FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 1, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-10181
ELJER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2270874
(State of Incorporation) (I.R.S. Employer I.D. No.)
17120 Dallas Parkway, Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 407-2600
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 _____
At November 10, 1995 there were 7,136,652 shares of registrant's common stock
outstanding.
<PAGE>
ELJER INDUSTRIES, INC.
FORM 10-Q
October 1, 1995
INDEX
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income for the nine
months ended October 1, 1995 and October 2, 1994
Condensed Consolidated Statements of Income for the three
months ended October 1, 1995 and October 2, 1994
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Unaudited Condensed Consolidated Financial Statements
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
ITEM 2--CHANGES IN SECURITIES
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5--OTHER INFORMATION
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
October October
1, 1995 2, 1994
------- --------
<S> <C> <C>
NET SALES $294,223 $ 302,103
COST OF SALES 219,279 218,378
-------- ---------
GROSS PROFIT 74,944 83,725
SELLING & ADMINISTRATIVE EXPENSES 56,098 61,701
LITIGATION AND RELATED COSTS 4,468 5,935
-------- ---------
INCOME FROM OPERATIONS 14,378 16,089
OTHER EXPENSE, net 1,252 1,109
INTEREST INCOME 1,361 1,182
INTEREST EXPENSE 11,467 9,246
-------- ---------
INCOME BEFORE INCOME TAXES 3,020 6,916
INCOME TAX EXPENSE (BENEFIT) 586 (95)
-------- ---------
NET INCOME $ 2,434 $ 7,011
======== =========
NET INCOME PER SHARE $ 0.34 $ 0.99
======== =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,132 7,117
======== =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
October October
1, 1995 2, 1994
------- -------
<S> <C> <C>
NET SALES $102,752 $107,872
COST OF SALES 74,016 75,850
-------- --------
GROSS PROFIT 28,736 32,022
SELLING & ADMINISTRATIVE EXPENSES 17,679 21,376
LITIGATION AND RELATED COSTS 2,217 2,664
-------- --------
INCOME FROM OPERATIONS 8,840 7,982
OTHER EXPENSE, net 321 352
INTEREST INCOME 367 439
INTEREST EXPENSE 3,808 2,847
-------- --------
INCOME BEFORE INCOME TAXES 5,078 5,222
INCOME TAX EXPENSE 556 957
-------- --------
NET INCOME $ 4,522 $ 4,265
======== ========
NET INCOME PER SHARE $ 0.63 $ 0.60
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,137 7,130
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
October January
A S S E T S 1, 1995 1, 1995
- - - - - - -------- -------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash & temporary cash investments $ 7,700 $ 26,109
Restricted cash 17,251 17,266
Trade accounts receivable, net of
reserves of $8,416 and $7,696 77,857 65,332
Inventories 66,747 68,249
Other current assets 4,505 5,603
-------- --------
Total current assets 174,060 182,559
PROPERTIES & EQUIPMENT, net of accumulated
depreciation of $108,193 and $101,328 63,262 59,924
COST IN EXCESS OF NET TANGIBLE ASSETS
ACQUIRED, net 11,016 11,281
OTHER ASSETS 3,205 3,293
-------- --------
$251,543 $257,057
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
October January
LIABILITIES AND SHAREHOLDERS' EQUITY 1, 1995 1, 1995
- ------------------------------------ --------- ---------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt $ 37,998 $ 43,065
Trade accounts payable 17,894 17,705
Prepetition liabilities subject to compromise 29,660 32,868
Accrued expenses 61,715 64,675
--------- ---------
Total current liabilities 147,267 158,313
LONG-TERM DEBT 85,519 83,021
POSTRETIREMENT BENEFITS 39,443 40,353
OTHER LIABILITIES 14,466 14,067
DEFERRED INCOME TAXES 1,052 882
--------- ---------
Total liabilities 287,747 296,636
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par value,
50,000,000 shares authorized;
7,136,652 and 7,129,626 shares outstanding 7,186 7,186
Additional capital 78,965 78,936
Accumulated deficit (117,036) (119,470)
Foreign currency translation adjustments (5,269) (6,174)
Treasury stock (50) (57)
--------- ---------
Total shareholders' deficit (36,204) (39,579)
--------- ---------
$ 251,543 $ 257,057
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
October October
1, 1995 2, 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,434 $ 7,011
Adjustments to reconcile net income to net cash
(used in) provided by operating activities-
Depreciation and amortization 7,047 7,554
Loss on disposition of fixed assets 73 110
Stock issued as compensation 36 273
Changes in assets and liabilities-
Trade accounts receivable (11,999) (19,076)
Inventories 2,108 (1,405)
Trade accounts payable and accrued expenses (5,849) 11,423
Accrued litigation - Kowin Development (149) 2,019
Postretirement benefits (910) 517
Other assets 1,000 899
Other, net (228) 2,113
--------- ---------
Net cash (used in) provided by operating activities (6,437) 11,438
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in properties and equipment (10,256) (8,049)
Proceeds from disposition of properties
and equipment 424 408
--------- ---------
Net cash used in investing activities (9,832) (7,641)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt 793 5,611
Decrease in long-term debt (3,685) (7,020)
Collateralization of letters of credit 201 (1,642)
--------- ---------
Net cash used by financing activities (2,691) (3,051)
--------- ---------
EFFECTS OF EXCHANGE RATES ON CASH 551 201
--------- ---------
NET (DECREASE) INCREASE IN CASH & TEMPORARY
CASH INVESTMENTS (18,409) 947
CASH & TEMPORARY CASH INVESTMENTS,
BEGINNING OF PERIOD 26,109 23,439
--------- ---------
CASH & TEMPORARY CASH INVESTMENTS, $ 7,700 $ 24,386
END OF PERIOD ========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ELJER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
Eljer Industries, Inc. ("Eljer Industries") and its wholly-owned subsidiaries
(collectively, the "Company") after the elimination of intercompany transactions
and balances.
Accounting policies used in the preparation of the quarterly condensed
consolidated financial statements are consistent in all material respects with
the accounting policies described in the notes to financial statements appearing
in the Company's Annual Report on Form 10-K for the year ended January 1, 1995,
as filed with the Securities and Exchange Commission (the "Company's 1994 Form
10-K"). In the opinion of management, the interim financial statements reflect
all adjustments which are necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the interim periods
presented. The results for such interim periods are not necessarily indicative
of results for the full year. These financial statements should be read in
conjunction with the consolidated financial statements and the accompanying
notes to consolidated financial statements included in the Company's 1994 Form
10-K.
(2) BANKRUPTCY OF UNITED STATES BRASS CORPORATION:
As previously reported, on May 23, 1994, (the "Petition Date") Eljer
Industries' indirect, wholly-owned subsidiary, United States Brass Corporation
("U.S. Brass") filed a voluntary petition for reorganization under Chapter 11 of
the Federal Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Eastern District of Texas (the "Bankruptcy Court"). The
purpose of the filing is to resolve systematically the issues resulting from the
Qest polybutylene plumbing systems (the "Qest system") and related litigation
and to seek confirmation of a plan of reorganization ("Plan") which, among other
things, provides for the payment, satisfaction and discharge of all claims
against U.S. Brass involving the Qest system. U.S. Brass is conducting its
business and managing its properties as a debtor-in-possession under Section
1108 of the Bankruptcy Code subject to the supervision and orders of the
Bankruptcy Court. See the Company's 1994 Form 10-K for a discussion of the U.S.
Brass bankruptcy, including discussion of the Qest system litigation, related
insurance coverage, claims filed in the U.S. Brass bankruptcy proceeding and
claims against the Company.
As previously disclosed, U.S. Brass, Eljer Manufacturing, Inc. ("Eljer
Manufacturing") and Eljer Industries currently have filed with the Bankruptcy
Court an Amended Plan of Reorganization (the "Amended Brass Plan") and an
Amended Disclosure Statement (the "Amended Brass Disclosure Statement"). The
Amended Brass Plan contains proposed settlements with Eljer Industries, Eljer
Manufacturing and Shell Chemical Company, a subsidiary of Shell Oil Company
("Shell Oil"). A hearing on objections filed by various parties to the Amended
Brass Disclosure Statement was held on August 22, 1995. The Bankruptcy Court has
given no indication of when it will rule on the objections.
As previously reported, on April 7, 1995, the Official Polybutylene
Claimants Committee (the "PB Committee") in the U.S. Brass Bankruptcy filed a
proposed plan of reorganization and proposed disclosure statement (the "PB
Committee Disclosure Statement"). On June 20, 1995, a hearing was held on the PB
Committee Disclosure Statement during which the Bankruptcy Court heard
objections previously filed by various parties, including U.S. Brass, Eljer
Manufacturing and Eljer Industries, to the PB Committee Disclosure Statement.
The Bankruptcy Court has given no indication of when it will rule on the
objections.
<PAGE>
Two national class actions dealing with polybutylene plumbing systems
have been certified by state courts in Tennessee [Tina Cox et al. v. Shell Oil
Company et al., No. 18-844 (Chancery Court for Obion County at Union City,
Tennessee, filed June 13, 1995)], and Alabama [Garria Spencer, et al. v. Shell
Oil Company, et al. No. CV94-074 (Circuit Court of Greene County, Alabama, filed
November 16, 1994)]. In connection with the actions in Cox and Spencer and a
third proposed national class action pending in California state court [Helen
Meers, et al. v. Shell Oil Company, et al. No. M 30590 (Superior Court of the
State of California for the County of Monterey)], a global settlement conference
was convened involving parties to the three state court proceedings. Eljer
Industries and Eljer Manufacturing, defendants in Meers and third party
defendants in Spencer, participated in the settlement conference. As a result of
that settlement conference, Shell Oil, Hoechst Celanese Corporation ("Hoechst
Celanese") and the class counsel in Cox and Spencer entered into a settlement
agreement (the "Cox-Spencer Agreement"), whereby Shell Oil and Hoechst Celanese
will pay $950 million in settlement of polybutylene claims of class members. On
November 9, 1995, the Tennessee court in Cox approved the settlement. Once the
settlement in Cox is final and non-appealable, the Cox-Spencer Agreement
contemplates that class counsel in Spencer will dismiss all of their claims
against Hoechst Celanese and Shell Oil.
In connection with the Cox-Spencer Agreement, Eljer Industries, Eljer
Manufacturing and U.S. Brass have entered into a tentative settlement which is
contingent upon confirming a plan of reorganization in the U.S. Brass bankruptcy
embodying the terms of the tentative settlement and finalization of an agreement
with the parties to the Cox-Spencer Agreement. The tentative settlement provides
that Eljer Manufacturing and U.S. Brass will contribute an amount equal to any
proceeds of their insurance policies; the Company will contribute 75 percent of
the net proceeds of the Household International, Inc. ("Household") litigation
(subject to approval of the Company's bank group); $3 million in cash; a
non-interest bearing note for $20 million payable over 10 years; and 17.5
percent of the equity of Eljer Industries in exchange for which Eljer
Industries, Eljer Manufacturing and U.S. Brass will receive complete relief from
claims arising from polybutylene sales to date and U.S. Brass will remain an
indirect, wholly-owned subsidiary of Eljer Industries. Following an expected
finalization of an agreement with the parties to the Cox-Spencer Agreement, it
is anticipated that a third amended plan of reorganization containing the terms
of the tentative settlement will be filed by the Company in the U.S. Brass
bankruptcy. However, the timing or likelihood of approval of such an amended
plan of reorganization can not be predicted. The Company believes it has
previously made adequate reserves for the terms of this settlement based on the
current market price of the Company's stock. Until a third amended plan of
reorganization is filed, the Amended Brass Plan discussed above, remains pending
with the Bankruptcy Court.
As previously reported, on June 20, 1995, Hoechst Celanese filed a
motion to convert the Chapter 11 reorganization case of U.S. Brass to a Chapter
7 liquidation. On October 24, 1995, Hoechst Celanese withdrew its motion.
Under the Bankruptcy Code, claims against U.S. Brass that were or could
have been commenced prior to the Petition Date are stayed while U.S. Brass
continues business operations as a debtor-in-possession. Certain of these claims
are reflected as Prepetition liabilities subject to compromise on the Condensed
Consolidated Balance Sheets. Additional claims (liabilities subject to
compromise) may arise subsequent to the Petition Date resulting from rejection
of executory contracts or unexpired leases, and from the determination by the
Bankruptcy Court, or from the agreement of parties in interest, to allow claims
for contingencies and other disputed amounts. U.S. Brass will continue to
evaluate the claims filed in the bankruptcy proceeding and may make adjustments
in Prepetition liabilities subject to compromise. U.S. Brass received approval
from the Bankruptcy Court to pay or otherwise honor certain of its prepetition
obligations, including its secured working capital facility, employee wages,
commissions, sales incentive programs, existing product warranties and
outstanding checks. U.S. Brass participates in various intercompany transactions
with its parent, Eljer Manufacturing and an affiliated Canadian company and, at
October 1, 1995, U.S. Brass had a net affiliate receivable of approximately
$2.1 million.
<PAGE>
As previously reported, as a result of the uncertainties related to the
availability of insurance coverage and the ultimate outcome of the bankruptcy
proceeding, U.S. Brass recorded a charge against earnings in 1994 which reduced
its net book value to zero. U.S. Brass intends to adjust its litigation reserves
during the course of the bankruptcy in order to maintain an equity balance of
zero. Accordingly, for the three-month and nine-month periods ended October 1,
1995, U.S. Brass litigation expenses were reduced by approximately $202,000 and
$2.4 million, respectively, through a reduction in the litigation reserves.
Selected financial data for U.S. Brass are as follows (in thousands):
<TABLE>
<CAPTION>
For the Nine Months Ended
October October
1, 1995 2, 1994
------- -------
<S> <C> <C>
Net Sales to Nonaffiliate Customers ............ $ 59,212 $ 62,792
Sales to Affiliates ............................ 14,321 12,406
Reorganization Expenses ........................ 2,600 1,576
Income from Operations ......................... 1,101 2,630
Income Before Income Taxes ..................... -- 1,693
Net Income ..................................... -- 970
Cash Used in Operating Activities .............. (1,836) (3,330)
Cash Used in Investing Activities .............. (1,133) (1,725)
Cash Provided by Financing Activities .......... 3,292 5,081
Total Cash Flow ................................ 323 26
</TABLE>
<TABLE>
<CAPTION>
As of October As of January
1, 1995 1, 1995
------- -------
<S> <C> <C>
Total Current Assets ......................... $36,045 $35,966
Total Assets ................................. 52,594 52,725
Total Liabilities ............................ 52,594 52,725
Total Shareholders' Equity ................... -- --
</TABLE>
Cash payments of reorganization expenses made during the nine months ended
October 1, 1995, were approximately $1.4 million.
<PAGE>
(3) INVENTORIES:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
October January
1, 1995 1, 1995
-------- --------
<S> <C> <C>
Finished goods $ 34,941 $ 35,105
Work in process 10,261 9,617
Raw materials 21,545 23,527
-------- --------
Total inventories $ 66,747 $ 68,249
======== ========
</TABLE>
(4) LIQUIDITY AND CAPITAL RESOURCES:
In August 1995, the Company amended its U.S. term debt agreement to
extend the maturity date to January 31, 1997. Under the terms of the amendment,
a $3.0 million principal repayment was made in August 1995 in addition to a
$200,000 extension fee. Scheduled principal payments under the terms of the
amendment are $2.0 million in January 1996, $3.0 million in August 1996, and
$3.0 million in December 1996, with the remaining balance of $67.5 million due
at the January 31, 1997 maturity date. The $3.0 million December 1996 principal
payment may be accelerated to April 1996 if certain conditions related to the
U.S. Brass bankruptcy proceeding are not met.
(5) PENSION PLAN AMENDMENTS:
During the third quarter of 1995, the Company redesigned and amended
certain of its pension plans. Accordingly, the Company recorded a curtailment
gain of $2.7 million in income from operations. The amendments reflect a change
in the Company's approach towards employee retirement plans which includes
providing increased benefits under its 401(k) plan in lieu of certain of its
pension plans.
(6) CONTINGENCIES:
Relationship with Household
In the proceedings against Household, on July 26, 1995, the Superior
Court in and for New Castle County, Delaware heard arguments on Household's
motions for complete and partial summary judgment in the litigation between
Household, the Company and Eljer Manufacturing. On October 16, 1995, the
Superior Court denied all of Household's motions, except one claim which the
Company elected not to pursue. On November 1, 1995, the Superior Court extended
the period for discovery through the end of March 1996, with a trial date to
follow.
Kowin Development Company and Related Litigation
As reported in the Company's 1994 Form 10-K, on October 24, 1994,
Winston and Dorothy Ko, owners of Kowin Development Company and Croft
Investments, Ltd., filed a complaint in the Circuit Court of Cook County,
Illinois seeking individual damages of approximately $24 million from the
Company, Eljer Manufacturing and certain individual defendants flowing out of a
failed joint venture in the Peoples Republic of China. The defendants filed a
motion to dismiss which was granted by order entered on August 1, 1995. The
Circuit Court concluded that the action brought by the Kos was time barred. The
Kos have given notice that they intend to appeal the ruling.
<PAGE>
Environmental Matters
Proposition 65. As previously disclosed, the Company, Eljer
Manufacturing, U.S. Brass and approximately 15 other manufacturers and sellers
of residential and commercial brass faucets are defendants in two lawsuits; one
brought by the Attorney General of the State of California and the other by
Natural Resources Defense Council ("NRDC") and the Environmental Law Foundation
("ELF"); both alleging violations of California's Safe Drinking Water and Toxic
Enforcement Act of 1986 ("Proposition 65"). Settlements were reached wherein
Eljer Manufacturing agreed to pay $30,000 to the NRDC and ELF and U.S. Brass
agreed to allow the Attorney General a general, unsecured $30,000 claim in the
U.S. Brass bankruptcy. Both settlements call for the dismissal of Eljer
Industries as a named defendant. Also, over the course of the next four years
Eljer Manufacturing and U.S. Brass will phase out the sale in California of
leaded, brass faucets that exceed specified NSF ("National Sanitation
Foundation") standards, and, in the interim, warning tags will be placed on
faucets that exceed the specified NSF protocol. Under the proposed settlements,
neither Eljer Manufacturing nor U.S. Brass has any affirmative obligation to
market alternative brass faucets.
On October 6, 1995, a motion to approve settlement in the Attorney
General's case was granted and a Consent Judgment documenting the settlement
terms was entered by the court. Defendants who did not participate in, and who
objected to the settlement, have requested that the court reconsider entry of
the Consent Judgment. A hearing on that request is scheduled to take place in
November 1995.
On October 24, 1995, NRDC and ELF dismissed their lawsuit against
Eljer Manufacturing and U.S. Brass.
Marysville, Ohio Facility. As previously disclosed, the Ohio Attorney
General threatened commencement of a lawsuit for the Company's failure to renew
financial assurance obligations for the Marysville site under Ohio law. On July
7, 1995, the Company was informed that the Ohio Attorney General intended to
assess a $2.5 million civil penalty for alleged past financial assurance
violations for the Marysville site. On October 5, 1995, the Company agreed to
pay a cash penalty of $750,000, with an additional fine of $500,000 to be
suspended pending completion of closure activities at the Marysville site in
accordance with a closure plan approved by the Ohio Environmental Protection
Agency. The settlement also requires the Company to begin funding an $8.5
million trust account over the next 12 months which would be used to pay for the
clean-up at the Marysville site in order to meet the financial assurance
requirements. The Company believes it has adequate reserves established to
provide for the cash penalty and sufficient cash flow and debt availability to
fund the trust account.
Salem, Ohio Facility. On April 11, 1995, the Ohio Attorney General
initiated an enforcement action against Eljer Manufacturing's Salem, Ohio
facility for air emissions violations that allegedly occurred in 1989 and 1990.
The Ohio Attorney General threatened to pursue litigation against Eljer
Manufacturing to impose a permanent injunction that three identified sources of
emissions would remain in compliance with the Ohio Administrative Code, and to
recover civil penalties for past emission violations. In October 1995, Eljer
Manufacturing negotiated a settlement with the Ohio Attorney General for the
alleged air emission violations. The settlement calls for the payment of a
$75,000 cash penalty and entry of a consent decree which requires the Salem,
Ohio facility to maintain compliance over the next two years.
<PAGE>
Other Matters
As previously disclosed, the Consumer Product Safety Commission
("CPSC") has been conducting an investigation under Section 15 of the Consumer
Product Safety Act (the "Act") as to whether certain horizontal vent pipes
including a vent pipe manufactured by Chevron Chemical Company's Plexco
Performance Pipe division ("Plexco") pose a substantial product hazard under the
Act. The vent pipes are used to exhaust combustion gases from mid-and
high-efficiency small water boilers and central heating furnaces. Eljer's
Manufacturing's Selkirk Metalbestos division ("Selkirk") distributed Plexco
product from mid-1990 until the end of 1993. Selkirk began manufacturing and
selling its own vent pipe product in January 1994. The CPSC is expected to
announce the results of its investigation and recommendations shortly. By law,
the CPSC may direct repair, replacement or refund of any product that it
believes poses a substantial product hazard. In Canada, certain provincial
authorities have refused to continue gas service to any building containing
these vent pipes. Selkirk believes that its product is superior to the Plexco
product and has received no reports of product defects or failures. Therefore,
no accrual has been made for this contingency.
The Company and certain of its subsidiaries are involved in litigation
related to the Qest system, environmental matters, and other matters which, if
determined adversely to the Company, may have a material adverse effect on its
financial condition or results of operations. Reference is made to Note (2)
"Bankruptcy of United States Brass Corporation", Note (13) "Contingencies" and
Note (14) "Relationship with Household" to the Consolidated Financial Statements
in the Company's 1994 Form 10-K, which is incorporated herein, for additional
discussion of contingencies and legal matters involving the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales decreased by approximately $7.9 million for the nine-month
period ended October 1, 1995, compared to the nine-month period ended October 2,
1994, a 2.6% decrease. Net sales decreased by approximately $5.1 million, or
4.7%, to $102.8 million for the three-month period ended October 1, 1995,
compared to the same period in 1994. The sales declines were due primarily to a
weaker North American housing market as housing starts have declined
approximately 8% in 1995 from 1994. European operations achieved increased sales
of $3.2 million, or 6.9%, for the nine-month period ended October 1, 1995,
compared to the same period in 1994, substantially as a result of favorable
exchange rates, which partially offset the North American sales decreases.
Gross profit margin decreased to 25.5% for the nine-month period ended
October 1, 1995, from 27.7% for the comparable 1994 period. Gross margin
decreased to 28.0% for the three-month period ended October 1, 1995, from 29.7%
for the comparable 1994 period. The reduction in margin was attributable to
continued significant increases, both in North America and Europe, in the cost
of raw materials, including brass, aluminum, stainless steel, copper and
polybutylene resin. The Company has implemented price increases on all product
lines containing these raw materials during the first half of 1995. While the
price increases have not yet impacted the margin comparisons year to year, the
margin earned for the third quarter of 1995 did improve from the 24.7% reported
in the 1995 second quarter. During the third quarter of 1995, the gross profit
margin was also favorably impacted by a curtailment gain due to a redesign and
amendment of certain of the Company's pension plans covering both hourly and
salaried employees. The amendments reflect a change in the Company's approach
toward employee retirement plans which includes providing increased benefits
under its 401(k) plan in lieu of certain of its pension plans. The total
curtailment gains impact on income from operations, including a portion
applicable to selling and administrative expenses, was $2.7 million.
<PAGE>
Total selling and administrative expenses through October 1, 1995, were
approximately $5.6 million and $3.7 million lower, respectively, for the
nine-month and three-month periods then ended compared to the 1994 periods. In
addition to the pension curtailment gain, advertising expenses have been
significantly reduced and the Company's European operations have lowered costs
as a result of the successful completion of the reengineering efforts in the
latter part of 1994.
As previously reported, as a result of the uncertainties related to the
availability of insurance coverage and the ultimate outcome of the bankruptcy
proceeding, U.S. Brass recorded a charge against earnings in 1994 which reduced
its net book value to zero. U.S. Brass intends on adjusting its litigation
reserves during the course of the bankruptcy in order to maintain an equity
balance of zero. Accordingly, U.S. Brass litigation expense was reduced by
approximately $2.4 million and $202,000, respectively, for the nine-month and
three-month period ended October 1, 1995, through a reduction of certain U.S.
Brass litigation reserves. Total litigation and related costs of $6.9 million
were reduced by this $2.4 million adjustment, resulting in net litigation and
related costs of $4.5 million in the first nine months of 1995 compared to $5.9
million in the first nine months of 1994. The increase in total litigation costs
is primarily a result of the increased legal costs associated with the U.S.
Brass bankruptcy proceeding. See Note (2) "Bankruptcy of United States Brass
Corporation" to the Condensed Consolidated Financial Statements in Part I, Item
1 for additional discussion.
Interest expense increased approximately $2.2 million and $1.0 million
for the first nine months and third quarter of 1995, respectively, over the same
periods in 1994. This is due primarily to scheduled rate increases on debt and
an amendment to the U.S. term debt agreement effected in late 1994 to improve
liquidity and higher prime interest rates over the same period in 1994. The
increase in the year-to-date expenses was offset partially by the expiration of
an unfavorable interest rate swap agreement in April 1994, which added interest
expense of $1.3 million to the first half of 1994.
Income tax expense increased to $586,000 for the first nine months of
1995 from a benefit of $95,000 for the same period in 1994. The tax benefit in
1994 was due to European and Canadian pretax losses in the first nine months of
1994, and the Company's ability to utilize deferred tax benefits in the United
States.
Liquidity and Capital Resources
The net cash used in operating activities of $6.4 million for the nine
months ended October 1, 1995, was $17.8 million more than the net cash flow from
operating activities for the comparable 1994 period. Net income declined $4.6
million for the first nine months of 1995 compared to 1994. Receivables
increased during the first nine months of 1995 and 1994 reflecting the increased
quarterly sales and the seasonal pattern typical of the Company's operations.
Also, cash flow from operations in 1994 was favorably impacted by the timing of
payments to vendors. In addition, the cash usage in the 1995 and 1994 periods
included payments previously accrued of approximately $9.5 million and $5.9
million, respectively, to customers under purchase incentive programs. The 1994
period included a $2.0 million reimbursement of amounts previously paid in
connection with the Kowin Development Company litigation.
Capital expenditures for the first nine months of 1995 were $10.3
million and included payments related to a new state-of-the-art kiln and dryers
at the Company's Tupelo, Mississippi, chinaware plant, enameling robots at the
Company's Salem, Ohio, cast iron plant, and new welded dual wall chimney
manufacturing equipment at the Company's United Kingdom plant.
<PAGE>
Overall, cash and temporary cash investments decreased $18.4 million
during the first nine months of 1995. The decrease in cash and temporary cash
investments is primarily a seasonal decline due to the success of the annual
extended terms program, which allows customers to make purchases in the first
half of the year and defer payment until early in the fourth quarter, and normal
cash payments occurring in the first half of the year that do not repeat in the
second half of the year. Further, the Company continues to maintain
approximately $25 million of borrowing availability for its liquidity needs.
Eljer Manufacturing had term debt of $75.5 million outstanding at
October 1, 1995. In August 1995, the Company amended its U.S. term debt
agreement to extend the maturity date to January 31, 1997. Under the terms of
the amendment, a $3.0 million principal repayment was made in August 1995 in
addition to a $200,000 extension fee. Scheduled principal payments are $2.0
million in January 1996, $3.0 million in August 1996 and $3.0 million in
December 1996, with the balance of $67.5 million becoming due at the January 31,
1997 maturity date. The $3.0 million December 1996 principal payment may be
accelerated to April 1996 if certain conditions related to the U.S. Brass
bankruptcy proceeding are not met.
As previously reported in the Company's 1994 Form 10-K, after March 31,
1992, the Company was unable to demonstrate financial responsibility for
closure, post-closure and third party liability with respect to its Salem, Ohio,
facility and its Marysville, Ohio, site. On September 30, 1994, the U.S.
Department of Justice ("DOJ") proposed payment related to the Salem site of a
cash penalty of $175,000 with an additional fine of $912,000 to be held in
abeyance pending completion of the site closure activities. The deferred amount
would then be waived if the Company continues to comply with the financial
responsibility requirements of the December 1990 consent decree. On October 19,
1994, the Company accepted the DOJ offer and is currently awaiting approval and
entry of the modified consent decree by the court. The Company believes it
currently meets its financial responsibility requirements regarding the Salem
site although the Ohio Environmental Protection Agency ("Ohio EPA") has asserted
that the Company has not posted sufficient collateral to cover the cost of
post-closure care. The Company disputes the Ohio EPA's contention and has
entered into discussions to resolve this issue.
In addition, as previously disclosed, the Ohio Attorney General
threatened commencement of a lawsuit for the Company's failure to renew
financial assurance obligations for the Marysville site under Ohio law. On July
7, 1995, the Company was informed that the Ohio Attorney General intended to
assess a $2.5 million civil penalty for alleged past financial assurance
violations for the Marysville site. On October 5, 1995, the Company agreed to
pay a cash penalty of $750,000, with an additional fine of $500,000 to be
suspended pending completion of closure activities at the Marysville site in
accordance with a closure plan approved by the Ohio Environmental Protection
Agency. The settlement also requires the Company to begin funding an $8.5
million trust account over the next 12 months which would be used to pay for the
clean-up at the Marysville site in order to meet the financial assurance
requirements. The Company believes it has adequate reserves established to
provide for the cash penalty and sufficient cash flow and debt availability to
fund the trust account.
As previously reported, U.S. Brass filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
The purpose of the filing is to resolve systematically the issues resulting from
the Qest system and related litigation and to seek confirmation of a Plan which,
among other things, will provide for the payment, satisfaction and discharge of
all claims against U.S. Brass involving the Qest system. There have been two
proposed Plans filed with the Bankruptcy Court, which are discussed more fully
in Note (2) "Bankruptcy of United States Brass Corporation" to the Condensed
Consolidated Financial Statements in Part I, Item 1. As announced on November 9,
1995, U.S. Brass, Eljer Industries, and Eljer Manufacturing have tentatively
agreed to participate in a global polybutylene settlement related to the two
certified national class actions dealing with polybutylene claims. As part of
the settlement, Shell Oil and Hoechst Celanese, who were suppliers of the resins
used in the manufacture of the polybutylene plumbing systems, have agreed to
make up to $950 million available to repair such systems. The settlement was
approved on November 9, 1995, by the Chancery Court for Obion County at Union
City, Tennessee, the court hearing one of two national class actions dealing
with polybutylene plumbing systems.
<PAGE>
The settlement is conditioned on the confirmation of a plan of
reorganization in the U.S. Brass bankruptcy proceeding and finalization of an
agreement with the parties to the global polybutylene settlement. Under the
terms of its proposed agreement, the Company will contribute an amount equal to
the proceeds it receives from certain insurance coverage; 75 percent of the net
proceeds, if any, resulting from the litigation with its former parent,
Household (see Note (6) "Contingencies" for further discussion); $3.0 million in
cash; a non-interest bearing note for $20.0 million payable over 10 years; and
17.5 percent of the equity of Eljer Industries. In addition, U.S. Brass will
continue to be an indirect, wholly-owned subsidiary of Eljer Industries.
Following an expected finalization of an agreement with the parties in the
global polybutylene settlement, a third amended plan of reorganization
containing the terms of the tentative agreement will be filed with the
Bankruptcy Court. However, the timing or likelihood of approval of such an
amended plan cannot be predicted. The Company believes it has previously made
adequate reserves for the terms of this agreement based on the current market
price of the Company's stock.
No assurances can be given that the proposed agreement will be
finalized and a related plan of reorganization be confirmed and agreed to by the
Bankruptcy Court and U.S. Brass creditors. As a result, no assurances can be
given that the reorganization of U.S. Brass will successfully be concluded or,
if it is concluded, what the effects to U.S. Brass, Eljer Industries and Eljer
Manufacturing would be. If the proposed agreement is not finalized, the ultimate
resolution of the U.S. Brass bankruptcy could involve the Company losing its
control over U.S. Brass. The possibility also exists that settlement of claims
against the Company, as previously discussed in the Company's 1994 Form 10-K,
could, among other things, result in a change in the Company's equity structure.
Until these matters are further resolved, they continue to create a substantial
doubt about the Company's ability to continue as a going concern in its present
consolidated form.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
See Note (2) "Bankruptcy of United States Brass Corporation" to the
Condensed Consolidated Financial Statements in Part I, Item 1 of this report and
Note (2) "Bankruptcy of United States Brass Corporation", Note (13)
"Contingencies" and Note (14) "Relationship with Household" to the Consolidated
Financial Statements in the Company's 1994 Form 10-K, which are made a part
hereof by this reference.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
10 Amendment No. 1 to the Salaried Pension Plan
of Eljer Manufacturing, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES:
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ELJER INDUSTRIES, INC.
Date: November 15, 1995 By:/s/Brooks F. Sherman
------------------------- --------------------
Brooks F. Sherman
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
AMENDMENT NO. 1
TO THE
SALARIED PENSION PLAN OF
ELJER MANUFACTURING, INC.
Pursuant to Section 10.01 of the Salaried Pension Plan of Eljer
Manufacturing, Inc., as amended and restated effective as of April 1, 1989 (the
"Plan"), this Amendment No. 1 to the Plan is adopted, effective as set forth
herein, by Eljer Manufacturing, Inc. (the "Company").
W I T N E S S E T H :
WHEREAS, the Company desires to amend the Plan for the purposes of
freezing participation under the Plan effective December 31, 1995 and freezing
the accrual of benefits under the Plan as provided herein effective December 31,
1995;
NOW, THEREFORE, the Plan is amended in the following respects:
1.
Section 1.04, defining "Average Final Compensation," is amended by adding the
following new sentence at the end of said Section:
Notwithstanding anything in the Plan to the contrary, a Member's
Average Final Compensation shall be frozen on December 31, 1995 and all
Compensation paid to the Member after December 31, 1995 shall be disregarded in
determining the Member's Average Final Compensation.
2.
Section 1.12, defining "Compensation," is amended by adding the following new
paragraph at the end of said Section:
Notwithstanding anything in the Plan to the contrary, an
Employee's Compensation shall be frozen on December 31, 1995, and all amounts
paid to the Employee after December 31, 1995 shall be disregarded in determining
the Employee's Compensation.
1
<PAGE>
3.
Section 1.13, defining "Covered Compensation," is amended by adding the
following new sentence at the end of said Section:
Notwithstanding anything in the Plan to the contrary, a Member's
Covered Compensation shall be frozen on December 31, 1995.
4.
Section 1.14, defining "Credited Service," is amended by adding the following
new sentence at the end of said Section:
Notwithstanding anything in the Plan to the contrary:
(a) With respect to a Member who is less than 50 years of age
on December 31, 1995, the Member's Credited Service shall be frozen on December
31, 1995, and all service for periods after December 31, 1995 shall be
disregarded in determining the Member's Credited Service; and
(b) With respect to a Member who is 50 years of age or older
on December 31, 1995, the Member's Credited Service shall not be frozen and all
service shall be considered in determining the Member's Credited Service in
accordance with Section 3.02.
5.
Section 1.25, defining "Final Average Compensation," is amended by adding the
following new sentence at the end of said Section:
Notwithstanding anything in the Plan to the contrary, a Member's Final
Average Compensation shall be frozen on December 31, 1995, and all Compensation
paid to the Member after December 31, 1995 shall be disregarded in determining
the Member's Final Average Compensation.
2
<PAGE>
6.
Article II of the Plan is amended by adding the following new Section 2.04:
Section 2.04. No New Members. Notwithstanding
anything in the Plan to the contrary, no new Members shall
be admitted to the Plan after December 31, 1995.
7.
This Amendment No. 1 to the Plan is effective December 31, 1995.
IN WITNESS WHEREOF, Eljer Manufacturing, Inc. has adopted this
Amendment No. 1 to the Salaried Pension Plan of Eljer
Manufacturing, Inc. this 29 day of September, 1995.
ELJER MANUFACTURING, INC.
By:/s/ Brooks F. Sherman
---------------------
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 1, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> OCT-01-1995
<CASH> 7,700
<SECURITIES> 0
<RECEIVABLES> 86,273
<ALLOWANCES> 8,416
<INVENTORY> 66,747
<CURRENT-ASSETS> 174,060
<PP&E> 171,455
<DEPRECIATION> 108,193
<TOTAL-ASSETS> 251,543
<CURRENT-LIABILITIES> 147,267
<BONDS> 85,519
<COMMON> 7,186
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0
<OTHER-SE> (43,390)
<TOTAL-LIABILITY-AND-EQUITY> 251,543
<SALES> 294,223
<TOTAL-REVENUES> 294,223
<CGS> 219,279
<TOTAL-COSTS> 219,279
<OTHER-EXPENSES> 60,566
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<INTEREST-EXPENSE> 10,106
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