<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 33-64140
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 office)
(Zip Code)
(214) 398-1411
--------------
(Registrant's telephone number, including area code)
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
----- -----
As of August 11, 1999, the registrant had outstanding 54,322,168 shares of
voting common stock, par value $0.01 per share.
<PAGE>
DAL-TILE INTERNATIONAL INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 - Financial Statements (Unaudited) 3
Notes to Consolidated Condensed Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
</TABLE>
Page 2
<PAGE>
DAL-TITLE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $219,303 $190,907 $419,995 $376,738
Cost of goods sold 113,652 102,380 217,662 200,883
-------- -------- -------- --------
Gross profit 105,651 88,527 202,333 175,855
Expenses:
Transportation 14,800 14,211 28,928 28,744
Selling, general and administrative 59,503 55,070 118,271 112,503
Amortization of intangibles 1,401 1,401 2,802 2,802
-------- -------- -------- --------
Total expenses 75,704 70,682 150,001 144,049
-------- -------- -------- --------
Operating income 29,947 17,845 52,332 31,806
Interest expense 9,696 11,649 19,881 23,253
Interest income 45 30 71 56
Other income 495 396 707 5
-------- -------- -------- --------
Income before income taxes 20,791 6,622 33,229 8,614
Income tax provision 1,300 1,175 2,600 2,339
-------- -------- -------- --------
Net income $ 19,491 $ 5,447 $ 30,629 $ 6,275
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Net income per common share $ 0.36 $ 0.10 $ 0.57 $ 0.12
======== ======== ======== ========
Average shares 54,011 53,435 53,789 53,435
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Net income per common share $ 0.36 $ 0.10 $ 0.56 $ 0.12
======== ======== ======== ========
Average shares 54,675 54,500 54,371 54,325
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Page 3
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 2, JANUARY 1,
1999 1999
-------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 993 $ 1,546
Trade accounts receivable 106,940 93,331
Inventories 135,179 138,418
Prepaid expenses 3,793 4,213
Other current assets 15,689 17,319
-------- -----------
Total current assets 262,594 254,827
Property, plant, and equipment, at cost 295,172 288,060
Less accumulated depreciation 95,091 86,058
-------- -----------
200,081 202,002
Goodwill, net of amortization 145,414 147,796
Finance costs, net of amortization 5,957 6,687
Tradename and other assets 29,288 29,496
-------- -----------
Total assets $643,334 $ 640,808
======== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
Page 4
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 2, JANUARY 1,
1999 1999
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Trade accounts payable $ 29,775 $ 28,684
Accrued expenses 66,263 59,420
Accrued interest payable 439 490
Current portion of long-term debt 51,509 46,509
Income taxes payable 1,719 169
Deferred income taxes 1,702 1,930
Other current liabilities 152 10
--------- -----------
Total current liabilities 151,559 137,212
Long-term debt 415,468 453,923
Other long-term liabilities 22,140 32,639
Deferred income taxes 1,867 1,575
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 200,000,000; issued and
outstanding shares - 54,127,288 541 535
Additional paid-in capital 442,277 436,182
Accumulated deficit (316,229) (346,858)
Accumulated other comprehensive loss (74,289) (74,400)
--------- -----------
Total stockholders' equity 52,300 15,459
--------- -----------
Total liabilities and stockholders' equity $ 643,334 $ 640,808
========= ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
Page 5
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
JULY 2, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
------ -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 535 $436,182 $ (346,858) $ (74,400) $ 15,459
Net proceeds from common stock issue 6 6,095 -- -- 6,101
Comprehensive Income
Net Income -- -- 30,629 -- 30,629
Foreign currency translation adjustments -- -- -- 111 111
--------
Total Comprehensive income 30,740
------ -------- ----------- ------------- --------
Balance at July 2, 1999 $ 541 $442,277 $ (316,229) $ (74,289) $ 52,300
====== ======== =========== ============= ========
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 6
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JULY 2, JULY 3,
1999 1998
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 30,629 $ 6,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,004 14,234
Asset write-down - 1,700
Other, net (14) (302)
Changes in operating assets and liabilities:
Trade accounts receivable (13,494) (15,861)
Inventories 3,707 1,142
Other assets 2,099 (245)
Trade accounts payable and accrued expenses 7,312 10,980
Accrued interest payable (52) (1,616)
Other liabilities (9,009) 1,093
--------- ---------
Net cash provided by operating activities 35,182 17,400
INVESTING ACTIVITIES
Proceeds from sale of (expenditures for) property, plant
and equipment, net (8,540) 1,196
FINANCING ACTIVITIES
Borrowings under long-term debt 137,000 60,008
Repayments of long-term debt (170,455) (84,955)
Fees and expenses associated with debt refinancing - (241)
Registration fees - (94)
Net proceeds from common stock issue 6,101 -
--------- ---------
Net cash used in financing activities (27,354) (25,282)
Effect of exchange rate changes on cash 159 (65)
--------- ---------
Net decrease in cash (553) (6,751)
Cash at beginning of period 1,546 7,488
--------- ---------
Cash at end of period $ 993 $ 737
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 7
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The operating results of Dal-Tile International Inc. and its
consolidated subsidiaries (the "Company") for the six months ended
July 2, 1999 reflect the results of operations of Dal-Tile
International Inc. and its consolidated subsidiaries. Due to the
Company's 52/53 week accounting cycle, the second quarter of 1999
ended on July 2, 1999.
The accompanying unaudited interim consolidated condensed financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of the
financial position, results of operations, and cash flow have been
included. The results of operations for the six months ended July 2,
1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the January 1, 1999 annual report on
Form 10-K of the Company.
Certain prior year amounts have been reclassified to conform to the
1999 presentation.
2. EARNINGS PER SHARE
Basic earnings per share are based on the average number of shares
outstanding during each period presented. Diluted earnings per share
are based on the average number of shares outstanding including any
dilutive effects of options, warrants and convertible securities.
3. COMPREHENSIVE INCOME
Total comprehensive income includes net income and foreign currency
translation adjustments. For the six months ended July 2, 1999 and
July 3, 1998, total comprehensive income was $30,740 and $613,
respectively.
4. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
July 2, January 1,
1999 1999
------------- ------------
<S> <C> <C>
Raw materials $ 9,219 $ 9,016
Work-in-process 4,179 4,053
Finished goods 121,781 125,349
------------- ------------
$ 135,179 $ 138,418
============= ============
</TABLE>
Page 8
<PAGE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 2, January 1,
1999 1999
------------- ------------
<S> <C> <C>
Term A Loan $ 185,000 $ 205,000
Term B Loan 123,500 124,000
Revolving Credit Loan 141,850 152,050
Other 16,627 19,382
------------- ------------
466,977 500,432
Less current portion 51,509 46,509
------------- ------------
$ 415,468 $ 453,923
============= ============
</TABLE>
6. INCOME TAXES
The income tax provision for the second quarter of 1999 reflects an
effective tax rate of approximately 6% compared to 18% for the second
quarter of 1998. For the six months ended July 2, 1999 the effective
tax rate was approximately 8% compared to 27% for the same period in
1998. These rates reflect expected Mexico tax liabilities and U.S.
state and possession income taxes based on estimated taxable income in
those jurisdictions. The decrease in effective rates in 1999 versus
1998 was due to increased levels of pretax income, which primarily
affect the federal tax jurisdiction. No U.S. federal income tax
expense was recorded for 1999 or 1998 due to an offset by a valuation
allowance against U.S. federal deferred tax assets recorded during
1997. If the valuation allowance had not been recorded, the effective
tax rate for the six months ended July 2, 1999 and July 3, 1998 would
have been approximately 38.5%. The requirement for a valuation
allowance will continue to be reassessed in future reporting periods.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to federal, state, local and foreign laws and
regulations relating to the environment and to work places. Laws that
affect or could affect the Company'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 investigation and 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 remedial
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
Page 9
<PAGE>
possible identification of presently unknown sites, the scope of
contamination of such sites, the allocation of costs among other
potentially responsible parties with respect to any such sites and the
ability of such parties to satisfy their share of liability.
Accordingly, there can be no assurance that the Company will not
become involved in future litigation or other proceedings or, if the
Company were found to be responsible or liable in any litigation or
proceeding, that such costs would not be material to the Company.
The Company is also a defendant in various lawsuits arising from
normal business activities. In the opinion of management, the ultimate
liability likely to result from the contingencies described above is
not expected to have a material adverse effect on the Company's
consolidated financial condition, results of operations or liquidity.
Page 10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the second quarter of 1999, the Company achieved record growth in
sales and profits. Sales through the Company-operated sales centers and home
center channels improved due to higher volume and strong market acceptance of
new products. Manufacturing costs declined in correlation with increased
volume and improved efficiencies. Cash flow increased allowing for greater
than anticipated reductions in debt levels. For the remainder of 1999, the
Company plans to continue the introduction of new products servicing both the
commercial and residential markets. Although the Company will continue to
focus on debt reduction, the improved cash flow is expected to allow for
earlier implementation of various plans to expand and modernize manufacturing
capacity and improve overall manufacturing efficiencies. Efforts will
continue to streamline operations and reduce costs.
The following is a discussion of the results of operations for the three and
six months ended July 2, 1999 compared with the three and six months ended
July 3, 1998 for Dal-Tile International Inc. and its consolidated
subsidiaries (the "Company"). Due to the Company's 52/53 week accounting
cycle, the second quarter of 1999 ended on July 2, 1999.
NET SALES
Net sales for the second quarter of 1999 increased $28.4 million, or 14.9%,
to $219.3 million from $190.9 million in the second quarter of 1998. Net
sales for the six months ended July 2, 1999 increased $43.3 million, or
11.5%, to $420.0 million from $376.7 million for the same period in 1998.
These increases for the three and six months ended July 2, 1999 were due
primarily to increased sales volume through the Company-operated sales
centers and additional sales within the home center channel. During the
second quarter of 1999, independent distributor sales increased 1.0% versus
the second quarter of 1998, but decreased for the six months ended July 2,
1999 due to the first quarter 1998 one time sale of inventories related to
the sale of three remaining American Olean stores.
GROSS PROFIT
Gross profit for the second quarter of 1999 increased $17.2 million, or
19.4%, to $105.7 million from $88.5 million in the second quarter of 1998.
Gross profit for the six months ended July 2, 1999 increased $26.4 million,
or 15.0%, to $202.3 million from $175.9 million for the same period in 1998.
Gross margin increased for the second quarter of 1999 to 48.2% from 46.4% in
the second quarter of 1998. Year to date, gross margin improved to 48.2%
versus 46.7% for the same period in 1998. These increases for the three and
six months ended July 2, 1999 were due to higher sales and lower
manufacturing costs partially offset by reductions in selling prices due to
more intense competition.
OPERATING EXPENSES
Operating expenses in the second quarter of 1999 increased $5.0 million, or
7.1%, to $75.7 million from $70.7 million in the second quarter of 1998. For
the six months ended July 2, 1999, operating expenses increased $6.0 million,
or 4.2%, to $150.0 million from $144.0 million for the same period in 1998.
These increases were due primarily to additional spending related to new
product introductions and higher costs associated with the growth in sales.
Operating expenses as a percent of sales in the second quarter of 1999
improved to 34.5% from 37.0% in the second quarter of 1998. Year to date,
operating expenses as a percent of sales decreased to 35.7% compared to 38.2%
for the same period in
Page 11
<PAGE>
1998. These decreases for the three and six months ended July 2, 1999 were
due primarily to higher sales. In addition, transportation costs as a percent
of sales decreased due to improved inventory positioning and lower freight
rates from carrier consolidation.
OPERATING INCOME
Operating income in the second quarter of 1999 increased $12.1 million, or
68.0%, to $29.9 million from $17.8 million in the second quarter of 1998. For
the six months ended July 2, 1999, operating income increased $20.5 million,
or 64.5%, to $52.3 million versus $31.8 million for the same period in 1998.
Operating income improved due primarily to higher sales and decreased
manufacturing costs.
INTEREST EXPENSE (NET)
Interest expense (net) in the second quarter of 1999 decreased $1.9 million,
or 16.4%, to $9.7 million from $11.6 million in the second quarter of 1998.
For the six months ended July 2, 1999, interest expense (net) decreased $3.4
million, or 14.7%, to $19.8 million from $23.2 million for the same period in
1998. These decreases were due to reduced borrowing requirements on the
Company's credit facility and related reductions in interest rates and fees.
INCOME TAXES
The income tax provision for the second quarter of 1999 reflects an effective
tax rate of approximately 6% compared to 18% for the second quarter of 1998.
For the six months ended July 2, 1999 the effective tax rate was
approximately 8% compared to 27% for the same period in 1998. These rates
reflect expected Mexico tax liabilities and U.S. state and possession income
taxes based on estimated taxable income in those jurisdictions. The decrease
in effective rates in 1999 versus 1998 was due to increased levels of pretax
income, which primarily affect the federal tax jurisdiction. No U.S. federal
income tax expense was recorded for 1999 or 1998 due to an offset by a
valuation allowance against U.S. federal deferred tax assets recorded during
1997. If the valuation allowance had not been recorded, the effective tax
rate for the six months ended July 2, 1999 and July 3, 1998 would have been
approximately 38.5%. The requirement for a valuation allowance will continue
to be reassessed in future reporting periods.
NET INCOME
Net income in the second quarter of 1999 increased to $19.5 million, or $0.36
per share, from $5.4 million, or $0.10 per share, in the second quarter of
1998 and increased to $30.6 million, or $0.56 per share, for the six months
ended July 2, 1999 compared to $6.3 million, or $0.12 per share, for the same
period in 1998. Using a 38.5% effective tax rate, net income for the six
months ended July 2, 1999 would have been $20.4 million, or $0.38 per share,
compared to $5.3 million, or $0.10 per share, for the same period in 1998.
Net income increased due to higher gross profit and operating income and
reduced interest expense.
Page 12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and funds available under the Company's bank credit
agreement (the "Third Amended Credit Facility") continue to provide the
Company with liquidity and capital resources for working capital
requirements, capital expenditures and debt service. For the six months ended
July 2, 1999, cash provided by operating activities was $35.2 million
compared to $17.4 million for the same period in 1998. The improvement in
operating cash flow was due to increased profitability compared to the same
period in 1998.
Net expenditures for property, plant and equipment were $8.5 million for the
six months ended July 2, 1999 compared to cash provided of $1.2 million for
the same period in 1998. Net cash provided in 1998 included $8.1 million of
net cash proceeds from the sale of the Lansdale, PA manufacturing facility.
Expenditures for the first half of 1999 included costs for multiple projects
to improve manufacturing, distribution and information systems. For the
remainder of 1999, the Company expects to incur expenditures for routine
capital improvements, continued costs to upgrade distribution facilities and
information systems and costs to expand and modernize several manufacturing
facilities.
Cash used in financing activities was $27.4 million for the first half of
1999, which primarily reflects revolver repayments of $10.2 million, term
debt amortization of $20.5 million and additional debt and fees of
approximately $2.5 million offset by cash inflows of approximately $6.1
million related to the issuance of common stock. Total availability under the
Third Amended Credit Facility as of July 2, 1999 was $94.2 million.
Although the Company believes cash flow from operating activities, together
with borrowings available under the Third Amended Credit Facility, will be
sufficient to fund working capital needs, capital expenditures and debt
service requirements, the Company is constantly pursuing opportunities to
improve its capital structure and may seek alternative financing arrangements.
The peso fluctuation and economic uncertainties in Mexico are not expected to
have a significant impact on the Company's liquidity. Since the Company has
no peso-based borrowings, high interest rates in Mexico are not expected to
directly affect the Company's liquidity. Any future devaluation of the peso
against the U.S. dollar may adversely affect the Company's results of
operations or financial condition.
The Company is involved in various proceedings relating to environmental
matters and is currently engaged in the investigation and cleanup of
hazardous substances 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 adverse effect on the Company's liquidity and financial
condition.
The United States is a party to the General Agreement on Tariffs and Trade
("GATT"). Under GATT, the United States currently imposes import duties on
ceramic tile from non-North American countries at no more than 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.
Page 13
<PAGE>
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 ceramic tile from Mexico of approximately 12%, 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 increase productivity to
offset increases in costs resulting from inflation in the U.S. and Mexico.
Inflation has not had a material impact on the Company's results of
operations during the six months ended July 2, 1999 and July 3, 1998.
However, any future increases in the inflation rate, and any increases in
interest rates which affect financing costs, may negatively affect the
Company's results of operations.
IMPACT OF YEAR 2000
The Company is continuing its efforts to modify and replace portions of its
software and equipment so that its computer systems will function properly in
the year 2000 and thereafter. The primary activity for this effort has been
the modification or upgrade of mission critical IT software information
systems necessary to process day-to-day business transactions (such as
customer sales and orders, invoices, customer statements, shipment planning
and distribution, product planning and financial accounting). These efforts
have been completed.
The Company continues to address other non-mission critical information
systems and mission critical non-information systems. Non-mission critical
information systems include, but are not limited to, local area networks,
desktop PC's and departmental software applications. Management estimates
these efforts will be completed by October 1999. Mission critical
non-information systems relate primarily to plant equipment. These efforts
are expected to be complete by the end of the year.
In addition to the Company's software and equipment, disruptions to the
operations of the Company's major customers and suppliers could have a
material adverse impact on the Company's operations and financial condition.
Major customers and suppliers have been surveyed to certify their readiness
for Year 2000. The Company is preparing a detailed Year 2000 contingency plan
which 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 October 1999.
The total Year 2000 project cost is estimated at approximately $5.4 million
and is being expensed as incurred. Through the end of the second quarter of
1999, expenses totaling $4.5 million have been incurred for Year 2000
activities. 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
Page 14
<PAGE>
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.
The Company believes that, with modifications to existing software and
conversions to new software and equipment, the Year 2000 issue will not pose
significant operational problems for its computer systems. The Company also
believes that it is expending its best efforts to make such modifications.
However, if such modifications and conversions are not made, are made
improperly, or are not completed in a timely manner, the Year 2000 issue
could have a material adverse impact on operations.
PART II. OTHER INFORMATION
ITEM 4. At the annual meeting of the Company held on April 29, 1999, the
shareholders of the Company approved the following proposals:
To elect eight directors to serve the ensuing year and until
respective successors shall have been duly elected and qualified.
<TABLE>
<CAPTION>
Directors For Against
--------- --- -------
<S> <C> <C>
Jacques R. Sardas 49,652,956 591,399
Charles J. Pilliod, Jr. 49,688,656 555,699
Douglas D. Danforth 49,838,856 405,499
Norman E. Wells, Jr. 49,841,856 402,499
Vincent A. Mai 49,654,056 590,299
Henry F. Skelsey 49,654,056 590,299
John M. Goldsmith 49,653,856 590,499
John F. Fiedler 49,841,856 402,499
</TABLE>
To amend the Company's 1997 Amended and Restated Stock Option
Plan to increase the number of shares reserved for issuance
pursuant thereto.
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
--- --------- ------- ----------------
<S> <C> <C> <C>
38,346,149 8,874,487 9,727 3,013,992
To approve the Company's 1999 Employee Stock Purchase Plan.
For Against Abstain Broker non-votes
--- ------- ------- ----------------
47,169,031 54,660 6,672 3,013,992
To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1999.
For Against Abstain
--- ------- -------
50,034,334 205,526 4,495
</TABLE>
Page 15
<PAGE>
ITEM 5. OTHER INFORMATION
Cautionary Statement for purposes of "Safe Harbor Provisions" of
the Private Securities Litigation Reform Act of 1995.
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to
risks, uncertainties and other factors which could cause actual
results to differ materially from future results expressed or
implied by such forward looking statements. Potential risks and
uncertainties include, but are not limited to, the impact of
competitive pressures and changing economic conditions on the
Company's business and its dependence on residential and
commercial construction activity, the fact that the Company is
highly leveraged, 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, system integration issues and environmental laws
and other regulations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
10.1 - Demand Registration Rights Letter Agreement dated
as of August 5, 1999 between Dal-Tile International
Inc., DTI Investors LLC and Jacques R. Sardas.
10.2 - Transfer Restriction Letter dated as of August 5,
1999 between Dal-Tile International Inc., DTI
Investors LLC and Jacques R. Sardas.
10.3 - Amendment to Jacques R. Sardas Stock Option and
Stock Appreciation Rights Agreements dated as of
August 5, 1999.
27.1 - Financial Data Schedule
(b) Reports On Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended July 2,
1999.
Page 16
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
DAL-TILE INTERNATIONAL INC.
-------------------------------------------
(Registrant)
Date:
August 13, 1999 /s/ W. Christopher Wellborn
- --------------- -------------------------------------------
Executive Vice President, Chief Financial
Officer and Assistant Secretary
Page 17
<PAGE>
[LETTERHEAD]
August 5, 1999
DTI Investors LLC
65 East 55th Street
New York, New York 10022
Attention: Vincent Mai
Dear Vincent:
In order to facilitate the orderly sale of shares of common stock (the
"Common Stock") of Dal-Tile International Inc. (the "Company"), the Company
hereby agrees with DTI Investors LLC and its manager (individually or
collectively, "DTI") that DTI shall have the right from time to time, subject
to receipt of the approvals referred below, to request (each, a "Demand
Registration") registration of the sale of shares of Common Stock owned by
DTI, its members, affiliates of such members or family members or family
trusts of such members (the "DTI Parties").
The Company will not be obligated to effect (a) more than one Demand
Registration in 1999, (b) any Demand Registration in which the estimated net
proceeds are less than $20 million, and (c) any Demand Registration within
six months after the effective date of any previously filed registration
statement of the Company, and the Company shall have the right to postpone
any requested registration for up to 90 days if it determines that such
registration could reasonably be expected to have an adverse effect on any
proposal or plan by the Company or its subsidiaries to engage in any
acquisition, merger, disposition or other material corporate transaction
(based on a good faith determination by the Board of Directors of the Company
that, in light of such proposal or plan, such postponement is appropriate).
The Company will also not be obligated to effect any Demand Registration
prior to December 31, 2001 unless such Demand Registration is approved by the
CEO of the Company, provided that if Jacques Sardas is not CEO at such time,
such Demand Registration must be approved by a majority of those directors of
the Company who are not officers, directors, employees or consultants of AEA
Investors Inc. or members of DTI Investors LLC. Notwithstanding the
immediately preceding sentence, but subject to the first sentence of this
paragraph, the Company shall be obligated to effect a Demand Registration if
notice of such Demand Registration is made after March 31, 2001 and the
holders of at least 40% of the aggregate outstanding limited liability
company units of DTI Investors LLC shall have requested that such Demand
Registration be effected.
Demand Registrations shall be underwritten offerings intended for broad
public distribution, and not "shelf" registrations on a continuous basis.
DTI shall have the right to select the managing underwriters for any Demand
Registration, who shall be of national prominence and reasonably acceptable
to the Company. The Company will use all reasonable efforts to effect the
registration and sale of any Common Stock subject to a Demand Registration as
promptly as practicable. The Company shall enter into customary agreements
(including any
7834 C. F. Hawn Freeway
Dallas, Texas 75217
214.398.1411
<PAGE>
DTI Investors LLC
August 5, 1999
Page 2
"lock-up" or indemnity agreements) and bear all expenses in connection with
the registrations provided for herein, other than DTI's legal expenses,
underwriting discounts and commissions and transfer taxes, if any. DTI
agrees, in connection with any registered public offering in which the
Company itself proposes to sell equity securities, or (to the extent the DTI
parties are not participating in such offering) any registered public
offering requested by Jacques Sardas as contemplated in the penultimate
paragraph hereof, that it will enter into customary "lock up" agreements
restricting its sale of shares of Common Stock for a period not to exceed 180
days following the effective date of such public offering, in each case to
the extent required by the managing underwriter of such offering.
The obligations of the Company contained herein are subject to (i)
requirements of applicable law, (ii) restrictions that may be imposed, in
good faith, by the Company's underwriters, and (iii) the DTI Parties
cooperating and providing any needed consents, agreements (including any
required "lock up" or customary indemnity agreements, to the extent such
arrangements are requested of members of Company management or significant
shareholders, generally) and information (provided that the DTI Parties
(other than DTI) shall have no obligation to make representations to the
underwriters with respect to the Company).
Except as provided below, DTI's right to Demand Registrations provided
for herein does not include the right to participate in registration
statements filed by the Company for the sale of equity securities by the
Company (a "Primary Offering"), but does include the right to participate in
registration statements requested by Jacques Sardas pursuant to Section
9(b)(ii) of his employment agreement, dated July 17, 1998 (the "Employment
Agreement"). Common Stock requested to be included in such registration by
Mr. Sardas and DTI will be included pro rata on the basis of the number of
shares held by the participants in the registration, subject to reduction, if
necessary, based on the advice of the managing underwriter for the offering,
provided however that Mr. Sardas shall not be obligated to reduce his
participation in such registration below 2 million shares of Common Stock.
DTI agrees that its registration rights hereunder (whether exercised by DTI
on its own behalf or on behalf of the DTI Parties) are subject to the
provisions of Section 9(b)(i) of the Employment Agreement. The parties
further agree that references in the last sentence of Section 9(b)(i) of the
Employment Agreement to "the number of shares of Common Stock held by the
Executive" and the reference in the second sentence of this paragraph to "the
number of shares held by the participants" shall include all shares subject
to stock options and all shares issuable under stock appreciation rights held
by the Executive. The Employment Agreement is deemed to be amended to the
extent it is inconsistent with this paragraph.
Notwithstanding the first sentence of the immediately preceding
paragraph, from and after March 31, 2001, DTI and, pursuant to Section
9(b)(ii) of his Employment Agreement (as a result of DTI's participation
therein), Mr. Sardas, shall have the right to participate in, and cause the
Company to include in any registration statement for, a Primary Offering,
shares of Common Stock requested by DTI and Mr. Sardas to be so included,
subject to reduction, if necessary, based on the advice of the managing
underwriter for such offering (it being understood that the Company shall
have priority in the event of any such reduction, and with respect to any
increase in the size of such offering). As between DTI and Mr. Sardas,
participation will be pro rated as set forth in Section 9(b)(ii) of the
Employment Agreement, provided that Mr. Sardas shall have priority as to
500,000 of his shares. The Company will give DTI prompt written notice of
its intention to effect a Primary Offering.
-2-
<PAGE>
DTI Investors LLC
August 5, 1999
Page 3
For the avoidance of doubt, it is agreed and acknowledged that DTI's
right, on behalf of the DTI Parties, to request registrations and to
participate in registrations made by the Company or others shall survive the
termination or dissolution of DTI Investors LLC (at which point its manager
shall continue to have such rights, to be exercised on behalf of the DTI
Parties), and shall be subject to the provisions contained in the second
paragraph of this Agreement.
This Agreement shall be governed by the law of the state of Delaware,
without regard to its rules of conflict of laws.
Very truly yours,
DAL-TILE INTERNATIONAL INC.
By: /s/ Mark A. Solls
---------------------------------------
Name: Mark A. Solls
Title: Vice President/Secretary
Agreed and Accepted:
DTI INVESTORS LLC
By: AEA Investors Inc., its Manager
By:
------------------------------
Title:
---------------------------
/s/ Jacques R. Sardas
- ---------------------------------
Jacques R. Sardas
-3-
<PAGE>
DTI Investors LLC
August 5, 1999
Dal-Tile International Inc.
7834 Hawn Freeway
Dallas, Texas 75217
Attention: Mr. Jacques R. Sardas
Dear Jack:
In connection with the granting of registration rights for the
benefit of, and the proposed extension of the expiration date of, DTI
Investors LLC (the "LLC"), the LLC agrees with Dal-Tile International Inc.
("Dal-Tile") not to consummate any proposed sale or other transfer (whether
or not for value) of shares of Dal-Tile common stock or securities
convertible into Dal-Tile common stock unless approved by the CEO of
Dal-Tile, provided that if Jacques Sardas ("Sardas") is not CEO at such time,
such sale or transfer must be approved by a majority of those directors of
Dal-Tile who are not officers, directors, employees or consultants of AEA
Investors Inc. or members of the LLC. By his execution hereof, Sardas agrees
not to consummate any proposed sale or other transfer of shares of Dal-Tile
common stock or securities convertible into Dal-Tile common stock unless
approved by the LLC. These restrictions are not intended to apply to the
transfer by (a) Sardas to family members or family trusts, or by operation of
the laws of descent or distribution, so long as the transferee agrees to be
bound by the terms of this letter agreement (and Sardas agrees to cause any
persons to whom Sardas has transferred stock or options to be so bound), or
(b) Sardas or the LLC, pursuant to registration rights granted by Dal-Tile as
of the date hereof. Nothing contained herein shall be deemed to restrict the
LLC's right to distribute shares of Dal-Tile common stock to its members in
connection with an exercise of registration rights for the benefit of its
members, provided that in connection therewith its members agree to
agreements that restrict transfer (on the same terms as contained in this
agreement, including permitted transfers by distributees of the type
contemplated by clause (a) of the preceding sentence) of Dal-Tile shares
distributed to such members (other than shares being sold pursuant to the
exercise of registration rights) until December 31, 2001. This agreement
shall be governed by the law of the State of Delaware, without regard to its
rules of conflict of laws, and shall terminate on December 31, 2001. The
parties hereto agree that damages would not be an adequate remedy for breach
of this Agreement, and accordingly, the parties may specifically enforce the
provisions hereof.
Very truly yours,
DTI INVESTORS LLC
By: AEA Investors Inc., its Manager
By:
---------------------------------
Name:
Title:
Agreed and Accepted:
DAL-TILE INTERNATIONAL INC.
By: /s/ Mark A. Solls
-------------------------
Name: Mark A. Solls
Title: Vice President/Secretary
/s/ Jacques R. Sardas
- ---------------------------- -------------------------------------
Jacques R. Sardas [family transferees]
<PAGE>
AMENDMENT TO STOCK OPTION AND SAR AGREEMENTS
1. Reference is made to the Amended and Restated Nonqualified Stock
Option Agreement, dated as of February 20, 1998, the Nonqualified Stock
Option Agreement, dated as of July 17, 1998 and the Nonqualified Stock Option
Agreement, dated as of December 10, 1998 (collectively, the "Option
Agreements"), in each case, between Jacques Sardas ("Optionee") and Dal-Tile
International Inc. (the "Company"). Terms defined in the Option Agreements
are used herein as so defined. Section 4 of each of the Option Agreements is
hereby amended and modified to provide that, upon termination of Optionee's
employment with the Company for any reason other than Cause (as defined in
Optionee's Employment Agreement), Optionee's Options shall (to the extent
vested pursuant to the terms of the Option Agreements and the Plan) remain
exercisable until the expiration of their respective terms. This amendment
is not intended to modify in any other respect the provisions of the
Agreements, which shall remain in full force and effect as so modified, and
in particular this amendment does not modify the provisions of the Option
Agreements or the Plan relating to vesting or termination for Cause.
2. Reference is made to the Stock Appreciation Rights Agreement, dated
as of February 20, 1998, covering Stock Appreciation Rights with respect to 2
million shares of Common Stock, and the Stock Appreciation Rights Agreement,
dated as of February 20, 1998, covering Stock Appreciation Rights with
respect to 250,000 shares of Common Stock (collectively, the "SAR
Agreements"), in each case, between Jacques Sardas ("Grantee") and the
Company. Terms defined in the SAR Agreements are used herein as so defined.
Section 6.3 of each of the SAR Agreements is hereby amended and modified to
provide that, upon termination of Grantee's employment with the Company for
any reason other than Cause (as defined in Grantee's Employment Agreement),
Grantee's SARs shall (to the extent vested pursuant to the terms of the SAR
Agreements) remain exercisable until the expiration of their respective
terms. This amendment is not intended to modify in any other respect the
provisions of the SAR Agreements, which shall remain in full force and effect
as so modified, and in particular this amendment does not modify the
provisions of the SAR Agreements relating to vesting or termination for Cause.
IN WITNESS WHEREOF, the parties have hereto executed this Agreement as of
August 5, 1999.
DAL-TILE INTERNATIONAL INC.
By: /s/ Mark A. Solls
----------------------------------------
Title: Vice President/Secretary
----------------------------------------
/s/ Jacques R. Sardas
-------------------------------------------
Jacques R. Sardas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-03-1999 JAN-02-1999
<PERIOD-END> JUL-02-1999 JUL-02-1999
<CASH> 993 993
<SECURITIES> 0 0
<RECEIVABLES> 106,940 106,940
<ALLOWANCES> 10,609 10,609
<INVENTORY> 135,179 135,179
<CURRENT-ASSETS> 262,594 262,594
<PP&E> 295,172 295,172
<DEPRECIATION> 95,091 95,091
<TOTAL-ASSETS> 643,334 643,334
<CURRENT-LIABILITIES> 151,559 151,559
<BONDS> 415,468 415,468
0 0
0 0
<COMMON> 541 541
<OTHER-SE> 51,759 51,759
<TOTAL-LIABILITY-AND-EQUITY> 643,334 643,334
<SALES> 219,303 419,995
<TOTAL-REVENUES> 219,303 419,995
<CGS> 113,652 217,662
<TOTAL-COSTS> 189,356 367,663
<OTHER-EXPENSES> (495) (707)
<LOSS-PROVISION> 1,627 3,494
<INTEREST-EXPENSE> 9,696 19,881
<INCOME-PRETAX> 20,791 33,229
<INCOME-TAX> 1,300 2,600
<INCOME-CONTINUING> 19,491 30,629
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,491 30,629
<EPS-BASIC> 0.36 0.57
<EPS-DILUTED> 0.36 0.56
</TABLE>