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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 1, 1999
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 8, 1999, there were 53,566,996 shares of the Registrant's Common
Stock outstanding. The aggregate market value of Common Stock held by
non-affiliates of the Registrant at March 8, 1999 was $221,539,392 (based on
the closing sale price of the Common Stock on March 8, 1999). 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 1999 -----------------------
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................................................................. 10
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............................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 22
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, believes
that it is the largest manufacturer, distributor and marketer of ceramic tile
in the United States, and one of the largest in the world. Unless the context
otherwise requires, references herein to the "Company" and "Dal-Tile" shall
refer to Dal-Tile International Inc. and its consolidated subsidiaries.
Dal-Tile International Inc. is a holding company and conducts all its
operations through its subsidiaries. References herein to fiscal year 1998
refer to the fiscal year ended January 1, 1999.
Dal-Tile currently conducts its business in one industry segment, engaging in
the manufacturing, distribution and marketing of glazed and unglazed 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. A full range of tile and stone
products are offered, 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). Products are sold through a network of 220 Company-operated
sales centers to tile contractors, architects, design professionals,
builders, developers and individual consumers. In addition, Dal-Tile is a
significant supplier to the do-it-yourself and buy-it-yourself market by
supplying home center retailers, such as The Home Depot and Lowe's. The
Company's manufactured products are marketed under the brand names
DALTILE(R), AMERICAN OLEAN(R) and HOME SOURCE(R). 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, TX. 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
Products are distributed through three separate distribution channels
consisting of (i) Company-operated sales centers, (ii) independent
distributors and (iii) home center retailers. The business is organized 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.
Dal-Tile has three regional distribution centers strategically located in
California, Maryland and Texas to improve customer service in each
distribution channel through shorter lead times, increased order fill rates
and improved on-time deliveries to its customers. In addition, the regional
distribution centers enhance the ability to plan and schedule production and
to manage inventory requirements.
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COMPANY-OPERATED SALES CENTERS
A network of 220 Company-operated sales centers located in the U.S., Canada
and Puerto Rico distributes primarily the DALTILE brand product, serving
customers in all 50 states and portions of Canada and Puerto Rico. For fiscal
year 1998, a majority of the Company's net sales was made through its
Company-operated sales centers in the United States and Canada.
In addition to sales center staff, this distribution channel is supported by
a dedicated sales force of approximately 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.
Sales centers are designed to serve as a "one-stop" source that provides
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
3,000 to 30,000 square feet and 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 sales center distribution system has expanded from 210 sales centers in
1994 to 220 sales centers at January 1, 1999. 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 serviced through a dedicated business
unit, which includes 10 regional sales managers to serve the particular
requirements of its customers. Currently, the AMERICAN OLEAN brand is
distributed through approximately 175 independent distributor locations that
service a variety of residential and commercial customers. 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 and Lowe's, serving more than 1,200
home center retail outlets nationwide. The home center retailer channel has
provided Dal-Tile with new sources of sales over the past five years and is
expected to continue presenting growth opportunities.
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ESTABLISHED BRANDS AND SPECIAL MARKETING PROGRAMS
The Company believes that it has two of the leading brand names in the U.S.
ceramic tile industry--DALTILE and AMERICAN OLEAN. The roots of the DALTILE
and AMERICAN OLEAN brand names date back approximately 50 years and 75 years,
respectively.
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 assessment of the needs of
professional installers, designers, architects and builders, as well as a
review of competitive products. 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), literature/catalogs and an
Internet website.
In addition to distributing the DALTILE and AMERICAN OLEAN brands, home
center retailers distribute a home center brand--HOME SOURCE.
The Company also has special marketing programs with Kohler(R) for bathroom
and kitchen fixture color coordination and Laura Ashley(TM) for home
furnishing accessories coordination. Through such programs, ceramic tile
products and merchandising programs are developed to complement these product
lines.
PRODUCTS AND PRODUCT DEVELOPMENT
Dal-Tile 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. In addition, stone and allied products purchased from third-party
manufacturers are sold. 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 1998, approximately 72% of net sales were
Company-manufactured products, with the remainder being provided by other
domestic manufacturers, as well as foreign manufacturers located principally
in Italy, Spain and Mexico. The Company 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 granite. 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
Dal-Tile'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 Home Depot and Lowe's, and is a significant
supplier to this channel. The customer base is broad and
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diversified, consisting of more than 31,000 active accounts in the United
States. In addition, the Company 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 1998
accounted for less than 10% of net sales, and the 10 largest customers
accounted for approximately 19% of net sales in the same period.
MANUFACTURING
Currently, Dal-Tile operates nine tile manufacturing facilities with an
aggregate annual manufacturing capacity of 378 million square feet. During
the five year period 1994-1998, approximately $131 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 251 million square
feet to 378 million square feet during the same period. In fiscal year 1996,
approximately 22 million square feet of state-of-the-art wall tile production
capacity was established at the El Paso, TX facility and was increased to
approximately 45 million square feet in fiscal year 1997. During fiscal year
1998, approximately 22 million square feet of state-of-the-art wall tile
production capacity was added at the Dallas, TX facility, which will replace
less efficient production capacity at this location.
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 which
produces frit (ground glass) and one which produces refractories. This
location is the Company's largest manufacturing facility, representing
approximately 42% of annual manufacturing capacity.
Dal-Tile 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 fiscal year 1996 by closing the Lansdale, PA and Jackson, TN wall
tile facilities and consolidated a portion of mosaic tile production in late
fiscal year 1996. In fiscal year 1997, the Company initiated the process of
consolidating a portion of unglazed floor tile production by closing the
Coleman, TX facility. In addition, production was suspended in late fiscal
year 1997 at the Mt. Gilead, NC glazed floor tile facility, and the facility
was closed during fiscal year 1998. As of January 1, 1999, the Company was
pursuing the sale of the Mt. Gilead 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 and continue to invest in manufacturing
technology to lower its costs and develop new capabilities.
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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
Dal-Tile 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.
Talc represents the Company's largest tonnage raw material requirement.
Dal-Tile owns long-term talc mining rights in Texas that satisfy all talc
requirements and owns long-term clay mining rights in Alabama, Kentucky and
Mississippi that satisfy nearly all clay requirements for producing unglazed
quarry tile.
Clay is purchased in different grades for the manufacture of 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. Pure nepheline syenite is purchased 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, feldspar could be used in the production of mosaic tile.
Feldspar can be purchased from a number of sources at comparable cost.
Glazes are used on a significant percentage of manufactured tile, consisting
of a mixture of frit (ground glass), zircon, stains and other materials, with
frit representing the largest ingredient. The Company manufactures
approximately 69% of its frit requirements.
Management reviews its sources of raw materials periodically and may
eliminate or reduce the use of certain raw materials based on the cost and
chemical composition of alternative sources.
MANAGEMENT INFORMATION SYSTEMS
During fiscal year 1998, the Company focused on supply chain and logistics
systems enhancements, financial system improvements and Year 2000 compliance.
For fiscal year 1999, the Company plans to
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continue these initiatives. In addition, an agreement with AWI to provide
mainframe data processing services will expire May 31, 1999. The Company has
entered into an agreement to transfer the mainframe data processing function
to IBM during the second quarter of fiscal year 1999.
COMPETITION
Sales of the Company's products are made in a highly competitive marketplace.
Management 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 the United States, and one of the largest in
the world. In addition to competition from domestic and foreign tile
manufacturers, Dal-Tile encounters competition from manufacturers of products
that 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 1998, approximately 64%
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.
Dal-Tile 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,
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 1, 1999, the Company employed approximately 7,400 persons,
approximately 3,000 of which were employed by its Mexican subsidiary.
Approximately 8% of employees in the United States are represented by unions.
Approximately 90% of the employees in Mexico are represented by a union under
a collective bargaining agreement which was renewed as of January 22, 1999.
The Company has not experienced a significant work stoppage in Mexico in over
18 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.
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
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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 post closure care projects 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.
The Company received notice from the TNRCC terminating the 1991 Order and
releasing the Company from any obligation regarding the payment of deferred
penalties. 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 certification has been submitted for approval by the
TNRCC. To date, the Company has incurred costs of approximately $3.9 million 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 fiscal year 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 fiscal year 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 and
submitted a closure plan with respect to the Walton site subject to the
approval of the TNRCC. In addition, pursuant to the 1994 Order, among other
things, an administrative penalty of $213,200 assessed against the
individuals has been deferred pending timely and satisfactory 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
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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 fiscal year 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 fiscal year 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 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-
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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 tile and the operation and maintenance of equipment, at times result
in the generation of solid and hazardous waste that require expenditures in
connection with the appropriate handling, treatment, storage and disposal of
such waste.
In addition, in light of the lengthy manufacturing history of the Company's
facilities, it is possible that additional environmental issues and related
matters may arise relating to past activities which the Company cannot now
predict, including tort liability and liability under environmental laws. In
particular, a number of the Company's facilities located in the United States
used lead compounds in glaze materials. The Company's Mexican facilities
continue to use lead compounds in their glaze materials on certain specially
ordered tiles. Significant exposure to lead compounds may have adverse health
effects. Although it is impossible to quantify the Company's liability, if
any, in respect of these matters, including liability to individuals exposed
to lead compounds, no claims relating to its use of lead compounds or waste
disposal matters have been made against the Company except as set forth
above. In addition, it is impossible to predict the effect which future
environmental regulation in the United States, Mexico and Canada could have
on the Company.
GEOGRAPHIC LOCATION
Financial information by geographic location for the three fiscal years ended
January 1, 1999 is set forth in Note 13 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.
MANUFACTURING, DISTRIBUTION AND OFFICE FACILITIES
The Company owns or leases 12 manufacturing, distribution and office
facilities. The location, use and floor area of such facilities are described
as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
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
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.
The Company's Jacksonville, FL facility (leased) was closed in fiscal year
1997 and the corresponding lease expires on May 31, 1999. The Company closed
its Coleman, TX manufacturing facility in fiscal year 1997 and closed its Mt.
Gilead, NC manufacturing facility in fiscal year 1998. As of January 1, 1999,
the Company was pursuing the sale of the Mt. Gilead facility.
SALES CENTERS
As of January 1, 1999, the Company owned two sales centers aggregating 38,020
square feet. Their location and floor area are as follows:
<TABLE>
<CAPTION>
LOCATION SQ. FEET
- -------- --------
<S> <C>
Denver, CO......................................................... 22,500
San Antonio, TX.................................................... 15,520
</TABLE>
In addition, 218 sales centers were leased as of January 1, 1999 (aggregating
approximately 2.5 million square feet) pursuant to leases that extend for
terms on average of three to five years with expiration dates primarily from
1999-2004.
For a description of aggregate rental expenses with respect to its operating
leases, see Note 12 to the Consolidated Financial Statements included herein
relating to commitments and contingencies.
ITEM 3. LEGAL PROCEEDINGS
In addition to the proceedings described under Item 1,
"Business-Environmental Regulation," the Company is involved in various
lawsuits arising in the normal course of business. In the opinion of
management, the ultimate outcome of these lawsuits will not have a material
adverse effect on the Company.
-10-
<PAGE>
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 January 4, 1997, through January
1, 1999:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
January 3, 1998 to April 3, 1998 14-1/8 10-1/2
April 4, 1998 to July 3, 1998 15-3/16 12-5/16
July 4, 1998 to October 2, 1998 14 8-3/16
October 3, 1998 to January 1, 1999 11-1/2 6
</TABLE>
HOLDERS
At March 8, 1999, there were 96 holders of record of Common Stock and
53,566,996 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 limits dividends, loans and other
cash distributions from Dal-Tile Group to Dal-Tile, so that profits generated
by Dal-Tile Group may not be available to Dal-Tile to pay cash dividends or
repay indebtedness or otherwise. In light of these limitations, Dal-Tile
Group will be prohibited from making such dividends, loans and other cash
distributions, and Dal-Tile does not believe that Dal-Tile Group will be able
to make such dividends, loans and other cash distributions in the foreseeable
future.
-11-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented for fiscal years 1994 through
1998 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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3, DECEMBER 31,
----------------------------
1999 1998 1997 1995 1994
------------------ --------------- --------------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA: (1)
Net sales.................................. $ 751,785 $ 676,637 $ 720,236 $ 474,812 $ 506,309
Cost of goods sold......................... 396,112 404,728 369,731 225,364 268,272
--------- --------- ----------- --------- ---------
Gross profit............................... 355,673 271,909 350,505 249,448 238,037
Expenses:
Transportation......................... 55,988 58,425 47,125 33,535 32,068
Selling, general and administrative.... 222,790 277,515 190,911 134,193 132,887
Provisions for merger integration
charges............................... - - 9,000 22,430 -
Amortization of goodwill............... 5,604 5,605 5,605 4,765 4,765
--------- --------- ----------- --------- ---------
Total operating expenses................... 284,382 341,545 252,641 194,923 169,720
--------- --------- ----------- --------- ---------
Operating income (loss) ................... 71,291 (69,636) 97,864 54,525 68,317
Interest expense........................... 45,051 40,649 46,338 55,453 53,542
Interest income............................ 128 268 1,685 1,250 1,403
Other income .............................. 1,264 1,220 129 2,994 1,341
--------- --------- ----------- --------- ---------
Income (loss) before income taxes and
extraordinary item.................... 27,632 (108,797) 53,340 3,316 17,519
Income tax provision ...................... 3,604 1,439 18,914 1,176 10,614
--------- --------- ----------- --------- ---------
Income (loss) before extraordinary item.... 24,028 (110,236) 34,426 2,140 6,905
Extraordinary item - loss on early
retirement of debt, net of taxes.......... - - (29,072) - -
--------- --------- ----------- --------- ---------
Net income (loss).......................... $ 24,028 $(110,236) $ 5,354 $ 2,140 $ 6,905
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary item per
common share.............................. $ 0.45 $ (2.06) $ 0.71 $ 0.07 $ 0.24
Extraordinary item per common share........ - - (0.60) - -
--------- --------- ----------- --------- ---------
Net income (loss) per common share......... $ 0.45 $ (2.06) $ 0.11 $ 0.07 $ 0.24
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
Average outstanding common shares.......... 53,487 53,435 48,473 28,743 28,587
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item per
common share............................. $ 0.45 $ (2.06) $ 0.69 $ 0.07 $ 0.23
Extraordinary item per common share....... - - (0.58) - -
--------- --------- ----------- --------- ---------
Net income (loss) per common share........ $ 0.45 $ (2.06) $ 0.11 $ 0.07 $ 0.23
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
Average outstanding common and
equivalent shares....................... 53,983 53,435 50,053 29,668 29,664
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD): (2)
Working capital................ $ 117,615 $ 154,888 $ 180,819 $ 152,128 $ 115,717
Total assets................... 640,808 672,069 688,497 672,393 488,417
Total debt..................... 500,432 557,091 465,858 527,816 492,753
Long-term debt................. 453,923 537,830 433,035 480,769 489,404
Stockholders' equity (deficit). 15,459 3,920 115,569 9,639 (103,823)
</TABLE>
-12-
<PAGE>
(1) Operating data for the fiscal years ended December 31, 1995 and
December 31, 1994 excludes the results of operations of AO as the AO
Acquisition occurred on December 29, 1995, and are not directly
comparable to subsequent periods.
(2) Balance sheet data for January 1, 1999, 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 December 31, 1994 data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
For the fiscal year ended January 1, 1999, the Company's earnings
substantially improved over fiscal year 1997. Significant sales and earnings
growth were achieved during fiscal year 1998 due primarily to steps taken to
reduce overall costs and improve customer service and the overall supply
chain. Through improved production forecasting, distribution and delivery
enhancements and refinements in order entry and invoicing processes, the
supply chain was strengthened, which in turn allowed for better product
availability and improved order fill rates.
Earnings improved due to the growth in sales and reductions in both
transportation and general and administrative expenses. The reductions in
transportation costs were achieved through improved positioning of
inventories, the renegotiation of freight contracts and consolidation of
carriers. The Company continued to reduce general and administrative expenses
through elimination of unneeded overhead and lower bad debt expense and
professional fees.
Significant improvements in cash flows were achieved as the Company focused
on the management of working capital and reduced capital spending. Through
the implementation of better collection and billing procedures, accounts
receivable were reduced and days sales outstanding dropped from 60 days in
fiscal year 1997 to 52 days in fiscal year 1998. The Company continued to
improve the management of its inventories by providing better alignment of
production requirements with sales demands. Net capital expenditures
decreased approximately $34 million while still allowing for the completion
of state-of-the-art manufacturing capacity at the Dallas, TX plant and
installation of additional capacity at the Monterrey, Mexico facility.
On July 1, 1998, Armstrong World Industries, Inc.("AWI") completed its sale
in a registered public offering of 10,350,000 shares of Dal-Tile common stock
(the "Common Stock"), and on November 18, 1998, AWI completed the sale in a
registered public offering of all of its remaining shares of the Common
Stock. The Company did not receive any proceeds from the sale by AWI of the
Common Stock.
ASSET WRITE-DOWNS AND OTHER CHARGES
FISCAL YEAR 1998
During fiscal year 1998, the Mt. Gilead, NC glazed floor manufacturing
facility was closed and is currently being held for sale. Based on this
decision, the Company reviewed the carrying value to determine the extent, if
any, of impairment relating to the asset. An aggregate provision of $6.6
million was recorded in cost of sales to reduce the carrying value of the
facility to its estimated net realizable value. The provision was comprised
of $1.7 million recorded during the second quarter of fiscal year 1998 based
upon a preliminary estimate made by the Company and $4.9 million recorded
during the
-13-
<PAGE>
fourth quarter of fiscal year 1998 based upon an independent appraisal. The
provision in the fourth quarter was substantially offset by the release of
excess reserves which were previously provided by the Company. At January 1,
1999, the net book value of the facility was $2.0 million and was classified
in machinery and equipment on the face of the balance sheet.
FISCAL YEAR 1997
During fiscal year 1997, the Company recorded charges of $90.1 million for
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 were 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.
In response to deterioration in the aging of the Company's accounts
receivable, the Company increased collection efforts and undertook detailed
reviews of collectibility, and subsequently recorded an increase in the
reserve for doubtful accounts of $21.3 million for fiscal year 1997. The
write-down of uncollectible trade accounts receivable related to increases in
receivables balances arising principally as a result of earlier sales
initiatives that included, among other things, extended credit terms and
efforts to expand the Company's customer base, and operational and systems
integration issues that resulted in limited access by sales center personnel
to certain account information. In addition, in an effort to improve customer
service, authority to extend credit was decentralized and assigned to
management at the retail sales centers. Sales resulting from these
initiatives were a result of products being shipped under defined terms to
customers, with the full expectation of invoiced amounts being paid in full
within the terms of the sale. By the end of the second quarter of fiscal year
1997, the sales initiatives, which began in the fourth quarter of fiscal year
1996, were discontinued and the Company moved to a more centralized credit
approval process and implemented more stringent credit policies.
The Company also extensively reviewed its finished product inventories,
including various patterns, shapes and sizes. Management believes that delays
in systems integration resulted in impaired inventory management, and, in
particular, resulted in an imbalance in inventory mix. During the third
quarter of fiscal year 1997, the Company's new management undertook an
additional study of the business and its operations and determined that it
would reduce the number of SKUs offered for sale by the Company and would
discontinue additional patterns. These actions, coupled with the results of
physical inventories and the delay in systems integration, resulted in a need
to record fiscal year 1997 inventory provisions of $36.5 million, consisting
of $14.2 million related to results of physical inventories, $15.7 million
believed to be slow moving and/or obsolete or out of balance with other
related products, $4.5 million to write-down certain other inventory accounts
and $2.1 million to write-down raw materials.
The balance of the charges consisted of $6.7 million in respect of terminated
employees, $6.2 million primarily related to liabilities incurred for lease
terminations, executive search fees and other items, $8.5 million in respect
of accrued expenses, primarily related to freight and insurance, $5.3 million
in respect of fixed assets impairment and $5.6 million in respect of other
charges, primarily related to write-down of notes, non-trade receivables and
certain other assets.
As of January 1, 1999, reserves relating to the fiscal year 1997 charges for
inventories, accounts receivable and other non-productive assets were
depleted, and the Company substantially completed the work-down of all other
charges incurred. Reserves of approximately $3.8 million relating to fiscal
year 1997 initiatives to restructure the organization remain outstanding and
are expected to effect future cash flows through the end of fiscal year 1999.
-14-
<PAGE>
FISCAL YEAR 1996
On December 29, 1995, the Company acquired American Olean Tile Company, Inc.
("AO") and certain related assets of the ceramic tile business (the "AO
Acquisition") of AWI. In the first quarter of fiscal year 1996, the Company
recorded an integration charge of $9.0 million 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 fiscal year 1997. The
primary components of the charge were $7.4 million for lease commitments,
$1.3 million for severance and employee contracts and $0.3 million for shut
down costs of the closed facilities.
As of January 1, 1999, the Company retained approximately $6.6 million of
reserves primarily related to the continued expiration of lease commitments
associated with sales centers that had been closed. Future cash outlays are
anticipated to continue through the end of fiscal year 2004.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
JANUARY 1, 1999 JANUARY 2, 1998 JANUARY 3, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of goods sold..................................... 52.7 59.8 51.3
--------------- ---------------- ----------------
Gross profit........................................... 47.3 40.2 48.7
Operating expenses..................................... 37.8 50.5 33.9
--------------- ---------------- ----------------
9.5 (10.3) 14.8
Non-recurring charges:
Provision for merger integration charges.......... - - 1.2
--------------- ---------------- ----------------
Operating income (loss)................................ 9.5 (10.3) 13.6
Interest expense (net)................................. 6.0 6.0 6.2
Other income........................................... 0.2 0.2 -
--------------- ---------------- ----------------
Income (loss) before income taxes and
extraordinary item................................ 3.7 (16.1) 7.4
Income tax provision................................... 0.5 0.2 2.6
--------------- ---------------- ----------------
Income (loss) before extraordinary item................ 3.2 (16.3) 4.8
Extraordinary item, net of taxes....................... - - (4.1)
--------------- ---------------- ----------------
Net income (loss)...................................... 3.2% (16.3)% 0.7%
--------------- ---------------- ----------------
--------------- ---------------- ----------------
</TABLE>
FISCAL YEAR ENDED JANUARY 1, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 2,
1998
NET SALES
Net sales increased $75.2 million, or 11.1%, to $751.8 million for fiscal
year 1998 from $676.6 million for fiscal year 1997. The increase in net sales
was due principally to improved customer service in all distribution channels
realized through system and process enhancements, better product availability
and the restructuring of the sales organization in late fiscal year 1997. Net
sales through Company-operated sales centers increased $50.7 million, or
10.7%, and same store sales increased approximately 10.3%. In
-15-
<PAGE>
addition, net sales increased within the independent distributor and Home
Centers channels approximately $9.3 million, or 8.8%, and $7.2 million, or
9.2%, respectively.
Net sales within Mexico increased $6.7 million to $25.2 million in fiscal
year 1998 from $18.5 million in fiscal year 1997. This increase occurred as
the Company increased its utilization of U.S. manufacturing capacity from its
El Paso, TX and Dallas, TX facilities resulting in a larger allocation of the
Company's Mexican production to be sold in Mexico.
GROSS PROFIT
Gross profit increased $83.8 million, or 30.8%, to $355.7 million in fiscal
year 1998 from $271.9 million in fiscal year 1997. The increase in gross
profit was due primarily to the growth in sales and lower manufacturing costs.
Gross margin increased to 47.3% for fiscal year 1998 from 40.2% for fiscal
year 1997. This increase was due primarily to higher sales and lower
manufacturing costs. During fiscal year 1998, overall manufacturing plant
utilization increased from approximately 80% to 90% resulting in lower per
unit manufacturing costs. Additionally, cost reductions were achieved through
the closing of inefficient plants and shifting of production to low cost
state-of-the-art facilities. Fiscal year 1997 results were negatively
affected by inventory valuation adjustments of $36.5 million.
EXPENSES
Expenses decreased $57.1 million, or 16.7%, to $284.4 million in fiscal year
1998 from $341.5 million in fiscal year 1997. The decrease was due primarily
to reductions in staffing, lower bad debt expense and reduced professional
service fees. Fiscal year 1997 was negatively affected by charges of $53.6
million. These charges related to the write-down of uncollectible trade
accounts receivable and other non-productive assets, adjustments to accrued
expenses and various other charges relating to the implementation of fiscal
year 1997 initiatives to restructure the organization.
Expenses as a percent of sales decreased to 37.8% in fiscal year 1998 from
50.5% in fiscal year 1997. This decrease was the result of higher sales and
the decreased expenses described above. In addition, freight expense as a
percent of sales decreased to 7.4% for fiscal year 1998 versus 8.6% in fiscal
year 1997.
OPERATING INCOME (LOSS)
Operating income (loss) increased to $71.3 million in fiscal year 1998, from
a loss of $69.6 million in fiscal year 1997. Operating margin increased to
9.5% from a negative operating margin of 10.3% for the previous fiscal year
due primarily to increased sales, decreased manufacturing costs and decreased
expenses.
INTEREST EXPENSE (NET)
Interest expense (net) increased $4.5 million, or 11.1%, to $44.9 million in
fiscal year 1998 from $40.4 million in fiscal year 1997. Interest expense
increased due to higher borrowing requirements through the end of fiscal year
1997 and increased fees and interest rates in connection with the second and
third quarter 1997 amendments to the Company's credit facility offset by
decreases associated with the work-down of debt throughout fiscal year 1998.
-16-
<PAGE>
INCOME TAXES
The income tax provisions for fiscal years 1998 and 1997 reflect Mexico tax
liabilities and U.S. state and possession income tax based on taxable income
in those jurisdictions.
No U.S. federal income tax expense was recorded for fiscal year 1998 due to
an offsetting reduction in a valuation allowance recorded against U.S.
federal deferred tax assets. No U.S. federal income tax benefit was recorded
in fiscal year 1997 due to the Company establishing a valuation allowance in
that year which offset any benefit of federal net operating losses and to
reflect management's estimation as to the future utilization of the deferred
tax assets. The valuation allowance will continue to be reassessed in future
reporting periods.
PESO-U.S. DOLLAR EXCHANGE RATE
During the fourth quarter of fiscal year 1998, management reviewed the
reporting requirements related to its Mexican operations. Based on this
review, the Company changed its functional currency in Mexico to the U.S.
dollar. The Company's Mexican facility is considered an extension of the U.S.
parent and primarily a provider of ceramic tile to the Company's U.S.
operations. Due to the U.S. parent's manufacturing requirements, fiscal year
1998 domestic sales in Mexico were limited to approximately 3.4% of the
Company's consolidated net sales. Prior to fourth quarter 1998, translation
gains or losses relating to exchange rate changes were reported as a separate
component of stockholders' equity. Due to the change in functional currency,
translation gains or losses and foreign currency transaction gains or losses
are recognized in other income and expense. During fiscal year 1998, the
Company recorded translation and transaction gains of approximately $1.7
million. Management utilizes foreign currency forward contracts to offset
exposure to exchange rate changes. During fiscal years 1998 and 1997, the
Company did not enter into any foreign currency forward contracts.
FISCAL YEAR ENDED JANUARY 2, 1998 COMPARED TO FISCAL 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
fiscal year 1996 and into fiscal year 1997 of redundant sales centers from
the AO Acquisition. Sales within the Home Centers channel decreased
approximately 10% compared to fiscal year 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 fiscal year 1997, the Company completed its sales center consolidation
and substantially completed its information systems integration.
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.
-17-
<PAGE>
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 fiscal year 1997, gross margin (excluding charges) was 48.4%
and decreased to 42.7% in the second half of fiscal year 1997, primarily as a
result of higher per unit manufacturing costs associated with reduced
production levels. Additionally, during fiscal year 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 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 costs 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 AO integration.
Expenses as a percent of sales (excluding 1997 second and third quarter
charges and the 1996 merger integration charge) increased to 42.6% in fiscal
year 1997 from 33.9% in fiscal year 1996. These increases were the result of
lower sales and the increased expenses described above.
During the fourth quarter of fiscal year 1997, the Company issued stock units
under a stock appreciation rights agreement to certain executives which
permit the holders, upon the satisfaction of certain conditions, to receive
value in excess of the base price of the unit at the date of grant. Payment
of the excess will be in cash, stock or a combination of cash and stock at
the discretion of the Board of Directors. In connection with this agreement,
non-cash expense of $5.9 million was recorded in the fourth quarter of fiscal
year 1997.
OPERATING INCOME (LOSS)
Operating income (loss) decreased $167.5 million to a loss of $69.6 million
in fiscal year 1997 from income of $97.9 million in fiscal year 1996.
Operating margin (excluding 1997 second and third quarter charges and the
1996 merger integration charge) decreased to 3.0% from 14.8% for the previous
fiscal year 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
decreased due to interest savings from the refinancing of debt concurrent
with the Company's initial public offering in the third quarter of fiscal
year 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 was
recorded against the net Federal and State deferred tax asset. This valuation
allowance will be reassessed in future reporting periods.
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<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
Funds available under the Company's existing bank credit agreement provided
liquidity and capital resources for working capital requirements, capital
expenditures and debt service. Cash provided by operating activities was
$57.0 million in fiscal year 1998 versus cash used of $52.8 million in fiscal
year 1997. This improvement was due primarily to increased profitability and
improved management of working capital.
Net expenditures for property, plant and equipment were $5.8 million for
fiscal year 1998, inclusive of $8.1 million in net cash proceeds from the
first quarter sale of the Company's Lansdale, PA manufacturing facility. The
expenditures were for routine capital improvements, the completion of the
Dallas, TX plant expansion and costs to expand the Monterrey, Mexico
manufacturing facility.
During the fourth quarter of fiscal year 1998, the Company amended certain
financial covenants to provide increased flexibility under the existing bank
credit agreement (as amended, the "Third Amended Credit Facility"). Under the
Third 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 1, 1999. A commitment fee at a rate
per annum based on a pricing grid is payable quarterly.
Cash used in financing activities was $56.7 million for fiscal year 1998,
which reflects revolver repayments and term debt amortization on the
Company's Third Amended Credit Facility of $38.0 million and $13.5 million,
respectively. Total availability as of January 1, 1999 under the Third
Amended Credit Facility was $83.9 million. The Company believes cash flow
from operating activities,
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<PAGE>
together with borrowings available under the Company's Third Amended Credit
Facility, will be sufficient to fund future working capital needs, capital
expenditures and debt service requirements.
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 aggregate notional amount on which the Company had interest rate
swap agreements outstanding was $300.0 million at January 1, 1999. Under the
terms of the swap agreements, the Company pays a fixed interest rate of
approximately 5.7%. As of January 1, 1999, the swap agreements had an
aggregate fair value of $(3.2) million, with $100.0 million in effect until
January 13, 2000 and $200.0 million in effect through January 16, 2001. There
were no interest rate swap agreements during fiscal year 1997.
The peso devaluation and economic uncertainties in Mexico are not expected to
have a significant impact on liquidity. Since the Company has no peso-based
borrowings, high interest rates in Mexico are not expected to directly affect
the Company.
The Company is involved in various proceedings relating to environmental
matters and 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
glazed ceramic tile from non-North American countries at 15%, to be reduced
ratably to 8-1/2% by 2004. Accordingly, GATT may stimulate competition from
non-North American manufacturers who now export, or who may seek to export,
ceramic tile to the United States. The Company cannot predict with certainty
the effect that GATT may have on the Company's operations.
In 1993, Mexico, the United States and Canada approved the North American
Free Trade Agreement ("NAFTA"). NAFTA has, among other things, removed and
will continue to remove, over a transition period, most normal customs duties
imposed on goods traded among the three countries. In addition, NAFTA will
remove or limit many investment restrictions, liberalize trade in services,
provide a specialized means for settlement of, and remedies for, trade
disputes arising thereunder, and will result in new laws and regulations to
further these goals. Although NAFTA lowers the tariffs imposed on the
Company's ceramic tile manufactured in Mexico and sold in the United States,
it also may stimulate competition in the United States and Canada from
manufacturers located in Mexico. The United States currently imposes import
duties on glazed ceramic tile from Mexico of approximately 13%, although
these duties on imports from Mexico are being phased out ratably under NAFTA
by 2008. It is uncertain what ultimate effect NAFTA will have on the
Company's results of operations.
EFFECTS OF INFLATION
The Company believes it has generally been able to enhance productivity to
offset increases in costs resulting from inflation in the U.S. and Mexico.
Inflation has not had a material impact on the results of operations for fiscal
years 1998, 1997 and 1996. However, any future increases in the inflation rate,
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<PAGE>
which affect financing costs, may negatively affect the Company's results of
operations.
IMPACT OF YEAR 2000
Some of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year
1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company is continuing its efforts to modify and replace certain portions
of its software and equipment so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total
Year 2000 cost is estimated at approximately $5.4 million and will be
expensed as incurred. To date, the Company has completed the updating of
"mission critical" software for Year 2000 date processing and has implemented
these changes into the day-to-day business systems. In addition, customers,
suppliers and carriers have been required to certify their readiness for Year
2000. Through the end of fiscal year 1998, expenses totaling $3.5 million
were incurred for Year 2000 activities.
The modification and testing of all "mission critical" software and
equipment, including the testing of interrelationships of all components is
estimated to be completed no later than the second quarter of fiscal year
1999, which is prior to any anticipated impact on the Company's operating
systems. Less critical activities, including the upgrade of stand-alone
equipment and monitoring of supplier and carrier progress, will continue for
the balance of fiscal year 1999. 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 in a timely manner, the Year 2000 issue could have a material
adverse impact on operations.
The cost of the project and the date by which the Company believes it will
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes,
non-performance of key software and hardware vendors and similar
uncertainties.
In addition, material disruptions to the operations of the Company's major
customers and suppliers as a result of Year 2000 issues could also have a
material adverse impact on the Company's operations and financial condition.
At present, the Company is preparing a detailed Year 2000 contingency plan.
The contingency plan will include a more definitive risk assessment related
to major customers and suppliers and how the Company plans to mitigate such
risk. The plan is expected to be in place by the end of the third quarter of
fiscal year 1999.
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
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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, Year
2000 issues, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information regarding the Company's market-sensitive
financial instruments and constitutes a forward-looking statement. The
information is presented in U.S. dollars, which is the Company's reporting
currency. Since all significant international operations use the U.S. dollar
as the functional currency, the Company deems foreign currency risk to be
minimal. The Company's major market risk exposure relates to changes in the
general level of U.S. interest rates. To mitigate the impact of fluctuations
in U.S. rates, the Company currently maintains approximately 60% of its debt
as fixed rate by entering into interest rate swap agreements. Interest rate
swap agreements are designated with a portion of the principal balance and
term of a specific debt obligation. The Company does not enter into contracts
for speculative purposes.
<TABLE>
<CAPTION>
FAIR VALUE
JANUARY 1,
EXPECTED MATURITY DATES 1999 2000 2001 2002 2003 THEREAFTER 1999
(IN THOUSANDS) ---------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total debt:
Fixed Rate................... $ 3,633 $ 3,921 $ 2,885 $ 879 $ - $ - $ 11,318
Average Interest Rate........ 8.3% 8.4% 8.5% 8.3%
Variable Rate................ $42,876 $52,876 $52,876 $219,387 $120,800 $ 299 $489,114
Average Interest Rate (a).... 7.3% 7.5% 7.3% 7.3% 7.9% 7.9%
Interest rate swaps:
Pay Fixed/Receive Variable... $ (900) $ 204 $ 18 $ - $ - $ - $(3,174)
Average Pay ................. 5.7% 5.7% 5.7%
Average Receive.............. 5.4% 5.8% 5.9%
</TABLE>
(a) The Term loans, revolver borrowings and other debt bear interest at
weighted average variable rates based on implied forward rates in the
yield curve at the reporting date plus an applicable margin ranging
from 0.625%-2.75% depending upon the Company's leverage ratio (as
defined under the Third Amended Credit Facility). The variable rate
is equal to LIBOR (London Interbank Offered Rate) as announced from
time to time. At January 1, 1999, the LIBOR interest rate in effect
was 5.3% and applicable margins were 2.0% and 2.5% for the Term A
loan / revolver borrowings and Term B loan, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages F-1
through F-23 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
The directors and executive officers of the Company are set forth below.
Certain of the executive officers hold positions with Dal-Tile Corporation or
Dal-Tile Mexico, each a subsidiary of the Company. All directors hold office
until the annual meeting of stockholders following their election or until
their successors are duly elected and qualified. Officers are appointed by
the Board of Directors and serve at the discretion thereof.
<TABLE>
<CAPTION>
NAME AGE POSITION OR OFFICE HELD
---- --- -----------------------
<S> <C> <C>
Jacques R. Sardas........................... 68 President, Chief Executive Officer and Chairman of the
Board of Directors
Charles J. Pilliod, Jr...................... 80 Director
Douglas D. Danforth......................... 76 Director
John F. Fiedler............................. 60 Director
Vincent A. Mai.............................. 58 Director
Norman E. Wells, Jr......................... 50 Director
Henry F. Skelsey............................ 40 Director
John M. Goldsmith........................... 35 Director
W. Christopher Wellborn..................... 43 Executive Vice President, Chief Financial Officer and
Assistant Secretary
Mark A. Solls............................... 42 Vice President, General Counsel and Secretary
Dan L. Cooke................................ 57 Vice President, Information Technology
William L. Justus........................... 44 Vice President, Logistics
William R. Hanks............................ 45 Vice President, Manufacturing
David F. Finnigan .......................... 42 Vice President, Independent Distributor and Home Center
Services Operations
D.D. "Gus" Agostinelli...................... 53 Vice President, Human Resources
Javier Eugenio Martinez Serna............... 47 Vice President, Mexico Operations
Matthew J. Kahny............................ 37 Vice President, Marketing
Harold G. Turk.............................. 52 Vice President, Sales Centers Operations
H. Clay Orme................................ 59 Vice President, Operations
Silvano Cornia.............................. 39 Vice President, Research and Development
Scott R. Veldman............................ 42 Treasurer
</TABLE>
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 & Rubber Company, concluding as
President of Goodyear Worldwide Tire.
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.
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 Sola International Inc.
JOHN F. FIEDLER, Director - Mr. Fiedler has been a Director of the Registrant
since July 1998. He is
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<PAGE>
Chairman and Chief Executive Officer of Borg-Warner Automotive, Inc. Prior to
joining Borg-Warner in June of 1994, he was Executive Vice President of The
Goodyear Tire & Rubber Company where he was responsible for North American
Tires. Mr. Fiedler's 29 year career with Goodyear included numerous sales,
marketing and manufacturing positions in the U.S. and Far East.
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 LLC, 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. Since August 1998, Mr. Skelsey has been Executive Vice
President and Chief Financial Officer of Tanning Technology Corporation, a
system integration and solution business. From March 1988 until August 1998,
Mr. Skelsey was a Managing Director of AEA Investors (the managing member of
DTI Investors LLC, a beneficial owner of Common Stock of the Registrant), and
since August 1998, Mr. Skelsey has acted as a consultant to AEA Investors.
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 LLC, 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.
W. CHRISTOPHER WELLBORN, Executive Vice President, Chief Financial Officer
and Assistant Secretary-Mr. Wellborn has been Executive Vice President, Chief
Financial Officer and Assistant Secretary of the Registrant since August
1997. From June 1993 to August 1997, 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. From December 1994 to December 1997, 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.
WILLIAM L. JUSTUS, Vice President, Logistics-Mr. Justus has been Vice
President, Logistics of the Registrant since September 1998. From 1995 until
he joined the Company, Mr. Justus was Vice President of Operations for
Livingston Healthcare Services, Inc. From 1989 to 1995, Mr. Justus worked at
Bayer Corporation, concluding as Director of Physical Logistics for Bayer's
Agfa Division.
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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 and Home Center
Services Operations-Mr. Finnigan has been Vice President, Independent
Distributor Operations since August 1997 and Vice President of Home Center
Services Operations since March 1998. 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 AO,
AWI 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.
From 1994 to 1997, he worked for Alcoa Fujikura Ltd. as Vice President,
Human Resources. Additionally, Mr. Agostinelli held various Human Resource
positions within PPG Industries.
JAVIER EUGENIO MARTINEZ SERNA, Vice President, Mexico Operations-Mr. Martinez
has been Vice President, Mexico Operations of the Registrant since August
1995. Prior to August 1995, he was a managing director of Materiales
Ceramicos S.A. de C.V., a prior subsidiary of the Registrant, since December
1985. From 1980 to 1985, 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.
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 Vice President of Warehouse Administration and Sales
of the Company from 1976 to 1991.
H. CLAY ORME, Vice President, Operations-Mr. Orme has been Vice President,
Operations of the Registrant since March 1999. Prior to joining the Company,
Mr. Orme spent 36 years at Goodyear Tire & Rubber Company, concluding as Vice
President, Product Supply for Goodyear's Global Operations. His
responsibilities included the supervision of eighty-five plants located in
twenty-six countries and corporate facilities planning.
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.
SCOTT R. VELDMAN, Treasurer-Mr. Veldman has been Treasurer of the Registrant
since December 1998. From October 1997 to December 1998, he was Assistant
Treasurer of the Company. Prior to that, Mr. Veldman worked with Borg-Warner
Security Corporation for 11 years, most recently as Assistant Treasurer.
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 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement") is
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<PAGE>
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the section "Principal Stockholders" in the 1999
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 1999 Proxy Statement is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, 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 (*).
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
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>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
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.
4.2 Dal-Tile International Inc. 1990 Stock Option Plan (As Amended and
Restated) (Filed as Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (No. 333-70879) and incorporated herein by
reference.)
10.1 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.)
10.2 Credit and Guarantee Agreement, dated August 14, 1996 among
Dal-Tile International Inc., Dal-Tile Group Inc., the several
banks, financial institutions and other entities from time-to-time
party thereto, Credit Suisse, as Documentation Agent, Goldman
Sachs Credit Partners L.P., as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent. (Filed as Exhibit 10.1 to
the Registrant's Form 10-Q filed on November 7, 1996 and
incorporated herein by reference.)
10.3 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.)
10.4 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.)
10.5 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.)
10.6 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.)
10.7 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.)
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<PAGE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
10.8 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.)
10.9 Employment Agreement, dated as of June 13, 1997, and amended as of
October 10, 1997 between Dal-Tile International Inc. and Jacques
R. Sardas. (Filed as Exhibit 10.17 to the Registrant's Form 10-K
for fiscal year 1997 and incorporated herein by reference.)
10.10 Amended and Restated Employment Agreement, dated as of July 17,
1998 between Dal-Tile International Inc. and Jacques R. Sardas.
(Filed as Exhibit 10.1 to the Registrant's Form 10-Q filed on
August 7, 1998 and incorporated herein by reference.)
10.11 Employment Agreement, dated as of August 25, 1997, and amended
October 10, 1997, between Dal-Tile International Inc. and W.
Christopher Wellborn. (Filed as Exhibit 10.18 to the Registrant's
Form 10-K for fiscal year 1997 and incorporated herein by
reference.
*10.12 First Amendment to Employment Agreement, dated as of November 24,
1998 between Dal-Tile International Inc. and W. Christopher Wellborn.
10.13 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, W. Christopher
Wellborn, Dan L. Cooke, Marc Powell, and David F. Finnigan. (Filed
as Exhibit 10.19 to the Registrant's Form 10-K for fiscal year
1997 and incorporated herein by reference.)
10.14 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).
10.15 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).
10.16 Third Amendment, dated as of November 19, 1998, to the Credit and
Guarantee Agreement (Filed as Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed on January 20, 1999 and
incorporated herein by reference).
10.17 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. (Filed as Exhibit 10.22
to the Registrant's Form 10-K for fiscal year 1997 and
incorporated herein by reference.)
+21.1 List of subsidiaries of Dal-Tile International Inc.
+23.1 Consent of Ernst & Young LLP
+27.1 Financial Data Schedule
- -----------------
+ Filed herewith.
</TABLE>
-28-
<PAGE>
(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) OF 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 17TH DAY
OF MARCH 1999.
DAL-TILE INTERNATIONAL INC.
By: s/Jacques R. Sardas
---------------------------------------
JACQUES R. SARDAS
President, Chief Executive Officer and
Chairman of the Board of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY CONSTITUTES AND APPOINTS JACQUES R. SARDAS AND/OR W. CHRISTOPHER
WELLBORN AS HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER
OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS REPORT AND ANY
AND ALL DOCUMENTS IN CONNECTION THEREWITH, AND TO FILE THE SAME, WITH ALL
EXHIBITS THERETO, AND ALL DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEY-IN-FACT AND
AGENT 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, AND HEREBY RATIFIES,
APPROVES AND CONFIRMS ALL THAT HIS SAID ATTORNEY-IN-FACT AND AGENT, OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jacques R. Sardas President, Chief Executive Officer March 17, 1999
- -------------------------------- and Chairman of the Board of
JACQUES R. SARDAS Directors
/s/ W. Christopher Wellborn Executive Vice President, Chief March 17, 1999
- --------------------------------- Financial Officer and Assistant
W. CHRISTOPHER WELLBORN Secretary (Principal Financial and
Accounting Officer)
/s/ John M. Goldsmith Director March 17, 1999
- -------------------------------
JOHN M. GOLDSMITH
/s/ Charles J. Pilliod, Jr. Director March 17, 1999
- ---------------------------------
CHARLES J. PILLIOD, JR.
/s/ Henry F. Skelsey Director March 17, 1999
- --------------------------------
HENRY F. SKELSEY
-30-
<PAGE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John F. Fiedler Director March 17, 1999
- -------------------------------
JOHN F. FIEDLER
/s/ Douglas D. Danforth Director March 17, 1999
- -------------------------------
DOUGLAS D. DANFORTH
/s/ Vincent A. Mai Director March 17, 1999
- --------------------------------
VINCENT A. MAI
/s/ Norman E. Wells, Jr. Director March 17, 1999
- --------------------------------
NORMAN E. WELLS, JR.
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
DAL-TILE INTERNATIONAL INC.
ITEM 14(A)-INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
CONTENTS
<S> <C>
Report of Independent Auditors....................................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 1, 1999 and January 2, 1998................................... F-3
Consolidated Statements of Operations for each of the three years in the period ended
January 1, 1999...................................................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended
January 1, 1999...................................................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
January 1, 1999...................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and Qualifying Accounts........................................................ S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Dal-Tile International Inc.
We have audited the accompanying consolidated balance sheets of Dal-Tile
International Inc. as of January 1, 1999 and January 2, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended January 1, 1999. 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 1, 1999 and January 2, 1998, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended January 1, 1999, 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
Ernst & Young
Dallas, Texas
February 10, 1999
F-2
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1999 1998
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,546 $ 7,488
Trade accounts receivable................................. 93,331 96,296
Inventories............................................... 138,418 130,747
Prepaid expenses.......................................... 4,213 3,120
Other current assets...................................... 17,319 18,438
---------------- ----------------
Total current assets................................ 254,827 256,089
Property, plant and equipment, at cost:
Land...................................................... 12,364 17,205
Leasehold improvements.................................... 12,193 11,067
Buildings................................................. 75,995 75,134
Machinery and equipment................................... 179,479 183,806
Construction in process................................... 8,029 12,020
---------------- ----------------
288,060 299,232
Accumulated depreciation...................................... 86,058 71,547
---------------- ----------------
202,002 227,685
Goodwill, net of amortization................................. 147,796 152,560
Finance costs, net of amortization............................ 6,687 6,599
Tradename and other assets, net of amortization............... 29,496 29,136
================ ================
Total assets........................................ $ 640,808 $ 672,069
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 28,684 $ 18,231
Accrued expenses.......................................... 59,420 55,043
Accrued interest payable.................................. 490 2,287
Current portion of long-term debt......................... 46,509 19,261
Income taxes payable...................................... 169 801
Deferred income taxes..................................... 1,930 863
Other current liabilities................................. 10 4,715
---------------- ----------------
Total current liabilities........................... 137,212 101,201
Long-term debt................................................ 453,923 537,830
Other long-term liabilities................................... 32,639 27,230
Deferred income taxes......................................... 1,575 1,888
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 535 534
Additional paid-in capital................................ 436,182 436,100
Accumulated deficit....................................... (346,858) (370,886)
Accumulated other comprehensive loss...................... (74,400) (61,828)
---------------- ----------------
Total stockholders' equity.......................... 15,459 3,920
================ ================
Total liabilities and stockholders' equity.......... $ 640,808 $ 672,069
================ ================
</TABLE>
See accompanying notes.
F-3
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
---------------- ---------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................... $ 751,785 $ 676,637 $ 720,236
Cost of goods sold...................................... 396,112 404,728 369,731
---------------- ---------------- ---------------
355,673 271,909 350,505
Operating expenses:
Transportation....................................... 55,988 58,425 47,125
Selling, general and administrative.................. 222,790 277,515 190,911
Provision for merger integration charges............. - - 9,000
Amortization of goodwill and tradename............... 5,604 5,605 5,605
---------------- ---------------- ---------------
Total operating expenses................................ 284,382 341,545 252,641
---------------- ---------------- ---------------
Operating income (loss)................................. 71,291 (69,636) 97,864
Interest expense........................................ 45,051 40,649 46,338
Interest income......................................... 128 268 1,685
Other income............................................ 1,264 1,220 129
---------------- ---------------- ---------------
Income (loss) before income taxes and extraordinary item 27,632 (108,797) 53,340
Income tax provision.................................... 3,604 1,439 18,914
---------------- ---------------- ---------------
Income (loss) before extraordinary item................. 24,028 (110,236) 34,426
Extraordinary item - loss on early retirement of
debt, net of taxes.................................... - - (29,072)
---------------- ---------------- ---------------
Net income (loss)....................................... $ 24,028 $(110,236) $ 5,354
================ ================ ===============
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary item per common share $ 0.45 $ (2.06) $ 0.71
Extraordinary item per common share.....................
- - (0.60)
---------------- ---------------- ---------------
Net income (loss) per common share...................... $ 0.45 $ (2.06) $ 0.11
================ ================ ===============
Average outstanding common shares....................... 53,487 53,435 48,473
================ ================ ===============
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item per common share $ 0.45 $ (2.06) $ 0.69
Extraordinary item per common share..................... - - (0.58)
---------------- ---------------- ---------------
Net income (loss) per common share...................... $ 0.45 $ (2.06) $ 0.11
================ ================ ===============
Average outstanding common and equivalent shares........ 53,983 53,435 50,053
================ ================ ===============
</TABLE>
See accompanying notes.
F-4
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
PREVIOUS CONVERTED ADDITIONAL OTHER
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK STOCK CAPITAL DEFICIT LOSS TOTAL
------------- --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995....... $ 41 $ - $ 334,035 $ (266,004) $ (58,433) $ 9,639
Stock conversion................... (41) 454 (413) - - -
Proceeds from AWI in connection
with the AO Acquisition............ - - 650 - - 650
Stock issued in connection with
the Initial Public Offering......... - 80 101,828 - - 101,908
Comprehensive income (loss):
Net income.......................... - - - 5,354 - 5,354
Currency translation adjustment..... - - - - (1,982) (1,982)
---------
Total comprehensive income.......... - - - - - 3,372
------------- --------- ---------- ----------- ------------- ---------
BALANCE AT JANUARY 3, 1997.......... - 534 436,100 (260,650) (60,415) 115,569
Comprehensive income (loss):
Net loss............................ - - - (110,236) - (110,236)
Currency translation adjustment..... - - - - (1,413) (1,413)
---------
Total comprehensive loss............ - - - - - (111,649)
------------- --------- ---------- ----------- ------------- ---------
BALANCE AT JANUARY 2, 1998.......... - 534 436,100 (370,886) (61,828) 3,920
Common stock registration
expenses............................ - - (1,030) - - (1,030)
Proceeds from common stock
issue............................... - 1 1,112 - - 1,113
Comprehensive income (loss):
Net income.......................... - - - 24,028 - 24,028
Currency translation adjustment..... - - - - (12,572) (12,572)
---------
Total comprehensive income.......... - - - - - 11,456
------------- --------- ---------- ----------- ------------- ---------
BALANCE AT JANUARY 1, 1999.......... $ - $ 535 $ 436,182 $ (346,858) $ (74,400) $ 15,459
============= ========= ========== =========== ============= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .............................................. $ 24,028 $(110,236) $ 5,354
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ........................... 27,873 24,543 24,017
Extraordinary loss ...................................... - - 29,072
Impairment of long-lived assets ......................... 6,625 - -
Provision for losses on accounts receivable ............. 7,024 27,805 5,781
Foreign exchange transaction (gain) loss ................ (2,407) 339 (59)
Deferred income tax provision (benefit) ................. 1,995 (475) 13,539
Changes in operating assets and liabilities:
Trade accounts receivable ........................ (5,091) (688) (25,752)
Inventories ...................................... (14,956) 10,845 (39,607)
Other assets ..................................... (3,194) (7,420) 217
Trade accounts payable and accrued expenses ...... 14,955 4,442 6,854
Accrued interest payable ......................... (1,797) (1,004) (14,105)
Other liabilities ................................ 1,901 (958) (23,995)
--------- --------- ---------
Net cash provided by (used in) operating activities ........... 56,956 (52,807) (18,684)
INVESTING ACTIVITIES
Expenditures for property, plant and equipment, net ........... (5,776) (40,074) (42,039)
FINANCING ACTIVITIES
Borrowings under long-term debt ............................... 149,808 111,007 451,000
Borrowings under Term B loan .................................. - 125,000 -
Borrowings under previous bank credit facility ................ - - 63,723
Repayment of long-term debt ................................... (206,467) (19,968) (576,679)
Repayment of long-term debt from Term B loan .................. - (122,000) -
Fees associated with debt refinancing and stock registration .. (1,118) (3,576) (42,765)
Proceeds from issuance of common stock ........................ 1,113 - 102,558
--------- --------- ---------
Net cash provided by (used in) financing activities ........... (56,664) 90,463 (2,163)
Effect of exchange rate changes on cash ....................... (458) (93) (80)
--------- --------- ---------
Net increase (decrease) in cash ............................... (5,942) (2,511) (62,966)
Cash at beginning of year ..................................... 7,488 9,999 72,965
========= ========= =========
Cash at end of year ........................................... $ 1,546 $ 7,488 $ 9,999
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 1999
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 15).
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements reflect the consolidation of all
accounts of the Company, which includes the Group and the Group's wholly
owned subsidiaries:
<TABLE>
<CAPTION>
FORM OF ENTITY
--------------------------
<S> <C>
Dal-Tile Group Inc........................................ U.S. Corporation
Dal-Tile Corporation...................................... U.S. Corporation
Tileways, Inc............................................. U.S. Corporation
DTM/CM Holdings, Inc...................................... U.S. Corporation
R&M Supplies, Inc. ....................................... U.S. Corporation
Dal-Minerals Company ..................................... U.S. Corporation
Dal-Tile Mexico, S.A. de C.V. ("Dal-Tile Mexico")......... Mexican Corporation
Dal-Tile of Canada Inc.................................... Canadian Corporation
</TABLE>
During 1998, the Company merged the operations of Materiales Ceramicos, S.A.
de C.V., a Mexican Corporation, into Dal-Tile Mexico.
Significant intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
INVENTORIES
U.S. finished products inventories are valued at the lower of cost (last-in,
first-out ("LIFO")) or market, while U.S. raw materials and goods-in-process
inventories are valued at the lower of cost (first-in, first-out ("FIFO")) or
market. Mexican and Canadian inventories are valued at the lower of cost
(FIFO) or market.
DEPRECIATION
Depreciation for financial reporting purposes is determined using the
straight-line method. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
----------------------
<S> <C>
Leasehold improvements....................................... Life of lease
Buildings.................................................... 20-30
Machinery and equipment...................................... 3-15
</TABLE>
INTANGIBLE ASSETS
Goodwill and tradename, which represent the excess cost over the fair value
of net assets acquired, are amortized on a straight-line basis over the
expected period to be benefited of 40 years and 25 years, respectively.
Accumulated amortization relating to goodwill at January 1, 1999 and January
2, 1998 was $66,654,000 and $61,890,000, respectively. Accumulated
amortization relating to tradename at January 1, 1999 and January 2, 1998 was
$2,520,000 and $1,680,000, respectively. The carrying values of goodwill,
tradename and other long-lived assets are reviewed periodically to determine
whether they 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 1, 1999 and January 2, 1998 was approximately
$2,358,000 and $1,112,000, respectively.
ADVERTISING EXPENSES
Advertising and promotion expenses are charged to income during the period in
which they are incurred. Advertising and promotion expenses incurred for the
fiscal years 1998, 1997 and 1996 amounted to $14,353,000, $16,722,000 and
$14,627,000, 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
F-8
<PAGE>
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 the 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 maintains a defined benefit plan for
eligible employees with funding policies based on local statutes.
FOREIGN CURRENCY TRANSLATION
The Company's Mexican operations use the U.S. dollar as their functional
currency. Translation gains or losses are reflected in the consolidated
statements of operations. 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 $1,727,000, $558,000 and $(80,000) for the years ended January 1,
1999, January 2, 1998 and January 3, 1997, respectively.
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.
CONCENTRATIONS OF CREDIT RISK
The Company is engaged in the manufacturing and distribution of glazed and
unglazed ceramic tile products and accessories in the United States and
Mexico and the distribution of such manufactured products in Canada. The
Company grants credit to customers, substantially all of whom are dependent
upon the construction economic sector. The Company continuously evaluates its
customers' financial condition and periodically requires payments to its
customers to be issued on behalf of the customer and the Company. In
addition, the Company frequently obtains liens on property to secure accounts
receivable.
Trade accounts receivable are net of an allowance for losses from
uncollectible accounts of $9,581,000 and $13,160,000 at January 1, 1999 and
January 2, 1998, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
F-9
<PAGE>
NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
-------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary item ............. $ 24,028 $(110,236) $ 34,426
Extraordinary item .................................. - - (29,072)
----------- --------- ---------
Net income (loss) ................................... $ 24,028 $(110,236) $ 5,354
=========== ========= =========
Average common shares outstanding ................... 53,487 53,435 48,473
Net income (loss) per common share .................. $ 0.45 $ (2.06) $ 0.11
=========== ========= =========
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item ............. $ 24,028 $(110,236) $ 34,426
Extraordinary item .................................. - - (29,072)
----------- --------- ---------
Net income (loss) ................................... $ 24,028 $(110,236) $ 5,354
=========== ========= =========
Average common shares outstanding ................... 53,487 53,435 48,473
Effect of dilutive stock options .................... 496 - 1,580
----------- --------- ---------
Average common shares outstanding (assuming dilution) 53,983 53,435 50,053
Net income (loss) per common share .................. $ 0.45 $ (2.06) $ 0.11
=========== ========= =========
</TABLE>
Options to purchase 1,694,000 shares of common stock at prices ranging from
$8.69 to $9.01 per share were outstanding during the fourth quarter of fiscal
year 1998, but were not included in the computation of diluted earnings per
share for fiscal year 1998 because the options' exercise price was greater
than the average market price of the common shares during each quarter of
fiscal year 1998 in which the options were outstanding.
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 diluted earnings per share for fiscal year
1997. Due to the Company's net loss for the year, these options would have
had an antidilutive effect on earnings per share.
Options to purchase 50,000 shares of common stock at $19.75 per share were
outstanding during the fourth quarter of fiscal year 1996 but were not
included in the computation of diluted earnings per share for fiscal year
1996 because the options' exercise price was greater than the average market
price of the common shares during each quarter of fiscal year 1996 in which
the options were outstanding.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for
F-10
<PAGE>
Derivative Instruments and Hedging Activities" ("SFAS 133"), which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of SFAS 133 will have a significant effect on earnings or the
financial position of the Company.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Finished products in U.S. ................................................. $ 119,508 $ 110,323
Finished products in Mexico................................................ 3,822 4,307
Finished products in Canada................................................ 2,019 2,266
Goods-in-process........................................................... 4,053 3,960
Raw materials.............................................................. 9,016 9,891
------------ ------------
Total inventories.......................................................... $ 138,418 $ 130,747
============ ============
</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 $1,600,000 lower and $2,200,000 higher than reported at January 1,
1999 and January 2, 1998, respectively.
During fiscal year 1998, inventory quantities in six 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 fiscal year 1998 costs, the effect of which decreased net
income by approximately $772,000, or $0.01 per share (basic and diluted).
During fiscal year 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 fiscal year 1997 costs, the effect of which decreased net
income by approximately $691,000, or $0.01 per share (basic and diluted).
4. INITIAL PUBLIC OFFERING
During the third quarter of fiscal year 1996, the Company completed an
initial public offering (the "Offering") of its common stock and a concurrent
private placement of its common stock. 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
re-capitalization of its capital stock. Pursuant to a common stock
conversion, all of the classes of the Company's previously outstanding common
stock were converted into 45,404,472 shares of a single class of common
stock. In addition, all outstanding options to purchase Dal-Tile's capital
stock were converted into options to purchase 4,204,747 shares of common
stock.
F-11
<PAGE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Term A Loan, interest due quarterly at LIBOR plus 2% (approximately 7.3% at
January 1, 1999), principal due in variable quarterly installments through
December 31, 2002, collateralized by certain assets of the
Company..................................................................... $ 205,000 $ 217,500
Term B Loan, interest due quarterly at LIBOR plus 2-1/2% (approximately
7.8% at January 1, 1999), principal due in variable quarterly installments
through December 31, 2003, collateralized by certain
assets of the Company....................................................... 124,000 125,000
Revolving line of credit, interest due quarterly at blended LIBOR rates plus 2%
(approximately 7.5% at January 1, 1999), principal due
December 31, 2002, collateralized by certain assets of the Company.......... 152,050 190,000
Other, principally borrowings to fund capital additions......................... 19,382 24,591
--------- ---------
500,432 557,091
Less current portion............................................................ 46,509 19,261
--------- ---------
$ 453,923 $ 537,830
========= =========
</TABLE>
Concurrent with the Offering, the Company entered into a new bank credit
agreement (the "New Bank Credit Agreement") which, along with the proceeds
from the Offering and private placement, were used to repay substantially all
of the Company's debt. The New Bank Credit Agreement included a term loan of
$275,000,000 ("Term A Loan") and a revolving line of credit of $250,000,000.
During the second quarter of fiscal year 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 fiscal year 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).
During the fourth quarter of fiscal year 1998, the Company amended certain
financial covenants to provide increased flexibility under the Second Amended
Credit Facility (as amended, the "Third Amended Credit Facility"). Under the
Third 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 1, 1999. A commitment fee at a rate
per annum based on a pricing grid is payable quarterly.
As of January 1, 1999, the Company had availability of approximately
$83,854,000 on the revolving line of credit. The availability is net of
$14,096,333 in letters of credit for foreign inventory purchases and
F-12
<PAGE>
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 aggregate notional amount on which the Company had interest rate
swap agreements outstanding was $300,000,000 at January 1, 1999. Under the
terms of the swap agreements, the Company pays a fixed interest rate of
approximately 5.7%. As of January 1, 1999, the swap agreements had an
aggregate fair value of $(3,174,000), with $100,000,000 in effect until
January 13, 2000 and $200,000,000 in effect through January 16, 2001. There
were no interest rate swap agreements during fiscal year 1997.
Aggregate maturities of long-term debt for the five years subsequent to
January 1, 1999 (in thousands) are:
<TABLE>
<S> <C>
1999.......................................... $ 46,509
2000.......................................... 56,796
2001.......................................... 55,761
2002.......................................... 220,267
2003.......................................... 120,800
</TABLE>
Total interest cost incurred for the fiscal years 1998, 1997 and 1996
amounted to approximately $45,173,000, $41,817,000 and $47,706,000,
respectively, of which approximately $122,000, $1,168,000 and $1,368,000,
respectively, was capitalized to property, plant and equipment. Total
interest paid was $45,712,000, $41,899,000 and $52,857,000 for the fiscal
years ended January 1, 1999, January 2, 1998 and January 3, 1997,
respectively.
6. EXTRAORDINARY ITEM
In connection with the refinancing and early extinguishment of debt during
the fiscal year ended January 3, 1997, the Company recorded an extraordinary
charge of $44,800,000 ($29,072,000, net of tax) for prepayment premiums on
certain debt repaid, the write-off of existing deferred financing fees and a
termination fee paid in connection with the termination of the Company's
management agreement with AEA Investors.
7. CAPITAL STRUCTURE
Common stock consists of the following:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Common stock, $0.01 par value--authorized shares--200,000,000, issued and
outstanding shares--53,552,246 at January 1, 1999 and 53,435,101 at
January 2, 1998................................................................. $ 535 $ 534
============ ============
</TABLE>
At January 1, 1999, 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
F-13
<PAGE>
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 therefore, 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. ASSET WRITE-DOWNS AND OTHER CHARGES
FISCAL YEAR 1998
During fiscal year 1998, the Mt. Gilead, NC glazed floor manufacturing
facility was closed and is currently being held for sale. Based on this
decision, the Company reviewed the carrying value to determine the extent, if
any, of impairment relating to the asset. An aggregate provision of
$6,625,000 was recorded in cost of sales to reduce the carrying value of the
facility to its estimated net realizable value. The provision was comprised
of $1,700,000 recorded during the second quarter of fiscal year 1998 based on
a preliminary estimate made by the Company and $4,925,000 recorded during the
fourth quarter of fiscal year 1998 based upon an independent appraisal. The
provision in the fourth quarter was substantially offset by the release of
excess reserves which were previously provided by the Company. At January 1,
1999, the net book value of the facility was $2,000,000 and was classified in
machinery and equipment on the face of the balance sheet.
FISCAL YEAR 1997
During fiscal year 1997, the Company recorded charges of $90,100,000 for
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 were comprised of $36,500,000 in cost of sales, $3,500,000 in
transportation expenses and $50,100,000 in selling, general and
administrative expenses.
In response to deterioration in the aging of the Company's accounts
receivable, the Company increased collection efforts and undertook detailed
reviews of collectibility, and subsequently recorded an increase in the
reserve for doubtful accounts of $21,300,000 for fiscal year 1997. The
write-down of uncollectible trade accounts receivable related to increases in
receivables balances arising principally as a result of earlier sales
initiatives that included, among other things, extended credit terms and
efforts to expand the Company's customer base, and operational and systems
integration issues that resulted in limited access by sales center personnel
to certain account information. In addition, in an effort to improve customer
service, authority to extend credit was decentralized and assigned to
management at the retail sales centers. Sales resulting from these
initiatives were a result of products being shipped under defined terms to
customers, with the full expectation of invoiced amounts being paid in full
within the terms of the sale. By the end of the second quarter of fiscal year
1997, the sales initiatives, which began in the fourth quarter of fiscal year
1996, were discontinued and the Company moved to a more centralized credit
F-14
<PAGE>
approval process and implemented more stringent credit policies.
The Company also extensively reviewed its finished product inventories,
including various patterns, shapes and sizes. Management believes that delays
in systems integration resulted in impaired inventory management, and, in
particular, resulted in an imbalance in inventory mix. During the third
quarter of fiscal year 1997, the Company's new management undertook an
additional study of the business and its operations and determined that it
would reduce the number of SKUs offered for sale by the Company and would
discontinue additional patterns. These actions, coupled with the results of
physical inventories and the delay in systems integration, resulted in a need
to record fiscal year 1997 inventory provisions of $36,500,000, consisting of
$14,200,000 related to results of physical inventories, $15,700,000 believed
to be slow-moving and/or obsolete or out of balance with other related
products, $4,500,000 to write-down certain other inventory accounts and
$2,100,000 to write-down raw materials.
The balance of the charges consisted of $6,700,000 in respect of terminated
employees, $6,200,000 primarily related to liabilities incurred for lease
terminations, executive search fees and other items, $8,500,000 in respect of
accrued expenses, primarily related to freight and insurance, $5,300,000 in
respect of fixed assets impairment and $5,600,000 in respect of other
charges, primarily related to write-down of notes, non-trade receivables and
certain other assets.
As of January 1, 1999, reserves relating to the fiscal year 1997 charges for
inventories, accounts receivable and other non-productive assets were
depleted, and the Company substantially completed the work-down of all other
charges incurred. Reserves of approximately $3,800,000 relating to fiscal
year 1997 initiatives to restructure the organization remain outstanding and
are expected to effect future cash flows through the end of fiscal year 1999.
FISCAL YEAR 1996
On December 29, 1995, the Company acquired American Olean Tile Company, Inc.
and certain related assets of the ceramic tile business (the "AO
Acquisition") of Armstrong World Industries, Inc. ("AWI"). In the first
quarter of fiscal year 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 fiscal year 1997. The primary components of the charge were $7,400,000
for lease commitments, $1,300,000 for severance and employee contracts and
$300,000 for shut down costs of the closed facilities.
As of January 1, 1999, the Company retained approximately $6,600,000 of
reserves primarily related to the continued expiration of lease commitments
associated with sales centers that had been closed. Future cash outlays are
anticipated to continue through the end of fiscal year 2004.
F-15
<PAGE>
9. INCOME TAXES
Income (loss) before income taxes and extraordinary items relating to
operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
-------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
United States........................... $ 12,905 $ (116,249) $ 45,812
Mexico.................................. 14,827 7,879 7,603
Other................................... (100) (427) (75)
-------------- ------------- --------------
$ 27,632 $ (108,797) $ 53,340
============== ============= ==============
</TABLE>
The components of the provision for income taxes include the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
---------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. state - current...................... $ 262 $ - $ 3,060
U.S. - deferred........................... 1,286 - (1,590)
---------------- --------------- ---------------
1,548 - 1,470
Mexico - current.......................... 1,876 2,082 1,716
Mexico - deferred......................... 180 (643) -
---------------- --------------- ---------------
2,056 1,439 1,716
---------------- --------------- ---------------
Total with extraordinary item............. 3,604 1,439 3,186
Tax effect of extraordinary item.......... - - 15,728
---------------- --------------- ---------------
Total before extraordinary item.... $ 3,604 $ 1,439 $ 18,914
================ =============== ===============
</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
fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
-------------- --------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) at U.S. statutory rate $ 9,671 $ (37,958) $ 2,989
Amortization of goodwill.................. 1,667 1,668 1,668
State income tax.......................... 1,006 (5,489) 3,751
Foreign loss not benefited................ 35 149 26
Difference between U.S. and Mexico
statutory rate..................... 884 709 684
Mexico inflationary indexing
and other........................... (2,267) (2,028) (1,629)
Valuation allowance....................... (7,679) 44,107 (10,134)
Non-permanently reinvested foreign
earnings........................... - - 5,571
Other..................................... 287 281 260
-------------- --------------- -------------
Total with extraordinary item...... $ 3,604 $ 1,439 $ 3,186
============== =============== =============
</TABLE>
F-16
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Book basis of property, plant and equipment over tax .. $ 17,777 $ 18,707
Book basis of other assets over tax.................... 10,866 10,640
Other, net............................................. 8,323 6,983
---------------- ---------------
Total deferred tax liabilities.................... 36,966 36,330
---------------- ---------------
Deferred tax assets:
Tax basis of inventories over book..................... 9,326 5,519
Tax basis of other assets over book.................... 1,287 1,325
Net operating loss carryforwards....................... 45,741 52,518
Expenses not yet deductible for tax.................... 13,535 18,324
---------------- ---------------
Total deferred tax assets......................... 69,889 77,686
Valuation allowance for deferred tax assets............ (36,428) (44,107)
---------------- ---------------
Net deferred tax assets................................ 33,461 33,579
---------------- ---------------
Net deferred tax liabilities........................... $ 3,505 $ 2,751
================ ===============
</TABLE>
Total income tax payments, net of refunds received, during the fiscal years
ended January 1, 1999, January 2, 1998 and January 3, 1997, were $1,836,000,
$3,206,000 and $1,989,000, respectively. The Company has U.S. federal net
operating loss carryforwards of approximately $118,000,000, which expire in
the years 2008 - 2018. 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 retained in fiscal year 1998.
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 1, 1999, January 2, 1998 and January 3,
1997 and, for financial statement presentation purposes, have been classified
as components of income tax expense. Total tax provision amounts accrued by
Dal-Tile Mexico for this obligation amounted to approximately $810,000,
$327,000 and $390,000 for the fiscal years ended January 1, 1999, January 2,
1998 and January 3, 1997, respectively.
10. RELATED PARTY TRANSACTIONS
AEA Investors Inc., a majority stockholder, previously provided management,
consulting and financial
F-17
<PAGE>
services to the Company for fees and expenses. The Company incurred fees and
expenses for such services of $485,000 for the fiscal year ended January 3,
1997. 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
fiscal year 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.
During fiscal year 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 $6,749,000, $6,147,000 and
$2,549,000 for the fiscal years ended January 1, 1999, January 2, 1998 and
January 3, 1997, respectively.
11. STOCK PLANS
The Company has a stock option plan (the "Plan") that provides for the
granting of options for up to 10,586,425 shares of its common stock to key
employees of the Company. Options granted under the Plan prior to January 1,
1996 vest 20% at the date of the grant and 20% on each successive anniversary
of the date of the grant until fully vested. Options granted on or after
January 1, 1996 vest 25% at the date of the grant and 25% on each successive
anniversary of the date of the grant until fully vested. In each case, the
options expire on the tenth anniversary of the date of the grant; however,
these terms may be modified on an individual grant basis at the discretion of
the Company's Board of Directors.
Stock option activity under the Plan is summarized as follows (option data
shown below is after giving effect to the Company's options conversion):
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF AVERAGE
SHARES EXERCISE PRICES EXERCISE PRICE
--------------- ----------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1995............ 2,595,347 $ 9.01 9.01
Granted.............................. 1,695,535 9.91 - 19.75 10.20
Canceled............................. (185,048) 9.01 9.01
--------------- ----------------- ----------------
Outstanding at January 3, 1997.............. 4,105,834 9.01 - 19.75 9.50
Granted.............................. 3,215,174 12.63 - 17.00 13.41
Canceled............................. (723,637) 9.01 - 19.75 10.44
--------------- ----------------- ----------------
Outstanding at January 2, 1998.............. 6,597,371 9.01 - 13.75 11.30
Granted.............................. 3,770,000 8.69 - 11.31 8.92
Canceled............................. (110,024) 9.01 - 13.69 11.26
----------------- ---------------- ----------------
Outstanding at January 1, 1999.............. (1) 10,257,347 $ 8.69 - 11.94 $ 9.73
=============== ================= ================
</TABLE>
(1) In February 1998, 2,675,000 stock options with a price range of $13.69
to $13.75 were repriced to the current fair value price of $11.94. In
December 1998, 3,617,279 stock options with a price range of $9.44 to
$13.69 were repriced to the current fair value price of $9.01.
The Company has reserved 10,586,425 shares of common stock for options,
329,078 of which are ungranted at January 1, 1999 and are for future issuance
under the Plan.
F-18
<PAGE>
At January 1, 1999, January 2, 1998 and January 3, 1997, there were 5,051,347
options exercisable at a weighted average exercise price of $9.84, 4,200,159
options exercisable at a weighted average exercise price of $10.07 and
2,986,372 options exercisable at a weighted average exercise price of $9.30,
respectively.
The following table summarizes information with regard to stock options
outstanding at January 1, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE OPTIONS REMAINING
PRICE OUTSTANDING CONTRACTUAL LIFE
- -------- ----------- ----------------
<S> <C> <C>
$ 8.69............................................................. 1,064,000 9.94 years
9.01............................................................. 6,058,481 6.13 years
9.91............................................................. 709,866 0.57 years
11.94............................................................. 2,425,000 8.78 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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
-------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)-- as reported................................. $ 24,028 $ (110,236) $ 5,354
Net income (loss)-- pro forma................................... 14,929 (112,150) 3,827
Earnings (loss) per share (basic and diluted) --
as reported..................................................... 0.45 (2.06) 0.11
Earnings (loss) per share (basic and diluted)-- pro forma....... 0.28 (2.10) 0.08
</TABLE>
The pro forma effects on net income (loss) for the fiscal years ended January
1, 1999, January 2, 1998 and January 3, 1997 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 fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997
was $4.03, $5.62 and $2.93 per option, respectively. The fair value of the
options at the date of grant was estimated using the binomial model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Expected life (years)..................................... 3 3 3
Interest rate............................................. 5.25% 5.96% 5.08%
Volatility................................................ 61.9% 53.5% 33.6%
Dividend yield............................................ 0.00% 0.00% 0.00%
</TABLE>
F-19
<PAGE>
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 fiscal year 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 recorded stock unit compensation
expense of approximately $1,770,000 and $5,900,000 for the fiscal years ended
January 1, 1999 and January 2, 1998, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its sales 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 1, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999.................................................... $ 28,965
2000.................................................... 18,294
2001.................................................... 14,366
2002.................................................... 11,433
2003.................................................... 7,691
Thereafter.............................................. 16,483
-----------
$ 97,232
-----------
-----------
</TABLE>
Rental expense amounted to approximately $33,269,000, $31,075,000 and
$24,166,000 for the fiscal years ended January 1, 1999, January 2, 1998 and
January 3, 1997, respectively.
The Company is subject to federal, state, local and foreign laws and
regulations relating to the environment and to work places. Laws that affect
or could affect the Group's United States operations include, among others,
the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act and the Occupational Safety and Health Act. The Company believes
that it is currently in substantial compliance with such laws and the
regulations promulgated thereunder.
The Company is involved in various proceedings relating to environmental
matters. The Company, in the past, has disposed or arranged for the disposal
of substances, which are now characterized as hazardous and currently is
engaged in the cleanup of hazardous substances at certain sites. It is the
Company's policy to accrue liabilities for remedial investigations and
cleanup activities when it is probable that such liabilities 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.
F-20
<PAGE>
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.
13. 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 centers in the United States, Canada and Puerto Rico 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.
Financial information by geographical area is summarized below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
--------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Consolidated revenue:
Unaffiliated customers:
United States .................................. $ 716,075 $ 648,529 $ 695,532
Mexico ......................................... 25,242 18,533 17,927
Other .......................................... 10,468 9,575 6,777
--------------- --------------- --------------
Total consolidated revenue from unaffiliated
customers ................................ $ 751,785 $ 676,637 $ 720,236
=============== =============== ==============
Intercompany revenue:
United States .................................. $ 5,462 $ 4,348 $ 4,057
Mexico ......................................... 74,533 71,802 61,526
Eliminations/other ............................. (79,995) (76,150) (65,583)
--------------- --------------- --------------
Total consolidated revenue ................. $ 751,785 $ 676,637 $ 720,236
=============== =============== ==============
Consolidated operating income (loss):
United States .................................. $ 60,558 $ (76,686) $ 90,175
Mexico ......................................... 10,608 7,508 7,339
Eliminations/other ............................. 125 (458) 350
--------------- --------------- --------------
Total consolidated operating income (loss) $ 71,291 $ (69,636) $ 97,864
=============== =============== ==============
Consolidated identifiable assets:
United States .................................. $ 580,719 $ 613,882 $ 623,444
Mexico ......................................... 56,435 53,637 54,889
Eliminations/other ............................. 3,654 4,550 10,164
--------------- --------------- --------------
Total consolidated identifiable assets ..... $ 640,808 $ 672,069 $ 688,497
=============== =============== ==============
</TABLE>
14. 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).
F-21
<PAGE>
The change was made to help facilitate the financial closing process. The
effect of the change was to increase net sales for fiscal year 1996 by
approximately $6,000,000. The impact of the change on net income for fiscal
year 1996 was not material.
15. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
Provided below are the condensed unconsolidated financial statements of
Dal-Tile International Inc.:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Condensed balance sheets:
Cash ....................................................... $ 59 $ 59
Other assets ............................................... 9,500 9,151
Investment in Dal-Tile Group Inc., net of accumulated losses 7,667 -
---------- ----------
Total assets ............................................... $17,226 $ 9,210
========== ==========
Senior secured zero coupon notes ........................... $ - $ 157
Other liabilities .......................................... 1,767 1,232
Accumulated losses, net of investment in Dal-Tile Group Inc. - 3,901
Stockholders' equity ....................................... 15,459 3,920
---------- ----------
Total liabilities and stockholders' equity ................. $17,226 $ 9,210
========== ==========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
1999 1998 1997
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Condensed statements of operations:
Equity in net income (loss) of Dal-Tile
Group Inc. ...................................... $ 24,140 $ (110,739) $ 11,841
Other expense (income)............................ 99 (520) (511)
Interest income................................... - - 921
Interest expense.................................. 13 17 7,919
-------------- -------------- ---------------
Net income (loss)................................. $ 24,028 $ (110,236) $ 5,354
============== ============== ===============
Condensed statements of cash flows:
Cash flow used in operating activities............ $ (80) $ (129) $ (6,303)
Financing activities:
Proceeds from sale of stock and equity infusion... 1,113 - 102,558
Investment in Dal-Tile Group Inc.................. - 91 (18,134)
Fees associated with debt refinancing and stock
registration.............................. (876) - (9,457)
Repayment of long-term debt....................... (157) - (98,938)
-------------- -------------- ---------------
Net increase (decrease) in cash................... - (38) (30,274)
Cash at beginning of period....................... 59 97 30,371
-------------- -------------- ---------------
Cash at end of period.......................... $ 59 $ 59 $ 97
============== ============== ===============
</TABLE>
F-22
<PAGE>
16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
operations for the fiscal years ended January 1, 1999 and January 2, 1998:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal year ended January 1, 1999:
Net sales .................................... $ 185,831 $ 190,907 $ 194,068 $ 180,979
Gross profit ................................. 87,328 88,527 92,676 87,142
Operating income ............................. 13,961 17,845 20,882 18,603
Net income ................................... 828 5,447 9,936 7,817
Per share:
Net income - basic........................ 0.02 0.10 0.19 0.15
- assuming dilution ........... 0.02 0.10 0.18 0.15
Fiscal 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)
</TABLE>
Second quarter 1998 gross profit results have been restated to reflect the
reclassification of a $1,700,000 provision to reduce the carrying value of
the Mt. Gilead, NC manufacturing facility. This provision was originally
recorded in selling, general and administrative expenses. Operating income
was not impacted by this reclassification. During the fourth quarter of
fiscal year 1998, an additional provision of $4,925,000 was recorded to
further reduce the carrying value. This decrease in gross profit was
substantially offset by the release of excess reserves which were previously
provided by the Company (see Note 8).
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.
F-23
<PAGE>
SCHEDULE II
DAL-TILE INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
Allowance for Losses from Uncollectible Accounts:
<TABLE>
<CAPTION>
ADDITIONS CHARGED
BALANCE AT TO COSTS AND (a) BALANCE AT END OF
BEGINNING OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------------------- ----------------------- ------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998................ $ 13,160 $ 7,024 $ 10,603 $ 9,581
1997................ 12,750 27,805 27,395 13,160
1996................ 9,389 5,781 2,420 12,750
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE>
EXHIBIT 4.1
TEMPORARY CERTIFICATE -- EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN
READY FOR DELIVERY
NUMBER SHARES
DAL-TILE INTERNATIONAL INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR
RIDGEFIELD PARK, NEW JERSEY OR NEW YORK, NEW YORK CERTAIN DEFINITIONS
CUSIP 23426R 10 8
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF DAL-TILE
INTERNATIONAL INC. TRANSFERABLE ON THE BOOKS OF THE CORPORATION IN PERSON OR
BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY
ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER
AGENT AND REGISTERED BY THE REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE
SIGNATURES OF ITS DULY AUTHORIZED OFFICERS.
Dated:
COUNTERSIGNED AND REGISTERED:
ChaseMellon Shareholder Services, L.L.C. PRESIDENT
TRANSFER AGENT
AND REGISTRAR
[SEAL]
BY
AUTHORIZED SIGNATURE. SECRETARY
<PAGE>
DAL-TILE INTERNATIONAL INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ______ Custodian _______
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with rights of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF
ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------ shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------- Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated ______________
------------------------------------------------------------
NOTICE: The signature to this assignment must correspond
with the name as written upon the face of the certificate
in every particular without alteration or enlargement or
any change whatever. The signature of the person
executing this power must be guaranteed by an Eligible
Guarantor Institution such as a Commercial Bank, Trust
Company, Securities Broker/Dealer, Credit Union, or a
Savings Association participating in a Medallion program
approved by the Securities Transfer Association, Inc.
<PAGE>
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement, dated as of the 24th day
of November, 1998, by and between Dal-Tile International Inc., a Delaware
corporation (the "Company"), and W. Christopher Wellborn (the "Executive").
The Executive has served as Executive Vice President and Chief Financial
Officer of the Company since August 25, 1997 pursuant to an Employment
Agreement dated as of August 25, 1997 and amended as of October 10, 1997 (the
"Employment Agreement"). The Company and the Executive desire to extend the
term of the Employment Agreement and amend certain other of its provisions.
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 Employment Agreement is hereby
amended as follows:
1. Section 1, TERM OF EMPLOYMENT, is hereby deleted in its entirety and
replaced with the following:
"Section 1, TERM OF EMPLOYMENT. The term of Executive's employment
under this Agreement (the "Term") shall commence on August 25, 1997
and continue through and expire on December 31, 2001 unless earlier
terminated as herein provided."
2. Section 5.4, TERMINATION WITHOUT CAUSE, is hereby deleted in its
entirety and replaced with the following:
"Section 5.4, TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. The
Company shall have the right at anytime 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 3.3 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
<PAGE>
usual payroll practices for executive's, (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
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, and (iv) in a lump sum payment (to be paid as promptly
as practicable, but no later than 10 days after the determination
thereof) a portion of any other bonus plan(s) in which the Executive
is a participant computed and determined in accordance with its
terms, on a pro rated basis based on the performance of the Company
from the beginning of the bonus period through the date 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 3.1 or 3.2, (ii) a relocation of
the Company's headquarters or required relocation of the Executive
more than 100 miles outside of the Dallas/Fort Worth Metropolitan
area, (iii) a material diminution in the Executive's duties or
responsibilities, (iv) an adverse change in the Executive's title,
or (v) assignment to Executive of duties and responsibilities that
are inconsistent with his position in any material respect."
3. All other terms and conditions of the Employment Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this First Amendment
to Employment Agreement as of the date first above written.
DAL-TILE INTERNATIONAL INC.
/s/ W. Christopher Wellborn By: /s/ Mark A. Solls
- ---------------------------------- ----------------------------------
W. Christopher Wellborn Name: Mark A. Solls
--------------------------------
Title: Vice President
--------------------------------
2
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
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
Dal-Tile Mexico, S.A. de C.V.......................................Mexico
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-70879) pertaining to the Dal-Tile International Inc. 1990
Stock Option Plan (As Amended and Restated) of our report dated February 10,
1999 with respect to the consolidated financial statements and schedule of
Dal-Tile International Inc. included in the Annual Report (Form 10-K) for the
year ended January 1, 1999.
ERNST & YOUNG LLP
Dallas, Texas
March 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 1,546
<SECURITIES> 0
<RECEIVABLES> 93,331
<ALLOWANCES> 9,581
<INVENTORY> 138,418
<CURRENT-ASSETS> 254,827
<PP&E> 288,060
<DEPRECIATION> 86,058
<TOTAL-ASSETS> 640,808
<CURRENT-LIABILITIES> 137,212
<BONDS> 453,923
0
0
<COMMON> 535
<OTHER-SE> 14,924
<TOTAL-LIABILITY-AND-EQUITY> 640,808
<SALES> 751,785
<TOTAL-REVENUES> 751,785
<CGS> 396,112
<TOTAL-COSTS> 680,494
<OTHER-EXPENSES> (1,264)
<LOSS-PROVISION> 7,024
<INTEREST-EXPENSE> 45,051
<INCOME-PRETAX> 27,632
<INCOME-TAX> 3,604
<INCOME-CONTINUING> 24,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,028
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>