UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JULY 3, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to_____________
Commission file number 33-64140
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DAL-TILE INTERNATIONAL INC.
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(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
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(Address of principal executive office)
(Zip Code)
(214) 398-1411
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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As of August 7, 1998, the registrant had outstanding 53,545,101 shares of voting
common stock, par value $0.01 per share.
DAL-TILE INTERNATIONAL INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
-----
Item 1 - Financial Statements (Unaudited) 3
Notes to Consolidated Condensed Financial Statements
(Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
Page 2
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1998 1997 1998 1997
--------- ---------- --------- -----------
Net sales $190,907 $173,742 $376,738 $341,151
Cost of goods sold 100,680 100,133 199,183 184,350
--------- ---------- --------- -----------
Gross profit 90,227 73,609 177,555 156,801
Expenses:
Transportation 14,211 14,902 28,744 26,391
Selling, general and administrative 56,770 69,197 114,203 122,189
Amortization of intangibles 1,401 1,401 2,802 2,802
--------- ---------- --------- -----------
Total expenses 72,382 85,500 145,749 151,382
--------- ---------- --------- -----------
Operating income (loss) 17,845 (11,891) 31,806 5,419
Interest expense 11,649 9,280 23,253 17,359
Interest income 30 67 56 206
Other income (expense) 396 (132) 5 548
--------- ---------- --------- -----------
Income (loss) before income taxes 6,622 (21,236) 8,614 (11,186)
Income tax provision 1,175 (7,433) 2,339 (3,915)
--------- ---------- --------- -----------
Net income (loss) $ 5,447 $(13,803) $ 6,275 $ (7,271)
--------- ---------- --------- -----------
--------- ---------- --------- -----------
BASIC EARNINGS PER SHARE
Net income (loss) per common share $ 0.10 $ (0.26) $ 0.12 $ (0.14)
--------- ---------- --------- -----------
--------- ---------- --------- -----------
Average shares 53,435 53,435 53,435 53,435
--------- ---------- --------- -----------
--------- ---------- --------- -----------
DILUTED EARNINGS PER SHARE
Net income (loss) per common share $ 0.10 $ (0.26) $ 0.12 $ (0.14)
--------- ---------- --------- -----------
--------- ---------- --------- -----------
Average shares 54,500 53,435 54,325 53,435
--------- ---------- --------- -----------
--------- ---------- --------- -----------
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 3
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JULY 3, JANUARY 2,
1998 1998
---------- ------------
ASSETS
Current Assets:
Cash $ 737 $ 7,488
Trade accounts receivable 111,670 96,296
Inventories 128,457 130,747
Prepaid expenses 3,431 3,120
Other current assets 17,596 18,438
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Total current assets 261,891 256,089
Property, plant, and equipment, at cost 290,887 299,232
Less accumulated depreciation 80,608 71,547
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210,279 227,685
Goodwill, net of amortization 150,178 152,560
Finance costs, net of amortization 5,998 6,599
Tradename and other assets 29,155 29,136
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Total assets $657,501 $672,069
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---------- ---------
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 4
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
JULY 3, JANUARY 2,
1998 1998
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $23,453 $18,231
Accrued expenses 61,089 55,043
Accrued interest payable 593 2,287
Current portion of long-term debt 39,598 19,261
Income taxes payable 334 801
Deferred income taxes 1,414 863
Other current liabilities 4,672 4,715
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Total current liabilities 131,153 101,201
Long-term debt 492,546 537,830
Other long-term liabilities 28,443 27,230
Deferred income taxes 1,684 1,888
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 200,000,000; issued and
outstanding shares - 53,435,101 534 534
Additional paid-in capital 435,242 436,100
Accumulated deficit (364,611) (370,886)
Accumulated other comprehensive loss (67,490) (61,828)
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Total stockholders' equity 3,675 3,920
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Total liabilities and stockholders' equity $657,501 $672,069
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The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 5
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
JULY 3, 1998
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
-------- --------- ------------ -------------- ----------
Balance at January 2, 1998 $ 534 $436,100 $(370,886) $(61,828) $ 3,920
Common stock registration fees - (858) - - (858)
Comprehensive income (loss)
Net Income - - 6,275 - 6,275
Foreign currency translation adjustments - - - (5,662) (5,662)
-------- --------- ------------ -------------- ----------
Total Comprehensive income (loss) 613
-------- --------- ------------ -------------- ----------
Balance at July 3, 1998 $ 534 $435,242 $(364,611) $(67,490) $ 3,675
-------- --------- ------------ -------------- ----------
-------- --------- ------------ -------------- ----------
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 6
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
----------------------
JULY 3, JULY 4,
1998 1997
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OPERATING ACTIVITIES
Net income (loss) $ 6,275 $ (7,271)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 14,234 10,292
Asset write-down 1,700 -
Provision for losses on accounts receivable 3,207 10,264
Deferred income tax provision 1,017 (6,398)
Foreign currency transaction (gain) (1,319) (280)
Changes in operating assets and liabilities:
Trade accounts receivable (19,068) (18,010)
Inventories 1,142 (36,857)
Other assets (245) (6,111)
Trade accounts payable and accrued expenses 10,980 6,151
Accrued interest payable (1,616) (767)
Other liabilities 1,093 (2,274)
---------- ----------
Net cash provided by (used in) operating activities 17,400 (51,261)
INVESTING ACTIVITIES
Proceeds from sale of (expenditures for) property,
plant, and equipment, net 1,196 (28,671)
FINANCING ACTIVITIES
Borrowings under long-term debt 60,008 196,060
Repayments of long-term debt (84,955) (131,589)
Fees and expenses associated with debt refinancing (241) (2,824)
Fees and expenses associated with common stock
registration (94) -
---------- ----------
Net cash provided by (used in) financing activities (25,282) 61,647
Effect of exchange rate changes on cash (65) (20)
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Net decrease in cash (6,751) (18,305)
Cash at beginning of period 7,488 9,999
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Cash at end of period $ 737 $ (8,306)
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---------- ----------
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 7
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The operating results of Dal-Tile International Inc. and its consolidated
subsidiaries (the "Company") for the three and six months ended July 3,
1998 reflect the results of operations of Dal-Tile International Inc. and
its consolidated subsidiaries. Due to the Company's 52/53 week accounting
cycle, the second quarter of 1998 ended on July 3, 1998.
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of
normal recurring adjustments considered necessary for a fair presentation
of the financial position, results of operations, and cash flow have been
included. The results of operations for the six months ended July 3, 1998
are not necessarily indicative of the results that may be expected for the
year ending January 1, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
January 2, 1998 annual report on Form 10-K of the Company.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
2. EARNINGS PER SHARE
Earnings per share are presented on both the basic and diluted methods.
Basic earnings per share are based on the average number of shares
outstanding during each period presented. Diluted earnings per share are
based on the average number of shares outstanding including any dilutive
effects of options, warrants and convertible securities.
3. COMPREHENSIVE INCOME
As of January 3, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS 130
had no impact on the Company's net income or shareholders' equity. SFAS 130
requires foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to the requirements of SFAS 130.
For the six months ended July 3, 1998 and July 4, 1997, total comprehensive
income (loss) amounted to $613 and ($7,839), respectively.
Page 8
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
4. INVENTORIES
Inventories were as follows:
JULY 3, JANUARY 2,
1998 1998
------------ --------------
Raw Materials $ 8,870 $ 9,891
Work-in-process 4,150 3,960
Finished goods 115,437 116,896
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$ 128,457 $ 130,747
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------------ --------------
5. ASSET WRITE-DOWN
As a result of refinement of the Company's manufacturing strategy, the
Company has decided to pursue the sale of its Mt. Gilead, North Carolina
glazed floor tile facility. A $1,700 provision, which was included in
selling, general and administrative expenses, was recorded in the second
quarter of 1998 to reduce the carrying value of the facility to its
estimated net realizable value.
6. LONG-TERM DEBT
Long-term debt consists of the following:
JULY 3, JANUARY 2,
1998 1998
------------ ------------
Term Loan A $ 217,500 $ 217,500
Term Loan B 124,500 125,000
Revolving Credit Loan 168,000 190,000
Other 22,144 24,591
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532,144 557,091
Less current portion 39,598 19,261
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$ 492,546 $ 537,830
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Page 9
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
7. INCOME TAXES
The income tax provision for the three and six months ended July 3, 1998
reflects effective tax rates of approximately 18% and 27%, respectively.
For the three and six months ended July 4, 1997, the rate was approximately
35%. The effective tax rate for the three and six months ended July 3,
1998 reflects expected Mexico tax liabilities and U.S. state and possession
income tax based on estimated taxable income in those jurisdictions.
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to federal, state, local and foreign laws and
regulations relating to the environment and to work places. Laws that
affect or could affect the Company's United States operations include,
among others, the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and the Occupational Safety and Health Act.
The Company believes it is currently in substantial compliance with such
laws and the regulations promulgated thereunder.
The Company is involved in various proceedings relating to environmental
matters. The Company, in the past, has disposed or arranged for the
disposal of substances which are now characterized as hazardous and
currently is engaged in the cleanup of hazardous substances at certain
sites. It is the Company's policy to accrue liabilities for remedial
investigations and cleanup activities when it is probable that such
liabilities have been incurred and when they can be reasonably estimated.
The Company has provided reserves which management believes are adequate to
cover probable and estimable liabilities of the Company with respect to
such investigations and cleanup activities, taking into account currently
available information and the Company's contractual rights of
indemnification. However, estimates of future response costs are
necessarily imprecise due to, among other things, the possible
identification of presently unknown sites, the scope of contamination of
such sites, the allocation of costs among other potentially responsible
parties with respect to any such sites and the ability of such parties to
satisfy their share of liability. Accordingly, there can be no assurance
that the Company will not become involved in future litigation or other
proceedings or, if the Company were found to be responsible or liable in
any litigation or proceeding, that such costs would not be material to the
Company.
The Company is also a defendant in various lawsuits arising from normal
business activities. In the opinion of management, the ultimate liability
likely to result from the contingencies described above is not expected to
have a material adverse effect on the Company's consolidated financial
condition, results of operations or liquidity.
Page 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the second quarter of 1998, the Company continued to see positive results
from the strategic plan implemented in July 1997. Sales increased $5.1 million
over the first quarter of 1998 and cash flow has increased due to higher
profitability and improved management of accounts receivable and inventories.
The Company will continue to focus on customer service enhancements during the
remainder of 1998 while furthering efforts to reduce transportation costs and
operating costs.
The following is a discussion of the results of operations for the three and six
months ended July 3, 1998 compared with the three and six months ended July 4,
1997 for Dal-Tile International Inc. and its consolidated subsidiaries (the
"Company"). Due to the Company's 52/53 week accounting cycle, the second quarter
of 1998 ended on July 3, 1998.
NET SALES
Net sales for the second quarter of 1998 increased $17.2 million, or 9.9%, to
$190.9 million from $173.7 million in the second quarter of 1997. Net sales
for the six months ended July 3, 1998 increased $35.5 million, or 10.4%, to
$376.7 million from $341.2 million for the same period in 1997. The increase
in net sales was due principally to improved customer service in all
distribution channels resulting from better product availability and the
realignment of the sales organization. This realignment has focused more
experienced sales personnel on customer satisfaction.
GROSS PROFIT
Gross profit for the second quarter of 1998 increased $16.6 million, or 22.6%,
to $90.2 million from $73.6 million in the second quarter of 1997. Gross profit
for the six months ended July 3, 1998 increased $20.8 million, or 13.3%, to
$177.6 million from $156.8 million for the same period in 1997. Gross margin
increased in the second quarter of 1998 to 47.3% from 42.4% in the second
quarter of 1997. Gross margin increased for the six months ended July 3, 1998
to 47.1% from 46.0% for the comparable period in 1997. The increases were due
to higher sales and lower obsolescence or slow moving reserve requirements.
These increases were partially offset by an unfavorable shift in product mix and
higher per unit manufacturing costs related to reduced production levels during
the first quarter of 1998.
EXPENSES
Expenses in the second quarter of 1998 decreased $13.1 million, or 15.3%, to
$72.4 million from $85.5 million in the second quarter of 1997. For the six
months ended July 3, 1998, expenses decreased $5.7 million, or 3.8%, to $145.7
million from $151.4 million for the same period in 1997. Expenses as a percent
of sales in the second quarter of 1998 decreased to 37.9% from 49.2% in 1997.
For the six months ended July 3, 1998, expenses as a percent of sales decreased
to 38.7% from 44.4% in 1997. The decreases were due in part to higher sales,
reductions in staffing, lower professional fees and the overall reduction in
operating expenses associated with cost reduction initiatives implemented in
July 1997. These decreases were offset by high transportation costs and a $1.7
million write-down of assets at the Company's Mt. Gilead manufacturing facility.
The Company is currently pursuing the sale of this facility. Additionally,
expenses for the three and six months ended July 4, 1997 were negatively
affected by charges of $16.3 million, of which $7.6 million was recorded to
increase the reserve for doubtful accounts. The balance of the charges consisted
of $2.5 million in respect of terminated employees and $6.2 million in respect
of other charges, primarily related to liabilities incurred for lease
terminations, executive search fees and other items.
Page 11
OPERATING INCOME (LOSS)
Operating income in the second quarter of 1998 increased $29.7 million to $17.8
million from a loss of ($11.9) million in the second quarter of 1997. The
Company had operating income of $31.8 million for the six months ended July 3,
1998 as compared to $5.4 million for the same period in 1997. Operating income
increased due to higher sales, decreased operating expenses, as well as
decreases in provisions for doubtful accounts and slow moving or obsolete
inventories.
INTEREST EXPENSE (NET)
Interest expense (net) in the second quarter of 1998 increased $2.4 million, or
26.1%, to $11.6 million from $9.2 million in the second quarter of 1997. For the
six months ended July 3, 1998, interest expense (net) increased $6.0 million, or
34.9%, to $23.2 million from $17.2 million for the same period in 1997. These
increases were due to increased borrowing requirements through the end of 1997
and higher fees and interest rates in connection with second and third quarter
1997 amendments to the Company's credit facility.
INCOME TAXES
The income tax provision for the three and six months ended July 3, 1998
reflects effective tax rates of approximately 18% and 27%, respectively. For
the three and six months ended July 4, 1997, the rate was approximately 35%.
The effective tax rate for the three and six months ended July 3, 1998 reflects
expected Mexico tax liabilities and U.S. state and possession income tax based
on estimated taxable income in those jurisdictions. No U.S. federal income tax
expense has been recorded for 1998 due to an offset by a valuation allowance
against U.S. federal deferred tax assets recorded during 1997. The valuation
allowance will continue to be reassessed in future reporting periods.
The effective rates for the three and six months ended July 4, 1997, were based
on the estimated annual income of 1997. Subsequent to the first quarter of
1997, the Company incurred significant U.S. losses which eliminated the U.S.
federal and state income tax liability for that period and generated substantial
net operating loss carryforwards. A valuation allowance was established in 1997
to offset any benefit from the net operating losses and to reflect management's
estimation as to the future utilization of the deferred tax assets. The
resulting provision for 1997 was due to taxes incurred on earnings in Mexico.
NET INCOME (LOSS)
Net income in the second quarter of 1998 increased to $5.4 million from a loss
of ($13.8) million in the second quarter of 1997 and increased to income of $6.3
million for the six months ended July 3, 1998 from a loss of ($7.3) million for
the same period in 1997. Net income increased due to higher sales and lower
operating expenses offset by higher interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and funds available under the Company's bank credit
agreement (the "Second Amended Credit Facility") continue to provide the Company
with liquidity and capital resources for working capital requirements, capital
expenditures and debt service. Cash provided by operating activities for the
six months ended July 3, 1998 was $17.4 million compared to cash usage of $51.3
million for the same period in 1997. Cash provided during the six months ended
July 3, 1998 resulted from increased profitability, improved management of
accounts receivable and inventory reductions achieved through better alignment
of production requirements with sales opportunities.
Page 12
Cash provided by investing activities for the six months ended July 3, 1998 was
$1.2 million, inclusive of $8.1 million in net cash proceeds from the sale of
the Company's Lansdale, PA manufacturing facility. During the remainder of
1998, the Company plans to expend approximately $18 million for capital
expenditures, including routine capital improvements, remaining costs to
complete the Dallas, TX plant expansion and costs to expand the Monterrey,
Mexico manufacturing facility.
Cash used in financing activities was $25.3 million for the first half of 1998,
which reflects repayments of $22.0 million on the revolver portion of the Second
Amended Credit Facility and payments of various other debt and fees. Total
availability as of July 3, 1998 under the Second Amended Credit Facility was
$68.0 million. The Company believes cash flow from operating activities,
together with borrowings available under the Second Amended Credit Facility (or
replacement thereof), will be sufficient to fund future working capital needs,
capital expenditures and debt service requirements.
Given increasingly stringent financial covenants and debt service requirements
under the Second Amended Credit Agreement, the Company expects that it will be
required to seek to refinance its indebtedness or amend the terms thereof in
1999 or possibly sooner. The Company's ability to amend or refinance its
obligations with respect to its indebtedness and to raise capital through
alternative means such as selling assets or raising equity capital, as well as
its ability to comply with its obligations under any new or amended debt
facilities, depends on its financial and operating performance, which, in turn,
is subject to prevailing economic conditions and to financial, business and
other factors beyond its control. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
stockholders at that time would be diluted. Further, such equity securities may
have rights, preferences or privileges senior to those of the Company's common
stock. There can be no assurance that future borrowing facilities will be
available for the repayment or refinancing of the Company's indebtedness or that
the Company's existing lenders will agree to any requested modification of the
terms of its indebtedness or that the Company's operating results will be
sufficient for compliance with its obligations under any new or amended debt
facilities. The Company expects that debt incurred as part of a refinancing
would involve higher borrowing costs.
The peso devaluation and economic uncertainties in Mexico are not expected to
have a significant impact on the Company's liquidity. Since the Company has no
peso-based borrowings, high interest rates in Mexico are not expected to
directly affect the Company's liquidity. Any future devaluation of the peso
against the U.S. dollar may adversely affect the Company's results of operations
or financial condition.
The Company is involved in various proceedings relating to environmental matters
and is currently engaged in 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 adverse effect on
the Company's liquidity and financial condition.
The United States is a party to the General Agreement on Tariffs and Trade
("GATT"). Under GATT, the United States currently imposes import duties on
glazed ceramic tile from non-North American countries at 15%, to be reduced
ratably to 8 1/2% by 2004. Accordingly, GATT may stimulate competition from
non-North American manufacturers who now export, or who may seek to export,
ceramic tile to the United States. The Company cannot predict with certainty
the effect that GATT may have on the Company's operations.
In 1993, Mexico, the United States and Canada approved the North American Free
Trade Agreement ("NAFTA"). NAFTA has, among other things, removed and will
continue to remove, over a
Page 13
transition period, most normal customs duties imposed on goods traded among
the three countries. In addition, NAFTA will remove or limit many investment
restrictions, liberalize trade in services, provide a specialized means for
settlement of, and remedies for, trade disputes arising thereunder, and will
result in new laws and regulations to further these goals. Although NAFTA
lowers the tariffs imposed on the Company's ceramic tile manufactured in
Mexico and sold in the United States, it also may stimulate competition in
the United States and Canada from manufacturers located in Mexico. The United
States currently imposes import duties on glazed ceramic tile from Mexico of
approximately 13%, although these duties on imports from Mexico are being
phased out ratably under NAFTA by 2008. It is uncertain what ultimate effect
NAFTA will have on the Company's results of operations.
EFFECTS OF INFLATION
The Company believes it has generally been able to increase productivity to
offset increases in costs resulting from inflation in the U.S. and Mexico.
Inflation has not had a material impact on the Company's results of operations
during the six months ended July 3, 1998 and July 4, 1997. However, any future
increases in the inflation rate, and any increases in interest rates which
affect financing costs, may negatively affect the Company's results of
operations.
IMPACT OF YEAR 2000
Some of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company is continuing its efforts to modify and replace certain portions of
its software and hardware so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total project cost
is estimated at approximately $6.0 million and will be expensed as incurred. To
date, the Company has incurred expenses totaling approximately $1.3 million and
has completed the Year 2000 assessment, development of a modification plan and a
portion of the activities called for in the plan.
The project is estimated to be completed no later than April 2, 1999, which is
prior to any anticipated impact on the Company's operating systems. The Company
believes that, with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
adverse impact on operations.
The cost of the project and the date by which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, non-performance of key software and
hardware vendors and similar uncertainties.
In addition, material disruptions to the operations of the Company's major
customers and suppliers as a result of Year 2000 issues could also have a
material adverse impact on the Company's operations and financial condition.
Page 14
PART II. OTHER INFORMATION
Item 4. At the annual meeting of the Company held on April 30, 1998, the
shareholders of the Company approved the following proposals:
To elect seven directors to serve the ensuing year and until
respective successors shall have been duly elected and
qualified.
DIRECTORS FOR AGAINST
---------- --- -------
Jacques R. Sardas 52,687,441 79,820
Charles J. Pilliod, Jr. 52,686,141 81,120
Douglas D. Danforth 52,742,441 24,820
Norman E. Wells, Jr. 52,688,441 78,820
Vincent A. Mai 52,687,941 79,320
Henry F. Skelsey 52,687,541 79,720
John M. Goldsmith 52,688,241 79,020
To amend the Company's 1996 Amended and Restated Stock Option Plan to,
among other things, increase the number of shares reserved for
issuance pursuant thereto.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- -----------------
31,524,614 1,617,814 18,376,294 1,248,539
To approve the material terms of the Company's Annual Incentive Plan.
FOR AGAINST ABSTAIN
--- ------- -------
34,166,347 222,570 18,378,344
To approve the stock units under stock appreciation rights agreements
granted to Messrs. Jacques R. Sardas, W. Christopher Wellborn, David
F. Finnigan, Dan L. Cooke and Marc S. Powell.
FOR AGAINST ABSTAIN
--- ------- -------
32,739,444 1,647,369 18,380,448
To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending January 1, 1999.
FOR AGAINST ABSTAIN
--- ------- -------
52,744,435 11,850 10,976
Page 15
Item 5. OTHER INFORMATION
Cautionary Statement for purposes of "Safe Harbor Provisions" of the
Private Securities Litigation Reform Act of 1995.
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to risks,
uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such
forward looking statements. Potential risks and uncertainties
include, but are not limited to, the impact of competitive pressures
and changing economic conditions on the Company's business and its
dependence on residential and commercial construction activity, the
fact that the Company is highly leveraged, 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Amended and Restated Employment Agreement dated as of
July 17, 1998 between Dal-Tile International Inc. and
Jacques R. Sardas.
10.2 Management Subscription Agreement dated as of
July 17, 1998 between Dal-Tile International Inc. and
Jacques R. Sardas.
10.3 Management Subscription Agreement dated as of
July 17, 1998 between Dal-Tile International Inc. and
W. Christopher Wellborn.
27.1 - 27.2 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended July 3, 1998.
Page 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAL-TILE INTERNATIONAL INC.
(Registrant)
Date:
August 7, 1998 /s/ W. Christopher Wellborn
- -------------- -----------------------------------
Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Page 17