ELJER INDUSTRIES INC, 10-K, 1994-03-31

ELJER INDUSTRIES INC
10-K, 1994-03-31
HEATING EQUIP, EXCEPT ELEC & WARM AIR; & PLUMBING FIXTURES

Previous: MERRILL LYNCH LIFE INSURANCE COMPANY, 10-K, 1994-03-31

Next: SCOTSMAN INDUSTRIES INC, 10-K, 1994-03-31

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 (FEE REQUIRED)

For the Fiscal Year Ended January 2, 1994

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

COMMISSION FILE NO 0-10181

ELJER INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 75-2270874
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

17120 DALLAS PARKWAY
DALLAS, TEXAS 75248
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 407-2600

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1 par value New York Stock Exchange
Common Stock Purchase Rights 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.
------

As of March 18, 1994, there were outstanding 7,107,326 shares of the
registrant's common stock, par value $1, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by nonaffiliates of the registrant (based on
the closing price for the common stock on the New York Stock Exchange on March
18, 1994) was approximately $58,635,000.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held June 21, 1994, which will be filed with the Securities and
Exchange Commission not later than 120 days after January 2, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

ITEM 1. BUSINESS

BACKGROUND

GENERAL

Eljer Industries, Inc. through its subsidiaries ("Eljer Industries" or the
"Company"), is a leading manufacturer of high quality building products for
residential and commercial construction, remodeling, repair and do-it-yourself
markets. Eljer Industries manufactures and markets plumbing and heating,
ventilating and air conditioning ("HVAC") products in North America and HVAC
products in Europe. The Company markets its products through wholesale
distribution channels and, in North America, directly to building products
retailers. In North America, Eljer Industries is one of three leading full-line
suppliers of bath and kitchen fixtures and faucets and is a leading supplier of
registers, grilles and venting systems. In Europe, Eljer Industries is a
leading manufacturer of prefabricated chimneys and venting systems. During
fiscal years 1993, 1992 and 1991, revenues from sales of plumbing products
comprised approximately 59%, 54% and 56%, respectively, of the Company's
revenues, and the balance of its revenues was derived from HVAC products.

. North American Operations

Eljer Plumbingware manufactures and markets a full line of plumbing fixtures,
including vitreous china toilets and lavatories and enameled cast iron tubs,
whirlpools, sinks and lavatories. It also markets faucets manufactured by
United States Brass Corporation ("U.S. Brass"), an indirect wholly-owned
subsidiary of Eljer Industries.

U.S. Brass manufactures and markets a full range of faucets, plumbing
supplies, connectors and polybutylene plumbing systems in the United States.

Selkirk and Dry manufacture and market HVAC products, including registers,
grilles, venting systems, prefabricated chimneys, air diffusers and fireplaces.
Combined, Selkirk and Dry ("Selkirk/Dry") are a market leader for registers,
grilles and venting systems in North America.

. European Operations

Selkirk Europe manufactures and markets a full line of prefabricated chimneys
and venting systems for commercial, industrial and residential, repair, fuel
conversion and new construction. The conversion from coal to oil and gas for
energy is a major source of demand for Selkirk Europe's venting products.
Selkirk Europe is a market leader for sales of these products in Europe, and
also sells the products in many other markets around the world. The Europa
chimney, one of Selkirk Europe's leading products, can be used to vent exhaust
from furnaces and boilers and is particularly well suited for "fast track"
construction, which is used in Europe.

HISTORY

The "Eljer" business name traces its origin to a plumbing supply
manufacturing business formed in 1904. The Company's North American HVAC
products business originated in 1925, U.S. Brass became a plumbing company in
1962 and the Company's European business dates from 1964. Through various
transactions in the 1980's, Household International, Inc. ("Household")
acquired these businesses that now make up Eljer Industries.

Eljer Industries itself was organized under the laws of the State of Delaware
on January 26, 1989, as a wholly-owned subsidiary of Household. On April 14,
1989 (the "Distribution Date"), all of the outstanding shares of common stock
of Eljer Industries were distributed to holders of Household common stock (the
"spin-off"). Prior to the Distribution Date, the entities now operating the
Eljer Industries businesses were
<PAGE>

subsidiaries and divisions of Household Manufacturing, Inc. ("HMI"), or
Household Manufacturing, Limited, wholly-owned subsidiaries of Household.
Pursuant to a Reorganization and Distribution Agreement, entered into by
Household, Eljer Industries and other companies, Eljer Industries declared and
paid a cash dividend to Household and made other cash payments to repay certain
HMI revolving bank debt. Household agreed through a reimbursement agreement to
provide Eljer Industries with beginning equity of $84.4 million after all
payments and reimbursements were made. In mid-January 1993, the Company
initiated discussions with Household to recover damages allegedly incurred by
the Company in connection with the spin-off by Household in 1989. Household
commenced a lawsuit on February 5, 1993, in the Delaware Chancery Court for a
declaratory judgment that Household has no liability to the Company arising out
of the spin-off. On February 11, 1993, the Company sued Household in state
court in Dallas County, Texas, claiming that Household breached the contractual
agreements in connection with the spin-off and is seeking to recover
unspecified monetary damages. See Note 14 to the Consolidated Financial
Statements in Item 8 for further discussion.

RECENT DEVELOPMENTS

PENDING LEGAL PROCEEDINGS

On March 14, 1994, the Company announced an agreement in principle to settle
for $3.4 million the class action securities litigation against the Company and
certain present and former members of its Board of Directors pending in the
United States District Court for the Northern District of Texas. The proposed
settlement is subject to negotiation and execution of a definitive settlement
agreement among the parties and approval by the court. The Company believes
that a significant portion of the proposed settlement amount would be paid by
its liability insurance carrier, with the remainder covered by litigation
reserves previously established. The suit, originally filed as four purported
class action suits in December 1991 and later consolidated into one, asserted
causes of action based on alleged inadequate disclosures in the Company's 1989
and 1990 annual reports to shareholders and, in particular, disclosures with
respect to the litigation involving the Qest polybutylene plumbing system
manufactured and sold by U.S. Brass and with respect to the availability of
insurance coverage therefor. The plaintiffs sought unspecified actual and
punitive damages, as well as costs and attorneys' fees. In 1992 the court
certified a plaintiff class consisting of all purchasers of the Company's
common stock during the period from March 30, 1990 through August 8, 1991.

The Company is currently involved in significant legal proceedings including
a number of lawsuits and claims which involve the Qest polybutylene plumbing
system manufactured and sold by U.S. Brass since 1979. Information regarding
legal proceedings of the Company is set forth herein in "History" and
"Environmental Regulation" in Item 1, "Legal Proceedings" in Item 3 and Notes
13 and 14 to the Consolidated Financial Statements in Item 8, and is
incorporated herein by these references.

STRATEGY

Eljer Industries' business strategy is to continue to focus on two
significant issues: (1) operational performance and (2) management of legal
issues and related expenses in connection with polybutylene cases and other
litigation. Operating performance is benefitting from the continued
implementation of the Company's previous strategic programs and plans.
Litigation costs, most of which relate to non-operating issues arising from
business conducted prior to the Company's spin-off by Household in 1989,
increased substantially during 1993 and will continue to reduce the full effect
of improving earnings. The Company is committed to realizing its operating
potential while managing these significant litigation issues and their related
expenses to a successful conclusion.

In 1992, the Company received a favorable federal appeals court ruling on the
timing and availability of insurance coverage for polybutylene-related
liabilities. Based upon this ruling, the Company believes that substantially
all such liabilities are covered by insurance or by adequate reserves. However,
many of the

2
<PAGE>

Company's excess insurance carriers who were not directly involved in that
litigation have raised issues that have required the Company and U.S. Brass to
enter into costly litigation to establish the coverage. The Company continues
to be exposed to protracted polybutylene litigation and may suffer adverse
court verdicts in polybutylene lawsuits, which include the possibility of
punitive damage awards for which insurance coverage may not be available; may
not receive complete and timely reimbursement from its excess insurance
carriers; and may not obtain interim funding arrangements from its insurers.
Given these possibilities, the Company believes, as previously reported, that
payment of such litigation costs may materially and adversely affect its
liquidity.

As previously disclosed, the Company and U.S. Brass are exploring several
proactive measures to fully resolve these polybutylene-related liabilities. The
Company is continuing to press its suit against Household and is seeking to
hold Household responsible for a portion of these liabilities, in addition to
other damages. The Company is also exploring other options including the
reorganization of U.S. Brass under federal bankruptcy laws. Such a proceeding
could provide a means of maximizing the return to creditors of U.S. Brass and
systematically resolving the issues raised in the polybutylene-related
litigation. The Company has been party to an Amended and Restated Credit
Agreement (the "Credit Agreement") which included a default provision which
might have been triggered in the event of a U.S. Brass bankruptcy proceeding.
The Company and its lenders executed, as of March 25, 1994, the First Amendment
to Amended and Restated Credit Agreement (the "Amendment"). Under the terms of
the Amendment, the filing of such a proceeding would no longer constitute an
event of default.

EXTENSION OF TERM DEBT

As of March 25, 1994, the maturity date covering the term portion of the
Company's debt and the letters of credit supporting industrial revenue bonds
and other obligations was extended to April 30, 1996, pursuant to the terms of
the Amendment. A $6.0 million principal payment was made at the closing date of
the Amendment, with scheduled principal payments of $2.0 million, $4.0 million
and $11.0 million due on October 5, 1994, December 30, 1994 and December 29,
1995, respectively, subject to certain criteria. In addition, the interest rate
was increased 0.5% at the closing date of the Amendment and will be increased
by 0.5% at six-month intervals to maturity. The Company will be working toward
some manner of debt restructuring prior to the maturity of the Amendment in
April 1996. Neither the Company nor any of its subsidiaries has any commitment
with respect to restructurings or other sources of financing and there can be
no assurance that any such commitments can be obtained prior to the maturity of
the existing Credit Agreement, as amended. In connection with the Amendment,
the maturity date related to the accounts receivable sale program was
accelerated to September 30, 1994. The Company is currently having discussions
with other potential lenders to replace this facility and, while there can be
no assurance in this regard, anticipates it will be successful. The structure
of the new facility may be different than the current program. See Management's
Discussion and Analysis of Financial Condition and Results of Operations--
"Liquidity and Capital Resources" in Item 7 and Notes 2, 3, 7 and 13 to the
Consolidated Financial Statements in Item 8 for further discussion.

DESCRIPTION OF BUSINESS

PRODUCTS

Plumbing Fixtures. Eljer Plumbingware manufactures and markets enameled cast
iron and vitreous china plumbing fixtures for residential and commercial
applications. These fixtures include toilets, lavatories, sinks, bathtubs and
whirlpools. Eljer Plumbingware also markets faucets and acrylic bathtubs and
whirlpools for these applications. Eljer Plumbingware's line of products
includes bathroom and kitchen fixtures for new and remodeled construction.
Eljer Plumbingware regularly updates its products, monitoring color and style
trends and developing new products with growth potential.

Cast iron and vitreous china fixtures are sold under the Eljer trademark. The
Company manufactures vitreous china fixtures in two domestic plants and imports
certain specialized fixtures from Thailand. Enameled cast iron fixtures are
manufactured at one domestic plant. See "Properties" in Item 2 for a
description of these facilities.

3
<PAGE>

Eljer Plumbingware has been a leader in developing and manufacturing low
water consumption 1.6 gallon toilets, which are now statutorily mandated
throughout the United States. Eljer Plumbingware offers a broad line of such
products.

Faucets, Plumbing Supplies and Systems. U.S. Brass manufactures a wide range
of faucets, plumbing supplies and plumbing systems for residential and
commercial construction, remodeling and do-it-yourself applications. U.S. Brass
markets these products under the Valley, Eastman and Qest trademarks. The
Valley trademark applies to faucets. In recent years, U.S. Brass has introduced
the Valley Plus faucet line, directed to the middle and luxury markets, and
(Valley) Colourburst, a collection of high style, affordable faucets, directed
to remodeling and custom home markets. Eljer Plumbingware markets, under the
Eljer trademark, faucets manufactured by U.S. Brass that complement its fixture
line. Eastman plumbing supplies include supply tubes and valves, fittings, air
gaps and flexible gas and water connectors. Qest plumbing systems,
incorporating polybutylene pipe and metal connective fittings, offer ease of
installation, freeze tolerance and cost reduction to builders and plumbing
contractors. U.S. Brass also manufactures several private label faucets for
large retailers and other faucet manufacturers.

Various lawsuits have been filed against U.S. Brass, the Company and Eljer
Manufacturing, Inc., a wholly-owned subsidiary of Eljer Industries ("Eljer
Manufacturing"), regarding polybutylene plumbing systems using acetal fittings
manufactured and sold for residential site-built installations from 1979
through 1986 and for other installations from about 1975 through 1990. Metal
fittings are currently used for the polybutylene plumbing systems which the
Company manufactures and markets and which it believes have performed
satisfactorily. See "Recent Developments" in Item 1, "Legal Proceedings" in
Item 3 and Note 13 to the Consolidated Financial Statements in Item 8.

Heating, Ventilating and Air Conditioning Products. The Company, through
Selkirk/Dry and Selkirk Europe, manufactures and markets, in the United States,
Canada and Europe, prefabricated chimneys, venting systems, registers, grilles
and other related specialty items.

The Company believes it is a leading manufacturer of venting systems of its
type in both North America and Europe. These venting systems are used in
residential, commercial and industrial construction primarily to provide
venting of discharge from a furnace, appliance, boiler or diesel engine to the
outside. Eljer Industries' brands in North America are sold primarily under the
Metalbestos, Airmate, P.S. Chimney and SEL-VENT trademarks and in Europe under
the Selkirk and Europa trademarks.

Selkirk/Dry also manufactures and markets registers, grilles and diffusers.
These products are used primarily in new residential and commercial
construction and are marketed in the United States under the Airmate and
Selaire trademarks and in Canada under the Lloydaire trademark. They are also
sold into the retail market under the Showcase trademark. The Company also
manufactures other specialty products, including gas and wood-burning
fireplaces, and products made from fiber reinforced materials.

MARKETS AND DISTRIBUTION

Plumbing. Plumbing products are sold domestically and are exported primarily
through two major channels of distribution: (1) plumbing wholesalers; and (2)
retail outlets.

Eljer Industries' sales force is comprised of both agents and direct
salesmen. Eljer Industries markets plumbing products primarily in North
America. The Company also sells plumbing products through wholesale
distributors in the Far East and Middle East. Eljer Industries supports its
product lines with a variety of advertising, including national and trade
magazines.

Plumbing products sold by the Company are used primarily in new home
construction and repair/remodeling; therefore, demand for plumbing products is
closely related to both the rate of new housing starts and remodeling and
repair activities. The housing market is cyclical and is affected by, among
other

4
<PAGE>

things, interest rates, consumer confidence and the availability of mortgage
loans. Another major end use of plumbing products is in the repair and
remodeling markets which represent a different source of demand for plumbing
products, reducing the Company's reliance on new home construction. Both
housing starts and the repair and remodeling market experienced increases in
1993, and many published forecasts indicate further improvements in 1994. The
other major end use of plumbing products is in the commercial market, which
consists of hotels, health care facilities, educational and penal institutions
and office buildings.

The markets for plumbing products are highly competitive. Competition is
based on brand recognition, design and quality of the product, product
performance, price and service, with the relative importance of such factors
varying among products and markets. Eljer Industries, Kohler Company and
American Standard, Inc. are the better recognized companies selling fixtures in
the United States. The Company believes that overall it has the third largest
market share in the plumbing fixtures market. Eljer Industries also is a
supplier in the faucet market, where there are numerous major domestic and
import manufacturers, several of which are substantially larger than Eljer
Industries.

HVAC. Eljer Industries' HVAC products are used in the residential, industrial
and commercial construction markets for new construction and repair and
remodeling applications. HVAC products are sold primarily to regional
wholesalers and through retailers and contractors. Sales of these products are
subject to customer demand and general business conditions in these markets and
the North American and European economies. Participation in eastern Europe
markets, as they convert to natural gas, represents a strong market potential
in the future, depending on economic conditions.

In all major HVAC product lines, there are a variety of competitors who
aggressively compete for market share. Competition is based primarily on brand
recognition, product design, product quality, range of product line, price,
service and engineering support. Eljer Industries believes that it is
competitive with respect to each of these factors.

RAW MATERIALS

The manufacture of plumbing products requires clay, iron, brass, copper and
plastics, including polybutylene resin. Other than polybutylene resin, which is
currently produced only by Shell Chemical Company, a subsidiary of Shell Oil
Company, these materials are, and have been, readily available from several
sources. The Company has not experienced difficulty in obtaining polybutylene
resin from Shell Oil Company as needed.

The major raw materials used in the manufacture of HVAC products are cold-
rolled steel, galvanized steel, stainless steel coils and aluminum coils. These
materials are readily available from several sources and the Company has
experienced no difficulties with respect to availability of these materials.

ENVIRONMENTAL REGULATION

General. Like many industrial facilities, Eljer Industries' plants may
generate hazardous and nonhazardous waste, disposal of which is subject to
federal and state regulation. Due to the Company's and its predecessors'
longtime presence in the industry, business practices followed many years ago
could potentially become the focus of environmental actions. Several facilities
have been required to implement programs to remedy the effects of past waste
disposal. Although a number of plants have not been the focus of comprehensive
environmental studies, Eljer Industries is aware of no instances of
noncompliance with currently applicable safety, health and environmental laws
and regulations which might have a significant adverse effect on the Company's
financial condition or results of operations except as set forth below. With
respect to current operating procedures, Eljer Industries believes that it is
in material compliance with such applicable laws and regulations. The Company
has established accruals of approximately $13.0 million at the end of 1993 (see
discussion of individual sites below) pertaining to environmental, health and
safety matters. The Company believes these accruals are adequate; however,
given the significance of these matters, there

5
<PAGE>

may be costs in excess of amounts accrued that could have a material and
adverse effect on individual future years' operating results .

Although the monitoring of environmental issues is an integral part of the
Company's operations, Eljer Industries estimates that its capital expenditures
for environmental control facilities during fiscal years 1994 and 1995 will not
be material. The Company's capital expenditures for environmental control
facilities during fiscal years 1993 and 1992 were also not material.

Solid and Hazardous Wastes. The past disposal of hazardous and nonhazardous
waste generated at the Company's plants may now be subject to the requirements
of the federal Resource Conservation and Recovery Act and comparable state
statutes. Several facilities have been required to implement programs to remedy
the effects of past waste disposal.

A consent decree between the Company and the United States Environmental
Protection Agency ("EPA" or "U.S. EPA") was entered into in October 1990,
regarding the Company's Salem, Ohio, facility. The decree requires, among other
things, a closure plan to be approved by the Ohio Environmental Protection
Agency ("Ohio EPA") for the clean-up and closure of an area at that plant. In
December 1992, the Company and the Ohio EPA reached agreement on the proposed
closure plan and a joint settlement statement was filed in January 1993. The
Company submitted a revised closure plan on April 30, 1993, and has not yet
received either approval of, or comments on, the proposed plan. The Company has
begun closure and has paid $1.6 million to complete an interim closure of the
area and expects to pay approximately $1.8 million for additional closure and
post-closure costs. The Company has established accruals which it believes are
adequate to provide for these costs.

At the Company's Marysville, Ohio, facility, which was closed in 1987, the
Ohio EPA has entered a negotiated administrative order requiring the Company to
close an on-site disposal area holding foundry sand containing lead. In
addition, certain solvents have been reported to be present in the soil and
"perched" water in an on-site former drum accumulation area. The Company
submitted a draft closure plan for remediation on December 16, 1993. Assuming
the plan is approved in its current form, the Company's environmental
consultant estimates the cost of its implementation, including post-closure
care, to be approximately $9.4 million; however, there is no assurance that the
plan will be approved. In connection with the closure plan, an environmental
consultant has assessed the groundwater at the site and concluded that there is
no adverse impact on aquifers at the site. This report was presented to the
Ohio EPA on January 10, 1994. The ultimate cost to complete the closure of the
facility will depend on the nature and extent of the substances there and the
remediation technology ultimately agreed upon by the Ohio EPA. The Company has
established accruals which it believes are adequate to provide for these costs.

Under the terms of the consent decree regarding the Company's Salem, Ohio,
facility, discussed above, and related federal and state laws and regulations,
the Company is required to demonstrate financial responsibility for closure,
post-closure care and third-party liability with respect to the Salem site and
the Marysville site. Primarily as a result of the unusual items recorded in
1991 and the extraordinary item and cumulative effect of changes in accounting
principles recorded in 1992, the Company was unable to continue making the
required demonstration of financial responsibility after March 1992. On March
31, 1992, the Company notified the Ohio EPA that it could not make the required
demonstration at that time, and was pursuing alternative means of satisfying
the financial responsibility requirements. On October 9, 1992, the Company
received from the Ohio EPA a notice of violation with respect to its failure to
demonstrate financial responsibility. On October 12, 1992, the Company again
notified both the U.S. EPA and the Ohio EPA of its inability to meet the
financial responsibility requirements and asserted the unfavorable district
court decision in 1991 on timing and availability of insurance coverage and its
effect on the Company's financial position as an event of force majeure. The
Company received letters from the Ohio EPA dated June 21, 1993 and February 24,
1994, advising that the Company was in violation of financial assurance
requirements for the Salem and Marysville sites.

6
<PAGE>

The Company pursued negotiations with the U.S. EPA with regard to
alternatives to the Company's financial responsibility requirements under the
Salem consent decree. In September 1993, however, the U.S. EPA informed the
Company that it was withdrawing a proposed settlement offer that might have
resolved the matter without the imposition of any penalties and was referring
the matter of the Company's alleged noncompliance with the Salem consent decree
to the U.S. Department of Justice ("DOJ"). The Company obtained a letter of
credit effective September 28, 1993, to meet the closure and post-closure
financial responsibility requirements relative to the Salem facility. On
February 8, 1994, the DOJ sent the Company a letter demanding that the Company
pay $1.1 million in stipulated penalties covering the period during which it
was not able to meet the financial responsibility requirements associated with
closure and post-closure care of its Salem facility. The Company disputes the
amount and imposition of penalties and has entered into negotiations with the
DOJ with respect thereto. The Company has recently obtained third-party
liability coverage for the Salem facility.

The Company has been unable to renew closure, post-closure or third-party
liability financial responsibility assurances for the Marysville site. On June
21, 1993, the Ohio EPA informed the Company that this matter was being referred
to the U.S. EPA, but the Company has not heard from the U.S. EPA on this
matter.

The Salem consent decree provides for a stipulated penalty of $2,000 per day
for each failure to comply with a financial assurance provision (with lesser
penalties of $500 to $1,000 per day during the first month of noncompliance).
An Ohio statute provides generally for fines of $10,000, with higher fines for
second convictions or reckless violations of its regulations. Federal law
allows the imposition of civil penalties of up to $25,000 per day for violation
of federal regulations and makes certain violations subject to criminal
penalties. The government may attempt to impose statutory penalties on the
Company for its failure to comply with the financial responsibility
requirements at the Marysville site and additional penalties with regard to the
Salem facility. In the Company's opinion, after consultation with counsel, any
penalties ultimately imposed are likely to be less than the maximum potential
penalties authorized under the law. The Company believes that it has
meritorious defenses to the imposition of any penalties and intends to
vigorously defend against such penalties.

Superfund. The federal Comprehensive Environmental Response, Compensation and
Liability Act (commonly referred to as "Superfund" or the "Superfund Act") and
similar state laws subject certain parties to liability for the clean-up of
contaminated waste treatment or disposal sites. Liability under the Superfund
Act is considered "joint and several", meaning that any one responsible party
theoretically could be liable for all clean-up costs, which are often
substantial. However, the Superfund Act provides for the allocation of
liability in an equitable manner among responsible parties and for contribution
among them.

Certain of the Company's plants may have disposed of waste at sites which
have or may become a part of federal Superfund clean-up efforts. The Company
has received notice that eight of these sites are the subject of federal, and
two are the subject of state, remedial investigations or activities, for which
the Company has not resolved its alleged liability. In 1992 and 1993 the
Company resolved its alleged liability at three additional sites. At nine of
the sites still being addressed, the Company considers itself to be a de
minimis contributor to the volume of waste. With regard to the remaining site,
the American Zinc Company site in Dumas, Texas, the Company is conducting a
preliminary investigation of its connection, if any, to a former owner of the
site. On October 6, 1993, the Texas Natural Resource Conservation Commission
("TNRCC") informed the Company that it may be in the position of being named as
a potentially responsible party ("PRP") with regard to this site. The Company
has responded to a TNRCC request for information concerning the Company's
connection, if any, to the site. If the site listing on the Texas Superfund
Registry were finalized, the PRPs would be jointly and severally liable for any
clean-up costs. The Company is assessing the position it will take in
responding to the TNRCC. At this early stage it is not reasonably possible for
the Company to determine the environmental condition of the site or the nature
and cost of any remediation that may be required. Similarly, with respect to
another site as to which the Company was

7
<PAGE>

recently notified that it may be a de minimis PRP, no determination of its
share of the costs of any remediation can currently be made. The Company has
established accruals which it believes are adequate to provide for any
liabilities it may have with respect to the other eight sites.

Air and Water. Air and water emissions by the Company's plants have in the
past received the attention of regulatory authorities and may require capital
expenditures in the future. During 1991 the Company received from the EPA an
administrative order citing it with a violation of the Clean Water Act for
unpermitted discharge of wastewater streams at the Salem, Ohio, plant. The
Company has been in negotiations with the EPA since then and has filed a
sampling plan and tendered the sampling results to the EPA. In January 1993 the
Company received notice from the DOJ that it intended to file a civil action
seeking penalties for alleged violations of the Clean Water Act from at least
1988. The government advised the Company that it was seeking a civil penalty of
approximately $1 million and requested a good faith settlement offer from the
Company to avoid filing a lawsuit. The Company has negotiated with the
government a settlement in principle of the proposed civil action. Under the
settlement in principle, the details of which will be reduced to writing in a
consent decree, the Company would pay a $300,000 cash penalty and conduct
certain remediation work estimated to cost approximately $690,000. The Company
has established accruals which it believes are adequate to provide for these
costs.

Other Matters. In October 1991, Eljer Manufacturing sold a facility located
in Atlanta to joint venture partners Toto Ltd., Mitsui & Co., Ltd. and Mitsui &
Co. (USA), Inc. ("Toto and Mitsui"). Toto and Mitsui have given Eljer
Manufacturing notice that certain soil and groundwater sampling allegedly
revealed several areas of contamination for which they claim indemnity under
their purchase agreement. Eljer Manufacturing could be responsible for the
costs of remediation, up to a contractual limit of $750,000, if this
contamination resulted from an unlawful release of hazardous substances or
disposal of solid waste or hazardous waste at the facility prior to October
1991. The sufficiency of the notice given is being disputed and Eljer
Manufacturing has proposed conducting additional environmental assessments. In
addition, Eljer Manufacturing has notified the prior owner of the facility, JP
Industries, Inc., ("JP Industries") of Eljer Manufacturing's claims under the
indemnity provisions of its purchase agreement with JP Industries. Eljer
Manufacturing believes that it has meritorious challenges to Toto and Mitsui's
claims as well as valid claims against JP Industries should it be liable for
any contamination at this site.

In anticipation of the possible sale of the Company's Wilson, North Carolina,
manufacturing plant, an environmental investigation was performed of that
plant. One monitoring well on the property showed the presence of some
hazardous substances. This finding was reported to the State of North Carolina
and a follow-up investigation was performed. The Company is now in the process
of preparing a report and action plan to be submitted to the state. Another
well on the property was found to contain trichloroethene, another hazardous
substance. Based on the location of the well and the direction of groundwater
flow, and the Company's understanding that it has not used trichloroethene at
the plant, it is presently the Company's belief that any trichloroethene on the
property originated from off-site sources. The Company has established accruals
which it believes are adequate to provide for the costs of investigation and
remediation, if any.

8
<PAGE>

requirement and $2,500 per day for a violation of the discharge requirement.
Allegations are also made that the same conduct constitutes unfair business
practices, misrepresentation, fraud and deceit, breach of contract and
warranties, and negligence. The Company and U.S. Brass intend to defend the
lawsuits vigorously, and while they will continue to do so, they have also
engaged in settlement discussions with the plaintiffs. The Company and U.S.
Brass do not expect the resolution of these lawsuits to have a material adverse
effect on its financial condition or results of operations.

FOREIGN AND DOMESTIC OPERATIONS

See Note 15 to the Consolidated Financial Statements in Item 8 for geographic
segment financial data.

GENERAL

Customers. Eljer Industries is not dependent upon any single customer, or
upon any single group of customers, the loss of which would have a material
adverse effect on Eljer Industries.

Backlog of Orders and Inventory. The backlog of unshipped factory orders at
the end of fiscal years 1993 and 1992 was approximately $15.3 million and $17.4
million, respectively. The decline is primarily attributable to a downturn in
the Company's European business, which continued to experience reduced sales
volumes at the end of 1993 (see Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 for additional
discussion). Eljer Industries expects that all of the orders in backlog at the
end of fiscal year 1993 will be shipped during 1994. Eljer Industries must
carry inventory of certain products to meet rapid delivery requirements of its
customers.

Employees. Eljer Industries employs approximately 3,900 people, approximately
1,400 of whom are covered by collective bargaining agreements with various
labor unions. The collective bargaining agreement at the manufacturing plant in
Nampa, Idaho, expired July 8, 1991. The plant has been operating without a
contract since that date. The expirations of current collective bargaining
agreements range from 1994 to 1996. A new three-year agreement was reached at
the Company's cast iron foundry manufacturing plant in Salem, Ohio, effective
March 5, 1993, without production interruption. A new three-year agreement was
also reached at the Company's vitreous china plant in Tupelo, Mississippi,
effective October 25, 1993, without production interruption. A new three-year
agreement was reached at the Company's Logan, Ohio, plant effective February 3,
1994, without production interruption, the only location for which an agreement
expired in 1994. In general, relations with employees have been satisfactory.

Patents and Trademarks. Eljer Industries has a number of United States and
foreign patents and also holds a number of patent applications, licenses,
trademarks and trade names, including the trademarks mentioned herein. Except
for certain trademarks mentioned herein, none of the foregoing is believed to
be material to Eljer Industries.

Other. No material portion of the businesses of Eljer Industries is subject
to renegotiation of profits or termination of contracts at the election of the
federal government. The Company's businesses in total are not significantly
seasonal, although many products experience increased sales during the second
and third quarters of the year due to larger housing construction activity, and
certain HVAC products often experience higher sales in the autumn months.

9
<PAGE>

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the names, ages, titles with Eljer Industries and
principal occupations and employment for the past five years of the persons
serving as executive officers of Eljer Industries.

<TABLE>
<CAPTION>
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
<S> <C>
Scott G. Arbuckle, 62..... President and Chief Executive Officer. Mr. Arbuckle
has served in his current position since February
1990. Mr. Arbuckle previously served as Executive
Vice President of Eljer Industries and President of
the HVAC Group from April 1989 to February 1990.
From 1982 to April 1989, Mr. Arbuckle served as an
Executive Vice President of HMI. He joined U.S.
Brass in 1963.

Henry W. Lehnerer, 53..... Vice President--Finance and Chief Financial Officer.
Mr. Lehnerer has served in his current position
since May 1993. Mr. Lehnerer previously served as
Chief Financial Officer of Princeton Packaging
Holdings, Inc., a flexible packaging company with
operations in the United States and the U.K. Prior
to joining Princeton Packaging, he was Executive
Vice President and Chief Financial Officer of
Wormald Americas, Inc., a manufacturer of sprinkler
systems and other fire prevention products.

James F. Thomason, 59..... Vice President--Manufacturing. Mr. Thomason
previously served as Group President--Selkirk/Dry
N.A. from April 1990 to April 1991. Prior to joining
Eljer Industries, Mr. Thomason served in various
management positions with the Kohler Company, most
recently as Vice President--Operations for Plumbing
and Specialty Products, International.

John M. Botton, 59........ Group President--Selkirk Europe. Mr. Botton served
in this position since April 1989. Mr. Botton
previously served as HMI's division president for
Selkirk Europe from 1980 to April 1989. Mr. Botton
retired from this position with the Company on March
22, 1994.

Edward W. Fordyce, Jr.,
52....................... Vice President--General Counsel and Secretary. Mr.
Fordyce has served as Vice President--General
Counsel since May 1992, and was appointed to the
additional post of Secretary in September 1992. Mr.
Fordyce previously served as Vice President--General
Counsel and Assistant Secretary of Lennox
International, Inc., Dallas, Texas, a privately-held
manufacturer of heating, ventilating and air
conditioning equipment, from 1989 to 1991, and as
Vice President--General Counsel and Assistant
Secretary of National Gypsum Co., Dallas, Texas,
from 1979 to 1988.

Charles R. Wackenhuth, 55. Vice President--Human Resources. Mr. Wackenhuth has
served in his current position since April 1989. Mr.
Wackenhuth previously served as Director--Human
Resources/Compensation for HMI from 1982 to April
1989.
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
<S> <C>
James A. Harris, 37........ Vice President--Sales and Marketing. Mr. Harris has
served in his current position since January 1992.
Mr. Harris previously served as Vice President--
Marketing of Eljer Industries from April 1989
through December 1991, and served as Director--
Marketing of HMI's plumbing products group from
February 1988 to April 1989. Prior to joining HMI,
Mr. Harris served in various sales and marketing
management positions with American Standard, Inc.

Brooks F. Sherman, 33...... Controller, Treasurer and Assistant Secretary. Mr.
Sherman served as Controller and Assistant Secretary
since joining HMI's plumbing products group in March
1989. In April 1991, Mr. Sherman was named
Treasurer. Prior to joining HMI, Mr. Sherman served
in various positions, most recently financial
consulting and audit manager for Arthur Andersen &
Co., an international accounting firm.
</TABLE>

ITEM 2. PROPERTIES

The following table sets forth the location, approximate square footage and
use of each of the principal manufacturing plants of Eljer Industries,
separated by the division or subsidiary which operates the facility. Except as
indicated in the table, all of the plants are owned by Eljer Industries.

<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE USE
-------- -------------- ---
<S> <C> <C>
ELJER PLUMBINGWARE:
Ford City, Pennsylvania....... 736,000 Manufacture of vitreous china
products.
Salem, Ohio................... 477,000 Foundry--manufacture of
enameled cast iron products.
Tupelo, Mississippi***........ 422,000 Manufacture of vitreous china
products.
Wilson, North Carolina........ 220,000 Manufacture of fiberglass
bathtubs and showers.
U.S. BRASS:
Abilene, Texas................ 174,000 Manufacture of faucets.
Commerce, Texas............... 172,000 Manufacture of polybutylene
plumbing systems and brass
and copper gas and water
connectors.
Plano, Texas.................. 98,000 Manufacture of brass plumbing
supplies.
Elkhart, Indiana.............. 97,000 Manufacture of polybutylene
plumbing systems.
SELKIRK/DRY:
Winters, Texas................ 337,000 Manufacture of registers,
grilles, diffusers and gas
vents.
Logan, Ohio................... 194,000 Manufacture of gas vents and
chimney systems.
Nampa, Idaho.................. 154,000 Manufacture of gas vents and
chimney systems.
Coleman, Texas................ 110,000 Manufacture of registers,
grilles and fireplaces.
Brockville, Ontario, Canada... 75,000 Manufacture of fireplaces and
chimney systems.
Mississauga, Ontario, Canada*. 55,000 Manufacture of registers and
grilles.
SELKIRK EUROPE:
Cologne, Germany**............ 105,000 Manufacture of chimney
systems.
Barnstaple, England........... 92,000 Manufacture of gas vents and
chimney systems.
Mullicott Cross, England...... 68,000 Manufacture of venting and
specialty products.
</TABLE>
- --------
* Leased until December 1994--the Company is currently negotiating a renewal
of this lease.
** Leased until 1997.
*** Leased until 2066.

11
<PAGE>

In general, the manufacturing facilities for plumbing products are in good
condition and are operating at capacities which range from approximately 40% to
100%. The facility used for the manufacture of fiberglass products in Wilson,
N.C., which the Company is actively trying to sell, is also in good condition
but is operating at lower capacity levels.

The manufacturing facilities for gas vents and chimney systems are presently
operating at approximately 60% to 75% capacity, except Canada, which is
operating at a lower capacity level. The plants, which are used to manufacture
registers, grilles and other specialty items, are presently operating at
approximately 75% capacity. Each of these facilities is in good condition.

All Selkirk/Dry and Eljer Plumbingware properties, with the exception of
Salem, Ohio, secure the domestic bank term loans. The Commerce, Texas, location
secures certain industrial revenue bond obligations. All owned properties in
England secure both the revolving credit agreement and the term debt in the
United Kingdom. See Note 7 to the Consolidated Financial Statements in Item 8
for further discussion.

In addition to the foregoing, Eljer Industries owns or leases a number of
warehouse distribution centers throughout the United States.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings of the Company is set forth herein in
"History", "Recent Developments" and "Environmental Regulation" appearing in
Item 1, and in Notes 13 and 14 to the Consolidated Financial Statements in Item
8, and is incorporated herein by these references.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders of Eljer Industries
during the fourth quarter of fiscal year 1993.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION FOR COMMON STOCK

Eljer Industries' common stock is traded principally on the New York Stock
Exchange. The following table reflects the range of high and low selling prices
of Eljer Industries' common stock by quarter for 1993 and 1992. This
information is based on closing prices as reported by the New York Stock
Exchange.

<TABLE>
<CAPTION>
1993 1992
------------- --------------
HIGH LOW HIGH LOW
------ ------ ------- ------
<S> <C> <C> <C> <C>
First Quarter................................ $9 3/4 $8 1/2 $13 7/8 $6 1/8
Second Quarter............................... 9 1/4 6 1/2 9 1/4 4 1/2
Third Quarter................................ 7 1/4 5 1/4 11 3/4 6 5/8
Fourth Quarter............................... 9 5 5/8 11 8 3/8
</TABLE>

HOLDERS

At March 18, 1994, there were approximately 9,820 holders of record of common
stock.

12
<PAGE>

DIVIDENDS

No dividends were declared in fiscal 1993 or 1992. The Board of Directors
intends to review its dividend policy regularly with the intent of restoring a
cash dividend when appropriate; however, Eljer Industries is currently
restricted by certain debt covenants from paying dividends during the term of
its restructured U.S. credit agreement. See Note 7 to the Consolidated
Financial Statements in Item 8.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data of Eljer Industries.
Results for fiscal year 1989 are not necessarily indicative of the financial
position of Eljer Industries had it been autonomous. This historical data
should be read in conjunction with the Consolidated Financial Statements and
the related notes thereto in Item 8 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7. Net income per
share is not applicable to actual results for 1989 since Eljer Industries was
not a separate entity with a capital structure of its own during the entirety
of this period. The unaudited pro forma results include the effects of certain
events resulting from the spin-off, primarily the incurrence of substantially
more interest expense, on the historical consolidated statement of income for
the fiscal year ended 1989, as if such events had been completed as of the
beginning of said year.

<TABLE>
<CAPTION>
PRO FORMA ACTUAL
1993 1992 1991 1990 1989 1989
------ ------ ------ ------ ----------- ------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $387.6 $397.3 $402.5 $449.2 $429.9 $429.9
Income from operations
before unusual items....... 21.1 23.4 19.0 20.8 28.5 28.7
Income (loss) before income
taxes...................... 6.4 9.4 (47.8) 6.1 13.0 16.2
Income (loss) before
extraordinary item and
cumulative effects of
changes in accounting
principles................. 3.9 (2.1) (59.7) 2.5 7.3 9.2
Net income (loss)........... 3.9 (57.3)** (59.7) 2.5 7.3 9.2
Earnings (loss) per share
before extraordinary item
and cumulative effects of
changes in accounting
principles................. .55 (.30) (8.46) .35 1.03 N/A
Earnings (loss) per share... .55 (8.11)** (8.46) .35 1.03 N/A
Total assets................ 228.8 254.4 239.2 268.8 N/A 306.5
Long-term debt.............. 103.1 114.8 87.7* 88.1 N/A 125.7
Dividends per common share.. -- -- -- .28 .28 .21
</TABLE>
- --------
* Includes long-term debt subject to restructure, included in Current
Liabilities at the end of 1991.
** Includes an extraordinary charge of $16.0 million ($2.26 per share) and
cumulative effects of changes in accounting principles of $39.2 million
($5.55 per share). See Notes 1 and 13 to the Consolidated Financial
Statements in Item 8 for additional discussion.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Year ended January 2, 1994 ("1993"), compared with year ended January 3, 1993
("1992")

Net sales decreased 2.5% or $9.8 million from the 1992 level. 1993 sales
benefitted from successful new product introductions and a strong retail market
in the United States with North American sales rising $11.5 million or 3.8%
over the 1992 level. However, sales declined approximately $21.3 million in
Europe, of which approximately $9.7 million resulted from unfavorable exchange
rates due to the strong U.S. dollar. The

13
<PAGE>

planned elimination of low-margin product lines also contributed to the slight
sales reduction. The downward trend in European sales is anticipated to
continue well into 1994.

Gross profit margins for 1993 improved in North America to 25.6% from 24.1%
in 1992. This is attributable to the continuation of a management strategy to
reduce costs and increase margins on major product lines and eliminate those
product lines with lower margins. As an example of eliminating a lower margin
product line, in September 1993, Eljer Industries sold its Valdosta, Georgia,
fiberglass and acrylic plant, and no longer sells under the GlasTec trade name.
The Company has entered into negotiations to sell its Wilson, North Carolina,
fiberglass plant. Gross profit margins of the Company's North American plumbing
products alone rose from 19.7% in 1992 to 23.0% in 1993 due in part to reduced
costs and increased sales of higher margin products, particularly in the last
half of 1993, and improved burden absorption on the higher volume.

The reduced level of European sales resulted in a gross profit margin
reduction from 41.4% in 1992 to 39.2% in 1993. The resurgence in North American
plumbing sales, improved product quality and lower costs related to workers'
compensation, medical insurance and new processes and products in 1993
contributed to offsetting the European margin decline and maintained the 28.2%
1992 margin level on a consolidated basis.

Total selling and administrative expenses were $3.0 million or 3.6% lower
than the 1992 level ($80.9 million in 1993; $83.9 million in 1992), primarily
as a result of lower selling expenses in Europe. In addition, costs incurred in
1992 related to the bank debt restructuring were not present in the 1993
results. Conversely, litigation costs were $2.3 million higher in 1993 than in
1992 due primarily to higher litigation costs incurred in the Company's suits
against its insurance carriers and costs incurred for a suit against Household,
the Company's former parent.

Overall, North American income from operations increased $6.3 million in
1993, despite the increased litigation costs, compared to 1992. The increase
was more than offset by the $8.6 million decline in European operating income
in 1993.

Other expense, net, was relatively stable, rising only $248,000 in 1993.
Interest expense was also stable, decreasing only $94,000 in 1993. Interest
income was $542,000 lower in 1993 compared to 1992. This is due to lower cash
investments, due to litigation payments and related costs, and lower interest
rates in 1993.

Tax expense, including tax on repatriation of foreign earnings and a loss of
tax benefit on indemnified liabilities, was approximately $9.0 million lower in
1993 than 1992. Tax expense in 1993 decreased due to lower European earnings,
which are taxed at rates higher than those in the United States, and the
Company's ability to utilize deferred tax benefits in the United States. In
addition, the 1992 tax expense included $7.3 million of charges related to the
1989 spin-off from Household.

Net income for the year increased $6.0 million over the 1992 $2.1 million
loss before the extraordinary item and effects of changes in accounting
principles, resulting in the Company's best performance since 1989.

1992 Compared with year ended December 29, 1991 ("1991")

Net sales remained relatively stable during 1992, decreasing only $5.2
million or 1.3% from the 1991 level. Sales of the plumbing product lines were
reduced by $8.9 million or 4.0%. This reduction was partially offset by a $3.7
million or 2.1% increase in sales of HVAC products. The reductions in sales of
plumbing products was primarily a result of a three-year management strategy to
exit from low margin activities. The Company was also adversely affected by
negative publicity concerning its financial condition during part of the year,
which particularly slowed the conversion of potential new accounts to the Eljer
brand. The successful insurance case appeal and bank debt restructuring
provided the bases for the Company to reverse this decline in the fourth
quarter of 1992, in which sales of plumbing products exceeded the fourth
quarter 1991 sales. Although European sales were slightly higher in 1992 over
1991, fourth quarter 1992 sales in

14
<PAGE>

Europe were substantially below the prior year due to deteriorating economic
conditions, particularly in Germany.

Gross profit margin increased from 26.2% to 28.2% in 1992. This improvement
was the result of the implementation of the three-year management strategy
which increased margins earned on most major product lines. Several key
improvements by the Company included substantial reductions of fixed costs and
excess capacity through the disposition of three plants in 1991, the planned
decline or elimination of low margin products, reduction in the cost of medical
insurance programs and the increase in sales of HVAC products, which yield
higher margins. The impact of these improvements was partially offset by the
Company's adoption of Statement of Financial Accounting Standards ("SFAS") No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions" as
of the beginning of 1992. The implementation of SFAS No. 106 resulted in an
additional $1.9 million reduction in gross margin and continues to have an
unfavorable financial impact.

Total selling and administrative expenses were $0.9 million or 1.1% higher
than the 1991 level and litigation costs were $1.5 million higher than the 1991
level. In total, legal, professional and bank restructuring fees were
approximately $3.7 million higher in 1992 than in the previous year. This
increase was partially offset by reductions in sales commissions and other
selling costs.

Operating profit before unusual items was $23.4 million or 5.9% of sales in
1992, compared to $19.0 million or 4.7% of sales in 1991. For the fourth
quarter of 1992, operating profit before unusual items was $6.6 million or 6.2%
of sales, compared to $5.5 million or 5.3% of sales in the fourth quarter of
1991. These improvements occurred despite the impact of implementing SFAS No.
106, which reduced operating profit by $2.1 million in 1992 and $0.5 million in
the fourth quarter of 1992.

The Company recorded the following unusual items in 1991 which were not
repeated in 1992:

1) During 1991, management completed its previously disclosed
reevaluation of the Company's vacuum forming production line at its Salem,
Ohio, foundry which had experienced significant operating problems. In
performing its final evaluation, management determined that the system
could not produce cast iron products in a cost efficient manner and
therefore was written off. The write-off totaled $9.0 million.

2) As previously disclosed, the Company also began implementation of
various steps to restructure its business in 1991, including plant idlings
and closings, debt restructuring, product line rationalization and
downsizing of certain operations. The total cost associated with the
Company's restructuring was approximately $7.6 million.

3) As discussed in Note 13 to the Consolidated Financial Statements in
Item 8, as a result of the June 1991 adverse district court decision (which
has since been overturned on appeal) regarding the timing and availability
of primary insurance coverage relating to the Qest polybutylene plumbing
system manufactured and sold by U.S. Brass, the Company fully reserved for
receivables from its insurance carriers, resulting in a $14.6 million 1991
charge. The Company also established an additional reserve of $6.7 million
in 1991 for prior settlements, judgments on appeal and other related costs.

4) During 1991, the Company established additional environmental
remediation reserves of $9.9 million including reserves to cover potential
additional environmental clean-up costs associated with the closed
Marysville, Ohio, facility, and the completion of the closure plan at its
Salem, Ohio, facility.

5) During early 1991 management implemented a program to offer incentives
to turn inventories identified as slow moving. Based upon the results of
these efforts, management decided to discontinue certain products and a
$5.0 million reserve was established during the fourth quarter of 1991 to
reflect these items at their estimated fair market value.

Other expense, net in 1992 of $1.1 million was $1.3 million lower than the
1991 level due primarily to favorable foreign exchange gains recognized in 1992
and lower expense attributable to the receivables sales program discussed in
Note 3 to the Consolidated Financial Statements in Item 8.

15
<PAGE>

Interest expense was $0.9 million higher in 1992 compared to 1991. This is
due primarily to default rates being charged on the Company's debt in 1992 and
the new financing completed in May 1992 by U.S. Brass. This impact was offset
somewhat by an overall reduction in the base interest rate being charged on the
Company's variable rate debt and the expiration of an unfavorable interest rate
swap agreement in April 1992. A second interest rate swap agreement with a $65
million notional amount will continue to adversely affect the Company's
interest costs through its April 14, 1994, expiration date.

As discussed in Note 11 to the Consolidated Financial Statements in Item 8,
the Company expensed $3.6 million in 1992 for the estimated tax cost for
repatriating those foreign earnings which were no longer considered permanently
reinvested and the Company's inability to utilize the tax benefit of certain
liabilities partially indemnified by Household. Tax expense in 1992 was also
affected by the Company's inability to realize the tax benefit of its U.S.
loss. In addition, a $3.0 million assessment was received subsequent to yearend
1992 from Household pursuant to a Tax Sharing Agreement which pertained to the
Internal Revenue Service audits of years 1983 through 1985 (prior to the spin-
off), for which no indemnification exists. The Company continues to investigate
the merits of Household's claim.

In the fourth quarter of 1992, the Company established a $16.0 million
reserve for litigation associated with a Chinese joint venture entered into by
a separate division of HMI, a predecessor company to Eljer Manufacturing (see
Note 13 to the Consolidated Financial Statements in Item 8 for discussion).
This reserve is considered extraordinary due to its unusual nature and the fact
that it has no relation to any of the operating divisions of HMI which became
part of Eljer Industries.

As discussed in Notes 1, 9 and 11 to the Consolidated Financial Statements in
Item 8, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions", No. 109, "Accounting for Income
Taxes" and No. 112, "Employers' Accounting for Postemployment Benefits"
effective the beginning of 1992. As a result, a total of $39.2 million of
cumulative catch-up adjustments are reflected in the 1992 results as changes in
accounting principles.

LIQUIDITY AND CAPITAL RESOURCES

The net cash provided by operating activities of $7.3 million in 1993 was
$4.7 million more than in 1992. The increase results primarily from the
improved earnings position in 1993, as discussed above. Inventories decreased
$3.2 million in 1993 due to planned reductions in Europe and tightly
controlling inventory levels as sales volumes increased in North America. The
increase in cash occurred in spite of the bonding of damage awards and legal
fees totaling $14.0 million in 1993 related to the Kowin Development litigation
(See Note 13 to the Consolidated Financial Statements in Item 8). The cash flow
in 1992 was negatively affected by a $7 million payment to reduce the
outstanding trade accounts receivable sold in conjunction with new financing
received by one of the Company's subsidiaries. No such payment was made in
1993.

Capital expenditures in 1993 of approximately $7.9 million were primarily for
the improvement of existing equipment at various locations and the
implementation of new manufacturing processes and tooling for new products. The
Company is nearing capacity levels at its vitreous china plants and intends to
implement a capital expansion project at its existing facilities in 1994.

The net cash used in financing activities was $23.7 million in 1993. Through
its cash flow generated by operating activities, the Company was able to
achieve a net debt reduction of approximately $14.1 million in 1993. The 1993
reduction relates mainly to revolving debt, which was obtained in 1992 by U.S.
Brass and the Company's Selkirk subsidiaries in the United Kingdom and Germany.
In addition, approximately $5.5 million was used for the collateralization of
environmental, insurance and related letters of credit during 1993 and
approximately $4.0 million of advanced corporation taxes was paid by the
Company's Selkirk subsidiary in the U.K. related to funds dividended to the
Company in December 1992.

16
<PAGE>

The Company has been party to the Credit Agreement since it restructured its
debt in December 1992. The Credit Agreement provided, among other things, a
maturity date of April 30, 1995, for the Company's restructured term debt and
letters of credit supporting industrial revenue bonds and other obligations.
The Company has also been a party to a $13.0 million accounts receivable sale
program, discussed in Note 3 to the Consolidated Financial Statements in Item
8, which had the same maturity date. In addition, the Credit Agreement included
a default provision which might have been triggered in the event of a U.S.
Brass bankruptcy proceeding. The Company and its lenders executed, as of March
25, 1994, the Amendment under the terms of which the maturity date covering the
term portion of the debt and the letters of credit supporting industrial
revenue bonds and other obligations was extended to April 30, 1996; and filing
of a bankruptcy proceeding relative to U.S. Brass no longer constitutes an
event of default. A $6.0 million principal payment was made at the closing date
of the Amendment, with scheduled principal payments of $2.0 million, $4.0
million and $11.0 million due on October 5, 1994, December 30, 1994 and
December 29, 1995, respectively, subject to certain criteria. In addition, the
interest rate was increased 0.5% at the closing date of the Amendment and will
be increased by 0.5% at six-month intervals to maturity. The Company will be
working toward some manner of debt restructuring prior to the maturity of the
Amendment in April 1996. Neither the Company nor any of its subsidiaries has
any commitment with respect to restructurings or other sources of financing and
there can be no assurance that any such commitments can be obtained prior to
the maturity of the existing Credit Agreement, as amended.

In connection with the Amendment, the maturity date related to the accounts
receivable sale program was accelerated to September 30, 1994. The Company is
currently having discussions with other potential lenders to replace this
facility and, while there can be no assurance in this regard, anticipates it
will be successful. The structure of a new facility may be different than the
current program.

At year end 1993, the Company was in compliance with all covenants related to
its existing debt. See Note 7 to the Consolidated Financial Statements in Item
8 for additional discussion of debt.

Two of the Company's manufacturing plants, one of which has been closed since
1987, are the subject of waste disposal and remediation projects. In total, the
Company has accrued approximately $13.0 million at the end of 1993 pertaining
to known environmental, health and safety matters. The principal environmental
clean-up efforts will occur over the next several years. However, the Company
provided a cash letter of credit in the amount of $1.9 million to the Ohio EPA
covering closure and post-closure care for the Salem plant. If the Company were
required to provide a letter of credit to the environmental agency in 1994 for
a substantial portion of the amount accrued at yearend for the Marysville
plant, such letter of credit will likely have to be fully cash collateralized.
See Note 13 to the Consolidated Financial Statements in Item 8 for further
discussion.

On August 14, 1992, the U.S. Seventh Circuit Court of Appeals ruled in favor
of the Company on the appeal of a June 1991 adverse decision in the Company's
lawsuit against its primary insurer regarding the timing and availability of
insurance coverage relating to the Qest polybutylene plumbing system (the
"system" or the "Qest system") manufactured and sold since 1979 by U.S. Brass.
Since December 1992, Travelers Indemnity Company of Illinois ("Travelers"), the
Company's first layer excess insurance carrier for 1982 through 1986, has
provided defense and indemnity coverage for Qest system claims associated with
installations completed during the years 1982 through 1986 subject to a full
reservation of rights. In September 1993 Travelers advised the Company that its
coverage for Qest system claims for 1982 and 1983 installations was exhausted.
The Company's next layer excess carrier, California Union Insurance Company
("California Union"), has disputed its obligations to provide coverage for
indemnity costs for years 1982 and 1983, but is making certain amounts
available with respect to payments of indemnity subject to a full reservation
of rights. California Union has refused to pay defense costs. As previously
disclosed, two other excess carriers, Gibraltar Casualty Company and Hartford
Indemnity Company, which are the Company's next layer excess carriers for 1980
and 1981, have refused to make any payments for defense or indemnity. The
Company's primary comprehensive general liability insurance carrier for policy
years 1979 through 1988,

17
<PAGE>

Liberty Mutual Insurance Company ("Liberty Mutual"), has exhausted its coverage
for property damage claims for years 1980 through 1986. Although some coverage
exists for the years 1979, 1987 and 1988, Liberty Mutual has refused to pay
indemnity or defense for the years 1987 through 1988 because it claims that the
Company owes Liberty Mutual reimbursement for overpayments in other years.
Liberty Mutual has also refused to pay certain costs of defense or indemnity
involving 1979 installations alleged to precede its coverage. The Company's
carriers have advised it that they will not pay any punitive damages judgments
which may be entered against the Company. The Company is engaged in coverage
litigation against most of its excess insurance carriers in both state and
federal court.

In the Qest system, the Celcon acetal fittings, rather than the polybutylene
pipe, have, in the Company's opinion, caused the vast majority of failures
experienced to date. The manufacture and sale of Celcon acetal fittings were
discontinued after 1986 for residential site-built installations and in 1990
for other uses. Based on the favorable ruling described above, the Company
believes that substantially all losses arising from Qest claims for systems
installed prior to 1987 are covered by insurance. The Company has limited
insurance for the years 1987 through 1990. Although the Company believes it
will ultimately prevail in its pursuit of insurance coverage in years 1979 to
1986, it may have to bear, in the interim, all or a portion of the costs of
defense and settlement of claims and litigation for polybutylene plumbing
systems installed from 1979 through 1983 and 1987 through 1990. If the Company
continues to be exposed to protracted litigation or suffers adverse court
verdicts in Qest system lawsuits, including the possibility of punitive damage
awards for which insurance coverage may not be available, and if the Company
does not receive complete and timely reimbursement from its excess insurance
carriers, or obtain interim funding arrangements from its insurers, payments of
such litigation costs may adversely affect its liquidity. Although the Company
continues to believe that the Qest system liabilities are substantially covered
by insurance, it is also exploring other means of resolving the polybutylene-
related liabilities. It is continuing to press its suit against Household and
is seeking to hold Household responsible for a portion of these liabilities, in
addition to other damages. Further, the Company is exploring other options
including the reorganization of U.S. Brass under federal bankruptcy laws. Such
a proceeding could provide a means of maximizing the return to creditors of
U.S. Brass and systematically resolving the issues raised in the polybutylene-
related litigation. Under the terms of the Amendment (discussed above), the
filing of such a proceeding no longer constitutes an event of default under the
Credit Agreement. See Note 13 to the Consolidated Financial Statements in Item
8 for further discussion.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ELJER INDUSTRIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. 19
Consolidated Statements of Income........................................ 20
Consolidated Balance Sheets.............................................. 21
Consolidated Statements of Cash Flows.................................... 22
Consolidated Statements of Shareholders' Equity.......................... 23
Notes to Consolidated Financial Statements............................... 24
</TABLE>

18
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Eljer Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Eljer
Industries, Inc. (a Delaware corporation) and subsidiaries as of January 2,
1994, and January 3, 1993, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended January 2, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eljer Industries, Inc. and
subsidiaries as of January 2, 1994 and January 3, 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended January 2, 1994 in conformity with generally accepted accounting
principles.

As discussed further in Notes 2 and 13, the Company and its indirect, wholly-
owned subsidiary, United States Brass Corporation ("U.S. Brass"), are
defendants in a number of lawsuits and are the subject of certain claims which
involve the Qest polybutylene plumbing system manufactured and sold by U.S.
Brass since 1979. In addition, the nature and extent of the Company's insurance
coverage related to potential losses arising from these claims and lawsuits is
currently being contested by many of its insurance carriers. Management
believes its insurance coverage is adequate, however, the ultimate outcome of
these matters is uncertain at this time. Management is exploring various
avenues to resolve the polybutylene-related liabilities, including the
reorganization of U.S. Brass under federal bankruptcy laws. A reorganization of
U.S. Brass would create a substantial doubt about the ability of U.S. Brass to
continue as a going concern. The ultimate outcome of these matters is uncertain
and the financial statements do not include any adjustments that might result
from the outcome of these uncertainties.

As discussed further in Notes 1, 9 and 11 to the Consolidated Financial
Statements, effective December 30, 1991, the Company changed its methods of
accounting for postretirement benefits other than pensions, postemployment
benefits and income taxes.

ARTHUR ANDERSEN & CO.

Dallas, Texas,
March 31, 1994

19
<PAGE>

ELJER INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Net Sales...................................... $387,562 $397,343 $402,511
Cost of Sales.................................. 278,374 285,131 297,099
-------- -------- --------
Gross Profit................................... 109,188 112,212 105,412
Selling & Administrative Expenses.............. 80,902 83,910 82,987
Litigation Costs............................... 7,215 4,931 3,440
Unusual Items:
Write-Off of Equipment Not in Service........ -- -- 9,026
Restructuring/Plant Idling Expense........... -- -- 7,583
Reserve for Receivable from Insurance
Carriers and Settlements.................... -- -- 21,329
Environmental Remediation Expense............ -- -- 9,910
Provision for Discontinued Inventories....... -- -- 5,000
-------- -------- --------
Income (Loss) From Operations.................. 21,071 23,371 (33,863)
Other Expense, net............................. 1,367 1,119 2,370
Interest Income................................ 1,380 1,922 2,224
Interest Expense............................... 14,647 14,741 13,800
-------- -------- --------
Income (Loss) Before Income Taxes.............. 6,437 9,433 (47,809)
Tax on Repatriation of Foreign Earnings and
Loss of Tax Benefit on Indemnified Liabili-
ties.......................................... 640 3,583 8,632
Income Taxes................................... 1,899 7,946 3,247
-------- -------- --------
Income (Loss) Before Extraordinary Item and Cu-
mulative Effects of Changes in Accounting
Principles.................................... 3,898 (2,096) (59,688)
Extraordinary Item............................. -- 16,000 --
Cumulative Effects of Changes in Accounting
Principles:
Postretirement Benefits...................... -- 38,676 --
Accounting for Income Taxes.................. -- 27 --
Postemployment Benefits...................... -- 500 --
-------- -------- --------
Net Income (Loss).............................. $ 3,898 $(57,299) $(59,688)
======== ======== ========
Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item and Cu-
mulative Effects of Changes in Accounting
Principles.................................... $ .55 $ (.30) $ (8.46)
Extraordinary Item............................. -- (2.26) --
Cumulative Effects of Changes in Accounting
Principles.................................... -- (5.55) --
-------- -------- --------
Net Income (Loss).............................. $ .55 $ (8.11) $ (8.46)
======== ======== ========
Weighted Average Number of Common Shares....... 7,085 7,066 7,059
======== ======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements.

20
<PAGE>

ELJER INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
ASSETS 1993 1992
------ -------- --------
<S> <C> <C>
Current Assets:
Cash & temporary cash investments........................ $ 23,439 $ 46,808
Restricted cash.......................................... 15,966 3,000
Trade accounts receivable, net of reserves of $8,890 and
$10,068................................................. 49,995 51,273
Inventories.............................................. 59,548 63,535
Other current assets..................................... 7,202 10,871
-------- --------
Total current assets................................... 156,150 175,487
Properties & Equipment, net................................ 58,015 63,116
Cost in Excess of Net Tangible Assets Acquired, net........ 11,879 12,389
Other Assets............................................... 2,758 3,376
-------- --------
$228,802 $254,368
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term debt and current maturities of long-term debt. $ 18,430 $ 20,867
Trade accounts payable................................... 18,933 21,624
Accrued expenses......................................... 63,687 72,883
-------- --------
Total current liabilities.............................. 101,050 115,374
Long-Term Debt............................................. 103,114 114,760
Postretirement Benefits.................................... 40,743 40,651
Other Liabilities.......................................... 13,144 13,652
Deferred Income Taxes...................................... 871 896
-------- --------
Total liabilities...................................... 258,922 285,333
Shareholders' Equity (Deficit):
Common stock, $1 par value, 50,000,000 shares authorized;
7,092,326 and 7,068,393 shares outstanding.............. 7,186 7,186
Additional capital....................................... 78,700 78,544
Accumulated deficit...................................... (107,246) (111,144)
Foreign currency translation adjustments................. (8,666) (5,433)
Treasury stock........................................... (94) (118)
-------- --------
Total shareholders' equity (deficit)................... (30,120) (30,965)
-------- --------
$228,802 $254,368
======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements.

21
<PAGE>

ELJER INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Income (Loss).............................. $ 3,898 $(57,299) $(59,688)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation and amortization................ 11,245 10,233 11,306
(Gain) loss on disposition of fixed assets... (124) 321 9,801
Increase in deferred taxes................... -- 27 341
Stock issued as compensation................. 180 26 146
Change in assets and liabilities--
Trade accounts receivable.................. (745) (4,699) 16,264
Inventories................................ 3,197 (603) 12,527
Trade accounts payable and accrued ex-
penses.................................... 8,290 8,701 14,387
Accrued litigation--Kowin Development...... (14,021) 16,000 --
Postretirement benefits.................... 92 40,651 --
Other assets............................... (3,165) (2,036) 10,514
Other, net................................. (1,515) (1,692) 7,796
Reduction of sale of outstanding trade
accounts receivable......................... -- (7,000) (20,000)
-------- -------- --------
Net cash provided by operating activi-
ties.................................... 7,332 2,630 3,394
Cash Flows from Investing Activities:
Investment in properties and equipment......... (7,926) (7,975) (8,712)
Proceeds from disposition of properties and
equipment..................................... 1,936 1,081 3,986
-------- -------- --------
Net cash used in investing activities.... (5,990) (6,894) (4,726)
Cash Flows from Financing Activities:
Increase (decrease) in short-term debt......... (14,481) 19,837 24,800
Proceeds from issuance of long-term debt....... 1,068 6,479 --
Repayments of long-term debt................... (816) (3,456) (12,708)
Collateralization of letters of credit......... (5,513) (1,019) (3,088)
Dividends paid................................. -- -- (494)
Taxes paid on dividends from foreign subsidiar-
ies........................................... (3,974) -- --
-------- -------- --------
Net cash (used in) provided by financing
activities.............................. (23,716) 21,841 8,510
-------- -------- --------
Effects of Exchange Rates on Cash................ (995) (3,645) 495
-------- -------- --------
Net Increase (Decrease) in Cash & Temporary Cash
Investments..................................... (23,369) 13,932 7,673
Cash & Temporary Cash Investments, Beginning of
Period.......................................... 46,808 32,876 25,203
-------- -------- --------
Cash & Temporary Cash Investments, End of Period. $ 23,439 $ 46,808 $ 32,876
======== ======== ========
</TABLE>

The accompanying notes to consolidated financial statements
are an integral part of these statements.

22
<PAGE>

ELJER INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
RETAINED FOREIGN TOTAL
EARNINGS CURRENCY SHAREHOLDERS'
COMMON ADDITIONAL (ACCUMULATED TRANSLATION TREASURY EQUITY
STOCK CAPITAL DEFICIT) ADJUSTMENTS STOCK (DEFICIT)
------ ---------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at yearend 1990. $7,186 $78,385 $ 5,843 $ 4,586 $(131) $ 95,869
Shares issued to
directors/employees.. -- 140 -- -- 6 146
Foreign currency
translation adjust-
ments................ -- -- -- (5) -- (5)
Net loss.............. -- -- (59,688) -- -- (59,688)
------ ------- --------- -------- ----- --------
Balance at yearend 1991. 7,186 78,525 (53,845) 4,581 (125) 36,322
Shares issued to
directors/employees.. -- 19 -- -- 7 26
Foreign currency
translation adjust-
ments................ -- -- -- (10,014) -- (10,014)
Net loss.............. -- -- (57,299) -- -- (57,299)
------ ------- --------- -------- ----- --------
Balance at yearend 1992. 7,186 78,544 (111,144) (5,433) (118) (30,965)
Shares issued to
directors/employees.. -- 156 -- -- 24 180
Foreign currency
translation adjust-
ments................ -- -- -- (3,233) -- (3,233)
Net income............ -- -- 3,898 -- -- 3,898
------ ------- --------- -------- ----- --------
Balance at yearend 1993. $7,186 $78,700 $(107,246) $ (8,666) $ (94) $(30,120)
====== ======= ========= ======== ===== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements.

23
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Consolidation

The Consolidated Financial Statements include the assets, liabilities,
revenues and expenses of Eljer Industries, Inc., a Delaware corporation, and
all wholly-owned subsidiaries ("Eljer Industries" or the "Company"). Prior to
April 14, 1989 (the "Distribution Date"), the entities now comprising Eljer
Industries were subsidiaries and divisions of Household Manufacturing, Inc.
("HMI") or Household Manufacturing, Limited, wholly-owned subsidiaries of
Household International, Inc. ("Household"). The Company operates in a single
business segment--the manufacturing and marketing of building products for
commercial and residential construction and remodeling. All significant
intercompany accounts and transactions have been eliminated.

Certain reclassifications to the prior years financial statements have been
made to conform to the 1993 presentation.

Fiscal Year

The Company reports on a 52-53 week fiscal year ending on the Sunday nearest
to December 31. Fiscal year 1993 had 52 weeks, which ended on January 2, 1994.
Fiscal years 1992 and 1991 had 53 and 52 weeks, respectively, which ended on
January 3, 1993 and December 29, 1991, respectively.

Temporary Cash Investments

Temporary cash investments are primarily bank deposits, commercial paper,
treasury bills and bankers' acceptances, with original maturities of three
months or less. These investments are carried at cost, which approximates
market.

Restricted Cash

Restricted cash is comprised of insurance reimbursements and funds securing
letters of credit which are legally restricted as to use. The restricted funds
are either related to current liabilities, or the Company anticipates that the
funds will become unrestricted within a 12-month period.

Inventories

Inventories are stated at the lower of cost or market and include the
appropriate elements of material, labor and manufacturing overhead expenses.
Cost is determined using the last-in, first-out ("LIFO") method for
substantially all domestic inventories and the first-in, first-out ("FIFO")
method for all foreign inventories.

Properties and Equipment

Properties and equipment, including items financed through capital leases,
are recorded at cost and depreciated over their estimated useful lives, using
principally the straight-line method for financial reporting purposes and
accelerated methods for tax reporting purposes. Useful lives range from 20 to
40 years, or lease terms, for buildings and leasehold improvements and from 3
to 12 years, or lease terms, for machinery, fixtures and equipment.

Fair Value of Financial Instruments

The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosure about Fair Value
of Financial Instruments", which requires the

24
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of the fair market value of off- and on-balance-sheet financial
instruments. As discussed in Note 7, the Company is party to an interest rate
swap agreement. The differential to be paid or received is accrued as interest
rates change and is recognized over the life of the agreement. The estimated
fair value of the liability, which has no carrying value at the end of 1993,
was approximately $2.2 million. The carrying value of all remaining financial
instruments, including long-term and short-term debt and cash and temporary
cash investments, approximates their fair value at yearend.

Cost of Businesses Acquired

Cost in excess of net tangible assets acquired is amortized using the
straight-line method over 40 years. The amortization recorded for 1993, 1992
and 1991 was $443,000, $583,000 and $865,000, respectively. The amount of
accumulated amortization was $5.8 million and $5.7 million at the end of 1993
and 1992, respectively.

Revenue Recognition

The Company recognizes revenues from the sale of products at the time the
products are shipped.

Concentrations of Credit Risk

Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk", consist primarily of trade accounts
receivable and temporary cash investments.

The Company's customer base for plumbing products is comprised of plumbing
wholesalers and retail outlets primarily in North America. Heating, ventilating
and air conditioning products were sold primarily to regional distributors, as
well as through retail channels of distribution in the United States, Canada
and Europe. Although the Company is directly affected by the well-being of the
construction and remodeling and repair industries, and the North American and
European economies in general, management does not believe significant credit
risk exists at the end of 1993.

The Company places its temporary cash investments with high credit worthy
financial institutions and does not believe significant credit risk exists with
respect to these securities at the end of 1993.

Equity

The Company has foreign subsidiaries located primarily in Canada, Germany and
the United Kingdom. Assets and liabilities of the foreign subsidiaries are
translated into United States dollars at the exchange rate prevailing at the
balance sheet date. Revenue and expense accounts for these subsidiaries are
translated using the weighted average exchange rate during the period. These
translation methods give rise to cumulative foreign currency translation
adjustments which are a component of Equity. In 1993, 1992 and 1991, net
foreign currency transaction gains (losses) of approximately $(120,000),
$762,000 and $224,000, respectively, are included in other expense, net.

Changes in Accounting Principles

In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The standard mandated a
significant change in the method of expensing these benefits, requiring
companies to charge the expected cost of these benefits to expense during the
years employees render services rather than expensing these costs as benefits
are paid. The statement was effective for fiscal

25
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years beginning after December 15, 1992, however, the Company elected early
adoption of the statement as of the beginning of 1992. The cumulative effect of
this change in accounting principle in 1992 was approximately $38.7 million.
See Note 9 for further discussion.

SFAS No. 109, "Accounting for Income Taxes", was issued by the FASB in
February 1992, effective for fiscal years beginning after December 15, 1992,
with earlier adoption encouraged. The Company elected to adopt the new standard
effective the beginning of 1992. Under SFAS No. 109, deferred tax assets or
liabilities are computed based on the difference between the financial
statement and income tax bases of assets and liabilities using the enacted tax
rate. Deferred income tax expenses or credits are based on the changes in the
asset or liability from period to period. Prior to 1992, deferred income tax
expenses or credits were recorded to reflect the tax consequences of timing
differences between the recording of income and expenses for financial
reporting purposes and for purposes of filing federal income tax returns at
income tax rates in effect when the difference arose. As permitted under SFAS
No. 109, prior years' financial statements have not been restated. The effect
of the application of this standard, which was immaterial, was recorded as a
cumulative effect of change in accounting principle in 1992. See Note 11 for
further discussion.

In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits", which established accounting standards for employers
who provide benefits to former or inactive employees after employment but
before retirement. This statement requires employers to accrue a liability for
employees' compensation for future absences if certain conditions are met. The
FASB mandated application of this statement for fiscal years beginning after
December 15, 1993, however, the Company elected early adoption of the statement
effective the beginning of 1992. The cumulative effect of initially applying
this statement was a charge of approximately $500,000 in 1992 and was reported
in these financial statements as an effect of a change in accounting principle
in that period.

(2) LIQUIDITY & CAPITAL RESOURCES:

Polybutylene Litigation

As discussed in Note 13, the Company is currently involved in significant
legal proceedings including a number of lawsuits and claims which involve Qest
polybutylene plumbing systems manufactured and sold by its indirect, wholly-
owned subsidiary, United States Brass Corporation ("U.S. Brass"). It may suffer
adverse court verdicts in polybutylene lawsuits, which include the possibility
of punitive damage awards for which insurance coverage may not be available;
may not receive complete and timely reimbursement from its excess insurance
carriers; and may not obtain interim funding arrangements from its insurers.
Given these possibilities, the Company believes, as previously reported, that
payment of such litigation losses and expenses may materially and adversely
affect its liquidity.

As previously disclosed, the Company and U.S. Brass are exploring other means
of resolving the polybutylene-related liabilities. The Company is continuing to
press its suit against Household and is seeking to hold Household responsible
for a portion of these liabilities, in addition to other damages. The Company
is also exploring other options including the reorganization of U.S. Brass
under federal bankruptcy laws. Such a proceeding could provide a means of
maximizing the return to creditors of U.S. Brass and systematically resolving
the issues raised in the polybutylene-related litigation. The Company has been
party to an Amended and Restated Credit Agreement (the "Credit Agreement")
which included a default provision which might have been triggered in the event
of a U.S. Brass bankruptcy proceeding (see Note 7 for discussion). The Company
and its lenders executed, as of March 25, 1994, the First Amendment to Amended
and Restated Credit Agreement (the "Amendment"). Under the terms of the
Amendment, the filing of such a proceeding would no longer constitute an event
of default. In 1993, U.S. Brass' sales totaled $74.1 million and its assets
totaled $46.8 million at the end of 1993.

26
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Restricted Cash

Restricted cash relates to cash that is legally restricted as to its use. At
yearend 1993, the Company had several components of restricted cash.
Approximately $6.3 million of the restricted cash balance relates to the
previously disclosed reimbursement by the Travelers Indemnity Company of
Illinois ("Travelers") of certain settlement and litigation payments previously
made by or on behalf of U.S. Brass. The cash is restricted as to its use by the
Credit Agreement only for the payment of settlements, judgments, appeal bonds
and deposits, attorneys' fees, and related expenses in the polybutylene
plumbing system and other litigation. In addition, the Company maintained
restricted cash balances of approximately $9.7 million at yearend 1993 and
approximately $3.0 million at yearend 1992 to secure letters of credit.

Extension of Term Debt

The Company has been party to the Credit Agreement since it restructured its
debt in December 1992. The Credit Agreement provided, among other things, a
maturity date of April 30, 1995, for the Company's restructured term debt and
letters of credit supporting industrial revenue bonds and other obligations.
The Company has also been a party to a $13.0 million accounts receivable sale
program, discussed in Note 3, which had the same maturity date. The Company and
its lenders executed, as of March 25, 1994, the Amendment under the terms of
which the maturity date covering the term portion of the debt and the letters
of credit supporting industrial revenue bonds and other obligations was
extended to April 30, 1996; and filing of a bankruptcy proceeding relative to
U.S. Brass no longer constitutes an event of default. A $6.0 million principal
payment was made at the closing date of the Amendment, with scheduled principal
payments of $2.0 million, $4.0 million and $11.0 million due on October 5,
1994, December 30, 1994 and December 29, 1995, respectively, subject to certain
criteria. The interest rate under the Credit Agreement was the prime rate, plus
a margin of 1.0% (or 7.0%) at the end of 1993. However, upon execution of the
Amendment, the rate increased to the prime rate, plus a margin of 1.5% and will
be increased by 0.5% at six-month intervals to maturity. The Company will be
working toward some manner of debt restructuring prior to the maturity of the
Amendment in April 1996. Neither the Company nor any of its subsidiaries has
any commitment with respect to restructurings or other sources of financing and
there can be no assurance that any such commitments can be obtained prior to
the maturity of the existing Credit Agreement, as amended. The amended Credit
Agreement is secured by substantially all the assets of the Company's domestic
operations, excluding U.S. Brass and by the stock of certain of the Company's
subsidiaries. See Note 7 for additional discussion of debt.

In connection with the Amendment, the maturity date related to the accounts
receivable sale program (discussed in Note 3) was accelerated to September 30,
1994. The Company is currently having discussions with other potential lenders
to replace this facility and, while there can be no assurance in this regard,
anticipates it will be successful. The structure of the new facility may be
different than the current program.

(3) TRADE ACCOUNTS RECEIVABLE:

The Company was party to an agreement with a financial institution whereby
the Company sold on an ongoing basis an undivided interest in certain of its
trade receivables. On December 11, 1992, the Company and the financial
institution amended the original agreement in its entirety. The terms under the
amended agreement are similar to the original agreement. In accordance with the
amended agreement, the maturity date was extended to April 30, 1995. As
discussed in Note 2, as of March 25, 1994, the maturity date for the accounts
receivable sale facility was accelerated to September 30, 1994. Under this
agreement, an undivided fractional interest in new invoices is sold daily to
maintain a constant participation interest as collections reduce the previously
sold balance. The amount of trade receivables sold under this agreement was $13
million at the end of 1993, with no further additions available. The costs
associated with the sale are based on the financial institution's prime rate
and are recorded in other expense in the accompanying financial

27
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
statements. The agreement requires the maintenance of certain financial ratios,
including ratios based on write-offs and past due balances and the financial
covenants required in the Credit Agreement discussed in Note 7 with which the
Company is in compliance at yearend 1993.

(4) INVENTORIES:

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Finished goods............................................ $33,572 $36,132
Work in process........................................... 8,529 7,737
Raw materials............................................. 17,447 19,666
------- -------
Total inventories..................................... $59,548 $63,535
======= =======
</TABLE>

Included in finished goods, work in process and raw materials are inventories
valued on the LIFO method of $46.1 million at the end of both 1993 and 1992.

If inventories valued on the LIFO method had been valued at their current
cost, they would have been $8.4 million and $9.1 million higher at the end of
1993 and 1992, respectively.

During 1993, 1992 and 1991 inventory quantities were reduced. These
reductions resulted in liquidations of LIFO inventory quantities carried at
lower costs prevailing in prior years as compared with the cost of 1993, 1992
and 1991 purchases, the effect of which decreased cost of goods sold by
approximately $0.7 million, $0.4 million and $1.6 million, respectively. The
Company also recorded a $5 million reserve for inventory discontinued in 1991.
Charges against the reserve in 1993 and 1992 were approximately $2.1 million
and $1.1 million, respectively.

(5) PROPERTIES AND EQUIPMENT:

Properties and equipment, net, consisted of assets owned and leased under
capital lease arrangements and were as follows (in thousands):

<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Land.................................................. $ 3,473 $ 3,557
Buildings and leasehold improvements.................. 36,536 37,736
Machinery, fixtures and equipment..................... 112,799 109,907
Accumulated depreciation and amortization............. (94,793) (88,084)
-------- --------
Properties and equipment, net..................... $ 58,015 $ 63,116
======== ========
</TABLE>

(6) ACCRUED EXPENSES:

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Accrued income taxes..................................... $ 5,492 $ 9,933
Accrued payroll and employee benefits.................... 13,148 9,616
Insurance related accruals............................... 13,601 13,259
Litigation and related reserves.......................... 12,634 6,351
Accrued rebates.......................................... 5,122 4,677
Kowin litigation reserve................................. 1,979 16,000
Other current liabilities................................ 11,711 13,047
------- -------
Total accrued expenses............................... $63,687 $72,883
======= =======
</TABLE>

28
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEBT:

Short-Term Facilities

Effective May 13, 1992, U.S. Brass entered into a financing arrangement with
a financing institution not a party to the debt restructuring discussed below.
The arrangement expires in May 1995 with annual renewals thereafter. Borrowings
of up to $20 million are available under these agreements, limited by eligible
amounts of accounts receivable and inventory. Substantially all the assets of
U.S. Brass with the exception of property and equipment, have been pledged as
security under these agreements. These agreements require the maintenance of
certain financial covenants, including tangible net worth, working capital and
capital expenditure requirements. At the end of 1993, the Company was in
compliance with all covenants under these agreements. The total principal
amount owed by U.S. Brass related to these agreements at yearend 1993 and 1992
was approximately $3.9 million and $10.7 million, respectively. Interest
related to these agreements is 2% over prime per annum (8.0% at yearend 1993
and 1992). In addition, $0.1 million in facility fees and closing costs were
paid in 1993 compared to $0.3 million in 1992.

The Company's Selkirk U.K. subsidiary is party to an agreement with a bank
which includes a revolving credit facility whereby the subsidiary may borrow
the British Pounds Sterling or Deutsche Mark equivalent of approximately $6.9
million. The revolver, which expires in September 1997, is secured by
substantially all the Selkirk subsidiary's assets as defined in the facility
agreement between the subsidiary and the bank. Financial covenants are
consistent with the long-term U.K. foreign bank term loan discussed below.
There were no balances outstanding at yearend 1993 under this facility. The
total principal amount owed by the subsidiary related to this agreement at
yearend 1992 was approximately $5.6 million. Interest is calculated based upon
LIBOR plus an additional approximate 1.5% to 2.0%, depending on operating cash
flow as compared to total debt servicing payments. Interest rates were 7.0% and
9.0% per annum at the end of 1993 and 1992, respectively. Commitment fees are
calculated at 0.75% per annum payable quarterly and in arrears on any undrawn
portion of the revolving credit facility.

In addition, the Company's Selkirk subsidiary in Germany had unsecured credit
lines with three German banks totaling approximately $6.6 million at yearend
1993, and had unsecured lines with two German banks totaling $4.6 million at
yearend 1992. There are no scheduled expiration dates on these lines, however,
they are reviewed annually by the banks for renewal. The total amount
outstanding related to these credit lines at the end of 1993 and 1992 was
approximately $1.2 million and $3.2 million, respectively. Interest was
calculated on debt outstanding at annual yearend rates ranging from 9.0% to
10.25% in 1993 and 11.25% to 12.25% in 1992.

The average amounts of short-term borrowings outstanding during 1993 and 1992
were approximately $14.6 million and $29.8 million, respectively. The maximum
amounts outstanding during 1993 and 1992 were approximately $19.9 million and
$39.4 million, respectively. The weighted average interest rates during 1993
and 1992 were approximately 9.6% and 9.0%, respectively, on these borrowings.

29
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Long-Term Facilities

Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Domestic:
Bank Term Loans, secured................................ $ 98,251 $ 98,800
Industrial revenue bonds, secured by letters of credit
and certain fixed assets of the Company, bearing
interest at varying rates between 6.75% and 14.00%..... 9,805 9,861
Capital lease obligations, secured by letters of credit
and certain fixed assets of the Company, bearing
interest at 8.50%...................................... 439 650
Foreign:
Bank Term Loan, secured................................. 7,939 6,479
-------- --------
Subtotal................................................. 116,434 115,790
Less: Current portion of long-term debt.................. 13,320 1,030
-------- --------
$103,114 $114,760
======== ========
</TABLE>

The Company's Credit Agreement and related agreements were amended in early
1994. See Note 2 for discussion of amendment terms.

As discussed above, the Company's Selkirk subsidiary in the United Kingdom is
party to financing arrangements with a European bank. The financing includes a
term loan portion and a revolving credit facility. The term debt matures on
June 30, 1999, and provides for scheduled semiannual principal payments. This
facility bears interest at varying rates based upon LIBOR plus an additional
approximate 1.5% to 2% based upon operating cash flows as compared to debt
servicing payments. Borrowings are made in either British Pounds Sterling or
German Deutsche Marks and are secured by substantially all the assets of the
U.K. subsidiary as defined in the facility agreement.

Both the foreign and domestic term loans are subject to certain financial
covenants with which the Company is in compliance at yearend 1993. These
covenants include tangible net worth, operating cash flow and various other
debt service, fixed charge and current ratio requirements. In addition, the
Company is restricted by certain covenants from paying dividends during the
term of its Credit Agreement, as amended.

The Company is party to an interest rate swap agreement which has effectively
fixed the interest rates on $65 million related to the previous bank term loans
and other floating rate obligations. The fixed rate payable under this
agreement is 10.290% in exchange for six-month LIBOR, with the term expiring in
April 1994. The six-month LIBOR rate in effect under the swap agreement at
yearend 1993 was 3.375%.

Aggregate maturities of long-term debt and capital lease obligations for each
of the next five years and thereafter are as follows (in thousands):

<TABLE>
<S> <C>
1994............................ $ 13,320
1995............................ 12,698
1996............................ 76,670
1997............................ 2,462
1998............................ 1,641
Thereafter...................... 9,643
--------
Total......................... $116,434
========
</TABLE>

30
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash paid for interest during 1993, 1992 and 1991 was $14.2 million, $14.5
million and $14.2 million, respectively.

(8) EMPLOYEE BENEFIT PLANS:

Substantially all of the Company's employees are covered under various
defined benefit pension plans maintained by the Company and by Household. Plan
benefits are based primarily on years of service. Under a Labor and Benefits
Agreement between Household and the Company, on March 31, 1989, Household
assumed the assets and liabilities in connection with pension plans covering
Company employees prior to that date, and Household is responsible for all
pension benefits accrued as of and prior to that date. All employees became
100% vested in the Household plans at that time. The Company established new
employee benefit plans similar to those previously in effect and is responsible
for all funding subsequent to March 31, 1989. The Company's funding policy is
based on an actuarially determined cost method allowable under Federal tax law.
Since Household retained all assets from the previous benefit plans, the
Company has incurred pension expense for the new plans since the Distribution
Date.

The Company's net periodic pension cost includes the following components (in
thousands):

<TABLE>
<CAPTION>
1993 1992 1991
------- ------ -------
<S> <C> <C> <C>
Service cost-benefits earned during the period.... $ 2,851 $2,773 $ 2,581
Interest cost on projected benefit obligation..... 1,541 1,299 1,151
Actual return on plan assets...................... (2,252) (331) (1,357)
Net amortization and deferral..................... 1,507 (176) 1,335
------- ------ -------
Net periodic pension cost....................... $ 3,647 $3,565 $ 3,710
======= ====== =======
</TABLE>

The projected benefit obligations assumed an annual discount rate of 7.5% to
9.0% in 1993 and 7.75% to 9.0% in 1992. The annual rate of compensation
increase ranged from 4.0% to 7.0% in 1993 and in 1992. The expected long-term
annual rate of return on plan assets was 8.5% to 10% in 1993 and 9.0% to 10.0%
in 1992. The amortization period for prior service cost is 14 to 18 years,
depending on the plan, which approximates the average remaining service period
of the employee work force. The funded status of the plans is as follows (in
thousands):

<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations................................ $13,313 $ 9,620
======= =======
Accumulated benefit obligations........................... $15,580 $11,961
======= =======
Projected benefit obligations............................. $25,304 $20,594
Plan assets at fair value................................... 16,899 12,784
------- -------
Projected benefit obligations in excess of plan assets...... 8,405 7,810
Unrecognized net loss....................................... 1,799 511
Unrecognized prior service cost............................. 4,661 5,421
Remaining unrecognized net obligation established at April
1, 1989.................................................... 347 418
------- -------
Pension liability recognized in the consolidated balance
sheets..................................................... $ 1,598 $ 1,460
======= =======
</TABLE>

The Company also has a defined contribution plan in which each participant's
contribution is matched in part by the Company up to a maximum of 3% of the
participant's compensation. The Company's matching contribution for this plan
was approximately $715,000 in 1993, $666,000 in 1992 and $644,000 in 1991.

31
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(9) OTHER POSTRETIREMENT BENEFITS:

The Company sponsors three defined benefit postretirement plans which provide
for certain health care and life insurance benefits to retired employees in the
United States. Life insurance and comprehensive medical benefits are available
to active employees who, immediately upon retirement, receive a pension under
the Company's retirement plan. Postretirement benefits are also continued for
former employees who are currently receiving Company pension benefits. The
medical program covers dependents of retirees in addition to former employees.
Employee contributions are required in the case of medical benefits for those
employees who retired on and after January 1, 1975. No contributions are
necessary for employees retiring prior to that date and for certain surviving
spouses.

Effective the beginning of 1992, the Company adopted SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions" which requires that
the expected cost of these benefits be charged to expense during the years that
the employees render service. This was a significant change from the Company's
previous policy of recognizing these costs as benefits were paid. The Company
recorded a cumulative catch-up adjustment in 1992 which resulted in the
immediate recognition of approximately $38.7 million of transition liability in
that year.

The following table sets forth the plans' combined funded status reconciled
with the amount shown in the Company's financial statement at the end of 1993
and 1992 (in thousands of U.S. dollars). Since the Company funds these plans on
a "pay-as-you-go" basis, the Company's postretirement health care plans are
underfunded.

<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $30,857 $23,993
Fully eligible active plan participants.................. 3,576 5,395
Other active plan participants........................... 7,534 11,263
------- -------
41,967 40,651
Plan assets at fair value.................................. -- --
------- -------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... 41,967 40,651
Unrecognized actuarial loss.............................. (4,125) --
Unrecognized prior service cost.......................... 2,901 --
------- -------
Accrued postretirement benefit cost........................ $40,743 $40,651
======= =======
</TABLE>

Net periodic postretirement benefit cost for 1993 and 1992 included the
following components (in thousands):

<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Service cost--benefit attributed to service during the pe-
riod...................................................... $ 462 $ 931
Interest cost on accumulated postretirement benefit obliga-
tion...................................................... 2,900 3,196
Immediate recognition of transition obligation............. -- 38,676
Amortization of prior service cost......................... (840) --
------- -------
Net periodic postretirement benefit cost................... $ 2,522 $42,803
======= =======
</TABLE>

32
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

For measurement purposes, health care cost trend rates for various services
varied from 9.5% annually for 1993 and 1992, decreasing gradually to 4.5% by
2007, and remain at that level thereafter. Increasing the health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation at the end of 1993 and 1992 by $5.3 million
and $5.5 million, respectively and the aggregate of the service and interest
cost components of net postretirement health care cost for 1993 and 1992 by
$0.5 and $0.7 million, respectively. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation at the end of
1993 and 1992 was 7.0% and 8.5%, respectively. There were no plan assets at
yearend.

(10) SHAREHOLDERS' EQUITY:

Common Stock

The Company has 50,000,000 shares of $1 par value common stock authorized
with 7,186,875 shares issued and 7,092,326 shares outstanding at yearend 1993.
Treasury stock totaled 94,549 and 118,482 shares at the end of 1993 and 1992,
respectively, and is accounted for under the par value method.

Preferred Stock

The Company has 10,000,000 shares of $1 par value preferred stock authorized,
of which none are issued or outstanding.

Stock Rights

Pursuant to a Stockholder Rights Plan adopted by the Company on the
Distribution Date and amended on July 31, 1989, January 4, 1990 and November 5,
1991, each outstanding share of the Company's common stock carries with it a
common stock purchase right (the "Right"). In the event of an acquisition by a
person or group of 15% or more of the Company's common stock, each Right (other
than Rights owned by the person or group triggering the event, which will
become void) will become exercisable to purchase one share of the Company's
common stock at 50% of its then market value. The Rights will not become
exercisable, however, if the person or group meeting the 15% threshold does so
through an all-cash tender offer in which it becomes the owner of at least 80%
of the Company's stock. The Rights are subject to adjustment in the event of
certain changes in the Company or its common stock, including the merger of the
Company with another entity. The Rights will expire on May 1, 1999, unless
previously exercised or redeemed, or unless the Company extends the expiration
date.

Stock Options

The Company has a Long-Term Executive Incentive Compensation Plan (the
"Plan") whereby awards, including stock options (the "Options"), can be granted
to key employees. The Options are exercisable in 25% increments over a four-
year period beginning one year after the date of grant. Options are generally
granted for a term of no more than ten years and one day from the date of
grant. The Options exercise price per share is not less than the fair market
value of the Company's common stock at the date of grant. However, certain
Options were granted in 1989 to employees in exchange for options for Household
common stock which they forfeited as a result of the spin-off. These Options
have special terms as to exercisability and purchase prices based on the value
of the options forfeited.

33
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes the Options activity:

<TABLE>
<CAPTION>
RANGE OF
SHARES OPTION PRICES
------- -------------
<S> <C> <C>
Options outstanding at yearend 1990.................. 162,943 $ 8.25-$28.63
Options granted...................................... 118,300 $11.25-$22.44
Options forfeited.................................... (10,561) $11.25-$28.63
-------
Options outstanding at yearend 1991.................. 270,682 $ 8.25-$28.63
Options granted...................................... 188,300 $10.50
Options forfeited.................................... (29,455) $10.50-$28.63
-------
Options outstanding at yearend 1992.................. 429,527 $ 8.25-$28.63
Options granted...................................... 106,000 $ 8.13-$ 8.94
Options forfeited.................................... (46,695) $ 8.25-$14.69
-------
Options outstanding at yearend 1993.................. 488,832 $ 8.13-$28.63
=======
Options exercisable at yearend 1993.................. 207,592
=======
</TABLE>

At the Distribution Date, the Company had reserved 500,000 shares of common
stock to cover grants under the Plan. During 1993, 350,000 additional shares
were made available. As of the end of 1993 there were 332,358 shares available
for grant under the Plan.

(11) INCOME TAXES:

Income (loss) before taxes and income taxes in 1993, 1992 and 1991 are shown
below (in thousands):

<TABLE>
<CAPTION>
1993 1992 1991
------ -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic operations............................ $1,823 $ (6,649) $(61,784)
Foreign operations............................. 4,614 16,082 13,975
------ -------- --------
Total consolidated......................... $6,437 $ 9,433 $(47,809)
====== ======== ========
Income taxes:
Domestic operations
Current...................................... $1,236 $ 3,100 $ (4,316)
Deferred..................................... -- -- 629
------ -------- --------
Total domestic............................. $1,236 $ 3,100 $ (3,687)
====== ======== ========
Foreign operations
Current...................................... $ 663 $ 4,846 $ 7,124
Deferred..................................... -- -- (190)
------ -------- --------
Total foreign.............................. 663 4,846 6,934
------ -------- --------
Total consolidated........................ $1,899 $ 7,946 $ 3,247
====== ======== ========
</TABLE>

As discussed in Note 1, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", at the beginning of 1992 and the $27,000 cumulative effect of
this change is reported in the accompanying financial statements. Deferred
income taxes (credit) for 1993 and 1992 reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial reporting
and tax purposes as measured using enacted tax rates. These temporary
differences are determined in accordance with SFAS No. 109 and are more
inclusive in nature than "timing differences" as determined under previously
applicable accounting principles.

34
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1993 and 1992 are as
follows:

<TABLE>
<CAPTION>
TAX EFFECT
(IN THOUSANDS)
------------------
1993 1992
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.......................... $ 10,525 $ 10,756
Inventory.............................................. 3,960 3,564
Other.................................................. -- 45
-------- --------
Total deferred tax liabilities......................... 14,485 14,365
-------- --------
Deferred tax assets:
Sales and product allowances........................... 2,594 4,184
Self insurance......................................... 7,264 4,942
Litigation and legal................................... 5,600 7,385
Postretirement benefits................................ 14,266 14,365
EPA.................................................... 4,223 4,472
Other.................................................. 5,793 3,573
-------- --------
Total deferred tax assets.............................. 39,740 38,921
Valuation allowance.................................... (26,126) (25,452)
-------- --------
Deferred tax assets after valuation allowance.......... 13,614 13,469
-------- --------
Net deferred tax liabilities............................. $ 871 $ 896
======== ========
</TABLE>

At the end of 1993 and 1992, valuation allowances were provided for the net
deferred tax assets as required under SFAS No. 109. The valuation allowance
increased approximately $0.7 million and $6.4 million during 1993 and 1992,
respectively.

The Company has a tax basis alternative minimum tax credit carryforward of
approximately $1.2 million at yearend 1993, which is available to reduce future
federal income taxes. The Company no longer has a net operating loss ("NOL")
carryforward for domestic federal income tax purposes as foreign dividends
depleted the NOL.

The difference between the provisions for income taxes and income taxes
computed using the statutory federal income tax rate at yearend were as follows
(in thousands):

<TABLE>
<CAPTION>
1993 1992 1991
------ ------- --------
<S> <C> <C> <C>
Federal Income Tax Expense (Benefit) at Statutory
Rate............................................... $2,189 $ 3,207 $(16,255)
Increase (decrease) resulting from:
Effect of unused net operating losses............. -- 2,119 16,754
Excess of expenses for financial reporting pur-
poses over tax basis due to purchase accounting
adjustments...................................... 418 242 566
Effects of alternative minimum tax................ (255) -- --
Tax assessment under Household tax sharing agree-
ment............................................. -- 3,000 --
Foreign tax effects............................... 319 2,078 2,182
Tax effects of distributable earnings in foreign
subsidiaries..................................... (776) (2,700) --
Other............................................. 4 -- --
------ ------- --------
Total Income Tax Expense........................ $1,899 $ 7,946 $ 3,247
====== ======= ========
</TABLE>

35
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A $3.0 million assessment, recorded in 1992, was received by the Company from
Household, pursuant to a Tax Sharing Agreement which pertains to the Internal
Revenue Service audits of years 1983 through 1985 (prior to the Distribution
Date) for which no indemnification exists. No payment has been made related to
this assessment. Additional assessments may be made by Household for other
years prior to the 1989 spin-off.

In 1993, the Company provided for $0.6 million of tax expense for
repatriating those earnings which are no longer considered permanently
reinvested in foreign subsidiaries. In accordance with the Company's accounting
policy, U.S. deferred taxes have not been provided on approximately $9.0
million of undistributed earnings of foreign subsidiaries at the end of 1993,
as the Company intends to reinvest these earnings permanently in the foreign
operations or to repatriate such earnings only when to do so would be tax
effective. The amount of the unrecognized tax liability for these undistributed
earnings is not material at the end of 1993 due to the availability of foreign
tax credits.

Under an agreement with Household, the Company is entitled to the tax
deduction associated with certain liabilities, currently estimated to be
approximately $54 million, which are indemnified by Household. The Company, in
turn, contributes an amount equivalent to the tax benefit of such items when
paid, regardless of whether the Company is in a tax paying position. Payments
associated with approximately $34.1 million in liabilities have been made
through the end of 1993. These payments normally have no impact on the
financial results of the Company; however, an impact did occur due to the net
operating losses of the Company in the United States in 1993 and 1992, when a
total of $1.3 million and $4.6 million, respectively, of such payments were
made. The impact of future payments will be dependent on the tax paying
position of the Company.

Cash paid for income taxes in 1993, 1992 and 1991 was $3.6 million, $7.0
million and $4.7 million, respectively.

(12) LEASES:

Rental expense under operating leases was $6.2 million in 1993 and $6.3
million in both 1992 and 1991.

Future minimum lease commitments under noncancelable operating leases at the
end of 1992 were as follows (in thousands):

<TABLE>
<S> <C>
1994.............................. $3,419
1995.............................. 2,191
1996.............................. 1,278
1997.............................. 834
1998.............................. 500
Thereafter........................ --
------
Total minimum lease commitments... $8,222
======
</TABLE>

(13) CONTINGENCIES:

Polybutylene Litigation

U.S. Brass is a defendant (together, in some cases, with the Company,
Household, Eljer Manufacturing, Inc. ("Eljer Manufacturing") and Qest Products,
Inc.) in a number of lawsuits filed by homeowners, homeowner associations,
developers, builders and plumbing contractors which involve the Qest
polybutylene plumbing system (the "system" or the "Qest system") manufactured
and sold by U.S. Brass or a predecessor

36
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
company for residential site-built installations from 1979 through 1986 and for
other installations from about 1975 through 1990. The Company does not
currently engage and has never engaged in the manufacture and sale of the Qest
system in the United States; the manufacture and sale of the system has been
made by the Company's subsidiary U.S. Brass. As discussed below, based upon an
August 1992 ruling of the federal appeals court regarding the timing and
availability of insurance coverage relating to Qest system claims, the Company
believes that substantially all losses arising from Qest claims are either
covered by insurance or are covered by adequate reserves. However, as discussed
below, certain of the Company's excess insurance carriers are contesting the
nature and extent of coverage. In addition, insurance coverage may not be
available for future punitive damages, if any, assessed in the underlying Qest
system litigation.

Other defendants in the Qest system lawsuits are Shell Chemical Company
("Shell Chemical"), a subsidiary of Shell Oil Company, the manufacturer of
polybutylene resin from which U.S. Brass extrudes the pipe used in the system,
Celanese Specialty Resins, a unit of Hoechst Celanese Corporation ("Celanese")
and the manufacturer of a resin from which U.S. Brass injection molded the
Celcon acetal fittings formerly used in the system, other pipe and fittings
manufacturers, and builders, developers and plumbing contractors. These
lawsuits allege that the Qest system leaked and seek recovery based on
negligence, breach of warranty, strict tort liability and, in some cases, fraud
or misrepresentation. Most of the claims involved systems that began to leak
after installation, although a limited number of claims involve systems that
have not leaked. Plaintiffs typically claim compensation for replacement of
allegedly defective plumbing systems, but frequently also seek recovery for
property damage, diminution in value, punitive and statutory damages and
attorneys' fees and occasionally seek recovery for personal injuries. In cases
in which systems have leaked, the vast majority of the failures experienced to
date have involved the Celcon acetal fittings, rather than the polybutylene
pipe. U.S. Brass stopped selling these fittings for residential site-built
construction after 1986 and began selling copper and brass insert fittings
which have performed satisfactorily. U.S. Brass has estimated that
approximately 860,000 Qest systems were sold for residential installations
(including site-built, manufactured housing and mobile homes) from 1979 through
1986. The number of Qest installations has been estimated based on the average
number of fittings used in a typical residence, which is an imprecise method
and does not take into account, among other things, such variables as mixed
manufacturers' products in one installation, repairs, sales through consumer
channels for various uses, etc., but is the best available method of
estimation.

Through the end of 1993, 202 lawsuits (representing approximately 26,700
residential installations) and approximately 11,000 homeowner claims not
involving litigation have been settled at a total cost to all defendants of
approximately $114.5 million. The total amount paid by U.S. Brass has been
approximately $61 million, of which approximately $49 million was reimbursed by
the Company's primary and excess insurance carriers. Through yearend 1993, the
approximately 37,700 settled homeowner claims have been resolved at an average
cost of approximately $3,000 per claim. At the end of 1993, an additional 109
lawsuits involving approximately 23,600 residential claims remained pending,
not including purported class members in Arizona, California and Nevada. Taken
as a percentage of estimated Qest residential installations (including site-
built, manufactured housing and mobile homes) for the period 1979 through 1990,
approximately 4.6% of Qest installations are the subject of claims. Not all
leak claims have involved the Qest system. Some claims have involved
competitors' systems, and many claims have involved mixed systems, containing
both Qest components and components manufactured by competitors. In addition,
U.S. Brass and its insurers were not the sole contributors to the settlements
described above. U.S. Brass did not sell the Qest system directly to the
homeowners, but rather sold the system to wholesalers who, in turn, resold the
system to plumbing contractors and ultimately to homeowners. These factors,
plus the method of estimation described above, make the estimates difficult to
calculate and verify.

A number of cases asserting class action allegations are pending against U.S.
Brass. Included among these cases are three purported class actions,
collectively encompassing owners of homes (site-built, mobile

37
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and modular/manufactured), apartment buildings and commercial buildings located
in San Diego County, California, containing polybutylene pipe and acetal
fittings. Two of these class actions, whose classes are further limited to
persons who have not filed individual actions or participated in other class
actions, have been conditionally certified. A case has been filed against U.S.
Brass as a purported class action brought on behalf of all persons in Arizona
who have not filed individual actions, and who purchased single family
residences, single family condominiums, multi-family residences or apartments,
or manufactured homes containing polybutylene pipe systems with acetal insert
fittings. An opt-in class action consisting of a class of homeowners residing
in the northern counties of Nevada who have purchased homes containing Qest
brand polybutylene plumbing products has been certified. A second case has been
filed in Nevada purporting to be a class action on behalf of similarly situated
persons in the southern counties of Nevada. U.S. Brass has denied substantive
allegations in each of the class action complaints and has opposed
certification of each such class action.

A limited number of the homeowner claims resolved and pending involve Qest
systems installed in manufactured housing, including mobile homes and
recreational vehicles. As discussed above, the vast majority of failures to
date have involved the Celcon acetal fittings, rather than the polybutylene
pipe. U.S. Brass stopped selling these fittings for manufactured housing,
mobile homes and recreational vehicle applications in 1990. U.S. Brass
estimates that an additional 480,000 systems were sold for mobile home
installations beginning in 1987 through 1990, and approximately 675,000
recreational vehicle installations occurred during the period from 1981 through
1990. U.S. Brass is unable to estimate the percentage of claims involving leaks
in manufactured housing, including mobile homes and recreational vehicles
except that the number of such claims has been small compared to the number of
installations. The average cost to repair or replace a Qest system installed in
a recreational vehicle or mobile home unit is approximately $200 to $1,000.

Through the end of 1993, only five lawsuits have been adjudicated. In 1988 a
jury returned a verdict in favor of 90 homeowners against U.S. Brass, Shell
Chemical, Celanese and a developer in the amount of approximately $2.0 million
actual damages plus approximately $1.2 million statutory damages. U.S. Brass'
share of the total verdict is approximately $2.1 million. Both plaintiffs and
defendants, including U.S. Brass, appealed the verdict. In May 1990 another
jury returned a verdict in favor of 104 homeowners, and the court entered a
judgment in the amount of approximately $1.1 million in actual and statutory
damages, of which U.S. Brass' share was approximately $700,000. U.S. Brass
appealed the verdict. In September 1993 the Texas Court of Appeals reduced U.S.
Brass' share of these two judgments from approximately $2.8 million to
approximately $2.3 million, excluding post-judgment interest. The Company has
appealed these judgments. The Company believes these judgments are covered by
insurance. The Company's excess insurance carrier, Travelers, provided the
bonds necessary for the appeals and has acknowledged its responsibility to pay
the judgments. In February 1991 another jury returned a verdict in favor of 36
homeowners against U.S. Brass, Shell Chemical, Celanese and other defendants of
approximately $1.3 million in actual and punitive damages, the largest portion
of which represented punitive damages assessed against Celanese. Shell
Chemical, Celanese and other defendants reached a settlement with the
plaintiffs prior to the entry of a judgment on the verdict. A judgment on the
verdict was entered against U.S. Brass in the approximate amount of $75,000,
which amount U.S. Brass tendered to the plaintiffs, but the plaintiffs refused.
The plaintiffs appealed the judgment and the Texas Court of Appeals affirmed
the trial court judgment rejecting plaintiff's appeal. The plaintiffs have
again appealed. In November 1992 a California jury entered a verdict against
U.S. Brass in the amount of approximately $65,000 compensatory damages and
$65,000 punitive damages on behalf of 15 homeowners. As a result of the credit
applied to the compensatory damages verdict due to a settlement by co-defendant
Celanese, a judgment was entered against U.S. Brass for only the punitive
damage award. The parties have appealed the judgment.

38
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On March 30, 1993, a California jury awarded approximately $290,000 against
the Company and U.S. Brass for compensatory damages on behalf of 41 plaintiff
homeowners and indemnity for the developer. The Company's compensatory damage
liability to the plaintiff homeowners was reduced from $190,000 to zero by
virtue of credits received from prior settling defendants. The Company, Eljer
Manufacturing and U.S. Brass were also found by the jury to have violated the
California Song-Beverly Consumer Warranty Act, under which they may be liable
for the plaintiffs' costs and attorneys' fees which are believed to be
approximately $400,000 to $600,000. In addition, the Company, Eljer
Manufacturing and U.S. Brass, as well as Shell Chemical and Celanese, were
found by the jury to be liable to the plaintiffs for fraud. The jury assessed
punitive damages in the amount of $48 million against defendants Shell
Chemical, Celanese and the Company, Eljer Manufacturing and U.S. Brass and in
favor of the cross-plaintiff developer, Coles Development Corp. However, this
amount was reduced by the court to $2 million, and the Company, Eljer
Manufacturing and U.S. Brass' share thereof was reduced from $3.1 million to
$129,000. The developer accepted the reduction in lieu of a new trial. The jury
also assessed $190,000 in punitive damages against the Company, Eljer
Manufacturing and U.S. Brass and in favor of the plaintiff homeowners. The
parties have appealed the judgment. The Company's general liability insurance
carrier has refused to provide indemnity coverage for the punitive damage
awards. Reimbursement of future punitive awards, if any, may also be denied by
insurance carriers.

U.S. Brass continues to defend the pending suits vigorously but also to
settle cases where practical and where payments from its insurance carriers are
available. In early 1988 U.S. Brass established a toll-free telephone service
to handle calls from homeowners who have Qest polybutylene plumbing systems
which have experienced failures. U.S. Brass, with assistance from Shell
Chemical and Celanese, settled claims and performed repairs and replacements
using a professional claims handler and local plumbing contractors. As a result
of the financial impact on the Company of the federal district court ruling in
June 1991 discussed below, U.S. Brass, in July 1991, withdrew its
administrative and financial participation in the toll-free telephone service.
Since then, a similar service has continued to be operated by Shell Chemical,
Celanese and E.I. duPont de Nemours & Company. Shell Chemical and Celanese have
advised U.S. Brass that they intend to seek reimbursement in the future from
U.S. Brass for a share of claim settlements and administrative costs depending,
in part, on the availability of insurance coverage for such claims (see
discussion below). On February 4, 1994, Shell Chemical and Celanese notified
U.S. Brass that they believe they have made expenditures on behalf of U.S.
Brass totaling approximately $35.3 million. However, insufficient information
supporting this amount has been provided to U.S. Brass, and when and if
sufficient information is ultimately provided, U.S. Brass believes that it has
grounds to seek substantial reductions in any such amount or to avoid any
liability for such demands. U.S. Brass believes that the amount, if any, for
which it may ultimately be responsible should be covered by its general
liability insurance and, as such, no liability has been recorded in the
accompanying financial statements.

On August 14, 1992, the U.S. Court of Appeals for the Seventh Circuit ruled
in favor of the Company in an appeal from a declaratory judgment decision
relating to the timing and availability of primary insurance coverage. The
appeals court decision reversed a 1991 federal district court decision
involving Liberty Mutual Insurance Company ("Liberty Mutual"), the Company's
primary comprehensive general liability carrier for policy years 1979 through
1988, and Highlands Insurance Company and Travelers, the Company's first-layer
excess insurance carriers during the same period who had intervened in that
lawsuit. The appeals court ruled that losses incurred by the Company in the
defense and settlement of claims involving the Qest system should be allocated
to a particular insurance policy based on the date of installation of the Qest
system (the "trigger of coverage") and not upon the date of leaks or repair
and/or replacement of the system, as the lower court had ruled. The insurers'
petitions for rehearing were denied on November 5, 1992. On February 3, 1993,
Liberty Mutual and Travelers filed a joint petition for a writ of certiorari
with the United States Supreme

39
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Court, seeking review of the appeals court ruling. On March 29, 1993, the
Supreme Court declined to review the appeals court's ruling.

As a consequence of the appeals court ruling, and in accordance with the
parties' reimbursement agreements, Liberty Mutual, Highlands Insurance Company
and Travelers have commenced reallocation of payments previously made by them
and by the Company for defense and settlement of Qest claims that had been
assigned to policy years based upon dates of discovery of leaks, to policy
years based upon dates of installation of the systems. On August 27, 1993,
Travelers paid U.S. Brass the amount of approximately $6.9 million pursuant to
the reimbursement agreements. On December 13, 1993, Travelers paid U.S. Brass
the additional amount of approximately $92,000 pursuant to those agreements.
U.S. Brass believes that Travelers owes additional amounts, and has informed
Travelers of its position. U.S. Brass may be obligated to reimburse certain
amounts previously paid by the two other insurers who are parties to the
agreements. Travelers' payments were made under a reservation of rights.

Five insurance coverage lawsuits are now pending in various courts with
respect to the polybutylene plumbing litigation:

(1) On July 18, 1993, the Company, Eljer Manufacturing and U.S. Brass filed
suit in the United States District Court for the Northern District of Illinois
against 18 insurance carriers, seeking declaratory relief and damages relating
to coverage for the polybutylene plumbing litigation both for costs of defense
and the amounts of any settlements or judgments. That court is within the
jurisdiction of the United States Court of Appeals for the Seventh Circuit,
which issued the decision in the Company's favor discussed above concerning
trigger of coverage. No substantive rulings have yet been issued in this
matter; certain discovery activities have commenced. A number of insurers have
moved to refer the matter to the Illinois state court, but no decision has been
rendered on that motion. Trial is now set for on or about May 1, 1995.

(2) On September 6, 1991, Travelers filed a declaratory judgment action
against the Company in the Circuit Court of Cook County, Illinois, seeking,
among other relief, a declaratory judgment that Travelers is not obligated to
defend or indemnify the Company for claims involving Qest systems, that
Travelers is not obligated to reimburse the Company for punitive, exemplary or
treble damages incurred, and that payments made by Travelers for claims which
are not covered or excluded from coverage must be reimbursed by the Company.
The Company has filed an answer denying the material allegations of the
complaint and asking for entry of judgment in its favor. It has also asserted a
counterclaim seeking in excess of $2 million in overdue insurance proceeds from
Travelers for insurable losses previously paid by the Company under a sharing
agreement to which both were parties. In December 1992, following the appeals
court ruling in the Company's favor, Travelers agreed to defend and indemnify
the Company for Qest claims where the systems were installed from 1982 through
1986, unless and until Travelers obtains a contrary ruling in its state court
litigation. The court has issued one ruling concerning the entitlement of U.S.
Brass to insurance coverage from the Travelers: that ruling upheld U.S. Brass'
position that Travelers, which had participated in the previous insurance
coverage litigation in federal court in Illinois, was bound to the ruling
concerning trigger of coverage issued in that federal litigation by the United
States Court of Appeals for the Seventh Circuit. Thus, the policies issued by
Travelers will be triggered for purposes of coverage where the Qest product
which has given rise to the claim against U.S. Brass was installed during the
course of a year during which a Travelers policy was in effect. The court has
not yet addressed numerous other issues and defenses asserted by Travelers
concerning its obligation to provide coverage. The court also stated on the
record that if Travelers had not participated in the prior federal litigation,
the court would have felt bound by rulings issued by Illinois intermediate
appellate courts to find that Travelers' policies would not have been triggered
for coverage purposes until the Qest system first leaked. Such a position, if
applied to carriers other than Travelers, would substantially diminish the
amount of insurance proceeds available to U.S. Brass.

40
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) Another excess carrier, Gibraltar Casualty Company ("Gibraltar"), has
filed an action in the Circuit Court of Cook County, Illinois, on March 16,
1992, seeking a declaratory judgment that Gibraltar has no obligation to defend
or indemnify the Company for Qest claims. Hartford Accident & Indemnity Company
("Hartford"), and Allstate Insurance Company, two other excess insurance
carriers, have been granted leave to intervene in the Gibraltar action and seek
a similar declaratory judgment.

(4) On September 21, 1993, California Union Insurance Company ("California
Union"), which was named as a defendant in the federal litigation now pending
in the United States District Court for the Northern District of Illinois,
filed suit against the Company, Eljer Manufacturing and U.S. Brass in the
Superior Court of Orange County, California. On October 7, 1993, each of these
entities removed the case to the United States District Court for the Central
District of California, and on March 1, 1994, the case was transferred to the
United States District Court for the Northern District of Illinois, where the
first insurance coverage action discussed above, which was brought by the
Company, is now pending.

(5) On November 12, 1993, four insurance carriers, National Surety
Corporation, First State Insurance Company, Hartford, and Old Republic
Insurance Company, brought suit in the Circuit Court of Cook County, Illinois
against the Company, Eljer Manufacturing and U.S. Brass, and against 22 other
insurance carriers who issued policies under which the Company has sought
coverage for polybutylene plumbing claims. The Company has moved to dismiss
this action, or for a stay, based on the prior pendency in the United States
District Court for the Northern District of Illinois of the first insurance
coverage case discussed above. Briefing on the Company's motion is now
complete, but no decision has been rendered. The case has been consolidated
with the action filed by the Travelers discussed above.

The Company intends to litigate these insurance coverage suits vigorously and
believes it should ultimately prevail; however, the insurers have raised a
number of defenses to the Company's demands for coverage, and the ultimate
outcome of these matters is not certain at this time. Accordingly, no
provisions for any liabilities that may result upon an unfavorable resolution
of the insurance coverage matter have been made in the Company's financial
statements.

Both Gibraltar and Hartford have refused to make any interim payments on
account of defense or indemnity for Qest claims where the systems were
installed in 1980 and 1981 pending resolution of the state court action. The
Company may bear all or a portion of the costs of defense and settlement of
litigation involving Qest systems installed in those years. The Company is
currently negotiating with these two, and other, carriers for interim funding
arrangements. California Union, which issued policies at coverage levels in
1982 and 1983 that the Company believes have now been reached, has disputed its
obligations to provide coverage but is making certain amounts available with
respect to payments of indemnity, but not for costs of defense.

On December 28, 1993, Celanese filed suit in the Superior Court of New Jersey
against Household and two subsidiaries of the Company, Eljer Manufacturing and
U.S. Brass. The suit alleges a scheme to induce Celanese to sell and continue
to sell raw materials for use in polybutylene plumbing systems and to divert to
Celanese the defendants' liability for claims and litigation arising from
alleged failures in the plumbing systems. In addition, Celanese alleges that
Household interfered with sharing arrangements between the Company's
subsidiaries and Celanese for handling product liability claims by rendering
the Company's subsidiaries incapable of meeting their respective obligations as
a result of the spin-off of the Company by Household in 1989. In the lawsuit,
Celanese seeks compensatory and punitive damages from the defendants and a
declaration that Household and Eljer Manufacturing are liable for all
obligations of U.S. Brass arising out of the sharing agreements and the
polybutylene plumbing system actions. The Company denies any wrongdoing on the
part of its subsidiaries.

41
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Environmental Matters

Like many industrial facilities, the Company's plants may generate hazardous
and nonhazardous waste, disposal of which is subject to federal and state
regulation. Due to the Company's and its predecessors' longtime presence in the
industry, business practices followed many years ago could potentially become
the focus of environmental actions. Several facilities have been required to
implement programs to remedy the effects of past waste disposal. Although a
number of plants have not been the focus of comprehensive environmental
studies, the Company is aware of no instances of noncompliance with currently
applicable safety, health and environmental laws and regulations which might
have a significant adverse effect on the Company's financial condition or
results of operations except as set forth below. With respect to current
operating procedures, the Company believes that it is in material compliance
with such applicable laws and regulations. The Company has established accruals
of approximately $13.0 million at the end of 1993 (see discussion of individual
sites below) pertaining to environmental, health and safety matters. The
Company believes these accruals are adequate; however, given the significance
of these matters, there may be costs in excess of amounts accrued that could
have a material and adverse effect on individual future years' operating
results.

The past disposal of hazardous and nonhazardous waste generated at the
Company's plants may now be subject to the requirements of the federal Resource
Conservation and Recovery Act and comparable state statutes. Several facilities
have been required to implement programs to remedy the effects of past waste
disposal.

42
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
cumulative effect of changes in accounting principles recorded in 1992, the
Company was unable to continue making the required demonstration of financial
responsibility after March 1992. On March 31, 1992, the Company notified the
Ohio EPA that it could not make the required demonstration at that time, and
was pursuing alternative means of satisfying the financial responsibility
requirements. On October 9, 1992, the Company received from the Ohio EPA a
notice of violation with respect to its failure to demonstrate financial
responsibility. On October 12, 1992, the Company again notified both the U.S.
EPA and the Ohio EPA of its inability to meet the financial responsibility
requirements and asserted the unfavorable district court decision in 1991 on
timing and availability of insurance coverage and its effect on the Company's
financial position as an event of force majeure. The Company received letters
from the Ohio EPA dated June 21, 1993 and February 24, 1994, advising that the
Company was in violation of financial assurance requirements for the Salem and
Marysville sites.

The federal Comprehensive Environmental Response, Compensation and Liability
Act (commonly referred to as "Superfund" or the "Superfund Act") and similar
state laws subject certain parties to liability for the clean-up of
contaminated waste treatment or disposal sites. Liability under the Superfund
Act is considered "joint and several", meaning that any one responsible party
theoretically could be liable for all clean-up costs, which are often
substantial. However, the Superfund Act provides for the allocation of
liability in an equitable manner among responsible parties and for contribution
among them.

43
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of federal, and two are the subject of state, remedial investigations or
activities, for which the Company has not resolved its alleged liability. In
1992 and 1993 the Company resolved its alleged liability at three additional
sites. At nine of the sites still being addressed, the Company considers itself
to be a de minimis contributor to the volume of waste. With regard to the
remaining site, the American Zinc Company site in Dumas, Texas, the Company is
conducting a preliminary investigation of its connection, if any, to a former
owner of the site. On October 6, 1993, the Texas Natural Resource Conservation
Commission ("TNRCC") informed the Company that it may be in the position of
being named as a potentially responsible party ("PRP") with regard to this
site. The Company has responded to a TNRCC request for information concerning
the Company's connection, if any, to the site. If the site listing on the Texas
Superfund Registry were finalized, the PRPs would be jointly and severally
liable for any clean-up costs. The Company is assessing the position it will
take in responding to the TNRCC. At this early stage it is not reasonably
possible for the Company to determine the environmental condition of the site
or the nature and cost of any remediation that may be required. Similarly, with
respect to another site as to which the Company was recently notified that it
may be a de minimis PRP, no determination of its share of the cost of any
remediation can currently be made. The Company has established accruals which
it believes are adequate to provide for any liabilities it may have with
respect to the other eight sites.

Air and water emissions by the Company's plants have in the past received the
attention of regulatory authorities and may require capital expenditures in the
future. During 1991 the Company received from the EPA an administrative order
citing it with a violation of the Clean Water Act for unpermitted discharge of
wastewater streams at the Salem, Ohio, plant. The Company has been in
negotiations with the EPA since then and has filed a sampling plan and tendered
the sampling results to the EPA. In January 1993 the Company received notice
from the DOJ that it intended to file a civil action seeking penalties for
alleged violations of the Clean Water Act from at least 1988. The government
advised the Company that it was seeking a civil penalty of approximately $1
million and requested a good faith settlement offer from the Company to avoid
filing a lawsuit. The Company has negotiated with the government a settlement
in principle of the proposed civil action. Under the settlement in principle,
the details of which will be reduced to writing in a consent decree, the
Company would pay a $300,000 cash penalty and conduct certain remediation work
estimated to cost approximately $690,000. The Company has established accruals
which it believes are adequate to provide for these costs.

In October 1991, Eljer Manufacturing sold a facility located in Atlanta to
joint venture partners Toto Ltd., Mitsui & Co., Ltd. and Mitsui & Co. (USA),
Inc. ("Toto and Mitsui"). Toto and Mitsui have given Eljer Manufacturing notice
that certain soil and groundwater sampling allegedly revealed several areas of
contamination for which they claim indemnity under their purchase agreement.
Eljer Manufacturing could be responsible for the costs of remediation, up to a
contractual limit of $750,000, if this contamination resulted from an unlawful
release of hazardous substances or disposal of solid waste or hazardous waste
at the facility prior to October 1991. The sufficiency of the notice given is
being disputed and Eljer Manufacturing has proposed conducting additional
environmental assessments. In addition, Eljer Manufacturing has notified the
prior owner of the facility, JP Industries, Inc., ("JP Industries") of Eljer
Manufacturing's claims under the indemnity provisions of its purchase agreement
with JP Industries. Eljer Manufacturing believes that it has meritorious
challenges to Toto and Mitsui's claims as well as valid claims against JP
Industries should it be liable for any contamination at this site.

44
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's understanding that it has not used trichloroethene at the plant, it
is presently the Company's belief that any trichloroethene on the property
originated from off-site sources. The Company has established accruals which it
believes are adequate to provide for the costs of investigation and
remediation, if any.

Kowin Development and Related Litigation

The federal appeals court in Chicago on January 31, 1994, affirmed
substantially all of a previously-announced arbitration award and judgment
thereon in favor of Kowin Development Company ("Kowin") against Eljer
Manufacturing arising from a failed manufacturing joint venture in the People's
Republic of China. The appeals court vacated a portion of the damages award in
the amount of $1 million, which together with approximately $725,000 of
associated interest charges will reduce the aggregate award of damages,
interest and attorneys' fees, if it becomes final, from approximately $13.2
million to approximately $11.5 million. Both Eljer Manufacturing and Kowin
filed petitions for rehearing with the appeals court which were denied on March
4, 1994. Eljer Manufacturing intends to file a petition for certiorari to the
United States Supreme Court. Eljer Manufacturing previously posted $13.2
million cash in lieu of an appeal bond against any payments it might ultimately
owe in this litigation. The arbitration award and related costs were included
in a charge against earnings in 1992.

The arbitration proceedings originated with claims filed in 1988 in a lawsuit
brought by Kowin in federal district court in the Central District of
California, which was stayed pending the arbitration proceedings. In May, 1993,
Kowin was allowed to add additional causes of action, plaintiffs and defendants
(including the Company, three current or former officers of Eljer
Manufacturing, Household and certain of its current or former directors and
officers) to the lawsuit; however, in October, 1993, the court entered an order
dismissing with prejudice all federal law claims of Kowin and of the additional
plaintiffs. No appeal was taken from the dismissal.

Croft Investments, Ltd. ("Croft"), an affiliate of Kowin, the holder of 25%
interest in the failed China joint venture, filed a demand for arbitration
before the American Arbitration Association in Chicago of its claims for $8
million in lost profits and other unspecified damages. Croft had sought to
litigate these claims in the Kowin lawsuit in California, but in the May, 1993,
order of that court (discussed above) was denied permission to be added as an
additional plaintiff on the basis that Croft's claims should have been brought
in the arbitration proceedings initiated by Kowin in 1989. The Company and
Eljer Manufacturing then filed a motion to permanently stay the Croft demand
for arbitration and to bar Croft's claims on the same grounds as the court had
relied upon in refusing to add Croft as a plaintiff in this lawsuit. On August
26, 1993, the court denied this motion on the basis that it lacked jurisdiction
to entertain it. On September 27, 1993, the Company and Eljer Manufacturing
filed an appeal of this ruling with the Ninth Circuit Court of Appeals. That
appeal is still pending.

Eljer Manufacturing has been advised by its Chinese counsel that the Beijing
High People's Court has confirmed a judgment previously entered in the amount
of approximately $1.2 million against it and in favor of its former Chinese
joint venture partner. Eljer Manufacturing has taken a further appeal from this
decision and, based upon advice of counsel, believes it also has substantial
procedural defenses against any effort to enforce this judgment in the United
States. Eljer Manufacturing believes its reserves adequate to provide for any
liability ultimately incurred in this matter.

The claims in the Chinese litigation relate to the joint venture interest
sold in April 1988 by HMI to Simonds Industries, Inc. ("Simonds") and involve
none of Eljer Manufacturing's current business operations. Prior to the sale in
1988, the assets sold to Simonds were operated by a separate division of HMI
which was unrelated to the other operating divisions of HMI which subsequently
became a part of the Company. Despite this fact, no indemnification for these
claims was received from Household, the former parent corporation of

45
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company, in connection with the spin-off of the Company, including its
Eljer Manufacturing subsidiary, to Household's stockholders in April 1989. The
Company has an agreement with Simonds, a successor to HMI in the Chinese joint
venture, under which claims related to the joint venture performance after
April 15, 1988 (the date of the sale of HMI's interests to Simonds) are the
responsibility of Simonds. The Company is not presently able to determine what
amount, if any, of the amount awarded in the Chinese proceeding or in the Kowin
litigation is properly the responsibility of Simonds.

Shareholder Suits

During the second quarter of 1991, four lawsuits (later consolidated into
one) were filed in the Delaware Chancery Court against the Company and the
individual members of its Board of Directors, alleging breach of fiduciary
duties in conjunction with the Board's decision to defer discussion of the May
7, 1991 acquisition proposal from Jacuzzi, Inc. until its regularly scheduled
meeting on June 18, 1991. No monetary damages were specified in the suits. The
suits were voluntarily dismissed on March 29, 1993.

Other Matters

On December 15, 1992, the Attorney General of the State of California, the
Natural Resources Defense Council and the Environmental Law Foundation filed
lawsuits against the Company, U.S. Brass and approximately 15 other
manufacturers and sellers of residential and commercial brass faucets alleging
violations of California's Safe Drinking Water and Toxic Enforcement Act of
1986 ("Proposition 65"). The lawsuits allege that the Company, U.S. Brass and
other plumbing manufacturers did not provide clear and reasonable warning to
California purchasers prior to knowingly and intentionally exposing persons to
lead, a chemical known to the State of California to cause reproductive
toxicity, and that the Company, U.S. Brass and other plumbing manufacturers
knowingly discharged or released lead into drinking water in violation of
Proposition 65. The lawsuits claim that the alleged exposures and discharges
occur from the leaching of lead into drinking water from brass faucets
manufactured by the companies. The Company and U.S. Brass, if found liable,
could be subject to a civil penalty not to exceed $2,500 per day for a
violation of the warning requirement and $2,500 per day for a violation of the
discharge requirement. Allegations are also made that the same conduct
constitutes unfair business practices, misrepresentation, fraud and deceit,
breach of contract and warranties, and negligence. The Company and U.S. Brass
intend to defend the lawsuits vigorously, and while they will continue to do
so, they have also engaged in settlement discussions with the plaintiffs. The
Company and U.S. Brass do not expect the resolution of these lawsuits to have a
material adverse effect on its financial condition or results of operations.

46
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 13, 1993, the Company reported that a federal court jury in
Oklahoma City, Oklahoma, had rendered a verdict against U.S. Brass in a lawsuit
filed by two local businessmen, who manufactured and marketed a modified Vise
Grip as a "crimping tool" to be used in the installation of polybutylene
plumbing systems. The jury found that U.S. Brass attempted to monopolize the
market for crimping tools used in the installation of U.S. Brass' Qest
polybutylene plumbing systems, tied the sale of warranted Qest polybutylene
plumbing products to the purchase of U.S. Brass' own crimping tools, and
interfered with the plaintiffs' business relationships. The jury awarded the
plaintiffs damages for violation of federal and state antitrust laws which, if
not set aside, would be $600,000 after trebling. In addition, the jury awarded
$300,000 in actual damages and $300,000 in punitive damages for the plaintiffs'
claim that U.S. Brass interfered with their business and contractual
relationships. U.S. Brass believes that the jury's award for both antitrust and
interference with business claims is tantamount to double recovery and
erroneous as a matter of law. U.S. Brass believes that the jury findings, which
were confirmed by a court judgment on November 10, 1993, were not supported by
the evidence presented at trial and has asked the court to set aside or
substantially reduce the awards. If post-judgment motions are unsuccessful,
U.S. Brass intends to appeal. Plaintiffs have asked for award of attorney's
fees in an amount of approximately $450,000 and taxable court costs. The
parties have stipulated to the amount of taxable court costs. The Company,
however, has opposed the application for attorney's fees. The matter is under
submission to the court.

(14) RELATIONSHIP WITH HOUSEHOLD:

On February 5, 1993, Household filed an action in the Delaware Chancery Court
against the Company, Eljer Manufacturing and U.S. Brass seeking declaratory
relief against the defendants for any claims alleging any breach of fiduciary
duty which Household owed to the defendants during the time they were wholly-
owned subsidiaries of Household and for any claims arising out of the
distribution of the stock of the Company to stockholders of Household in April
1989. The action also seeks a declaration that Delaware law applies to any
claims of the defendants against Household, arising from or related to such
distribution, and an injunction against the defendants' commencing or
maintaining any lawsuit outside Delaware against Household relating to such
distribution. On March 16, 1993, Household amended its complaint to seek
additional declaratory relief that it is not liable to the Company for any
breach of fiduciary duty at or after the spin-off. The Company believes the
action is without merit and will vigorously defend its interests.

In two opinions dated April 22, 1993 and May 5, 1993, the Delaware Chancery
Court denied the Company's motion to dismiss or stay the case and partially
denied Household's motion to stay the Texas case referred to below. The court
only granted Household a limited injunction preventing the Company, Eljer
Manufacturing and U.S. Brass from seeking an order in any state court other
than Delaware to enjoin, preclude or otherwise prohibit or delay the
prosecution of Household's action in the Delaware Chancery Court.

The Company, Eljer Manufacturing and U.S. Brass sought and obtained review in
the Delaware Supreme Court of the Delaware Chancery Court's orders. Household
also sought and obtained review of the Chancery Court's denial of its motion
for a stay of litigation outside Delaware. On December 22, 1993, the Delaware
Supreme Court issued an order remanding the case to the Delaware Chancery Court
for the purpose of clarifying the record on appeal. The Chancery Court was
instructed to determine if there are any known claims for alleged breaches of
fiduciary duties by Household. If there are no such claims, then the Chancery
Court was further directed to determine what, if any, other bases there may be
to invoke the Chancery Court's equitable jurisdiction. If no such basis exists,
the Chancery Court was directed to determine whether Household's action for a
declaratory judgment should be either dismissed or transferred to the Delaware
Superior Court. On March 18, 1994, the Chancery Court issued its report and
recommendation to the Supreme Court of Delaware. The Chancery Court concluded
that it did not have subject matter

47
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
jurisdiction over Household's action for a declaratory judgment, but also
concluded that under Delaware law, Household had a right to transfer the case
to the Delaware Superior Court. The Company intends to continue its appeal of
the remaining issues before the Delaware Supreme Court.

On February 11, 1993, the Company and Eljer Manufacturing filed an action
against Household in the District Court of Dallas County, Texas, alleging
claims for breach of contract based upon Household's breach of the
Reimbursement Agreement, dated as of April 14, 1989, and the Reorganization and
Distribution Agreement, dated as of March 15, 1989, executed in connection with
the distribution of the Company's stock to holders of Household's stock in
April 1989. Household appeared on March 15, 1993, to raise the defense of lack
of personal jurisdiction over it. In September 1993, the Delaware Chancery
Court enjoined the Company and Eljer Manufacturing from proceeding with its
action in Texas pending hearing and determination of the Delaware Supreme Court
appeal. The Company intends to pursue vigorously its claims against Household.

(15) GEOGRAPHIC SEGMENTS:

Data on the Company's geographic segments, based on the locations of the
Company's operations, are as follows (in thousands):

<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Sales to unaffiliated customers--
North America................................. $313,376 $301,898 $307,206
Europe........................................ 74,186 95,445 95,305
-------- -------- --------
Total....................................... $387,562 $397,343 $402,511
======== ======== ========
Income (Loss) from operations--
North America................................. 15,765 $ 9,483 $(46,119)
Europe........................................ 5,306 13,888 12,256
-------- -------- --------
Total....................................... $ 21,071 $ 23,371 $(33,863)
======== ======== ========
Identifiable assets--
North America................................. $181,193 $193,132 $180,202
Europe........................................ 47,609 61,236 59,030
-------- -------- --------
Total....................................... $228,802 $254,368 $239,232
======== ======== ========
</TABLE>

48
<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(16) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1993 QUARTER QUARTER QUARTER QUARTER
---- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................. $ 95,648 $84,507 $102,965 $104,442
Gross profit.......................... 25,860 23,862 29,160 30,306
Net income (loss)..................... 874 (1,446) 3,136 1,334
Earnings (loss) per share............. .12 (.20) .44 .19
<CAPTION>
1992
----
<S> <C> <C> <C> <C>
Net sales............................. $ 97,078 $97,568 $ 96,935 $105,762
Gross profit.......................... 25,867 27,011 27,447 31,887
Income (loss) before extraordinary
item and cumulative effects of
changes in accounting principles..... (1,773) 343 1,454 (2,120)
Earnings (loss) before extraordinary
item and cumulative effects of
changes in accounting principles per
share................................ (.25) .05 .20 (.30)
Net income (loss)..................... (40,976) 343 1,454 (18,120)
Earnings (loss) per share............. (5.80) .05 .20 (2.56)
</TABLE>

The unaudited quarterly financial data above have been restated from the
Company's previously filed Forms 10-K and 10-Q to reflect certain
reclassifications from cost of sales to selling and administrative costs.

49
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The section entitled "Election of Directors" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on June 21,
1994, sets forth certain information with respect to the directors of the
Registrant and is incorporated herein by reference. Certain information with
respect to persons who are or may be deemed to be executive officers of the
Registrant is set forth under the caption "Executive Officers of the
Registrant" in Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

The section entitled "Executive Compensation and Certain Transactions"
appearing in the Registrant's proxy statement for the annual meeting of
stockholders to be held on June 21, 1994, sets forth certain information with
respect to the compensation of management of the Registrant and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The sections entitled "Voting Securities and Principal Stockholders" and
"Election of Directors" appearing in the Registrant's proxy statement for the
annual meeting of stockholders to be held on June 21, 1994, set forth certain
information with respect to the ownership of the Registrant's Common Stock and
are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section entitled "Executive Compensation and Certain Transactions"
appearing in the Registrant's proxy statement for the annual meeting of
stockholders to be held on June 21, 1994, sets forth certain information with
respect to certain business relationships and transactions between the
Registrant and its directors and officers and is incorporated herein by
reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K

(1) FINANCIAL STATEMENTS

The financial statements filed as part of this report are listed on the Index
to Consolidated Statements on page 18.

(2) FINANCIAL STATEMENT SCHEDULES

Index to Consolidated Financial Statement Schedules

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Report of Independent Public Accountants 54
For the three years 1993, 1992 and 1991:
Schedule V --Properties and Equipment 55
Schedule VI --Accumulated Depreciation and Amortization of
Properties and Equipment 55
Schedule VIII --Valuation and Qualifying Accounts 56
Schedule X --Supplementary Income Statement Information 56
</TABLE>

50
<PAGE>

All other Schedules have been omitted because the required information is
shown in the consolidated financial statements or notes thereto or they are not
applicable.

(3) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3A* Form of Restated Certificate of Incorporation of the Registrant
3B* Form of Amended Bylaws of the Registrant
4A* Form of Restated Certificate of Incorporation of the Registrant
(see Exhibit 3A)
4B* Form of Amended Bylaws of the Registrant (see Exhibit 3B)
4C* Form of Common Stock Certificate
4D* Form of Rights Agreement between the Registrant and Harris Trust &
Savings Bank, as Rights Agent ("Rights Amendment")
4E* Amendment and Amendment No. 2 to Rights Agreement dated as of July
31, 1989 and January 4, 1990 respectively
4F***** Amendment No. 3 to Rights Agreement dated as of November 5, 1991
4G** Credit Agreement dated as of April 14, 1989 among the Registrant
and the banks listed therein and NCNB Texas National Bank and
Morgan Guaranty Trust Company of New York, as agents, together
with Amendment No. 1 thereto dated as of April 14, 1989, and
Amendment No. 2 thereto dated as of December 30, 1989.
4H*** Amendment No. 3 to the Credit Agreement dated as of June 15, 1990
and Amendment No. 4 thereto dated as of December 28, 1990.
4I****** Amended and Restated Credit Agreement dated as of December 11,
1992 among Eljer Manufacturing, Inc., as Borrower, Eljer
Industries, Inc., as Parent Guarantor, the Banks Listed therein,
and NationsBank of Texas, N.A., as Administrative Agent and Co-
Agent, and Morgan Guaranty Trust Company of New York, as Co-Agent
and, for limited purposes, The First National Bank of Chicago, as
"First Chicago".
Instruments with respect to long-term debt which do not exceed 10
percent of the total assets of the Registrant and its consolidated
subsidiaries have not been filed. The Registrant agrees to furnish
a copy of such instruments to the Commission upon request.
4J Form of First Amendment to Amended and Restated Credit Agreement
dated as of March 25, 1994.
10A* Form of Reorganization and Distribution Agreement
10B* Form of Employee Benefits and Labor Agreement
10C* Form of Tax Sharing Agreement
10D* Form of Transition Management Services Agreement
10E* Form of Standstill Agreement between the Registrant & Household
International, Inc.
10F**** Form of Employment Agreement with Scott G. Arbuckle
10G**** Form of Employment Agreement with James F. Thomason
10H**** Form of Employment Agreement with John M. Botton, Charles R.
Wackenhuth, Henry W. Lehnerer, Edward W. Fordyce, Jr., James A.
Harris and Brooks F. Sherman
10I* Salaried Pension Plan for Eljer Manufacturing, Inc.
10J* Supplemental Retirement Plan
</TABLE>

51
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10K* Supplemental Savings Plan
10L* Tax Reduction Investment Plan
10M* Long-Term Executive Incentive Compensation Plan of the Registrant
10N**** 1991 Long-Term Incentive Plan
10O**** Form of Executive Severance Agreement with Scott G. Arbuckle
10P**** Form of Executive Severance Agreement with John M. Botton, James
F. Thomason, Charles R. Wackenhuth, Henry W. Lehnerer, Edward W.
Fordyce, Jr., James A. Harris and Brooks F. Sherman
10Q***** Eljer Supplemental Benefit Plan
10R***** Eljer Excess Benefit Plan
10S******* Eljer Industries, Inc. Stock Payment Plan for Non-Employee
Directors
22 Subsidiaries of the Registrant
Consent of Arthur Andersen & Co., independent certified public
24 accountants
</TABLE>
- --------
*Incorporated by reference to the Registrant's Registration Statement on
Form 10 filed February 14, 1989, as amended by Forms 8 filed March 14,
1989, March 23, 1989, March 27, 1989, August 3, 1989, January 10, 1990,
May 2, 1990 and November 19, 1991 (File No. 0-10181).

**Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1989 filed March 29, 1990.

***Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the Fiscal Year Ended December 30, 1990 filed March 25, 1991.

****Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarterly Period Ended March 31, 1991 filed May 14, 1991.

*****Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarterly Period Ended September 29, 1991 filed November 12,
1991.

******Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the Fiscal Year Ended January 3, 1993, filed April 1, 1993.

*******Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed December 16, 1993 (registration no. 33-51527).

(4) REPORTS ON FORM 8-K

A report on Form 8-K was filed on November 17, 1993, related to the
announcement of a settlement of a lawsuit brought in April 1993, by Kohler
Company against the Company and its subsidiary, Eljer Manufacturing, for unfair
competition, design patent and trade dress infringement in the manufacture and
sale of plumbing products.

A report on Form 8-K was filed on October 22, 1993, related to (1) the
Illinois State Court judge's ruling on the insurance dispute with the
Travelers, and (2) the verdict against U.S. Brass in a federal district court
in Oklahoma City, Oklahoma.

52
<PAGE>

SUBSEQUENT REPORTS ON FORM 8-K

A report on Form 8-K was filed on January 7, 1994, related to the
announcement that Celanese filed suit in the Superior Court of New Jersey
against Household, the former parent of the Company, Eljer Manufacturing and
U.S. Brass. See Note 13 for a discussion of the lawsuit.

A report on Form 8-K was filed on February 11, 1994, related to the
announcement that the federal appeals court in Chicago had affirmed
substantially all of a previously-announced arbitration award in favor of Kowin
Development and against Eljer Manufacturing. See Note 13 for additional
discussion.

A report on Form 8-K was filed on March 25, 1994, related to the March 14,
1994, announcement of an agreement in principle to settle the class action
securities litigation against the Company and certain present and former
members of the Board of Directors pending in a federal court in Texas. See Note
13 for a discussion of the proposed settlement.

53
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Eljer Industries, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Eljer Industries, Inc. and subsidiaries
included in this Form 10-K, and have issued our report thereon dated March 31,
1994. Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the outcome of lawsuits, claims and
related insurance coverage involving the Qest polybutylene plumbing systems
manufactured and sold by the Company's indirect, wholly-owned subsidiary,
United States Brass Corporation. This matter is discussed further in Notes 2
and 13 to the consolidated financial statements. Our report on the consolidated
financial statements includes an additional explanatory paragraph with respect
to the changes in the methods of accounting for postretirement benefits other
than pensions, postemployment benefits and income taxes as discussed in Notes
1, 9 and 11 to the consolidated financial statements. Our audits were made for
the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The schedules listed in the index to Item 14 are
the responsibility of the Company's management and are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

ARTHUR ANDERSEN & CO.

Dallas, Texas,March 31, 1994

54
<PAGE>

ELJER INDUSTRIES, INC.

SCHEDULE V--PROPERTIES AND EQUIPMENT

(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING AT OTHER CHANGES AT END
CLASSIFICATION OF PERIOD COST RETIREMENTS ADD(DEDUCT)(1) OF PERIOD
-------------- ---------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
1991
Land.................. $ 3,891 $ 209 $ (509) $ (5) $ 3,586
Buildings and lease-
hold improvements.... 39,878 460 (2,101) (105) 38,132
Machinery, fixtures
and equipment........ 115,236 8,043 (14,304) 1,011 109,986
-------- ------- -------- -------- --------
Total............... $159,005 $ 8,712 $(16,914) $ 901 $151,704
======== ======= ======== ======== ========
1992
Land.................. $ 3,586 $ -- $ -- $ (29) $ 3,557
Buildings and lease-
hold improvements.... 38,132 704 (95) (1,005) 37,736
Machinery, fixtures
and equipment........ 109,986 7,271 (4,217) (3,133) 109,907
-------- ------- -------- -------- --------
Total............... $151,704 $ 7,975 $ (4,312) $ (4,167) $151,200
======== ======= ======== ======== ========
1993
Land.................. $ 3,557 $ -- $ (80) $ (4) $ 3,473
Buildings and lease-
hold improvements.... 37,736 217 (1,265) (152) 36,536
Machinery, fixtures
and equipment........ 109,907 7,709 (3,641) (1,176) 112,799
-------- ------- -------- -------- --------
Total............... $151,200 $ 7,926 $ (4,986) $ (1,332) $152,808
======== ======= ======== ======== ========
</TABLE>
- --------
(1) Amounts represent primarily foreign currency translation adjustments
related to the Company's foreign entities.

SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTIES AND EQUIPMENT

(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING ADD (DEDUCT) AT END
CLASSIFICATION OF PERIOD ADDITIONS RETIREMENTS OTHER (1) OF PERIOD
-------------- ---------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1991
Buildings and lease-
hold improvements.... $ 13,023 $ 1,883 $ (282) $ (21) $14,603
Machinery, fixtures
and equipment........ 60,942 9,710 (2,886) 104 67,870
-------- ------- ------- ------- -------
Total............... $ 73,965 $11,593 $(3,168) $ 83 $82,473
======== ======= ======= ======= =======
1992
Buildings and lease-
hold improvements.... $ 14,603 $ 1,832 $ (95) $ (382) $15,958
Machinery, fixtures
and equipment........ 67,870 7,818 (2,815) (747) 72,126
-------- ------- ------- ------- -------
Total............... $ 82,473 $ 9,650 $(2,910) $(1,129) $88,084
======== ======= ======= ======= =======
1993
Buildings and lease-
hold improvements.... $ 15,958 $ 1,821 $ (371) $ (69) $17,339
Machinery, fixtures
and equipment........ 72,126 8,981 (2,803) (850) 77,454
-------- ------- ------- ------- -------
Total............... $ 88,084 $10,802 $(3,174) $ (919) $94,793
======== ======= ======= ======= =======
</TABLE>
- --------
(1) Amounts represent primarily foreign currency translation adjustments
related to the Company's foreign entities.

55
<PAGE>

ELJER INDUSTRIES, INC.

SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS

(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS/ TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTION OF PERIOD
----------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
1991
Accounts receivable
reserves............. $ 8,398 $ 7,439 $ -- $(6,873)(1) $ 8,964
======= ======= ===== ======= =======
Reserve for
receivables from
insurance carriers... $ -- $14,613 $ -- $ -- $14,613
======= ======= ===== ======= =======
1992
Accounts receivable
reserves............. $ 8,964 $ 6,155 $ -- $(5,051)(1) $10,068
======= ======= ===== ======= =======
Reserve for
receivables from
insurance carriers... $14,613 $ -- $ -- $(1,158) $13,455
======= ======= ===== ======= =======
Valuation allowance
for deferred tax as-
sets................. $ -- $25,452(3) $ -- $ -- $25,452
======= ======= ===== ======= =======
1993
Accounts receivable
reserves............. $10,068 $ 3,229 $(207) $(4,200)(1) $ 8,890
======= ======= ===== ======= =======
Reserve for
receivables from
insurance carriers... $13,455 $ -- $ -- $(6,005)(2) $ 7,450
======= ======= ===== ======= =======
Valuation allowance
for deferred tax as-
sets................. $25,452 $ 674 $ -- $ -- $26,126
======= ======= ===== ======= =======
</TABLE>
- --------
(1) Includes primarily write-offs of uncollectible accounts and customer
discounts taken.
(2) Includes primarily collection of proceeds from insurance carriers.
(3) Established in conjunction with the implementation of SFAS No. 109.

SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION

(IN THOUSANDS)

<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Maintenance and repairs............................. $ 9,962 $ 9,104 $ 8,720
======= ======= =======
Advertising costs................................... $13,238 $13,679 $12,630
======= ======= =======
</TABLE>

56
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Dated: March 31, 1994

Eljer Industries, Inc.

/s/ Henry W. Lehnerer
By: _________________________________
Henry W. Lehnerer
Vice President--Finance and Chief
Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Frank J. Morgan
- ------------------------------------
Frank J. Morgan Chairman of the Board March 31, 1994
/s/ Scott G. Arbuckle March 31, 1994
- ------------------------------------
Scott G. Arbuckle Director, President and
Chief Executive Officer
(Principal Executive
Officer)
/s/ Henry W. Lehnerer
- ------------------------------------
Henry W. Lehnerer Vice President--Finance and March 31, 1994
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ John H. Deininger
- ------------------------------------
John H. Deininger Director March 31, 1994
/s/ Walter C. Minnick
- ------------------------------------
Walter C. Minnick Director March 31, 1994
/s/ Paul E. Price
- ------------------------------------
Paul E. Price Director March 31, 1994
/s/ C.A. Rundell, Jr.
- ------------------------------------
C.A. Rundell, Jr. Director March 31, 1994
/s/ Jerre L. Stead
- ------------------------------------
Jerre L. Stead Director March 31, 1994
</TABLE>

<PAGE>

FIRST AMENDMENT
---------------

THIS FIRST AMENDMENT (this "AMENDMENT") is entered into as of March 25,
1994, among the undersigned. Terms not defined in this Amendment have the
respective meanings given such terms in the Credit Agreement defined below.

RECITALS
--------

A. That certain AMENDED AND RESTATED CREDIT AGREEMENT (as amended,
supplemented, or replaced, the "CREDIT AGREEMENT") dated as of December 11,
1992, was executed by ELJER MANUFACTURING, INC., a Delaware corporation (the
"BORROWER"); ELJER INDUSTRIES, INC., a Delaware corporation (the "PARENT
GUARANTOR"); the financial institutions named on SCHEDULE 1 to the Credit
----------
Agreement; NATIONSBANK OF TEXAS, N.A., ("NATIONSBANK"), as a Bank and a co-agent
and the administrative agent for itself, the other Banks and "First Chicago" (as
defined in the Credit Agreement); MORGAN GUARANTY TRUST COMPANY OF NEW YORK
("MORGAN GUARANTY"), as a Bank and a co-agent for itself, the other Banks, and
First Chicago; and, for the limited purposes set forth in SECTION 10.14 of the
-------------
Credit Agreement, First Chicago.

B. The undersigned desire to amend the Credit Agreement to, among other
things, extend the Maturity Date, provide for the periodic increase of the
Variable Rate, and add certain mandatory prepayment obligations.

NOW THEREFORE, the undersigned agree as follows:

1. Maturity Date. SECTION 1.1 of the Credit Agreement is amended so that
------------- -----------
the definition of the term MATURITY DATE reads as follows:

MATURITY DATE means the earlier of (a) April 30, 1996, and (b) the
effective date that the Banks' obligations to extend or maintain credit
hereunder are otherwise canceled or terminated in accordance with
provisions herein.

2. Variable Rate. SECTION 1.1 of the Credit Agreement is amended so that
------------- -----------
the definition of the term VARIABLE RATE reads as follows:

VARIABLE RATE means the sum of the Prime Rate plus the Applicable
Margin.

3. Applicable Margin. SECTION 1.1 of the Credit Agreement is amended to
----------------- -----------
include the definition of the term APPLICABLE MARGIN which shall read as
follows:

APPLICABLE MARGIN means, for any day, the margin of interest over the
Prime Rate that is applicable when any interest rate is determined under
this Agreement, as follows:

<PAGE>

Time Period Applicable
Margin
<S> <C>

From March 25, 1994, through September 30, 1994 1.5%

From October 1, 1994, through March 31, 1995 2.0%

From April 1, 1995, through September 30, 1995 2.5%

From October 1, 1995, through March 31, 1996 3.0%

From April 1, 1996, through April 30, 1996 3.5%

</TABLE>

4. Excess Cash Flow. SECTION 1.1 of the Credit Agreement is amended so
---------------- -----------
that the definition of the term EXCESS CASH FLOW reads as follows:

EXCESS CASH FLOW means, as determined by the Parent Guarantor for
itself and each of its domestic Subsidiaries (other than U.S. Brass) on a
consolidated basis for the fiscal year ending in 1994, and each fiscal year
thereafter, the following:

[(A + B) - (C + $5,000,000)] - D, where

A is the sum of (1) actual Cash Flow From Operating Activities
during such fiscal year (excluding interest income from the
Parent Guarantor), plus (2) the lesser of actual cash EPA
Payments during such fiscal year or cash EPA Payments projected
for such fiscal year (as set forth in column "X" of the following
table), minus (3) the actual cash payments from U.S. Brass to the
Borrower and its Subsidiaries under the U.S. Brass - EMI Tax
Sharing Agreement during such fiscal year;

B is the sum of the A amounts for any prior fiscal years for which
an A amount was determined (i.e., 1994 and the fiscal years
thereafter);

C is, for each fiscal year, the amount shown in column "Z" of the
following table; and

D is any amounts paid as Excess Cash Flow under this Agreement for
any prior fiscal year.

-2-

<PAGE>

<TABLE>
<CAPTION>
"w" "x" "y" "z"

Projected Cash Prior Year's "z"
Fiscal Flow From Projected plus Current Year's
Year Operating Projected Brass Tax "w" and "x" minus
Ended Activities EPA Payments Payments Current Year's "y"
<S> <C> <C> <C> <C>
1994 $12,230 $-0- $403 $11,827

1995 $ 803 $11,000 $607 $21,417

</TABLE>

All of the above amounts are in thousands.

5. Obligation. SECTION 1.1 of the Credit Agreement is amended so that
------------------------
the definition of OBLIGATION reads as follows:

OBLIGATION means all present and future debt, obligations, and
liabilities, and all renewals, extensions, and modifications thereof, owed
to any one or more Banks, whether in its capacity as a Bank or as an Agent,
and arising pursuant to any Loan Paper, the Morgan Guaranty Swap Agreement,
the Existing Letters of Credit, or the Cash Management/Deposit Account
Agreements, together with all interest thereon and reasonable costs,
expenses, and attorneys' fees incurred in the enforcement thereof.

6. Payments; Prepayments; Order of Application; Letters of Credit;
Debtor-In Possession Financing.

SECTION 2.5(C) of the Credit Agreement is amended in its entirety to read as
- --------------
follows:

(c) Promptly upon receipt thereof, the Borrower shall pay as a
mandatory prepayment of the Obligation all proceeds Borrower or any Related
Company receives from any settlement with or judgment against Household
International, Inc. in connection with claims which heretofore or hereafter
have been or may be made against Household International, Inc. or any
affiliate thereof in either of the following cases : (i) Eljer Industries,
-----------------
Inc. and Eljer Manufacturing, Inc. v. Household International, Inc., Cause
-------------------------------------------------------------------
93-01219 in the 193rd Judicial District Court, State of Texas, and (ii)

Household International, Inc. v. Eljer Industries, Inc., Eljer
--------------------------------------------------------------
Manufacturing, Inc. and United States Brass Corporation, Cause 12862 in the
-------------------------------------------------------
Chancery Court of the State of Delaware in and for New Castle County, or
arising out of disputes which are the same as or similar to any of those in
either of those cases.

SECTION 2.5(E) of the Credit Agreement is amended in its entirety to read as
- --------------
follows:

(e) (i) On or before October 5, 1994, the Borrower shall pay as
a mandatory prepayment of the Obligation an amount equal to $2,000,000, and
(ii) on or before December 30, 1994, the Borrower shall pay as a mandatory
prepayment of the Obligation an amount equal to $4,000,000, less amounts
previously paid under CLAUSES (B) and (D) above and (G) below. On or
before December 29, 1995, the Borrower shall

-3-

<PAGE>

pay as a mandatory prepayment of the Obligation an amount equal to
$11,000,000, less amounts (i) previously paid in 1994 and 1995 to clean up
the Borrower's facilities in Marysville, Ohio, or to the U.S.
Environmental Protection Agency or the Ohio Environmental Protection Agency
in connection with such facilities or (ii) used in 1994 and 1995 to
collateralize letters of credit issued and outstanding, to purchase
insurance, or otherwise to provide financial assurance, during 1994, 1995,
and 1996, of Borrower's obligations with respect to the clean up of the
Borrower's facilities at Marysville, Ohio, or (iii) certified in writing by
the Borrower to the Administrative Agent as reasonably anticipated to be
expended during 1996 to clean up, or used during 1996 to assure the
Borrower's obligations with respect to the clean up of the Borrower's
facilities at Marysville, Ohio.

SECTION 2.13(B)(I) of the Credit Agreement is amended in its entirety to read as
- ------------------
follows:

(i) $13,000,000 to serve as bonds for, or otherwise give
assurances of the performance of, the Related Companies' EPA
Obligations (but no other purpose).

SECTION 2.13(B)(II) of the Credit Agreement is amended in its entirety to read
- -------------------
as follows:

(ii) $10,000,000 to serve as bonds for, or to otherwise give
assurances of the performance of, the Related Companies' respective
obligations in connection with insurance policies, coverage, and
retained liabilities, including, without limitation, reimbursement
obligations to insurance companies in connection with payments of
claims under health insurance, workers' compensation, automobile or
products liability, or other insurance programs of the Related
Companies, but excluding any purposes other than insurance purposes
which are not used for EPA Obligations.

SECTION 2.14 of the Credit Agreement is amended in its entirety to read as
- ------------
follows:

SECTION 2.14 Debtor-In-Possession Financing. Should the Borrower
------------------------------
become a debtor-in-possession in a Chapter 11 bankruptcy case under the
United States Bankruptcy Code (the "BANKRUPTCY CODE"), then the Banks shall
have the following rights with respect to post-petition credit obtained by
the Borrower, as debtor or debtor-in-possession, under the provisions of
Section 364 of the Bankruptcy Code ("DIP FINANCING"): Before applying to
the bankruptcy court for authorization to obtain or incur DIP Financing
from any lender other than a Bank (an "OTHER LENDER"), the Borrower must
offer the opportunity to provide DIP Financing to each Bank, and the
Borrower will not apply to the bankruptcy court for any such authorization
with respect to an Other Lender during the 20-day period following the
making of such offer by the Borrower. If at the end of such 20-day period
no Bank has agreed to provide DIP Financing on terms and conditions
acceptable to the Borrower and such Bank, then the Borrower shall be free
to apply to the bankruptcy court for DIP Financing from one or more Other
Lenders.

7. Information. The following subparagraph is added at the end of
-----------
SECTION 6.1 of the Credit Agreement:
- -----------

-4-

<PAGE>

(q) As soon as available and in any event within 30 days after the
end of each calendar month (commencing with April, 1994) a detailed
description of capital expenditures for the month and year-to-date
(specifically identifying capital expenditures of $100,000 or more),
comparing total actual capital expenditures for such month and year-to-date
with total budgeted capital expenditures for such month and year-to-date.

8. Expenses. SECTION 6.6 of the Credit Agreement is amended to read as
-------- -----------
follows:

SECTION 6.6 Expenses. The Borrower shall promptly (a) advance to the
--------
Administrative Agent and its special counsel, upon their request, estimated
filing and recording fees and expenses for the Loan Papers creating the
Bank Liens, and (b) pay all reasonable costs, fees, and expenses paid or
incurred by the Administrative Agent or the Agents incident to any Loan
Paper (including, but not limited to, any additional filing or recording
fees and travel expenses), and the reasonable fees and expenses paid or
incurred by counsel or other professional advisors to the Agents in
connection with the negotiation, preparation, due diligence, delivery, and
execution of the Loan Papers and any related amendment, waiver, or consent,
or to the enforcement of the obligations of any Related Company, or
otherwise related, directly or indirectly to the payment or prospects of
payment of the Obligation, or the exercise of any Rights (including, but
not limited to, reasonable attorneys' fees and court costs), all of which
shall be a part of the Obligation. The Borrower shall promptly pay all
reasonable costs, fees, and expenses paid or incurred by the Agents
(including, without limitation, reasonable attorneys' and other
professional fees and expenses) in connection with or related to any
proceedings before any Tribunal involving any Related Company, or by the
Agents or any Bank in connection with the enforcement of Rights under any
Loan Paper following the occurrence and during the continuance of an Event
of Default, all of which shall be a part of the Obligation.

9. Financial Covenants. SECTION 8 of the Credit Agreement is amended in
------------------- ---------
its entirety to read as follows:

SECTION 8

FINANCIAL COVENANTS

Until the Obligation has been paid and performed in full, and unless a
deviation therefrom is permitted by the Required Banks, the Parent
Guarantor and the Borrower, for themselves and the other Related Companies,
jointly and severally agree as follows:

SECTION 8.1 Capital Expenditures. No Related Company (including,
--------------------
without limitation, U.S. Brass) will, directly or indirectly, make
expenditures for the acquisition, construction, improvement, or replacement
of land, buildings, equipment, or other fixed or capital assets or
leaseholds (excluding expenditures properly chargeable to repairs or
maintenance), other than expenditures which are for or related to assets or
leaseholds used or useful in the normal business operations of such
Related Company and which, together with all other such expenditures by
any other Related Company, do not exceed the following limits (which, for
calendar year 1995, may be adjusted upward by the unused amount of the
previous year's maximum amount to the extent that in 1994 the following

-5-

<PAGE>

projects, designated to the Bank as "high priority" by the Borrower and
Parent Guarantor were not completed: the addition of new chinaware
capacity, including new kilns at the Ford City and Tupelo plants, welded
chimney equipment at Selkirk Europe U.S.A., Inc., Eljer Industries, Ltd.
and their subsidiaries, and robotics improvements in the area of cast iron
tub production):

<TABLE>
<CAPTION>
Calendar Year Maximum Amount
<S> <C>

1993 $12,560,000
1994 $15,000,000
1995 $10,593,000
January 1-April 30, 1996 $ 3,500,000
</TABLE>

SECTION 8.2 Minimum Adjusted Tangible Net Worth - Parent Guarantor.
------------------------------------------------------
At the end of any fiscal quarter listed below, the Adjusted Tangible Net
Worth - Parent Guarantor shall not be less than the applicable minimum
amount set forth below opposite such fiscal quarter:

<TABLE>
<CAPTION>
Fiscal Quarter Minimum
Ending On Or About Amount
<S> <C>
12/31/93 $( 2,179,000)
3/31/94 $(41,292,000)
6/30/94 $(41,273,000)
9/30/94 $(39,453,000)
12/31/94 $(35,921,000)
3/31/95 $(35,024,000)
6/30/95 $(34,260,000)
9/30/95 $(30,225,000)
12/31/95 $(26,085,000)
</TABLE>

For purposes of the calculations in this SECTION 8.2 and in SECTION 8.3,
----------- -----------
below, accruals for post-retirement benefits according to Financial
Accounting Standards No. 106 will be reflected after December 31, 1993.

SECTION 8.3 Minimum Adjusted Tangible Net Worth - US Only. At the
---------------------------------------------
end of any fiscal quarter listed below, the Adjusted Tangible Net Worth -
US Only shall not be less than the applicable minimum amount set forth
below opposite such fiscal quarter:

<TABLE>
<CAPTION>
Fiscal Quarter Minimum
Ending On Or About Amount
<S> <C>
12/31/93 $( 74,945,000)
3/31/94 $(114,113,000)
6/30/94 $(114,537,000)
9/30/94 $(114,086,000)
12/31/94 $(112,439,000)
</TABLE>

-6-

<PAGE>

SECTION 8.4 Minimum Consolidated Cash Flow From Operating Activities
--------------------------------------------------------
-Parent Guarantor. For the period of four consecutive fiscal quarters
-----------------
ending with the fiscal quarter listed below, the consolidated Cash Flow
From Operating Activities for the Parent Guarantor and its Consolidated
Subsidiaries (excluding U.S. Brass and any compensation earned from U.S.
Brass under the U.S. Brass - EMI Tax Sharing Agreement) shall not be less
than the applicable minimum amount set forth below opposite such fiscal
quarter:

Fiscal Quarter Minimum
Ending On Or About Amount
<S> <C>

12/31/93 $(12,413,000)
3/31/94 $ 10,000,000
6/30/94 $ 12,000,000
9/30/94 $ 12,000,000
12/31/94 $ 13,500,000
3/31/95 $ 5,000,000
6/30/95 $ (300,000)
9/30/95 $(1,500,000)
12/31/95 $(3,000,000)
</TABLE>

SECTION 8.5 Minimum Consolidated Cash Flow From Operating Activities
--------------------------------------------------------
-U.S. Only. For the period of four consecutive fiscal quarters ending with
----------
the fiscal quarter listed below, the consolidated Cash Flow From Operating
Activities for the Parent Guarantor and its Consolidated Subsidiaries
(excluding U.S. Brass and any foreign Subsidiaries, any interest income
resulting from the Permitted Debt described in ITEMS 7 AND 8 on SCHEDULE
------------- --------
5.15, and any compensation earned from U.S. Brass under the U.S. Brass -
----
EMI Tax Sharing Agreement) shall not be less than the applicable minimum
amount set forth below opposite such fiscal quarter:

<TABLE>
<CAPTION>
Fiscal Quarter Minimum
Ending On Or About Amount
<S> <C>
12/31/93 $(16,489,000)
3/31/94 $(11,000,000)
6/30/94 $ (9,000,000)
9/30/94 $(13,000,000)
12/31/94 $ 2,500,000
3/31/95 $ (2,000,000)
6/30/95 $ (8,000,000)
9/30/95 $ (7,000,000)
12/31/95 $ (7,000,000)
</TABLE>

-7-

<PAGE>

SECTION 8.6 Minimum Current Ratio - Parent Guarantor. At no time
----------------------------------------
after the date hereof shall the ratio of the consolidated current assets
(excluding any compensation payable by U.S. Brass under the U.S. Brass -
EMI Tax Sharing Agreement) to the consolidated current liabilities
(excluding current maturities of Restricted Debt and any amounts accrued in
connection with the Kowin-Simonds Lawsuit) of the Parent Guarantor and its
Consolidated Subsidiaries (excluding U.S. Brass) be less than 1.60 to 1.00.

SECTION 8.7 Fixed Charge Coverage Ratio - Parent Guarantor. For any
----------------------------------------------
fiscal quarter listed below, the Fixed Charges Coverage Ratio for the
Parent Guarantor and its Consolidated Subsidiaries (excluding U.S. Brass)
for the period of four consecutive fiscal quarters ending with such fiscal
quarter shall not be less than (i) the number set forth below opposite such
fiscal quarter to (ii) 1.00:

Fiscal Quarter
Ending On Or About Number

SECTION 8.8 Fixed Charge Coverage Ratio - U.S. Only. For any fiscal
---------------------------------------
quarter listed below, the Fixed Charges Coverage Ratio for the Parent
Guarantor and its Consolidated Subsidiaries (excluding U.S. Brass and any
foreign Subsidiaries) for the period of four consecutive fiscal quarters
ending with such fiscal quarter shall not be less than (i) the number set
forth below opposite such fiscal quarter to (ii) 1.00:

Fiscal Quarter
Ending On Or About Number
<S> <C>
12/31/93 0.30
3/31/94 0.35
6/30/94 0.35
9/30/94 0.40
12/31/94 0.40
3/31/95 0.45
6/30/95 0.45
9/30/95 0.45
12/31/95 0.45
</TABLE>

For purposes of the provisions of SECTIONS 8.4, 8.5 and 8.6 of the Credit
----------------- ---
Agreement and the calculations on the Financial Report Certificate with respect
to those Sections, the principal

-8-

<PAGE>

amount of debt outstanding under any facility described in PARAGRAPH 13(C) of
---------------
this Amendment shall be excluded.

10. U.S. Brass Bankruptcy. SECTIONS 9.1(G) and (H) of the Credit
--------------------- --------------- ---
Agreement are hereby amended by changing each reference to "Related Company" to
refer instead to "Related Company (other than U.S. Brass)". If U.S. Brass
hereafter becomes a debtor in a case under the Bankruptcy Code -- but only while
it is a debtor under the Bankruptcy Code -- it shall thereupon cease to be a
Related Company under the Credit Agreement and otherwise cease to be the subject
of any provisions in the Loan Papers relating to Subsidiaries of the Borrower or
Parent Guarantor or members of the ERISA Group; provided that, notwithstanding
anything to the contrary contained herein, (i) for purposes of considering
whether any representation or warranty, action or inaction, event or
circumstance creates a Material Adverse Effect under the Loan Papers, (ii) and
with respect to any representation or warranty, any action or inaction, event or
circumstance occurring prior to the filing of any such case under the Bankruptcy
Code, U.S. Brass shall be a Related Company, and subject to the provisions of
the Loan Papers relating to members of the ERISA Group and Subsidiaries of the
Borrower or Parent Guarantor. Furthermore, U.S. Brass shall remain a Related
Company for purposes of SECTIONS 6.1(L), (N), (O), (P), SECTIONS 6.6, and
------------------------- --- ------------
7.5(B)(II), but in the latter case only to the extent that the intellectual
- ----------
property referred to therein is made available to U.S. Brass on a non-exclusive
basis. It is not the intention of the parties that an Event of Default or
Default shall occur if a court of competent jurisdiction shall determine, or the
Required Banks shall agree, that all or any of the funds in the Restricted
Account belong to U.S. Brass and should be removed from the Restricted Account
and delivered to or for the benefit of U.S. Brass.

11. Permitted Debt. ITEM 2 on SCHEDULE 5.15 is amended to read as
-------------- ------ -------------
follows:

2. The First Chicago Receivables Purchase Facility, provided that,
the "Commitment Amount", as defined thereunder, may not exceed $13,000,000.

12. The calculation worksheet to EXHIBIT F to the Credit Agreement is
---------
amended in its entirety to be in the form of the "New Calculation Worksheet to
Exhibit F" attached hereto.
13. First Chicago Receivables Purchase Facility. The Agents and the Banks
--------------------------------------------
consent to any or all of the following:

(a) the amendment of the First Chicago Receivables Purchase Facility
to provide for its termination on September 30, 1994;

(b) the assignment by First Chicago to another Person of all of First
Chicago's rights and interests under the First Chicago Receivables Purchase
Facility, and the agreement by such other Person to become "First Chicago"
under the Credit Agreement (in which event such assignee shall be deemed to
be "First Chicago" under the Credit Agreement);

(c) the termination of the First Chicago Receivables Purchase
Facility and its replacement by a new revolving credit facility of up to
$13,000,000 (the "NEW RECEIVABLES FACILITY") with a new lender (the "NEW
LENDER"), which New Receivables Facility may be secured by security
interests in categories of collateral which now are

-9-

<PAGE>

being sold under the First Chicago Receivables Purchase Facility. If any
New Receivables Facility is entered into, the consent hereunder is
conditioned upon, and the Administrative Agent is hereby irrevocably
authorized and directed to execute and deliver on behalf of the Banks, new
agreements or amendments to the Credit Agreement with the New Lender which
establish an intercreditor relationship which is substantially the same and
no less favorable to the Banks as that between First Chicago and the Banks
pursuant to the Credit Agreement, including, without limitation, limits on
the rights of the New Lender which are similar to those contained in the
Credit Agreement.

14. Representations and Warranties. The Borrower and the Parent Guarantor
------------------------------
jointly and severally represent and warrant to each Agent and to each Bank that
on the date of this Amendment:

(a) the execution and delivery of this Amendment have been authorized
by all requisite corporate action and will not violate its organizational
documents;

(b) except for matters heretofore disclosed in writing by any Related
Company, the representations and warranties in each Loan Paper (as affected
by this Amendment) to which it is a party are true and correct in all
material respects on and as of the date hereof as though made on and as of
the date hereof (except to the extent that (i) such representations and
warranties speak to a specific date or (ii) the facts on which such
representations and warranties are based have been changed by transactions
contemplated by the Credit Agreement); and

15. Conditions. This First Amendment shall not become effective unless:
----------

(a) The Administrative Agent shall have received a certificate from a
Responsible Officer certifying, based on due inquiry, that all of the
representations and warranties in PARAGRAPH 14, above, shall be true and
------------
correct;

(b) Administrative Agent shall have received executed counterparts of
this First Amendment from the Borrower, the Parent Guarantor and all Banks,
and a certificate from a Responsible Officer of each of the Borrower and
Parent Guarantor certifying as to (i) the due incumbency of its officers
authorized to execute this First Amendment, (ii) resolutions duly adopted
by its directors approving and authorizing execution of this First
Amendment, and (iii) any changes to its corporate charter or bylaws since
December 11, 1992;

(c) The Borrower shall have made a mandatory prepayment of the
Obligation in an amount of $6,000,000, plus any outstanding amounts payable
under SECTION 6.6 of the Credit Agreement; and
-----------

(d) The Borrower shall have delivered to the Administrative Agent a
copy of the executed amendment described in SECTION 13(A) of this
-------------
Amendment.

-10-

<PAGE>

16. Release. In consideration of the agreement of the parties hereto to
-------
enter into this Amendment, (a) the Parent Guarantor and the Borrower each
release the Administrative Agent, each Agent, each Bank, and their respective
parents, subsidiaries, directors, officers, employees, representatives, agents,
successors, assigns, and attorneys from all claims and causes of action existing
on or before the date hereof under or in connection with the Existing Credit
Facilities, the Morgan Guaranty Swap Agreement, or the Existing Letters of
Credit, or arising in connection with the execution, negotiations, and
preparation of this Amendment, the Credit Agreement and the other Loan Papers,
and (b) the Administrative Agent, each Agent, and each Bank each release the
Borrower, the Parent Guarantor, and their respective parents, subsidiaries,
directors, officers, employees, representatives, agents, successors, assigns,
and attorneys from all claims and causes of action existing on or before the
date hereof under or in connection with the Existing Credit Facilities, the
Morgan Guaranty Swap Agreement, the Existing Letters of Credit or the Loan
Papers, or arising in connection with the execution, negotiations, and
preparation of this Amendment, the Credit Agreement and the other Loan Papers;
provided that, nothing herein shall be deemed to be a waiver of any Default or
Event of Default under the Loan Papers.

17. Miscellaneous. This Amendment is a Loan Paper, and, therefore, this
-------------
Amendment is subject to the applicable provisions of SECTION 11 of the Credit
----------
Agreement, all of which applicable provisions are incorporated herein by
reference the same as if set forth herein verbatim. Except as affected by this
Amendment, the Loan Papers are unchanged and continue in full force and effect.
Borrower and Parent Guarantor each agree that all Loan Papers to which it is a
party remain in full force and effect and continue to evidence its legal, valid,
and binding obligations enforceable in accordance with their terms (as affected
by this Amendment), except as enforceability may be limited by applicable Debtor
Relief Laws and general principles of equity. This Amendment shall be binding
upon and inure to the benefit of each of the undersigned and their respective
successors and permitted assigns.

THE LOAN PAPERS, INCLUDING THIS AMENDMENT, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

18. Counterparts. This Amendment may be executed in more than one
------------
counterpart, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.

-11-

<PAGE>

EXECUTED as of the date first written above.

ELJER MANUFACTURING, INC.,
as Borrower

By:
------------------------------
Name:
----------------------
Title:
---------------------

ELJER INDUSTRIES, INC.,
as Parent Guarantor

By:
------------------------------
Name:
----------------------
Title:
---------------------

NATIONSBANK OF TEXAS, N. A.,
as Administrative Agent, an Agent,
and a Bank

By:
------------------------------
Name:
----------------------
Title:
---------------------

MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as an Agent and a Bank

By:
------------------------------
Name:
----------------------
Title:
---------------------

THE FIRST NATIONAL BANK OF CHICAGO,
as a Bank and as "First Chicago" as defined herein

By:
------------------------------
Name:
----------------------
Title:
---------------------

<PAGE>

ROYAL BANK OF CANADA,
as a Bank

By:
-----------------------------
Name:
---------------------
Title:
--------------------

NATIONAL CITY BANK,
as a Bank

By:
-----------------------------
Name:
---------------------
Title:
--------------------

THE BANK OF TOKYO, LTD.,
NEW YORK AGENCY,
as a Bank

By:
-----------------------------
Name:
---------------------
Title:
--------------------

BAKER NYE, L.P.,
as a Bank

By:
-----------------------------
Name:
---------------------
Title:
--------------------

BAKER NYE INVESTMENTS, L.P.,
as a Bank

By:
-----------------------------
Name:
---------------------
Title:
--------------------

CAMBRIDGE CAPITAL FUND, L.P.,
as a Bank

By:
-----------------------------
Name:
---------------------
Title:
--------------------

<PAGE>

PEARL STREET, L.P.,
as a Bank

By:
-------------------------------
Name:
-----------------------
Title:
----------------------

DK ACQUISITION PARTNERS,
as a Bank

By: M.H. Davidson & Co., a general partner

By:
-------------------------------
Name:
-----------------------
Title:
----------------------

FOOTHILL CAPITAL CORPORATION,
as a Bank

By:
-------------------------------
Name:
-----------------------
Title:
----------------------

THIRD AVENUE VALUE FUND, INC.,
as a Bank

By:
-------------------------------
Name:
-----------------------
Title:
----------------------

CITIBANK, N.A.,
as a Bank

By:
-------------------------------
Name:
-----------------------
Title:
----------------------
<PAGE>

NEW CALCULATION WORKSHEET TO EXHIBIT F
(evidencing compliance with Section 8)

SECTION 8.1: CAPITAL EXPENDITURES

Actual aggregate capital expenditures for
all Related Companies during 12-month
period ending December 31, 19___ $____________

Permitted capital expenditures for all
Related Companies during 12-month period
ending December 31, 19___

Base amount:

a. 1993 -- $12,560,000
b. 1994 -- $15,000,000
c. 1995 -- $10,593,000
d. January 1-April 30, 1996 -- $3,500,000 $___________

Plus, for 1995 only, adjustment equal
to unused amount of 1994 not used for
"high priority" items described in
Section 8.1 of the Credit Agreement $___________

Total permitted capital expenditures $___________

-1-

<PAGE>

SECTION 8.2: MINIMUM ADJUSTED TANGIBLE NET WORTH - PARENT GUARANTOR

Actual Adjusted Tangible Net Worth - Parent Guarantor for fiscal quarter
ending on or about _____________, calculated as follows:

(a) consolidated shareholders' equity $___________

minus (or plus, if such amount is a negative number)

(b) accumulated foreign currency translation adjustments $___________

plus

(d) Delayed Tax Sharing Benefits $___________

minus

(e) goodwill $___________

minus

(f) dividends received from U.S. Brass $___________

minus

(g) compensation earned from U.S. Brass under the
U.S. Brass - EMI Tax Sharing Agreement $___________

plus

(h) amounts expensed (if any) for the Kowin-Simonds Lawsuit $___________

Actual Adjusted Tangible Net Worth - Parent Guarantor $___________

Minimum Adjusted Tangible Net Worth - Parent Guarantor:
Quarter ending on or about:
12/31/93 $ (2,179,000)
3/31/94 $(41,292,000)
6/30/94 $(41,273,000)
9/30/94 $(39,453,000)

-2-

<PAGE>

12/31/94 $(35,921,000)
3/31/95 $(35,024,000)
6/30/95 $(34,260,000)
9/30/95 $(30,225,000)
12/31/95 $(26,085,000) $___________

-3-

<PAGE>

SECTION 8.3: MINIMUM ADJUSTED TANGIBLE NET WORTH - US ONLY

Actual Adjusted Tangible Net Worth - US Only for fiscal quarter ending
on or about _____________, calculated as follows:

(a) consolidated shareholders' equity $__________

minus (or plus, if such amount is a negative number)

(b) accumulated foreign currency translation adjustments $__________

plus

(d) Delayed Tax Sharing Benefits $__________

minus

(e) goodwill $__________

minus

(f) dividends received from U.S. Brass or foreign $__________

Subsidiaries minus

(g) compensation earned from U.S. Brass under the
U.S. Brass - EMI Tax Sharing Agreement $__________

plus

(h) amounts expensed (if any) for the Kowin-Simonds Lawsuit $__________

Actual Adjusted Tangible Net Worth - US Only $__________

Minimum Adjusted Tangible Net Worth - US Only:
Quarter ending on or about:
12/31/93 $( 74,945,000)
3/31/94 $(114,113,000)
6/30/94 $(114,537,000)
9/30/94 $(114,086,000)

-4-

<PAGE>

12/31/94 $(112,439,000)
3/31/95 $(112,084,000)
6/30/95 $(111,822,000)
9/30/95 $(110,014,000)
12/31/95 $(108,015,000) $__________

-5-

<PAGE>

SECTION 8.4: MINIMUM CONSOLIDATED CASH FLOW FROM OPERATING ACTIVITIES - PARENT
GUARANTOR

Actual Consolidated Cash Flow From
Operating Activities for four consecutive fiscal
quarters ending on or about _______________, 19___ $___________________*

Minimum Permitted Consolidated Cash
Flow From Operating Activities:
<TABLE>
<CAPTION>
Fiscal Quarter ending on or about:
<S> <C>
12/31/93 $(12,413,000)
3/31/94 $ 10,000,000
6/30/94 $ 12,000,000
9/30/94 $ 12,000,000
12/31/94 $ 13,500,000
3/31/95 $ 5,000,000
6/30/95 $ (300,000)
9/30/95 $(1,500,000)
12/31/95 $(3,000,000)

$___________________

</TABLE>

* Excluding any compensation earned from U.S. Brass under the U.S. Brass -
EMI Tax Sharing Agreement.

Definition of "Cash Flow From Operating Activities" as stated in the Credit
Agreement:

CASH FLOW FROM OPERATING ACTIVITIES means the line item labelled as such on
the cash flow statement for the applicable Person(s) calculated in
accordance with United States generally accepted accounting principles
(subject to the last sentence of Section 1.2, and excluding any amounts
paid in connection with the Kowin-Simonds Lawsuit).

-6-

<PAGE>

SECTION 8.5: MINIMUM CONSOLIDATED CASH FLOW FROM OPERATING ACTIVITIES - U.S.
ONLY

Actual Consolidated Cash Flow From
Operating Activities for four consecutive fiscal
quarters ending on or about _____________, 19___ $___________________*

Minimum Permitted Consolidated Cash
Flow From Operating Activities:

Fiscal Quarter ending on or about:

12/31/93 $(16,489,000)
3/31/94 $(11,000,000)
6/30/94 $ (9,000,000)
9/30/94 $(13,000,000)
12/31/94 $ 2,500,000
3/31/95 $ (2,000,000)
6/30/95 $ (8,000,000)
9/30/95 $ (7,000,000)
12/31/95 $ (7,000,000)

$___________________

* Excluding any interest income resulting from the Permitted Debt described
in items 7 and 8 on Schedule 5.15 and any compensation earned from U.S.
Brass under the U.S. Brass - EMI Tax Sharing Agreement.

Definition of "Cash Flow From Operating Activities" as stated in the Credit
Agreement:

-7-

<PAGE>

SECTION 8.6: MINIMUM CURRENT RATIO - PARENT GUARANTOR
<TABLE>
<CAPTION>
<S> <C>
A. Consolidated current assets $_______________

B. Income tax receivables (if any) payable
by U.S. Brass to the Borrower under
the U.S. Brass - EMI Tax Sharing Agreement) $_______________

C. Adjusted consolidated current assets (A-B) $_______________

D. Consolidated current liabilities $_______________

E. Current maturities of Restricted Debt $_______________

F. Amounts accrued in connection with
the Kowin-Simonds Lawsuit $_______________

G. Adjusted consolidated current liabilities $_______________
(D-E-F)

H. Ratio of C to G __.__ to 1.00

I. Permitted Ratio 1.60 to 1.00
</TABLE>

-8-

<PAGE>

SECTION 8.7: FIXED CHARGE COVERAGE RATIO - PARENT GUARANTOR

Calculated for the four fiscal quarters ending on or about ____________,
19__:

A. Consolidated net income during such period, before taxes
on income and after excluding any amounts expensed in
connection with the Kowin-Simonds Lawsuit $____________

B. The amount accrued during such period as consolidated
interest expense on borrowed money and capital lease
obligations (including payments on swap contracts),
minus the consolidated interest income for such period
(provided that interest on the two promissory notes
described in items 7 and 8 on Schedule 5.15 shall be
excluded in all respects in determining A and B) $____________

C. The amount accrued during such period as
consolidated payments on operating leases $____________

D. Future EPA Accruals $____________

E. Sum of A, B, C, and D $____________

F. Consolidated amount paid as principal during such
period for borrowed money and capital lease obligations,
excluding optional prepayments of principal and required
prepayments (such as those required under Section 2.5(b)
and (d)) which are not in specified amounts but are in
amounts contingent upon some aspect of cash flows or
receipts or upon the occurrence of some other event) $____________

G. Sum of B, C, and F $____________

H. Ratio of E to G ___:___to 1.00

I. Minimum Permitted Ratio:

Fiscal Quarter Ending On Or About:

12/31/93 0.85
3/31/94 0.60
6/30/94 0.65
9/30/94 0.65
12/31/94 0.65

-9-

<PAGE>

3/31/95 0.75
6/30/95 0.75
9/30/95 0.75
12/31/95 0.75

___.___ to 1.00

-10-

<PAGE>

SECTION 8.8: FIXED CHARGE COVERAGE RATIO - U.S. ONLY

Calculated for the four fiscal quarters ending on or about __________,
19__:

A. Consolidated net income during such period, before taxes
on income and after excluding any amounts expensed in
connection with the Kowin-Simonds Lawsuit $___________

B. The amount accrued during such period as consolidated
interest expense on borrowed money and capital lease
obligations (including payments on swap contracts),
minus the consolidated interest income for such period
(provided that interest on the two promissory notes
described in items 7 and 8 on Schedule 5.15 shall
be excluded in all respects in determining A and B)

C. The amount accrued during such period as
consolidated payments on operating leases $___________

D. Future EPA Accruals $___________

E. Sum of A, B, C, and D $___________

G. Sum of B, C, and F $___________

H. Ratio of E to G ___.___ to 1.00

I. Minimum Permitted Ratio:

Fiscal Quarter Ending On Or About:

12/31/93 0.30
3/31/94 0.35
6/30/94 0.35
9/30/94 0.40
12/31/94 0.40

-11-

<PAGE>

3/31/95 0.45
6/30/95 0.45
9/30/95 0.45
12/31/95 0.45

___.___ to 1.00

-12-

<PAGE>

EXHIBIT 22

SUBSIDIARIES OF ELJER INDUSTRIES, INC.

<TABLE>
<CAPTION>
PERCENTAGE STATE/COUNTRY OF
OWNERSHIP INCORPORATION
---------- ----------------
<S> <C> <C>
Design Plus, Inc.(1)................................ 100% Pennsylvania
Eljer FSC Ltd....................................... 100% Virgin Islands
Eljer Industries Ltd................................ 100% United Kingdom
Eljer Manufacturing Canada, Inc.(1)................. 100% Canada
Eljer Manufacturing, Inc............................ 100% Delaware
Eljer Plumbingware, Inc.(1)......................... 100% Delaware
Glastec, Inc.(1).................................... 100% Delaware
Selkirk Canada U.S.A., Inc.......................... 100% Delaware
Selkirk Europe U.S.A., Inc.......................... 100% Delaware
Selkirk Manufacturing France S.A.R.L.(2)............ 99.95% France
Selkirk Manufacturing Ltd.(1)....................... 100% United Kingdom
Selkirk Schornsteintechnik GmbH(1).................. 100% Germany
Selkirk S.R.L.(1)................................... 100% Italy
Selkirk UK, U.S.A. No. 1, Inc....................... 100% Delaware
Selkirk UK, U.S.A. No. 2, Inc....................... 100% Delaware
Selkirk/Dry, Inc.(1)................................ 100% Delaware
United States Brass Corporation(1).................. 100% Delaware
</TABLE>
- --------
(1) Indirect wholly-owned subsidiary of Eljer Industries, Inc.
(2) 99.95% indirectly owned subsidiary of Eljer Industries, Inc.

<PAGE>

EXHIBIT 24

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (registration nos. 33-29009; 33-31885, as
amended by 33-51525; and 33-51527).

ARTHUR ANDERSEN & CO.

Dallas, Texas,
March 31, 1994