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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 DECEMBER 31, 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 1, 2000, there were 54,815,686 shares of the Registrant's Common
Stock outstanding. The aggregate market value of Common Stock held by
nonaffiliates of the Registrant at March 1, 2000 was $194,943,383 (based on
the closing sale price of the Common Stock on March 1, 2000). 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 2000 -----------------------
ANNUAL MEETING OF STOCKHOLDERS PART III
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DAL-TILE INTERNATIONAL INC.
FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 10
Item 3. Legal Proceedings................................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 12
Item 6. Selected Financial Data.......................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 22
Item 8. Financial Statements and Supplementary Data...................................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 23
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 24
Item 11. Executive Compensation .......................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 27
Item 13. Certain Relationships and Related Transactions................................................... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 28
PART I
ITEM 1. BUSINESS
GENERAL
Dal-Tile International Inc., a Delaware corporation formed in 1987 (the
"Registrant"), believes that it is the largest manufacturer, distributor and
marketer of ceramic tile in 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 1999 refer to the fiscal year ended December 31, 1999.
Dal-Tile currently conducts its business in one industry segment, engaging in
the manufacturing, distribution and marketing of wall, floor and mosaic tile.
The Company operates with a significant level of vertical integration,
combining what it believes to be North America's largest volume distribution
system with modern manufacturing facilities located in the United States and
Mexico. 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
218 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 names
DALTILE-Registered Trademark-, AMERICAN OLEAN-Registered Trademark- and HOME
SOURCE-Registered Trademark-. In addition, the Company resells other
manufacturers' products.
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 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.
1
During fiscal year 1999, Dal-Tile opened a state-of-the-art showroom and
design center in Dallas, TX dedicated exclusively to the residential business.
The showroom provides a place for customers of local builders, remodelers,
architects, designers and contractors to view and select ceramic tile for
their building projects. The showroom is staffed with design professionals
knowledgeable in wall and floor tile applications, as well as current design
and decorating trends.
COMPANY-OPERATED SALES CENTERS
A network of 218 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 1999, a majority of the Company's net sales were 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
approximately 110 sales associates servicing both commercial and residential
markets. The DALTILE brand also has a group of over 40 sales representatives
dedicated exclusively to the architectural community. The architectural
community exercises significant influence over the specification of products
utilized in commercial applications.
The Company has designed each sales center to serve as a "one-stop" source
that provides 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 ceramic 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, with a typical center
occupying approximately 12,000 square feet. The sales centers consist of a
showroom dedicated to displaying the product offerings together with office
space and a warehouse in which inventory is stocked. Sales center displays and
inventories are designed to reflect local consumer preferences. The sales
centers generally are located in light industrial areas rather than retail
areas and generally occupy moderately priced lease space under 3 to 5 year
leases.
As of December 31, 1999, the sales center distribution system included 217
Dal-Tile sales centers and one American Olean sales center. 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 DISTRIBUTOR
The independent distributor channel is serviced through a dedicated business
unit that includes 12 regional sales managers to serve the particular
requirements of its customers. Currently, the AMERICAN OLEAN brand is
distributed through 201 independent distributor locations and one
Company-owned sales center 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.
2
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 1,400
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 significant growth opportunities.
ESTABLISHED BRANDS AND SPECIAL MARKETING PROGRAMS
The Company believes that it has two of the leading brand names in the U.S.
ceramic tile industry - DALTILE and AMERICAN OLEAN. The roots of the DALTILE
and AMERICAN OLEAN brand names date back approximately fifty and seventy-five
years, respectively.
The Company-operated sales centers distribute primarily the DALTILE brand,
which includes a fully integrated marketing program, emphasizing a focus on
fashion. The product offering is based on the Company's assessment of the
needs of professional installers, designers, architects and builders, as well
as a review of competitive 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 primarily through independent distributors. The brand is supported
by a fully integrated marketing program, including public relations efforts,
displays, merchandising (sample boards, chip chests), literature/catalogs and
an Internet website.
In addition to distributing the DALTILE and AMERICAN OLEAN brands, certain
home center retailers distribute a home center brand-HOME SOURCE.
The Company also has a special marketing program with Kohler-Registered
Trademark- for bathroom and kitchen fixture color coordination. The program
includes development of ceramic tile products and merchandising programs to
complement this product line.
PRODUCT AND PRODUCT DEVELOPMENT
The Company manufactures and sells different types of tile in various sizes
and styles for commercial and residential use, as well as related trim and
angle pieces. The Company also sells stone and quarry-related products and
allied products purchased from third-party manufacturers. Management believes
that "one-stop shopping," which requires a full product line at its
Company-operated sales centers, is an important competitive advantage in
servicing its core customers, especially tile contractors.
3
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 to invest 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, floor covering dealers and ceramic specialty retailers. The
Company also sells to the do-it-yourself and buy-it-yourself market through a
relationship with home center retailers, such as The Home Depot and Lowe's,
and is a significant supplier to this channel. The Company has a broad and
diversified customer base of more than 45,000 active accounts in the United
States. In addition, the Company has sales to over 216 national accounts,
including recognized 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 1999
accounted for less than 10 percent of net sales, and the 10 largest customers
accounted for approximately 18 percent of net sales in the same period.
MANUFACTURING
Currently, Dal-Tile operates nine tile manufacturing facilities with an
aggregate annual manufacturing capacity of 419 million square feet. During the
five-year period 1995-1999, approximately $142 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 380 million square feet
to 419 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 to replace less
efficient production capacity at this location.
In fiscal year 1999, approximately 22 million square feet of state-of-the-art
glazed floor tile capacity was added in Monterrey, Mexico. Also, approximately
5.6 million square feet of state-of-the-art wall tile trim capacity was added
in the Dallas, TX facility to 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.
4
The Company also has a 49.99 percent 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 consolidating a portion of the 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 December 31, 1999, the Company was
pursuing the sale of the Coleman and Mt. Gilead facilities.
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.
The following table summarizes the products currently manufactured by the
Company's facilities:
FACILITY PRODUCT TYPE
- ------- ------------
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.......................... 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
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" tile 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 tile primarily from pure nepheline syenite and clay and
(iv) unglazed quarry tile from clay.
During the fourth quarter of fiscal year 1999, the Company sold its talc
mining operation, along with the related mineral rights, to Wold Talc Company.
In conjunction with the sale, a long-term supply agreement for talc
requirements was signed between the Company and Wold Talc Company.
5
Dal-Tile owns long-term clay mining rights in Alabama, Kentucky and
Mississippi that satisfy nearly all clay requirements for producing unglazed
quarry tile. The Company purchases a number of different grades of clay for
the manufacture of its non-quarry tile. Management believes that there is an
adequate supply of all grades of clay and that all are readily available from
a number of independent sources.
The Company purchases all of its impure nepheline syenite requirements from
Minnesota Mining and Manufacturing Company; however, management believes that
there is an adequate supply of impure nepheline syenite which can be obtained
from other sources. 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 frit (ground glass), zircon, stains and other materials, with frit being
the largest ingredient. The Company manufactures approximately 62 percent 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 1999, the Company converted its mainframe enterprise
systems processing from AWI to IBM Global Services to reduce costs and improve
service. In addition, payroll/ personnel processing was converted from an
in-house system to ADP and all Year 2000 activities were completed. During
fiscal year 2000, the Company will focus on operating improvements and cost
reductions through initiatives to improve customer service, inventory turns
and forecasting. Improvements in customer service will include the launch of
Internet e-commerce programs.
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 1999, approximately 68
percent of ceramic tile sales (by unit volume) in the United States consisted
of imports, including approximately 7 percent 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 flooring coverings for
residential and commercial uses. Among such floor coverings are carpet, wood
flooring, resilient flooring and stone products (such as marble, granite,
slate and limestone tile). Among such wall coverings are paint, wallpaper,
porcelain, laminates and wood paneling. Ceramic tile products compete
effectively as to price
6
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 December 31, 1999, the Company employed 7,571 persons, 3,101 of which were
employed by its Mexican subsidiary. Approximately 10 percent of employees in
the United States are represented by unions. Approximately 90 percent of the
employees in Mexico are represented by a union under a collective bargaining
agreement, effective January 1, 2000. The Company has not experienced a
significant work stoppage in Mexico in over 19 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 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 to compliance with such
laws and regulations. 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.
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 Resource Conservation and Recovery Act ("RCRA")
Part B post closure care permitting 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 and post
closure care permit application have 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
7
recover at least 50 percent 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. Permits for the Elam and
Pleasant Run projects are anticipated to be issued in the second quarter of
fiscal year 2000.
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. ("Master-Halco") (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. The Company has agreed to indemnify such individuals against any
costs relating to the disposal of industrial solid waste at the site. Pursuant
to the 1994 Order, the Company completed a remedial investigation and
submitted a closure plan with respect to the Walton site. In fiscal year 1999,
the TNRCC approved the closure plan. 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 believes, based on
current estimates, that the remediation is reasonably likely to cost between
approximately $2 million and $4 million. In fiscal year 1999, Master-Halco
agreed to pay the Company $690,000 to resolve Master-Halco's share of
remediation costs relating to the Walton site. The Company expects to recover
at least 50 percent of its 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. The Company currently
anticipates that, weather permitting, the remediation activities at the Walton
site will be completed in the second quarter of fiscal year 2000. The Walton
site will also require a post closure permit.
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 percent 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 percent 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
8
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
RCRA and other U.S. federal and state laws. The Company also generates
non-hazardous wastes and is engaged in recycling and pollution prevention
programs. Compliance with current laws and regulations has not had, and is not
expected to have, a material adverse effect on the Company, including with
respect to its capital expenditures, earnings and competitive position.
Numerous aspects of the manufacture of ceramic tile currently require
expenditures for environmental compliance. For example, the mixing of raw
materials, preparation of glazes, and pressing, drying and firing of tile all
are sources of air emissions that require expenditures for compliance with
laws and regulations governing air emissions, including the purchase,
operation and maintenance of control equipment to prevent or limit air
emissions. Many of these manufacturing processes also currently result in the
accumulation of dust that contains silica, thereby requiring expenditures for
capital equipment in order to comply with Occupational Safety and Health
Administration ("OSHA") regulations with respect to potential employee
exposure to such dust. In addition, the rinsing of spray dryers and containers
used for the preparation of glaze and tile body results in wastewater
discharges that require expenditures for compliance with laws and regulations
governing water pollution. Finally, certain of the Company's manufacturing
processes, including the preparation of glaze, the assembly of certain 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
9
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 are pending against the Company
except as set forth above. In addition, it is impossible to predict the effect
which future environmental regulation in the United States, Mexico and Canada
could have on the Company.
GEOGRAPHIC LOCATION
Financial information by geographic location for the three years ended
December 31, 1999 is set forth in Note 12 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, distributing, 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:
LOCATION USE SQ. FEET LEASED/OWNED
- -------- --- -------- ------------
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)
(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 closed its Coleman, TX manufacturing facility in fiscal year
1997, and closed its Mt. Gilead, NC manufacturing facility in fiscal year
1998. As of December 31, 1999, the Company was pursuing the sale of the
Coleman and Mt. Gilead facilities.
SALES CENTERS
As of December 31, 1999, the Company owned one sales center in Denver,
Colorado, totaling approximately 22,500 square feet.
10
In addition, 217 sales centers were leased as of December 31, 1999
(aggregating approximately 2.6 million square feet), pursuant to leases that
extend for terms on average of 3 to 5 years with expiration dates primarily
from 2000 - 2005.
For a description of aggregate rental expenses with respect to its operating
leases, see Note 11 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.
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 references herein.
11
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 3, 1998, through December 31, 1999.
HIGH LOW
---- ----
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
January 2, 1999 to April 2, 1999 13-1/16 7
April 3, 1999 to July 2, 1999 13 7-1/2
July 3, 1999 to October 1, 1999 13-1/8 6-3/4
October 2, 1999 to December 31, 1999 10-1/2 7-11/16
HOLDERS
At March 1, 2000, there were 107 holders of record of Common Stock and
54,815,686 shares of Common Stock outstanding.
DIVIDEND POLICY
The Company has not paid cash dividends on Common Stock during the last two
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 percent interest in RISA. The 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 or 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 or other cash distributions in the foreseeable
future.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented for fiscal years 1995 through
1999 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 Result of Operations" and
with the Consolidated Financial Statements including the related notes thereto
included elsewhere herein.
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2, JANUARY 3, DECEMBER 31,
1999 1999 1998 1997 1995
--------------- ------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA: (1)
Net sales...................... $ 850,568 $ 751,785 $ 676,637 $ 720,236 $ 474,812
Cost of goods sold............. 440,514 396,112 404,728 369,731 225,364
------------ ------------ ----------- ----------- -----------
Gross profit................... 410,054 355,673 271,909 350,505 249,448
Expenses:
Transportation............. 57,124 55,988 58,425 47,125 33,535
Selling, general and administrative 232,845 222,790 277,515 190,911 134,193
Provisions for merger integration - - - 9,000 22,430
Amortization of goodwill... 5,607 5,604 5,605 5,605 4,765
------------ ------------ ----------- ----------- -----------
Total operating expenses....... 295,576 284,382 341,545 252,641 194,923
------------ ------------ ----------- ----------- -----------
Operating income (loss)........ 114,478 71,291 (69,636) 97,864 54,525
Interest expense............... 37,125 45,051 40,649 46,338 55,453
Interest income................ 126 128 268 1,685 1,250
Other income .................. 250 1,264 1,220 129 2,994
------------ ------------ ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item........... 77,729 27,632 (108,797) 53,340 3,316
Income tax provision .......... 3,966 3,604 1,439 18,914 1,176
------------ ------------ ----------- ----------- -----------
Income (loss) before extraordinary
item......................... 73,763 24,028 (110,236) 34,426 2,140
Extraordinary item - loss on early
retirement of debt, net of taxes - - - (29,072) -
------------ ------------ ----------- ----------- -----------
Net income (loss).............. $ 73,763 $ 24,028 $ (110,236) $ 5,354 $ 2,140
============ ============ =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary
item per common share........ $ 1.36 $ 0.45 $ (2.06) $ 0.71 $ 0.07
Extraordinary item per common share - - - (0.60) -
------------ ------------ ----------- ----------- -----------
Net income (loss) per common share $ 1.36 $ 0.45 $ (2.06) $ 0.11 $ 0.07
============ ============ =========== =========== ===========
Weighted average common shares 54,103 53,487 53,435 48,473 28,743
============ ============ =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary
item per common share........ $ 1.35 $ 0.45 $ (2.06) $ 0.69 $ 0.07
Extraordinary item per common share - - - (0.58) -
------------ ------------ ----------- ----------- -----------
Net income (loss) per common share $ 1.35 $ 0.45 $ (2.06) $ 0.11 $ 0.07
============ ============ =========== =========== ===========
Weighted average common shares,
assuming dilution.......... 54,539 53,983 53,435 50,053 29,668
============ ============ =========== =========== ===========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................ $ 91,791 $ 117,615 $ 154,888 $ 180,819 $ 152,128
Total assets................... 638,704 640,808 672,069 688,497 672,393
Total debt..................... 410,673 500,432 557,091 465,858 527,816
Long-term debt................. 353,877 453,923 537,830 433,035 480,769
Stockholders' equity........... 100,944 15,459 3,920 115,569 9,639
13
(1) Operating data for the fiscal year ended December 31, 1995 excludes
the results of operations of AO as the AO Acquisition occurred on
December 29, 1995, and is not directly comparable to subsequent
periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Fiscal year 1999 was marked by sustained growth in sales and profits driven by
improved performance across all product lines and continued reductions of
overall operating expenses. The Company improved sales by 13.1 percent versus
fiscal year 1998 due in part to the introduction of thirty new products
servicing both the commercial and residential markets. An emphasis was placed
on growth in the residential market as the Company substantially increased its
sales force, launched natural stone product lines and opened a new
state-of-the-art ceramic tile showroom and design center. In addition, product
availability improved through the implementation of initiatives to improve all
areas of the supply chain.
Increased efficiencies throughout the organization contributed to a
significant improvement in earnings versus fiscal year 1998. Per unit
manufacturing costs declined through the modernization of plant equipment,
while transportation costs were reduced from 7.4 percent of sales in fiscal
year 1998 to 6.7 percent of sales through improved controls and the fiscal
year 1998 consolidation of freight carriers. Selling, general and
administrative expenses declined from 29.6 percent of sales in fiscal year
1998 to 27.4 percent of sales in fiscal year 1999 due primarily to corporate
cost reduction initiatives, lower bad debt expense and increased sales.
Cash flow from operations increased by $46.9 million due primarily to
increased profitability and improvements in working capital. Days sales
outstanding decreased from 51 days in fiscal year 1998 to 44 days in fiscal
year 1999 due primarily to better accounts receivable collections. Billing
procedures and invoice accuracy were improved and field credit managers were
fully integrated into regional operations. Inventory turns improved from 3.0
in fiscal year 1998 to 3.2 in fiscal year 1999. The Company increased its
capital spending by $19.3 million to $25.1 million primarily to increase
capacity and to modernize its facilities. Free cash flow increased by $27.6
million versus fiscal year 1998 to $78.8 million.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
FISCAL YEAR ENDED
----------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
---------------- --------------- ---------------
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of goods sold..................................... 51.8 52.7 59.8
---------------- --------------- ---------------
Gross profit........................................... 48.2 47.3 40.2
Operating expenses..................................... 34.7 37.8 50.5
---------------- --------------- ---------------
Operating income (loss)................................ 13.5 9.5 (10.3)
Interest expense (net)................................. 4.3 6.0 6.0
Other income........................................... - 0.2 0.2
---------------- --------------- ---------------
Income (loss) before income taxes...................... 9.2 3.7 (16.1)
Income tax provision................................... 0.5 0.5 0.2
---------------- --------------- ---------------
Net income (loss)...................................... 8.7% 3.2% (16.3)%
================ =============== ===============
14
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 1,
1999
NET SALES
Net sales increased $98.8 million, or 13.1 percent, to $850.6 million for
fiscal year 1999 from $751.8 million for fiscal year 1998. The increase in
sales related principally to the Company-operated sales centers, which
increased $87.2 million, or 16.7 percent versus fiscal year 1998. During
fiscal year 1999, the Company increased residential sales through new product
introductions and the addition of a dedicated sales force. In addition, a new
state-of-the-art showroom and design center was opened to provide higher
levels of customer service to this market. Also, the Company achieved growth
in commercial sales through improved product availability and overall customer
service.
Net sales to independent distributors were down $1.4 million, or 1.2 percent
versus fiscal year 1998 and the Home Center channel increased $9.0 million, or
10.4 percent. Independent distributor sales were negatively affected by the
Company's continued process of restructuring its distributor base, while Home
Centers sales were favorably affected by the growth of the residential
business and sales to new store locations. Net sales within Mexico increased
$3.7 million to $28.9 million in fiscal year 1999 from $25.2 million in fiscal
year 1998.
GROSS PROFIT
Gross profit increased $54.4 million, or 15.3 percent, to $410.1 million in
fiscal year 1999 from $355.7 million in fiscal year 1998. The increase in
gross profit was due primarily to the growth in sales and lower manufacturing
costs. Gross margin increased to 48.2 percent for fiscal year 1999 from 47.3
percent for fiscal year 1998. This increase was due primarily to lower
manufacturing costs and increased productivity offset by reductions in selling
prices caused by more intense competition. During fiscal year 1999,
manufacturing cost reductions were achieved through shifts in production to
low cost state-of-the-art manufacturing equipment at several facilities. In
addition, efficiencies were gained through the implementation of various
process improvements. Inventory shrink and breakage were significantly reduced
due to better controls at the Company-operated stores and distribution centers.
OPERATING EXPENSES
Operating expenses increased $11.2 million, or 3.9 percent, to $295.6 million
in fiscal year 1999 from $284.4 million in fiscal year 1998. The increase was
due primarily to higher selling and marketing costs associated with the
increase in sales.
Operating expenses as a percent of sales decreased to 34.7 percent in fiscal
year 1999 from 37.8 percent in fiscal year 1998. This decrease was the result
of higher sales and the Company's efforts to reduce general and administrative
costs. Due to improved collection experience, bad debt provisions were lowered
during fiscal year 1999 and consulting expenses were reduced through the
completion of Y2K efforts and other initiatives. In addition, freight expense
as a percent of sales decreased to 6.7 percent for fiscal year 1999 versus 7.4
percent in 1998 due to improved shipment planning, increased efficiencies in
distribution and consolidation of freight carriers.
OPERATING INCOME
Operating income increased to $114.5 million in fiscal year 1999 from $71.3
million in fiscal year 1998. Operating margin increased to 13.5 percent
compared to 9.5 percent for the previous fiscal year due primarily to
increased sales and decreased operating costs.
15
INTEREST EXPENSE (NET)
Interest expense (net) decreased $7.9 million, or 17.6 percent, to $37.0
million in fiscal year 1999 from $44.9 million in fiscal year 1998. Interest
expense decreased due to reduced borrowing requirements on the Company's
credit facility. Also, lower fees and interest rates combined with reduced
borrowing spreads contributed to the reduction in interest expense. The
Company's credit facility contains a pricing mechanism that lowers borrowing
spreads as financial performance improves. During fiscal year 1999, borrowing
spreads decreased from 2.0 percent to 1.25 percent on the revolver and Term A
Loan borrowings and decreased from 2.5 percent to 1.75 percent on the Term B
Loan borrowings.
INCOME TAXES
The income tax provisions for fiscal years 1999 and 1998 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 years 1999 and 1998 due to an offsetting reduction in a valuation
allowance recorded against U.S. federal deferred tax assets. The valuation
allowance was established in fiscal year 1997 offsetting any benefit of
federal net operating losses and to reflect management's estimation as to the
future utilization of the deferred tax assets. The pro forma effective tax
rate assuming no net operating loss carryforward for fiscal years 1999 and
1998 would have been 38.5 percent.
During the fourth quarter of fiscal year 1999, the Company sold its talc
mining operation along with the related mineral rights to Wold Talc Company.
In conjunction with the sale, a long-term supply agreement for talc
requirements was signed between the Company and Wold Talc Company. The Company
recorded a $2.0 million gain on the sale of the talc mine, which will be
amortized over the life of the long-term supply agreement. The transaction
generated a $70 million net operating loss for tax purposes, for which a
valuation allowance had previously been established to offset the benefit.
The Company will continue to reassess valuation allowance requirements in
future reporting periods.
PESO-U.S. DOLLAR EXCHANGE RATE
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 1999 domestic
sales in Mexico were limited to approximately 3.4 percent 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 in Mexico to
the U.S. dollar, translation gains or losses and foreign currency transaction
gains or losses are recognized in other income and expense. During fiscal year
1999, the Company recorded translation and transaction gains of approximately
$0.1 million. If necessary, management utilizes foreign currency forward
contracts to offset exposure to exchange rate changes. During fiscal years
1999 and 1998, the Company did not enter into any foreign currency forward
contracts.
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 percent, 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-
16
operated sales centers increased $50.7 million, or 10.7 percent, and same
store sales increased approximately 10.3 percent. In addition, net sales
increased within the independent distributor and Home Centers channels
approximately $9.3 million, or 8.8 percent, and $7.2 million, or 9.2 percent,
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.
GROSS PROFIT
Gross profit increased $83.8 million, or 30.8 percent, 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 percent for fiscal year 1998 from 40.2 percent
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 percent to 90 percent
resulting in lower per unit manufacturing costs. Additionally, cost reductions
were achieved through the closing of inefficient plants and shifting
production to low cost state-of-the-art facilities. Fiscal year 1997 results
were negatively affected by inventory valuation adjustments of $36.5 million.
OPERATING EXPENSES
Operating expenses decreased $57.1 million, or 16.7 percent, 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.
Operating expenses as a percent of sales decreased to 37.8 percent in fiscal
year 1998 from 50.5 percent 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 percent for fiscal year
1998 versus 8.6 percent 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
percent from a negative operating margin of 10.3 percent 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 percent, 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.
17
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 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 percent 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. If
necessary, 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.
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 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 December 31,
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 to
write-down 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.
18
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 SKU's offered for sale by the Company and would
discontinue additional patterns. These actions, coupled with the results of
physical inventories and the delay in systems integration, resulted in a need
to record 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 inventory or out of balance
inventory 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 December 31, 1999, reserves relating to the fiscal year 1997 charges to
write-down inventories, accounts receivable and other non-productive assets
were depleted, and the Company completed the work-down of all other charges
incurred. During fiscal year 1999, the Company paid approximately $1.4 million
of the remaining $3.8 million for severance and other costs. The remaining
$2.4 million of outstanding reserves were reversed to income.
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.
19
During fiscal year 1999, approximately $2.4 million of reserves associated
with sales centers that had been closed were deemed in excess of future lease
commitments due to the Company's efforts to sub-lease various locations. The
excess was reversed against intangible assets booked at the time of the AO
Acquisition. As of December 31, 1999, the Company retained approximately $3.6
million of reserves primarily related to the continued expiration of lease
commitments associated with various other sales centers that were closed.
Future cash outlays are anticipated to continue through the end of fiscal year
2004.
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
$103.9 million in fiscal year 1999 versus $57.0 million in fiscal year 1998.
This improvement was due primarily to increased profitability and improved
management of working capital.
Net expenditures for property, plant and equipment were $25.1 million for
fiscal year 1999, which included approximately $18.8 million for manufacturing
process improvements and the expansion and modernization of various
manufacturing facilities. In addition, the Company incurred expenditures for
routine capital improvements and for enhancements to distribution and
information systems.
Cash used in financing activities was $79.3 million for fiscal year 1999. Cash
outflows for revolver repayments of $43.3 million, term debt amortization of
$41.0 million and additional debt and fees of approximately $5.6 million were
offset by cash inflows of approximately $10.6 million primarily related to the
exercise of options of common stock. Total availability as of December 31,
1999 under the Third Amended Credit Facility was $128.0 million. The Company
believes cash flow from operating activities, 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 December 31, 1999, with $100.0 million in
effect until January 13, 2000 and $200.0 million in effect through January 16,
2001. Under the terms of the swap agreements, the Company pays a fixed
interest rate of approximately 5.7 percent. As of December 31, 1999, the swap
agreements had an aggregate fair value of $1.5 million.
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 position.
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
20
ultimate liability with respect to such investigation and remediation
activities will have a material effect on the Company's liquidity and
financial condition.
The United States is a party to the General Agreement on Tariffs and Trade
("GATT"). Under GATT, the United States currently imposes import duties on
ceramic tile from non-North American countries at no more than 15 percent, to
be reduced ratably to 8 1/2 percent 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 12 percent,
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 1999, 1998 and 1997. However, any future increases in the
inflation rate, which affect financing costs, may negatively affect the
Company's results of operations.
IMPACT OF YEAR 2000
During the fourth quarter of fiscal year 1999, the Company completed efforts
to modify and replace portions of its software and equipment so that its
computer systems would function properly in the year 2000 and thereafter. The
total Year 2000 project cost was approximately $5.0 million and was expensed
as incurred. Efforts were expended to modify or upgrade mission critical
Information Technology software information systems necessary to process
day-to-day business transactions (such as customer sales and orders, invoices,
customer statements, shipment planning and financial accounting). Also,
modifications to manufacturing process computers and non-mission critical
information systems, which included, but was not limited to, local area
networks, desktop PC's and departmental software applications were completed.
As of March 1, 2000, the Company has not experienced any material Year 2000
compliance problems and, to the Company's knowledge, none of its significant
vendors or customers have suffered material problems related to Year 2000
compliance that the Company believes are likely to materially adversely affect
the Company. However, the Company cannot assure that problems will not occur
in the future related to Year 2000 compliance or that such problems will not
have a material adverse affect on operations.
21
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks, uncertainties and other factors, which
could cause actual results to differ materially from future results expressed
or implied by such forward-looking statements. Potential risks and
uncertainties include, but are not limited to, the impact of competitive
pressures and changing economic conditions on the Company's business and its
dependence on residential and commercial construction activity, the fact that
the Company is highly leveraged, 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 tables below provide information regarding the Company's market sensitive
financial instruments and constitute forward-looking statements. 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 50 percent 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.
INTEREST RATE SENSITIVITY TABLE AS OF DECEMBER 31, 1999:
FAIR VALUE
DECEMBER 31,
EXPECTED MATURITY DATES 2000 2001 2002 2003 2004 1999
(IN THOUSANDS) ----------- ---------- ----------- ----------- ----------- -------------
Total debt:
Fixed rate................... $ 3,921 $ 2,885 $ 879 $ - $ - $ 7,685
Average interest rate........ 8.4% 8.5% 8.3%
Variable rate................ $ 52,875 $52,875 $ 176,138 $ 120,800 $ 300 $ 402,988
Average interest rate (a).... 7.7% 8.6% 8.7% 9.4% 9.4%
Interest rate swaps:
Pay fixed/receive variable... $ 2,050 $ 152 $ - $ - $ - $ 1,501
Average pay ................. 5.7% 5.7%
Average receive.............. 6.7% 7.4%
(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 0.25
percent to 2.75 percent 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") or the prime rate as announced from
time to time. At December 31, 1999, the LIBOR interest rate in effect was 5.8
percent and applicable margins were 1.25 percent and 1.75 percent for the Term
A Loan / revolver borrowings and Term B Loan, respectively. The prime rate in
effect was 8.5 percent and the applicable margin was 0.25 percent.
22
INTEREST RATE SENSITIVITY TABLE AS OF JANUARY 1, 1999:
FAIR VALUE
JANUARY 1,
EXPECTED MATURITY DATES 1999 2000 2001 2002 2003 THEREAFTER 1999
(IN THOUSANDS) ---------- ---------- ---------- ----------- ---------- ------------ -------------
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%
(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
percent to 2.75 percent depending upon the Company's leverage ratio (as
defined under the Third Amended Credit Facility). The variable rate is equal
to LIBOR as announced from time to time. At January 1, 1999, the LIBOR
interest rate in effect was 5.3 percent and applicable margins were 2.0
percent and 2.5 percent 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-22 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.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are set forth below.
Certain of the executive officers hold positions with Dal-Tile Corporation or
Dal-Tile Mexico, each a subsidiary of the Company. All Directors hold office
until the annual meeting of stockholders following their election or until
their successors are duly elected and qualified. Officers are appointed by the
Board of Directors and serve at the discretion thereof.
NAME AGE POSITION OR OFFICE HELD
--- --- -----------------------
Jacques R. Sardas....................... 69 President, Chief
Executive Officer and
Chairman of the
Board of Directors
Charles J. Pilliod, Jr.................. 81 Director
Douglas D. Danforth..................... 77 Director
John F. Fiedler......................... 61 Director
Vincent A. Mai.......................... 59 Director
Norman E. Wells, Jr..................... 51 Director
Henry F. Skelsey........................ 41 Director
John M. Goldsmith....................... 36 Director
Martin C. Murrer........................ 42 Director
W. Christopher Wellborn................. 44 Executive Vice
President, Chief
Financial Officer and
Assistant Secretary
Mark A. Solls........................... 43 Vice President, General
Counsel and Secretary
Dan L. Cooke............................ 58 Vice President,
Information Technology
William L. Justus....................... 45 Vice President,
Logistics
William R. Hanks........................ 46 Vice President,
Manufacturing
David F. Finnigan....................... 43 Vice President, Home
Center Sales and
Business Development
Andrew D. Hiduke........................ 52 Vice President, Human
Resources
Javier Eugenio Martinez Serna........... 48 Vice President, Mexico
Operations
Matthew J. Kahny........................ 38 Vice President,
Marketing
Harold G. Turk.......................... 53 Vice President, Sales
Centers Operations
H. Clay Orme............................ 60 Vice President,
Operations
Silvano Cornia.......................... 40 Vice President,
Research and
Development
D. Curtis Cook.......................... 49 Vice President,
American Olean
Distribution
Scott R. Veldman........................ 43 Treasurer
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.
24
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 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. and of Atlantic Express
Transportation Corporation.
JOHN F. FIEDLER, Director - Mr. Fiedler has been a Director of the Registrant
since July 1998. He is 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 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 was the President, Chief Executive Officer and a
Director of AEA Investors (the managing member of DTI Investors LLC, a
beneficial owner of Common Stock of the Registrant) from April 1989 to
December 1998, which included appointment to Chairman in 1998. From January
1999 to December 1999, Mr. Mai served as Chairman and Chief Executive Officer
and currently serves as Chairman of AEA Investors. 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 was President and Chief Executive
Officer of Easco, Inc. from November 1996 to September 1999. From March 1993
to November 1996, he was President and Chief Executive Officer of CasTech
Aluminum Group, Inc. Mr. Wells is also a director of Sovereign Specialty
Chemicals, 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 LLP, an independent accounting firm.
MARTIN C. MURRER, DIRECTOR - Mr. Murrer has been a Director of the Registrant
since February 2000. Mr. Murrer has been a Managing Director of AEA Investors
(the managing member of DTI Investors LLC, a beneficial owner of Common Stock
of the Registrant) since February 1999. From 1995 through 1999, Mr. Murrer was
a Managing Director at Donaldson, Lufkin & Jenrette. From 1990 through 1995,
he was a Vice President at Goldman Sachs. Mr. Murrer is also a Director of PC
Connection, Inc.
25
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 various 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.
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, Home Center Sales and Business Development
- -Mr. Finnigan has been Vice President, Home Center Sales and Business
Development since January 2000. Mr. Finnigan was Vice President, Independent
Distributor and Home Center Services from April 1998 through December 1999.
From August 1997 through April 1998, Mr. Finnigan was Vice President,
Independent Distributor Operations of the Company. From January 1996 through
January 1997, Mr. Finnigan held the position of Vice President, Sales Center
Operations of the Company. Prior to the AO Acquisition, he held various
executive marketing positions with AO, AWI and Evans and Black.
ANDREW D. HIDUKE, Vice President, Human Resources - Mr. Hiduke has been Vice
President, Human Resources of the Company since September 1999. From January
1998 to September 1999, Mr. Hiduke was a human resources consultant for
various corporate clients. From February 1990 through January 1998, Mr. Hiduke
was Senior Vice President for All First Financial (formerly First Maryland
Bank Corp.) where he was responsible for retail delivery. Mr. Hiduke's 20-year
career in banking included numerous senior level human resources management
and operational positions.
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.
26
MATTHEW J. KAHNY, Vice President, Marketing - Mr. Kahny has been Vice
President, Marketing since August 1997. From January 1996 to 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 Center Operations - Mr. Turk has been
Vice President, Sales Center Operations of the Registrant since January 1997.
From January 1996 to December 1996, Mr. Turk was Vice President, Home Center
Services of the Company. In 1995, Mr. Turk was Executive Vice President of
Field Operations of the Company. In 1994, he was Executive Vice President of
Marketing of the Company. From April 1991 through 1993, Mr. Turk was Executive
Vice President of Sales and Marketing, Western Region of the Company. Mr. Turk
was a Vice President of Warehouse Administration 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 85 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.
D. CURTIS COOK, Vice President, American Olean Distribution - Mr. Cook has
been Vice President, American Olean Distribution of the Company since January
2000. From January 1996 until December 1999, Mr. Cook was General Manager,
Independent Distributor Operations. From December 1979 through December 1995,
he served at American Olean, then a subsidiary of AWI, where he became
Regional Sales Manager, Southern Region.
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 for 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 2000 Annual Meeting of
the Stockholders (the "2000 Proxy Statement") is incorporated by reference
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information appearing in the section "Principal Stockholders" in the 2000
Proxy Statement is incorporated by reference herein.
27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the section captioned "Certain Transactions" in
the 2000 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 (*).
EXHIBIT
NO.
- -------
2.1 Stock Purchase Agreement, dated as of December 21, 1995, by and among
Dal-Tile International Inc., Armstrong Enterprises, Inc., Armstrong
Cork Finance Corporation and Armstrong World Industries, Inc. (Filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K filed on
January 19, 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.)
28
EXHIBIT
NO.
- -------
3.1 Second Amended and Restated Certificate of Incorporation of the
Company. (Filed as Exhibit 3.1 to the Registrant's form 10Q filed on
November 7, 1996, and incorporated herein by reference.)
3.2 Amended and Restated By-laws of the Company. (Filed as Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 (No. 333-5069) and
incorporated herein by reference.)
4.1 Specimen form of certificate for Common Stock. (Filed as Exhibit 4.1
to the Registrant's form 10-K filed on March 17, 1999, and
incorporated herein by reference.)
*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.)
29
EXHIBIT
NO.
- -------
10.7 Form of Indemnification Agreement filed by Dal-Tile International Inc.
and its directors and officers. (Filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)
10.8 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. 333-64140) and incorporated herein by
reference.)
*10.9 Employment Agreement, dated as of June 13, 1997, and amended 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 on
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 the Employment Agreement, dated as of November 24,
1998, between Dal-Tile International Inc. and W. Christopher Wellborn.
(Filed as exhibit 10.12 to the Registrant's form 10-K for fiscal year
1998, and incorporated herein by reference.)
*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 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 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 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.)
30
EXHIBIT
NO.
- -------
+10.18 Supply Agreement dated as of December 29, 1999, between Dal-Tile
Corporation and Wold Talc Company.
+ 21.1 List of subsidiaries of Dal-Tile International Inc.
+ 23.1 Consent of Ernst and Young LLP
+ 24.1 Power of Attorney (on the signature page hereof)
+ 27.1 Financial Data Schedule
-------------------------------------
+ Included herewith
(b) Reports on Form 8-K:
None.
(c) Exhibits:
See Item 14(a) above.
(d) Financial Statement Schedule:
See Item 14(a) above.
31
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 7TH DAY OF MARCH,
2000.
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 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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Jacques R. Sardas President, Chief Executive March 7, 2000
- ------------------- Officer and Chairman of the
Jacques R. Sardas Board of Directors
32
SIGNATURE TITLE DATE
- --------- ----- ----
/s/W. Christopher Wellborn Executive Vice President, Chief March 7, 2000
- ------------------------------ Financial Officer and Assistant
W. CHRISTOPHER WELLBORN Secretary (Principal Financial and
Accounting Officer)
/s/John M. Goldsmith Director March 7, 2000
- ------------------------------
JOHN M. GOLDSMITH
/s/Charles J. Pilliod, Jr. Director March 7, 2000
- ------------------------------
CHARLES J. PILLIOD, JR.
/s/Henry F. Skelsey Director March 7, 2000
- ------------------------------
HENRY F. SKELSEY
/s/John F. Fiedler Director March 7, 2000
- ------------------------------
JOHN F. FIEDLER
/s/Douglas D. Danforth Director March 7, 2000
- ------------------------------
DOUGLAS D. DANFORTH
/s/Vincent A. Mai Director March 7, 2000
- ------------------------------
VINCENT A. MAI
/s/Norman E. Wells, Jr. Director March 7, 2000
- ------------------------------
NORMAN E. WELLS, JR.
/s/Martin C. Murrer Director March 7, 2000
- ------------------------------
MARTIN C. MURRER
33
DAL-TILE INTERNATIONAL INC.
ITEM 14(A) - INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FISCAL YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
CONTENTS
Report of Independent Auditors...................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1999 and January 1, 1999................ F-3
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1999............................................................. F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1999...................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1999............................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE
Schedule II - Valuation and Qualifying Accounts..................................... S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
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 December 31, 1999 and January 1, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 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 auditing standards generally
accepted in the United States. 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 December 31, 1999 and January 1, 1999, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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.
Dallas, Texas /s/ Ernst & Young LLP
January 26, 2000
F-2
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JANUARY 1,
1999 1999
-------------- ---------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash ........................................ $ 1,193 $ 1,546
Trade accounts receivable ................... 94,915 93,331
Inventories ................................. 140,153 138,418
Prepaid expenses ............................ 4,884 4,213
Other current assets ........................ 14,819 17,319
-------------- ---------------
Total current assets .................... 255,964 254,827
Property, plant and equipment, at cost:
Land ........................................ 11,456 12,364
Leasehold improvements ...................... 11,407 12,193
Buildings ................................... 76,969 75,995
Machinery and equipment ..................... 190,195 179,479
Construction in progress .................... 19,702 8,029
-------------- ---------------
309,729 288,060
Accumulated depreciation ...................... 102,405 86,058
-------------- ---------------
207,324 202,002
Goodwill, net of amortization ................. 143,041 147,796
Finance costs, net of amortization ............ 5,226 6,687
Tradename and other assets, net of amortization 27,149 29,496
-------------- ---------------
Total assets ............................ $ 638,704 $ 640,808
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable ...................... $ 36,388 $ 28,684
Accrued expenses ............................ 67,375 59,920
Current portion of long-term debt ........... 56,796 46,509
Income taxes payable ........................ 1,153 169
Deferred income taxes ....................... 2,461 1,930
-------------- ---------------
Total current liabilities ............... 164,173 137,212
Long-term debt ................................ 353,877 453,923
Other long-term liabilities ................... 17,671 32,639
Deferred income taxes ......................... 2,039 1,575
Commitments and Contingencies
Stockholders' Equity:
Common stock ................................ 547 535
Additional paid-in capital .................. 447,738 436,182
Accumulated deficit ......................... (273,095) (346,858)
Accumulated other comprehensive loss ........ (74,246) (74,400)
-------------- ---------------
Total stockholders' equity .............. 100,944 15,459
-------------- ---------------
Total liability and stockholders' equity ...... $ 638,704 $ 640,808
============== ===============
See accompanying notes.
F-3
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED
----------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ...................................... $ 850,568 $ 751,785 $ 676,637
Cost of goods sold ............................. 440,514 396,112 404,728
---------- ---------- ----------
410,054 355,673 271,909
Operating expense:
Transportation ............................. 57,124 55,988 58,425
Selling, general and administrative ........ 232,845 222,790 277,515
Amortization of goodwill and tradename ..... 5,607 5,604 5,605
---------- ---------- ----------
Total operating expense ........................ 295,576 284,382 341,545
---------- ---------- ----------
Operating income (loss) ........................ 114,478 71,291 (69,636)
Interest expense ............................... 37,125 45,051 40,649
Interest income ................................ 126 128 268
Other income ................................... 250 1,264 1,220
---------- ---------- ----------
Income (loss) before income taxes .............. 77,729 27,632 (108,797)
Income tax provision ........................... 3,966 3,604 1,439
---------- ---------- ----------
Net income (loss) .............................. $ 73,763 $ 24,028 $(110,236)
========== ========== ==========
BASIC EARNINGS PER SHARE
Net income (loss) per common share ............. $ 1.36 $ 0.45 $ (2.06)
========== ========== ==========
Weighted average common shares ................. 54,103 53,487 53,435
========== ========== ==========
DILUTED EARNINGS PER SHARE
Net income (loss) per common share ............. $ 1.35 $ 0.45 $ (2.06)
========== ========== ==========
Weighted average common shares assuming dilution 54,539 53,983 53,435
========== ========== ==========
See accompanying notes.
F-4
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
------------ ------------- --------------- ------------------ ------------
BALANCE AT JANUARY 3, 1997 ......... $ 534 $ 436,100 $(260,650) $ (60,415) $ 115,569
COMPREHENSIVE 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 expense .. - (1,030) - - (1,030)
Proceeds from common stock issue ... 1 1,112 - - 1,113
COMPREHENSIVE INCOME:
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
Stock option compensation .......... - 255 - - 255
Exercise of stock options .......... 12 11,301 - - 11,313
COMPREHENSIVE INCOME:
Net income ......................... - - 73,763 - 73,763
Currency translation adjustment .... - - - 154 154
------------
Total comprehensive income ......... - - - - 73,917
------------ ------------- --------------- ------------------ ------------
BALANCE AT DECEMBER 31, 1999 ....... $ 547 $ 447,738 $(273,095) $ (74,246) $ 100,944
============ ============= =============== ================== ============
See accompanying notes.
F-5
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-------------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
-------------- -------------- -------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) ................................. $ 73,763 $ 24,028 $(110,236)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ................... 26,889 27,873 24,543
Impairment of long-lived assets ................. - 6,625 -
Provision for losses on accounts receivable .... 2,199 7,024 27,805
Foreign exchange transaction (gain) loss ........ 153 (2,407) 339
Deferred income tax provisions (benefit) ........ (1,717) 1,995 (475)
Changes in operating assets and liabilities:
Trade accounts receivable ....................... (3,673) (5,091) (688)
Inventories ..................................... (1,388) (14,956) 10,845
Other assets .................................... 3,474 (3,194) (7,420)
Trade accounts payable and accrued expenses ..... 14,594 14,955 4,442
Accrued interest payable ........................ 94 (1,797) (1,004)
Other liabilities ............................... (10,444) 1,901 (958)
-------------- -------------- -------------
Net cash provided by (used in) operating activities 103,944 56,956 (52,807)
INVESTING ACTIVITIES
Expenditures for property, plant and equipment, net (25,129) (5,776) (40,074)
FINANCING ACTIVITIES
Borrowings under long-term debt ................... 255,600 149,808 111,007
Borrowings under Term B Loan ...................... - - 125,000
Repayment of long-term debt ....................... (345,359) (206,467) (19,968)
Repayment of long-term debt from Term B loan ...... - - (122,000)
Fees associated with debt refinancing and stock
registration ................................. (176) (1,118) (3,576)
Proceeds from issuance of common stock ............ 10,640 1,113 -
-------------- -------------- -------------
Net cash provided by (used in) financing activities (79,295) (56,664) 90,463
Effect of exchange rate on cash ................... 127 (458) (93)
-------------- -------------- -------------
Net decrease in cash .............................. (353) (5,942) (2,511)
Cash at beginning of year ......................... 1,546 7,488 9,999
-------------- -------------- -------------
Cash at end of year ............................... $ 1,193 $ 1,546 $ 7,488
============== ============== =============
See accompanying notes.
F-6
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 13).
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, as well as natural
stone products. 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:
FORM OF ENTITY
--------------
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
Dal-Tile Mexico, S.A. de C.V. ("Dal-Tile Mexico")..... Mexican Corporation
Dal-Tile of Canada Inc................................ Canadian Corporation
During 1999, the Company merged the operations of R&M Supplies, Inc. and
Dal-Minerals Company into Dal-Tile Corporation.
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.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
F-7
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:
YEARS
-----------------
Leasehold improvements............................... Life of lease
Buildings............................................ 20 - 30
Machinery and equipment.............................. 3 - 15
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 December 31, 1999 and January 1, 1999 was
$71,421,000 and $66,654,000, respectively. Accumulated amortization relating
to tradename at December 31, 1999 and January 1, 1999 was $3,360,000 and
$2,520,000, respectively. The Company assesses the recoverability of
intangible assets by determining whether the amortization of the balances over
their remaining lives can be recovered through undiscounted future operating
cash flows of the acquired operations. Recoverability is reviewed when events
or changes in circumstances indicate that the carrying amount may exceed such
cash flows.
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 December 31, 1999 and January 1, 1999 was approximately
$3,819,000 and $2,358,000, respectively.
ADVERTISING EXPENSE
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 1999, 1998 and 1997 amounted to $20,572,000, $14,353,000 and
$16,722,000, respectively.
STOCK OPTIONS
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the underlying common stock
at the date of grant. The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations in accounting for its employee stock options.
Under APB 25, no compensation expense is recognized if the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant.
F-8
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 made 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 of
$137,000, $1,727,000 and $558,000 for the years ended December 31, 1999,
January 1, 1999 and January 2, 1998, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of cash, trade accounts receivables 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 $5,186,000 and $9,581,000 at December 31, 1999 and
January 1, 1999, respectively.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
F-9
NET INCOME (LOSS) PER SHARE
The computations of the Company's basic and diluted earnings per share are
presented in the table below.
FISCAL YEAR ENDED
----------------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
--------------- ---------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) .................. $ 73,763 $ 24,028 $ (110,236)
=============== ================ ==================
Weighted average common shares ..... 54,103 53,487 53,435
Net income (loss) per common share.. $ 1.36 $ 0.45 $ (2.06)
=============== ================ ==================
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) .................. $ 73,763 $ 24,028 $ (110,236)
=============== ================ ==================
Weighted average common shares ..... 54,103 53,487 53,435
Effect of dilutive stock options ... 436 496 -
--------------- ---------------- ------------------
Weighted average common shares
assuming dilution .................. 54,539 53,983 53,435
Net income (loss) per common share.. $ 1.35 $ 0.45 $ (2.06)
=============== ================ ==================
Options to purchase 2,472,000 shares of common stock at prices ranging from
$9.44 to $11.94 per share were outstanding during the fourth quarter of fiscal
year 1999, but were not included in the computation of diluted earnings per
share for fiscal year 1999 because the options' exercise price was greater
than the average market price of the common shares during each quarter of
fiscal year 1999 in which the options were outstanding.
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.
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board issued Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS 137"). This deferred
the required adoption of SFAS 133 to fiscal years and quarters beginning after
June 15, 2000. 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.
F-10
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, JANUARY 1,
1999 1999
------------------ ------------------
(IN THOUSANDS)
Finished products in U.S........................... $ 118,877 $ 119,508
Finished products in Mexico........................ 4,828 3,822
Finished products in Canada........................ 2,166 2,019
Goods-in-process................................... 4,316 4,053
Raw materials...................................... 9,966 9,016
------------------ ------------------
Total inventories.................................. $ 140,153 $ 138,418
================== ==================
If U.S. finished products inventories were shown at current costs
(approximating the FIFO method) rather than at LIFO values, inventories would
have been $2,700,000 lower and $1,600,000 lower than reported at December 31,
1999 and January 1, 1999, respectively.
During fiscal year 1999, inventory quantities in six 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 1999 costs, the effect of which decreased net income by approximately
$1,713,000, or $0.03 per share (basic and diluted).
During fiscal year 1998, inventory quantities in six 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).
4. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, JANUARY 1,
1999 1999
------------------ ----------------
(IN THOUSANDS)
Term A Loan, interest due quarterly at LIBOR plus 1.25% or Prime plus .25%
(approximately 8.1% at December 31, 1999), principal due in variable quarterly
installments through December 31, 2002.(1)...................................... $ 165,000 $ 205,000
Term B Loan, interest due quarterly at LIBOR plus 1.75% (approximately 7.9% at
December 31, 1999), principal due in variable quarterly installments through
December 31, 2003.(1)............................................................ 123,000 124,000
Revolving line of credit, interest due quarterly at blended LIBOR rates plus 1.25%
or Prime plus .25% (approximately 8.6% at December 31, 1999), principal due
December 31, 2002.(1)............................................................ 108,800 152,050
Other, principally borrowings to fund capital additions............................. 13,873 19,382
------------------ ----------------
410,673 500,432
Less current portion................................................................ 56,796 46,509
------------------ ----------------
$ 353,877 $ 453,923
================== ================
(1) Substantially all of the Company's assets are pledged on the debt.
F-11
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 December 31, 1999. A commitment fee at a
rate per annum based on a pricing grid is payable quarterly.
As of December 31, 1999, the Company had availability of approximately
$127,985,000 on the revolving line of credit. The availability is net of
$13,215,000 in letters of credit for foreign inventory purchases and
industrial revenue bond financing transactions.
The Company periodically uses interest rate swap agreements to manage exposure
to fluctuations in interest rates. These agreements involve the exchange of
interest obligations on fixed and floating interest rate debt without the
exchange of the underlying principal amounts. The differential paid or
received on the agreements is recognized as an adjustment to interest expense
over the term of the underlying swap agreement. The book value of the interest
rate swap agreements represents the differential receivable or payable with a
swap counterparty since the last settlement date. The underlying aggregate
notional amount on which the Company had interest rate swap agreements
outstanding was $300,000,000 at December 31, 1999, with $100,000,000 in effect
until January 13, 2000 and $200,000,000 in effect through January 16, 2001.
Under the terms of the swap agreements, the Company pays a fixed interest rate
of approximately 5.7%. As of December 31, 1999, the swap agreements had an
aggregate fair value of $1,501,310.
Aggregate maturities of long-term debt for the five years subsequent to
December 31, 1999, (in Thousands) are:
2000............................. $ 56,796
2001............................. 55,760
2002............................. 177,017
2003............................. 120,800
2004............................. 300
Total interest cost incurred for the fiscal years 1999, 1998 and 1997 amounted
to approximately $37,508,000, $45,173,000 and $41,817,000, respectively, of
which approximately $383,000, $122,000 and $1,168,000, respectively, was
capitalized to property, plant and equipment. Total interest paid was
$35,952,000, $45,712,000 and $41,899,000 for fiscal years ended December 31,
1999, January 1, 1999 and January 2, 1998, respectively.
5. CAPITAL STRUCTURE
Common stock consists of the following:
DECEMBER 31, JANUARY 1,
1999 1999
------------------ ------------------
(IN THOUSANDS)
Common stock, $0.01 par value - authorized shares -
200,000,000, issued and outstanding shares, 54,669,255 at
December 31, 1999 and 53,552,246 at January 1, 1999......... $ 547 $ 535
================== =================
At December 31, 1999, the Company had authorized 11,100,000 shares of
preferred stock, none of which were outstanding. Holders of common stock are
entitled to one vote per share on all matters to be voted upon, including the
election of directors. Holders of common stock do not have cumulative voting
rights and, therefore, holders of a majority of the remaining shares will not
be able to elect any directors.
F-12
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.
6. ASSET WRITE-DOWN 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 on 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 December 31, 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
receivables, the Company increased collection efforts and undertook detailed
reviews of collectibility, and subsequently recorded an increase in the
reserve for the 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 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 of systems integration, resulted in the
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 inventory or out of
balance
F-13
inventory 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 to 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 December 31, 1999, reserves relating to the fiscal year 1997 charges to
write-down inventories, accounts receivable and other non-productive assets
were depleted, and the Company completed the work-down of all other charges
incurred. During fiscal year 1999, the Company paid approximately $1,400,000
of the remaining $3,800,000 for severance and other costs. The remaining
$2,400,000 of outstanding reserves were reversed to income.
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 $9,000,000 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.
During fiscal year 1999, approximately $2,400,000 of reserves associated with
sales centers that had been closed were deemed in excess of future lease
commitments due to the Company's efforts to sub-lease various locations. The
excess was reversed against intangible assets booked at the time of the AO
Acquisition. As of December 31, 1999, the Company retained approximately
$3,600,000 of reserves primarily related to the continued expiration of lease
commitments associated with various other sales centers that had been closed.
Future cash outlays are anticipated to continue through the end of fiscal year
2004.
7. INCOME TAXES
Income (loss) before income taxes relating to operations is as follows:
FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
------------- ----------- ------------
(IN THOUSANDS)
United States................ $ 65,430 $ 12,905 $ (116,249)
Mexico....................... 11,502 14,827 7,879
Other........................ 797 (100) (427)
------------- ----------- ------------
$ 77,729 $ 27,632 $ (108,797)
============= =========== ============
F-14
The components of the provision for income taxes include the following:
FISCAL YEAR ENDED
--------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
--------------- -------------- -------------
(IN THOUSANDS)
U.S. state - current............... $ 334 $ 262 $ -
U.S. - deferred.................... 1,247 1,286 -
--------------- -------------- -------------
1,581 1,548 -
Mexico - current................... 2,289 1,876 2,082
Mexico - deferred.................. 96 180 (643)
--------------- -------------- -------------
2,385 2,056 1,439
--------------- -------------- -------------
Total.............................. $ 3,966 $ 3,604 $ 1,439
=============== ============== =============
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 December 31, 1999, January 1, 1999 and January 2, 1998 are as
follows:
FISCAL YEAR ENDED
----------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
-------------- -------------- --------------
(IN THOUSANDS)
Provision (benefit) at U.S. statutory rate........ $ 27,205 $ 9,671 $ (37,958)
Amortization of goodwill.......................... 1,667 1,667 1,668
State income tax.................................. 1,028 1,006 (5,489)
Foreign loss not benefited........................ (279) 35 149
Difference between U.S. and Mexico
statutory rate.................................. 915 884 709
Mexico inflationary indexing and other............ (2,556) (2,267) (2,028)
Valuation allowance............................... (24,285) (7,679) 44,107
Other............................................. 271 287 281
-------------- -------------- --------------
Total............................................. $ 3,966 $ 3,604 $ 1,439
============== ============== ==============
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:
F-15
DECEMBER 31, JANUARY 1,
1999 1999
------------------- -------------------
(IN THOUSANDS)
Deferred tax liabilities:
Book basis of property, plant and equipment over tax.......... $ 18,394 $ 17,777
Book basis of other assets over tax......................... 9,319 10,866
Other, net ................................................. 9,592 8,323
------------------- -------------------
Total deferred tax liabilities........................ 37,305 36,966
------------------- -------------------
Deferred tax assets:
Tax basis of inventories over book.......................... 922 9,326
Tax basis of other assets over book......................... 741 25,884
Net operating loss carryforwards............................ 56,530 45,741
Expenses not yet deductible for tax......................... 11,351 13,535
------------------- -------------------
Total deferred tax assets............................. 69,544 94,486
Valuation allowance for deferred tax assets................. (36,739) (61,025)
------------------- -------------------
Net deferred tax assets..................................... 32,805 33,461
------------------- -------------------
Net deferred tax liabilities................................ $ 4,500 $ 3,505
=================== ===================
Total income tax payments, net of refunds received, during the fiscal years
ended December 31, 1999, January 1, 1999, and January 2,1998, were $1,680,000,
$1,836,000 and $3,206,000, respectively. The Company has U.S. federal net
operating loss carryforwards of approximately $147,000,000, which expire in
the years 2008 - 2019. 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 1999.
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 ending December 31, 1999, January 1, 1999 and January
2, 1998 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
$915,000, $810,000 and $327,000 for the fiscal years ended December 31, 1999,
January 1, 1999 and January 2, 1998, respectively.
During the fourth quarter of 1999, the Company sold its talc mining operation
along with the related mineral rights to Wold Talc Company. In conjunction
with the sale, a long-term supply agreement for talc requirements was signed
between the Company and Wold Talc Company. The Company recorded a $2,000,000
gain on the sale of the talc mine, which will be amortized over the life of
the long-term supply agreement. The transaction generated a $70,000,000 net
operating loss for tax purposes, for which a valuation allowance had
previously been established to offset the benefit.
F-16
8. RELATED PARTY TRANSACTIONS
Certain directors 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 expired on May 31,
1999. Payments made under this agreement were $4,542,000, $6,749,000 and
$6,147,000 for the fiscal years ended December 31, 1999, January 1, 1999 and
January 2, 1998, respectively.
9. EMPLOYEE STOCK PURCHASE PLAN
In March 1999, the Company's Stockholders approved the Company's Employee
Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, employees can purchase
common stock at a specified price through payroll deductions during an
offering period, currently established on a semi-annual basis beginning on
January 1 and July 1 of each year. The Company reserved for issuance 500,000
shares, all of which were available for issue at December 31, 1999.
10. STOCK PLAN
The Company has a stock option plan (the "Plan") that provides for the
granting of options for up to 9,608,545 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. Generally, 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.
The terms of the stock option plan 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):
WEIGHTED
AVERAGE
NUMBER OF RANGE OF EXERCISE
SHARES EXERCISE PRICES PRICE
-------------- --------------------- ----------------
Outstanding at January 3, 1997 . 4,105,834 $ 9.01 - 19.75 $ 9.50
Granted .................... 3,215,174 12.63 - 17.00 13.41
Cancelled .................. (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
Cancelled .................. (110,024) 9.01 - 13.69 11.26
-------------- --------------------- ----------------
Outstanding at January 1, 1999 . (1) 10,257,347 $ 8.69 - 11.94 $ 9.73
Granted .................... 475,000 8.44 - 11.25 9.03
Exercised .................. (975,094) 8.69 - 9.91 9.33
Cancelled .................. (522,359) 8.69 - 11.94 9.44
-------------- --------------------- ----------------
Outstanding at December 31, 1999 9,234,894 $ 8.44 - 11.94 $ 9.77
============== ===================== ================
(1) In February 1998, 2,675,000 stock options with a price range of $13.69 to
$13.75 were repriced to the then 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 $9.01, which was in excess of the then current
fair market value.
F-17
The Company has reserved 9,608,545 shares of common stock for options, 373,651
of which had not been granted at December 31, 1999, and are for future
issuance under the Plan.
At December 31, 1999, January 1, 1999 and January 2, 1998, there were
5,415,212 options exercisable at a weighted average exercise price of $10.03,
5,051,347 options exercisable at a weighted average exercise price of $9.84
and 4,200,159 options exercisable at a weighted average exercise price of
$10.07 respectively.
The following table summarizes information with regard to stock options
outstanding at December 31, 1999:
WEIGHTED AVERAGE
EXERCISE OPTIONS REMAINING
PRICE OUTSTANDING CONTRACTUAL LIFE
-------------------- ------------------------ -------------------------
$ 8.44 100,000 9.70 years
8.69 996,000 8.94 years
8.81 100,000 9.16 years
9.01 5,114,758 5.91 years
9.19 228,000 9.82 years
9.44 32,000 9.96 years
9.91 224,136 0.05 years
11.25 15,000 9.51 years
11.94 2,425,000 7.77 years
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:
FISCAL YEAR ENDED
---------------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
----------------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) - as reported........................ $ 73,763 $ 24,028 $ (110,236)
Net income (loss) - pro forma.......................... 62,609 14,929 (112,150)
Earnings (loss) per share as reported - basic.......... 1.36 0.45 (2.06)
- diluted........ 1.35 0.45 (2.06)
Earnings (loss) per share pro forma - basic.......... 1.16 0.28 (2.10)
- diluted........ 1.15 0.28 (2.10)
The pro forma effects on net income (loss) for the fiscal years ended January
1, 1999 and January 2, 1998 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 December 31, 1999, January 1, 1999 and January 2, 1998
was $3.80, $4.03 and $5.62 per option, respectively. The fair value of the
options at the date of grant was estimated using the Black Scholes model with
the following weighted average assumptions:
F-18
FISCAL YEAR ENDED
-------------------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
-------------------- ----------------- ----------------
Expected life (years)................. 3 3 3
Interest rate......................... 5.83% 5.25% 5.96%
Volatility............................ 55.0% 61.9% 53.5%
Dividend yield........................ 0.00% 0.00% 0.00%
The Company has issued stock units under a stock appreciation rights agreement
to certain executives which permit the holders to receive values 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
$710,000, $1,770,000 and $5,900,000 for the fiscal years ended December 31,
1999, January 1, 1999 and January 2, 1998, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its sales centers and various
distribution, manufacturing and transportation equipment under noncancelable
operating leases. Certain leases contain escalation provisions and renewal
options. The minimum aggregate annual lease payments subsequent to December
31, 1999 are as follows (in thousands):
2000............................ $ 22,726
2001............................ 18,899
2002............................ 15,635
2003............................ 11,080
2004............................ 8,496
Thereafter...................... 14,819
----------------
$ 91,655
================
Rental expense amounted to approximately $34,040,000, $33,269,000 and
$31,075,000 for the fiscal years ended December 31, 1999, January 1, 1999 and
January 2, 1998, 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
F-19
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 liabilities likely to result from
the contingencies described above are not expected to have a material adverse
effect on the Company's consolidated financial condition, results of
operations or liquidity.
12. 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 governing tax authorities. Such
intercompany sales are eliminated in the consolidated financial statements.
Financial information by geographical area is summarized below:
FISCAL YEAR ENDED
----------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
-------------- --------------- ----------------
(IN THOUSANDS)
Consolidated revenue:
Unaffiliated customers:
United States ......................... $ 811,359 $ 716,075 $ 648,529
Mexico ................................ 28,936 25,242 18,533
Other ................................. 10,273 10,468 9,575
-------------- --------------- ----------------
Total consolidated revenue
from unaffiliated customers .. $ 850,568 $ 751,785 $ 676,637
============== =============== ================
Intercompany revenue:
United States ......................... $ 3,847 $ 5,462 $ 4,348
Mexico ................................ 85,102 74,533 71,802
Other ................................. 43 - -
Eliminations .......................... (88,992) (79,995) (76,150)
-------------- --------------- ----------------
Total consolidated revenue ....... $ 850,568 $ 751,785 $ 676,637
============== =============== ================
Consolidated operating income (loss)
United States ......................... $ 102,641 $ 60,558 $ (76,686)
Mexico ................................ 11,167 10,608 7,508
Eliminations/other .................... 670 125 (458)
-------------- --------------- ----------------
Total consolidated operating
income (loss) ............ $ 114,478 $ 71,291 $ (69,636)
============== =============== ================
Consolidated identifiable assets:
United States ......................... $ 568,374 $ 576,037 $ 609,152
Mexico ................................ 61,347 56,435 53,637
Eliminations/other .................... 8,983 8,336 9,820
-------------- --------------- ----------------
Total consolidated identifiable...
assets ........................ $ 638,704 $ 640,808 $ 672,609
============== =============== ================
F-20
13. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
Provided below are the condensed unconsolidated financial statements of
Dal-Tile International Inc.:
DECEMBER 31, JANUARY 1,
1999 1999
------------------ -----------------
(IN THOUSANDS)
Condensed balance sheets:
Cash ......................................... $ 59 $ 59
Other assets ................................. 20,336 12,510
Investment in Dal-Tile Group Inc., net
of accumulated losses ..................... 81,412 7,667
------------------ -----------------
Total assets ................................. $ 101,807 $ 20,236
================== =================
Other liabilities ............................ $ 863 $ 4,777
Stockholders' equity ......................... 100,944 15,459
------------------ -----------------
Total liabilities and stockholders' equity ... $ 101,807 $ 20,236
================== =================
FISCAL YEAR ENDED
----------------------------------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1999 1999 1998
---------------- ---------------- ---------------
(IN THOUSANDS)
Condensed statements of operations:
Equity in net income (loss)
of Dal-Tile Group Inc. ................ $ 72,468 $ 24,140 $ (110,739)
Other expense (income) .................... (1,295) 99 (520)
Interest expense .......................... - 13 17
---------------- ---------------- ---------------
Net income (loss) ......................... $ 73,763 $ 24,028 $ (110,236)
================ ================ ===============
Condensed statements of cash flows:
Cash flow used in operating activities .... $ (10,464) $ (80) $ (129)
Financing activities:
Proceeds from issuance of stock ........... 10,640 1,113 -
Investment in Dal-Tile Group Inc. ......... - - 91
Fees associated with stock registration ... (176) (876) -
Repayment of long-term debt ............... - (157) -
---------------- ---------------- ---------------
Net increase (decrease) in cash ........... - - (38)
Cash at beginning of period ............... 59 59 97
---------------- ---------------- ---------------
Cash at end of period ................ $ 59 $ 59 $ 59
================ ================ ===============
F-21
14. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the fiscal years ended December 31, 1999 and January 1, 1999:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal year ended December 31, 1999:
Net sales ............................... $ 200,692 $ 219,303 $ 219,500 $ 211,073
Gross profit ............................ 96,682 105,651 107,220 100,501
Operating income ........................ 22,385 29,947 34,145 28,001
Net income .............................. 11,138 19,491 23,777 19,357
Per share:
Net income
basic ........................... 0.21 0.36 0.44 0.35
assuming dilution ............... 0.21 0.36 0.43 0.35
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
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 6).
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 common and common
equivalent shares outstanding.
F-22
SCHEDULE II
DAL-TILE INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
Allowance for Losses from Uncollectible Accounts:
Balance at Additions
Beginning of Charged to Costs and (a) Balance at End of
Period Expenses Deductions Period
------------------ --------------------- ---------------- ---------------------
1999 $ 9,581 $ 2,199 $ 6,594 $ 5,186
1998 13,160 7,024 10,603 9,581
1997 12,750 27,805 27,395 13,160
(a) Uncollectible accounts written off, net of recoveries.
S-1