ELJER INDUSTRIES INC, 10-K405, 1995-03-29

ELJER INDUSTRIES INC
10-K405, 1995-03-29
HEATING EQUIP, EXCEPT ELEC & WARM AIR; & PLUMBING FIXTURES

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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 1, 1995

[_] 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
incorporation or organization) Identification No.)

17120 DALLAS PARKWAY
DALLAS, TEXAS 75248
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (214) 407-2600

Securities registered pursuant to Section 12(b) of the Act:
None
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. X
-----

As of March 24, 1995, there were outstanding 7,129,626 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 24,
1995) was approximately $42,778,000.

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 20, 1995, which will be filed with the Securities and
Exchange Commission not later than 120 days after January 1, 1995.

<PAGE>

ITEM 1. BUSINESS

BACKGROUND

GENERAL

Eljer Industries, Inc. through its subsidiaries ("Eljer Industries" or,
together with its subsidiaries, the "Company") is a leading manufacturer of high
quality building products for residential construction, commercial construction
and repair and remodeling 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, the
Company is a leading manufacturer of prefabricated chimneys and venting systems.
During fiscal years 1994, 1993 and 1992, revenues from sales of plumbing
products comprised approximately 64%, 59% and 54%, respectively, of the
Company's net sales, with the balance derived from the sale of HVAC products.

o NORTH AMERICAN OPERATIONS

Eljer Plumbingware, a division of Eljer Manufacturing, Inc. ("Eljer
Manufacturing"), a wholly-owned subsidiary of Eljer Industries, 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"), a wholly-owned subsidiary of Eljer Manufacturing.

U.S. Brass manufactures and markets a full range of faucets, plumbing
supplies, connectors and polybutylene plumbing systems in the United States. On
May 23, 1994, 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"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 and Note 2 to the Consolidated Financial
Statements in Item 8 for discussion.

Selkirk and Dry, each divisions of Eljer Manufacturing, manufacture and
market HVAC products, including registers, grilles, venting systems,
prefabricated chimneys, air diffusers and fireplaces. Combined, Selkirk and Dry,
along with a Selkirk subsidiary in Canada ("Selkirk/Dry"), are a market leader
for registers, grilles and venting systems in North America.

In February 1995, the Company formed Industrias Eljer de Mexico, S.A.
de C.V., ("Eljer de Mexico") under the laws of Mexico. Eljer de Mexico is 99%
owned by Eljer Manufacturing and 1% owned by Selkirk Canada U.S.A., Inc., a
wholly-owned subsidiary of Eljer Industries. It is expected that Eljer de Mexico
will engage in certain assembly and packaging operations on behalf of the
Company in Ojinaga, Chihuahua, Mexico, although it has not commenced any
operations.

o EUROPEAN OPERATIONS

The Company has European subsidiaries operating primarily in Germany
and the United Kingdom ("Selkirk Europe"). 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 these products in Europe, and also sells its 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
considered by the Company to be particularly well suited for "fast track"
construction, which is used in Europe.

<PAGE>

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
the 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. Under
Household's ownership, various Eljer businesses operated as subsidiaries or as
divisions of subsidiaries of Household. On April 14, 1989, all the outstanding
shares of common stock of Eljer Industries were distributed to holders of
Household common stock (the "spin-off").

DESCRIPTION OF BUSINESS

PRODUCTS

Plumbing Fixtures. Eljer Plumbingware manufactures and markets enameled
cast iron and vitreous china plumbing fixtures, including toilets, lavatories,
sinks and bathtubs for residential and commercial applications. 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 and colors in response to changing style trends
and develops new products. Eljer Plumbingware has been a leader in developing
and manufacturing low water consumption 1.6 gallon toilets, which are
statutorily mandated throughout the United States. Eljer Plumbingware offers a
broad line of such products.

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.

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 ranging from competitively priced bathroom faucets
to high-end luxury models (Valley Plus). The Valley products also include
kitchen faucets, such as a pull-out spray model. Eljer Plumbingware markets,
under the Eljer trademark, faucets manufactured by U.S. Brass that complement
its fixture line. U.S. Brass also manufactures several private label faucets for
large retailers. 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. Polybutylene plumbing systems using acetal fittings (the "Qest
system"), manufactured and sold for residential site-built installations from
1979 through 1986 and for other installations from about 1975 through 1990, have
been the subject of litigation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7, and Notes 2 and 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 North America and in 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.

<PAGE>

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
Sel-Aire trademarks and in Canada under the Lloydaire trademark. They are also
sold in 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. Sales through retail channels accounted for
approximately 37% of net plumbing sales in 1994.

The Company markets, through agents and direct salesmen, 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 fluctuations in
remodeling and repair activities. The housing market is cyclical and is affected
by, among other things, interest rates, consumer confidence and the availability
of mortgage loans. The repair and remodeling markets are less cyclical,
providing a different source of demand for plumbing products and reducing the
Company's reliance on new home construction. Both housing starts and the repair
and remodeling market experienced increases in 1994, although many published
forecasts indicate a softening of housing starts in 1995. The other 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 these factors
varying among products and markets. The Company, 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. The Company also is a supplier in the
faucet market, in which there are numerous major domestic and import
manufacturers, several of which are substantially larger than the Company.

HVAC. The Company's 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. The Company believes that eastern
Europe markets, as they convert to natural gas, represent 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. The Company 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 plastic, including polybutylene resin. Due to increased demand in 1994 for
brass by the automotive and plumbing industries, and a strike affecting a major
brass supplier, the Company has experienced some difficulty in obtaining
required quantities of brass from its existing suppliers. Accordingly, the
Company has begun purchasing brass from alternate sources. While this has
resulted in some delays in filling orders, no other impact is anticipated.
Polybutylene resin is currently produced domestically only by Shell Chemical
Company ("Shell Chemical"), a subsidiary of Shell Oil Company. The Company has
not experienced difficulty in obtaining

<PAGE>

polybutylene resin from Shell Chemical as needed. Other materials are, and have
been, readily available from several sources.

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.

FOREIGN AND DOMESTIC OPERATIONS

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

GENERAL

Customers. The Company 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 the Company.

Backlog of Orders and Inventory. The backlog of unshipped factory
orders at the end of fiscal years 1994 and 1993 was approximately $19.8 million
and $15.3 million, respectively. The increase is primarily due to increased
orders for polybutylene plumbing systems, and a brass rod shortage which has
slowed the order fill rate on brass fittings. The Company expects that all the
orders in backlog at the end of fiscal year 1994 will be shipped during 1995.
The Company must carry inventory of certain products to meet rapid delivery
requirements of its customers.

Employees. The Company employs approximately 4,200 people,
approximately 1,600 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. 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. The
Company's other collective bargaining agreements, including the contract for its
largest plant in Ford City, Pennsylvania, which expires in May 1995, have
expiration dates ranging from 1995 to 1997.
In general, relations with employees have been satisfactory.

Patents and Trademarks. The Company 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 the Company.

Other. No material portion of the Company's operations is subject to
renegotiation of profits or termination of contracts at the election of the
federal government. The Company's operations, taken as a whole, 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.

<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 executive
officers of Eljer Industries.

<TABLE>
<CAPTION>
NAME AND AGE OFFICE AND EXPERIENCE
---------------- -----------------------
<S> <C>
Scott G. Arbuckle, 63..........................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 Household Manufacturing, Inc.
("HMI"), a wholly-owned subsidiary of Household. He joined
U.S. Brass in 1963.

Henry W. Lehnerer, 54..........................Vice President-Finance and Chief Financial Officer. Mr. Lehnerer
has served in his current position since May 1993. From
February 1991 to May 1993, Mr. Lehnerer served as Chief
Financial Officer of Princeton Packaging Holdings, Inc., a
flexible packaging company with operations in the United
States and the United Kingdom. Prior to joining Princeton
Packaging Holdings, Inc., he served as Executive Vice
President and Chief Financial Officer of Wormald Americas,
Inc., a manufacturer of sprinkler systems and other fire
prevention products.

James F. Thomason, 60..........................Vice President-Manufacturing. Mr. Thomason has served in his
current position since April 1991, having 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.

George W. Hanthorn, 47.........................Vice President-General Counsel and Secretary. Mr. Hanthorn
has served in this position since October 1994. Mr. Hanthorn
previously served as Senior Vice President-General Counsel and
Secretary of Greyhound Lines, Inc., Dallas, Texas, a
publicly-held transportation services company, from 1990 to
1994, and as Vice President, General Counsel and Secretary of
Greyhound Lines, Inc. from 1987 to 1990.

Charles R. Wackenhuth, 56......................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.

James A. Harris, 38............................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.

Brooks F. Sherman, 34..........................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.
</TABLE>

<PAGE>

ITEM 2. PROPERTIES

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

<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(1).......... 422,000 Manufacture of vitreous china products.
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(2). 55,000 Manufacture of registers and grilles.
SELKIRK EUROPE:
Barnstaple, England............. 92,000 Manufacture of gas vents and chimney systems.
Mullicott Cross, England........ 68,000 Manufacture of venting and specialty products.
ELJER DE MEXICO:
Ojinaga, Mexico(3).............. 19,000 Assembly and packaging of faucets and vents.
</TABLE>
------------
(1) Leased until 2066
(2) Leased until 1999
(3) Leased until 1998

In general, the manufacturing facilities for plumbing products are in
good condition and are operating at capacities which range from approximately
50% to 100%.

The manufacturing facilities for gas vents and chimney systems are
presently operating at approximately 80% capacity, except the Canadian plant,
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 90% capacity. Each of these facilities is in good condition.

All Selkirk/Dry and Eljer Plumbingware properties, with the exception
of the Salem, Ohio, plant secure the Company's 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 Notes 3 and 7 to the Consolidated
Financial Statements in Item 8 for further discussion.

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

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

U.S. Brass

U.S. Brass is involved in significant legal proceedings including a
number of claims which involve Qest systems manufactured and sold by U.S. Brass.
On May 23, 1994, U.S. Brass filed a voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code. See "Liquidity and Capital Resources" in Item
7 and Note 2 to the Consolidated Financial Statements in Item 8 for discussion
of the litigation and the related bankruptcy proceeding.

Household Litigation

As previously disclosed, the Company is currently involved in
litigation with Household relating to the spin-off. Household filed an action in
the Delaware Chancery Court on February 5, 1993, against Eljer Industries, Eljer
Manufacturing and U.S. Brass seeking declaratory relief. U.S. Brass has since
been dismissed from the case. Following a finding by the Delaware Chancery Court
that it had no subject matter jurisdiction, that action was transferred to the
Delaware Superior Court for trial on the merits, where it remains pending. On
March 9, 1995, the Company's motion to dismiss or stay the action was denied.
Discovery is proceeding in that action, but no trial date has been set.

On February 11, 1993, Eljer Industries and Eljer Manufacturing filed a
breach of contract action against Household in the District Court of Dallas
County, Texas, based upon Household's alleged 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 spin-off.
The Company is preparing for trial in the Texas action and a trial date has been
set for the week of July 10, 1995.

Environmental Proceedings

The Company operates plants that may generate hazardous and
nonhazardous waste, disposal of which is subject to federal and state
regulation. 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
Company facilities have been required to implement programs to remedy the
effects of past waste disposal. Not all plants have been the focus of
comprehensive environmental studies. Except as described below, the Company is
not aware of any 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.
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 $13.8 million at the end of 1994 (see
discussion of individual sites provided below) pertaining to environmental,
health and safety matters which the Company believes are adequate. Although the
timing of the related payments is uncertain, the Company believes that a
substantial portion of the payments will be made over the next three years.

Salem and Marysville, Ohio, Facilities. The Company and the Ohio
Environmental Protection Agency ("Ohio EPA") previously reached agreement on a
proposed closure plan for the Company's Salem, Ohio, facility and the Company
submitted the proposed closure plan on April 30, 1993. The Company has not yet
received either approval of, or comments on, the proposed closure plan. Through
1993, the Company paid $1.6 million to complete an interim closure of the
subject area and accruals of approximately $1.8 million for additional closure
and post-closure costs expected in future periods are recorded at yearend 1994,
which the Company believes are adequate. No activity related to closure or
post-closure clean-up of the Salem, Ohio, facility had a material adverse impact
on the Company's 1994 liquidity or results of operations and none is expected.

<PAGE>

the cost of implementing the closure plan, including post-closure care, will be
approximately $9.4 million. However, the ultimate cost to complete closure and
post-closure activities at the facility will depend to a large extent on the
remediation technology ultimately agreed upon by the Ohio EPA. The Company has
previously established accruals which it believes will be adequate to provide
for the cost to implement its closure plan. However, there is no assurance that
the plan will be approved without making additional revisions or modifications.
Although no estimate can be made, in the event the closure plan is not approved,
the cost of remediation could have a material impact on future operating results
or financial position.

None of the costs of clean-up and closure of the Salem and Marysville
sites have been discounted. The Company discounted the post-closure costs of
these sites over a 20 to 30 year period using a discount rate of 5%. The
aggregate undiscounted amount of these liabilities at yearend 1994 was
approximately $3.3 million, of which the discounted amount of approximately $1.8
million was accrued. The Company's environmental consultants estimate that the
payments associated with these postclosure costs for each of the first five
years after the closures are completed will be approximately $128,000 per year
with aggregate payments of approximately $2.7 million over the remaining 15 to
25 years.

After March 1992, the Company was unable to demonstrate financial
responsibility for closure, post-closure care and third-party liability with
respect to the Salem site and the Marysville site. On September 30, 1994, the
U.S. Department of Justice (the "DOJ") proposed payment by the Company 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, for failure to meet the
financial assurance requirements. The deferred amount would then be waived if
the Company continues to comply with the financial responsibility requirements
of the December 1990 consent decree with the United States Environmental
Protection Agency (the "U.S. EPA") relating to the Salem site. On October 19,
1994, the Company accepted the DOJ offer pending agreement on a modification to
the 1990 consent decree which has not yet been reached. The Company has
established accruals which it believes adequate to provide for the $175,000 cash
penalty assessed. The Company believes it currently meets its financial
responsibility requirements regarding the Salem site although Ohio EPA has
recently 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 intends to resolve this issue prior to entering into final agreement with
the DOJ on the penalties discussed above.

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. Subsequently, the Company received
correspondence from the Ohio EPA threatening to escalate enforcement action
against the Company and, in October 1994, the Company received correspondence
from the Ohio Attorney General threatening commencement of a lawsuit for failure
to meet the financial assurances section of the Ohio Administrative Code. The
Company is currently negotiating the matter with the Ohio Attorney General's
office and the Ohio EPA and may be required to place $8.5 million in cash in a
trust which will be used to pay for the clean-up at the Marysville site in order
to meet the financial assurance requirements for this site. Ohio statutes permit
the Ohio Attorney General to seek penalties of up to $10,000 per day for
violations of its regulations and makes the reckless violation of its
regulations a felony. If a settlement is not reached, the Ohio Attorney General
might argue that the Company has been out of compliance with two separate
financial assurance requirements since March 1992. The Company continues to
believe that it has legitimate defenses to the imposition of any penalties and
intends to vigorously defend against such penalties, but cannot currently
estimate what penalties, if any, may be imposed on the Company if it is
ultimately found to have violated the Ohio regulations. Accordingly, no specific
accrual has been established to provide for such penalties.

As reported in the Company's 1993 Form 10-K, the Company has negotiated
with the DOJ and the U.S. EPA a settlement for alleged violations of the Clean
Water Act for unpermitted discharge of wastewater streams at the Salem, Ohio,
plant. The settlement calls for the payment of a $300,000 cash penalty and the
performance of certain remediation work estimated to cost approximately
$690,000. The specific terms and conditions of the settlement remain to be
negotiated. The Company has previously established accruals which it believes
are adequate to cover these costs.

<PAGE>

Superfund 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.

As disclosed in the Company's 1993 Form 10-K, 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. Through notifications from the U.S. EPA, the
Company believes its total liabilities related to Superfund sites to be
immaterial (approximately $220,000 at yearend 1994) if liability and
contributions are assessed in an equitable manner among all responsible parties.
The Company has established accruals which it believes are adequate to provide
for any liabilities it may have with respect to these sites.

Atlanta, Georgia, Site. As previously disclosed, in October 1991, Eljer
Manufacturing sold a facility located in Atlanta, Georgia to joint venture
partners Toto Ltd., Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. ("Toto and
Mitsui"). Toto and Mitsui subsequently asserted that Eljer Manufacturing is
responsible under the indemnification provisions included in the Purchase and
Sale Agreement to remediate alleged contamination at the sold facility. Under
the agreement, Eljer Manufacturing's liability for remediation costs is limited
to $750,000. Eljer Manufacturing has notified the prior owner of the facility,
JP Industries, Inc., ("JP Industries") that it may be liable to Eljer
Manufacturing for indemnity under the provisions of Eljer Manufacturing's
purchase agreement with JP Industries. Eljer Manufacturing does not believe that
any remediation at the Atlanta site is necessary and no estimate of a liability,
if any, can be made at this time. In addition, no estimate can be made of the
amount, if any, that Eljer Manufacturing may receive from JP Industries.

Wilson, North Carolina, Site. In anticipation of the 1994 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 benzene and methylene chloride. 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,
the direction of groundwater flow and the Company's understanding that
trichloroethene has never been used at the plant, it is presently the Company's
belief that any trichloroethene on the property originated from off-site
sources. The Company does not believe it is responsible for remediation of any
trichloroethene which may be present at the site. However, the Company retains
responsibility under the indemnification provisions included in the Purchase and
Sale Agreement to remediate benzene and methylene chloride that exceed maximum
levels allowed by North Carolina law. While the cost to comply with the
Company's indemnity obligations is estimated at $509,000 based on the use of
traditional remediation methods, the Company hopes to receive approval from the
state of North Carolina to pursue alternative remediation methods which would
substantially reduce these costs. The Company has established accruals which it
believes are adequate to provide for the costs of investigation and remediation,
if any.

<PAGE>

U.S. Brass will begin selling the bismuth brass faucets in California as well as
continuing to sell its leaded brass faucets with appropriate Proposition 65
labeling. Additionally, the Company and U.S. Brass are currently attempting to
negotiate a settlement concerning any penalties that might be due as a result of
the failure of the Company and U.S. Brass to properly label faucets sold in
California in accordance with Proposition 65 and for the alleged violation of
the discharge requirements. The Company does not expect the resolution of these
lawsuits to have a material adverse effect on its financial condition or results
of operations. Claims have been filed in the U.S. Brass bankruptcy totalling $6
million related to this matter. The Company disputes these claims and expects to
file an objection to them in the Bankruptcy Court. The outcome of the claims
against U.S. Brass will be dependent on the final plan of reorganization
("Plan"). See Note 2 to the Consolidated Financial Statements in Item 8 for
discussion. The Company and U.S. Brass currently label their faucets in
accordance with Proposition 65.

Insurance. The Company has recently made claims to its applicable
insurance carriers under certain insurance policies for any amounts paid in the
past or for which it may become obligated to pay in the future in connection
with various environmental matters. The Company cannot predict the amount, if
any, of insurance proceeds that may be received as a result of these
environmental claims. No receivables from insurance carriers have been recorded
related to environmental matters.

Additional information regarding legal proceedings of the Company is
set forth herein in Notes 2, 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 shareholders of Eljer Industries
during the fourth quarter of fiscal year 1994.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
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 1994 and 1993. This
information is based on selling prices as reported by the New York Stock
Exchange.

<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter......................... $9-1/4 $6-5/8 $9-3/4 $8-1/2
Second Quarter........................ 8-1/2 5-7/8 9-1/4 6-1/2
Third Quarter......................... 8-1/2 6-1/2 7-1/4 5-1/4
Fourth Quarter......................... 7-3/4 5-1/8 9 5-5/8
</TABLE>

HOLDERS

At March 24, 1995, there were approximately 9,095 holders of record of
common stock.

DIVIDENDS

No dividends were declared in fiscal 1994 or 1993. 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 U.S. credit agreement. See Notes 3 and 7 to the Consolidated
Financial Statements in Item 8.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data of Eljer
Industries. 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.
<TABLE>
<CAPTION>

1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In millions, except per share amounts)

<S> <C> <C> <C> <C> <C>
Net sales ............................... $406.1 $387.6 $397.3 $402.5 $449.2
Income from operations before unusual
items .............................. 22.1 21.1 23.4 19.0 20.8
Income (loss) from operations ........... .3 21.1 23.4 (33.9) 20.8
Income (loss) before income taxes ....... (12.4) 6.4 9.4 (47.8) 6.1
Income (loss) before extraordinary item
and cumulative effects of changes in
accounting principles .............. (12.2)<F3> 3.9 (2.1) (59.7) 2.5
Net income (loss) ....................... (12.2)<F3> 3.9 (57.3)<F2> (59.7) 2.5
Earnings (loss) per share before
extraordinary item and cumulative
effects of changes in accounting
principles ......................... (1.72)<F3> .55 (.30) (8.46) .35
Earnings (loss) per share ............... (1.72)<F3> .55 (8.11)<F2> (8.46) .35
Total assets ............................ 257.1 235.4 254.4 239.2 268.8
Long-term debt .......................... 83.0 103.1 114.8 87.7<F1> 88.1
Dividends per common share .............. -- -- -- -- .28
---------------------
<FN>
<F1> Includes long-term debt subject to restructure, included in Current Liabilities at the end of 1991.
<F2> 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 Note 1 to the Consolidated Financial Statements in Item 8 for
additional discussion.
<F3> Includes a $21.9 million unusual charge related to U.S. Brass. See Note 2 to the Consolidated
Financial Statements in Item 8 for additional discussion.
</FN>
</TABLE>

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

RESULTS OF OPERATIONS

Year ended January 1, 1995 ("1994"), compared with year ended January
2, 1994 ("1993")

Net sales increased 4.8% or $18.5 million over the 1993 level resulting
in the strongest sales performance since 1990. The increase was the result of
strong performances in substantially all North American markets where the
Company continued to benefit from an improved housing economy and penetration of
its traditional channels of distribution and retail chains. 1994 sales of
products in North America increased $27.3 million or 8.7% over the 1993 level.
As anticipated, European sales continued to decline during 1994, dropping $8.8
million or 11.8% despite a $1.6 million favorable exchange rate impact due to
the weakening U.S. dollar.

Gross profit margins decreased to 27.8% in 1994 compared to 28.2% in
1993. The decline was the result of a significant reduction in the level of
sales of higher margin products in Europe, where the market has remained soft,
primarily offset by improved margins on the Company's plumbing products due to
increased volume and improved product mix. The Company has recently completed
reengineering the European operations to reduce costs and anticipates that the
benefits of these changes, as well as expected modest economic strengthening,
should improve the European results in 1995, although raw material price
increases will limit this improvement. The reengineering consisted primarily of
the relocation

<PAGE>

of the Company's operations in Germany to its plants in the United Kingdom.
Costs related to the restructuring were approximately $867,000 in 1994 and were
covered by accruals established in 1991. Cash flows from European operations are
sufficient to cover the cash flow usage resulting from this reengineering of
operations.

Gross profit margins for 1994 improved in North America to 26.5% from
25.6% in 1993. This was primarily attributable to production efficiencies and
better cost absorption associated with increased volume. Maintenance of this
level of gross profit margin in 1995 will be dependent on the U.S. economy,
particularly the housing economy, and the ability of the Company to pass on raw
material price increases to its customers.

Total selling and administrative expenses for 1994 were $865,000 or
1.1% higher than the 1993 level ($81.8 million in 1994; $80.9 million in 1993)
primarily as a result of increased sales incentives and commissions due to
higher sales volume, partially offset by lower advertising costs. Litigation
costs continued to increase in 1994, rising $1.6 million over the 1993 level.
The higher costs relate primarily to the Chapter 11 bankruptcy proceeding of
U.S. Brass. See Note 2 to the Consolidated Financial Statements in Item 8 for
additional discussion.

In December 1994, U.S. Brass recorded a $21.9 million unusual charge
due to uncertainties related to the availability of insurance coverage related
to Qest system claims and its inability to achieve a prompt resolution of the
bankruptcy case, reducing its net book value to zero. See additional discussion
in Note 2 to the Consolidated Financial Statements in Item 8.

Despite the increased litigation costs, and not considering the unusual
charge discussed above, 1994 North American operating income increased $6.4
million, or 40.8%, over the 1993 level, more than offsetting the $5.4 million
European decline.

Interest expense decreased $2.0 million or 13.6% in 1994 from the 1993
level. The decrease was due primarily to the April 1994 expiration of an
unfavorable interest rate swap agreement offset somewhat by an increase in
interest rates on substantially all North American borrowings primarily due to
increases in the prime rate. Interest expense related to the swap agreement was
approximately $1.3 million and $4.4 million in 1994 and 1993, respectively.

Income tax expense was reduced from $2.5 million in 1993 to a tax
benefit of $173,000 in 1994. This was due to benefits realized related to
certain European pretax losses in 1994 partially offset by the Company's
inability to realize the tax benefit of its loss in the United States, which
arose from the unusual charge recorded by U.S. Brass.

Without considering the $21.9 million unusual charge discussed above,
net income for 1994 would have increased $5.7 million over the 1993 level,
resulting in the Company's best performance since its spin-off from Household.
As a result of the unusual charge, net income for 1994 decreased $16.1 million
from the 1993 level.

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 planned elimination of low-margin
product lines also contributed to the slight sales reduction.

Gross profit margins for 1993 improved in North America to 25.6% from
24.1% in 1992. This was 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

<PAGE>

plant, and ceased selling under the GlasTec trade name. In April 1994, the
Company also sold 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 related to the suit against
Household.

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.

LIQUIDITY AND CAPITAL RESOURCES

The net cash provided by operating activities of $10.8 million in 1994
was $3.4 million more than in 1993. The operating cash activity in the 1993
period included a cash usage related to a deposit of approximately $13.2 million
in lieu of an appeal bond for the previously disclosed Kowin Development
Corporation ("Kowin") litigation, in addition to other costs and fees associated
with this lawsuit. On June 30, 1994, following refusal of the United States
Supreme Court to review the opinion of the Appeals Court, a final judgment was
entered in this suit, approximately $11.6 million of the deposit was paid to
Kowin and approximately $2.0 million of related amounts previously paid,
including interest thereon, was returned to the Company. The Company has an
unfunded postretirement obligation of $40.3 million at the end of 1994. The
Company funds its postretirement benefit obligation on a pay-as-you-go basis.
Funding was $2.9 million and $2.4 million in 1994 and 1993, respectively.

Capital expenditures in 1994 were $11.5 million and included production
capacity expansion at the Company's Ford City, Pennsylvania, chinaware plant and
advanced twin wall chimney production equipment in Europe, as well as the
replacement and improvement of capital equipment at various other locations.

The Company experienced an increase in short-term borrowings during
1994 related mainly to the debtor-in-possession financing secured by U.S. Brass,
and to the new revolving credit facility (the

<PAGE>

"Revolver") at Eljer Manufacturing (both discussed below). The Company reduced
its long-term borrowings by a total of $20.8 million in 1994.

On October 17, 1994, Eljer Manufacturing entered into the Revolver with
Congress Financial Corp. ("Congress"). Under the terms of the Revolver, Congress
may advance up to $35 million to Eljer Manufacturing based upon a percentage of
eligible accounts receivable and subject to certain criteria. Advances by
Congress are secured primarily by the accounts receivable of Eljer
Manufacturing. The expiration date of the Revolver is October 17, 1997. The
Revolver may be renewed annually thereafter. Approximately $13.0 million of the
borrowings from the Revolver was used to repay all amounts outstanding under the
Company's prior accounts receivable sale program. An additional $7.5 million of
the borrowings was used to repay a portion of the existing term debt pursuant to
an amendment which allowed Eljer Manufacturing to enter into the Revolver. Eljer
Manufacturing also was required to accelerate a $4.0 million principal repayment
of term debt which was originally scheduled for December 30, 1994. After making
these payments and $8.3 million of scheduled term debt payments in 1994, the
remaining U.S. term debt balance at yearend 1994 was $78.5 million compared to
$98.3 million at yearend 1993. No additional U.S. term debt principal reductions
are required until the $11.0 million required payment due December 29, 1995,
which may be reduced by amounts paid related to certain environmental matters.
The balance of the term debt is due April 30, 1996.

The Company intends to explore some manner of debt restructuring or
extension of existing debt prior to the April 1996 term debt maturity date.
Neither the Company nor any of its subsidiaries has any commitment with respect
to restructuring or other sources of financing or extension of existing debt and
there can be no assurance that any such commitment or extension can be obtained
prior to the term debt maturity date. Failure to obtain such a commitment or
extension or failure to pay the term debt when due would constitute an event of
default thereunder, and would give the lenders the right, if they elect to do
so, to foreclose on the collateral which constitutes essentially all the
domestic assets of the Company (except that pledged under the Revolver and
assets of U.S. Brass), including the stock of its foreign subsidiaries. Failure
to pay the term debt when due, would also be an event of default under the
Revolver.

At yearend 1994, 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.

As discussed in "Legal Proceedings" in Item 3 and in Note 13
"Contingencies" to the Consolidated Financial Statements in Item 8, 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 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
complies with the financial responsibility requirements of the December 1990
consent decree. On October 19, 1994, the Company accepted the DOJ offer pending
agreement on a modification to the December 1990 consent decree. The Company
currently meets its financial responsibility requirements regarding the Salem
facility.

As previously disclosed, the Ohio EPA has informed the Company that its
failure to renew financial responsibility assurances for the Marysville site was
being referred to the U.S. EPA on this matter. Although Ohio EPA and U.S. EPA
may attempt to impose significant civil and criminal penalties for failure to
renew financial assurances for the Marysville site, the Company continues to
believe that it has meritorious defenses to the imposition of any penalties and
intends to vigorously defend against such penalties and that any penalties
ultimately imposed are likely to be less than the maximum potential penalties
authorized under the law. However, the Company may be required to place $8.5
million in cash in a trust which will be used to pay for the clean-up at the
Marysville site in order to meet the financial assurance requirements.
Negotiations are currently being held with the Ohio EPA regarding this matter.

As previously disclosed, and as discussed in Note 2 to the Consolidated
Financial Statements in Item 8, on May 23, 1994 (the "Petition Date"), 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

<PAGE>

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. As previously disclosed, on June 28, 1994, U.S. Brass
entered into a debtor-in-possession financing agreement (the "DIP Financing
Agreement") with Congress, which had provided secured financing for working
capital purposes prior to the Petition Date. Pursuant to the DIP Financing
Agreement, Congress agreed to provide loans and advances in an amount not to
exceed $20 million when added to the outstanding amount of advances made by
Congress prior to the Petition Date. At yearend 1994, the outstanding principal
amount of such advances was approximately $7.9 million. U.S. Brass believes that
it will have sufficient cash resources and financing to meet trade obligations
and cover operating and restructuring expenses during 1995 and intends to pay
all post-Petition Date operating expenses (including trade obligations) in the
ordinary course of business.

Between 1988 and July 1991 U.S. Brass, Shell Chemical and Celanese
Specialty Resins ("Celanese"), a unit of Hoechst Celanese Corporation
participated in a toll-free customer hotline for homeowners with Qest system
claims. Pursuant to an agreement, U.S. Brass, Shell Chemical, and Celanese
shared the cost of repairs and replacements (the "Sharing Agreement"). In July
1991, U.S. Brass withdrew its participation from the Sharing Agreement. Shell
Chemical and Celanese have settled and continue to settle cases and repair or
replace Qest systems for which they contend that U.S. Brass, was or is partially
responsible under the Sharing Agreement. On February 7, 1995, Shell Chemical and
Celanese notified U.S. Brass that they believe they have made expenditures on
behalf of U.S. Brass totaling approximately $59 million under the Sharing
Agreement. However, insufficient information supporting this amount has been
provided to U.S. Brass and U.S. Brass disputes the claimed amount and the
validity of the Sharing Agreement. This claim will be subject to treatment in
U.S. Brass' bankruptcy. A description of claims filed in the U.S. Brass
bankruptcy is included in Note 2 to the Consolidated Financial Statements in
Item 8.

The Official Polybutylene Creditor's Committee (the "PB Committee") has
alleged that Eljer Industries, Eljer Manufacturing and Household may be liable
for Qest system claims under principles of alter ego and related theories of
liability. On January 30, 1995, the Bankruptcy Court denied the PB Committee's
motion to file a proposed complaint on behalf of U.S. Brass against the Company
to determine whether the Company should be held liable for certain debts of U.S.
Brass based on alter ego liability. The PB Committee has filed a notice of
appeal from that ruling. Since the filing of U.S. Brass' bankruptcy petition,
the PB Committee and certain co-defendants in the Qest system litigation have
asserted that Eljer Industries and Eljer Manufacturing are also directly liable
for damages arising from the design, manufacture and marketing of the Qest
system.

While the Company may explore settlement alternatives on these issues
in the context of U.S. Brass' bankruptcy proceeding, including possible
contributions of cash, Eljer Industries' stock, or other consideration to a U.S.
Brass Plan, the Company will continue to vigorously contest, absent a
settlement, any such claims of derivative or direct liability. However, if such
derivative or direct claims were successfully asserted against Eljer Industries
or Eljer Manufacturing and a settlement is not achieved during the pendency of
the U.S. Brass bankruptcy proceeding, it could, depending upon the availability
of insurance coverage for costs and indemnity, have a material adverse effect on
the Company's liquidity and financial condition and on its ability to continue
to meet its financial obligations. At this time, the number and magnitude of
Qest system related claims that may be generated in connection with the U.S.
Brass bankruptcy are unknown and an estimate cannot be made. A proposed Plan was
filed with the Bankruptcy Court on March 22, 1995. See Note 2 to the
Consolidated Financial Statements in Item 8 for additional discussion. 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. (See also Notes 2 and 13 to the
Consolidated Financial Statements in Item 8.) The 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
discussed in Note 2 to the Consolidated Financial Statements in Item 8) could,
among other things, result in a change in the Company's equity structure. These
matters create a substantial doubt about the Company's ability to continue as a
going concern in its present consolidated form.

<PAGE>

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 ................ 17
Consolidated Statements of Income ....................... 19
Consolidated Balance Sheets ............................. 20
Consolidated Statements of Cash Flows ................... 21
Consolidated Statements of Shareholders' Equity ......... 22
Notes to Consolidated Financial Statements .............. 23
</TABLE>
16

<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 1,
1995, and January 2, 1994, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended January 1, 1995. 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.

As discussed in Note 3 to the accompanying consolidated financial
statements, the Company will be required to make up to an $11 million term debt
payment on December 29, 1995, and the remaining $67.5 million in term debt will
become due on April 30, 1996. Management's current projections indicate that
there will not be sufficient cash flows from operations to fund the April 1996
obligation. The Company intends to explore some manner of debt restructuring or
extension of existing debt prior to the April 1996 U.S. Term Debt maturity date.
Neither the Company nor any of its subsidiaries has any commitment with respect
to restructuring or other sources of financing or extension of existing debt and
management has indicated that there can be no assurance that any such commitment
or extension can be obtained prior to the U.S. Term Debt maturity date.

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 1, 1995 and January 2, 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended January 1, 1995 in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed further
in Note 2 to the consolidated financial statements, 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. In addition, the nature and extent of the insurance coverage
related to potential losses arising from these claims and lawsuits are currently
being contested by several of the insurance carriers. In order to systematically
resolve these matters, on May 23, 1994, U.S. Brass filed a voluntary petition
for reorganization under Chapter 11 of the Federal Bankruptcy Code. The
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 could, among other things, result in a change in the
Company's equity structure. If the Company is not successful in resolving these
claims in the U.S. Brass bankruptcy proceeding, it will be required to litigate
those claims in the forums in which they may be brought. The ultimate outcome of
these matters is uncertain at this time and could have a material, adverse
impact on the financial position and results of operations of the Company. These
matters create a substantial doubt about the Company's ability to continue as a
going concern in its present consolidated form. Management's plans in regard to
these matters are described in Note 2. The consolidated financial statements do
not include any adjustments or reclassifications that might result from the
outcome of these uncertainties.

<PAGE>

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 LLP

Dallas, Texas,
March 28, 1995

<PAGE>

ELJER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- ------
<S> <C> <C> <C>

Net Sales ............................................. $ 406,063 $ 387,562 $ 397,343
Cost of Sales ......................................... 293,365 278,374 285,131
---------- ---------- ----------
Gross Profit .......................................... 112,698 109,188 112,212
Selling & Administrative Expenses ..................... 81,767 80,902 83,910
Litigation Costs ...................................... 8,805 7,215 4,931
Unusual Item - Provision for Polybutylene/Celcon
Claims ....................................... 21,857 -- --
---------- ---------- ----------
Income From Operations ................................ 269 21,071 23,371
Other Expense, net .................................... 1,687 1,367 1,119
Interest Income ....................................... 1,683 1,380 1,922
Interest Expense ...................................... 12,662 14,647 14,741
---------- ---------- ----------
Income (Loss) Before Income Taxes ..................... (12,397) 6,437 9,433
Tax on Repatriation of Foreign Earnings and Loss
of Tax Benefit on Indemnified Liabilities .... -- 640 3,583
Income Tax (Benefit) Expense .......................... (173) 1,899 7,946
---------- ---------- ----------
Income (Loss) Before Extraordinary Item and
Cumulative Effects of Changes in Accounting
Principles ................................... (12,224) 3,898 (2,096)
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) ..................................... $ (12,224) $ 3,898 $ (57,299)
========== ========== ==========
Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item and Cumulative
Effects of Changes in Accounting Principles ........... $ (1.72) $ 0.55 $ (0.30)
Extraordinary Item .................................... -- -- (2.26)
Cumulative Effects of Changes in Accounting
Principles .......................................... -- -- (5.55)
---------- ---------- ----------
Net Income (Loss) ..................................... $ (1.72) $ 0.55 $ (8.11)
========== ========== ==========
Weighted Average Number of Common Shares .............. 7,120 7,085 7,066
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.

<PAGE>

ELJER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
ASSETS 1994 1993
------ ------ ------
<S> <C> <C>
Current Assets:
Cash & temporary cash investments ............................. $ 26,109 $ 23,439
Restricted cash ............................................... 17,266 15,966
Trade accounts receivable, net of reserves of $7,696 and $8,890 65,332 49,995
Inventories ................................................... 68,249 59,548
Other current assets .......................................... 5,603 13,823
--------- ---------

Total current assets ...................................... 182,559 162,771

Properties & Equipment, net ....................................... 59,924 58,015
Cost in Excess of Net Tangible Assets Acquired, net ............... 11,281 11,879
Other Assets ...................................................... 3,293 2,758
--------- ---------
$ 257,057 $ 235,423

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------ ---------
Current Liabilities:
Short-term debt and current maturities of long-term debt ....... $ 43,065 $ 18,430
Trade accounts payable ......................................... 17,705 18,933
Prepetition liabilities subject to compromise .................. 32,868 --
Accrued expenses ............................................... 64,675 70,308
--------- ---------

Total current liabilities ................................. 158,313 107,671

Long-Term Debt .................................................... 83,021 103,114
Postretirement Benefits ........................................... 40,353 40,743
Other Liabilities ................................................. 14,067 13,144
Deferred Income Taxes ............................................. 882 871
--------- ---------

Total liabilities ......................................... 296,636 265,543

Shareholders' Equity (Deficit):
Common stock, $1 par value, 50,000,000 shares
authorized; 7,129,626 and 7,092,326 shares outstanding .... 7,186 7,186
Additional capital ............................................ 78,936 78,700
Accumulated deficit ........................................... (119,470) (107,246)
Foreign currency translation adjustments ...................... (6,174) (8,666)
Treasury stock ................................................ (57) (94)
--------- ---------

Total shareholders' deficit ............................... (39,579) (30,120)
--------- ---------

$ 257,057 $ 235,423
========= =========
</TABLE>

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

<PAGE>

ELJER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) ........................................... $(12,224) $ 3,898 $ (57,299)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization ........................... 9,496 11,245 10,233
(Gain) loss on disposition of properties
and equipment .......................................... 370 (124) 321
Stock issued as compensation ............................ 273 180 26
Change in assets and liabilities -
Trade accounts receivable ........................... (2,165) (745) (4,699)
Inventories ......................................... (7,997) 3,197 (603)
Trade accounts payable and accrued expenses ......... 26,582 8,290 8,701
Accrued litigation - Kowin Development .............. 1,877 (14,021) 16,000
Postretirement benefits ............................ (390) 92 40,651
Other assets ........................................ 4,746 (3,165) (2,036)
Other, net .......................................... 3,189 (1,515) (1,665)
Reduction of sale of outstanding trade
accounts receivable ................................. (13,000) -- (7,000)
-------- -------- ----------

Net cash provided by operating activities ......... 10,757 7,332 2,630

Cash Flows From Investing Activities:
Investment in properties and equipment ...................... (11,511) (7,926) (7,975)
Proceeds from disposition of properties and equipment ....... 459 1,936 1,081
-------- -------- ----------

Net cash used in investing activities ............. (11,052) (5,990) (6,894)

Cash Flows From Financing Activities:
Increase (decrease) in short-term debt ...................... 25,506 (14,481) 19,837
Repayments of long-term debt ................................ (20,818) (816) (3,456)
Proceeds from issuance of long-term debt .................... -- 1,068 6,479
Collateralization of letters of credit ...................... (1,639) (5,513) (1,019)
Taxes paid on dividends from foreign subsidiaries ........... -- (3,974) --
-------- -------- ----------

Net cash provided by (used in) financing activities 3,049 (23,716) 21,841
-------- -------- ----------

Effects of Exchange Rates on Cash ............................... (84) (995) (3,645)
-------- -------- ----------

Net Increase (Decrease) in Cash & Temporary Cash
Investments .................................................. 2,670 (23,369) 13,932
Cash & Temporary Cash Investments, Beginning of Period .......... 23,439 46,808 32,876
-------- -------- ----------
Cash & Temporary Cash Investments, End of Period ................ $ 26,109 $ 23,439 $ 46,808
======== ======== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.

<PAGE>

ELJER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
Foreign Total
Currency Shareholders'
Common Additional Accumulated Translation Treasury Equity
Stock Capital Deficit Adjustments Stock (Deficit)
------- ---------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 adjustments . -- -- -- (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 adjustments . -- -- -- (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)
Shares issued to directors/
employees ............... -- 236 -- -- 37 273
Foreign currency
translation adjustments . -- -- -- 2,492 -- 2,492
Net loss .................. -- -- (12,224) -- -- (12,224)
------- -------- ---------- --------- ------ ---------

Balance at yearend 1994 ...... $ 7,186 $ 78,936 $ (119,470) $ (6,174) $ (57) $ (39,579)
======= ======== ========== ========= ====== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.

<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, together with its
subsidiaries, 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.

Fiscal Year

The Company reports on a 52-53 week fiscal year ending on the Sunday
nearest to December 31. Fiscal year 1994 had 52 weeks, which ended on January 1,
1995. Fiscal years 1993 and 1992 had 52 and 53 weeks, respectively, which ended
on January 2, 1994 and January 3, 1993, 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. Depreciation and
amortization expense was $9.1 million, $10.8 million and $9.7 million for 1994,
1993 and 1992, respectively.

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

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

disclosure of the fair market value of off- and on-balance-sheet financial
instruments. The carrying value of all financial instruments, including
long-term and short-term debt, cash and temporary cash investments and
restricted cash, approximates their fair value at yearend.

Cost of Businesses Acquired

Cost in excess of net tangible assets acquired ("goodwill") is
amortized using the straight-line method over 40 years. The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related operating income over the remaining life of the goodwill in measuring
whether the goodwill is recoverable. The amortization recorded for 1994, 1993
and 1992 was $433,000, $443,000 and $583,000, respectively. The amount of
accumulated amortization was $6.0 million and $5.8 million at the end of 1994
and 1993, 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 consists of plumbing
wholesalers and retail outlets primarily in North America. Heating, ventilating
and air conditioning products are 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 1994.

The Company places its temporary cash investments with financial
institutions it considers credit worthy, and does not believe significant credit
risk exists with respect to these securities at the end of 1994.

The FASB issued SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments", effective for financial
statements issued for fiscal years ending after December 15, 1994. SFAS No. 119
requires new disclosures about derivatives and other financial instruments. At
yearend 1994, the Company was not a party to any derivative contracts.

Foreign Currency Translation

The Company has foreign subsidiaries operating 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 Shareholders' Equity.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1994, 1993 and 1992, the Company also had net foreign currency
transaction gains (losses) which approximated $78,000, $(120,000) and $762,000,
respectively, and which are included in Other Expense, net.

Environmental Matters

The Company records a liability for environmental matters when it is
probable that a liability has been incurred and the amount can be reasonably
estimated. With the exception of applicable amounts representing current
liabilities, these amounts are recorded as Other Liabilities. The amounts
recorded represent the estimated costs of remediation. The Company does not
discount environmental liabilities for a specific clean-up site to reflect the
time value of money unless the aggregate amount of the obligation and the amount
and timing of the cash payments for that site are fixed or reliably determined.
The litigation expenses relating to environmental matters are accrued separately
as incurred. At the time a liability is recorded, amounts recoverable from third
parties, if any, would be recorded as an asset. When required, the Company may
make capital improvements to establish or maintain compliance with environmental
regulations. Such capital expenditures would be subject to the same accounting
policies as all other Properties and Equipment. The costs associated with
investigation and assessment of environmental compliance are expensed as
incurred. See Note 13 for discussion of Environmental Matters.

Changes in Accounting Principles

During the first quarter of 1994, the Company adopted the provisions of
FASB Interpretation No. 39 ("FIN 39"). FIN 39 requires the Company to present
separately in its Consolidated Balance Sheets its contingent liabilities which
can be estimated and the related recoverable assets. Accordingly, the
Consolidated Balance Sheet and Consolidated Statement of Cash Flows for 1993
have been reclassified to conform to the 1994 presentation. The resulting asset
is a component of Other current assets in the accompanying Consolidated Balance
Sheets.

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 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.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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) BANKRUPTCY OF UNITED STATES BRASS CORPORATION:

On May 23, 1994, (the "Petition Date") the Company's 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 "System" or the "Qest system") and related litigation and
to seek confirmation of a plan of reorganization (the "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.

Qest System Litigation

Since 1975, U.S. Brass or its predecessor Qest Products, Inc. has
engaged in the manufacture and sale of Qest systems. U.S. Brass is a defendant
(together in some cases with Eljer Industries, Eljer Manufacturing, Inc. ("Eljer
Manufacturing"), Qest Products, Inc. and Household), in a number of lawsuits
arising out of the manufacture and sale of the Qest systems for residential
site-built applications between 1979 and 1986 and for manufactured housing,
including mobile homes and recreational vehicle applications between 1975 and
1990. The Qest system litigation led U.S. Brass to file for Chapter 11
bankruptcy protection in May 1994. The Bankruptcy filing is discussed more fully
below. The Company does not currently engage and has never engaged in the
manufacture and sale of the Qest system, except through U.S. Brass; although, as
discussed more fully below, direct claims allegedly arising out of the
manufacture and sale of the Qest system have been made against Eljer Industries
and Eljer Manufacturing.

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 ("Celanese"), a unit of Hoechst Celanese Corporation
("Hoechst Celanese") and the manufacturer of a resin from which U.S. Brass
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 involve Systems that began to leak
after installation, although a limited number of claims involve Systems that
have not leaked. 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, although recent allegations have been made that the
polybutylene pipe is subject to premature failure. U.S. Brass stopped selling
Celcon fittings for residential site-built construction after 1986 and for
mobile homes and recreation vehicles after 1990. In 1988 U.S. Brass began using
Shell Duraflex PB4137 resin ("PB4137 Resin") to extrude polybutylene pipe. The
Company believes copper and brass insert fittings and polybutylene pipe extruded
from PB4137 Resin have performed satisfactorily. U.S. Brass continues to
manufacture and sell Qest systems with this polybutylene pipe using copper and
brass insert fittings.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of the Petition Date, U.S. Brass had judgments against it related to
these lawsuits of approximately $3.2 million, which were covered by previously
established accruals. These accruals remain at the end of 1994 since all Qest
system litigation against U.S. Brass has been stayed pending the outcome of the
bankruptcy proceeding.

U.S. Brass did not, for the most part, sell Qest systems directly to
homeowners, but instead sold components of its Qest system to plumbing
wholesalers and distributors who in turn sold those products to plumbing
contractors. The plumbing contractors used, in whole or in part, Qest system
components (fittings, pipe and accessories), assembled those components into
plumbing systems, and installed those plumbing systems in homes and other
buildings. In many cases it is believed that plumbing contractors mixed
components from U.S. Brass and other manufacturers to assemble the plumbing
systems they installed. Although newly discovered data has recently been
collected that may permit a calculation of the number of Qest system
installations using Celcon fittings, such data has not yet been analyzed and an
accurate estimate of Qest system installations has not yet been made.

Similarly, data is not currently available to permit U.S. Brass to
estimate accurately the number of installations that have failed or the number
of claims regarding installations that have been settled to date. Settlements
have been entered into by a number of parties, including U.S. Brass. However,
U.S. Brass does not have access to all of the settlement data. Through the
Petition Date, approximately 109 Qest system lawsuits involving approximately
30,000 residential claims, remained pending, not including purported class
members in certain class action lawsuits pending in Arizona, California and
Nevada. Through this same period, U.S. Brass had paid approximately $63 million
in settlements related to its Qest system of which approximately $50 million has
been reimbursed by the Company's primary and excess insurance carriers. Some of
the insurance reimbursements made to U.S. Brass have been paid under a
reservation of rights (see Insurance Coverage below).

Between 1988 and July 1991 U.S. Brass, Shell Chemical and Hoechst
Celanese participated in a toll-free consumer hotline for homeowners with Qest
system claims. U.S. Brass, Shell Chemical and Hoechst Celanese shared the cost
of repairs and replacements (the "Sharing Agreement") until July 1991 when U.S.
Brass withdrew its participation. Shell Chemical and Hoechst Celanese have
settled and continue to settle cases and repair or replace Qest systems for
which they contend that U.S. Brass was or is partially responsible under the
Sharing Agreement. As of February 7, 1995, Shell Chemical and Hoechst Celanese
claim that they have expended approximately $59 million under the Sharing
Agreement on behalf of U.S. Brass. U.S. Brass disputes the validity of the
Sharing Agreement and the validity of the claimed amount. Shell Chemical and
Hoechst Celanese have not provided U.S. Brass with sufficient information to
support this amount, which, if ultimately proven to be a liability of U.S.
Brass, should be subject to coverage by insurance and will be subject to
treatment in U.S. Brass' bankruptcy discussed below.

In December 1993, Celanese filed suit in New Jersey state court against
U.S. Brass, Eljer Manufacturing and Household seeking damages arising out of the
sale of raw materials used in the manufacture of the Celcon acetal fittings used
in the Qest system and out of the Sharing Agreement. In May 1994 Shell Chemical
filed an action against U.S. Brass, Eljer Manufacturing and Household in New
Jersey state court seeking damages arising out of the Sharing Agreement. These
actions have been transferred to the Bankruptcy Court where they remain pending
on a motion by Shell Chemical and Celanese to sever the claims against Household
and remand those claims back to New Jersey state court.

As discussed above, an estimate of additional liability related to Qest
system litigation cannot be made. However, 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 $21.9 million unusual charge
against

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

earnings in 1994 which reduced its net book value to zero. Additional
descriptions of the insurance coverage, the U.S. Brass bankruptcy and its
potential impact on the Company are discussed below.

Insurance Coverage

Although insurance carriers have paid a substantial portion of the
claims made to date by U.S. Brass, since 1985 the Company has been involved in
litigation with its insurance carriers concerning coverage for Qest system
litigation. In 1992 the United States Court of Appeals for the Seventh Circuit
issued an opinion holding that the policy period of coverage of a Qest system
claim is triggered by the date of installation of the System as opposed to the
date when the leak occurs. The 1992 favorable decision is significant because
most of the Company's insurance policies purchased after 1987 generally exclude
coverage for certain Qest system claims. However, significant insurance coverage
litigation remains pending and the Seventh Circuit opinion is not necessarily
binding on all insurance carriers issuing coverage to the Company. In addition,
some reimbursement of insurance payments may be ultimately required for payments
made under reservations of rights, retrospective premium adjustments or
indemnification agreements. An estimate of this amount cannot be made as it is
dependent on the outcome of the litigation described below.

Various insurance carriers filed state court actions in Illinois and
one in California state court seeking declaratory relief that they are not
obligated to provide insurance coverage for Qest system litigation. These
actions were removed to the Bankruptcy Court for the Northern District of
Illinois (the "Illinois Bankruptcy Court") soon after U.S. Brass filed its
Chapter 11 petition. On November 11, 1994, the Illinois Bankruptcy Court denied
U.S. Brass' motion to transfer venue to the U.S. District Court for the Eastern
District of Texas and granted the insurer's motion to abstain from hearing the
case and to remand to the state courts. U.S. Brass has appealed the ruling of
the Illinois Bankruptcy Court to the U.S. District Court for the Northern
District of Illinois. The Illinois Bankruptcy Court has suspended the operation
of the remand order pending the resolution of the appeal. The Illinois cases
remain subject to the bankruptcy automatic stay. Additionally, on June 14, 1994,
U.S. Brass filed a complaint commencing an adversary action in the Bankruptcy
Court against all insurance companies involved in the Illinois state court
actions as well as one additional carrier. This action was dismissed by the
Bankruptcy Court on the basis of the earlier-filed litigation that was pending
in Illinois. U.S. Brass has appealed the ruling of the Bankruptcy Court to the
U.S. District Court for the Eastern District of Texas. Because this litigation
is in the early stages and because it is not possible to predict the outcome of
its appeals, it is not possible to estimate the amount of insurance proceeds, if
any, that U.S. Brass will ultimately recover for Qest system claims.

Other Litigation

As previously disclosed, U.S. Brass has filed an appeal with the United
States Court of Appeals for the Tenth Circuit of the $1.2 million judgment
against U.S. Brass entered in 1993 involving a modified crimping tool used in
the installation of the Qest system. At yearend 1994, U.S. Brass had adequate
accruals established related to this judgment. Any judgment that may ultimately
be obtained in this case will be an unsecured claim in U.S. Brass' bankruptcy
proceeding and paid in accordance with the provisions of the Plan.

Status of U.S. Brass Bankruptcy Proceeding

The filing of its voluntary Chapter 11 petition acted as an automatic
stay of certain litigation and other actions against U.S. Brass or its property.
Among other things, the automatic stay applies to the commencement or
continuation of federal, administrative or other actions or proceedings against
U.S. Brass that were or could have been commenced before the Chapter 11 case was
filed or to recover a claim

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

against U.S. Brass that arose before the case was filed. Consequently, U.S.
Brass' creditors are prohibited from attempting to collect prepetition debts
without the consent of the Bankruptcy Court. Any creditor may seek relief from
the stay by making a motion to the Bankruptcy Court. U.S. Brass believes the
automatic stay extends also to claims made in those lawsuits filed against the
Company, Eljer Manufacturing and Household, based upon alter ego and related
theories of liability (see Claims Against the Company discussion below). U.S.
Brass contends that under bankruptcy law, such claims are property of U.S. Brass
by reason of its Chapter 11 filing.

On March 22, 1995, Eljer Industries, Eljer Manufacturing, and U.S.
Brass filed with the Bankruptcy Court a proposed Plan for U.S. Brass under
chapter 11 of the Bankruptcy Code. The Plan provides for, among other things,
the liquidation and treatment of claims against U.S. Brass involving the Qest
system through a trust to be established under the Plan. The Plan provides that
the trust will be assigned rights under certain historical insurance policies
maintained for the benefit of Eljer Manufacturing, U.S. Brass and, in some
cases, Eljer Industries. Most of the insurance carriers which provided these
policies are involved in the litigation described in Insurance Coverage above.
The proceeds of other litigation are also expected to help fund the trust. The
Plan also provides that other persons, subject to Bankruptcy Court approval, may
make contributions to the trust. Shell Chemical has proposed a settlement
wherein it would contribute up to $200 million to the trust. The Plan provides
that holders of claims involving the Qest system will be prevented, through an
injunction, from pursuing any such claims against Eljer Industries, Eljer
Manufacturing, U.S. Brass and any other person who makes a contribution to the
trust as approved by the Bankruptcy Court. Each holder of a general unsecured
claim (other than Qest system claims) may either receive an immediate one time
cash payment of 50% of its claim or receive 100% over time. Under the Plan,
Eljer Manufacturing will retain its equity interest in U.S. Brass if the
Bankruptcy Court determines, in connection with the confirmation of the Plan,
that all classes of claims are paid in full or have accepted the Plan.
Otherwise, the Plan provides that the existing equity interest in U.S. Brass
will be cancelled, and the new equity interests in U.S. Brass will be
transferred to the trust to be held for sale within 120 days of the Plan's
effective date. If such an event occurs, Eljer Manufacturing could reacquire
U.S. Brass through a successful bid at the time of such sale. The proposed
disclosure statement ("Disclosure Statement") submitted with the Plan is subject
to approval by the Bankruptcy Court and the proposed Plan is subject to a vote
of U.S. Brass' creditors. Any other party is free to file its own Plan with the
Bankruptcy Court, although no party has done so. No hearing on the proposed
Disclosure Statement has been set and it is not known when the Plan will be
submitted to creditors for voting.

It is not presently possible to predict the outcome of the proposed
Plan. It is also not presently possible to estimate the ultimate number or
dollar value of Qest system claims that may be filed and allowed in the
bankruptcy case (see discussion of Claims Filed in the U.S. Brass Bankruptcy
Proceeding below). In addition, because of the uncertainties related to the
insurance litigation, it is not presently possible to estimate the value of the
assets that may be available to satisfy any claims that may be filed and
allowed. There is a possibility that the Company would lose all or some of its
equity interest in U.S. Brass if the Bankruptcy Court does not determine that
claimants will receive 100% satisfaction of their allowed claims. In the event
the Company loses all or some of its equity interest in U.S. Brass, the Company
might be able to repurchase its equity interest in U.S. Brass through the
payment of additional consideration, although there can be no assurances that
other bidders for U.S. Brass would not emerge or that the Company would have
sufficient resources with which to pay for U.S. Brass. Accordingly, the
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 (see Claims Against the Company discussion below) could,
among other things, result in a change in the Company's equity structure. These
matters create a substantial doubt about the Company's ability to continue as a
going concern in its present consolidated form.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Claims Filed in the U.S. Brass Bankruptcy Proceeding

In a bankruptcy proceeding, the Bankruptcy Court establishes a date by
which all claims against the debtor must be filed (the "Bar Date"). The Bar Date
for non-Qest system creditors of U.S. Brass was March 1, 1995. U.S. Brass or
other parties may seek extensions of this Bar Date. Under the proposed Plan,
there is no Bar Date for creditors who hold claims relating to the Qest system.

As of March 1, 1995, approximately 1,000 claims had been filed with the
Bankruptcy Court, asserting the aggregate amount of approximately $1.5 billion,
consisting primarily of alleged Qest system related damages. Additional claims
may be filed. Many claims are disputed or based on contingencies that have not
occurred. Additional claims have been made which do not specify the amount of
damages. Any party to the bankruptcy, including U.S. Brass, may object to a
filed claim. Following such an objection, the claim will be allowed only in an
amount as determined by the Bankruptcy Court. U.S. Brass has not yet reviewed
all of the claims filed, but expects that it will file objections to many of the
claims. The outcome of such objections cannot be predicted and the number or
value of claims that may be allowed by the Bankruptcy Court cannot be estimated
at this time. As discussed above, an estimate of additional liability related to
Qest system litigation cannot be made. However, 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 $21.9 million unusual 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.

Claims Against The Company

The Official Polybutylene Creditors' Committee (the "PB Committee") has
alleged that Eljer Industries, Eljer Manufacturing and Household may be liable
for Qest system claims under principals of alter ego and related theories of
liability. On January 30, 1995, the Bankruptcy Court denied the PB Committee's
motion to file a proposed complaint on behalf of U.S. Brass against the Company
to determine whether the Company should be held liable for certain debts of U.S.
Brass based on alter ego liability. The PB Committee has filed a notice of
appeal from that ruling.

Certain parties have alleged that claims exist against Eljer
Manufacturing and Eljer Industries relating to the Qest system. Approximately 54
lawsuits representing approximately 30,000 homes have been filed in state or
federal courts in 8 different states that name Eljer Industries and/or Eljer
Manufacturing (or its predecessor HMI), in addition to U.S. Brass or other
parties, as defendants. These claims include allegations of direct and alter ego
liability. The Company does not believe that they have merit and will vigorously
defend such charges, although no assurances can be given that the Company will
prevail if such lawsuits are ultimately tried. As such, the Company cannot
estimate the amount, if any, for which it may ultimately be liable. The Company
may attempt to resolve such claims in the U.S. Brass bankruptcy through the
contribution of consideration which could take the form of cash, securities of
the Company or other consideration. However, no assurances can be given that
those settlement attempts will prove successful nor can estimates be given as to
the value of the consideration that might ultimately be offered in an attempt to
settle those claims. If the Company is not successful in resolving these claims
in the U.S. Brass bankruptcy proceeding, it will be required to litigate those
claims in the forums in which they may be brought.

Selected Financial Data

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-

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

possession. Certain of these claims are reflected as Prepetition liabilities
subject to compromise on the 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 the end of 1994, U.S. Brass had a net affiliate
receivable of approximately $2.5 million.

Selected financial data for U.S. Brass are as follows (in thousands):

<TABLE>
<CAPTION>
For the Fiscal Year Ended
------------------------------------
January January January
1, 1995 2, 1994 3, 1993
------- ------- -------
<S> <C> <C> <C>
Net Sales to Nonaffiliate Customers .............. $ 83,214 $ 74,080 $ 76,570
Sales to Affiliates .............................. 16,740 16,688 16,907
Reorganization Expenses .......................... 2,776 -- --
Income from Operations Before Unusual Items ...... 1,377 5,457 6,994
Income (Loss) from Operations .................... (20,480) 5,457 6,994
Income (Loss) Before Income Taxes ................ (21,628) 4,191 6,123
Net Income (Loss) ................................ (21,801) 2,472 2,876

Cash (Used in) Provided by Operating Activities .. (2,239) 9,131 7,028
Cash Used in Investing Activities ................ (2,341) (994) (824)
Cash Provided by (Used in) Financing Activities .. 3,708 (6,767) (3,897)
Total Cash Flow .................................. (872) 1,370 2,307
</TABLE>

<TABLE>
<CAPTION>
As of January As of January
1, 1994 2, 1994
------------- -------------
<S> <C> <C>
Total Current Assets ............................. 35,966 34,438
Total Assets ..................................... 52,725 50,607
Total Liabilities ................................ 52,725 28,806
Total Shareholders' Equity ....................... -- 21,801
</TABLE>

Cash payments of reorganization items made since the Petition Date are
immaterial.

(3) LIQUIDITY AND CAPITAL RESOURCES:

Financing Agreements

The Company experienced an increase in short-term borrowings during
1994 related mainly to the debtor-in-possession financing agreement (the "DIP
Financing Agreement") secured by U.S. Brass, and the new revolving credit
facility (the "Revolver") at Eljer Manufacturing discussed below. The Company
reduced its long-term borrowings by a total of $20.8 million in 1994.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On October 17, 1994, Eljer Manufacturing entered into the Revolver with
Congress Financial Corp. ("Congress"). Under the terms of the Revolver, Congress
may advance up to $35 million to Eljer Manufacturing based upon a percentage of
eligible accounts receivable and subject to certain criteria. Advances by
Congress are secured primarily by the accounts receivable of Eljer
Manufacturing. The expiration date of the Revolver is October 17, 1997. The
Revolver may be renewed annually thereafter. Approximately $13.0 million of the
borrowings from the Revolver was used to repay all amounts outstanding under the
Company's prior accounts receivable sale program. An additional $7.5 million of
the borrowings was used to repay a portion of the Company's U.S. term debt
agreement (the "U.S. Term Debt") pursuant to an amendment which allowed Eljer
Manufacturing to enter into the Revolver. Eljer Manufacturing also was required
to accelerate a $4.0 million principal repayment of U.S. Term Debt which was
originally scheduled for December 30, 1994. After making these payments and $8.3
million of scheduled U.S. Term Debt payments in 1994, the remaining U.S. Term
Debt balance at yearend 1994 was $78.5 million compared to $98.3 million at
yearend 1993. No additional U.S. Term Debt principal reductions are required
until the $11.0 million required payment due December 29, 1995, which may be
reduced by amounts paid related to certain environmental matters. The balance of
the U.S. Term Debt is due April 30, 1996. The interest rate under the U.S. Term
Debt was the prime rate, plus a margin of 3.0% (or 11.5%) at the end of 1994 and
will be increased by 0.5% at six month intervals to maturity.

The Company intends to explore some manner of debt restructuring or
extension of existing debt prior to the April 1996 U.S. Term Debt maturity date.
Neither the Company nor any of its subsidiaries has any commitment with respect
to restructuring or other sources of financing or extension of existing debt and
there can be no assurance that any such commitment or extension can be obtained
prior to the U.S. Term Debt maturity date. Failure to obtain such a commitment
or extension or failure to pay the term debt when due would constitute an event
of default thereunder, and would give the lenders the right, if they elect to do
so, to foreclose on the collateral which constitutes essentially all the
domestic assets of the Company (except that pledged under the Revolver and
assets of U.S. Brass), including the stock of its foreign subsidiaries. Failure
to pay the term debt when due, would also be an event of default under the
Revolver.

U.S. Brass

As previously disclosed, and as discussed extensively in Note 2, on May
23, 1994, U.S. Brass filed a voluntary petition for reorganization under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court. On June 28, 1994, U.S. Brass
entered into the DIP Financing Agreement with Congress, which had provided
secured financing for working capital purposes prior to the Petition Date.
Pursuant to the DIP Financing Agreement, Congress agreed to provide loans and
advances in an amount not to exceed $20 million when added to the outstanding
amount of advances made by Congress prior to the Petition Date. At yearend 1994,
the outstanding principal amount of such advances was approximately $7.9
million. Unused availability was approximately $6.6 million with an additional
$1.8 million available for professional fees, payment of which is subject to
Bankruptcy Court approval. U.S. Brass believes that it will have sufficient cash
resources and financing to meet trade obligations and cover operating and
reorganization expenses during 1995 and intends to pay all post-Petition Date
operating expenses (including trade obligations) in the ordinary course of
business.

Restricted Cash

Restricted cash relates to cash that is legally restricted as to its
use. At yearend 1994 and 1993, the Company had several components of restricted
cash. Approximately $6.0 million and $6.3 million at yearend 1994 and 1993,
respectively, of the restricted cash balance relates to the reimbursement, from
an insurance carrier under a reservation of rights, 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 U.S. Term Debt only for the

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payment of settlements, judgments, appeal bonds and deposits, attorneys' fees,
and related expenses in the Qest system and other litigation. In addition, the
Company maintained restricted cash balances of approximately $11.3 million and
$9.7 million at yearend 1994 and 1993, respectively, to secure letters of
credit.

(4) INVENTORIES:

Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- -------
<S> <C> <C>
Finished goods .................... $ 35,105 $33,572
Work in process ................... 9,617 8,529
Raw materials ..................... 23,527 17,447
-------- -------

Total inventories ............. $ 68,249 $59,548
======== =======
</TABLE>

Included in finished goods, work in process and raw materials are
inventories valued on the LIFO method of $57.6 million and $46.1 million at the
end of 1994 and 1993, respectively.

If inventories valued on the LIFO method had been valued at their
current cost, they would have been $10.2 million and $8.4 million higher at the
end of 1994 and 1993, respectively.

In 1994, LIFO inventory quantities increased, causing cost of goods
sold to be approximately $1.8 million higher than if inventories had been valued
at their current cost. During 1993 and 1992 inventory quantities were reduced
which resulted in liquidations of LIFO inventory quantities carried at lower
costs prevailing in prior years as compared with the cost of 1993 and 1992
purchases, the effect of which decreased cost of goods sold by approximately
$732,000 and $390,000, respectively.

The Company recorded a $5 million accrual for inventory discontinued in
1991. Charges against accruals in 1994, 1993 and 1992 were approximately
$468,000, $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>
1994 1993
-------- -------
<S> <C> <C>
Land .................................... $ 3,417 $ 3,473
Buildings and leasehold improvements .... 36,419 36,536
Machinery, fixtures and equipment ....... 121,416 112,799
Accumulated depreciation and amortization (101,328) (94,793)
---------- ---------

Properties and equipment, net ............ $ 59,924 $ 58,015
========== =========
</TABLE>

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) ACCRUED EXPENSES:

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
1994 1993
-------- -------
<S> <C> <C>
Accrued income taxes ................ $ 6,779 $ 5,492
Accrued payroll and employee benefits 14,155 13,148
Insurance related accruals .......... 12,971 13,601
Litigation and related reserves ..... 9,638 19,255
Accrued rebates ..................... 8,428 5,122
Other current liabilities ........... 12,704 13,690
-------- -------

Total accrued expenses .......... $ 64,675 $70,308
======== =======
</TABLE>

(7) DEBT:

Short-Term Facilities

As discussed in Note 3, Eljer Manufacturing entered into the Revolver,
for up to $35 million based upon a percentage of accounts receivable and subject
to certain criteria, with Congress during 1994. The Revolver requires
maintenance of various covenants related to information requests, additional
indebtedness, and other non-financial requirements. Eljer Manufacturing was in
compliance with all such covenants at yearend 1994. At the end of 1994, the
outstanding principal amounts of advances were approximately $22.1 million and
unused availability was approximately $6.7 million. Additional restrictive
covenants are placed on the Company if the unused availability amount falls
below $3.5 million. Interest is calculated based upon the prime rate per annum
plus an additional 1% unless Eljer Manufacturing elects to convert a portion of
the prime rate loans to Eurodollar rate loans, which have an interest rate of
LIBOR plus an additional 3%. Yearend 1994 interest rates were approximately
9.19% on approximately $9.0 million of Eurodollar rate based loans, and 9.5% on
approximately $13.1 million of prime rate based loans.

As discussed in Notes 2 and 3, on May 23, 1994, U.S. Brass filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code,
and on June 28, 1994, entered into the DIP Financing Agreement with Congress for
up to $20 million borrowings based on a percentage of accounts receivable and
inventories and subject to certain criteria. As security for the financing under
the DIP Financing Agreement, which expires in June 1996, the Bankruptcy Court
authorized U.S. Brass to grant first priority liens and security interests to
Congress over certain present and future accounts receivable and inventory of
U.S. Brass generated on and after the Petition Date and certain other assets.
The DIP Financing Agreement requires the maintenance of certain financial
covenants, including tangible net worth, working capital and capital expenditure
requirements. At the end of 1994, U.S. Brass was in compliance with all
covenants under the DIP Financing Agreement. The total principal amounts owed by
U.S. Brass related to the DIP Financing Agreement and the previous financing
agreement at yearend 1994 and 1993 were approximately $7.9 million and $3.9
million, respectively. Interest related to these agreements is the prime rate
per annum plus an additional 2%, or 10.5% and 8.0% at yearend 1994 and 1993,
respectively. In addition, $300,000 and $100,000 in facility fees and closing
costs were paid in 1994 and 1993, respectively.

The Company's Selkirk subsidiary in the United Kingdom is party to a
credit 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 $7.3 million. The revolver, which expires in
September 1997,

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 debt discussed below.
There were no balances outstanding at yearend 1994 and 1993 under this facility.
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
German banks totaling approximately $4.8 million, of which approximately $4.0
million was available at yearend 1994. 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 1994 and
1993 was approximately $780,000 and $1.2 million, respectively. Interest on debt
outstanding at annual yearend rates ranged from 8.5% to 9.5% in 1994 and 9.0% to
10.25% in 1993.

At yearend 1994 and 1993, the weighted average interest rates on
outstanding short-term borrowings were approximately 9.7% and 8.3%,
respectively.

Long-Term Facilities

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

<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Domestic:
U.S. Term Debt, secured ................................... $ 78,513 $ 98,251
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% ....................................... 9,755 9,805
Capital lease obligations, secured by letters of credit and
certain fixed assets of the Company, bearing interest
at 8.50% ............................................... 223 439
Foreign:
Bank Term Debt, secured ................................... 6,862 7,939
---------- ----------

Subtotal ...................................................... 95,353 116,434
Less: Current maturities of long-term debt .................... 12,332 13,320
---------- ----------
$ 83,021 $ 103,114
========== ==========
</TABLE>

The Company's U.S. Term Debt and related agreements were amended in
October 1994. See Note 3 for discussion.

As discussed above, the Company's Selkirk subsidiary in the United
Kingdom is party to financing arrangements with a European bank which includes a
revolving credit facility (discussed above) and a term debt portion. 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 margin of between 1.5% to 1.75% based upon the ratio of operating
cash flows 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 Company's subsidiaries in the United Kingdom as defined in the
facility agreement.

Both the foreign and domestic term debt are subject to certain
financial covenants with which the Company was in compliance at yearend 1994.
These covenants include tangible net worth, operating cash

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 U.S. Term Debt.

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>
1995 ................... $ 12,332
1996 ................... 68,912
1997 ................... 2,448
1998 ................... 1,623
1999 ................... 1,338
Thereafter ............. 8,700
--------

Total .......... $ 95,353
========
</TABLE>

Cash paid for interest during 1994, 1993 and 1992 was $14.2 million,
$14.2 million and $14.5 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>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Service cost during the period .............. $ 3,273 $ 2,851 $ 2,773
Interest cost on projected benefit obligation 1,833 1,541 1,299
Actual return on plan assets ................ 611 (2,252) (331)
Net amortization and deferral ............... (1,563) 1,507 (176)
------- ------- -------

Net periodic pension cost ............... $ 4,154 $ 3,647 $ 3,565
======= ======= =======
</TABLE>

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The projected benefit obligations assumed an annual discount rate of
8.0% to 8.5% in 1994 and 7.5% to 9.0% in 1993. The annual rate of compensation
increase ranged from 4.0% to 7.0% in 1994 and in 1993. The expected long-term
annual rate of return on plan assets, which consists primarily of mutual funds,
was 8.5% to 9.5% in 1994 and 8.5% to 10% in 1993. 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>
1994 1993
--------- ---------

<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations ................................... $ 14,577 $ 13,313
========= =========

Accumulated benefit obligations .............................. $ 16,745 $ 15,580
========= =========

Projected benefit obligations ................................ $ 25,065 $ 25,304

Plan assets at fair value ........................................ 18,009 16,899
--------- ---------

Projected benefit obligations in excess of plan assets ........... 7,056 8,405
Unrecognized net loss ............................................ (415) (1,799)
Unrecognized prior service cost .................................. (4,302) (4,661)
Remaining unrecognized net obligation established at April 1, 1989 -- (347)
--------- ---------

Pension liability included in accrued expenses ................... $ 2,339 $ 1,598
========= =========
</TABLE>

The Company also has a defined contribution plan available to all
domestic employees 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 $742,000 in
1994, $715,000 in 1993 and $666,000 in 1992.

(9) OTHER POSTRETIREMENT BENEFITS:

The Company sponsors a welfare benefit plan which provides for certain
health care and life insurance postretirement benefits to certain retired
employees in the United States. Life insurance and comprehensive medical
benefits are available to certain active employees who, immediately upon
retirement, receive a pension under the Company's retirement plan.
Postretirement benefits are also continued for certain former employees who are
currently receiving Company pension benefits. Generally, the medical program
covers dependents of retirees in addition to former employees. Retiree
contributions are required in the case of medical benefits for most retirees and
their eligible 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 plan's combined funded status
reconciled with the amount shown in the Company's financial statement at the end
of 1994 and 1993 (in thousands). Since the Company funds the plan on a
"pay-as-you-go" basis, the Company's postretirement health care plan is
underfunded.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ................................... $ 25,796 $ 30,857
Fully eligible active plan participants .... 3,467 3,576
Other active plan participants ............. 6,323 7,534
--------- ---------

35,586 41,967
Plan assets at fair value ...................... -- --
--------- ---------
Accumulated postretirement benefit obligation in
excess of plan assets ................... 35,586 41,967
Unrecognized actuarial gain (loss) ......... 2,831 (4,125)
Unrecognized prior service cost ............ 1,936 2,901
--------- ---------

Accrued postretirement benefit cost ............ $ 40,353 $ 40,743
========= =========
</TABLE>

Net periodic postretirement benefit cost for 1994, 1993 and 1992
included the following components (in thousands):

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------

<S> <C> <C> <C>
Service cost during the period ............... $ 626 $ 462 $ 931
Interest cost on accumulated postretirement
benefit obligation ....................... 2,715 2,900 3,196
Immediate recognition of transition obligation -- -- 38,676
Amortization of (gains) losses ............... 40 -- --
Amortization of prior service cost ........... (964) (840) --
--------- --------- ---------

Net periodic postretirement benefit cost ..... $ 2,417 $ 2,522 $ 42,803
========= ========= =========
</TABLE>

For measurement purposes, health care cost trend rates for various
services varied from 9.0% in 1994, 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 1994 by $4.5 million, and the aggregate of the
service and interest cost components of net postretirement health care cost for
1994 by $494,000. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation at the end of 1994 and 1993 was
8.25% and 7.0%, 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 7,129,626 shares outstanding at
yearend 1994. Treasury stock totaled 57,249 and 94,549 shares at the end of 1994
and 1993, 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.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
"Incentive 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 distribution of the
Company's stock to holders of Household's stock in April 1989 (the "spin-off").
These Options have special terms as to exercisability and purchase prices based
on the value of the Options forfeited.

The following table summarizes the Options activity:

<TABLE>
<CAPTION>
SHARES RANGE OF OPTION PRICES
------- ----------------------
<S> <C> <C>
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 granted .................................. 140,000 $ 7.13-$ 7.69
Options forfeited ................................ (68,925) $ 7.69-$ 28.63
-------

Options outstanding at yearend 1994............... 559,907 $ 7.13-$ 28.63
=======

Options exercisable at yearend 1994............... 278,657
=======
</TABLE>

At the Distribution Date, the Company had reserved 500,000 shares of
common stock to cover grants under the Incentive Plan. During 1993, 350,000
additional shares were made available. As of the end of 1994 there were 231,283
shares available for grant under the Incentive Plan.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) INCOME TAXES:

Income (Loss) Before Taxes and Income Tax (Benefit) Expense in 1994,
1993 and 1992 are shown below (in thousands):

<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic operations ........... $ (11,286) $ 1,823 $ (6,649)
Foreign operations ............ (1,111) 4,614 16,082
---------- ---------- ----------

Total consolidated ........ $ (12,397) $ 6,437 $ 9,433
========== ========== ==========

Income taxes:
Domestic operations
Current ................... $ 750 $ 1,236 $ 3,100
Deferred .................. -- -- --
---------- ---------- ----------

Total domestic ........ $ 750 $ 1,236 $ 3,100
========== ========== ==========

Foreign operations
Current ................... (923) 663 4,846
Deferred .................. -- -- --
---------- ---------- ----------

Total foreign ......... $ (923) 663 4,846
---------- ---------- ----------

Total consolidated $ (173) $ 1,899 $ 7,946
========== ========== ==========
</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 taxesreflect the impact of "temporary differences" between amounts of
assets and liabilities for financial reporting and tax purposes as measured
using enacted tax rates.

<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 1994 and 1993 are
as follows:

<TABLE>
<CAPTION>
TAX EFFECT
(IN THOUSANDS)
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization ............... $ 10,599 $ 10,525
Inventory ................................... 3,749 3,960
---------- ----------

Total deferred tax liabilities .............. 14,348 14,485
---------- ----------

Deferred tax assets:
Sales and product allowances ................ 2,332 2,594
Self insurance .............................. 6,644 7,264
Litigation and legal ........................ 11,248 7,278
Postretirement and pension benefits ......... 14,489 14,266
EPA ......................................... 4,461 4,223
Other ....................................... 4,473 4,115
---------- ----------
Total deferred tax assets ................... 43,647 39,740
Valuation allowance ......................... (30,181) (26,126)
---------- ----------
Deferred tax assets after valuation allowance 13,466 13,614
---------- ----------

Net deferred tax liabilities ..................... $ 882 $ 871
========== ==========
</TABLE>

At the end of 1994 and 1993, valuation allowances were provided for the
net deferred tax assets as required under SFAS No. 109. The valuation allowance
increased approximately $4.1 million and $674,000 during 1994 and 1993,
respectively.

The Company had a tax basis alternative minimum tax credit carryforward
of approximately $1.2 million at yearend 1994, which is available to reduce
future federal income taxes. The Company had a net operating loss carryforward
of $620,000 at yearend 1994 for domestic federal income tax purposes.

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>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Federal Income Tax (Benefit) Expense at Statutory Rate ........... $ (4,215) $ 2,189 $ 3,207
Increase (decrease) resulting from:
Effects of valuation allowances on deferred tax assets ...... 4,055 674 2,119
Excess of expenses for financial reporting purposes over
tax basis caused by permanent differences ............... 515 418 242
Effects of alternative minimum tax .......................... (202) (606) --
Tax assessment under Household tax sharing agreement ........ -- -- 3,000
Foreign tax effects ......................................... (545) (130) 2,078
Tax effects of distributable earnings in foreign subsidiaries -- (776) (2,700)
Other ....................................................... 219 130 --
--------- --------- ---------

Total Income Tax (Benefit) Expense ...................... $ (173) $ 1,899 $ 7,946
========= ========= =========
</TABLE>

<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 $640,000 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 $8.8 million
of undistributed earnings of foreign subsidiaries at the end of 1994, 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 1994 due to the availability of foreign tax credits.

Under an agreement with Household, the Company is entitled to the tax
deduction, if it can be utilized, associated with certain liabilities 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. An estimate of approximately $20.8 million of the
liabilities for which the Company may receive a benefit remain at yearend 1994.
The Company's portion of these liabilities at the end of 1994 approximates $8.0
million. These payments would have no impact on the financial results of the
Company if it were subject to statutory tax rates; however, an impact did occur
due to the Company's alternative minimum tax or taxable loss position in the
years presented. A total of $1.2 million, $1.3 million and $4.6 million of such
payments were made in 1994, 1993 and 1992, respectively. The impact of future
payments will be dependent on the tax paying position of the Company.

Net cash refunds related to income taxes in 1994 were $4.0 million.
Cash paid for income taxes in 1993 and 1992 was $3.6 million and $7.0 million,
respectively.

(12) LEASES:

Rental expense under operating leases was $5.6 million, $6.2 million
and $6.3 million in 1994, 1993 and 1992, respectively.

Future minimum lease commitments under noncancelable operating leases
at the end of 1994 were as follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
1995 .............................. $3,407
1996 .............................. 2,205
1997 .............................. 1,782
1998 .............................. 1,545
1999 .............................. 764
Thereafter ........................ --
------
Total minimum lease commitments $9,703
======
</TABLE>

(13) CONTINGENCIES:

Qest System Litigation

The Company is involved in certain litigation related to Qest
polybutylene plumbing systems. See Note 2 for discussion.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Environmental Matters

The Company operates plants that may generate hazardous and
nonhazardous waste, disposal of which is subject to federal and state
regulation. 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
Company facilities have been required to implement programs to remedy the
effects of past waste disposal. Not all plants have been the focus of
comprehensive environmental studies. Except as described below, the Company is
not aware of any 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.
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 $13.8 million at the end of 1994 (see
discussion of individual sites and summary table provided herein) pertaining to
environmental, health and safety matters which the Company believes are
adequate. Although the timing of the related payments is uncertain, the Company
believes that a substantial portion of the payments will be made over the next
three years.

Salem and Marysville, Ohio, Facilities. The Company and the Ohio
Environmental Protection Agency ("Ohio EPA") previously reached agreement on a
proposed closure plan for the Company's Salem, Ohio, facility and the Company
submitted a revised closure plan on April 30, 1993. The Company has not yet
received either approval of, or comments on, the revised closure plan. The
Company has paid $1.6 million to complete an interim closure of the subject area
and accruals of approximately $1.8 million for additional closure and
post-closure costs expected in future periods are recorded at yearend 1994,
which the Company believes are adequate. No activity related to closure or
postclosure of the Salem, Ohio, facility had a material adverse impact on the
Company's 1994 liquidity or results of operations and none is expected.

As disclosed in last year's Form 10-K, the Company has submitted a
closure plan for its Marysville, Ohio, facility to the Ohio EPA, which has not
yet commented on the plan. The Marysville, Ohio, facility was closed in 1987. If
it is approved in its current form, the Company's environmental consultants
estimate that the cost of implementing the closure plan, including post-closure
care, will be approximately $9.4 million. However, the ultimate cost to complete
closure and post-closure activities at the facility will depend to a large
extent on the remediation technology ultimately agreed upon by the Ohio EPA. The
Company has previously established accruals which it believes will be adequate
to provide for the cost to implement its closure plan. However, there is no
assurance that the plan will be approved without making additional revisions or
modifications. Although no estimate can be made, in the event the closure plan
is not approved, the cost of remediation could have a material impact on future
operating results or financial position.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 with the United
States Environmental Protection Agency (the "U.S. EPA") relating to the Salem
site. On October 19, 1994 the Company accepted the DOJ offer pending agreement
on a modification to the 1990 consent decree which has not yet been reached. The
Company has established accruals which it believes adequate to provide for the
$175,000 cash penalty assessed. The Company currently meets its financial
responsibility requirements regarding the Salem site although Ohio EPA has
recently 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 intends to resolve this issue prior to entering into final agreement with
the DOJ on the penalties discussed above.

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. Subsequently, the Company received
correspondence from the Ohio EPA threatening to escalate enforcement action
against the Company, and in October 1994, the Company received correspondence
from the Ohio Attorney General threatening commencement of a lawsuit for failure
to meet the financial assurances section of the Ohio Administrative Code. The
Company is currently negotiating the matter with the Ohio Attorney General's
office and the Ohio EPA and may be required to place $8.5 million in cash in a
trust which will be used to pay for the clean-up at this site to meet the
financial assurance requirements. Ohio statutes permit the Ohio Attorney General
to seek penalties of up to $10,000 per day for violations of its regulations and
makes the reckless violation of its regulations a felony. If a settlement is not
reached, the Ohio Attorney General might argue that the Company has been out of
compliance with two separate financial assurance requirements since March 1992.
The Company continues to believe that it has legitimate defenses to the
imposition of any penalties and intends to vigorously defend against such
penalties, but cannot currently estimate what penalties, if any, may be imposed
on the Company if it is ultimately found to have violated the Ohio regulations.
Accordingly, no specific accrual has been established to provide for such
penalties.

As reported in the Company's 1993 Form 10-K, the Company has negotiated
with the DOJ and the U.S. EPA a settlement for alleged violations of the Clean
Water Act for unpermitted discharge of wastewater streams at the Salem, Ohio
plant. The settlement calls for the payment of a $300,000 cash penalty and the
performance of certain remediation work estimated to cost approximately
$690,000. The specific terms and conditions of the settlement remain to be
negotiated. The Company has previously established accruals which it believes
are adequate to cover these costs.

As disclosed in the Company's 1993 Form 10-K, 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. Through notifications from the U.S. EPA, the
Company believes its total liabilities related to Superfund sites to be
immaterial (approximately $220,000 at year end 1994) if liability and
contributions are assessed in an equitable manner among all responsible parties.
The Company has established accruals which it believes are adequate to provide
for any liabilities it may have with respect to these sites.

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Wilson, North Carolina, Site. In anticipation of the 1994 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 benzene and methylene chloride. 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,
the direction of groundwater flow and the Company's understanding that
trichloroethene has never been used at the plant, it is presently the Company's
belief that any trichloroethene on the property originated from off-site
sources. The Company does not believe it is responsible for remediation of any
trichloroethene which may be present at the site. However, the Company retains
responsibility under the indemnification provisions included in the Purchase and
Sale Agreement to remediate benzene and methylene chloride that exceed maximum
levels allowed by North Carolina law. While the cost to comply with the
Company's indemnity obligations is estimated at $509,000 based on the use of
traditional remediation methods, the Company hopes to receive approval from the
state of North Carolina to pursue alternative remediation methods. The Company
has established accruals which it believes are adequate to provide for the costs
of investigation and remediation, if any.

Proposition 65. As previously disclosed, Eljer Industries, Eljer
Manufacturing, U.S. Brass and approximately 15 other manufacturers and sellers
of residential and commercial brass faucets are defendants in lawsuits brought
by the Attorney General of the State of California and the Natural Resources
Defense Council and the Environmental Law Foundation alleging violations of
California's Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition
65"). The lawsuits allege that U.S. Brass and Eljer Manufacturing did not label
their faucets in conformity with Proposition 65. The lawsuits further allege
that U.S. Brass and Eljer Manufacturing knowingly discharged or released lead
into drinking water in violation of Proposition 65, which discharge and exposure
allegedly arose out of leaching of lead into drinking water from leaded brass
faucets manufactured by the defendants. The California trial court has ruled in
the case brought by the California Attorney General that no cause of action has
been stated to support the claim that faucets leach lead into drinking water.
That ruling has been appealed to the California Court of Appeal. As part of a
proposal to settle these lawsuits, U.S. Brass has developed a faucet
manufactured from bismuth brass as opposed to leaded brass. If a settlement is
reached, it is expected that the Company and U.S. Brass will begin selling the
bismuth brass faucets in California as well as continuing to sell its leaded
brass faucets with appropriate Proposition 65 labeling. Additionally, the
Company and U.S. Brass are currently attempting to negotiate a settlement
concerning any penalties that might be due as a result of the failure of the
Company and U.S. Brass to properly label faucets sold in California in
accordance with Proposition 65 and for the alleged violation of the discharge
requirements. The Company does not expect the resolution of these lawsuits to
have a material adverse effect on its financial condition or results of
operations. Claims have been filed in the U.S. Brass bankruptcy totalling $6
million related to this matter. The Company disputes these claims and expects to
file an objection to them in the Bankruptcy Court. The

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outcome of the claims against U.S. Brass will be dependent on the final Plan.
See Note 2 for discussion. The Company and U.S. Brass currently label their
faucets in accordance with Proposition 65.

Following is a summary of environmental contingencies (in thousands):

<TABLE>
<CAPTION>
CHARGE
ESTIMATED ACCRUAL AGAINST CASH
GROSS BALANCE 1994 PAID IN
CONTINGENCY LIABILITY @ 1/1/95 EARNINGS 1994
----------- --------- -------- -------- -------

<S> <C> <C> <C> <C>
Salem closure,
post closure and
financial
assurance .......... $2,375 $2,375 $ 545 $ 0

Marysville closure
& post closure ..... 9,400 9,400 0 0

Marysville financial
assurance .......... Not Estimable 0 0 0

Salem Clean
Water Act
settlement ......... 990 990 0 0

All other
(individually less
than $1 million) ... 320 - 1,579 1,016 455 249
----------- ------ ------ -----
Total $13,085 - 14,344 $13,781 $1,000 $249
================ ======= ====== ====
</TABLE>

The Company has recently made claims to its applicable insurance
carriers under certain insurance policies for any amounts paid in the past or
for which it may become obligated to pay in the future in connection with
various environmental matters. The Company cannot predict the amount, if any, of
insurance proceeds that may be received as a result of these environmental
claims. No receivables from insurance carriers have been recorded related to
environmental matters.

Kowin and Related Litigation

On June 10, 1994, the United States Supreme Court denied the petition
for certiorari filed by Eljer Manufacturing in the previously disclosed Kowin
Development Company ("Kowin") litigation. The litigation resulted from a failed
manufacturing joint venture in the People's Republic of China (the "PRC Joint
Venture") in which Kowin held a 25% interest. On June 30, 1994, a final judgment
was entered and Kowin was paid approximately $11.6 million of the $13.2 million
cash bond previously posted by Eljer Manufacturing for this litigation.
Approximately $1.6 million of related amounts previously paid, plus interest
thereon, was returned to the Company. The amount of the judgment and related
costs were included in an extraordinary charge against earnings in 1992.

On October 24, 1994, the American Arbitration Association arbitrator
hearing Croft Investments, Ltd. ("Croft") v. Eljer Manufacturing, a/k/a HMI and
Eljer Industries (the "Croft Arbitration") dismissed all claims filed by Croft.
Croft was an affiliate of Kowin in the PRC Joint Venture. On January 31, 1995,
counsel for Croft executed a stipulation confirming that Croft will not

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contest that ruling by the arbitrator in the Croft Arbitration. As a result, on
February 7, 1995, Eljer Industries and Eljer Manufacturing filed a joint motion
to dismiss the appeal previously filed with the United States Court of Appeals
for the Ninth Circuit on Croft's ability to prosecute the Croft Arbitration
which was subsequently granted.

The approximately $1.2 million judgment against Eljer Manufacturing
entered in the People's Republic of China and previously disclosed, remains
subject to an appeal, but is outstanding and unpaid. Based upon advice of
counsel, Eljer Manufacturing continues to believe it has substantial procedural
defenses against any effort to enforce this judgment in the United States. Eljer
Manufacturing believes its $1.2 million accrual is adequate to provide for any
liability ultimately incurred in this matter. Additionally, as previously
disclosed, in 1988 Simonds Industries, Inc. purchased HMI's interest in the PRC
Joint Venture and may have liability for a portion of the amount awarded;
however, no estimate can be made of the amount, if any, that Eljer Manufacturing
may receive from Simonds Industries, Inc.

On October 24, 1994, Winston and Dorothy Ko, the owners of Kowin and
Croft, filed a complaint in the Circuit Court of Cook County, Illinois seeking
individual damages in an action entitled Winston Ko and Dorothy Ko v. Eljer
Industries, Inc., et al. Plaintiffs have claimed approximately $24 million in
damages for alleged losses on their real estate investments, and also seek
unspecified exemplary and punitive damages, and unspecified damages for alleged
injury to their reputations, for emotional distress and for lost profits on
their real estate investments. Eljer Industries, Eljer Manufacturing and related
individual defendants have filed a motion to dismiss the complaint. If the case
is ultimately litigated, the Company believes that it has adequate defenses and
should prevail.
Accordingly, no accrual has been established for this contingency.

Other Matters

As previously disclosed, the Consumer Product Safety Commission
("CPSC") has initiated an investigation under Section 15 of the Consumer Product
Safety Act (the "Act") as to whether a vent pipe product manufactured by Chevron
Chemical Company's Plexco Performance Pipe Division poses a substantial product
hazard under the Act. The vent is used to exhaust combustion gases from mid-and
high-efficiency small water boilers and central heating furnaces. Eljer
Manufacturing's Selkirk Metalbestos division ("Selkirk") distributed the Plexco
vent pipe from mid-1990 until the end of 1993. Selkirk began manufacturing and
selling its own vent pipe product in January 1994. Selkirk has responded to
informal requests for information from the CPSC and has also sent samples, as
requested, of its own vent pipe product. The status, as well as the scope and
extent of the CPSC investigation are unknown. However, by law, the CPSC may
direct repair, replacement or refund of any product that it believes poses a
substantial product hazard. In Canada, use of Plexco and similar vent pipe has
been restricted to certain applications by provincial authorities pending
further investigation. Selkirk believes that its vent product does not exhibit
the same characteristics as the Plexco product, but is continuing to test and
monitor its product. Therefore, no accrual for this contingency has been made.

(14) RELATIONSHIP WITH HOUSEHOLD:

The Company is currently involved in litigation with its former parent,
Household, relating to the spin-off in April 1989. Household filed an action in
the Delaware Chancery Court on February 5, 1993 against the Company, Eljer
Manufacturing and U.S. Brass seeking declaratory relief. Following a finding by
the Delaware Chancery Court that it had no subject matter jurisdiction, that
action was transferred to the Delaware Superior Court for trial on the merits
where it remains pending. On March

<PAGE>

ELJER INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9, 1995, the Delaware Superior Court denied the Company's motion to dismiss or
stay the Delaware action. The Company may appeal that decision. Discovery is
proceeding in that action, but no trial date has been set.

On February 11, 1993, the Company and Eljer Manufacturing filed a
breach of contract action against Household in the District Court of Dallas
County, Texas, 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. The Company is
preparing for trial in the Texas action and a trial date has been set for the
week of July 10, 1995.

(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>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Sales to unaffiliated customers-
North America ............. $ 340,628 $ 313,376 $ 301,898
Europe .................... 65,435 74,186 95,445
----------- ----------- -----------

Total ................. $ 406,063 $ 387,562 $ 397,343
=========== =========== ===========

Income (Loss) from operations-
North America ............. $ 334<F1> $ 15,765 $ 9,483
Europe .................... (65) 5,306 13,888
----------- ----------- -----------

Total ................. $ 269 $ 21,071 $ 23,371
=========== =========== ===========

Identifiable assets-
North America ............. $ 210,207 $ 187,814 $ 193,132
Europe .................... 46,850 47,609 61,236
----------- ----------- -----------

Total ................. $ 257,057 $ 235,423 $ 254,368
=========== =========== ===========

<FN>
<F1> This includes a $21.9 million unusual charge related to U.S. Brass (see
Note 2 for additional discussion). Not considering the unusual charge,
North American and Total Income from Operations would have been $22.2
million and $22.1 million, respectively in 1994.
</FN>
</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1994
----
<S> <C> <C> <C> <C>
Net sales ........................................................ $ 90,875 $ 103,356 $ 107,872 $ 103,960
Gross profit ..................................................... 24,268 27,435 32,022 28,973
Net income (loss) ................................................ 360 2,386 4,265 (19,235)<F1>
Earnings (loss) per share ........................................ .05 .34 .60 (2.71)

<CAPTION>
1993
----
<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)

<FN>
<F1> This includes a $21.9 million unusual charge related to U.S. Brass (see
Note 2 for additional discussion). Not considering the unusual charge
and its related tax effect, Net Income for the fourth quarter of 1994
would have been $2.6 million.
</FN>
</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.

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 20, 1995, sets forth certain information with respect to the directors
of the Registrant and is incorporated herein by reference. Certain information

<PAGE>

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 20, 1995, 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 20, 1995, 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 20, 1995, 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 16.

(2) FINANCIAL STATEMENT SCHEDULES

Index to Consolidated Financial Statement Schedules

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants 54

For the three years 1994, 1993 and 1992:
Schedule II -Valuation and Qualifying Accounts 55
</TABLE>

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 <F1> Form of Restated Certificate of Incorporation of the Registrant.

3B <F1> Form of Amended Bylaws of the Registrant.

<PAGE>

<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4A <F1> Form of Restated Certificate of Incorporation of the Registrant (see Exhibit
3A).

4B <F1> Form of Amended Bylaws of the Registrant (see Exhibit 3B).

4C <F1> Form of Common Stock Certificate.

4D <F1> Form of Rights Agreement between the Registrant and Harris Trust &
Savings Bank, as Rights Agent ("Rights Amendment").

4E <F1> Amendment and Amendment No. 2 to Rights Agreement dated as of July
31, 1989 and January 4, 1990, respectively.

4F <F3> Amendment No. 3 to Rights Agreement dated as of November 5, 1991.

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.

4G <F4> 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".

4H <F6> Form of First Amendment to Amended and Restated Credit Agreement
dated as of March 25, 1994.

4I <F7> Form of Second Amendment to Amended and Restated Credit Agreement
dated as of October 17, 1994.

4J <F7> Loan and Security Agreement by and among Congress Financial
Corporation (Southwest) as Lender and Eljer Manufacturing, Inc. as
Borrower and Eljer Industries, Inc. as Guarantor dated October 17, 1994.

10A <F1> Form of Reorganization and Distribution Agreement.

10B <F1> Form of Employee Benefits and Labor Agreement.

10C <F1> Form of Tax Sharing Agreement.

10D <F1> Form of Transition Management Services Agreement.

10E <F1> Form of Standstill Agreement between the Registrant & Household
International, Inc.

10F <F2> Form of Employment Agreement with Scott G. Arbuckle.

10G <F2> Form of Employment Agreement with James F. Thomason.

<PAGE>

<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10H <F2> Form of Employment Agreement with Charles R. Wackenhuth, Henry W.
Lehnerer, James A. Harris and Brooks F. Sherman.

10I Form of Employment Agreement with George W. Hanthorn.

10J <F1> Salaried Pension Plan for Eljer Manufacturing, Inc.

10K <F1> Tax Reduction Investment Plan.

10L <F1> Long-Term Executive Incentive Compensation Plan of the Registrant.

10M <F2> 1991 Long-Term Incentive Plan.

10N <F2> Form of Executive Severance Agreement with Scott G. Arbuckle.

10O Form of Amendment to Executive Severance Agreement with Scott G.
Arbuckle.

10P <F2> Form of Executive Severance Agreement with James F. Thomason, Charles
R. Wackenhuth, Henry W. Lehnerer, James A. Harris, Brooks F. Sherman
and George W. Hanthorn.

10Q Form of Amendment to Executive Severance Agreement with James F.
Thomason, Charles R. Wackenhuth, Henry W. Lehnerer, James A. Harris,
Brooks F. Sherman and George W. Hanthorn.

10R <F3> Eljer Supplemental Benefit Plan.

10S <F3> Eljer Excess Benefit Plan.

10T <F5> Eljer Industries, Inc. Stock Payment Plan for Non-Employee Directors

21 Subsidiaries of the Registrant.

23 Consent of Arthur Andersen, LLP, independent
certified public accountants.

27 Financial Data Schedule
----------
<FN>
<F1> 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).

<F2> 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.

<F3> 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.

<F4> 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.

<PAGE>

<F5> Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed December 16, 1993 (registration no. 33-51527).

<F6> Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended January
2, 1994, filed March 31, 1994.

<F7> Incorporated by reference to the Registrant's
Quarterly Report on Form 10- Q for the Quarterly
period ended October 2, 1994 filed November 16, 1994.
</FN>
</TABLE>

(4) REPORTS ON FORM 8-K

None.

Subsequent Reports on Form 8-K

None.

<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 23, 1995. Our report on the consolidated financial statements
includes an explanatory paragraph with respect to the substantial doubt about
the Company's ability to continue as a going concern in its present consolidated
form due to the issues arising from the Qest polybutylene plumbing systems
manufactured and sold by the Company's indirect, wholly-owned subsidiary, United
States Brass Corporation. Our report on the consolidated financial statements
also includes an emphasis of matter paragraph regarding the Company's term debt,
which expires on April 30, 1996. These matters are discussed in Notes 2 and 3 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 in 1992 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 schedule listed in the index to Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states 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 LLP

Dallas, Texas,
March 28, 1995

<PAGE>

ELJER INDUSTRIES, INC.
SCHEDULE II - 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
----------- ----------- ---------- -------- --------- ---------

1992
----
<S> <C> <C> <C> <C> <C>
Accounts receivable reserves $ 8,964 $ 6,155 $ -- $ (5,051)<F1> $ 10,068
======== ======= ======== ======== ========

Reserve for receivables from
insurance carriers .... $ 14,613 $ -- $ -- $ (1,158) $ 13,455
======== ======= ======== ======== ========

<CAPTION>
1993
----
<S> <C> <C> <C> <C> <C>
Accounts receivable reserves $ 10,068 $ 3,229 $ (207) $ (4,200)<F1> $ 8,890
======== ======= ======== ======== ========

Reserve for receivables from
insurance carriers .... $ 13,455 $ -- $ -- $ (6,005)<F2> $ 7,450
======== ======= ======== ======== ========

<CAPTION>
1994
----
<S> <C> <C> <C> <C> <C>
Accounts receivable reserves $ 8,890 $ 2,747 $ -- $ (3,941)<F1> $ 7,696
======== ======= ======== ======== ========

Reserve for receivables from
insurance carriers .... $ 7,450 $ -- $ (7,198)<F3> $ (252)<F2> --
======== ======= ======== ======== ========

<FN>
<F1> Includes primarily write-offs of uncollectible accounts and customer discounts taken.
<F2> Includes primarily collection of proceeds from insurance carriers.
<F3> Represents write-off against related asset.
</FN>
</TABLE>

<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 29, 1995 ELJER INDUSTRIES, INC.
----------------

By: /s/Henry W. Lehnerer
----------------------------
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 Chairman of the Board March 29, 1995
--------------------
Frank J. Morgan

/s/Scott G. Arbuckle Director, President March 29, 1995
--------------------- and Chief Executive Officer
Scott G. Arbuckle (Principal Executive Officer)

/s/Henry W. Lehnerer Vice President-Finance March 29, 1995
---------------------- and Chief Financial
Henry W. Lehnerer Officer (Principal
Financial and
Accounting Officer)

/s/John H. Deininger Director March 29, 1995
----------------------
John H. Deininger

/s/Paul E. Price Director March 29, 1995
----------------------
Paul E. Price

/s/C. A. Rundell, Jr. Director March 29, 1995
----------------------
C. A. Rundell, Jr.

/s/Walter C. Minnick Director March 29, 1995
----------------------
Walter C. Minnick
</TABLE>

<PAGE>

October 17, 1994

PRIVATE AND CONFIDENTIAL

Mr. George W. Hanthorn
1203 Dunbarton Dr.
Richardson, TX 75081

Re: Employment Agreement

Dear George:

1. This letter confirms your employment by ELJER INDUSTRIES, INC.
(the "Company") as Vice President - General Counsel. In that
capacity, you are entitled to the following:

a. A minimum annual salary of $200,000;

b. Benefits as described in, and in accordance with, the
Company's benefit plans; and

c. An annual par bonus equal to 40% of your annual salary. The
amount of bonus that you actually receive, if any, will depend
on the achievement of Corporate and your individual goals.
You are guaranteed that you will receiva a bonus of a least
25% of your annual salary earned in 1994 and in 1995.

2. During your employment with the Company, you will devote your full time
and energies to the faithful and diligent performance of the duties
inherent in, and implied by, your executive position.

3. In consideration of your continued employment with the
Company, it is mutually agreed that:

a. In the event your employment with the Company is
terminated by the Company, for any reason other than:

i. "Cause," as determined by the Compensation Committee
of the Board of Directors (for this purpose, "cause"
shall mean: (A) your willful and continued failure to
substantially perform your duties hereunder (other
than any such failure resulting from a "disability,"
as defined herein); or (B) your conviction for
committing an act of fraud, embezzlement, theft, or
other act constituting a felony; or (C) your willful
engagement in gross misconduct which is materially
and demonstrably injurious to the Company); or

<PAGE>

Mr. George W. Hanthorn
Page 2
October 17, 1994

ii. Inability, for reasons of "disability," reasonably to
perform your duties for six consecutive calendar
months (for purposes of this Agreement, "disability"
shall mean a permanent and total disability, within
the meaning of Internal Revenue Code Section
22(e)(3), as determined by the Compensation Committee
of the Board of Directors, in the exercise of good
faith and reasonable judgment, upon receipt of and in
reliance on sufficient competent medical advice from
a qualified physician selected by the Compensation
Committee); or

b. In the event that you resign your position with the
Company because:

i. You are assigned to a position of lesser rank or
status; or

ii. Your annual salary, annual par bonus, level of
participation in management incentive plans, or your
benefits are reduced; or

iii. You are reassigned to a geographical area more than
50 miles from your present residence;

the Company shall be required, and hereby agrees, to continue
paying your then annual salary, to pay your then annual bonus
at par level, and to provide all pension, profit sharing,
deferred compensation, medical and life insurance benefits
under the Company's benefit plans, or the economic equivalent
thereof, for a period of 12 months from the date of such
termination or resignation. If, pursuant to the terms of a
benefit plan, a benefit would be earned or accrued during such
12-month period but would be payable on a deferred basis (were
you to be employed during such 12-month period) the benefit
similarly shall be deferred hereunder; provided, however, that
the Company reserves the right to pay the present value of
such benefit to you in cash at the end of such 12-month
period.

4. You are not required to mitigate the amount of any payments to be made
by the Company, pursuant to this Agreement, by seeking other
employment, or otherwise, nor shall the amount of any payments provided
for in this Agreement be reduced by any compensation earned by you, as
the result of self-employment or your employment by another employer,
after the date of termination of your employment with the Company.

<PAGE>

George W. Hanthorn
Page 3
October 17, 1994

5. This Agreement will commence on October 17, 1994, and will
continue in effect until April 30, 1996, the last day of
which shall be the "Expiration Date." However, at the end of
said period and, if extended, at the end of each additional
year thereafter, the term of this Agreement shall be extended
automatically for one additional year, unless the Compensation
Committee of the Board of Directors delivers written notice
three months prior to the end of such term, or extended term,
to you, that this Agreement will not be extended. In such
case, this Agreement will terminate at the end of the term, or
extended term, then in progress.

The Company's obligation to pay severance benefits upon an employment
termination, within the two-year period following a "change in control"
shall be entirely governed by the terms of your Executive Severance
Agreement.

6. If a dispute arises regarding the termination of your
employment or the interpretation or enforcement of this
Agreement, and you obtain a final judgment, in your favor,
from a court of competent jurisdiction, from which no appeal
may be taken, whether because the time to do so has expired,
or otherwise, or your claim is settled by the Company prior to
the rendering of such a judgment, all reasonable legal and
other professional fees and expenses incurred by you in
contesting or disputing any such termination, or in seeking to
obtain or enforce any right or benefit provided for in this
Agreement, or in otherwise pursuing your claim, will be
promptly paid by the Company, with interest thereon, at the
highest statutory rate of your state of domicile, for interest
on judgments against private parties, from the date of payment
thereof by you to the date of reimbursement to you by the
Company.

Please acknowledge your acceptance of the terms and provisions of this Agreement
by signing in the space indicated below. We look forward to your contribution to
the success of ELJER INDUSTRIES, INC.

Sincerely, ACCEPTED AND AGREED as of

ELJER INDUSTRIES, INC. November 1, 1994
------------------------------

By:/s/ Scott G. Arbuckle /s/ George W. Hanthorn
----------------------- ------------------------------

AMENDMENT TO
EXECUTIVE SEVERANCE AGREEMENT

This Amendment to Executive Severance Agreement ("Amendment") dated as
of February 22, 1995, is between Eljer Industries, Inc., a Delaware corporation
(the "Company"), and Scott G. Arbuckle (the "Executive").

Recitals

A. The Company and the Executive are parties to the Executive Severance
Agreement dated as of May 2, 1991 (the "Agreement"), which is still
effective.

B. The parties have discovered, upon recent review, that certain
provisions of the Agreement are inaccurate or inconsistent with
each other and may be read in a manner contrary to the parties'
intent and understanding.

C. The parties desire to amend the Agreement as set forth below to
correct certain inaccuracies and inconsistencies in the Agreement
and to cause the Agreement to reflect more clearly their intent and
understanding.

Agreement

In consideration of the Recitals and the mutual covenants set forth in
this Amendment, the receipt and sufficiency of which are hereby acknowledged,
the Company and the Executive hereby agree as follows:

1. Definitions and Effectiveness. Except as otherwise defined in this
Amendment, all capitalized terms used herein shall have the respective meanings
set forth in the Agreement. This Amendment shall be effective for all purposes
as of the date set forth in the initial paragraph hereof.

2. References to Employment Agreement. All of the references in the
Agreement to the Executive's employment agreement with the Company dated
April 1, 1989, are amended to be references to the Executive's employment
agreement dated as of April 18, 1991.

3. Benefits Payable upon Retirement. Section 2.6 of the Agreement is
amended to read in its entirety as follows:

2.6 Termination upon Death or Retirement. Following a Change
in Control of the Company, if the Executive's employment is terminated
by reason of his death, the Executive's benefits shall be determined in
accordance with the Company's survivor's benefits, insurance, and other
applicable programs then in effect. If the Executive's employment is
terminated by reason of his retirement (as defined under the then
established rules of the Company's tax-qualified retirement plan)
within twenty-four (24) calendar months after a Change in Control of
the Company, the Executive shall be entitled to benefits determined in
accordance with the Company's retirement, insurance, and other
applicable programs then in effect, in addition to the Severance
Benefits.

<PAGE>

4. Rights and Obligations upon Termination for Cause. Section 2.7 of
the Agreement is amended to read in its entirety as follows:

2.7 Termination for Cause. Following a Change in Control of
the Company, if the Executive's employment is terminated by the Company
for Cause, the Company shall pay the Executive his Base Salary and
accrued vacation through the Effective Date of Termination, at the rate
then in effect, plus all other amounts to which the Executive is
entitled under any compensation plans of the Company, at the time such
payments are due.

5. Nonassumption by Successor. The second sentence of the first
paragraph of Article 8 of the Agreement is amended to read in its entirety as
follows:

Failure of the Company to obtain such assumption and agreement prior to
the effective date of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the
Company in the same amount and on the same terms as he would be
entitled to hereunder if he had terminated his employment with the
Company within twenty-four (24) calendar months after a Change in
Control.

6. Termination before a Change in Control. The second sentence of
Section 9.1 of the Agreement is amended to read in its entirety as follows:

Upon a termination of the Executive's employment by the Company or the
Executive or by reason of the Executive's death before the occurrence
of a Change in Control, there shall be no further rights under this
Agreement; provided, however, that if the Company terminates the
Executive's employment for any reason other than Disability or Cause in
connection with, or in anticipation of, a proposed Change in Control,
then the Executive's rights under this Agreement shall be the same as
if the termination had occurred within twenty-four (24) calendar months
after a Change in Control.

7. Nonexclusion of Applicable Plans. The following sentence is added
to, as the fourth sentence of, Section 9.3 of the Agreement:

Notwithstanding the first sentence of this Section 9.3, however,
nothing in this Agreement shall negate or impair any rights that the
Executive may have under the Eljer Industries, Inc. Long-Term Executive
Incentive Compensation Plan or the Eljer Industries 1991 Long- Term
Incentive Plan, or both, upon the occurrence of a Change in Control of
the Company.

8. Remainder of Agreement. Except as amended hereby, the Agreement
shall continue in full force and effect in the form that was effective
immediately before the effectiveness of this Amendment.

<PAGE>

9. Counterparts. This Amendment may be executed in counterparts, each
of which shall for all purposes be deemed an original and all of which shall
constitute the same document.

The Company:

ELJER INDUSTRIES, INC.

By:
----------------------------------
Member of Compensation Committee of
the Board of Directors

The Executive:

----------------------------------
SCOTT G. ARBUCKLE

192756/GW04

<PAGE>

AMENDMENT TO
EXECUTIVE SEVERANCE AGREEMENT

This Amendment to Executive Severance Agreement ("Amendment") dated as
of February 22, 1995, is between Eljer Industries, Inc., a Delaware corporation
(the "Company"), and Charles R. Wackenhuth (the "Executive").

Recitals

A. The Company and the Executive are parties to the Executive Severance
Agreement dated as of May 2, 1991 (the "Agreement"), which is still
effective.

B. The parties have discovered, upon recent review, that certain
provisions of the Agreement are inaccurate or may be read in a
manner contrary to the parties' intent and understanding.

C. The parties desire to amend the Agreement as set forth below to
correct certain inaccuracies in the Agreement and to cause the
Agreement to reflect more clearly their intent and understanding.

Agreement

1. Definitions and Effectiveness. Except as otherwise defined in
this Amendment, all capitalized terms used herein shall have the respective
meanings set forth in the Agreement. This Amendment shall be effective for all
purposes as of the date set forth in the initial paragraph hereof.

2. References to Other Benefits. The last recital or "Whereas"
paragraph of the Agreement is amended to read in its entirety as follows:

WHEREAS, the Executive and the Company desire that the terms
of this Agreement, with the terms of the Eljer Industries, Inc.
Long-Term Executive Incentive Compensation Plan and the Eljer
Industries 1991 Long-Term Incentive Plan, to the extent that the
Executive has an award under either or both of such plans, shall
constitute the entire understanding of the parties regarding the
Executive's entitlement to payment and benefits following a Change in
Control of the Company;

3. Termination before a Change in Control. The second sentence
of Section 9.1 of the Agreement is amended to read in its entirety as follows:

<PAGE>

rights under this Agreement shall be the same as if the termination had
occurred within twenty-four (24) calendar months after a Change in
Control.

4. Nonexclusion of Applicable Plans. Section 9.3 of the
Agreement is amended to read in its entirety as follows:

9.3. Entire Agreement. Except as described in the following
sentence of this Section 9.3, this Agreement contains the entire
understanding of the Company and the Executive with respect to the
Executive's entitlement to payments and benefits arising as a result of
a Change in Control of the Company. Nothing in this Agreement shall,
however, negate or impair any rights that the Executive may have under
the Eljer Industries, Inc. Long-Term Executive Incentive Compensation
Plan or the Eljer Industries 1991 Long-Term Incentive Plan, or both,
upon the occurrence of a Change in Control of the Company.

5. Remainder of Agreement. Except as amended hereby, the
Agreement shall continue in full force and effect in the form that was effective
immediately before the effectiveness of this Amendment.

6. Counterparts. This Amendment may be executed in counterparts,
each of which shall for all purposes be deemed an original and all of which
shall constitute the same document.

The Company:

ELJER INDUSTRIES, INC.

By:
--------------------------------
Member of Compensation Committee of
the Board of Directors

The Executive:

--------------------------------
CHARLES R. WACKENHUTH
4/192822.1

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF ELJER INDUSTRIES, INC.

<TABLE>
<CAPTION>
Percentage State/Country of
Ownership Incorporation
----------- ----------------
<S> <C> <C>

Design Plus, Inc. <F1> 100% Pennsylvania

Eljer FSC Ltd. 100% Virgin Islands

Eljer Industries Limited 100% United Kingdom

Eljer Manufacturing Canada, Inc. <F1> 100% Canada

Eljer Manufacturing, Inc. 100% Delaware

Eljer Plumbingware (1) 100% Delaware

Eljer Services Corp. 100% Delaware

GlasTec, Inc. (1) 100% Delaware

Industrias Eljer de Mexico, S.A. de C.V. <F1> 100% Mexico

Selkirk Canada U.S.A., Inc. 100% Delaware

Selkirk Europe U.S.A., Inc. 100% Delaware

Selkirk Manufacturing France S.A.R.L. <F2> 99.95% France

Selkirk Manufacturing Limited <F1> 100% United Kingdom

Selkirk Schornsteintechnik GmbH <F1> 100% Germany

Selkirk S.R.L. <F1> 100% Italy

Selkirk UK, U.S.A. No. 1, Inc. 100% Delaware

Selkirk/Dry, Inc. <F1> 100% Delaware

United States Brass Corporation <F1> 100% Delaware

<FN>
<F1> Indirect, wholly-owned subsidiary of Eljer Industries, Inc.
<F2> 99.95% indirectly owned subsidiary of Eljer Industries, Inc.
</FN>
</TABLE>

<PAGE>

EXHIBIT 23

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 LLP

Dallas, Texas,
March 29, 1995

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 1, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1995
<PERIOD-START> JAN-03-1994
<PERIOD-END> JAN-01-1995
<CASH> 26,109
<SECURITIES> 0
<RECEIVABLES> 73,028
<ALLOWANCES> 7,696
<INVENTORY> 68,249
<CURRENT-ASSETS> 182,559
<PP&E> 161,252
<DEPRECIATION> 101,328
<TOTAL-ASSETS> 257,057
<CURRENT-LIABILITIES> 158,313
<BONDS> 83,021
<COMMON> 7,186
0
0
<OTHER-SE> (46,765)
<TOTAL-LIABILITY-AND-EQUITY> 257,057
<SALES> 406,063
<TOTAL-REVENUES> 406,063
<CGS> 293,365
<TOTAL-COSTS> 293,365
<OTHER-EXPENSES> 112,429
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,397)
<INCOME-TAX> (173)
<INCOME-CONTINUING> (12,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,224)
<EPS-PRIMARY> (1.72)
<EPS-DILUTED> (1.72)

</TABLE>