder, free of
any and all Liens or options in favor of, or claims of, any other Person, except
the security interest created by this Agreement.
3.8 RECEIVABLES. (a) No amount payable to such Grantor under or in
connection with any Receivable is evidenced by any Instrument (other than any
Instrument endorsed for collection in the ordinary course of business) or
Chattel Paper which has not been delivered to the Administrative Agent.
(b) None of the obligors on any Receivables is a Governmental
Authority.
(c) The amounts represented by such Grantor to the Lenders from time
to time as owing to such Grantor in respect of the Receivables will at such
times be accurate in all material respects.
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7
3.9 INTELLECTUAL PROPERTY. (a) SCHEDULE 6 lists all Intellectual
Property owned by such Grantor in its own name on the date hereof that has been
registered with or issued by the United States Patent and Trademark Office or
the United States Copyright Office or with respect to which an application for
registration has been made with Offices.
(b) On the date hereof, all Intellectual Property listed on SCHEDULE 6
is valid, subsisting, unexpired and enforceable, has not been abandoned and all
such Intellectual Property is the only Intellectual Property which, in the
judgment of such Grantor, should be registered with or issued by the United
States Patent and Trademark Office in connection with the conduct of its
business and, to the best knowledge of such Grantor, does not infringe the
intellectual property rights of any other Person.
(c) Except as set forth in SCHEDULE 6 and for licensing agreements and
arrangements in the ordinary course of business, on the date hereof, none of the
Intellectual Property is the subject of any licensing or franchise agreement
pursuant to which such Grantor is the licensor or franchisor.
(d) No holding, decision or judgment has been rendered by any
Governmental Authority which would limit, cancel or question the validity of, or
such Grantor's rights in, any Intellectual Property in any respect that could
reasonably be expected to have a Material Adverse Effect.
(e) Except as set forth on SCHEDULE 6, no action or proceeding is
pending, or, to the knowledge of such Grantor, threatened, on the date hereof
(i) seeking to limit, cancel or question the validity of any Intellectual
Property listed on SCHEDULE 6 or such Grantor's ownership interest therein, or
(ii) which, if adversely determined, would have a material adverse effect on the
value of the Intellectual Property as a whole.
SECTION 4. COVENANTS
Each Grantor covenants and agrees with the Administrative Agent and
the Lenders that, from and after the date of this Agreement until the Secured
Obligations shall have been paid in full, no Letter of Credit shall be
outstanding which has not been fully cash collateralized pursuant to the Credit
Agreement and the Commitments shall have terminated:
4.1 COVENANTS IN CREDIT AGREEMENT. In the case of each Guarantor,
such Guarantor shall take, or shall refrain from taking, as the case may be,
each action that is necessary to be taken or not taken, as the case may be, so
that no Default or Event of Default is caused by the failure to take such action
or to refrain from taking such action by such Guarantor or any of its
Subsidiaries.
4.2 DELIVERY OF INSTRUMENTS AND CHATTEL PAPER. If any amount payable
under or in connection with any of the Collateral shall be or become evidenced
by any Instrument (other than any Instrument endorsed for collection in the
ordinary course of business) or Chattel Paper, such Instrument or Chattel Paper
shall be immediately delivered to the Administrative Agent, duly indorsed in a
manner satisfactory to the Administrative Agent, to be held as Collateral
pursuant to this Agreement.
4.3 MAINTENANCE OF INSURANCE. (a) Such Grantor will maintain, with
financially sound and reputable companies, insurance policies (i) insuring all
property of such Grantor (including, without limitation, its Inventory and
Equipment) against loss by fire, explosion, theft and such other casualties as
may be reasonably satisfactory to the Administrative Agent and (ii) to the
extent requested by the Administrative Agent, insuring such Grantor against
liability for personal injury and property damage relating to such property,
such policies to be in such form and amounts and having such coverage as may
<PAGE>
8
be reasonably satisfactory to the Administrative Agent and the Lenders.
(b) All such insurance shall (i) provide that no cancellation,
material reduction in amount or material change in coverage thereof shall be
effective until at least 30 days after receipt by the Administrative Agent of
written notice thereof, (ii) name the Administrative Agent as an additional
insured party or loss payee, (iii) if reasonably requested by the Administrative
Agent, include a breach of warranty clause and (iv) be reasonably satisfactory
in all other respects to the Administrative Agent.
(c) The Borrower shall deliver to the Administrative Agent and the
Lenders on the Tranche B Effective Date (and annually thereafter upon renewal of
replacement of the foregoing policies) a certificate of insurance evidencing
compliance with the terms and conditions of this Section.
4.4 PAYMENT OF OBLIGATIONS. Such Grantor will pay and discharge or
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all taxes, assessments and governmental charges or levies imposed
upon the Collateral or in respect of income or profits therefrom, as well as all
claims of any kind (including, without limitation, claims for labor, materials
and supplies) against or with respect to the Collateral, except that no such
charge need be paid if the amount or validity thereof is currently being
contested in good faith by appropriate proceedings, reserves in conformity with
GAAP with respect thereto have been provided on the books of such Grantor and
such proceedings could not reasonably be expected to result in the sale,
forfeiture or loss of any material portion of the Collateral or any interest
therein.
4.5 MAINTENANCE OF PERFECTED SECURITY INTEREST; FURTHER DOCUMENTATION.
(a) Such Grantor shall maintain the security interest created by this Agreement
as a perfected security interest having at least the priority described in
Section 3.3 and shall defend such security interest against the claims and
demands of all Persons whomsoever.
(b) Such Grantor will furnish to the Administrative Agent and the
Lenders from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Administrative Agent may reasonably request, all in reasonable
detail.
(c) At any time and from time to time, upon the written request of the
Administrative Agent, and at the sole expense of such Grantor, such Grantor will
promptly and duly execute and deliver, and have recorded, such further
instruments and documents and take such further actions as the Administrative
Agent may reasonably request for the purpose of obtaining or preserving the full
benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code (or other similar laws) in effect
in any jurisdiction with respect to the security interests created hereby.
4.6 CHANGES IN LOCATIONS, NAME, ETC. Such Grantor will not, except
upon 30 days' (or, in the case of clause (i) below, 5 days') prior written
notice to the Administrative Agent and delivery to the Administrative Agent of
(a) all additional executed financing statements and other documents reasonably
requested by the Administrative Agent to maintain the validity, perfection and
priority of the security interests provided for herein and (b) if applicable, a
written supplement to SCHEDULE 5 showing any additional location at which
Inventory or Equipment shall be kept:
(i) permit any of such Grantor's Inventory or Equipment to be kept at
a location other than those listed on SCHEDULE 5;
<PAGE>
9
(ii) change the location of its chief executive office or sole place
of business from that referred to in Section 4.4; or
(iii) change its name, identity or corporate structure to such an
extent that any financing statement filed by the Administrative Agent in
connection with this Agreement would become misleading.
4.7 NOTICES. Such Grantor will advise the Administrative Agent and
the Lenders promptly, in reasonable detail, of:
(a)any Lien (other than security interests created hereby or Liens
permitted under the Credit Agreement) on any of the Collateral which would
adversely affect the ability of the Administrative Agent to exercise any of its
remedies hereunder; and
(b)of the occurrence of any other event which could reasonably be
expected to have a material adverse effect on the aggregate value of the
Collateral or on the security interests created hereby.
4.8 PLEDGED SECURITIES. (a) If such Grantor shall become entitled to
receive or shall receive any stock certificate (including, without limitation,
any certificate representing a stock dividend or a distribution in connection
with any reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), option or rights in respect of
the Capital Stock of any Issuer, whether in addition to, in substitution of, as
a conversion of, or in exchange for, any shares of the Pledged Stock, or
otherwise in respect thereof, such Grantor shall accept the same as the agent of
the Administrative Agent and the Lenders, hold the same in trust for the
Administrative Agent and the Lenders and deliver the same forthwith to the
Administrative Agent in the exact form received, duly indorsed by such Grantor
to the Administrative Agent, if required, together with an undated stock power
covering such certificate duly executed in blank by such Grantor and with, if
the Administrative Agent so requests, signature guaranteed, to be held by the
Administrative Agent, subject to the terms hereof, as additional collateral
security for the Secured Obligations. Any sums paid upon or in respect of the
Pledged Securities upon the liquidation or dissolution of any Issuer shall be
paid over to the Administrative Agent to be held by it hereunder as additional
collateral security for the Secured Obligations, and in case any distribution of
capital shall be made on or in respect of the Pledged Securities or any property
shall be distributed upon or with respect to the Pledged Securities pursuant to
the recapitalization or reclassification of the capital of any Issuer or
pursuant to the reorganization thereof, the property so distributed shall,
unless otherwise subject to a perfected security interest in favor of the
Administrative Agent, be delivered to the Administrative Agent to be held by it
hereunder as additional collateral security for the Secured Obligations,
PROVIDED that, to the extent such liquidation, dissolution, recapitalization,
reclassification or reorganization is permitted under the Credit Agreement and
no Default or Event of Default has then occurred and is continuing or would
result therefrom, no such sums paid or property distributed shall be required to
be delivered to the Administrative Agent pursuant to this sentence. If any sums
of money or property so paid or distributed in respect of the Pledged Securities
shall be received by such Grantor, such Grantor shall, until such money or
property is paid or delivered to the Administrative Agent, hold such money or
property in trust for the Lenders, segregated from other funds of such Grantor,
as additional collateral security for the Secured Obligations.
(b) Without the prior written consent of the Administrative Agent and
except as permitted by or not prohibited under the Credit Agreement, such
Grantor will not (i) vote to enable, or take any other action to permit, any
Issuer to issue any stock or other equity securities of any nature or to issue
any other securities convertible into or granting the right to purchase or
exchange for any stock or other equity securities of any nature of any Issuer,
(ii) sell, assign, transfer, exchange, or otherwise
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10
dispose of, or grant any option with respect to, the Pledged Securities or
Proceeds thereof (except pursuant to a transaction expressly permitted by the
Credit Agreement), (iii) create, incur or permit to exist any Lien or option
in favor of, or any claim of any Person with respect to, any of the Pledged
Securities or Proceeds thereof, or any interest therein, except for the
security interests created by this Agreement or (iv) enter into any agreement
or undertaking restricting the right or ability of such Grantor or the
Administrative Agent to sell, assign or transfer any of the Pledged
Securities or Proceeds thereof.
(c) In the case of each Grantor which is an Issuer, such Issuer
agrees that (i) it will be bound by the terms of this Agreement relating to
the Pledged Securities issued by it and will comply with such terms insofar
as such terms are applicable to it, (ii) it will notify the Administrative
Agent promptly in writing of the occurrence of any of the events described in
Section 4.8(a) with respect to the Pledged Securities issued by it and (iii)
the terms of Sections 5.3(c) and 5.7 shall apply to it, MUTATIS MUTANDIS,
with respect to all actions that may be required of it pursuant to Section
5.3(c) or 5.7 with respect to the Pledged Securities issued by it.
4.9 RECEIVABLES. (a) Other than in the ordinary course of business
consistent with its past practice, such Grantor will not (i) grant any
extension of the time of payment of any Receivable, (ii) compromise or settle
any Receivable for less than the full amount thereof, (iii) release, wholly
or partially, any Person liable for the payment of any Receivable, (iv) allow
any credit or discount whatsoever on any Receivable or (v) amend, supplement
or modify any Receivable in any manner that could adversely affect the value
thereof.
(b) Such Grantor will deliver to the Administrative Agent a copy of
each material demand, notice or document received by it that questions or
calls into doubt the validity or enforceability of more than 5% of the
aggregate amount of the then outstanding Receivables.
4.10 INTELLECTUAL PROPERTY. (a) Such Grantor (either itself or
through licensees) will (i) continue to use each material Trademark on each
and every trademark class of goods applicable to and then used in connection
with its current line as reflected in its current catalogs, brochures and
price lists in order to maintain each such Trademark in full force free from
any claim of abandonment for non-use, (ii) maintain as in the past the
quality of products and services offered under each such Trademark, (iii) use
each such Trademark with the appropriate notice of registration and all other
notices and legends required by applicable Requirements of Law, (iv) not
adopt or use any mark which is confusingly similar or a colorable imitation
of any such Trademark unless the Administrative Agent, for the ratable
benefit of the Lenders, shall obtain a perfected security interest in such
mark pursuant to this Agreement, and (v) not (and not permit any licensee or
sublicensee thereof to) do any act or knowingly omit to do any act whereby
any such Trademark may become invalidated or impaired in any way.
(b) Such Grantor (either itself or through licensees) will not do
any act, or omit to do any act, whereby any material Patent may become
forfeited, abandoned or dedicated to the public.
(c) Such Grantor (either itself or through licensees) (i) will
employ each material Copyright and (ii) will not (and will not permit any
licensee or sublicensee thereof to) do any act or knowingly omit to do any
act whereby any material portion of the Copyrights may become invalidated or
otherwise impaired. Such Grantor will not (either itself or through
licensees) do any act whereby any material portion of the Copyrights may fall
into the public domain.
(d) Such Grantor (either itself or through licensees) will not do
any act that knowingly uses any material Intellectual Property to infringe
the intellectual property rights of any other Person.
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11
(e) Such Grantor will notify the Administrative Agent immediately
if it knows, or has reason to know, that any application or registration
relating to any material Intellectual Property may become forfeited,
abandoned or dedicated to the public, or of any adverse determination or
development (including, without limitation, the institution of, or any such
determination or development in, any proceeding in the United States Patent
and Trademark Office, the United States Copyright Office or any court or
tribunal in any country) regarding such Grantor's ownership of, or the
validity of, any material Intellectual Property or such Grantor's right to
register the same or to own and maintain the same.
(f) Whenever such Grantor, either by itself or through any agent,
employee, licensee or designee, shall file an application for the
registration of any Intellectual Property with the United States Patent and
Trademark Office, the United States Copyright Office or any similar office or
agency in any other country or any political subdivision thereof, such
Grantor shall report such filing to the Administrative Agent within five
Business Days after the last day of the fiscal quarter in which such filing
occurs. Upon request of the Administrative Agent, such Grantor shall execute
and deliver, and have recorded, any and all agreements, instruments,
documents, and papers as the Administrative Agent may request to evidence the
Administrative Agent's and the Lenders' security interest in any Copyright,
Patent or Trademark and the goodwill and general intangibles of such Grantor
relating thereto or represented thereby.
(g) Such Grantor will take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United States
Patent and Trademark Office, the United States Copyright Office or any
similar office or agency in any other country or any political subdivision
thereof, to maintain and pursue each application (and to obtain the relevant
registration) and to maintain each registration of the material Intellectual
Property, including, without limitation, filing of applications for renewal,
affidavits of use and affidavits of incontestability.
(h) In the event that any material Intellectual Property is
infringed, misappropriated or diluted by a third party, such Grantor shall
(i) take such actions as such Grantor shall reasonably deem appropriate under
the circumstances to protect such Intellectual Property and (ii) if such
Intellectual Property is of material economic value, promptly notify the
Administrative Agent after it learns thereof.
SECTION 5. REMEDIAL PROVISIONS
5.1 CERTAIN MATTERS RELATING TO RECEIVABLES. (a) The
Administrative Agent shall have the right to make test verifications of the
Receivables in any manner and through any medium that it reasonably considers
advisable, and each Grantor shall furnish all such assistance and information
as the Administrative Agent may require in connection with such test
verifications. At any time and from time to time, upon the Administrative
Agent's request and at the expense of the relevant Grantor, such Grantor
shall cause independent public accountants or others satisfactory to the
Administrative Agent to furnish to the Administrative Agent reports showing
reconciliations, aging and test verifications of, and trial balances for, the
Receivables.
(b) The Administrative Agent hereby authorizes each Grantor to
collect such Grantor's Receivables, subject to the Administrative Agent's
direction and control, and the Administrative Agent may curtail or terminate
said authority at any time after the occurrence and during the continuance of
an Event of Default, PROVIDED, HOWEVER, that such privilege shall
automatically be suspended upon the occurrence of an Event of Default
specified in Section 11(f) of the Credit Agreement. Without limiting the
foregoing, upon the request of the Administrative Agent at any time after the
occurrence and during the continuation of an Event of Default, each Grantor
shall notify obligors on the Accounts that such
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12
Accounts have been assigned to the Administrative Agent for the benefit of
the Lenders and that payments in respect thereof shall be made directly to
the Administrative Agent.
(c) (i) The Borrower shall use its reasonable efforts to
establish as soon after the Tranche B Effective Date as reasonably
practicable (and in any event the Borrower shall establish within 75 days
after the Tranche B Effective Date), for the benefit of the Administrative
Agent and the Lenders, a system (the "LOCKBOX SYSTEM") of lockboxes and
related deposit accounts ("LOCKBOX DEPOSIT ACCOUNTS") into which the Proceeds
of Receivables of the Grantors shall be deposited. In connection with the
establishment of the Lockbox Deposit Accounts of each Grantor after the
Tranche B Effective Date, such Grantor shall execute, and shall use
reasonable efforts to cause the relevant bank with which such Lockbox Deposit
Account is maintained (each such bank, a "DEPOSITORY BANK") to, execute and
deliver to the Administrative Agent a Lockbox Deposit Account Agreement,
substantially in the form of EXHIBIT A hereto (with such changes thereto as
shall be reasonably acceptable to the Administrative Agent), with respect to
each such Lockbox Deposit Account. Each Lockbox Deposit Account shall be,
and shall remain, under the sole dominion and control of the Administrative
Agent and, except in connection with a release pursuant to Section 5(c)(iii)
of amounts deposited in the Lockbox deposit Accounts, no Grantor shall have
any right of withdrawal from the Lockbox Deposit Accounts. Each Grantor shall
instruct all obligors on its Receivables (other than foreign obligors or any
Receivable resulting from a cash sale transaction) to make all payments in
respect of its Receivables to one or more of such Lockbox Deposit Accounts.
(ii) Until receipt by the Borrower and the relevant Depository Bank
of a Default Notice from the Administrative Agent pursuant to the next
succeeding sentence, or, if earlier, the occurrence of an Event of Default under
Section 11(f) of the Credit Agreement, all amounts deposited in the Lockbox
Deposit Accounts shall be released to the relevant Grantors in accordance with
instructions received from such Grantors. At any time after the occurrence and
during the continuation of an Event of Default, the Administrative Agent may
deliver a notice (a "DEFAULT NOTICE") to the Borrower and one or more Depository
Banks instructing the Depository Banks to transfer all amounts deposited in
Lockbox Depository Accounts maintained with such Depository Banks to a
Collateral Account specified by the Administrative Agent in such Default Notice
which is maintained under its sole dominion and control.
(c) At the Administrative Agent's request, each Grantor shall deliver
to the Administrative Agent all original and other documents evidencing, and
relating to, the agreements and transactions which gave rise to the Receivables,
including, without limitation, all original orders, invoices and shipping
receipts.
5.2 COMMUNICATIONS WITH OBLIGORS; GRANTORS REMAIN LIABLE. (a) The
Administrative Agent in its own name or in the name of others may at any time
after the occurrence and during the continuance of an Event of Default
communicate with obligors under the Receivables to verify with them to the
Administrative Agent's satisfaction the existence, amount and terms of any
Receivables.
(b) Anything herein to the contrary notwithstanding, each Grantor
shall remain liable under each of the Receivables to observe and perform all the
conditions and obligations to be observed and performed by it thereunder, all in
accordance with the terms of any agreement giving rise thereto. Neither the
Administrative Agent nor any Lender shall have any obligation or liability under
any Receivable (or any agreement giving rise thereto) by reason of or arising
out of this Agreement or the receipt by the Administrative Agent or any Lender
of any payment relating thereto, nor shall the Administrative Agent or any
Lender be obligated in any manner to perform any of the obligations of any
Grantor under or pursuant to any Receivable (or any agreement giving rise
thereto) to make any payment, to make any inquiry as to the nature or the
sufficiency of any payment received by it or as to the
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13
sufficiency of any performance by any party thereunder, to present or file
any claim, to take any action to enforce any performance or to collect the
payment of any amounts which may have been assigned to it or to which it may
be entitled at any time or times.
5.3 PLEDGED STOCK. (a) Unless an Event of Default shall have
occurred and be continuing and the Administrative Agent shall (unless such
Event of Default is an Event of Default specified in Section 11(f) of the
Credit Agreement, in which case no such notice need be given) have given
notice to the relevant Grantor of the Administrative Agent's intent to
exercise its corresponding rights pursuant to Section 5.3(b), each Grantor
shall be permitted to receive all cash dividends paid in respect of the
Pledged Stock and all payments made in respect of the Pledged Notes, in each
case paid in the normal course of business of the relevant Issuer and
consistent with past practice, to the extent permitted in the Credit
Agreement, and to exercise all voting and corporate rights with respect to
the Pledged Securities; PROVIDED, HOWEVER, that no vote shall be cast or
corporate right exercised or other action taken which, in the Administrative
Agent's reasonable judgment, would impair the Collateral or which would be
inconsistent with or result in any violation of any provision of the Credit
Agreement, this Agreement or any other Loan Document.
(b) If an Event of Default shall occur and be continuing and the
Administrative Agent shall (unless such Event of Default is an Event of
Default specified in Section 11(f) of the Credit Agreement in which case no
such notice need be given) give notice of its intent to exercise such rights
to the relevant Grantor or Grantors, (i) the Administrative Agent shall have
the right to receive any and all cash dividends, payments or other Proceeds
paid in respect of the Pledged Securities and make application thereof to the
Secured Obligations in accordance with Section 5.5, and (ii) any or all of
the Pledged Securities shall be registered in the name of the Administrative
Agent or its nominee, and the Administrative Agent or its nominee may
thereafter exercise (x) all voting, corporate and other rights pertaining to
such Pledged Securities at any meeting of shareholders of the relevant Issuer
or Issuers or otherwise and (y) any and all rights of conversion, exchange
and subscription and any other rights, privileges or options pertaining to
such Pledged Securities as if it were the absolute owner thereof (including,
without limitation, the right to exchange at its discretion any and all of
the Pledged Securities upon the merger, consolidation, reorganization,
recapitalization or other fundamental change in the corporate structure of
any Issuer, or upon the exercise by any Grantor or the Administrative Agent
of any right, privilege or option pertaining to such Pledged Securities, and
in connection therewith, the right to deposit and deliver any and all of the
Pledged Securities with any committee, depositary, transfer agent, registrar
or other designated agency upon such terms and conditions as the
Administrative Agent may determine), all without liability except to account
for property actually received by it and except for its gross negligence and
wilful misconduct, but the Administrative Agent shall have no duty to any
Grantor to exercise any such right, privilege or option and shall not be
responsible for any failure to do so or delay in so doing.
(c) Each Grantor hereby authorizes and instructs each Issuer of any
Pledged Securities pledged by such Grantor hereunder to (i) comply with any
instruction received by it from the Administrative Agent in writing that (x)
states that an Event of Default has occurred and is continuing and (y) is
otherwise in accordance with the terms of this Agreement, without any other
or further instructions from such Grantor, and each Grantor agrees that each
Issuer shall be fully protected in so complying, and (ii) unless otherwise
expressly permitted hereby, pay any dividends or other payments with respect
to the Pledged Securities directly to the Administrative Agent.
5.4 PROCEEDS TO BE TURNED OVER TO ADMINISTRATIVE AGENT. In
addition to the rights of the Administrative Agent and the Lenders specified
in Section 5.1 with respect to payments of Receivables, if an Event of
Default shall occur and be continuing, all Proceeds (including, if a Default
Notice has been
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14
delivered pursuant to Section 5.1(c)(ii) or an Event of Default shall have
occurred under Section 11(f) of the Credit Agreement, Proceeds of
Receivables) received by any Grantor consisting of cash, checks and other
near-cash items shall be held by such Grantor in trust for the Administrative
Agent and the Lenders, segregated from other funds of such Grantor, and
shall, forthwith upon receipt by such Grantor, be turned over to the
Administrative Agent in the exact form received by such Grantor (duly
indorsed by such Grantor to the Administrative Agent, if required). All
Proceeds received by the Administrative Agent hereunder shall be held by the
Administrative Agent in a Collateral Account maintained under its sole
dominion and control. All Proceeds while held by the Administrative Agent in
a Collateral Account (or by such Grantor in trust for the Administrative
Agent and the Lenders) shall continue to be held as collateral security for
all the Obligations and shall not constitute payment thereof until applied as
provided in Section 5.5.
5.5 APPLICATION OF PROCEEDS. At such intervals as may be agreed
upon by the Borrower and the Administrative Agent, or, if an Event of Default
shall have occurred and be continuing, at any time at the Administrative
Agent's election, the Administrative Agent may apply all or any part of
Proceeds held in any Collateral Account or otherwise held as collateral
security for the Secured Obligations (whether matured or unmatured), and/or
the net proceeds of any collection, recovery, receipt, appropriation,
realization or sale of the Collateral, against the Secured Obligations then
due and owing in the following order of priority:
FIRST, to the payment of all reasonable costs and expenses of every
kind incurred by the Administrative Agent in connection with this
Agreement, any other Loan Document or any of the Secured Obligations,
including, without limitation, (i) all costs incidental to the care or
safekeeping of any of the Collateral or in any way relating to the
Collateral or the rights of the Administrative Agent and the Lenders
hereunder, (ii) court costs, (iii) the reasonable fees and disbursements of
legal counsel and agents to the Administrative Agent, (iv) any other
reasonable costs or expenses incurred in connection with the exercise by
the Administrative Agent of any right or remedy under this Agreement or any
other Loan Document and (v) without duplication, any amounts which are
required by any provision of law to be paid by the Administrative Agent
prior to the payment of the Secured Obligations; and
SECOND, to the ratable satisfaction of all other Secured Obligations.
Without prejudice to the right of the Administrative Agent to maintain any
part of such funds as collateral security for such portion of the Secured
Obligations as may not then be due and owing and subject to the payment by
the Administrative Agent of any other amount required by any provision of
law, including, without limitation, Section 9-504(1)(c) of the New York UCC,
any part of such funds which the Administrative Agent elects not so to apply
and deems not required as collateral security for the Secured Obligations
shall be paid over from time to time by the Administrative Agent to the
relevant Grantor or to whomsoever may be lawfully entitled to receive the
same. Any balance of such funds remaining after the Secured Obligations
shall have been paid in full, no Letters of Credit shall be outstanding and
the Commitments shall have terminated shall be paid over to the relevant
Grantor or to whomsoever may be lawfully entitled to receive the same.
5.6 CODE AND OTHER REMEDIES. If an Event of Default shall occur and
be continuing, the Administrative Agent, on behalf of the Lenders, may exercise,
in addition to all other rights and remedies granted to them in this Agreement
and in any other instrument or agreement securing, evidencing or relating to the
Secured Obligations, all rights and remedies of a secured party under the New
York UCC or any other applicable law. Without limiting the generality of the
foregoing, the Administrative Agent, without demand of performance or other
demand, presentment, protest, advertisement or notice of any
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15
kind (except any notice required by law referred to below) to or upon any
Grantor or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, lease, assign, give option or
options to purchase, or otherwise dispose of and deliver the Collateral or
any part thereof (or contract to do any of the foregoing), in one or more
parcels at public or private sale or sales, at any exchange, broker's board
or office of the Administrative Agent or any Lender or elsewhere upon such
terms and conditions as it may deem advisable and at such prices as it may
deem best, for cash or on credit or for future delivery without assumption of
any credit risk. The Administrative Agent or any Lender shall have the right
upon any such public sale or sales, and, to the extent permitted by law, upon
any such private sale or sales, to purchase the whole or any part of the
Collateral so sold, free of any right or equity of redemption in any Grantor,
which right or equity is hereby waived and released. Each Grantor further
agrees, at the Administrative Agent's request, to assemble the Collateral and
make it available to the Administrative Agent at places which the
Administrative Agent shall reasonably select, whether at such Grantor's
premises or elsewhere. The Administrative Agent shall apply the net proceeds
of any action taken by it pursuant to this Section 5.6 to the payment in
whole or in part of the Secured Obligations, in accordance with Section 5.5.
To the extent permitted by applicable law, each Grantor waives all claims,
damages and demands it may acquire against the Administrative Agent or any
Lender arising out of the exercise by them of any rights hereunder. If any
notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if given
at least 10 days before such sale or other disposition.
5.7 REGISTRATION RIGHTS. (a) If the Administrative Agent shall
determine to exercise its right to sell any or all of the Pledged Stock
pursuant to Section 5.6, and if in the opinion of the Administrative Agent it
is necessary or advisable to have the Pledged Stock, or that portion thereof
to be sold, registered under the provisions of the Securities Act, the
relevant Grantor will cause the Issuer thereof to (i) execute and deliver,
and cause the directors and officers of such Issuer to execute and deliver,
all such instruments and documents, and do or cause to be done all such other
acts as may be, in the opinion of the Administrative Agent, necessary or
advisable to register the Pledged Stock, or that portion thereof to be sold,
under the provisions of the Securities Act, (ii) use its best efforts to
cause the registration statement relating thereto to become effective and to
remain effective for a period of one year from the date of the first public
offering of the Pledged Stock, or that portion thereof to be sold, and (iii)
make all amendments thereto and/or to the related prospectus which, in the
opinion of the Administrative Agent, are necessary or advisable, all in
conformity with the requirements of the Securities Act and the rules and
regulations of the Securities and Exchange Commission applicable thereto.
Each Grantor agrees to cause such Issuer to comply with the provisions of the
securities or "Blue Sky" laws of any and all jurisdictions which the
Administrative Agent shall designate and to make available to its security
holders, as soon as practicable, an earnings statement (which need not be
audited) which will satisfy the provisions of Section 11(a) of the Securities
Act.
(b) Each Grantor recognizes that the Administrative Agent may be
unable to effect a public sale of any or all the Pledged Stock, by reason of
certain prohibitions contained in the Securities Act and applicable state or
foreign securities laws or otherwise, and may be compelled to resort to one
or more private sales thereof to a restricted group of purchasers which will
be obliged to agree, among other things, to acquire such securities for their
own account for investment and not with a view to the distribution or resale
thereof. Each Grantor acknowledges and agrees that any such private sale may
result in prices and other terms less favorable than if such sale were a
public sale and, notwithstanding such circumstances, agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
manner. The Administrative Agent shall be under no obligation to delay a
sale of any of the Pledged Stock for the period of time necessary to permit
the Issuer thereof to register such
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16
securities for public sale under the Securities Act, or under applicable
state securities laws, even if such Issuer would agree to do so.
(c) Each Grantor agrees to use its best efforts to do or cause to
be done all such other acts as may be necessary to make such sale or sales of
all or any portion of the Pledged Stock pursuant to this Section 5.7 valid
and binding and in compliance with any and all other applicable Requirements
of Law. Each Grantor further agrees that a breach of any of the covenants
contained in this Section 5.7 will cause irreparable injury to the
Administrative Agent and the Lenders, that the Administrative Agent and the
Lenders have no adequate remedy at law in respect of such breach and, as a
consequence, that each and every covenant contained in this Section 5.7 shall
be specifically enforceable against such Grantor, and such Grantor hereby
waives and agrees not to assert any defenses against an action for specific
performance of such covenants except for a defense that no Event of Default
has occurred under the Credit Agreement.
5.8 WAIVER; DEFICIENCY. Each Grantor waives and agrees not to assert
any rights or privileges which it may acquire under Section 9-112 of the New
York UCC. Each Grantor shall remain liable for any deficiency if the proceeds
of any sale or other disposition of the Collateral are insufficient to pay its
Secured Obligations and the fees and disbursements of any attorneys employed by
the Administrative Agent or any Lender to collect such deficiency.
SECTION 6. THE ADMINISTRATIVE AGENT
6.1 ADMINISTRATIVE AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT, ETC. (a)
Each Grantor hereby irrevocably constitutes and appoints the Administrative
Agent and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of such Grantor and in the name of such Grantor or in its
own name, for the purpose of carrying out the terms of this Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Agreement, and, without limiting the generality of the foregoing, each
Grantor hereby gives the Administrative Agent the power and right, on behalf of
such Grantor, without notice to or assent by such Grantor, to do any or all of
the following:
(i) in the name of such Grantor or its own name, or otherwise, take
possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
Receivable or with respect to any other Collateral and file any claim or
take any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by the Administrative Agent for the purpose of
collecting any and all such moneys due under any Receivable or with respect
to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and deliver,
and have recorded, any and all agreements, instruments, documents and
papers as the Administrative Agent may request to evidence the
Administrative Agent's and the Lenders' security interest in such
Intellectual Property and the goodwill and general intangibles of such
Grantor relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, effect any repairs or any insurance
called for by the terms of this Agreement and pay all or any part of the
premiums therefor and the costs thereof;
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17
(iv) execute, in connection with any sale provided for in Section 5.6
or 5.7, any indorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral; and
(v) (1) direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Administrative Agent or as the Administrative
Agent shall direct;(2) ask or demand for, collect, and receive payment of
and receipt for, any and all moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral;(3)
sign and indorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices and other documents in connection with any of the
Collateral;(4) commence and prosecute any suits, actions or proceedings at
law or in equity in any court of competent jurisdiction to collect the
Collateral or any portion thereof and to enforce any other right in respect
of any Collateral;(5) defend any suit, action or proceeding brought against
such Grantor with respect to any Collateral;(6) settle, compromise or
adjust any such suit, action or proceeding and, in connection therewith,
give such discharges or releases as the Administrative Agent may deem
appropriate;(7) assign any Copyright, Patent or Trademark (along with the
goodwill of the business to which any such Copyright, Patent or Trademark
pertains), throughout the world for such term or terms, on such conditions,
and in such manner, as the Administrative Agent shall in its sole
discretion determine; and (8) generally, sell, transfer, pledge and make
any agreement with respect to or otherwise deal with any of the Collateral
as fully and completely as though the Administrative Agent were the
absolute owner thereof for all purposes, and do, at the Administrative
Agent's option and such Grantor's expense, at any time, or from time to
time, all acts and things which the Administrative Agent deems necessary to
protect, preserve or realize upon the Collateral and the Administrative
Agent's and the Lenders' security interests therein and to effect the
intent of this Agreement, all as fully and effectively as such Grantor
might do.
Anything in this Section 6.1(a) to the contrary notwithstanding, the
Administrative Agent agrees that it will not exercise any rights under the power
of attorney provided for in this Section 6.1(a) unless an Event of Default shall
have occurred and be continuing.
(b) If any Grantor fails to perform or comply with any of its
agreements contained herein, the Administrative Agent, at its option, but
without any obligation so to do, may perform or comply, or otherwise cause
performance or compliance, with such agreement.
(c) The reasonable expenses of the Administrative Agent incurred in
connection with actions undertaken as provided in this Section 6.1, together
with interest thereon at a rate per annum equal to the rate per annum at which
interest would then be payable on past due ABR Loans under the Credit Agreement,
from the date of payment by the Administrative Agent to the date reimbursed by
the relevant Grantor, shall be payable by such Grantor to the Administrative
Agent on demand.
(d) Each Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. All powers, authorizations
and agencies contained in this Agreement are coupled with an interest and are
irrevocable until this Agreement is terminated and the security interests
created hereby are released.
6.2 DUTY OF ADMINISTRATIVE AGENT. The Administrative Agent's sole
duty with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the New York UCC or
otherwise, shall be to deal with it in the same manner as the Administrative
Agent deals with similar property for its own account. Neither the
Administrative Agent, any Lender nor
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18
any of their respective officers, directors, employees or agents shall be
liable for failure to demand, collect or realize upon any of the Collateral
or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Collateral upon the request of any Grantor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof. The powers conferred on the Administrative
Agent and the Lenders hereunder are solely to protect the Administrative
Agent's and the Lenders' interests in the Collateral and shall not impose any
duty upon the Administrative Agent or any Lender to exercise any such powers.
The Administrative Agent and the Lenders shall be accountable only for
amounts that they actually receive as a result of the exercise of such
powers, and neither they nor any of their officers, directors, employees or
agents shall be responsible to any Grantor for any act or failure to act
hereunder, except for their own gross negligence or willful misconduct.
6.3 EXECUTION OF FINANCING STATEMENTS. Pursuant to Section 9-402 of
the New York UCC and any other applicable law, each Grantor authorizes the
Administrative Agent to file or record financing statements and other filing or
recording documents or instruments with respect to the Collateral without the
signature of such Grantor in such form and in such offices as the Administrative
Agent reasonably determines appropriate to perfect the security interests of the
Administrative Agent under this Agreement. A photographic or other reproduction
of this Agreement shall be sufficient as a financing statement or other filing
or recording document or instrument for filing or recording in any jurisdiction.
6.4 AUTHORITY OF ADMINISTRATIVE AGENT. Each Grantor acknowledges that
the rights and responsibilities of the Administrative Agent under this Agreement
with respect to any action taken by the Administrative Agent or the exercise or
non-exercise by the Administrative Agent of any option, voting right, request,
judgment or other right or remedy provided for herein or resulting or arising
out of this Agreement shall, as between the Administrative Agent and the
Lenders, be governed by the Credit Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Administrative Agent and the Grantors, the Administrative Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting, and no Grantor shall be under any
obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 7. MISCELLANEOUS
7.1 AMENDMENTS IN WRITING. None of the terms or provisions of this
Agreement may be waived, amended, supplemented or otherwise modified except by a
written instrument executed by each affected Grantor and the Administrative
Agent.
7.2 NOTICES. All notices, requests and demands to or upon the
Administrative Agent or any Grantor hereunder shall be effected in the manner
provided for in subsection 13.2 of the Credit Agreement, PROVIDED that any such
notice, request or demand upon any Guarantor shall be addressed to such
Guarantor at its address for notices pursuant to the Guarantee.
7.3 NO WAIVER BY COURSE OF CONDUCT; CUMULATIVE REMEDIES. Neither the
Administrative Agent nor any Lender shall by any act (except by a written
instrument pursuant to Section 7.1), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Lender of any right or
remedy hereunder on any one occasion shall not be
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19
construed as a bar to any right or remedy which the Administrative Agent or
such Lender would otherwise have on any future occasion. The rights and
remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any other rights or remedies provided
by law.
7.4 ENFORCEMENT EXPENSES; INDEMNIFICATION. (a) Each Guarantor agrees
to pay or reimburse each Lender and the Administrative Agent for all its costs
and expenses incurred in enforcing or preserving any rights under this Agreement
and the other Loan Documents to which such Grantor is a party, including,
without limitation, the reasonable fees and disbursements of counsel (including
the allocated fees and expenses of in-house counsel in lieu of the fees and
expenses of outside counsel) to each Lender and of counsel to the Administrative
Agent.
(b) Each Guarantor agrees to pay, and to save the Administrative Agent
and the Lenders harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all stamp, excise, sales or other
taxes which may be payable or determined to be payable with respect to any of
the Collateral or in connection with any of the transactions contemplated by
this Agreement.
(c) Each Guarantor agrees to pay, and to save the Administrative Agent
and the Lenders harmless from, any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever with respect to the execution, delivery,
enforcement, performance and administration of this Agreement to the extent the
Borrower would be required to do so pursuant to subsection 13.5 of the Credit
Agreement.
(d) The agreements in this Section 7.4 shall survive repayment of the
Secured Obligations and all other amounts payable under the Credit Agreement and
the other Loan Documents.
7.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
successors and assigns of each Grantor and shall inure to the benefit of the
Administrative Agent and the Lenders and their successors and assigns; PROVIDED
that no Grantor may assign, transfer or delegate any of its rights or
obligations under this Agreement without the prior written consent of the
Administrative Agent.
7.6 SET-OFF. Each Grantor hereby irrevocably authorizes the
Administrative Agent and each Lender at any time and from time to time while
an Event of Default pursuant to Section 11(a) of the Credit Agreement shall
have occurred and be continuing, without notice to such Grantor or any other
Grantor, any such notice being expressly waived by each Grantor, to set-off
and appropriate and apply any and all deposits (general or special, time or
demand, provisional or final), in any currency, and any other credits,
indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by the Administrative Agent or such Lender to or for the credit or the
account of such Grantor, or any part thereof in such amounts as the
Administrative Agent or such Lender may elect, against and on account of the
obligations and liabilities of such Grantor to the Administrative Agent or
such Lender hereunder and claims of every nature and description of the
Administrative Agent or such Lender against such Grantor, in any currency,
whether arising hereunder, under the Credit Agreement, any other Loan
Document or otherwise, as the Administrative Agent or such Lender may elect,
whether or not the Administrative Agent or any Lender has made any demand for
payment and although such obligations, liabilities and claims may be
contingent or unmatured. The Administrative Agent and each Lender shall
notify such Grantor promptly of any such set-off and the application made by
the Administrative Agent or such Lender of the proceeds thereof, PROVIDED
that the failure to give such notice shall not affect the validity of such
set-off and application. The rights of the Administrative Agent and each
Lender under this Section 7.6 are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which the
Administrative Agent or such Lender may have.
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20
7.7 COUNTERPARTS. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
7.8 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
7.9 SECTION HEADINGS. The Section headings used in this Agreement are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
7.10 INTEGRATION. This Agreement and the other Loan Documents
represent the agreement of the Grantors, the Administrative Agent and the
Lenders with respect to the subject matter hereof and thereof, and there are no
promises, undertakings, representations or warranties by the Administrative
Agent or any Lender relative to subject matter hereof and thereof not expressly
set forth or referred to herein or in the other Loan Documents.
7.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
7.12 SUBMISSION TO JURISDICTION; WAIVERS. Each Grantor hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which
it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the Courts of
the State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to such
Grantor at its address referred to in Section 7.2 or at such other address
of which the Administrative Agent shall have been notified pursuant
thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section any special, exemplary, punitive or consequential damages.
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21
7.13 ACKNOWLEDGEMENTS. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents to which it is a
party;
(b) neither the Administrative Agent nor any Lender has any fiduciary
relationship with or duty to any Grantor arising out of or in connection
with this Agreement or any of the other Loan Documents, and the
relationship between the Grantors, on the one hand, and the Administrative
Agent and Lenders, on the other hand, in connection herewith or therewith
is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among
the Lenders or among the Grantors and the Lenders.
7.14 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
7.15 ADDITIONAL GRANTORS. Each Subsidiary of the Borrower that is
required to become a party to this Agreement pursuant to subsection 7.10 of the
Credit Agreement shall become a Grantor for all purposes of this Agreement upon
execution and delivery by such Subsidiary of an Assumption Agreement in the form
of Annex 1 hereto.
7.16 RELEASES. (a) At such time as the Loans, the Reimbursement
Obligations and the other Secured Obligations shall have been paid in full, the
Commitments have been terminated and no Letters of Credit shall be outstanding,
the Collateral shall be released from the Liens created hereby, and this
Agreement and all obligations (other than those expressly stated to survive such
termination) of the Administrative Agent and each Grantor hereunder shall
terminate, all without delivery of any instrument or performance of any act by
any party, and all rights to the Collateral shall revert to the Grantors. At
the request and sole expense of any Grantor following any such termination, the
Administrative Agent shall deliver to such Grantor any Collateral held by the
Administrative Agent hereunder, and execute and deliver to such Grantor such
documents as such Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or otherwise
disposed of by any Grantor in a transaction permitted by the Credit Agreement,
then the Administrative Agent, at the request and sole expense of such Grantor,
shall execute and deliver to such Grantor all releases or other documents
reasonably necessary or desirable for the release of the Liens created hereby on
such Collateral. At the request and sole expense of the Borrower, a Guarantor
shall be released from its obligations hereunder in the event that all the
Capital Stock of such Guarantor shall be sold, transferred or otherwise disposed
of in a transaction permitted by the Credit Agreement; PROVIDED that the
Borrower shall have delivered to the Administrative Agent, at least ten Business
Days prior to the date of the proposed release, a written request for release
identifying the relevant Guarantor and the terms of the sale or other
disposition in reasonable detail, including the price thereof and any expenses
in connection therewith, together with a certification by the Borrower stating
that such transaction is in compliance with the Credit Agreement and the other
Loan Documents.
<PAGE>
22
7.17 PERFECTION OF LIENS. Each Grantor and the Administrative Agent
acknowledge that the Liens created by this Collateral Agreement are initially
intended to be perfected only by the filing of (a) Uniform Commercial Code
financing statements described on Schedule 3, (b) filings in the United States
Patent and Trademark Office and (c) the delivery of all Instruments (other than
any Instrument endorsed for collection in the ordinary course of business). It
is not intended that any filing will be made in any country other than the
United States of America with respect to the security interests granted pursuant
to this Collateral Agreement.
<PAGE>
23
IN WITNESS WHEREOF, each of the undersigned has caused this Collateral
Agreement to be duly executed and delivered as of the date first above written.
DAL-TILE GROUP INC.
By: ____________________________________
Title: _____________________________
DAL-TILE CORPORATION
By: ____________________________________
Title: _____________________________
R&M SUPPLIES, INC.
By: ____________________________________
Title: _____________________________
DAL-MINERALS COMPANY
By: ____________________________________
Title: _____________________________
<PAGE>
SCHEDULE 1
NOTICE ADDRESSES OF GRANTORS
Dal-Tile Group Inc.
7834 C.F. Hawn Freeway
Dallas, TX 75217
Attention: William Chandler
Facsimile: (214) 309-4138
Dal-Tile Corporation
7834 C.F. Hawn Freeway
Dallas, TX 75217
Attention: William Chandler
Facsimile: (214) 309-4138
Dal-Minerals Company
7834 C.F. Hawn Freeway
Dallas, TX 75217
Attention: William Chandler
Facsimile: (214) 309-4138
R&M Supplies, Inc.
7834 C.F. Hawn Freeway
Dallas, TX 75217
Attention: William Chandler
Facsimile: (214) 309-4138
<PAGE>
SCHEDULE 2
DESCRIPTION OF PLEDGED SECURITIES
PLEDGED STOCK:
Issuer Class of Stock Stock Certificate No. No. of Shares
- ---------------- -------------- ----------------------- ---------------
(See Attached)
PLEDGED NOTES:
Issuer Payee Principal Amount
- -------------------- --------------- ------------------------
(None)
<PAGE>
SCHEDULE 3
FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS
UNIFORM COMMERCIAL CODE FILINGS
- -------------------------------------------------------------------------------
DEBTOR FILING LOCATION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Dal-Tile Group Inc. Central Filing Offices in Texas and Delaware
- -------------------------------------------------------------------------------
Dal-Tile Corporation Central Filing Offices in: Alabama,
Alaska, Arizona, Arkansas, California,
Colorado, Connecticut, Delaware, District
of Columbia, Florida, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Maine,
Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New
Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oregon,
Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas,
Utah, Vermont, Virginia, Washington, West
Virginia, Wisconsin and Wyoming
County Clerk of Fayette County, Georgia
County Clerk of Oklahoma County, Oklahoma
County Clerk of Jefferson County, Kentucky
Recorder of Mortgages of Orleans Parish,
Louisiana
Local Filing Offices: Washington County,
Arkansas, Hancock County, Kentucky,
Baltimore County, Maryland, Norfolk and
Worcester Towns, Massachusetts, Madison
County, Mississippi, St. Louis County,
Missouri, Hillsborough Town, New Hampshire,
Cattaraugus and Albany Countries, New
York, Montgomery County, North Carolina,
Cuiahoga County, Ohio, Adams and
Montgomery Counties, Pennsylvania, and
Fairfax County, Virginia
<PAGE>
- -------------------------------------------------------------------------------
DEBTOR FILING LOCATION
- -------------------------------------------------------------------------------
R&M Supplies, Inc. Central Filing Offices in Texas and Delaware
- -------------------------------------------------------------------------------
Dal-Minerals Company Central Filing Offices in Alabama, Arizona,
California, Colorado Texas, Utah and Delaware
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PATENT AND TRADEMARK FILINGS
Filings of the Collateral Agreement\ with the United States Patent and Trademark
Office with respect to each application, registration and patent identified on
Schedule 6.
ACTIONS WITH RESPECT TO PLEDGED STOCK AND PLEDGED NOTES
Delivery of (a) the stock certificates representing the Pledged Stock described
on Schedule 2 and (b) the promissory notes described on Schedule 2.
<PAGE>
SCHEDULE 4
LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE
Grantor and Jurisdiction of Organization Location of Chief
Executive Office
Dal-Tile Group Inc., a Delaware corporation 7834 C.F. Hawn Freeway,
Dallas, TX 75217
Dal-Minerals Company, a Delaware corporation 7834 C.F. Hawn Freeway,
Dallas, TX 75217
R&M Supplies, Inc., a Delaware corporation 7834 C.F. Hawn Freeway,
Dallas, TX 75217
Dal-Tile Corporation, a Pennsylvania corporation 7834 C.F. Hawn Freeway,
Dallas, TX 75217
<PAGE>
SCHEDULE 5
LOCATION OF INVENTORY AND EQUIPMENT
- -------------------------------------------------------------------------------
GRANTOR LOCATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Dal-Tile Group Inc. None.
- -------------------------------------------------------------------------------
Dal-Tile Corporation Alabama, Alaska, Arizona, Washington
County, Arkansas, California, Colorado,
Connecticut, Delaware, District of
Columbia, Florida, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Maine,
Baltimore County, Maryland, Norfolk and
Worcester Towns, Massachusetts, Michigan,
Minnesota, Madison County, Mississippi,
St. Louis County, Missouri, Montana,
Nebraska, Nevada, Hillsborough Town, New
Hampshire, New Jersey, New Mexico,
Cattaraugus and Albany Counties, New York,
Montgomery County, North Carolina, North
Dakota, Cuiahoga County, Ohio, Oregon,
Adams and Montgomery Counties,
Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas,
Utah, Vermont, Fairfax County, Virginia,
Washington, West Virginia, Wisconsin,
Wyoming, Fayette County, Georgia, Oklahoma
County, Oklahoma, Jefferson and Hancock
Counties, Kentucky, Orleans Parish,
Louisiana.
- -------------------------------------------------------------------------------
R&M Supplies, Inc. None.
- -------------------------------------------------------------------------------
Dal-Minerals Company Alabama, Arizona, California, Colorado
Texas, Utah and Delaware
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SCHEDULE 6
<PAGE>
SCHEDULE 7
EXISTING PRIOR LIENS
None.
<PAGE>
ACKNOWLEDGEMENT AND CONSENT
The undersigned hereby acknowledges receipt of a copy of the Collateral
Agreement dated as of June ____, 1997 (the "AGREEMENT"), made by the Grantors
parties thereto for the benefit of The Chase Manhattan Bank, as Administrative
Agent. The undersigned agrees for the benefit of the Administrative Agent and
the Lenders as follows:
1. The undersigned will be bound by the terms of the Agreement and will comply
with such terms insofar as such terms are applicable to the undersigned.
2. The undersigned will notify the Administrative Agent promptly in writing of
the occurrence of any of the events described in Section 4.8(a) of the
Agreement.
3. The terms of Sections 5.3(a) and 5.7 of the Agreement shall apply to it,
MUTATIS MUTANDIS, with respect to all actions that may be required of it
pursuant to Section 5.3(a) or 5.7 of the Agreement.
[NAME OF ISSUER]
By __________________________________________
Title _______________________________________
Address for Notices:_________________________
_____________________________________________
_____________________________________________
Fax:
<PAGE>
Annex 1 to
COLLATERAL AGREEMENT
ASSUMPTION AGREEMENT, dated as of ________________, 199_, made by
______________________________, a ______________ corporation (the "ADDITIONAL
GRANTOR"), in favor of THE CHASE MANHATTAN BANK, as administrative agent (in
such capacity, the "ADMINISTRATIVE AGENT") for the banks and other financial
institutions (the "LENDERS") parties to the Credit Agreement referred to below.
All capitalized terms not defined herein shall have the meaning ascribed to them
in such Credit Agreement.
W I T N E S S E T H :
WHEREAS, Dal-Tile Group Inc. (the "BORROWER"), the Lenders and the
Administrative Agent have entered into a Credit Agreement, dated as of August
14, 1996 (as amended, supplemented or otherwise modified from time to time,
the "CREDIT AGREEMENT");
WHEREAS, in connection with the Credit Agreement, the Borrower and
certain of its Affiliates (other than the Additional Grantor) have entered
into the Collateral Agreement, dated as of June __, 1997 (as amended,
supplemented or otherwise modified from time to time, the "COLLATERAL
AGREEMENT") in favor of the Administrative Agent for the benefit of the
Lenders;
WHEREAS, the Credit Agreement requires the Additional Grantor to
become a party to the Collateral Agreement; and
WHEREAS, the Additional Grantor has agreed to execute and deliver
this Assumption Agreement in order to become a party to the Collateral
Agreement;
NOW, THEREFORE, IT IS AGREED:
1. COLLATERAL AGREEMENT. By executing and delivering this
Assumption Agreement, the Additional Grantor, as provided in Section 7.15 of
the Collateral Agreement, hereby becomes a party to the Collateral Agreement
as a Grantor thereunder with the same force and effect as if originally named
therein as a Grantor and, without limiting the generality of the foregoing,
hereby expressly assumes all obligations and liabilities of a Grantor
thereunder. The information set forth in Annex 1-A hereto is hereby added to
the information set forth in Schedules 1 through 8 to the Collateral
Agreement. The Additional Grantor hereby represents and warrants that each
of the representations and warranties contained in Section 3 of the
Collateral Agreement is true and correct on and as the date hereof (after
giving effect to this Assumption Agreement) as if made on and as of such
date.
2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW
YORK.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Assumption
Agreement to be duly executed and delivered as of the date first above
written.
[ADDITIONAL GRANTOR]
By: _________________________________________
Name:
Title:
<PAGE>
DAL-TILE INTERNATIONAL INC.
1997 AMENDED AND RESTATED
STOCK OPTION PLAN
ARTICLE 1
GENERAL
1.1 PURPOSE. The purpose of this Dal-Tile International Inc. 1997 Amended
and Restated Stock Option Plan (the "Plan") is to provide for certain key
employees of Dal-Tile International Inc. ("Dal-Tile"), a Delaware corporation,
its successors and assigns and its subsidiaries and affiliates (collectively,
the "Company"), an incentive (i) to join and remain in the service of the
Company, (ii) to maintain and enhance the long-term performance and
profitability of the Company and (iii) to acquire a proprietary interest in the
success of the Company. The grant and exercise of Options under the Plan is
intended to meet the requirements of Rule 16b-3 of the 1934 Act (as hereinafter
defined) at all times during which the Company and its Insiders (as hereinafter
defined) are subject to the requirements of Section 16 of the 1934 Act.
1.2 DEFINITION OF CERTAIN TERMS.
(a) "Agreement" means an agreement issued pursuant to Section 2.1.
(b) "Board" means the Board of Directors of Dal-Tile.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee appointed to administer the Plan
in accordance with Section 1.3.
<PAGE>
(e) "Common Stock" means the shares of common stock, par value $.01
per share, of Dal-Tile and, subject to Section 2.5, any other shares into which
such common stock shall thereafter be exchanged by reason of a recapitalization,
merger, consolidation, split-up, combination, exchange of shares or the like.
(f) "Date of Grant" means the date as of which an Option is granted
by the Committee under an Agreement.
(g) "Fair Market Value" per share as of a particular date means
(i) the closing sales price per share of Common Stock on the national
securities exchange on which the Common Stock is principally traded for the
last date (including the Date of Grant) on which there was a sale of such
Common Stock on such exchange, or (ii) if the shares of Common Stock are not
then traded on a national securities exchange, the average of the closing bid
and asked prices for the shares of Common Stock in the over-the-counter
market on which the Common Stock is principally traded for the last date
(including the Date of Grant) on which there was a sale of such Common Stock
in such market, or (iii) if the shares of Common Stock are not then listed on
a national securities exchange or traded in an over-the-counter market, such
value as the Committee, in its sole discretion, shall determine.
(h) "Insider" means an insider as so defined for purposes of
Section 16 of the 1934 Act.
(i) "Option" means any incentive stock option or "nonqualified"
stock option, both as described in Section 1.5, granted under the Plan.
(j) "Optionee" means an employee of the Company who has been
awarded any Option under this Plan.
(k) The terms "parent corporation" and "subsidiary corporation" as
used herein shall have the meaning given those terms in Code section 425(e)
and (f), respectively. A corporation shall be deemed a parent or a
subsidiary only for such periods during which the requisite ownership
relationship is maintained.
-2-
<PAGE>
(l) "Plan" means this Dal-Tile International Inc. 1997 Amended and
Restated Stock Option Plan and any predecessor plan.
(m) "Termination With Cause," with respect to any Optionee, means,
except as otherwise provided in an Agreement, termination by the Company of
such Optionee's employment for: (i) misappropriation of corporate funds,
(ii) conviction of a crime, (iii) willful violation of written directions of
the Chief Executive Officer or the Board of Directors of the Company; or (iv)
gross negligence and willful misconduct.
(n) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
1.3 ADMINISTRATION.
(a) (i) Subject to Section 1.3(e), the Plan shall be administered
by a committee of the Board which shall consist of at least two members of
the Board and which shall have the power of the Board to authorize awards
under the Plan. At all times during which Dal-Tile and its Insiders are
subject to the requirements of Section 16 of the 1934 Act, all members of the
Committee shall be "Non-Employee Directors" as described in Rule 16b-3 of the
1934 Act. All members of the Committee or a subcommittee shall be "outside
directors" for purposes of Section 162(m) of the Code with respect to any
optionees whose compensation may be subject to the deductibility limitations
of Section 162(m) of the Code. The members of the Committee shall be
appointed by, and may be changed from time to time in the discretion of, the
Board.
(b) The Committee shall have the authority (i) to exercise all of
the powers granted to it under the Plan, (ii) to construe, interpret and
implement the Plan and any Agreement executed pursuant to Section 2.1, (iii)
to prescribe, amend and rescind rules and regulations relating to the Plan,
(iv) to make all determinations necessary or advisable in administering the
Plan, and (v) to correct any defect, supply any omission and reconcile any
inconsistency in the Plan and (vi) to grant Options on such terms, not
inconsistent with the Plan, as it shall determine.
-3-
<PAGE>
(c) The determination of the Committee on all matters relating to
the Plan or any Agreement shall be conclusive.
(d) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
thereunder.
(e) Notwithstanding anything to the contrary contained herein, the
Board may, in its sole discretion, at any time and from time to time, resolve
to administer the Plan. Such event, the term "Committee" as used herein
shall be deemed to mean the Board.
1.4 PERSONS ELIGIBLE FOR AWARDS. Awards under the Plan may be made
from time to time to such key employees of the Company as the Committee shall
in its sole discretion select, provided, however, that subject to Section
3.4, the Committee may not award Options to any such employee with respect to
more than 4,000,000 shares of Common Stock in any fiscal year during the term
of the Plan.
1.5 TYPES OF AWARDS UNDER THE PLAN. Awards may be made under the Plan
in the form of (a) stock options which may, in the Committee's discretion, be
granted either as (i) "nonqualified" stock options subject to the provisions
of section 83 of the Code or (ii) "incentive stock options" described in
section 422 of the Code, all as more fully set forth in Article 2.
1.6 SHARES AVAILABLE FOR AWARDS.
(a) Subject to Section 3.4 (relating to adjustments upon changes in
capitalization), as of any date the total number of shares of Common Stock with
respect to which Options may be outstanding under the Plan shall be equal to the
excess (if any) of (i) 7,836,425 shares over (ii) the sum of (A) the number of
shares subject to outstanding Options granted under the Plan and (B) the number
of shares previously transferred pursuant to the exercise of Options granted
under the Plan. In accordance with (and without limitation upon) the preceding
sentence, but subject to the requirements of Rule 16b-3 of the 1934 Act, if
applicable, shares of Common Stock covered by
-4-
<PAGE>
Options granted under the Plan which expire or terminate for any reason shall
again become available for award under the Plan.
(b) Shares that are issued upon the exercise of Options awarded under
the Plan shall be authorized and unissued or treasury shares of Common Stock.
(c) Without limiting the generality of the preceding provisions of
this Section 1.6, the Committee may, but solely with the Optionee's consent,
agree to cancel any award of Options under the Plan and issue new Options in
substitution therefor, provided that the Options as so substituted shall satisfy
all of the requirements of the Plan as of the date such new Options are awarded.
1.7 OPTION PRICE. Except as the Committee may otherwise provide, the
exercise price of each Option shall not be less than 100% of the Fair Market
Value of the shares of Common Stock covered by the Option as of the Date of
Grant.
ARTICLE 2
STOCK OPTIONS
2.1 AGREEMENTS EVIDENCING STOCK OPTIONS.
(a) Options awarded under the Plan shall be evidenced by Agreements
which shall not be inconsistent with the terms and provisions of the Plan, and,
in the case of incentive stock options, of section 422 of the Code, and which
shall contain such provisions as the Committee may in its sole discretion deem
necessary or desirable. Without limiting the generality of the foregoing, the
Committee may in any Agreement impose such restrictions or conditions upon the
exercise of such Option or upon the sale or other disposition of the shares of
Common Stock issuable upon exercise of such Option as the Committee may in its
sole discretion determine. By accepting an award pursuant to the Plan each
Optionee shall thereby agree that each such award shall
-5-
<PAGE>
be subject to all of the terms and provisions of the Plan, including, but not
limited to, the provisions of Section 1.3(d).
(b) Each Agreement shall set forth the number of shares of Common
Stock subject to the Option granted thereby.
(c) Each Agreement relating to Options shall set forth the amount
payable by the Optionee to Dal-Tile upon exercise of the Option evidenced
thereby, subject to adjustment by the Committee to reflect changes in
capitalization as contemplated by Section 3.4.
(d) An Option granted under this Plan shall be an incentive stock
option only if the relevant Agreement by its terms (i) expressly sets forth
the rules described in Sections 2.8 and 2.9 hereof, and (ii) expressly states
that it is intended to qualify as an incentive stock option. Any Option
granted under this Plan which does not satisfy the foregoing requirements of
this Section 2.1(d) is intended to be a nonqualified stock option subject to
the provisions of section 83 of the Code, and is intended not to qualify for
incentive stock option treatment under section 422 of the Code.
2.2 TERM OF OPTIONS.
(a) Each Agreement shall set forth the period during which the
Option evidenced thereby shall be exercisable, whether in whole or in part,
and any vesting provisions applicable to the Option, such terms to be
determined by the Committee in its discretion; provided that, notwithstanding
the foregoing or any other provision of the Plan, no Agreement shall permit
an incentive stock option to be exercisable more than 10 years after the date
of grant.
(b) Each Agreement shall set forth such other terms and
conditions, not inconsistent with the terms of the Plan, as the Committee
shall deem appropriate.
2.3 EXERCISE OF OPTIONS. Subject to the provisions of this Article 2,
each Option granted under the Plan shall be exercisable as follows:
-6-
<PAGE>
(a) An Option shall become exercisable at such times and subject
to such conditions as the applicable Agreement or the Committee may otherwise
provide.
(b) Unless the applicable Agreement otherwise provides, an Option
granted under the Plan may be exercised from time to time as to all or part
of the shares as to which such Option shall then be exercisable.
(c) An Option shall be exercised by the filing of a written notice
of exercise with Dal-Tile, on such form and in such manner as the Committee
shall in its sole discretion prescribe.
(d) Any written notice of exercise of an Option shall be
accompanied by payment of the exercise price for the shares being purchased.
Except as the Committee may otherwise provide, such payment shall be made by
certified or official bank check payable to Dal-Tile (or the equivalent
thereof, including shares of Common Stock). As soon as practicable after
receipt of such payment, Dal-Tile shall deliver to the Optionee a certificate
or certificates for the shares of Common Stock so purchased.
2.4 TERMINATION OF OPTIONS.
(a) Notwithstanding anything to the contrary in this Plan, except
as the Agreement or the Committee may otherwise provide and as set forth in
Section 2.4(b) and Section 2.4(d), all incentive stock options and
"nonqualified" stock options granted to an Optionee (and already vested but
not yet exercised) shall terminate on the earliest to occur of the expiration
of the term of the Option and the date which is 45 days after termination of
his employment with the Company for any reason (one year after termination by
reason of death, disability or retirement at or after the Optionee's
sixty-fifth birthday or at such earlier retirement age as may be approved by
the Committee).
(b) Notwithstanding anything to the contrary in this Plan, all
Options granted to an Optionee shall immediately expire and cease to be
exercisable and
-7-
<PAGE>
all rights granted to an Optionee under this Plan and such Optionee's
Agreement shall immediately expire in the event of a Termination With Cause
of the Optionee by the Company at any time.
(c) Unless the applicable Agreement or the Committee expressly
provides otherwise, Options awarded to Optionees under the terms of the Plan
will be exercisable only in accordance with the following vesting schedule:
<TABLE>
CUMULATIVE
PERCENTAGE OF
VESTING DATE TOTAL SHARES
------------ ------------
<S> <C>
On the date of the applicable Agreement 25%
On the first anniversary of the date of
the Agreement 50%
On the second anniversary of the date of
the Agreement 75%
On the third anniversary of the date of
the Agreement 100%
</TABLE>
The Committee may modify this vesting schedule in any manner that it deems
appropriate in any Agreement or otherwise and may provide different vesting
schedules in different Agreements in its sole discretion. Except as set
forth in an Agreement or as the Committee may provide, in the event that an
Optionee's employment with the Company is terminated for any reason prior to
the date on which the Optionee's right to exercise the Options has fully
vested pursuant to this Section 2.4(c), the Options will immediately cease to
be exercisable with respect to any and all shares which have not vested as of
the date of such termination.
2.5 Unless otherwise determined by the Committee coincident with the
grant of an Option or subsequently, in the event of a Transaction which does
not also constitute a Non-Control Transaction (as hereinafter defined), the
Options shall vest and each Optionee shall be entitled to receive in respect
of each share of Common Stock subject to his Options (whether or not vested),
upon exercise, the same amount and kind of stock, securities, cash, property
or other consideration that each holder of a share of Common Stock was
entitled to receive in the Transaction in respect of each share. In the
-8-
<PAGE>
event of a Non-Control Transaction, each Optionee shall be entitled to
receive in respect of each share of Common Stock subject to his Options, upon
exercise of such Options after the vesting thereof, the same kind of stock,
securities, cash, property or other consideration that each holder of a share
of Common Stock was entitled to receive in the Non-Control Transaction in
respect of a share. Unless otherwise determined by the Committee, Options
will not automatically vest upon the occurrence of a Non-Control Transaction.
"Transaction" means, except as otherwise provided in an Agreement (i) the
approval by stockholders of the liquidation or dissolution of the Company, (ii)
a sale or other disposition of 80% or more of the outstanding voting stock of
the Company, or (iii) the merger or consolidation of the Company with or into
any entity. "Non-Control Transaction" means (i) a merger or consolidation in
which the Company is the surviving corporation and the shares of its outstanding
Common Stock are not changed into other securities or property pursuant to such
merger or consolidation, (ii) a merger or consolidation with an affiliate of the
Company following which those persons who owned directly or indirectly a
majority of the outstanding shares of voting stock immediately prior to such
merger or consolidation will own a majority of the outstanding shares of voting
stock of the surviving corporation, or (iii) a sale or other disposition of
capital stock of the Company following which those persons who owned directly or
indirectly a majority of the outstanding shares of voting stock of the Company
immediately prior to such sale will own a majority of the outstanding shares of
voting stock of the purchasing entity. Notwithstanding anything in the Plan,
the merger of DTI Merger Company with and into Dal-Tile (the "Merger"), pursuant
to which Dal-Tile is the surviving corporation, shall not affect the operation
of the Plan in any manner whatsoever, and, in particular, shall not be or be
deemed to be a Transaction and immediately subsequent to the Merger each Option
shall continue to be exercisable for Class A common stock, par value $.01 per
share, of Dal-Tile.
-9-
<PAGE>
2.6 RULE 16B-3. Notwithstanding anything in the Plan to the contrary, the
Plan shall be administered, and Options shall be granted and exercised, in
accordance with the 1934 Act and, specifically, Rule 16b-3 thereof.
2.7 $100,000 LIMITATION ON ANNUAL VESTING OF INCENTIVE STOCK OPTIONS.
(a) Subject to the further provisions of this Section 2.7, to the
extent that the aggregate fair market value of stock with respect to which
incentive stock options (determined without regard to the provisions of this
Section 2.7) are exercisable for the first time by any Optionee during any
calendar year (under all plans of the Optionee's employer corporation and its
parent and subsidiary corporations) exceeds $100,000 (or such limitation as set
forth in Section 422 of the Code as may be amended from time to time), such
Options shall be treated as Options that are "nonqualified" stock options.
(b) For purposes of Section 2.7(a), which shall be applied by taking
options into account in the order in which they were granted, the Fair Market
Value of any stock shall be determined as of the time the Option with respect to
such stock is granted.
(c) In applying the provisions of Section 2.7(a), there shall be
taken into account solely (i) incentive stock options granted to an Optionee
under this Plan, and (ii) incentive stock options granted to the Optionee after
December 31, 1986 under all other stock option plans of his employer
corporation, and its parent or subsidiary corporations.
(d) The foregoing provisions of this Section 2.7 shall in no way
limit or restrict the aggregate fair market value of the stock which may be
acquired in any calendar year upon the exercise of "nonqualified" stock options
granted under the Plan or under any other stock option plan of the Optionee's
employer corporation, or its parent or subsidiary corporations.
-10-
<PAGE>
2.8 SPECIAL RULES FOR 10% STOCKHOLDERS. Notwithstanding any provisions to
the contrary, an incentive stock option may not be granted under this Plan to an
individual who, at the time the option is granted, owns stock possessing more
than 10% of the total combined voting power of all classes of stock of his
employer corporation or of its parent or subsidiary corporations (as such
ownership may be determined for purposes of section 422 of the Code) unless (a)
at the time such incentive stock option is granted the option exercise price is
at least 110% of the Fair Market Value of the shares subject to the incentive
stock option and (b) the incentive stock option by its terms is not exercisable
after the expiration of 5 years from the date such incentive stock option is
granted.
ARTICLE 3
MISCELLANEOUS
3.1 AMENDMENT OF THE PLAN; MODIFICATION OF AWARDS.
(a) The Board may, without stockholder approval, from time to time
suspend or discontinue the Plan or revise or amend it in any respect whatsoever,
except that no such amendment shall impair any rights or obligations under any
award theretofore made under the Plan without the consent of the person to whom
such award was made, PROVIDED, FURTHER, that an amendment which requires
stockholder approval in order for the Plan to continue to comply with Rule 16b-3
or any other law, regulation or stock exchange requirement shall not be
effective unless approved by the requisite vote of stockholders.
(b) With the consent of the Optionee and subject to the terms and
conditions of the Plan (including Section 3.1(a)), the Committee may amend
outstanding Agreements with such Optionee, for example, to (i) accelerate the
time or
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<PAGE>
times at which an Option may be exercised or (ii) extend the scheduled
expiration date of the Option.
3.2 NONASSIGNABILITY. Except as the Committee may otherwise provide, no
right granted to any Optionee under the Plan or under any Agreement shall be
assignable or transferable other than by will or by the laws of descent and
distribution. Except as the Committee may otherwise provide, during the life of
the Optionee, all rights granted to the Optionee under the Plan or under any
Agreement shall be exercisable only by him.
3.3 WITHHOLDING OF TAXES.
(a) The Company shall be entitled to withhold from any payments to an
Optionee an amount sufficient to satisfy any federal, state and other
governmental tax required to be withheld in connection with the exercise of an
Option. Whenever under the Plan shares of Common Stock are to be delivered upon
exercise of an Option, Dal-Tile shall be entitled to require as a condition of
delivery that the Optionee remit an amount sufficient to satisfy all federal,
state and other governmental tax withholding requirements related thereto.
(b) DISPOSITION OF INCENTIVE STOCK OPTIONS. If an Optionee makes a
disposition, within the meaning of Section 424(c) of the Code and regulations
promulgated thereunder, of any share or shares of Common Stock issued to such
Optionee pursuant to the exercise of an Option granted as an Incentive Stock
Option within the two-year period commencing on the date after the Date of Grant
or within the one-year period commencing on the date after the date of transfer
of such share or shares of Common Stock to the Optionee pursuant to such
exercise, the Optionee shall, within ten (10) days of such disposition, notify
Dal-Tile thereof, by delivery of written notice to Dal-Tile at its principal
executive office.
3.4 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The number of shares of
Common Stock or other stock or securities which may be issued pursuant to the
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<PAGE>
exercise of Options granted under the Plan in the aggregate and to any
Optionee and the exercise price of Options shall be equitably adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from the subdivision or combination of shares of Common Stock or
other capital adjustments, or the payment of a stock dividend or
extraordinary cash dividend after the effective date of this Plan, or other
increase or decrease in the number of such shares of Common Stock effected
without receipt of consideration by Dal-Tile; provided, however, that any
Options to purchase fractional shares of Common Stock resulting from any such
adjustment shall be eliminated. Adjustments under this Section 3.4 shall be
made by the Committee, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding and conclusive.
3.5 RIGHT OF DISCHARGE RESERVED. Nothing in this Plan or in any
Agreement shall confer upon any employee or other person the right to
continue in the employment or service of the Company or affect any right
which the Company may have to terminate the employment or service of such
employee or other person.
3.6 NO RIGHTS AS A STOCKHOLDER. No Optionee or other person holding an
Option shall have any of the rights of a stockholder of Dal-Tile with respect
to shares subject to an Option until the issuance of a stock certificate to
him for such shares. Except as otherwise provided in Section 3.4, no
adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities or other
property) for which the record date is prior to the date such stock
certificate is issued.
3.7 NATURE OF PAYMENTS.
(a) Any and all payments of shares of Common Stock or cash
hereunder shall be granted, transferred or paid in consideration of services
performed by the Optionee for the Company.
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<PAGE>
(b) All such grants, issuances and payments shall constitute a
special incentive payment to the Optionee and shall not, unless otherwise
determined by the Committee, be taken into account in computing the amount of
salary or compensation of the Optionee for the purposes of determining any
pension, retirement, death or other benefits under (i) any pension, retirement,
life insurance or other benefit plan of the Company or (ii) any agreement
between the Company and the Optionee.
3.8 NON-UNIFORM DETERMINATIONS.
The Committee's determinations under the Plan need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Committee
shall be entitled, among other things, to make non-uniform and selective
determinations, and to enter into non-uniform and selective Agreements, as to
(i) the persons to receive awards under the Plan, and (ii) the terms and
provisions of awards under the Plan.
3.9 OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan shall be
deemed in any way to limit or restrict the Company or the Committee from making
any award or payment to any person under any other plan, arrangement or
understanding, whether now existing or hereafter in effect.
3.10 RESTRICTIONS.
(a) If the Committee shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder or the taking of any other action
thereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the full satisfaction of
the Committee.
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<PAGE>
(b) The term "Consent" as used herein with respect to any Plan Action
means (i) any and all listings, registrations or qualifications in respect
thereof upon any securities exchange or under any federal, state or local law,
rule or regulation, (ii) any and all written agreements and representations by
the grantee with respect to the disposition of shares, or with respect to any
other matter, which the Committee shall deem necessary or desirable to comply
with the terms of any such listing, registration or qualification or to obtain
an exemption from the requirement that any such listing, qualification or
registration be made and (iii) any and all consents, clearances and approvals in
respect of a Plan Action by any governmental or other regulatory bodies.
3.11 SECTION HEADINGS. The section headings contained herein are for the
purposes of convenience only and are not intended to define or limit the
contents of said sections.
3.12 INTERPRETATION. Unless expressly stated in the relevant Agreement,
each Option is intended to be performance-based compensation within the meaning
of Section 162(m)(4)(C) and the Committee shall interpret the Plan accordingly.
3.13 EFFECTIVE DATE AND TERM OF PLAN.
(a) The 1997 Amended and Restated Stock Option Plan was approved by
the Board effective as of June 11, 1997, subject to approval of the Plan by a
majority of the voting stockholders of the Company.
(b) The Plan shall terminate 10 years after its adoption by the
Board, and no awards shall thereafter be made under the Plan. Notwithstanding
the foregoing, all awards made under the Plan prior to the date on which the
Plan terminates shall remain in effect until such awards have been satisfied or
terminated in accordance with the terms and provisions of the Plan.
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<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
------------------ ---------------
<S> <C>
Dal-Tile Group Inc. Delaware
Dal-Tile Corporation Pennsylvania
R&M Supplies, Inc. Delaware
Tileways, Inc. Delaware
DTM/CM Holdings, Inc. Delaware
Dal-Minerals Company Delaware
Dal-Tile of Canada Inc. Ontario
Materials Ceramicos, S.A. de C.V. Mexico
Dal-Tile Mexico, S.A. de C.V. Mexico
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-START> JAN-04-1997
<PERIOD-END> JAN-02-1998
<CASH> 7,488
<SECURITIES> 0
<RECEIVABLES> 96,296
<ALLOWANCES> 13,160
<INVENTORY> 130,747
<CURRENT-ASSETS> 256,089
<PP&E> 299,232
<DEPRECIATION> 71,547
<TOTAL-ASSETS> 672,069
<CURRENT-LIABILITIES> 101,201
<BONDS> 537,830
0
0
<COMMON> 534
<OTHER-SE> 3,386
<TOTAL-LIABILITY-AND-EQUITY> 672,069
<SALES> 676,637
<TOTAL-REVENUES> 676,637
<CGS> 404,728
<TOTAL-COSTS> 746,273
<OTHER-EXPENSES> (1,220)
<LOSS-PROVISION> 27,805
<INTEREST-EXPENSE> 40,649
<INCOME-PRETAX> (108,797)
<INCOME-TAX> 1,439
<INCOME-CONTINUING> (110,236)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (110,236)
<EPS-PRIMARY> (2.06)
<EPS-DILUTED> (2.06)
</TABLE>
