AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1998
REG. NO. 333
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DAL-TILE INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 7834 HAWN FREEWAY 13-3548809
(State or other DALLAS, TX 75217 (I.R.S. Employer
jurisdiction (214) 398-1411 Identification No.)
of incorporation or
organization)
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
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JACQUES R. SARDAS
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE BOARD
DAL-TILE INTERNATIONAL
7834 HAWN FREEWAY
DALLAS, TX 75217
(214) 398-1411
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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COPIES TO:
FREDERICK H. FOGEL, ESQ. JOHN M. BRANDOW, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON DAVIS POLK & WARDWELL
ONE NEW YORK PLAZA 450 LEXINGTON AVE.
NEW YORK, NY 10004 NEW YORK, NY 10017
(212) 859-8000 (212) 450-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. |_|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Amount Proposed Proposed Amount of
Title of Shares to be Maximum Maximum Registration
to be Registered Registered Aggregate Price Aggregate Fee
Per Unit(1) Offering Price
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Common stock, par
value $0.01 per share......7,822,322 $8.90625 $69,667,555.31 $19,368
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1. Estimated solely for purpose of calculating the amount of the
registration fee. Pursuant to Rule 457(c), the registration fee is
based on the average high and low prices of the Registrant's common
stock as reported on the New York Stock Exchange on November 3, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
[RED HERRING]
The information in this prospectus is not complete and may be changed. The
selling stockholder may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED NOVEMBER 10, 1998
7,822,322 SHARES
DAL-TILE INTERNATIONAL INC.
COMMON STOCK
--------------------------------
ARMSTRONG IS OFFERING 7,822,322 SHARES OF COMMON STOCK OF
DAL-TILE.
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DAL-TILE'S COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE
SYMBOL "DTL". ON NOVEMBER 9, 1998, THE
REPORTED LAST SALE PRICE OF THE COMMON STOCK
ON THE NEW YORK STOCK EXCHANGE WAS $9 11/16 PER SHARE.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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PRICE $ A SHARE
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Underwriting
Price to Discounts and Proceeds to
Public Commissions Armstrong
------ ----------- ---------
Per Share............... $
Total................... $
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common
stock to purchasers on November , 1998.
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MORGAN STANLEY DEAN WITTER
November , 1998
<PAGE>
TABLE OF CONTENTS
PAGE
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Prospectus Summary........................................................3
Risk Factors..............................................................4
Use of Proceeds..........................................................12
Selling Stockholder......................................................12
The Underwriter..........................................................13
Where You Can Find More Information......................................14
Legal Matters............................................................15
Experts..................................................................15
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You should rely only on the information contained in or incorporated
into this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. This
prospectus is not an offer to sell the common stock and it is not
soliciting an offer to buy common stock in any state where the offer or
sale is not permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
In this prospectus, "Dal-Tile" refers to Dal-Tile International Inc.
and the "company," "we," "us" and "our" refer to Dal-Tile and its
subsidiaries, including the operations of American Olean Tile Company,
Inc., which Dal-Tile acquired on December 29, 1995. Daltile(R), American
Olean(R), Home Source(R) and Dal-Monte(R) are registered trademarks of the
company. In this prospectus "Armstrong" and the "selling stockholder"
refers to Armstrong World Industries, Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This prospectus includes or incorporates forward-looking statements.
We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to risks, uncertainties, and assumptions including, among other
things, those discussed under "Risk Factors" below and the following:
* the impact of competitive pressures and changing economic
conditions on our business;
* our dependence on residential and commercial construction
activity;
* our high level of indebtedness;
* currency fluctuations and other factors relating to our foreign
manufacturing operations;
* the impact of pending reductions in tariffs and custom duties;
and
* environmental laws and other regulations.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in and incorporated into
this prospectus might not occur.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information incorporated into this prospectus regarding our company, the
common stock being sold in the offering and our financial statements and
notes thereto.
We use the terms "floor" and "wall" tile to identify the most common
uses for a particular size or variety of tile; tile consumers use all sizes
and varieties of the products in all types of applications. When we make
statements in this prospectus or in documents incorporated by reference
about our market share or competitive position, investors should understand
that these statements are only estimates and approximations, and are
inherently imprecise. References to fiscal year 1998 refer to our fiscal
year ending January 1, 1999; references to fiscal year 1997 refer to our
fiscal year ended January 2, 1998; and references to fiscal year 1996 refer
to our fiscal year ended January 3, 1997.
We produce and distribute a broad line of high-quality ceramic wall
tile and floor tile products for both residential and commercial
applications, marketed primarily under our Daltile, American Olean and Home
Source brand names. We believe that we are the largest manufacturer,
distributor and marketer of ceramic tile in the United States, and one of
the largest in the world.
We commenced operations in 1947 as the Dallas Ceramic Company and
established our first wall tile manufacturing facility and corporate
headquarters in Dallas, Texas. On December 29, 1995, we completed the
acquisition of American Olean Tile Company, Inc. from Armstrong World
Industries, Inc.
Our principal executive offices are located at 7834 Hawn Freeway,
Dallas, Texas 75217. Our telephone number at that address is (214)
398-1411.
THE OFFERING
Common stock offered by
Armstrong....................... 7,822,322 shares
Common stock owned by
Armstrong after the offering.... Armstrong will not own any
Dal-Tile shares after the
offering.
Shares outstanding after the
offering........................ 53,552,246 shares
Use of Proceeds.................... We will not receive any of the
proceeds of the offering.
Risk Factors....................... See "Risk Factors" for a
discussion of factors you should
carefully consider before
deciding to invest in shares of
the common stock.
Dividend Policy.................... We do not currently anticipate
paying any cash dividends.
NYSE Symbol........................ DTL
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not
the only ones facing our company. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair
our business operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected.
In such case, the trading price of our common stock could decline, and you
may lose all or part of your investment.
SIGNIFICANT INDEBTEDNESS; PRINCIPAL AND INTEREST PAYMENT OBLIGATIONS
We have a high level of indebtedness and, as a result, have
significant obligations to repay principal and to pay interest on our debt.
At October 2, 1998, our outstanding debt was approximately $517.6 million,
including borrowings under our bank credit facility.
Our high level of indebtedness has important consequences to our
stockholders, such as:
* we must use a substantial portion of our cash flow from
operations to pay our debt service obligations;
* we are more sensitive to a downturn in general economic
conditions and changes in our industry;
* our ability to respond to market conditions (including
our ability to make capital expenditures) or to meet our
contractual or financial obligations may be limited;
* we are subject to restrictive financial and operating
covenants that could limit our ability to conduct our
business;
* we may have a higher level of indebtedness than our
competitors; and
* we may be limited in our ability to obtain additional
financing to fund our growth strategy, working capital,
capital expenditures, debt service requirements or other
purposes.
Our credit agreement requires us to make the following principal
payments:
* quarterly amortization payments on the remaining portion of
our $275 million Term A Loan starting in the third quarter
of fiscal year 1998 through December 31, 2002, at various
scheduled amounts (including an aggregate of $12.5 million
in fiscal year 1998 and $40 million in fiscal year 1999);
* quarterly amortization payments on our $125
million Term B Loan through December 31, 2003 (including an
aggregate of $1 million in each of fiscal year 1998 and
1999); and
* repayment of all borrowings under our $250 million revolving
credit facility on December 31, 2002.
RESTRICTIONS IN CREDIT AGREEMENT ON OUR OPERATIONS
Our credit agreement contains significant operating and financial
covenants (each of which is more fully described in our credit agreement).
The financial covenants include requirements that we maintain agreed levels
in the following areas:
* consolidated net worth;
* current ratio;
* consolidated interest coverage;
* consolidated leverage ratio; and
* consolidated EBITDA.
A breach of any of the covenants under our credit agreement could result in
an event of default. This would allow our lenders to declare all borrowed
amounts, together with accrued interest, to be immediately due and payable.
During the current fiscal year, certain of these financial covenants
began to become increasingly more stringent. Because of these financial
covenants and the debt service requirements under our credit agreement, we
expect that we will be required to seek to refinance our borrowings or
amend the terms of our credit agreement in 1999, or possibly sooner. We are
currently in discussions with our lenders regarding amending the financial
covenants.
Our ability to satisfy our debt service obligations, to amend or
refinance our borrowings and to raise capital through other means, such as
selling assets or raising equity capital, depends on our financial and
operating performance. Our financial and operating performance is subject
to economic conditions and financial, business and other factors beyond our
control.
If we raise additional funds by issuing equity securities, the
percentage ownership of our stockholders at that time would be diluted.
Also, new equity securities may have rights senior to those of the common
stock. We are uncertain as to whether we will be able to obtain the future
borrowing facilities necessary to repay or refinance our current
borrowings. We also are not sure that our lenders will agree to any
requested modification of the terms of our indebtedness or that our
operating results will allow us to comply with our obligations under any
new or amended credit agreement. We expect that debt incurred as part of a
refinancing would involve higher borrowing costs.
RISKS RELATED TO INTEGRATION OF AMERICAN OLEAN; OPERATING LOSSES AND
NEGATIVE CASH FLOW
We have experienced difficulties in the complex task of integrating
the American Olean operations, which we purchased in December 1995, with
our operations. Delays in bringing the combined companies onto a common,
fully integrated management information system affected many aspects of our
operations, particularly our logistics systems. As a result, we
overproduced some products and underproduced others. Transportation costs
increased because we needed to relocate inventory to meet demand. These
factors adversely affected customer service, and we lost sales. Accounts
receivable and inventory increased significantly, which adversely affected
our cash flow in 1996 and 1997.
The difficulties associated with the integration significantly
affected our financial results. For example:
* sales declined 6.1% in 1997 compared to 1996;
* operating margins declined to 3.0% in 1997 from 14.8% in
1996, excluding the charges described below, and certain
merger integration charges;
* operating income declined $86.4 million to $20.5 million in
1997 from $106.9 million in 1996, excluding the charges
described below, and certain merger integration charges; and
* we experienced negative free cash flow of $(92.9) million in
1997 and $(60.7) million in 1996.
We recorded charges of $24.7 million during the second quarter of 1997
and $65.4 million during the third quarter of 1997. These charges were
principally non-cash charges for the write-down of obsolete and slow moving
inventories, uncollectible trade accounts receivable, and other
non-productive assets, and costs for restructuring of manufacturing, store
operations and corporate administrative functions.
We believe that we have taken adequate charges for the costs
associated with the integration efforts, but we cannot be certain that we
will not incur charges for similar matters in the future. In addition,
although we have taken a number of actions to resolve the difficulties
associated with completing the integration, we are not certain that we have
taken or will be able to take all necessary steps, or that we will maintain
profitability and positive cash flow in the future.
We have substantially completed the conversion of our management
information systems, primarily onto the platform used by American Olean.
While our current information systems platform has allowed us to operate
during the integration, we expect that we will need to make additional
systems investments to improve the performance of our supply chain.
Further, as we grow and our customer service requirements increase in the
future, we expect that we will need to make additional investments in our
information systems. In the second quarter of 1999, we expect to shift from
computer services currently provided by Armstrong to those provided by a
third party. Although we believe we have adequately prepared for this
conversion, it is possible that material disruptions to our operations
could occur.
The continued success of the integration could be affected by a number
of factors beyond our control, including:
* general economic conditions;
* increased operating costs;
* potential loss of sales arising from our cost savings
initiatives or otherwise;
* the response of competitors or customers; and
* further delays or difficulties in implementation.
CYCLICAL BUSINESS
The U.S. ceramic tile industry is highly dependent on residential and
commercial construction activity--new construction as well as remodeling.
This construction activity is cyclical in nature and is significantly
affected by changes in general and local economic conditions. These
conditions include:
* interest rates;
* housing demand;
* employment levels;
* financing availability;
* commercial rental vacancy rates; and
* consumer confidence.
A prolonged decline in residential or commercial construction
activities could result in a significant decrease in our operating
performance.
COMPETITIVE INDUSTRY
We sell our products in a highly competitive marketplace. In the floor
and wall covering businesses, we compete with vendors of carpet, resilient
flooring, wood flooring, laminates, stone, wallpaper, paint and other
products. We also face extensive competition from domestic and foreign
manufacturers and independent distributors of ceramic tile. Although we
believe that we are the largest manufacturer, distributor and marketer of
ceramic tile in the United States, some of our U.S. competitors are
subsidiaries of publicly held companies that may have greater resources and
access to capital than we do. In addition, some of our foreign competitors
may be larger and have greater resources and access to capital than we do.
In 1997, approximately 60% of U.S. ceramic tile sales (by unit volume)
consisted of imports, including the approximately 7% of all ceramic tile
sold in the United States that we manufactured in Mexico. In recent years,
imports have accounted for an increasing proportion of U.S. ceramic tile
sales. Consequently, changes in exchange rates or global economic
conditions could affect our position with respect to our foreign
competitors.
MANAGEMENT TRANSITION
We are experiencing a period of management transition that has placed,
and may continue to place, a significant strain on our organizational
resources and personnel. We hired Jacques R. Sardas as Chief Executive
Officer in July 1997 and he has assembled a new senior management team. Our
ability to manage the integration of Dal-Tile and American Olean operations
and future business initiatives successfully will require our new
management personnel to work together effectively and will require us to
improve our operational, management and financial systems and controls. If
our management is unable to manage this transition effectively, our
business, competitive position, and financial results will be materially
and adversely affected.
DEPENDENCE ON KEY PERSONNEL
We rely on our key management personnel. In particular, we depend on
the continued employment of Jacques R. Sardas, our Chairman, President and
Chief Executive Officer. We have entered into an employment agreement with
Mr. Sardas which extends through December 31, 2001. Our future success will
also depend on our ability to attract and retain highly skilled personnel
in various areas, including technical, marketing, sales and management. If
we do not succeed in retaining and motivating our current employees and
attracting new employees we need, our business could suffer significantly.
IMPACT OF MEXICAN OPERATIONS; CURRENCY FLUCTUATIONS
Forty-three percent of our manufacturing capacity is owned and
operated by our Mexican subsidiaries (exclusive of manufacturing capacity
available from our Mexican joint venture). Accordingly, an event that has a
material adverse impact on our Mexican operations may have a material
adverse impact on our operations as a whole. The marketing, manufacturing
and regulatory environments in Mexico differ somewhat from those in the
United States.
Our Mexican facility primarily provides ceramic tile to our U.S.
operations and in addition sells ceramic tile in Mexico. In fiscal year
1997 and through the third quarter of 1998, sales in Mexico represented
approximately 3% of our consolidated net sales. Our sales in Mexico are
denominated in pesos and primarily all of our Mexican facility's cost of
sales and operating expenses are denominated in pesos. In fiscal year 1997
and through the third quarter of 1998, peso-denominated cost of sales and
operating expenses represented approximately 7% of our consolidated cost of
sales and operating expenses.
Exposure to exchange rate changes is favorable to operating results
when the peso devalues against the U.S. dollar, since our costs relating to
our Mexican operations are primarily denominated in pesos and our revenues
relating to our Mexican operations are primarily denominated in dollars. As
the peso appreciates against the U.S. dollar, the effect is unfavorable to
operating results. In addition to exchange rate changes affecting operating
results, we recognize foreign currency transaction gains or losses in other
income and expense. We recorded a foreign currency transaction gain of
approximately $0.6 million in fiscal 1997 and approximately $1.2 million
through the third quarter of 1998. In addition, the translation of foreign
assets and liabilities into dollars may result in non-cash increases or
reductions to stockholders' equity. We have not historically entered into
peso currency forward contracts.
The Mexican peso has been subject to large devaluations in the past,
and may be subject to significant fluctuations in the future. The peso
devalued 2.65% during 1997 and approximately 28% through the third quarter
of 1998. These devaluations resulted in a reduction of stockholders' equity
of approximately $1.4 million in 1997 and $12.6 million through the third
quarter of 1998 as a result of translating peso-denominated assets and
liabilities into dollars. Any future devaluation of the peso against the
dollar will result in a reduction of stockholders' equity.
Over the last few years, the Mexican government has begun a program of
reform to modify its role in the Mexican economy. Nevertheless, the Mexican
government continues to exercise significant influence over many aspects of
the Mexican economy. Accordingly, Mexican government actions concerning the
economy could have significant effects on private companies, including us.
Future Mexican governmental actions or future developments in the Mexican
economy, including a slowdown of the Mexican economy or the development of
any social unrest, may impair our operations or financial condition or
adversely affect the market price of our common stock.
TARIFFS AND CUSTOMS DUTIES
The United States is a party to the General Agreement on Tariffs and
Trade. Under GATT, the United States currently imposes import duties on
ceramic tile imported from non-North American countries at approximately
15%, to be reduced steadily to 8 1/2% by 2004. Accordingly, GATT may
stimulate competition from non-North American manufacturers who export
ceramic tile to the United States. We are uncertain what effect GATT may
have on our operations.
In 1993, Mexico, the United States and Canada approved the North
American Free Trade Agreement. NAFTA will remove most normal customs duties
imposed on goods traded among the three countries. Although NAFTA lowers
the tariffs imposed on our ceramic tile manufactured in Mexico and sold in
the United States, it also may stimulate competition in the United States
and Canada from manufacturers located in Mexico. The United States
currently imposes import duties on ceramic tile from Mexico of
approximately 13%, although these duties on imports from Mexico are being
phased out steadily under NAFTA through 2008. We are uncertain what effect
NAFTA may have on our operations.
CONTROL BY CERTAIN STOCKHOLDERS
Currently and following the offering, DTI Investors LLC, which is
controlled by AEA Investors Inc., will own approximately 53.4% of our
outstanding common stock. Accordingly, AEA Investors has sufficient voting
power to decide the results of matters submitted to a vote of stockholders.
Furthermore, this control could preclude a non-negotiated takeover attempt
and, consequently, adversely affect the price of our common stock.
REGULATIONS AND ENVIRONMENTAL CONSIDERATIONS
Our operations are subject to various U.S. and Mexican environmental
laws, including laws addressing materials used in our products. In
addition, certain of our operations are subject to U.S. and Mexican
environmental laws that impose limitations on the discharge of pollutants
into the air and water and establish standards for the treatment, storage
and disposal of solid and hazardous wastes. Although we believe that we
have made sufficient capital expenditures to maintain compliance with
existing laws, we may need to increase our spending as compliance standards
and technology change. If changes in law require unforeseen significant
expenditures, our business and financial condition may be adversely
affected.
We have been, and presently are, the subject of administrative
proceedings, litigation and investigations relating to environmental and
related matters. We do not believe that such proceedings, litigation and
investigations will have a material impact on our operations. This belief
is based on a number of factors, including certain indemnification rights
we enjoy. However, it is possible that we will become involved in future
litigation or other proceedings. If we were found to be responsible or
liable in any litigation or proceeding, it is possible that such costs will
be material, or that payment under our indemnification rights will not be
available or sufficient.
LIMITED TRADING MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Our common stock is traded on the New York Stock Exchange. The average
daily trading volume for the common stock as reported by the NYSE for the
third quarter of 1998 was approximately 107,000 shares. Despite the
increase in the number of shares of common stock to be publicly held as a
result of the offering, we are uncertain as to whether a more active
trading market in the common stock will develop. The price of our common
stock may vary significantly as a result of many factors, including:
* our results of operations;
* analyst estimates; and
* general market conditions.
In addition, the securities markets sometimes experience significant
price and volume fluctuations. These fluctuations are often unrelated or
disproportionate to the operating performance of particular companies.
Following the offering, sales or the expectation of sales of substantial
amounts of common stock in the public market by us or our stockholders
could adversely affect the prevailing market prices for the common stock.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could drop due to sales of a
large number of shares of our common stock in the market after the offering
or the perception that such sales could occur. These factors could also
make it more difficult for us to raise funds through future offerings of
common stock.
We have 53,552,246 shares of common stock outstanding. All of these
shares are freely transferable without restriction or further registration
under the federal securities laws, except for any shares held by
affiliates, including 28,604,811 shares held by DTI Investors LLC. In
connection with the offering, we, our directors and executive officers, and
DTI Investors LLC have each agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated, each will not sell any shares of
common stock. These restrictions only apply until the later of (i) January
1, 1999 or (ii) 45 days after the date of this prospectus, and do not apply
to shares issued under our option plan. See "The Underwriter."
In addition, as of October 15, 1998, there were 10,586,425 shares of
common stock reserved for issuance pursuant to our stock option plans and
options for the purchase of 9,215,356 shares of common stock were
outstanding. These shares will be available for sale in the public market
from time to time upon registration or pursuant to available exemptions
from registration.
IMPORTANCE OF RELATIONSHIP WITH HOME DEPOT
Approximately 10% of our revenues in the first three quarters of
fiscal 1998 consisted of sales to Home Depot. We believe that our
relationship with Home Depot is good, but we cannot be certain that we will
be able to maintain this relationship. The loss of Home Depot as a customer
or a significant reduction in sales to Home Depot could cause our business
to suffer significantly.
IMPACT OF YEAR 2000
Some of our 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 may 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.
We continue to modify and replace portions of our software and
hardware so that our computer systems will function properly with respect
to dates in the year 2000 and thereafter. The total Year 2000 costs are
estimated at approximately $6.0 million and will be recorded as expenses as
they are incurred. To date, we have incurred expenses totaling $2.8 million
and have completed our Year 2000 assessment. In addition, we have developed
a Year 2000 modification plan and completed a significant portion of the
activities called for in the plan.
The project is estimated to be completed no later than the end of the
second quarter of 1999, which is prior to any anticipated impact on our
operating systems. We believe that, with modifications to existing software
and conversions to new software, the Year 2000 issue will not pose
significant operational problems for our computer systems. However, if we
do not make the necessary modifications and conversions or do not complete
them on time, the Year 2000 issue could have a material impact on our
operations.
The cost of the project and the date by which we believe we will
complete the Year 2000 modifications are based on our best estimates, which
were derived utilizing a number of assumptions about future events, such
as:
* the availability and cost of personnel trained in this area;
* the ability to locate and correct all relevant computer
codes;
* the performance of key software and hardware vendors; and
* other similar uncertainties.
However, we are not sure that our estimates will be achieved and
our actual results could differ materially from those we anticipate.
In addition, our operations and financial condition could also suffer
significantly if the Year 2000 issue significantly disrupts the operations
of our major customers or suppliers.
ANTITAKEOVER PROVISIONS
Our certificate of incorporation and bylaws contain certain provisions
that could have the effect of discouraging or making it more difficult for
someone to acquire us through a tender offer, a proxy contest or otherwise,
even though such an acquisition might be economically beneficial to our
stockholders. These provisions include advance notice procedures for
stockholders to nominate candidates for election as members of our board of
directors and for stockholders to submit proposals for consideration at
stockholders' meetings. Our ability to issue preferred stock, in one or
more classes or series, with such powers and rights as may be determined by
our board of directors, also could make such an acquisition more difficult.
In addition, these provisions may make the removal of management more
difficult, even in cases where such removal would be favorable to the
interests of our stockholders.
We are subject to Section 203 of the Delaware General Corporation
Law which limits transactions between a publicly held company and
"interested stockholders" (generally, those stockholders who, together with
their affiliates and associates, own 15% or more of a company's outstanding
capital stock). This provision of Delaware law also may have the effect of
deterring certain potential acquisitions of us.
NO DIVIDEND PAYMENTS ARE EXPECTED
We do not currently anticipate paying any cash dividends. In addition,
our ability to pay dividends on our common stock is restricted under the
terms of our credit agreement.
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the offering.
SELLING STOCKHOLDER
The following table sets forth certain information regarding the
beneficial ownership of common stock that Armstrong is offering to sell
immediately prior to the offering and as adjusted to reflect the sale of
the shares of common stock.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED
TO THE OFFERING AFTER THE OFFERING
------------------- -------------------
NAME AND ADDRESS OF BENEFICIAL NUMBER (1) PERCENT SHARES NUMBER PERCENT
OWNER OFFERED
- ------------------------------ ---------- ------- ------- ------ -------
Armstrong Enterprises,
Inc.(1)................. 7,822,322 14.6% 7,822,322 -- --
Liberty and Charlotte
Streets
P.O. Box 3001
Lancaster, PA 17604
Armstrong World Industries,
Inc.(1).................. 7,822,322 14.6% 7,822,322 -- --
Liberty and Charlotte
Streets
P.O. Box 3001
Lancaster, PA 17604
- -------------
(1) Based on information supplied to us by Armstrong Enterprises, Inc.,
which is a wholly owned subsidiary of Armstrong World Industries, Inc.
OUR RELATIONSHIP WITH ARMSTRONG WORLD INDUSTRIES; SHAREHOLDERS AGREEMENT
On December 29, 1995, Armstrong World Industries acquired 37% of
Dal-Tile's outstanding capital stock in connection with our acquisition of
American Olean. At that time, we also entered into a shareholders agreement
and agreements with Armstrong relating to our use of certain trademarks
Armstrong owned, and Armstrong's supply to us of certain transition
services, raw materials produced at a mine operated by Armstrong and
computer services. The agreements relating to trademarks, transition
services and raw materials are no longer in effect and the agreement
relating to computer services (for which we pay Armstrong approximately $7
million per year) will expire on May 31, 1999.
In June of 1998, Armstrong sold 10,350,000 shares of our common stock
in a public offering.
Pursuant to the shareholders agreement, as currently in effect,
Armstrong has the right to appoint one member of Dal-Tile's Board of
Directors, although Armstrong has not done so. The shareholders agreement
also provides for registration rights under certain circumstances under the
Securities Act. The shareholders agreement will terminate upon the
completion of the offering.
THE UNDERWRITER
Under the terms and subject to the conditions contained in the
underwriting agreement dated the date hereof (the "underwriting
agreement"), Morgan Stanley & Co. Incorporated as the underwriter has
agreed to purchase, and Armstrong has agreed to sell to the underwriter,
7,822,322 shares of common stock.
Morgan Stanley is offering the shares of common stock subject to its
acceptance of the shares from the selling stockholder and subject to prior
sale. The underwriting agreement provides that the obligation of the
underwriter to pay for and accept delivery of the shares of common stock
offered hereby is subject to the approval of certain legal matters by its
counsel and to certain other conditions. Morgan Stanley is obligated to
take and pay for all of the shares of common stock offered hereby if any
are taken.
Morgan Stanley initially proposes to offer part of the shares of
common stock directly to the public at the public offering price set forth
on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Morgan Stanley may allow, and such dealers may reallow, a
concession not in excess of $ a share to certain dealers. After the initial
offering of the shares of common stock, Morgan Stanley may vary the
offering price and other selling terms from time to time.
Dal-Tile will pay the expenses of the offering, expected to be $ ,
other than underwriting discounts and commissions. Armstrong will receive
all proceeds of the offering and will pay the underwriting discounts and
commissions shown on the cover of the prospectus.
Each of Dal-Tile, Dal-Tile's directors and executive officers (for so
long as they remain in such capacities) and DTI Investors LLC has agreed
that, without the prior written consent of Morgan Stanley, it will not,
until the later of (i) January 1, 1999 or (ii) 45 days after the date of
this prospectus (1) offer, pledge, loan, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
(whether such shares or any securities are then owned by such person or are
thereafter acquired directly from Dal-Tile), (2) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of
the economic consequences of the ownership of the common stock, whether any
such transaction described in clause (1) or (2) of this paragraph is to be
settled by delivery of common stock or such other securities, in cash or
otherwise, (3) in the case of DTI Investors LLC, make any demand for, or
exercise any right with respect to, registration of any shares of common
stock or (4) in the case of Dal-Tile, file a registration statement with
the SEC for an offering of common stock or any securities convertible into
or exercisable or exchangeable for common stock (other than a registration
statement or Form S-8 or an equivalent form), other than, with respect to
clauses (1), (2), (3) and (4) above, (i) the offer and sale of the shares
of common stock made in connecting with this offering and (ii) options to
purchase common stock, or shares of common stock issued or issuable under
our existing stock option and stock purchase plans.
In order to facilitate the offering of the common stock, Morgan
Stanley may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock. Specifically, Morgan Stanley may
over-allot in connection with the offering, creating a short position in
the common stock for its own account. In addition, to cover over-allotments
or to stabilize the price of the common stock, Morgan Stanley may bid for,
and purchase, shares of common stock in the open market. Finally, Morgan
Stanley may reclaim selling concessions allowed to a dealer for
distributing the common stock in the offering, if Morgan Stanley
repurchases previously distributed common stock in transactions to cover
short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the common stock
above independent market levels. Morgan Stanley is not required to engage
in these activities, and may end any of these activities at any time.
Dal-Tile, Armstrong and Morgan Stanley have agreed to indemnify each
other against certain liabilities, including liabilities under the
Securities Act.
From time to time, Morgan Stanley has provided, and may continue to
provide, investment banking services to Dal-Tile and Armstrong.
More than 10% of the net proceeds of the offering may be paid to
affiliates of Morgan Stanley. Accordingly, the offering is being made
pursuant to the provisions of section (c)(8) of Rule 2710 of the NASD
Conduct Rules.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file
at the SEC's public reference rooms in Washington, D.C., New York, N.Y. and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also
available to the public from the SEC's web site at http://www.sec.gov.
Reports, proxy and information statements and other information concerning
us can also be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be part of this
prospectus, and later information that we file with the SEC will
automatically update this prospectus. We incorporate by reference the
following documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, prior to the termination of the offering:
* Annual Report on Form 10-K and Form 10-K/A for the year
ended January 2, 1998;
* Quarterly Reports on Form 10-Q for the quarters ended April
3, 1998, July 3, 1998 and October 2, 1998;
* The Proxy Statement dated April 3, 1998 relating to the 1998
Annual Meeting of Stockholders held April 30, 1998; and
* The description of the common stock contained in our
registration statement on Form 8-A, dated July 16, 1996
(File No. 1-11939).
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Mark A. Solls
Vice President, General
Counsel and Secretary
Dal-Tile International Inc.
7834 Hawn Freeway
Dallas, Texas 75217
(214) 398-1411
LEGAL MATTERS
Certain legal matters will be passed upon for the company by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York, for Morgan Stanley by Davis Polk &
Wardwell, New York, New York, and for the selling stockholder by Buchanan
Ingersoll Professional Corporation, Pittsburgh, Pennsylvania.
EXPERTS
The Consolidated Financial Statements and consolidated financial
statement schedule of Dal-Tile at January 2, 1998 and January 3, 1997 and
for each of the three years in the period ended January 2, 1998, are
included in Dal-Tile's annual report on Form 10-K and Form 10-K/A and are
hereby incorporated by reference and have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon
incorporated by reference herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The following table sets forth the estimated expenses to be borne by
us, in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting and commissions.
SEC registration fee.......................... $19,368
NASD filing fee............................... 7,467
Accounting fees and expenses**................
Legal fees and expenses**.....................
Blue Sky expenses and counsel fees**..........
Printing and engraving expenses**.............
Transfer Agent and Registrar's fees and
expenses**....................................
Miscellaneous expenses**...................... --------
Total..................................... $
========
- -------------
* Except for the SEC registration fee and the NASD filing fee, all the
foregoing expenses have been estimated.
** To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of the Second Amended and Restated Certificate of
Incorporation of Dal-Tile provides as follows:
"To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or may hereafter be amended, a Director of the
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a Director."
Section 145 of the General Corporation Law of the State of Delaware
provides as follows:
Under certain circumstances a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation or is or was
serving at its request in such capacity in another corporation or business
association, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by a director, officer, employee or agent of the
corporation, or a person who is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation or business association in connection with the defense or
settlement of an action or suit, if such person has acted in good faith and
in a manner that he or she reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court in which the
action or suit was brought shall determine upon application that the
defendant is fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
Dal-Tile has entered into agreements to provide indemnification for
its directors in addition to the indemnification provided for in the
Restated Bylaws of Dal-Tile. These agreements, among other things,
indemnify the directors, to the fullest extent provided by Delaware law,
for certain expenses (including attorney's fees), losses, claims,
liabilities, judgments, fines and settlement amounts incurred by such
indemnitee in any action or proceeding, including any action by or in the
right of Dal-Tile, on account of services as a director or officer of any
affiliate of Dal-Tile, or as a director or officer of any other company or
enterprise that the indemnitee provides services to at the request of
Dal-Tile.
The form of Indemnification Agreement filed as Exhibit 1.1 provides
for the indemnification of Dal-Tile, its controlling persons, its directors
and certain of its officers by Morgan Stanley against certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following is a list of exhibits filed as part of the
Registration Statement.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Indemnification Agreement between Morgan Stanley &
Co. Incorporated and Dal-Tile International Inc.*
1.2. Form of Underwriting Agreement, among Morgan Stanley & Co.
Incorporated and Armstrong World Industries, Inc. and
Armstrong Enterprises, Inc.*
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 Dal-Tile's Current
Report on Form 8-K filed on January 16, 1996 and incorporated
herein by reference.)
4.1. Specimen form of certificate for common stock. (Filed as
Exhibit 4.1 to Dal-Tile's Registration Statement on Form S-1
(No. 333-5069) and incorporated herein by reference.)
5.1. Opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel
to the company, as to the legality of the securities being
offered.*
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson (included
in Exhibit 5.1).*
23.2. Consent of Ernst & Young LLP.
24.1. Powers of Attorney (included on pages II-4 and II-5 of the
Registration Statement).
- -------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the company pursuant to the foregoing provisions, or otherwise,
the company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, each filing of the company's annual report pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the company pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT
MEETS ALL REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS ON THE
10TH DAY OF NOVEMBER, 1998.
DAL-TILE INTERNATIONAL INC.
By: /s/ Jacques R. Sardas
-----------------------------------------
Name: Jacques R. Sardas
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears
below constitutes and appoints Jacques R. Sardas, William C. Wellborn and
Mark A. Solls, and each of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, as well as any related registration statement (or amendment
thereto) filed pursuant to Rule 462(b) promulgated under the Securities Act
of 1933, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any
of them or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall
constitute one instrument.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE FIRST ABOVE INDICATED:
Signature Title
--------- -----
/s/ Jacques R. Sardas
- --------------------------- President, Chief Executive
Jacques R. Sardas Officer and Chairman of the
Board of Directors
/s/ William C. Wellborn
- --------------------------- Executive Vice President, Chief
William C. Wellborn Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
/s/ John M. Goldsmith
- --------------------------- Director
John M. Goldsmith
/s/ Charles J. Pilliod, Jr.
- --------------------------- Director
Charles J. Pilliod, Jr.
/s/ Henry F. Skelsey
- --------------------------- Director
Henry F. Skelsey
/s/ Douglas D. Danforth
- --------------------------- Director
Douglas D. Danforth
/s/ Vincent A. Mai
- --------------------------- Director
Vincent A. Mai
/s/ Norman E. Wells, Jr.
- --------------------------- Director
Norman E. Wells, Jr.
/s/ John F. Fiedler
- --------------------------- Director
John F. Fiedler
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Indemnification Agreement between Morgan Stanley & Co.
Incorporated and Dal-Tile International Inc.*
1.2. Form of Underwriting Agreement, among Morgan Stanley & Co.
Incorporated and Armstrong World Industries, Inc. and
Armstrong Enterprises, Inc.*
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 Dal-Tile's
Current Report on Form 8-K filed on January 16, 1996 and
incorporated herein by reference.)
4.1. Specimen form of certificate for common stock. (Filed as
Exhibit 4.1 to the Dal-Tile's Registration Statement on Form
S-1 (No. 333-5069) and incorporated herein by reference.)
5.1. Opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel
to the company, as to the legality of the securities being
offered.*
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson (included
in Exhibit 5.1).*
23.2. Consent of Ernst & Young LLP.
24.1. Powers of Attorney (included on pages II-4 and II-5 of the
Registration Statement).
- -------------
* To be filed by amendment.
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3) and related Prospectus of Dal-Tile
International Inc. for the registration of 7,822,322 shares of its common
stock and to the incorporation by reference therein of our report dated
February 16, 1998, with respect to the consolidated financial statements of
Dal-Tile International Inc., included in its Form 10-K and Form 10-K/A for
the year ended January 2, 1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Dallas, Texas
November 6, 1998
