ELGIN NATIONAL INDUSTRIES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 1997

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number: 333-43523

Elgin National Industries, Inc.
(Exact name of registrant as specified in its charter)

Delaware 36-3908410
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2001 Butterfield Road, Suite 1020, Downers Grove, Illinois 60515-1050
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(Address of principal executive offices)

Telephone Number: 630-434-7243
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Registrant's telephone number, including area code

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

NONE

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 (SS 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]

As of March 30, 1998, there were outstanding 6,408.3 shares of Class A
Common Stock and 19,951.7 shares of Preferred Stock. The aggregate market value
of the voting stock held by non-affiliates of the registrant is $0 because all
voting stock is held by an affiliate of the registrant.

ELGIN NATIONAL INDUSTRIES, INC.
Table of Contents

Page
Item Number
- ---- ------

PART I

1. BUSINESS................................................................ 1

2. PROPERTIES.............................................................. 10

3. LEGAL PROCEEDINGS....................................................... 11

4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 11

PART II

5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................... 12

6. SELECTED FINANCIAL DATA................................................. 12

7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 13

7A. MARKET RISK............................................................. 20

8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 20

9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................ 40

PART III

10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................... 40

11. EXECUTIVE COMPENSATION.................................................. 41

12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 44

13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 45

PART IV

14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........ 45

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PART I

ITEM 1. BUSINESS

Overview

Elgin National Industries, Inc., incorporated in 1962, was a publicly
traded company listed on the NYSE until it was taken private in 1988 through the
leveraged acquisition of stock of Elgin National Industries, Inc. by The Jupiter
Corporation ("Jupiter"), a private diversified holding company. In September,
1993, an investor group led by institutional investors and Senior Management
(consisting of Fred C. Schulte, Charles D. Hall and Wayne J. Conner) formed ENI
Holding Corp. ("AENI"), and ENI acquired the capital stock of Elgin National
Industries, Inc. from Jupiter in a leveraged buyout. In 1994, Elgin National
Industries, Inc. acquired K&M Inc. in order to broaden Mining Controls, customer
base into the heavy industrial and electric utility markets. Later that same
year, Soros Associates, Inc. was acquired to strengthen the Engineering Services
Groups technical expertise in the development of marine port facilities. In
1995, Elgin National Industries, Inc. sold the assets constituting Ohio Rod's
bicycle spoke and nipple product line and the stock of GC Thorsen, Inc. and at
the end of 1997, the stock of American Fastener Corporation was sold. The
foregoing acquisitions and divestitures assisted Elgin National Industries, Inc.
in reducing leverage and, Management believes, focusing on strengthening its
businesses.

On November 5, 1997, ENI and Elgin National Industries, Inc. completed a
recapitalization intended to retire certain existing indebtedness, redeem the
equity interests of outside institutional investors, merge Elgin National
Industries, Inc. into ENI and vest (directly or indirectly) in Senior Management
ownership of all of the issued and outstanding capital stock of the surviving
entity. The components of the recapitalization were (i) the offering of
$85,000,000 11% Senior Notes due 2007 (the "Offering"), (ii) ENI using part of
the proceeds of the Offering to repurchase all of the common stock, preferred
stock and common stock warrants of ENI not owned by Senior Management; (iii)
Elgin National Industries, Inc. using part of the proceeds of the Offering to
retire all senior subordinated indebtedness, including the payment of prepayment
fees; (iv) Elgin National Industries, Inc. merging into ENI, with ENI remaining
as the surviving entity; (v) following such merger, ENI changing its name to
Elgin National Industries, Inc. (items (iv) and (v) resulting in the entity
referred to herein as the "Company" or "Elgin"); and (vi) the Company and
certain of its subsidiaries entering into an amended senior credit facility (the
"Senior Credit Facility") (the matters described at items (i) through (vi) above
being the "Recapitalization Transactions").

Operating Businesses

The Company owns and operates a diversified group of middle-market
industrial manufacturing and engineering services businesses. The Company
focuses on operating businesses with leading positions in niche markets,
consistent operating profitability, diverse customer bases, efficient production
capabilities and broad product lines serving stable industries. The Company is
comprised of two operating groups. Through its Manufactured Products Group,
Elgin is a leading manufacturer and supplier of custom-designed, highly
engineered products used by a wide variety of customers in the industrial
equipment, durable goods, mining, mineral processing and electric utility
industries. Through its Engineering Services Group, Elgin provides design,
engineering, procurement and construction management services for mineral
processing and bulk materials handling systems used in the mining, mineral
processing, electric utility and the rail and marine transportation industries.

The Manufactured Products Group is comprised of Ohio Rod Products Company
("Ohio Rod"), Tabor Machine Company ("Tabor"), Norris Screen and Manufacturing
Inc. ("Norris"), Centrifugal and Mechanical Industries ("CMI"), Centrifugal
Services, Inc. ("CSI"), Mining Controls, Inc. ("Mining Controls"), Chandler
Products ("Chandler") and Clinch River Corporation ("Clinch"). The Engineering
Services Group is comprised of Roberts & Schaefer Company ("R&S") and Soros
Associates, Inc. ("Soros").

Manufactured Products Group

The Manufactured Products Group, through its eight business units,
manufactures and markets products used primarily in the industrial equipment,
durable goods, mining, mineral processing and electric utility industries. The
businesses within the Manufactured Products Group consist of original equipment
manufacturers, suppliers of after-market parts and services (including for the
Company's OEM products) and manufacturers of components used by other original
equipment manufacturers. These businesses have supplied their customers with
quality products and services for an average of over 36 years. Under the
strategic direction of Elgin's Senior Management, each of these businesses
operates on a decentralized basis, with its own management team, independent
market identity and dedicated manufacturing facilities. Representative end-users
of the products of the Manufactured Products Group include Consolidation Coal,
Detroit Diesel, Emerson Electric, General Electric, General Motors, Mack Truck,
Peabody Coal and Toyota. The Manufactured Products Group has a broad and diverse
customer base, with sales to over 1,900 customers worldwide in 1997, with no
single customer accounting for more than 4% of the Group's sales for that year.

Net sales for the Manufactured Products Group for the year ended December
31, 1997, were $78.6 million. Each of the business units of the Manufactured
Products Group is described below.

Ohio Rod Products Company

Ohio Rod, a division of Elgin, founded in 1947 and acquired by the Company
in 1986, is a leading U.S. manufacturer of cold-headed, long-length (up to 58"),
small diameter (.07" to .50") fasteners and threaded products. Cold-headed
products are produced by forcing steel rods into a die, rather than through a
hot forging process. Ohio Rod has a large installed base of highly specialized
cold-forging equipment, built in Europe to Ohio Rod's specifications. The
equipment is complex, with machinists generally requiring one to three years of
training before acquiring the necessary skills to operate it in full production.
The equipment efficiently combines the heading and threading processes into a
single step procedure and allows Ohio Rod's skilled machinists to minimize set-
up times for lower costs and faster turnaround. This gives Ohio Rod the
flexibility to complete production runs of customized fasteners in almost any
volume, including short production runs. Ohio Rod's manufacturing processes have
given it an important competitive advantage and, together with its broad product
line and emphasis on customer service, have combined to generate strong customer
loyalty and consistent profit margins. Ohio Rod also maintains a continuous
program of machine rebuild, acquisition and technology improvement to improve
productivity and product features. Ohio Rod has a broad, diverse and stable
customer base that includes over 600 active accounts.

Products. Ohio Rod is the leading supplier of thru-bolts to manufacturers
of fractional horsepower electric motors. "Thru-bolts" are headed and threaded
bolts of varying lengths that are basic components of the housing used to hold
together fractional horsepower electric motors. Fractional horsepower electric
motors are small specialized motors that are rated at increments of less than a
full horsepower. These motors are widely used in the housing, appliance, power
tool and automotive industries. For example, they power a broad range of
appliances such as refrigerators, air-conditioners, furnaces, humidifiers,
washers and dryers, sump pumps, garbage disposals, dishwashers, ceiling fans and
garage door openers. An industry source has estimated that over 30 motors of
this type could be found in the average newly constructed home. Fractional
horsepower electric motors are also widely used in industrial equipment, such as
power presses, lathes, drills and electric fork lifts, and in automotive
applications such as power windows, seats and trunks, windshield wipers and
starter motors. The variety of sizes and applications for electric motors
produces a corresponding need for thru-bolts with a wide variety of lengths and
diameters. The Company believes that Ohio Rod's ability to meet customer
specifications with timely delivery of a variety of quality thru-bolts has been
critical to Ohio Rod's success. Sales of thru-bolts used by manufacturers of
fractional horsepower electric motors comprised approximately 48% of Ohio Rod's
1997 sales. In addition to motor assembly, thru-bolts are used in a number of
other fastening applications that are also important to Ohio Rod's business.

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Ohio Rod is also the leading supplier of reel bolts used to secure the ends
of cable reels. Cable reels are used to spool and store cable, wire, rope,
rubber hoses and similar products. Primary users of these reels are
manufacturers of cable, rope and hoses, whose products are then sold principally
to end users such as utilities, construction companies and heavy manufacturers.

Ohio Rod's fastener products also constitute critical components in a
variety of other household and industrial products, including as reinforcement
bolts for steps on wooden ladders, axle rods for skate-wheel conveyor systems,
threaded studs to secure handles on equipment, construction bolts used in roof
repair and the assembly of pre-fabricated homes and bolts used as door hinges
and handle hinges on automobiles.

Markets and Customers. In 1997, Ohio Rod sold its products to over 600
customers, with no single customer accounting for over 10% of its sales. Ohio
Rod has grown by incrementally adding customers while successfully retaining a
high percentage of current customers, with approximately 75% of 1997 sales to
companies who have been customers of Ohio Rod for at least five years.

Sales and Marketing. Ohio Rod's products are sold through a network of five
manufacturer representatives supported by a sales manager and six company sales
personnel, and are marketed on the basis of product quality, production time and
price. Ohio Rod sells products to its customers primarily on a direct basis.

Competition. Ohio Rod competes primarily with small independent suppliers.
Management believes that Ohio Rod's consistent investment in specialized
equipment, high product quality, quick response times and ability to run short
or irregular sized orders have given it a significant competitive advantage. In
addition, management believes that the small production runs and low dollar
volume orders discourage new competitors from making the sizeable capital
investment in specialized heading and threading equipment that is necessary to
produce small production runs profitably.

Tabor Machine Company and Norris Screen and Manufacturing Inc.

Tabor, a wholly owned subsidiary of the Company founded in 1961 and
acquired by the Company in 1975, is a leading designer and custom manufacturer
of vibrating screen systems. A vibrating screen system employs a self-contained
drive mechanism that uses one, two or three moving screens of various textures,
materials and grades to sort, size and dewater coal, aggregates (sand, gravel
and crushed rock) and other minerals. Tabor is an industry leader in the supply
of vibrating screen systems to the eastern U.S. coal mining industry. Norris, a
wholly owned subsidiary of the Company founded in 1977 and acquired by the
Company in 1982, manufactures stainless steel screen cloths and polyurethane
screening surfaces that are used to separate the material being screened
according to size.

Products. Tabor designs and manufactures incline and horizontal vibrating
screen systems of varying sizes and capacities to customer specifications and
needs. Tabor's screens vary in size with widths of up to 10 feet and lengths of
up to 24 feet. Tabor's screen systems are used for the processing of coal,
crushed stone, sand and gravel and minerals, to remove water or size the
material (i.e. separate large and coarse materials from those of desired size
and consistency). Tabor is committed to refine its screening machines to better
serve its customer base and respond to competition. Recently, in part to respond
to design improvements by competitors, Tabor introduced a multiple slope
vibrating screen system, otherwise known in the industry as the "banana screen"
(due to its sloping banana shaped angle). The banana screen can accommodate a
higher tonnage of materials for processing and represents a further improvement
in Tabor's processing screen system technology.

Norris manufactures screening surfaces from stainless steel, polyurethane
and other materials to suit various screening requirements. Norris has developed
the patented Tabor-Thane(TM) Modular Screening System, which employs a screening
system of polyurethane panels that provides a longer life than conventional
screens. For

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customers requiring screens with more exact grading, Norris manufactures
stainless steel screen cloths. Norris' screen surfaces are used by Tabor as well
as other manufacturers of vibrating screen systems.

Both Tabor and Norris derive a substantial part of their revenue from
supplying after-market replacement parts and services. Each company maintains a
24-hour parts and service team to respond to customer needs.

Markets and Customers. Tabor and Norris sell primarily to eastern U.S. coal
producers, and Tabor has expanded its markets for its vibrating screen systems
to non-coal applications. The non-coal sector of the vibrating screen market is
significantly larger than the coal sector and management believes that it offers
considerable expansion opportunities. The initial thrust of this program has
been the aggregates industry (sand, gravel and crushed rock) which has screening
and dewatering requirements similar to coal. Management also believes increased
international opportunities are available for Tabor's products and plans to
pursue them in conjunction with the activities of CMI and R&S. Tabor now has
sales representatives in Canada, Mexico and China, and has sold products in each
of these countries. Recently, Tabor has increased sales in Poland and, in 1996,
sold its first vibrating screen system in Russia.

Sales and Marketing. Tabor markets and sells its products through five
internal salespeople supported by an in-house engineer and technical services
group that provide 24-hour service. Norris has a small sales force but primarily
markets its products jointly with Tabor to the coal and mineral processing
industries. The sales effort is managed at both businesses by a sales manager
with 35 years of service in the screening industry.

Competition. The principal competitors of Tabor and Norris are Allis
Minerals, WS Tyler, Conn-Weld Industries and UOP Johnson. Principal after-market
competitors are small regional job shops. Competition is on the basis of after-
market product support, product quality and price.

Centrifugal and Mechanical Industries and Centrifugal Services, Inc.

CMI, a division of Elgin, founded in 1938 and acquired by the Company in
1973, is, by the Company's estimation, the leading U.S. designer and
manufacturer of coal processing centrifuges. A centrifuge utilizes centrifugal
force to separate liquids from solids. Centrifuges are used in the coal industry
to dry coal after it has been treated with water and other fluids in the coal
cleaning and preparation process. CMI has a current installed base of over 1,800
centrifuges in the United States. In 1996, CMI manufactured and sold over 90% of
what it believes to be all centrifuges purchased by U.S. coal companies. CMI has
long-standing relationships with most U.S. coal producers and management views
the quality of its machines and the responsiveness of its field service
personnel as marketing strengths. CSI, a wholly owned subsidiary of the Company
founded in 1987 and acquired by the Company in 1995, provides after-market parts
and services to the centrifuge market.

Products and Services. CMI currently offers three types of centrifuges: the
vibratory vertical centrifuge, the screen-scroll vertical centrifuge and the
horizontal "chip-wringer" centrifuge. In addition, CMI is now introducing the
"Sidewinder," a horizontal vibratory centrifuge.

CMI's vibratory vertical centrifuge, used for coarse particle applications,
dries coal through centrifugal force and vibratory motion. The vibratory
centrifuge is built in two sizes ranging from 12,000 lbs. to 24,000 lbs. with
capacities to dry up to 300 tons of coal per hour. Each vibratory centrifuge
features large feed inlets, heavy duty motors, rugged bearing and shaft housing
and continuous lubrication, all of which accommodate a coarser grade of
materials.

The screen-scroll vertical centrifuge, used for small and fine particle
applications, dries coal by centrifugal force. CMI builds the screen-scroll
centrifuge in five models, ranging in size from 10,000 lbs. to 16,000 lbs. with
capacities to dry up to 120 tons of coal per hour.

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The "chip-wringer" centrifuge is used for non-coal applications. This
small, horizontal centrifuge, built in two models ranging in size from 1,000
lbs. to 3,600 lbs., is used in auto plants, other manufacturing facilities and
machine shops to separate oil, coolants and other impurities from tool and
machine metal cuttings for the purposes of reclaiming the liquids and allowing
proper disposal of the metal chips.

The Sidewinder features a streamlined servicing and maintenance design and
a wide variety of speed capabilities for use with a range of particle sizes.
Preliminary field tests of the Sidewinder have produced favorable results and
indicate higher product recovery performance than screen scroll machines.
Management believes that the Sidewinder's design may offer significant marketing
advantages, particularly in international markets where horizontal
configurations are more compatible with common coal preparation plant designs.

The centrifugal drying of coal is an extremely abrasive process, requiring
machine component parts and ongoing service to maintain performance and safe
operation. Over 80% of the combined net sales of CMI and CSI for 1997 were
after-market parts and services. CMI and CSI maintain an inventory of
replacement parts, rebuilt drive assemblies and complete machines for customers.
Rebuilt drive units are kept in stock, whenever possible, to be offered on an
exchange basis so the customer can minimize down time. CMI and CSI provide the
majority of replacement parts and service to the domestic coal centrifuge after-
market. Dedicated, specialized field service personnel, based near the eastern
coal fields are on call 24 hours a day, seven days a week to respond to customer
needs. This service force is instrumental in promoting the sale of replacement
parts. The acquisition of CSI has allowed the Company to sell parts and services
to smaller customers more effectively.

A recent innovation has improved CMI's after-market competitive position.
Introduced in 1995, CMI's "Long Life Parts Package(TM)" is a patented,
integrated system of components developed to reduce operating costs in screen-
scroll centrifuges. CMI believes that the design of the Long Life Parts
Package(TM) results in a more efficient drying process and is less stressful on
component parts, thereby reducing operating costs. Management believes the
performance advantages that have propelled the initial sales of the Long Life
Parts Package(TM), together with customers' significant up-front investment and
the unavailability of alternative products of like quality, provide CMI with the
opportunity for meaningful incremental sales that should more than offset any
reduced sales of less durable screening products to these customers. This
package has been favorably received by customers that have installed it to date.

Markets and Customers. CMI and CSI primarily serve the U.S. eastern coal
mining industry. In recent years, CMI has developed new markets for its products
in order to diversify its revenue sources and provide additional growth
opportunities. CMI has sold its centrifuges to the automotive and machining,
aggregates, steel and environmental remediation industries. The chip-wringer is
an example of this diversification. While seeking diversification, CMI continues
to refine and innovate its core product, the coal centrifuge. Examples of this
diversification include CMI's introduction of its patented Long Life Parts
Package(TM) and the Sidewinder horizontal centrifuge.

CMI has sold centrifuges to seven countries since 1992. Management has
focused special attention on expanding international sales, including the recent
introduction of the Sidewinder. Additionally, CMI engages in joint efforts with
the Engineering Services Group to identify and market to foreign coal
preparation plant projects that may include the use of centrifuges. CMI is in
the process of establishing a marketing, sales and service joint venture to
serve central and eastern Europe. Particular focus is now being directed to the
coal industry in Poland.

Sales and Marketing. CMI markets to the U.S. coal industry through its
sales force of ten, whose activities are coordinated by regional sales managers.
CMI has also added an in-house sales representative responsible for increasing
sales of centrifuges for non-coal applications. CMI parts are distributed from
different locations in the eastern U.S. coal fields, and equipment and parts are
also available through distributors in Canada and England. CSI has its own sales
and service force of three employees.

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Competition. CMI currently has no significant competitors in the domestic
OEM market. Management believes that CMI's product quality and service quality,
and the start up costs necessary to design and build centrifuges, represent
significant barriers to entry for any additional competitor. Management believes
that CMI's existing strong relationships with its customers, established market
presence and extensive network of sales and service personnel create a further
disincentive for any potential OEM competitor to enter CMI's niche market. CMI
and CSI compete with small independent providers in the sale of after-market
replacement parts and services. Management believes that CMI and CSI
differentiate themselves in this market by their extensive expertise and support
capabilities in servicing centrifuges, as well as by offering an inventory of
regularly replaced parts and rebuilt centrifuges.

Mining Controls, Inc.

Mining Controls, a wholly owned subsidiary of the Company was established
in 1977.

Products. Mining Controls designs and manufactures specialty high and low
voltage electrical power distribution equipment, electrical switch gear
equipment, power factor control and harmonic correction equipment and
underground lighting and electrical connectors. High and low voltage
distribution and switch gear equipment is sold to the coal, mineral and metals
mining industries and the underground tunneling industry. This equipment
regulates, controls and distributes electrical power for a variety of
requirements, depending on the customer's needs. Power factor control and
harmonic correction equipment is comprised of large, complex, customized
systems, generally selling for $50,000 to $750,000 each, and which control the
quality and characteristics of electrical power being transmitted into and from
industrial facilities with high levels of power consumption. Mining Controls
sells electrical products (lighting and connectors) and programmable control
equipment used by portable power centers, which provide lighting and electric
power for underground mining and tunneling equipment in a variety of
inaccessible locations. Mining Controls also sells replacement parts and rebuilt
equipment.

Markets and Customers. Mining Controls historically served primarily the
eastern U.S. coal mining industry, and continues to do so. Through the
integration of Gilbert and K&M, Inc., Mining Controls is able to provide
specialized and customized electrical power distribution systems, power factor
correction equipment and harmonic control equipment to heavy manufacturing,
utility and governmental facilities.

Sales and Marketing. Mining Controls sells its products through a ten-
person technical sales staff supported by a twelve-person engineering staff,
working closely with its customers' engineering representatives. Mining Controls
also has key relationships with specialized distributors for the marketing, sale
and distribution of its lighting and electrical products.

Competition. Mining Controls' primary competitors are Line Power
Manufacturing Co., American Switchgear Company and Pemco Corporation.
Competition is generally on the basis of price and the expertise of in-house
engineering and design staff. Mining Controls seeks to differentiate itself from
its competitors through its design and engineering expertise and by responding
more quickly and effectively to customer support requests.

Chandler Products

Chandler, a division of Elgin, founded in 1930 and acquired by the Company
in 1986, produces cold-formed, close tolerance, custom designed, precision-
threaded fasteners. Chandler's manufacturing facility has achieved ISO 9002
certification and has a fully functional quality lab accredited by the American
Association of Laboratory Accreditation. Chandler's manufacturing techniques and
quality control procedures have led to numerous customer awards, including the
General Motors Medallions of Excellence. In addition, the President of Ohio Rod
now has operating responsibility for Chandler and, along with Chandler's
experienced management team, is implementing several of Ohio Rod's proven
programs in marketing and operations.

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Products. Chandler's fastener products, produced to close tolerance from
customer specifications, are used in diesel engines to secure the engine
cylinder head and as accessory bolts to secure the starter motor, carburetor and
other diesel engine components. These fastener products are manufactured in a
range of sizes to the customer's specifications. Chandler fasteners are also
used to secure and join various components of commercial heavy duty
transmissions. These transmissions are used in dump trucks, freight trucks,
tanks and cement trucks. Hand tool OEMs use Chandler products to secure tool
housings and various components. Chandler also sells to industrial distributors
for resale to industrial customers.

Markets and Customers. Chandler's primary customers are manufacturers of
component assemblies in the heavy duty vehicle manufacturing industry,
representing a majority of Chandler's 1997 sales. Chandler also sells its
products for use in various industrial applications such as hand tools and the
truck and auto after-markets.

Sales and Marketing. Chandler markets its products through a combination of
independent sales representatives and a two person in-house sales force
supported by design and tool engineers and production and quality technicians.

Competition. Chandler faces competition from larger fastener manufacturers,
generally serving the automobile industry, particularly during periods of excess
capacity at their production facilities. Chandler seeks to differentiate itself
from its competition through its ability and willingness to complete short
specialized production runs, product quality and overall customer service.
Management believes that Chandler's ability to complete short specialized
production runs profitably constitutes a particular advantage over larger
manufacturers, which usually require longer uniform runs.

Clinch River Corporation

Clinch River, a wholly owned subsidiary of the Company was founded in 1970
and acquired by the Company in 1979.

Products. Clinch River is a full-service custom fabrication facility
specializing in the manufacture and repair of various types of preparation plant
and underground coal mining equipment and small parts used for power plants and
other industrial applications. Clinch River also manufactures a proprietary
curved dewatering screen under the trademark RADII-VIB(R). Clinch River offers
fabrication and repair services using a variety of metals, including stainless
steel, to fabricate a wide range of products engineered to the customer's
specifications. Clinch River is also an authorized distributor and service
center for Roots-Dresser industrial vacuum pumps and blowers.

Sales and Marketing. Clinch River markets its services and products through
a sales force of five, and serves primarily the coal and electric utility
industries in the southeastern United States.

Competition. Clinch River competes with other small, regional fabrication
firms on the basis of price, engineering expertise and customer service.

Engineering Services Group

The Engineering Services Group, comprised of R&S and Soros, provides
design, engineering, procurement and construction management services
principally to the mining, mineral processing, electric utility and rail and
marine transportation industries. Depending upon the needs of the client, these
services are provided on either an unbundled (i.e. task-specific) basis or a
full project turnkey basis. Historically, the Engineering Services Group
provided its services primarily to the United States coal mining industry. Over
the past ten years, the Engineering Services Group has diversified into markets
which include aggregates, industrial minerals, base metals and precious metals.
Today, this Group has a broad, well-balanced customer base within these
industries and derived approximately 75% of its net sales from customers outside
the coal mining industry during 1997. Net sales for the

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Engineering Services Group for the year ended December 31, 1997 were $61.0
million. The two business units comprising the Engineering Services Group are
described below.

Roberts & Schaefer Company

R&S, a wholly owned subsidiary of the Company founded in 1903 and acquired
by the Company in 1969, has for over 90 years provided design, engineering,
procurement and construction management services ranging from small engineering-
only services to turnkey projects.

Services. R&S provides engineering services including evaluating the
feasibility of the customer's proposal (from both a cost and engineering
standpoint), translating the customer's concept to a workable design, or
providing bankable feasibility studies and detailed and extensive engineering
support in effecting the realization of a design. In turnkey projects, R&S
performs all service activities necessary for project completion, including
design, subcontracting, equipment procurement, construction management and
startup. R&S also provides equipment procurement on behalf of its customers,
involving the designation and sourcing of equipment to meet the customer's
requirements.

Typical mineral processing facilities designed and built by R&S include
coal preparation plants, gold processing plants, copper processing plants and
aggregate and crushed rock processing plants. After mining, coal is often
prepared for shipment in a preparation plant. This facility crushes the coal and
cleans it by washing it in a liquid solution, separates it into higher and lower
grades, and removes non-coal materials. Cleaning upgrades the quality and
heating value of the coal by removing or reducing pyritic sulfur content, rock,
clay and other ash-producing impurities. Coal blending or mixing of various
sulfur types is often performed at the preparation plant in order to meet the
specific combustion and environmental needs of customers.

Mineral processing facilities generally are comprised of a conveying system
that transports mined raw material from a mine; a processing plant for size
reduction, sorting (often by use of screens of the type manufactured by Tabor
and Norris), and upgrading through chemical or mechanical means (often involving
use of centrifuges manufactured by CMI); a conveying system to move the
processed material to a storage area; and a loading facility for shipment of the
processed material to its final destination. Similar processes are often
required by transporters and end-users of the products, and R&S also designs
bulk materials handling systems for coal-fired electric power plants and for
handling multiple commodities at rail terminals, storage facilities, marine
terminals and ports. These systems consist of loading and unloading equipment to
remove the material from or place it into the transportation vehicle (trucks,
trains, ships or barges) and multiple conveying systems to move material to or
from stockpiles.

Markets and Customers. R&S provides its services, ranging from engineering-
only services to turnkey project completion, primarily to the mining, mineral
processing, electric utility and rail and marine transportation industries, with
a diversified customer base including a number of leading domestic and
international mining companies, electric utility companies and transportation
companies. Engineering-only services range in size from under $10,000 to several
hundred thousand dollars. R&S' turnkey services include full project
responsibility for the design and construction of mineral processing and bulk
material handling facilities. R&S focuses on turnkey projects of less than $25
million, with most such projects significantly smaller. Total backlog for the
Engineering Service Group at December 31, 1997 was $78.0 million.

Management believes that targeting projects in the range of $1 million to
$25 million gives R&S two strategic advantages. First, this is a niche of the
mineral processing and material handling markets that generally does not attract
larger firms, permitting R&S to compete with smaller, local and regional
contractors that may lack R&S' experience and capabilities. Second, by
maintaining a larger portfolio of smaller projects, R&S is better able to manage
the risk inherent in its business.

-8-

Traditionally, R&S provided its services primarily to the coal industry,
having designed and constructed 8 of the estimated 14 coal preparation plants
built in the United States during the ten years prior to November, 1997. Due to
R&S's strong position and reputation as a designer and builder of coal
preparation plants, it has often been requested to execute coal projects
internationally. R&S did undertake international projects when the opportunities
were presented, principally in the area of coal preparation. From the mid-1970's
through the mid-1980's, R&S had built plants in nine countries. Beginning in the
early 1990's, R&S initiated a program to broaden its market to include all types
of domestic mineral and metal processing facilities and bulk materials handling
systems. As a result of this program, R&S no longer depends to the same extent
on the U.S. coal mining industry, and now has a broad and diversified customer
base, having executed projects in the aggregates, industrial minerals and base
metal industries over the last ten years. This program has also been successful
in further diversifying the markets of R&S to include international work. During
1997, approximately 30% of the net sales of R&S were from international
projects.

Sales and Marketing. R&S markets its services through internal marketing
and sales groups located in Chicago and Salt Lake City. R&S management and
engineering staff participate in the process to adequately price and
successfully bid on projects. R&S also secures projects through partnering or
joint bidding arrangements with larger engineering and construction firms or
architectural engineers, particularly in the case of international projects. In
such arrangements, R&S will assume specific responsibility for a particular
component of a larger project. In this regard, R&S has executed projects with
and has ongoing client relationships with Raytheon, Black & Veatch and Bechtel
Power, including occasional joint venture relationships.

Competition. Primary competitors of R&S include Dearborn Midwest Conveyor
(coal and limestone handling), Kilbourn International, Inc. (mining), Mincorp
Engineers and Constructors (precious and base metals), Industrial Resources,
Inc. (coal processing and material handling) and McNally Wellman Co. (coal and
limestone handling). Generally, R&S competes with a large number of specialty
engineering firms on the basis of quality of work performed, strength of
reputation, responsiveness to customer needs, price and ability to meet
deadlines, and R&S seeks to differentiate itself from its competitors with
respect to each of these factors.

Soros Associates, Inc.

Soros, founded in 1955 and acquired by the Company in 1994, specializes in
designing and providing consulting engineering services with respect to marine
bulk and liquid material handling systems. The acquisition of Soros strengthened
the Engineering Services Group's technical expertise in the development of
marine port facilities, and has enabled Soros to begin to expand its business
from its traditional project base of design and consulting engineering. Soros
has designed more than 200 bulk, liquid and general cargo port facilities, 14 of
which were greenfield projects (i.e. start-ups at unimproved sites). Since 1955,
Soros has completed over 640 projects in 70 countries and has received over 20
citations and awards for its engineering excellence.

Soros offers a special expertise in offshore terminals, involving bulk
loading and unloading at open sea. Soros has more successful offshore terminal
installations around the world than any other firm, including the first open sea
loading berth at Port Latta, Tasmania; the first multiple oriented loading berth
at Punta Colorada, Argentina, and the first open sea continuous unloading berth
at Hsinta, Taiwan. Soros has extensive experience in the engineering of all
types of conveyers, shiploaders, unloaders, railroad yards, railroad and truck
loading and unloading, stackers, reclaimers, tunnels, covered and silo storage,
crushing, screening, drying, bagging, weighing, sampling and computerized
control and data management systems.

Soros' customer base consists of coal companies, port authorities (both
private and municipal) and municipalities. Competition for customers is on the
basis of reputation and perceived value added through the firm's

-9-

expertise, as well as price. Soros obtains its projects through reputation,
requests for proposals and local sales agents that build industry contacts.
Soros has also obtained project referrals from R&S.

Supplies

The Company acquires substantially all of its raw materials from outside
sources. The basic raw materials primarily used in the Manufactured Products
Group are flat sheet metal, coiled wire or rod and various forms of stainless
steel materials. Additionally, the Manufactured Products Group acquires circuit
breakers, components, transformer cores, motors and drive units from outside
sources. The Company subcontracts certain fabrication work to other suppliers.
The Company is dependent on the ability of such fabrication suppliers for timely
delivery, performance and quality specifications. The Engineering Services Group
sources many different types of components in the construction of plant
facilities, which in certain cases are sold directly to the Company's customer
by the selected supplier. These include equipment such as vibrating screens,
centrifuge dryers, flotation units and other finished products. The Company
believes there are numerous sources of supply for the different materials used
in its operations.

Employees

As of February 28, 1998, the Company had approximately 673 employees.
Approximately 28 employees of the Company at CMI's St. Louis, Missouri facility
are represented by District 9 of the International Association of Machinists and
Aerospace Workers ("IAM") and are covered by a contract between CMI and the IAM
effective from March 1, 1998 through February 28, 2003. Approximately eight
employees of TranService, Inc., a wholly owned subsidiary of the Company, are
represented by the United Mine Workers of America ("UMWA") and are covered by
the National Bituminous Coal Wage Agreement expiring on December 31, 2002, as
modified by that certain memorandum of understanding dated April 27, 1995
between the UMWA and TranService. The Company believes that its relations with
its employees are generally good.

ITEM 2. PROPERTIES

The Company and its businesses conduct operations from the following primary
facilities:

Approximate
Business Location Principal Function Owned/Leased Square Footage
- -------- -------- ------------------ ------------ --------------

Elgin Downers Grove, IL Headquarters leased 6,470
Ohio Rod Versailles, IN Manufacturing owned 93,350
Chandler Products Euclid, OH Manufacturing owned 88,000
Mining Controls Beckley, WV Manufacturing owned 28,825
CMI St. Louis, MO Manufacturing owned 63,295
CSI Raleigh, IL Manufacturing owned 16,166
leased 18,245
Tabor Bluefield, WV Manufacturing owned 44,000
Norris Princeton, WV Manufacturing owned 12,700
Clinch River Tazewell, VA Manufacturing owned 25,400
leased 7,200
R&S Chicago, IL and Office leased 16,200
Salt Lake City, UT Office leased 25,267
Soros Chicago, IL Office leased 5,800

-10-

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are involved in legal proceedings from
time to time in the ordinary course of its business. As of the date of this
filing, neither the Company nor any of its subsidiaries are a party to any
lawsuit or proceeding which, individually or in the aggregate, in the opinion of
management, is reasonably likely to have a material adverse effect on the
financial condition, results of operation or cash flow of the Company.

In connection with the 1993 leveraged buyout of the Company, The Jupiter
Corporation (the former ultimate parent entity of the Company) agreed to
indemnify the Company against various claims and ongoing litigation and assumed
the defense of such litigation. The litigation includes a wrongful death product
liability claim against R&S in connection with an accident at a work site.
Although the Company believes that Jupiter and its insurance carrier are
performing on the indemnity obligations, there can be no assurance that they
will continue to do so or that the Company would successfully recover on the
indemnity in the event of an adverse judgment against R&S or adverse outcomes in
any other proceeding. In any such case, the Company would bear the cost of
defense and any adverse judgment. One or more such adverse judgments could
materially and adversely affect the Company's business, financial condition,
results of operations and debt service capability.

Environmental

The Company is subject to a variety of foreign, federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous materials used in its manufacturing
processes. The Company has not historically incurred any material adverse effect
on its business, financial condition, results of operations or cash flow as a
result of the Company's compliance with U.S. federal, state, provincial, local
or foreign environmental laws or regulations or remediation costs. Some risk of
environmental liability and other costs is inherent, however, in the nature of
the businesses conducted by the Manufactured Products Group, which have been in
operation for an average of over 36 years and have performed little invasive
testing at their sites. In addition, businesses previously operated by the
Company have been sold in the past. There can be no assurance that future
identification of contamination at its current or former sites or at third
party-owned sites where waste generated by the Company has been disposed of
would not have a material adverse effect on the Company's business, results of
operations, financial condition or debt service capability. Any failure by the
Company to obtain required permits for, or adequately restrict the discharge of,
hazardous substances under present or future regulations could subject the
Company to substantial liability. Such liability could have a material adverse
effect on the Company's business, financial condition, results of operations and
debt service capability.

The Company has been named as a potentially responsible party by the New
York Department of Environmental Conservation for clean-up costs at the
Company's former manufacturing facility in Orangeburg, New York. The Company has
obtained the agreement of its former ultimate parent entity to indemnify it
against losses, damages and costs arising out of such action. Although the
Company believes that the indemnitor has performed its obligations on this site
to date, there can be no assurance that it will continue to do so or that the
Company would successfully recover on the indemnity. In such a case, the Company
would bear the cost of any remediation, which costs could be significant and
materially and adversely affect the Company's business, financial condition,
results of operations and debt service capability.

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

None.

-11-

PART II

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

There is no established public offering market for the outstanding common
equity of the Company and 100% of its outstanding common equity is beneficially
owned by Senior Management.

The ability of the Company to pay dividends is governed by restrictive
covenants contained in the indenture governing its publicly-held debt as well as
restrictive covenants contained in the Company's senior credit facility. As a
result of these restrictive covenants, the Company was not permitted to pay
dividends on December 31, 1997.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected historical financial information of
the Company, as of the dates and for the periods indicated. The historical
financial data as of December 31, 1994, 1995, 1996 and 1997 was derived from the
consolidated financial statements of the Company audited by Coopers & Lybrand
L.L.P. The historical financial data as of December 31, 1993 was derived from
the consolidated financial statements of the Company as of and for the four
months ended December 31, 1993, audited by Coopers & Lybrand L.L.P. and from the
unaudited consolidated financial statements of the Company for the twelve months
ended December 31, 1993. The selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's audited consolidated financial
statements and notes thereto.

Fiscal Year Ended December 31,
1993 1994 1995 (a) 1996 1997
---- ---- -------- ---- ----
(in thousands)

Statement of Operations Data:

Net sales......................................... $143,655 $197,284 $126,839 $135,651 $139,615
Cost of sales..................................... 116,784 167,170 102,654 100,119 102,744
-------- -------- -------- -------- --------
Gross profit.................................... 26,871 30,114 24,185 35,532 36,871
Selling, general and administrative expenses...... 19,884 19,356 19,891 21,226 21,840
Amortization expense.............................. 877 3,050 3,052 3,085 3,447
-------- -------- -------- -------- --------
Operating income................................ 6,110 7,708 1,242 11,221 11,584
Other expenses (income):
Interest expense, net............................ 2,771 6,270 4,807 3,340 3,471
Gain on the sale of product line................. -- -- (2,520) -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations before 3,339 1,438 (1,045) 7,881 8,113
income taxes.....................................
Provision for income taxes........................ 1,285 668 124 3,191 3,187
-------- -------- -------- -------- --------
Income (loss) from continuing operations.......... 2,054 770 (1,169) 4,690 4,926
Income from discontinued operations, net of 2,426 889 876 174 122
income taxes (b)................................. -------- -------- -------- -------- --------
Income (loss) before extraordinary items.......... 4,480 1,659 (293) 4,864 5,048
Extraordinary loss on early extinguishment of -- -- -- -- ( 293)
debt, net of income tax (c)...................... -------- -------- -------- -------- --------
Net income (loss)................................. $ 4,480 $ 1,659 $ (293) $ 4,864 $ 4,466
======== ======== ======== ======== ========

Other Financial Data:
Gross margin %.................................... 18.7% 15.3% 19.1% 26.2% 26.4%
Depreciation and amortization (d)................. $ 3,278 $ 5,776 $ 5,497 $ 5,382 $ 5,569
Capital expenditures (d).......................... 2,521 1,506 1,501 1,739 1,974
Net cash provided by operating activities......... $ 4,941 $ 8,037 $ 142 $ 17,506 $ 1,008
Net cash (used in) provided by investing (64,545) 722 24,478 1,935 (1,948)
activities.......................................
Net cash provided by (used in) financing 59,704 (11,481) (22,285) (10,785) (714)
activities.......................................
Operating Unit Data:
Net Sales:
Manufactured Products Group..................... $ 66,211 $ 75,698 $ 74,859 $ 78,952 $ 78,592
Engineering Services Group...................... 77,444 121,586 51,980 56,699 61,023
-------- -------- -------- -------- --------
Total Net Sales............................... $143,655 $197,284 $126,839 $135,651 $139,615
======== ======== ======== ======== ========

-12-

Balance Sheet Data (e):

Cash and cash equivalents......................... $ 2,722 -- $ 2,335 $ 10,991 $ 9,337
Working capital less cash and cash equivalents.... 32,006 $ 28,772 16,515 5,129 13,898
Property, plant and equipment, net................ 24,999 23,213 14,707 13,741 13,582
Total assets...................................... 148,831 139,082 95,294 95,914 102,879
Total debt........................................ 71,785 58,567 37,676 26,891 85,751
Redeemable preferred stock and redeemable 27,374 30,048 32,714 35,380 13,226
preferred stock units............................
Stockholder's deficit............................. (496) (1,511) (4,470) (2,272) (31,860)

__________

(a) The Company's 1995 performance was adversely affected by a loss of
approximately $7.8 million on a single turnkey project of the Engineering
Services Group that was completed in that year, and which resulted in
significant operating and control changes in that Group.

(b) Income from discontinued operations is comprised of earnings of GC Thorsen,
Inc. (sold in 1995), American Fastener Corporation (sold in 1996), along
with the associated gain on the sale of those businesses, and an investment
in a limited partnership (disposed of in 1993) plus management fees (paid
in 1993), net of income taxes.

(c) The loss on the early extinguishment of debt resulted from the retirement
of subordinated debt from proceeds of the Senior Notes and included
amortization of the remaining financing costs and a prepayment penalty.

(d) Excludes depreciation, amortization and capital expenditures related to
discontinued operations and extraordinary loss.

(e) Includes the balance sheet data of discontinued operations.

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

Overview

Elgin owns and operates a diversified group of middle-market industrial
manufacturing and engineering services businesses. The Company focuses on
operating businesses with leading positions in niche markets, consistent
profitability, diverse customer bases, efficient production capabilities and
broad product lines serving stable industries. The Company is comprised of ten
business units that are organized into two operating groups. Through its
Manufactured Products Group, Elgin is a leading manufacturer and supplier of
custom-designed, highly engineered products used by a wide variety of customers
in the industrial equipment, durable goods, mining, mineral processing and
electric utility industries. Through its Engineering Services Group, Elgin
provides design, engineering, procurement and construction management services
for mineral processing and bulk materials handling systems used in the mining,
mineral processing, electric utility and the rail and marine transportation
industries.

Variability of Revenues and Cash Flows

The Engineering Services Group's project base is typically comprised of
over 100 projects in process each year. At any given time, this project base
includes a substantial majority of small projects (which the Company defines as
producing less than $1.0 million in annual sales) as well as a number of larger
projects (which the Company defines as producing $1.0 million or more in annual
sales). The Company's revenues from these larger projects tend to fluctuate from
year to year depending on the number of such projects in process and the
respective status of each project. In addition, these larger projects often
extend over more than one year, causing potential fluctuations in revenues and
cash flows. The Company uses the percentage of completion method of accounting
for its engineering services contracts. Under this method of accounting, the
degree of completion of each contract is generally determined by comparing the
costs incurred to date to the total costs anticipated for the entire contract,
taking into

-13-

account the current estimates of cost to complete the contract. Revenue is
recognized on each contract as a percentage of the total contract revenue in
proportion to the degree of the project's completion. Management routinely
reviews total estimated costs to complete each contract and revises the
estimated gross margin on the contract accordingly. Losses are recognized in
full in the period in which they are determined. Cash flows can vary
significantly from period to period, depending on the terms of the larger
contracts then in force. In some contracts, the customers provide full or
partial advance cash payments prior to performance by the Company. In other
contracts, receipts follow disbursements in varying degrees. As a result,
reported operating income of the Engineering Services Group for any period is
not necessarily indicative of cash flow for that period.

Results of Operations

The following tables set forth, for the periods indicated, amounts derived
from the Company's consolidated statements of operations and related percentages
of net sales. There can be no assurance that the trends in operating results
will continue in the future.

Company Consolidated
(in millions)

For the Fiscal

Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----

Net sales....................................... $126.9 100.0% $135.6 100.0% $139.6 100.0%
Cost of sales................................... 102.7 80.9 100.1 73.8 102.7 73.6
Gross profit.................................... 24.2 19.1 35.5 26.2 36.9 26.4
Selling, general and administrative expenses.... 19.9 15.7 21.2 15.6 21.8 15.6
Amortization expense............................ 3.1 2.4 3.1 2.3 3.4 2.4
Operating income................................ 1.2 1.0 11.2 8.3 11.7 8.4
Interest expense, net........................... 4.8 3.8 3.3 2.4 3.5 2.5
Gain on sale of product line.................... 2.5 2.0 -- -- -- --
Income (loss) from continuing operations before (1.1) (0.8) 7.9 5.9 8.2 5.9
income taxes...................................
Provision for income taxes...................... 0.1 0.1 3.2 2.4 3.2 2.3
Income (loss) from continuing operations........ (1.2) (0.9) 4.7 3.5 5.0 3.6
Income from discontinued operations, net of 0.9 0.7 0.2 0.1 0.1 0.1
income taxes...................................
Income (loss) before extraordinary item......... (0.3) (0.2) 4.9 3.6 5.1 3.7
Extraordinary item, net of income taxes......... -- -- -- -- (0.6) (0.5)
Net income (loss)............................... (0.3) (0.2) 4.9 3.6 4.5 3.2

Manufactured Products Group
(in millions)

For the Fiscal
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----

Net sales....................................... $74.9 100.0% $78.9 100.0% $78.6 100.0%
Cost of sales................................... 50.6 67.6 52.8 66.9 51.5 65.5
Gross profit.................................... 24.3 32.4 26.1 33.1 27.1 34.5

Engineering Services Group
(in millions)

For the Fiscal
Year Ended December 31,
-----------------------
1995 1996 1995
---- ---- ----

Net sales....................................... $52.0 100.0% $56.7 100.0% $61.0 100.0%
Cost of sale.................................... 52.1 100.2 47.3 83.5 51.3 84.0
Gross profit.................................... (0.1) (0.2) 9.4 16.5 9.7 16.0

-14-

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Net Sales: Net sales for the Manufactured Products Group for the year ended
December 31, 1997 decreased $0.3 million, or 0.4%, to $78.6 million from $78.9
million for the corresponding period in 1996. Decreased screen and parts sales
to the aggregates market at Tabor and decreased starter sales at Mining Controls
were partially offset by increased high voltage distribution equipment sales at
Mining Controls, increased specialty fastener and reel bolt sales at Ohio Rod,
increased OEM and distributor sales at Chandler and increased centrifuge sales
at CMI.

Net sales for the Engineering Services Group for the year ended December
31, 1997 increased $4.3 million, or 7.6%, to $61.0 million from $56.7 million
for the corresponding period in 1996 due primarily to increased sales from
larger projects in process (including the completion of a domestic gold
processing facility that generated sales of $8.7 million during the period). For
the year ended December 31, 1997, sales of $42.0 million were reported on
sixteen larger projects, exceeding sales of $33.1 million reported on ten larger
projects for the corresponding period in 1996.

Cost of Sales: Cost of sales for the Manufacturing Products Group for the
year ended December 31, 1997 decreased $1.3 million, or 2.5%, to $51.5 million
from $52.8 million for the corresponding period in 1996 primarily due to
increased sales of lower cost replacement parts at CMI and Tabor, and to
improved operating efficiencies at Chandler and Ohio Rod due to increased sales
level. The slight decrease in the Manufacturing Group's sales also contributed
to the lower cost of sales. The Manufactured Products Group's cost of sales as a
percentage of net sales decreased to 65.5% for the year ended December 31, 1997
from 66.9% for the corresponding period in 1996.

Cost of sales for the Engineering Services Group for the year ended
December 31, 1997 increased $4.0 million, or 8.4%, to $51.3 million from $47.3
million for the corresponding period in 1996 primarily due to the increased
sales level. As a percentage of net sales, the Engineering Services Group's cost
of sales increased to 84.0% for the year ended December 31, 1997 from 83.5% for
the corresponding period in 1996 due to increased sales of projects having
higher procurement and construction management costs.

Gross Profit: Gross profit for the Manufactured Products Group for the year
ended December 31, 1997 increased $1.0 million, or 3.8%, to $27.1 million from
$26.1 million for the corresponding period in 1996 due to the increase in gross
profit as a percentage of sales. The Manufactured Products Group's gross profit
as a percentage of net sales increased to 34.5% for the year ended December 31,
1997 from 33.1% for the corresponding period in 1996. The increase in the gross
profit was primarily due to increased sales of higher margin replacement parts
at CMI and Tabor, and to the higher sales levels at Mining Controls, Chandler
and Ohio Rod.

Gross profit of the Engineering Services Group for the year ended December
31, 1997 increased $0.3 million, or 3.2%, to $9.7 million from $9.4 million for
the corresponding period in 1996 primarily due to increased project activity. As
a percentage of net sales, the Engineering Services Group's gross profit
decreased to 16.0% for the year ended December 31, 1997 from 16.5% for the
corresponding period in 1996 primarily due to the inclusion of larger projects
involving procurement and construction management services, which typically earn
a lower profit margin than smaller projects.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company for the year ended December 31, 1997
increased slightly in comparison to the corresponding period in 1996. Selling,
general and administrative expenses as a percentage of net sales remained
constant at 15.6% for the year ended December 31, 1997 and for the corresponding
period in 1996 due to increased net sales. Lower selling cost reported by the
Engineering Services Group were partially offset by increased selling costs
within the Manufactured Products Group and increased corporate costs.

Amortization Expense: Amortization expense of the Company for the year
ended December 31, 1997 increased $0.3 million, or 9.7%, to $3.4 million from
$3.1 million for the corresponding period in 1996. The increase in

-15-

amortization expense resulted from the accelerated amortization of an
acquisition intangible arising in the 1993 leveraged buy-out. The acceleration
of the amortization was due to the completion of the Recapitalization
Transactions.

Operating Income: Operating income of the Company for the year ended
December 31, 1997 increased $0.5 million, or 4.5% to $11.7 million from $11.2
million for the corresponding period in 1996 for the reasons discussed above.
Operating income as a percentage of net sales increased to 8.4% for the year
ended December 31, 1997 from 8.3% for the corresponding period in 1996.

Interest Expense, Net: Interest expense of the Company for the year ended
December 31, 1997 increased $0.2 million, or 5.7%, from the prior year to $3.5
million. The increased interest expense was due to the issuance of the $85.0
million 11% Senior Notes in November, 1997. The increased interest expense was
partially offset by a reduction in the interest rate due to the repayment of
$20.0 million senior subordinated notes in November, 1997 as well as an
additional debt reduction throughout the 1997 calendar year totaling $6.3
million.

Income from Continuing Operations Before Income Taxes: Income from
continuing operations before income taxes for the year ended December 31, 1997
increased $0.3 million, or 3.8%, to $8.2 million from $7.9 million for the
corresponding period in 1996 for the reasons discussed above. Income from
continuing operations, before income taxes, as a percentage of net sales
increased to 5.9% for the year ended December 31, 1997 from 5.8% for the year
ended 1996.

Provision for Income Taxes: Provision for income taxes was $3.2 million for
both the years ended December 31, 1997 and 1996. Although income before taxes
was slightly higher in 1997, the Company's effective tax rate decreased from 40%
in 1996 to 39% in 1997 offsetting the tax effect of the slightly higher earnings
level.

Income from Continuing Operations: Income from continuing operations of the
Company for the year ended December 31, 1997 increased $0.3 million, or 6.4%, to
$5.0 million from $4.7 million for the corresponding period in 1996 for the
reasons discussed above. Income from continuing operations as a percentage of
net sales increased to 3.6% for the year ended December 31, 1997 from 3.5% for
the corresponding period in 1996.

Income from Discontinued Operations, Net of Income Taxes: Income from
discontinued operations, net of income taxes, for the year ended December 31,
1997 decreased $0.1 million, or 50.0%, to $0.1 million from $0.2 million for the
corresponding period in 1996. In 1996, $0.2 million of earnings related to
American Fastener Corporation, which was sold on December 31, 1996, and included
an estimated gain. In 1997, the final purchase price adjustment for the sale of
American Fastener resulted in an addition of $0.1 million gain.

Income Before Extraordinary Item: The Company's income before extraordinary
item for the year ended December 31, 1997 increased $0.2 million, or 4.1%, to
$5.1 million from $4.9 million for the corresponding period in 1996 for the
reasons discussed above. Income before extraordinary item, net of income taxes,
as a percentage of net sales increased to 3.7% for the year ended December 31,
1997 from 3.6% for the corresponding period in 1996.

Extraordinary Item, Net of Income Taxes: The extraordinary item of $0.6
million for the year ended December 31, 1997 was the loss on the early
extinguishment of debt that resulted from retirement of subordinated debt from
proceeds of the Senior Note and included amortization of the remaining financing
costs and a prepayment penalty.

Net Income: The net income for the Company for the year ended December 31,
1997 decreased $0.4 million, or 8.2%, to $4.5 million from $4.9 million for the
year ended December 31, 1996 for the reasons discussed above. Net income as a
percentage of net sales decreased to 3.2% for the year ended December 31, 1997
from 3.6% for the corresponding year ended 1996.

-16-

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Net Sales: Net sales for the Manufactured Products Group for the year ended
December 31, 1996 increased $4.0 million, or 5.5%, to $78.9 million from $74.9
million in 1995 due primarily to modest increases in a number of businesses,
including increased high voltage distribution equipment sales at Mining Controls
and increased centrifuge sales at CMI, along with increased sales of spare parts
to the coal industry and increased screen sales to the aggregates industry at
Tabor. In addition, a full year of CSI's sales were included in 1996 compared to
only six months of sales included in 1995.

Net sales for the Engineering Services Group for the year ended December
31, 1996 increased $4.7 million, or 9.1%, to $56.7 million from $52.0 million in
1995 due primarily to increased revenues from the larger projects in process.
Although ten larger projects were in process during the year ended December 31,
1996 as compared to twelve larger projects during 1995, due to the nature of the
projects, net sales were $33.1 million in 1996 compared to $32.4 million in
1995. The Engineering Services Group had approximately 250 projects in process
during both years.

Cost of Sales: Cost of sales for the Manufactured Products Group for the
year ended December 31, 1996 increased $2.2 million, or 4.3%, to $52.8 million
from $50.6 million for the corresponding period in 1995 primarily due to
increased sales at CMI, Tabor, CSI and Mining Controls. The Manufactured
Products Group's cost of sales as a percentage of net sales decreased to 66.9%
for the year ended December 31, 1996 from 67.6% for the corresponding period in
1995 due to increased sales of lower cost replacement parts at CMI and CSI and
increased operating efficiencies at Ohio Rod.

Cost of sales for the Engineering Services Group for the year ended
December 31, 1996 decreased $4.8 million, or 9.2%, from $52.1 million to $47.3
million for the corresponding period in 1995. Included in the 1995 cost of sales
were additional costs resulting from an approximate $7.8 million loss on a large
turnkey project.

Gross Profit: Gross profit for the Manufactured Products Group for the year
ended December 31, 1996 increased $1.8 million, or 7.8%, to $26.1 million from
$24.3 million in 1995 due to increased sales at CMI, Tabor, CSI and Mining
Controls. The Manufactured Products Group's gross profit as a percentage of net
sales increased to 33.1% for the year ended December 31, 1996 from 32.4% in 1995
due to increased sales of higher margin replacement parts products at CMI and
CSI (including the successful introduction by CMI of its patented Long Life
Parts Package(TM)), increased sales volume at Mining Controls and increased
operating efficiencies at Ohio Rod.

Gross profit of the Engineering Services Group for the year ended December
31, 1996 increased to $9.4 million from a $0.1 million loss for the
corresponding period in 1995. The increased gross profit was primarily due to an
approximately $7.8 million loss on a large turnkey project that was completed in
1995. The increased gross profit earned in 1996 was also due to the increase in
net sales.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company for the year ended December 31, 1996
increased $1.3 million, or 6.7%, to $21.2 million from $19.9 million in 1995 due
to higher selling expenses related to increased net sales, increased executive
incentive compensation and costs from a full year of operations at CSI. Selling,
general and administrative expenses reported by the Engineering Services Group
for 1996 approximated the 1995 level. Due to the increased net sales level,
selling, general and administrative expenses as a percentage of net sales was
15.6% for the year ended December 31, 1996 compared to 15.7% in 1995.

Amortization Expense: Amortization expense was $3.1 million for both the
years ended December 31, 1996 and 1995. There were no intangible assets added,
or fully amortized in either year, resulting in the consistency of the expense.

-17-

Operating Income: Operating income of the Company for the year ended
December 31, 1996 increased $10.0 million to $11.2 million from $1.2 million in
1995 for the reasons discussed above. Operating income as a percentage of net
sales increased to 8.3% for the year ended December 31, 1996 from 1.0% in 1995.

Interest Expense, Net: Net interest expense of the Company decreased $1.5
million to $3.3 million for the year ended December 31, 1996 from $4.8 million
for the year ended 1995. This decrease was due to a decrease in debt
outstanding. The Company's outstanding debt decreased to $26.9 million as of
December 31, 1996 from $37.7 million as of December 31, 1995.

Gain on Sale of Product Line: In 1995, the Company sold its spoke and
nipple product line of its Ohio Rod division. This sale netted a $2.5 million
gain recognized in the year ended December 31, 1995. There were no product line
sales in 1996.

Income (Loss) from Continuing Operations before Income Taxes: Income (loss)
from continuing operations before income taxes of the Company for the year ended
December 31, 1996 increased $9.0 million to income of $7.9 million in 1996 from
a loss of $1.1 million in 1995 for the reasons discussed above. Income (loss)
from continuing operations before income taxes as a percentage of net sales was
5.9% in 1996 and a negative 0.8% in 1995.

Provision for Income Taxes: The provision for income taxes of the Company
was $3.2 million for the year ended December 31, 1996 compared to $0.1 million
for the year ended December 31, 1995. The $3.1 million increase was primarily
due to a higher income before income taxes, partially offset with a lower
effective tax rate.

Income (Loss) from Continuing Operations: The income (loss) from continuing
operations for the year ended December 31, 1996 increased $5.9 million to $4.7
million from a loss from continuing operations of $1.2 million in 1995 for the
reasons discussed above. Income (loss) from continuing operations as a
percentage of net sales increased to 3.5% from a negative 0.9% in 1995.

Income from Discontinued Operations, Net of Taxes: The income from
discontinued operations of the Company for the year ended December 31, 1996,
decreased $0.7 million to $0.2 million from $0.9 million for the year ended
December 31, 1995. In 1996 the Company sold its subsidiary American Fastener
Corporation. Earnings from this subsidiary plus the gain on the sale of the
subsidiary totaled $0.2 million in that year. In 1995, the Company sold its
subsidiary GC Thorsen, Inc. Earnings from this subsidiary plus the gain on the
sale of the subsidiary totaled $0.8 million in 1995. Also included in 1995
income from discontinued operations was $0.1 million in earnings from the
American Fastener Corporation subsidiary.

Net Income (Loss): Net income of the Company for the year ended December
31, 1996 increased $5.2 million to $4.9 million from a net loss of $0.3 million
in 1995 for the reasons discussed above. Net income (loss) as a percentage of
net sales increased to 3.6% for the year ended December 31, 1996 from a negative
0.2% in 1995.

Liquidity and Capital Resources

Net cash provided by operating activities for the year ended December 31,
1997 was $1.0 million, due primarily to $10.2 million generated from net income
and non-cash charges partially offset by a net increase in operating assets and
liabilities of $9.2 million. Cash generated by operating activities for the year
ended December 31, 1996 was $17.5 million primarily comprised of net income,
non-cash charges, deferred income taxes and increases in trade accounts payable
and contract billings in excess of related costs. As evidenced by these results,
cash flows from operations for any specific period are often materially affected
by the timing and amounts of payments on contracts of the Engineering Services
Group, and the timing of payments by such Group for products and services.

-18-

Cash used in investing activities for the year ended December 31, 1997
consisted of $2.0 million for capital expenditures resulting from the Company's
regular practice of upgrading and maintaining its equipment base and facilities.
The Company generated $1.9 million in 1996 from investing activities due to the
sale of the Company's American Fastener Corporation subsidiary being partially
offset by capital expenditures.

Cash used in financing activities for 1997 was $0.7 million, and included
$85.0 million from the issue of Senior Notes less associated financing costs and
funds used to repurchase common stock, preferred stock and warrants, and to
retire subordinated debt. Cash used in financing activities in 1996 was $10.0
million, primarily to reduce amounts outstanding under the Company's credit
facility, consistent with Senior Management's goal of reducing the leverage from
the 1993 buyout.

The Company's liquidity requirements, both long term (over one year) and
short term, are for working capital, capital expenditures and debt service. The
primary source for meeting these needs has been funds provided by operations.
Based on current and planned operations the Company believes that funds provided
from operations, along with cash on hand, will be adequate to meet its
anticipated debt service requirements, working capital needs and capital
expenditures. In connection with the Offering, the Company amended its credit
facility to provide a $20.0 million revolving line of credit, subject to
borrowing base limitations. The amended term is for a three-year period. At
December 31, 1997, there were no borrowings under the Senior Credit Facility
(excluding $4.0 million in outstanding letters of credit and excluding payment
and performance bonds) nor were any borrowings drawn upon closing of the
Offering.

Upon consummation of the Offering and the Recapitalization Transactions,
the senior subordinated notes were retired, along with the related warrants and
the Company's total outstanding senior indebtedness, in addition to the Notes in
the total principal amount of $85 million, was approximately $0.8 million
(excluding $4.0 million in outstanding letters of credit and excluding payment
and performance bonds). The Company will incur $9.4 million in interest expense
annually with respect to the Notes. The Company expects to meet its debt service
requirements from funds provided from operations. Based on current and planned
operations, the Company believes that funds provided from operations, along with
cash on hand, will be adequate to meet its anticipated debt service
requirements. The Company does not expect these debt service requirements to
adversely affect its financial condition, results of operation, capital
expenditures, acquisitions and anticipated operations.

Backlog

The Company's backlog consists primarily of that portion of contracts for
the Engineering Services Group that have been awarded but not performed and also
includes open orders for the Manufactured Products Group. Backlog at December
31, 1997 increased $36.9 million, or 74.7%, to $86.3 million from $49.4 million
at December 31, 1996. Approximately $8.2 million and $9.0 million, respectively,
for each period relates to the Manufactured Products Group, with the remainder
relating to the Engineering Services Group. Within the Engineering Services
Group's backlog at December 31, 1997, $18.0 million relates to a coal handling
facility, $9.2 million relates to the engineering and procurement of coal
processing equipment, $20.4 million relates to the engineering and procurement
of equipment for two material handling system projects, approximately $22.9
million relates to nine projects with individual backlogs in excess of $1.0
million, and the remaining backlog of $7.6 million results from approximately 90
additional projects with individual backlogs of less than $1.0 million. A
substantial majority of current backlog is expected to be realized in the next
twelve months.

Year 2000

The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" problem, being the inability
of many computer systems to incorporate in the date field the upcoming change in
millennium, thus creating the risk of erroneous results or complete system
failure by the Year 2000. The Company is developing an implementation plan to
eliminate the potential problem. The Company

-19-

presently believes that, with modifications to existing software and converting
to new software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems as so modified and converted. The
Company believes that addressing its Year 2000 issues will not result in a
material cost. If such modifications and modifications and conversions are not
completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.

Inflation

Historically, general inflation has had only a minor affect on the
operations of the Company and its internal and external sources for liquidity
and working capital, and the Company has generally been able to increase prices
to reflect cost increases.

ITEM 7A. MARKET RISK

In 1997, approximately 17% of the Company's net sales were attributable to
products sold or services provided outside of the United States. In 1997, the
majority of the Company's foreign sales were from Poland, China, Mexico,
Trinidad and Indonesia. A portion of these net sales and cost of sales is
derived from international operations which are conducted in foreign currencies.
Changes in the value of these foreign currencies relative to the U.S. dollar
could adversely affect the Company's business, financial condition, results of
operation and debt service capability. The majority of the Company's foreign
sales and costs are denominated in U.S. dollars. With respect to transactions
denominated in foreign currencies, the Company attempts to mitigate foreign
exchange risk by contractually shifting the burden of the risk of currency
fluctuations to the other party to the transactions.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements of Elgin National Industries, Inc.

Page
-----

Report of Independent Accountants...................................................................... 21

Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996.............................. 22

Consolidated Statements of Income (Loss) for the years ended December 31, 1997, 1996 and 1995.......... 23

Consolidated Statements of Changes in Stockholder's Deficit for the years ended December 31, 1997,
1996 and 1995......................................................................................... 24

Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............. 25

Notes to Consolidated Financial Statements............................................................. 26

-20-

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Elgin National Industries, Inc.

We have audited the accompanying consolidated balance sheets of Elgin
National Industries, Inc. (formerly known as ENI Holding Corp.) and Subsidiary
Companies as of December 31, 1997 and 1996 and the related consolidated
statements of income (loss), changes in stockholder's deficit and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Elgin National
Industries, Inc. and Subsidiary Companies as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

Coopers & Lybrand L.L.P.

Chicago, Illinois
March 6, 1998

-21-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

December 31, 1997 and 1996
(in thousands except share data)

Assets 1997 1996
------ --------- ---------

Current assets:

Cash and cash equivalents.......................................................... $ 9,337 $10,991
Accounts receivable, net........................................................... 27,355 19,888
Inventories, net................................................................... 13,497 12,901
Prepaid expenses and other assets.................................................. 1,728 714
Deferred income tax................................................................ 1,596 3,446
-------- -------
Total current assets........................................................... 53,513 47,940
Property, plant and equipment, net................................................... 13,582 13,741
Other assets......................................................................... 23,334 21,053
Goodwill and intangibles............................................................. 12,450 13,180
-------- -------
Total assets................................................................... $102,879 $95,914
======== =======

Liabilities and Stockholder's Deficit
-------------------------------------

Current liabilities:
Current portion of long-term debt.................................................. $ 311 $ 3,893
Accounts payable & accrued expenses................................................ 29,967 28,859
-------- -------
Total current liabilities...................................................... 30,278 32,752
Long-term debt less current portion.................................................. 85,440 22,998
Other liabilities.................................................................... 1,410 965
Deferred income tax.................................................................. 4,385 6,091
-------- -------
Total liabilities.............................................................. 121,513 62,806
-------- -------
Redeemable preferred stock units..................................................... 10,379 9,651
-------- -------
Redeemable preferred stock........................................................... 2,847 25,729
-------- -------
Common stock, (redeemable) (Class A, B and C) (par value $.01 per share; authorized
57,703 shares; 18,362 issued and outstanding as of December 31, 1996)
Paid in capital...................................................................... 1,519
-------
Stockholder's deficit:
Common stock, (Class A) (par value $.01 per share; authorized 23,678 shares; 6,408
issued and outstanding as of December 31, 1997)
Retained deficit................................................................... (31,860) (3,791)
-------- -------
Total stockholder's deficit.................................................... (31,860) (3,791)
-------- -------
Total liabilities and stockholder's deficit.................................... $102,879 $95,914
======== =======

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

-22-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)

1997 1996 1995
-------- -------- --------

Sales, net................................................................. $139,615 $135,651 $126,839
Cost of sales.............................................................. 102,744 100,119 102,654
-------- -------- --------
Gross profit............................................................. 36,871 35,532 24,185
Selling, general and administrative expenses............................... 21,840 21,226 19,891
Amortization expense....................................................... 3,447 3,085 3,052
-------- -------- --------
Operating income......................................................... 11,584 11,221 1,242
Other expenses (income)
Interest expense, net.................................................... 3,471 3,340 4,807
Gain on sale of product line............................................. (2,520)
-------- -------- --------
Income (loss) from continuing operations before income taxes............... 8,113 7,881 (1,045)
Provision for income taxes................................................. 3,187 3,191 124
-------- -------- --------
Income (loss) from continuing operations................................... 4,926 4,690 (1,169)
Discontinued operations
Income from discontinued operations (less applicable income taxes of
$0, $33, and $200, respectively)....................................... 51 281

Gain on sale of discontinued operations (less applicable income taxes
of $78, $77 and $375, respectively).................................... 122 123 595
-------- -------- --------
Income (loss) before extraordinary item.................................... 5,048 4,864 (293)
-------- -------- --------
Extraordinary loss on early extinguishment of debt, net of tax benefit of
$366...................................................................... (582)
-------- -------- --------
Net income (loss).......................................................... $ 4,466 $ 4,864 $ (293)
======== ======== ========

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

-23-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT

For the Years Ended December 31, 1997, 1996 and 1995
(in thousands except share data)

Total
Common Retained Stockholder's
Stock (Deficit) Deficit
------- ---------- --------------

Balance as of December 31, 1994................................. $ $ (3,030) $ (3,030)
Net loss for the year ended December 31, 1995................... (293) (293)
Redeemable preferred stock and redeemable preferred stock unit
dividends ($10 per share)..................................... (2,666) (2,666)
------- -------- --------
Balance as of December 31, 1995................................. (5,989) (5,989)
Net income for the year ended December 31, 1996................. 4,864 4,864
Redeemable preferred stock and redeemable preferred stock unit
dividends ($10 per share)..................................... (2,666) (2,666)
------- -------- --------
Balance as of December 31, 1996................................. (3,791) (3,791)
------- -------- --------
Net income for the year ended December 31, 1997................. 4,466 4,466
Redeemable preferred stock and redeemable preferred stock unit
dividends (173,946 shares at $8.47 per share; 96,629 shares
at $10 per share)............................................. (2,399) (2,399)
Repurchase Class B and C common stock........................... (30,136) (30,136)
------- -------- --------
Balance as of December 31, 1997................................. $ $(31,860) $(31,860)
======= ======== ========

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

-24-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)

1997 1996 1995
------- -------- --------

Cash flows from operating activities:
Net income (loss)........................................... $ 4,466 $ 4,864 $ (293)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 6,217 5,683 6,084
Provision for deferred income taxes....................... 1,716 411
Provision for doubtful accounts........................... 111 187 126
Provision for inventories................................. 419 751 648
Gain on sale of American Fastener Corporation............. (200) (200)
Gain on sale of product line.............................. (2,520)
Gain on sale of GC Thorsen, Inc........................... (970)
Income from pension overfunding........................... (757) (758) (780)
(Gain) loss on the disposal of assets..................... (16) (46) 82
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................ (7,578) (813) 13,572
(Increase) decrease in inventories........................ (1,015) (633) 96
(Increase) decrease in prepaid expenses and other assets.. (2,393) 180 52
Increase (decrease) in accounts payable and accrued
expenses................................................. 1,754 6,575 (16,366)
-------- -------- --------

Net cash provided by operating activities.............. 1,008 17,506 142
-------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of assets............................ 26 214 45
Purchase of property, plant and equipment................... (1,974) (2,153) (1,610)
Purchase Centrifugal Services, Inc.......................... (2,334)
Purchase assets of Process Equipment Company................ (798)
Proceeds from the sale of American Fastener Corporation..... 3,874
Proceeds from the sale of product line...................... 5,682
Proceeds from the sale of GC Thorsen, Inc................... 23,493
-------- -------- --------
Net cash (used) provided by investing activities....... (1,948) 1,935 24,478
-------- -------- --------
Cash flows from financing activities:
Repurchase redeemable preferred stock....................... (24,553)
Repurchase common stock..................................... (31,655)
Debt issuance costs......................................... (3,366)
Borrowings on revolving debt................................ 2,500
Borrowings on long-term debt................................ 85,000
Repayments of long-term debt................................ (26,140) (10,785) (23,391)
Decrease in cash overdrafts................................. (1,394)
-------- -------- --------
Net cash used in financing activities.................. (714) (10,785) (22,285)
-------- -------- --------
Net (decrease) increase in cash............................... (1,654) 8,656 2,335
Cash and cash equivalents at beginning of period.............. 10,991 2,335
-------- -------- --------
Cash and cash equivalents at end of period.................... $ 9,337 $ 10,991 $ 2,335
======== ======== ========

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

-25-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Company

Elgin National Industries, Inc. ("the Company") owns and operates a
diversified group of middle-market industrial manufacturing and engineering
services businesses. The Company is organized into two operating groups. Through
its Manufactured Products Group, the Company manufactures and supplies custom-
designed, highly engineered products used by a wide variety of customers in the
industrial equipment, durable goods, mining, mineral processing and electric
utility industries, primarily within the United States. Through its Engineering
Services Group, the Company provides design, engineering, procurement and
construction management services for mineral processing and bulk materials
handling systems used in the mining, mineral processing, electric utilities and
the rail and marine transportation industries, both within the United States and
internationally. The Company's distribution operation included American Fastener
Corporation and GC Thorsen, Inc. which were sold in 1996 and 1995, respectively.
These operations have been classified and shown as discontinued operations. (See
Note 21.)

2. Repurchase of Stock Owned by Outside Institutional Investors and Merger of
ENI Holding Corp. with Elgin National Industries, Inc.

On November 5, 1997 the Company issued $85,000,000 of 11.0% senior notes,
part of the proceeds of which was used to repurchase or retire (a) all common
stock, preferred stock (all of which was redeemable) and common stock warrants
not owned by Senior Management, representing approximately 68% of the total
equity of the Company for the aggregate purchase price of $56,208,000 and (b)
the senior subordinated indebtedness of its subsidiary, Elgin National
Industries, Inc., by payment of $20,777,000 representing the aggregate amount of
principal outstanding on such senior subordinated debt and all accrued interest
thereon and prepayment fees. The cost of early extinguishment of the senior
subordinated debt includes amortization of the remaining financing cost of
$648,000 and prepayment penalty of $300,000 and is reflected net of taxes as an
extraordinary item on the accompanying consolidated statements of income.
Effective immediately after repurchase and redemption, Elgin National
Industries, Inc. merged into ENI Holding Corp., with ENI Holding Corp. being the
surviving corporation. ENI Holding Corp. then changed the name of the surviving
corporation to Elgin National Industries, Inc.

3. Summary of Significant Accounting Policies

The significant accounting policies of the Company are summarized below:

(a) Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.

(b) Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

(c) Revenues and Cost Recognition on Contracts

The length of the Company's construction contracts varies, but is typically
longer than one year. However, in accordance with industry practice, contract-
related assets and liabilities are classified as current in the accompanying
consolidated balance sheets. Revenues are recognized on the percentage-of-
completion method measured by comparing costs incurred to date with total
estimated costs on each project. Contract costs include direct material and
engineering costs along with indirect costs related to contract performance.
Favorable adjustments to these cost

-26-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

estimates are made and recognized in income over the remaining contract period.
Unfavorable adjustments are recorded as soon as they are apparent. Estimated
losses on uncompleted contracts are provided in full within the period in which
such losses are determinable.

(d) Inventories

are valued at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) and the average cost bases.

(e) Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line and double declining-balance methods over
the estimated useful lives of the related assets which range from 3 to 30 years.
Upon the sale or other disposition of an asset, the cost and related accumulated
depreciation are removed from the accounts, and the gain or loss is included in
income. Maintenance and repair costs are charged to earnings as incurred. Costs
of improvements are capitalized.

(f) Goodwill and Intangibles

The excess of cost over fair value of the net assets acquired is reflected
in the consolidated financial statements as goodwill and is being amortized
using the straight-line method over a period of twenty years.

Intangibles consist primarily of non-compete agreements and are being
amortized using the straight-line method over a period of five years.

(g) Long-Lived Assets

Effective 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121), which requires that long-lived
assets and certain identifiable intangibles of an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. In the event that
facts and circumstances indicate that the cost of any long-lived assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a write-
down to market value or discounted cash flow value is required. The adoption did
not have a material effect on the Company's financial position or results of
operation.

(h) Income Taxes

Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at December 31, 1997 and 1996 based on tax rates
applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.

(i) Warrants Subject to Put

Warrants were issued to the senior subordinated debt holders and are stated
at their estimated fair value. As discussed in Note 11, these warrants were
subject to a put option at a price equal to the fair value of the underlying
stock. The warrants were repurchased by the Company on November 5, 1997.

-27-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(j) Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents, which approximate fair
value.

(k) Accounting Principles to be Adopted

The Company will implement the provisions of Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which will be effective for interim and annual financial statements issued for
periods beginning after December 15, 1997. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Management believes that adoption
of SFAS No. 130 will not have a material effect on the Company.

The Company will implement the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), which will be effective for periods
beginning after December 15, 1997. SFAS No. 131 specifies revised guidelines of
determining an entity's operating segments and the type and level of financial
information to be disclosed. The Company intends to adopt this standard in 1998
by making the required note disclosures. The adoption of this standard is not
expected to have a material effect on the Company's financial position or
results of operations.

(l) Reclassification

Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to 1997 presentation.

4. Accounts Receivable

Accounts receivable consist of:

December 31,
--------------------------
1997 1996
------------ ------------
(in thousands)

Trade accounts........................................................................ $ 9,183 $ 8,655
------- -------
Construction contracts:
Billed............................................................................. 14,009 9,551
Costs and estimated earnings in excess of billings on
contracts........................................................................ 2,830 436
Retainage due upon completion of contracts......................................... 1,697 1,558
------- -------
18,536 11,545
------- -------
Other receivables..................................................................... 214 241
------- -------
27,933 20,441
Less allowance for doubtful accounts.................................................. 578 553
------- -------
$27,355 $19,888
======= =======

Billings exceeded related costs and gross profit recognized on certain
contracts by $9,793,000 and $8,446,000 as of December 31, 1997 and 1996,
respectively. These amounts are classified as current liabilities in the
accompanying consolidated balance sheets.

It is estimated that all of the retainage due upon completion of contracts
at December 31, 1997 will be collected in 1998.

-28-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A significant portion of the Company's business activity is concentrated
within the coal mining industry. Accounts receivable at December 31, 1997 and
1996 from companies within the coal mining industry were $7,556,000 and
$9,601,000, respectively.

5. Inventories

Inventories consist of:

December 31,
-------------------
1997 1996
-------- --------
(in thousands)

Finished goods................................. $ 8,073 $ 7,008
Work-in-process................................ 1,524 1,260
Raw materials.................................. 5,501 6,029
------- -------
15,098 14,297
Less excess and obsolete reserve............... 1,601 1,396
------- -------
$13,497 $12,901
======= =======

6. Property, Plant and Equipment

Property, plant and equipment, at cost, consist of:

December 31,
-------------------
1997 1996
-------- --------
(in thousands)

Land........................................... $ 1,560 $ 1,560
Buildings and improvements..................... 4,660 4,457
Machinery and equipment........................ 16,585 15,057
------- -------
22,805 21,074
Less accumulated depreciation.................. 9,223 7,333
------- -------
$13,582 $13,741
======= =======

Depreciation expense, including amounts related to discontinued operations,
for the years ended December 31, 1997, 1996 and 1995 was $2,122,000, $2,479,000
and $2,737,000, respectively.

7. Goodwill and Intangibles

The components of goodwill and intangibles are as follows:

December 31,
-------------------
1997 1996
-------- --------
(in thousands)

Goodwill....................................... $ 9,891 $ 9,891
Non-compete agreements......................... 8,934 8,934
Financing and acquisition costs................ 3,619 4,505
------- -------
22,444 23,330
Less accumulated amortization.................. 9,994 10,150
------- -------
$12,450 $13,180
======= =======

Amortization expense, including amounts related to discontinued operations
and the early extinguishment of debt, was $4,095,000, $3,204,000 and $3,347,000,
for the years ended December 31, 1997, 1996 and 1995, respectively.

-29-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of:

December 31,
------------------
1997 1996
-------- --------
(in thousands)

Accounts payable--trade......................... $ 7,754 $ 8,922
Accounts payable--other......................... 403 319
Billings on contracts in excess of costs and
gross profit recognized....................... 9,793 8,446
Accrued payroll and commissions................. 3,391 2,752
Other accruals.................................. 8,626 8,420
------- -------
$29,967 $28,859
======= =======

9. Income Taxes

The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax liability and deferred tax asset and
their approximate tax effect are as follows:

December 31, 1997 December 31, 1996
------------------- --------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
---------- ------- ---------- -------
(in thousands) (in thousands)

Accounts receivable................. $ 553 $ 214
Inventories......................... $ 1,634 $ 631 1,998 772
Accrued expenses.................... 6,390 2,468 5,765 2,227
Intangibles......................... 5,103 1,971 3,471 1,341
Net operating loss.................. 448 448
-------- ------- -------- -------
Total deferred tax asset....... 13,127 5,518 11,787 5,002
-------- ------- -------- -------
Accounts receivable................. (1,161) (449)
Prepaid pension..................... (18,791) (7,257) (18,032) (6,965)
Property plant & equipment.......... (1,557) (601) (1,766) (682)
-------- ------- -------- -------
Total deferred tax liability... (21,509) (8,307) (19,798) (7,647)
-------- ------- -------- -------
Net deferred tax liability.......... $ (8,382) $(2,789) $ (8,011) $(2,645)
======== ======= ======== =======

The components of the provision (benefit) for income taxes are:

Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)

Current
Federal..................... $2,142 $1,167 $166
State....................... 575 573 283
Foreign..................... 38
Deferred
Federal..................... 118 1,473 300
State....................... 26 88 (50)
------ ------ ----
$2,899 $3,301 $699
====== ====== ====

-30-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Allocation of the provision for income taxes in the 1997, 1996 and 1995
Consolidated Statements of Income (Loss) include the following:

Years Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
(in thousands)

Continuing operations.................... $3,187 $3,191 $124
Discontinued operations--income
from discontinued operations........... 33 200
Discontinued operations--gain on sale of
discontinued operations................ 78 77 375
Extraordinary loss--tax benefit.......... (366)
------ ------ ----
$2,899 $3,301 $699
====== ====== ====

The Company's effective tax rates of 39%, 40% and 172% for the years ended
December 31, 1997, 1996 and 1995, respectively, differ from the statutory
federal tax rate of 34% as follows:

Years Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
(in thousands)

Income before income taxes............... $7,365 $8,165 $406
====== ====== ====
Statutory federal income tax............. 2,504 2,776 138
State taxes net of federal benefit....... 455 418 130
Foreign sales corporation income tax..... 88 54 5
Other Items.............................. (148) 53 426
------ ------ ----
$2,899 $3,301 $699
====== ====== ====

The Company made cash payments for income taxes totalling $3,201,000,
$1,585,000 and $538,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.

10. Long-Term Debt

Long-term debt consists of:

December 31,
Interest Rate at Year of ------------------
Type of Issue December 31, 1997 Maturity 1997 1996
------------- ----------------- -------- ------- -------
Fixed rate: (in thousands)

Senior notes...................... 11.00% 2007 $85,000
Senior subordinated notes......... 2001 $19,847*
Notes payable..................... 6.00% 2000 751 1,044
Variable rate:
Revolver loan..................... 2000
Term loan......................... 1998 6,000*
------- -------
Total long-term debt.................. 85,751 26,891
Less current maturities............... 311 3,893
------- -------
Total non-current long-term debt...... $85,440 $22,998
======= =======

- --------------
*Loans prepaid in year ended December 31, 1997

-31-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under the terms of the Bank Credit Agreement, the revolver loan has a
borrowing capacity of up to $20,000,000 (less any outstanding letters of credit)
based upon a monthly variable borrowing base. At December 31, 1997, the
Company's available borrowing base of $15,988,000 less their outstanding letters
of credit of $3,953,000 resulted in an unused portion of the revolving credit
facility of $12,035,000. The revolver interest was at either (a) the greater of
Federal Funds Rate plus 0.5% or the bank's reference rate, or (b) LIBOR plus
1.5%. A commitment fee of 3/10% per annum on unused borrowable money under the
revolving loan and a 1.5% per annum fee for outstanding letters of credit is
payable to the bank quarterly.

The Company's accounts receivables and inventory are pledged under the
terms of the Bank Credit Agreement.

The Bank Credit Agreement contains certain restrictive covenants, which,
among other things, limit the amount of indebtedness, limit the payment of
dividends and require the maintenance of certain financial ratios.

Annual principal payments on long-term debt at December 31, 1997 were as
follows (in thousands):

Senior Notes
notes payable Total
------- ------- -------

1998................. $311 $ 311
1999................. 331 331
2000................. 109 109
2001.................
2002.................
2003 and thereafter.. $85,000 85,000
------- ------ -------
$85,000 $751 $85,751
======= ====== =======

Under the terms of the senior notes, the Company is required to make only
interest payments until the senior notes maturity in 2007. The senior notes may
be redeemed, in whole or in part, at any time on or after November 1, 2002 at
the option of the Company, at the redemption prices as detailed below, being
equal to a percentage of the principal amount of the notes being redeemed, plus
accrued and unpaid interest and specified liquidated damages, if any, to the
date of redemption.

Year Percentage
---- ----------

2002..................... 105.500%
2003..................... 103.667%
2004..................... 101.833%
2005 and thereafter...... 100.000%

In addition, in the event of a Change of Control, each holder of the senior
notes will have the right to require the Company to make an offer to purchase
such holder's notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of purchase.

The senior notes contain certain restrictive covenants, which, among other
things, limit the ability of the Company to incur additional indebtedness and
make certain restricted payments, grant liens upon its assets, sell certain
assets, merge or consolidate.

The senior notes are unsecured obligations and are guaranteed by the
Company's material domestic subsidiaries.

-32-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's interest expense for the years ended December 31, 1997, 1996
and 1995 was $4,282,000, $3,662,000 and $4,953,000, respectively. The Company
made cash payments for interest totalling $2,964,000, $3,760,000 and $5,084,000,
respectively, during 1997, 1996 and 1995.

Based upon the Company's ability to obtain financing under similar terms,
the estimated fair value of the Company's long-term debt including the current
portion was $88,938,000 at December 31, 1997 and approximated its carrying value
at December 31, 1996.

11. Warrants Subject to Put

Effective November 5, 1997, the Company repurchased warrants outstanding
from its senior subordinated debt holders for the purchase of up to 1,678 shares
of Class B common stock. The warrants also had a put option which, under certain
events, allowed the holders to exercise the put option at the fair value of the
underlying common stock represented by the warrants. The estimated fair value of
the warrants was $153,000 at December 31, 1996, and was included in other
accruals.

12. Redeemable Preferred Stock Units

In exchange for amounts owed to certain officers, the Company granted to
them redeemable preferred stock units redeemable on December 31, 2007 with an
aggregate principal value of $7,274,000 provided, that, the Company's obligation
to make a redemption payment at such time is subject to the restrictions
contained in the Indenture governing the 11% senior notes due 2007.

The Company had accrued dividend equivalent amounts equal to $3,105,000 and
$2,377,000 at December 31, 1997 and 1996, respectively. Principal and accrued
dividend equivalent amounts were $10,379,000 and $9,651,000 at December 31, 1997
and 1996, respectively, and will be paid in tandem with the Company's redeemable
preferred stock dividend and redemption payments.

13. Redeemable Preferred Stock

The Company has 550,000 shares of $1.00 par value redeemable preferred
stock authorized with 19,952 shares issued and outstanding at December 31, 1997.
The redeemable preferred stock is mandatorily redeemable at $100 per share
totalling $1,995,000 for all shares currently outstanding, plus all accrued and
unpaid dividends thereon on December 31, 2007 or upon the occurrence of a
qualified public offering or other sale of the Company.

The redeemable preferred stock has a preferential liquidation value of $100
per share and accrues cumulative preferred dividends at 10% per annum of the
liquidation value. Dividends accrue cumulatively at a rate of 10% per annum.
Redeemable preferred stock has no voting rights.

With the completion of the repurchase (see Note 2.) on November 5, 1997,
the Company repurchased all redeemable preferred stock not owned by Senior
Management.

The Company had accrued dividends of $852,000 and $6,339,000 as of December
31, 1997 and 1996, respectively.

14. Common Stock

In conjunction with the repurchase of all outstanding Class B and Class C
common stock which was owned by outside institutional investors (see Note 2.),
the Company's Articles of Incorporation were amended, eliminating Class B and
Class C common stock. All associated paid in capital was eliminated in the
repurchase and redemption transaction.

-33-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Following are the number of shares authorized, issued and outstanding for
each of the Company's classes of capital stock as of December 31, 1997 and 1996.

1996
1997 -----------------------------
Common Common Common Common
Class A Class A Class B Class C
------- ------- ------- -------

Par value........................... $ 0.01 $ 0.01 $ 0.01 $ 0.01
Shares authorized................... 23,678 23,678 23,678 10,347
Shares issued and outstanding....... 6,408 6,408 1,608 10,346

Class A common stock has voting rights of one vote per share.

All classes of common stock were formerly subject to a put option (by
agreement of the shareholders) available in certain circumstances whereby the
common stock could be sold back to the Company. This put option was eliminated
in connection with the repurchase of all outstanding stock owned by outside
institutional investors.

15. Pension and Profit Sharing Plans

The Company has a noncontributory defined benefit plan which is open to all
eligible, full-time, nonunion employees and is salary related and integrated
with Social Security. The Company's funding policy for the plan is to fund the
minimum annual contribution required by applicable regulations.

Pension plan assets are primarily invested in bonds, corporate notes and
common stock.

The following table sets forth the funded status of the pension plan and
amounts recognized in the Company's consolidated financial statements at
December 31:

1997 1996
---- ----
(in thousands)

Actuarial present value of benefit obligations--accumulated benefit
obligations, including vested benefits, of $14,348 and $14,849
respectively.................................................. $14,729 $15,314
======= =======
Projected benefit obligations for service rendered.............. $17,134 $17,276
Plan assets at fair value....................................... 39,858 35,636
------- -------
Plan assets in excess of projected benefit obligations.......... 22,724 18,360
Unrecognized prior service cost................................. (170) (191)
Unrecognized (gain) loss from experience........................ (3,763) (135)
------- -------
Prepaid pension cost included in other assets................... $18,791 $18,034
======= =======

Net pension cost included the following components:

1997 1996 1995
---- ---- ----

Service cost--benefits earned during the period........................... $ 745 $ 767 $ 629
Interest cost on projected benefit obligation............................. 1,063 1,024 1,127
Actual return on plan assets.............................................. (6,174) (2,524) (5,420)
Net amortization and deferral............................................. 3,609 (25) 2,884
------- ------- --------
Subtotal net periodic pension income...................................... 757 758 780
Recognition of GC Thorsen, Inc. settlement and curtailment................ (217)
------- ------- -------
Total net periodic pension income......................................... $ 757 $ 758 $ 563
======= ======= =======

-34-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In determining the actuarial present value of the projected benefit
obligations, the settlement rate used was 6.25% and 6.5% in 1997 and 1996,
respectively. For 1997 and 1996 the rate of increase in the future compensation
level was 5.5%. The expected long-term rate of return on assets was 8.0% in 1997
and 1996.

In addition, the Company makes contributions to a union-administered
pension plan for certain employees who do not participate in the Company's
pension plan. The Company's aggregate expense for these plans for the years
ended December 31, 1997, 1996 and 1995 was $55,000, $56,000 and $68,000,
respectively.

The Company has a combined 401(k) employee savings and a profit sharing
plan for all eligible, full-time, nonunion employees. Contributions to the plan
are based upon management's discretion. The Company's aggregate expense for
these plans for the years ended December 31, 1997, 1996 and 1995 was $1,325,000,
$1,241,000 and $1,024,000, respectively.

In 1995, the Company established a nonqualified supplemental employee
retirement plan ("SERP") for certain employees whose pension benefits were
limited by the Omnibus Budget Reconciliation Act of 1993, the Employee
Retirement Income Security Act and the Uruguay Round General Agreement on
Tariffs and Trade ("GATT").

The following table sets forth the funded status of the SERP and amounts
recognized in the Company's consolidated financial statements at December 31:

1997 1996
------- -----
(in thousands)

Actuarial present value of accumulated benefit obligation including
vested benefits of $664 and $245 respectively........................... $ 664 $ 245
Projected benefit obligation for service rendered....................... ======= =====
Plan assets at fair value............................................... $ 1,069 $ 825
Projected benefit obligation in excess of plan assets................... (1,069) (825)
Unrecognized prior service cost......................................... 362 504
Unrecognized net loss from experience................................... 227 47
------- -----
Pension liability included in other liabilities......................... $ (480) $(274)
======= =====

Net SERP cost included in the following components:

1997 1996 1995
---- ---- ----

Service cost benefits earned during the period................ $ 64 $ 56 $ 44
Interest cost on projected benefit obligation................. 64 47 44
Net amortization and deferral................................. 151 41 41
----- ----- -----
Net periodic pension cost..................................... $ 279 $ 144 $ 129
===== ===== =====

In determining the actuarial present value of the projected benefit
obligation, the settlement rate used was 6.25% and 6.50% in 1997 and 1996,
respectively. For 1997 and 1996, the rate of increase in the future compensation
level was 5.5%.

In addition, the Company established during 1995 a non-qualified profit
sharing plan for certain employees whose 401(k) benefits were also limited by
the Omnibus Budget Reconciliation Act of 1993, the Employee Retirement Income
Security Act and the Uruguay Round General Agreement on Tariffs and Trade
("GATT"). The Company's expense for this plan in 1997, 1996 and 1995 was
$77,000, $61,000 and $50,000, respectively.

-35-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16. Leases

The Company has entered into noncancellable operating leases, primarily for
office space, vehicles and equipment, that have initial or remaining terms of
more than one year.

Future minimum annual rental expenditures are as follows:

(in thousands)
--------------

1998................................... $ 1,230
1999................................... 1,175
2000................................... 808
2001................................... 567
2002................................... 532
2003 and thereafter.................... 1,785
--------------
$ 6,097
==============

Rental expense for the twelve months ended December 31, 1997, 1996 and 1995
was $1,422,000, $1,609,000 and $1,582,000, respectively.

17. Related Party Transactions

At December 31, 1997 and 1996, the Company had the following outstanding
notes receivables and note payable:

(I) Two notes receivable from a limited partnership owned by an officer
each with principal due in the amount of $1,000,000 due in December, 2007.
Prepayment is required if the value to be paid under the redeemable preferred
stock units at the time of payment is less than the aggregate amount of the
principal and interest outstanding. Interest accrues at 5.35% and 6.31%,
respectively, and is payable at the earlier of prepayment or maturity. Interest
earned for the years ended December 31, 1997, 1996 and 1995 was $55,000, $53,000
and $53,000, respectively.

(II) Notes receivable from certain officers in the total principal amount
of $1,033,000 and $600,000 due in December, 2007. Interest accrues at 6.42% and
6.31%, respectively, per annum. Interest earned was $55,000, $52,000, and
$52,000, respectively, for the years ended December 31, 1997, 1996 and 1995.

The principal and related accrued interest on terms (I) and (II) are
included in other long-term assets in the accompanying balance sheet.

(III) Subject to an offset agreement, notes receivable and a note payable
in the amount of $1,603,000 with a limited partnership owned by an officer.
These notes accrue interest at 5.35% annually. All notes are due in December,
2007.

18. Contingencies

The Company has claims against others, and there are claims by others
against it, in a variety of matters arising out of the conduct of the Company's
business. The ultimate resolution of all such claims would not, in the opinion
of management, have a material effect on the Company's financial position, cash
flows or results of operations.

In connection with the 1993 leveraged buyout of the Company, The Jupiter
Corporation ("Jupiter"), the previous owner, agreed to indemnify the Company
against various claims and ongoing litigation and assumed the defense of such
litigation. The litigation includes a wrongful death product liability claim
against one of the

-36-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company's subsidiaries in connection with an accident at a work site. Although
the Company believes that Jupiter and its insurance carrier are performing on
the indemnity obligations, there can be no assurance that they will continue to
do so or that the Company would successfully recover on the indemnity in the
event of an adverse judgement against the subsidiary or adverse outcomes in any
other proceedings. In any such case, the Company would bear the cost of defense
and any adverse judgment. One or more such adverse judgements could materially
and adversely affect the Company's business, financial condition, results of
operations and debt service capability.

19. Acquisitions

In 1995, the Company purchased all of the outstanding shares of Centrifugal
Services, Inc. for $2,334,000 comprised of $1,512,000 cash and $822,000 of notes
payable.

In addition, during 1995, a subsidiary of the Company purchased selected
assets of Process Equipment Company for $798,000 comprised of a note payable. In
conjunction with the acquisition of the assets, an accounts payable liability of
$52,000 was assumed.

20. Sale of Product Line

On March 1, 1995, the Company sold the assets related to the spoke and
nipple product line of one of its divisions. Assets with a book value of
$3,162,000 were sold resulting in a before income tax gain of $2,520,000. This
product line had sales of $1,064,000 for the two months ended February 28, 1995.

21. Discontinued Operations

On April 5, 1995, the Company sold all the outstanding shares of its
subsidiary GC Thorsen, Inc. for $23,651,000 resulting in a gain of $595,000, net
of income taxes.

The results of GC Thorsen, Inc. have been reported as discontinued
operations in the Consolidated Statements of Income. Summarized results of GC
Thorsen, Inc. are as follows:

Three Months Ended
March 31, 1995
------------------
(in thousands)

Sales, net.............................................. $10,481
Cost and expenses....................................... 10,228
-------
Income before income taxes.............................. 253
Provision for taxes..................................... 101
-------
Income from discontinued operations..................... 152
Gain on sale of GC Thorsen, Inc. (net of income taxes
of $375)................................................ 595
-------
Total earnings related to discontinued GC Thorsen, Inc.. $ 747
=======

On December 31, 1996, the Company sold all the outstanding shares of its
subsidiary American Fastener Corporation for $3,982,000 resulting in a gain of
$123,000, net of income tax.

An additional gain of $122,000, net of income tax, was recognized in 1997
upon the final purchase price adjustment.

-37-

ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The results of American Fastener Corporation have been reported as
discontinued operations in the Consolidated Statements of Income. Summarized
results of American Fastener Corporation are as follows:

Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(in thousands)

Sales, net...................................................... $10,240 $10,639
Cost and expenses............................................... 10,156 10,411
------- ------- -------
Income before income taxes...................................... 84 228
Provision for taxes............................................. 33 99
------- ------- -------
Income from discontinued operations............................. 51 129
------- ------- -------
Gain on sale of American Fastener Corporation
(net of income taxes of $78 and $77, respectively)............ $ 122 123
------- ------- -------
Total earnings related to discontinued
American Fastener Corporation.......................... $ 122 $ 174 $ 129
======= ======= =======

22. Segment Information

The Company operates predominantly within the United States, primarily in
two industries, Manufactured Products and Engineering Services. By December 31,
1996, the Company had disposed of its Distribution group which comprised GC
Thorsen, Inc. and American Fastener Corporation. Information about the Company
by industry is presented below:

Years Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----

(in thousands)
Sales, net, to unaffiliated customers from continuing
operations:
Manufactured Products........................................... $ 78,592 $ 78,952 $ 74,859
Engineering Services............................................ 61,023 56,699 51,980
-------- -------- --------
Total sales, net........................................... $139,615 $135,651 $126,839
======== ======== ========
Operating income (loss) from continuing operations:

Manufactured Products........................................... $ 14,942 $ 14,094 $ 13,034
Engineering Services............................................ 3,031 2,658 (6,879)
Corporate including interest expense............................ (9,860) (8,871) (7,200)
-------- -------- --------
Income (loss) before taxes................................. $ 8,113 $ 7,881 $ (1,045)
======== ======== ========
Depreciation & amortization:
Manufactured Products........................................... $ 2,440 $ 2,532 $ 2,726
Engineering Services............................................ 1,485 1,545 1,536
Corporate and discontinued operations........................... 2,292 1,606 1,822
-------- -------- --------
Total depreciation & amortization.......................... $ 6,217 $ 5,683 $ 6,084
======== ======== ========
Capital expenditures:
Manufactured Products........................................... $ 1,754 $ 1,440 $ 1,306
Engineering Services............................................ 218 199 165
Corporate and discontinued operations........................... 2 514 139
======== ======== ========
Total capital expenditures................................. $ 1,974 $ 2,153 $ 1,610
======== ======== ========

-38-

ELGIN NATIONAL INDUSTRIES AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)

December 31,
------------------
1997 1996
-------- -------
(in thousands)

Identifiable assets:
Manufactured Products............................... $ 34,710 $34,083
Engineering Services................................ 19,525 15,395
Corporate and other................................. 48,644 46,436
-------- -------
Total assets...................................... $102,879 $95,914
======== =======

Corporate and other identifiable assets primarily include prepaid pension
costs and cash and cash equivalents.

23. Subsidiary Guarantors

The Company's payment obligations under the senior notes and revolver loan
are fully and unconditionally guaranteed on a joint and several basis
(collectively, "Subsidiary Guarantees") by Tabor Machine Company, Norris
Screen and Manufacturing, Inc., TranService, Inc., Mining Controls, Inc., Clinch
River Corporation, Centrifugal Services, Inc., Roberts & Schaefer Company and
Soros Associates, Inc., each a direct, wholly-owned subsidiary of the Company.
The following summarized combined financial data illustrates the composition of
the combined Guarantors.

December 31,
------------------
1997 1996
------- -------
(in thousands)

Current assets........................................ $28,893 $23,670
Noncurrent assets..................................... 11,691 15,338
------- -------
Total assets...................................... $40,584 $39,008
======= =======
Current liabilities................................... $20,241 $19,555
------- -------
Total liabilities................................. $20,241 $19,555
======= =======

Years Ended December 31,
------------------------------
1997 1996 1995
-------- ------- -------
(in thousands)

Sales, net................................................ $101,014 $97,358 $97,102
Gross profit.............................................. 20,334 20,220 12,816
Income (loss) from continuing operations.................. 6,837 6,649 (2,645)
Net income (loss)......................................... 4,307 4,673 (1,201)

The direct and non-direct, non-guarantor subsidiaries, in terms of assets,
equity, income, and cash flows, on an individual and combined basis are
inconsequential.

Separate financial statements of the Guarantors are not presented because
management has determined that these would not be material to investors.

-39-

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

MANAGEMENT

The following table sets forth information regarding the directors and
executive officers of the Company:

Name Age Position with the Company Director Since
---- --- ------------------------- --------------

Fred C. Schulte.......... 51 Chairman of the Board, Chief Executive 1988
Officer and Director

Charles D. Hall.......... 59 President, Chief Operating Officer 1993
and Director

Wayne J. Conner.......... 45 Vice President, Treasurer, Chief 1993
Financial Officer and Director

Lynn C. Batory........... 39 Vice President, Controller and Secretary

David Hall............... 38 Vice President of Manufacturing

Mort Maurer.............. 80 Director 1998

Directors are elected for one year terms and hold office until their successors
are elected and qualified. The executive officers are appointed by and serve at
the discretion of the Board of Directors.

A brief description of the employment history of the directors and
executive officers of the Company listed above are set forth below:

Fred C. Schulte is Chairman of the Board, Chief Executive Officer and a
Director of the Company. Mr. Schulte joined the Company as President and CEO in
1988 in connection with the acquisition of the Company by The Jupiter
Corporation. Mr. Schulte had joined The Jupiter Corporation earlier that same
year. From 1986 to 1988, Mr. Schulte served as Vice President-Executive
Department for Santa Fe Southern Pacific at its headquarters in Chicago. From
1976 to 1986, Mr. Schulte was employed with SF Mineral Company (a Santa Fe
Southern Pacific Company) in Albuquerque, New Mexico. From 1974 to 1976, Mr.
Schulte was employed by Kerr McGee Corporation where he held a number of
engineering, operating and management positions in the company's Hard-Minerals
Division. Prior to 1974, Mr. Schulte served for five years in the United States
Air Force as a pilot and operations officer. Mr. Schulte received an Engineer of
Mines degree from the Colorado School of Mines and a Master of Business
Administration degree from Oklahoma City University. Mr. Schulte also serves on
the board of directors of Pegasus Gold, Inc.

Charles D. Hall is President, Chief Operating Officer and a Director of the
Company. Mr. Hall joined the corporate staff of the Company in 1988, serving as
Vice President of Operations prior to being named President in 1997. From 1975
to 1988, Mr. Hall was employed by Ohio Rod, initially as Controller and Chief
Financial Officer and then, in late 1975, as President, a position he held until
1988. Prior to joining Ohio Rod, Mr. Hall was

-40-

employed by Walker China in Bedford Heights, Ohio from 1971 to 1974. Mr. Hall is
the father of David Hall, the Company's Vice President of Manufacturing.

Wayne J. Conner is Vice President, Chief Financial Officer, Treasurer and a
Director of the Company. Mr. Conner joined the Company in 1989 as Vice President
and Chief Financial Officer. From 1985 to 1989, Mr. Conner was employed by
AluChem, Inc. of Cincinnati, Ohio as the Corporate Controller and Chief
Financial Officer. From 1984 to 1985, Mr. Conner served as the Vice President of
Finance and Administration for a start-up computer manual writing company,
Comware, Incorporated. From 1976 to 1984, Mr. Conner was employed by Ohio Rod as
the Controller and Chief Financial Officer. Mr. Conner began his career at the
public accounting firm of Haskins and Sells. Mr. Conner is a graduate of the
University of Cincinnati, College of Business Administration and is a Certified
Public Accountant.

Lynn C. Batory is Vice President, Controller and Secretary of the Company.
Ms. Batory joined the Company in 1983 as an internal auditor performing
operational audits and special projects. Since then, Ms. Batory has held
positions of increasing responsibility including Accounting Manager, Assistant
Controller and her current position of Controller which she attained 1988. In
1993, Ms. Batory was also named Vice President and Secretary. Prior to joining
the Company, Ms. Batory was employed by NICOR, Inc. of Naperville, Illinois from
1981 to 1983 as a staff accountant providing financial support for ten mining
companies and five marine transportation companies. Ms. Batory holds a Bachelor
of Science degree in Accounting from the University of Houston.

David Hall is Vice President of Manufacturing. Mr. Hall joined the Company
in 1995, and is currently responsible for the operations of the Manufactured
Products Group. From 1984 to 1995, Mr. Hall was employed by Consolidated
Industries of Lafayette, Indiana where he served in various positions of
increasing responsibility including Assistant Controller, Controller, Vice
President of Finance and Administration and, beginning in 1994, General Manager.
Mr. Hall has a Bachelor of Science degree in Accounting from Butler University.
David Hall is the son of Charles D. Hall, President, Chief Operating Officer and
a director of the Company.

Mort Maurer was elected in January, 1998 to serve as a director of the
Company. Mr. Maurer has over 30 years executive managerial experience at large
manufacturing companies, including Northrop Corporation and RCA. From 1983 to
1987, Mr. Maurer served as Vice President of Monogram Industries. Mr. Maurer
currently serves as Chairman of the Board of Spaulding Composites, Inc. and
since 1987, Mr. Maurer has been retained as a consultant by Nortek, Inc. Mr.
Maurer holds a Master of Business Administration degree from Pepperdine
University and also holds a Bachelor of Science degree in Mechanical
Engineering.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and for the four other most highly
compensated officers of the Company having total annual salary and bonus in
excess of $100,000.

-41-

Annual Compensation
----------------------------------------------------
All Other Annual
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ---------- --------- ----------------

Fred C. Schulte........................................ 1997 $303,876 $244,414 $31,252 (1)
Chairman and Chief Executive Officer 1996 289,406 195,500 41,255 (1)
1995 275,625 100,000 41,280 (1)

Charles D. Hall........................................ 1997 $273,489 $244,414 $28,699 (1)
President and Chief Operating Officer 1996 260,466 195,500 37,397 (1)
1995 248,063 100,000 35,956 (1)

Wayne J. Conner........................................ 1997 $158,016 $244,414 $16,180 (1)
Vice President, Treasurer and Chief Financial Officer 1996 150,491 195,500 26,948 (1)
1995 143,325 100,000 24,268 (1)

Lynn C. Batory......................................... 1997 $101,875 $105,000 $10,569 (2)
Vice President, Controller and Secretary 1996 96,875 60,000 10,062 (2)
1995 91,250 31,750 9,554 (2)

David Hall............................................. 1997 $102,500 $ 75,000 $10,569 (2)
Vice President of Manufacturing 1996 97,500 35,000 10,000 (3)
1995 46,731 15,000 22.00 (3)

- -----------
(1) Reflects employer contributions to the Company's Profit Sharing Plan (as
defined) and Supplemental Employee Retirement Plan (as defined) and the
value of term life insurance premiums.

(2) Includes employer contributions to the Company's Profit Sharing Plan and
the value of life insurance premiums.

(3) For 1996, reflects employer contributions to the Company's Profit Sharing
Plan; for 1995, reflects the value of life insurance premiums.

Profit Sharing Plan

The Company maintains the Elgin National Industries, Inc. Master Savings &
Profit Sharing Plan (the "Profit Sharing Plan"). Generally, all non-union
employees of the Company who have completed one year of service are eligible to
participate in the Profit Sharing Plan. For any plan year, the Company may make
a discretionary contribution to the Profit Sharing Plan, which is allocated to
participants have completed 1,000 hours of service during the year and who are
employed on the last day of the year based on their compensation for that year.
Participants vest in their account balances ratably over five years (in 20
percent increments). Generally, distributions from the Profit Sharing Plan are
made following termination of employment.

Supplemental Employee Retirement Plan

The Company maintains the Elgin National Industries, Inc. Supplemental
Retirement Plan (the "Supplemental Employee Retirement Plan"). Employees are
eligible for participation in this plan if they participate in the Profit
Sharing Plan or the ENI Pension Plan for Employees of Elgin National Industries,
Inc. and Participating Affiliates (the "Pension Plan") and have been approved
for participation by the Board of Directors. The Supplemental Employee
Retirement Plan provides benefits to participants whose full benefits under the
Profit Sharing Plan or the Pension Plan have been limited by certain provisions
of the Internal Revenue Code. Benefits under the Supplemental Plan are generally
payable upon termination of employment.

-42-

PENSION PLAN TABLE (a)

Remuneration (b) Years of Service
- ---------------- --------------------------------------------------
15 20 25 30 35
------- ------- -------- -------- --------

$200,000 ............... $20,852 $27,802 $ 34,753 $ 41,703 $ 48,654
$225,000 ............... 23,664 31,552 39,440 47,328 55,216
$250,000 ............... 26,477 35,302 44,128 52,953 61,779
$300,000 ............... 32,102 42,802 53,503 64,203 74,904
$350,000 ............... 37,727 50,302 62,878 75,453 88,029
$400,000 ............... 43,352 57,802 72,253 86,703 101,154
$450,000 ............... 48,977 65,302 81,628 97,953 114,279
$500,000 ............... 54,602 72,802 91,003 109,203 127,404
$550,000 ............... 60,227 80,302 100,378 120,453 140,529
$600,000 ............... 65,852 87,802 109,753 131,703 153,654

- --------------
(a) The above table illustrates the estimated annual retirement benefits
payable to Pension Plan and Supplemental Employee Retirement Plan
participants commencing at age 65 in the form of a single life annuity, not
subject to deduction for social security or other offsets. The above
information is based on the current pension formula for various levels of
compensation and years of service.

(b) A participant's pension benefit is generally based on a percentage of his
salary and bonus for the highest five years of his employment and his years
of credited service. The compensation taken into account under the Pension
Plan for 1997 was limited to $160,000 in accordance with Internal Revenue
Code rules and such limitation may be adjusted periodically in the future
in accordance with Section 401(a)(17) of the Code. Remuneration in the
above table is represented as the highest consecutive five year average
salary. The above table does not reflect the current compensation
limitation under Code Section 401(a)(17) for qualified pension plans,
because the Supplemental Employee Retirement Plan provides benefits for
compensation above the limitation. Credited service under the Pension Plan
as of January 1, 1997 for the named executive officers is as follows: Mr.
Schulte, 8 years; Mr. C. Hall, 23 years; Mr. Conner, 15 years; Ms. Batory,
14 years; and Mr. D. Hall, 1 year.

Employment and Non-Competition Agreements

The Company and each of Messrs. Schulte, C. Hall and Conner entered into
employment and non-competition agreements, with an initial term beginning on
November 5, 1997, and ending on the fifth anniversary thereof (the "Employment
Agreements"). The terms of the new employment contracts relating to base salary
and related increases and annual bonuses are substantially similar to the terms
of the employment agreements negotiated between Senior Management and the
Selling Stockholders that were in effect prior to the Recapitalization
Transactions. The term of the Employment Agreements is subject to annual renewal
after the initial term unless one party gives written notice of non-renewal to
the other party at least 180 days prior to the then current expiration date.
Under the terms of the Employment Agreements, Mr. Schulte serves as the Chief
Executive Officer and received a base salary of $303,876 for 1997, and will
receive annual increases beginning in 1998 equal to the greater of the change in
the applicable consumer price index or 5% per annum; Mr. C. Hall serves as the
President and Chief Operating Officer and received a base salary of $273,489 for
1997, and will receive annual increases beginning in 1998 equal to the greater
of the change in the applicable consumer price index or 5% per annum; and Mr.
Conner serves as the Chief Financial Officer and received a base salary of
$158,016 for 1997, and will receive annual increases beginning in 1998 equal to
the greater of the change in the applicable consumer price index or 5% per
annum. Each of the executive officers is entitled to an annual bonus for 1997
and later years of 1.5% of the Company's consolidated earnings before interest,
taxes, amortization and the employment agreement bonuses described in this
paragraph, subject to certain adjustments. The Employment Agreements contain a
confidentiality covenant and a non-competition covenant that generally applies
during the term of employment and for a period of 3 years thereafter.

Each such Employment Agreement will terminate prior to the scheduled
expiration date in the event of the death or disability of the named executive
officer or upon the sale by such named executive officer of his stock in

-43-

the Company. In addition, the Company may terminate the employment of any of the
named executive officers for cause (as defined in the agreements, generally
commission of certain felonies, material breaches of duty or breaches of the
non-competition restriction) and any named executive officer may terminate
employment in the event the Company materially breaches the provisions of the
Employment Agreement. Upon such a termination by an executive officer or
termination by the Company without cause, the terminated executive officer will
be entitled to continued payments and benefits for the remainder of the then
current term. Upon the expiration and non-renewal of the Employment Agreement,
the executive officer will receive severance payments for one year thereafter
equal to the executive's base salary, subject to the executive's continued
compliance with the non-competition provisions. Under each of the Employment
Agreements, the Company has the obligation to maintain life insurance covering
each of the named executive officers, with the proceeds thereof to be used to
honor any put rights exercised by the estate of an executive officer.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Partnership Agreement. The issued and outstanding common stock of the
Company is owned by SHC Investment Partnership, a Delaware general partnership
(the "Partnership"). Each of Fern Limited Partnership (a Delaware limited
partnership controlled by Fred C. Schulte), Charles D. Hall and Wayne J. Conner
holds a 33.33% voting interest in the Partnership. The management of the
Partnership is governed by a partnership agreement (the "Partnership Agreement")
among Fern, Hall and Conner. The Partnership Agreement requires that partners
holding 66.66% of the voting interest in the Partnership must consent to any
vote cast by the Partnership in its capacity as the sole common stockholder of
the Company. Pursuant to the Partnership Agreement, each partner agrees to cause
the Partnership to vote in favor of the election of Schulte, Hall and Conner as
directors of the Company. Because of the greater number of common shares
originally contributed to the Partnership by Fern, Fern will also hold a non-
voting preferred equity interest in the Partnership. This preferred equity
interest is entitled to a preference in any distributions until the agreed value
of the preferred interest, and all accrued interest thereon, is paid. Generally,
the partners are not permitted to transfer their interests in the Partnership,
although the Partnership Agreement does permit a partner to transfer to family
members the right to receive revenues due on the Partnership interest. In
connection with the Partnership Agreement, each of Fern, Hall and Conner have
agreed to grant each other a right of first refusal with respect to their
respective shares of preferred stock in the Company. The outstanding preferred
stock in the Company will continue to be held by Fern, Hall and Conner
individually and will not be held by the Partnership.

The following table sets forth certain information regarding beneficial
ownership of the capital stock of the Company by (i) each stockholder expected
to own beneficially more than 5% of the outstanding capital stock of the
Company and (ii) each director or executive officer of the Company and all
directors and executive officers as a group.

Shares of Common Stock Shares of Preferred Stock
Beneficially Owned Beneficially Owned (a)
---------------------- -------------------------
Name Number Percent Number Percent
- ---- -------- --------- --------- ---------

SHC Investment Partnership............................. 6,408.3 100% -- --

Fred C. Schulte........................................ 2,136.1 331/3% 11,621.7 58%

Charles D. Hall........................................ 2,136.1 331/3% 4,165.0 21%

Wayne J. Conner........................................ 2,136.1 331/3% 4,165.0 21%

Lynn C. Batory......................................... -- -- -- --

David Hall............................................. -- -- -- --

Mort Maurer............................................ -- -- -- --

Directors and executive officers as a group (6 persons) 6,408.3 100% 19,951.7 100%

- --------------

(a) Does not include preferred stock units.

-44-

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Members of Senior Management are indebted to the Company in the aggregate
net amount of $3,633,000, described below.

Fred C. Schulte through his affiliate Fern Limited Partnership, a Delaware
limited partnership controlled by Mr. Schulte, is indebted to the Company in the
amount of $1,000,000 evidenced by a promissory note originally dated September
24, 1993 from Fern Limited Partnership, and payable to the Company, bearing
interest at 5.35% per annum and maturing in December, 2007, subject to certain
mandatory prepayment requirements. Fern Limited Partnership is also the obligor
on another promissory note dated September 24, 1993 and payable to the Company
in the amount of $1,603,000, bearing interest at 5.35% per annum and maturing in
December, 2007. This obligation is offset by two promissory notes from the
Company payable to Mr. Schulte in the aggregate amount of $1,603,000 and bearing
the same 5.35% percent interest rate and December, 2007 maturity date. On the
Issue Date, the maturity date of each of these notes was extended until after
the maturity date of the Notes.

Charles D. Hall is indebted to the Company in the amount of $516,500
evidenced by a promissory note, dated September 24, 1993, bearing interest at
6.42% per annum and maturing in December, 2007, subject to certain mandatory
prepayment requirements. On the Issue Date, the maturity date of such note was
extended until after the maturity date of the Notes.

Wayne J. Conner is indebted to the Company in the amount of $516,500
evidenced by a promissory note dated September 24, 1993 bearing interest at
6.42% per annum and maturing in December, 2007, subject to certain mandatory
prepayment requirements. On the Issue Date, the maturity date of such note was
extended until after the maturity date of the Notes.

In late December, 1997, the Company loaned members of Senior Management an
aggregate of $1,600,000, to be repaid pursuant to ten year promissory notes
bearing interest at the rate of 6.31% per annum, with principal and accrued
interest due at maturity.

PART IV

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

(a) 1. Financial Statements

See "Index to Consolidated Financial Statements of Elgin National Industries,
Inc." set forth in Item 8, "Financial Statements and Supplementary Data."

(b) 2. Financial Statement Schedule

Schedule II Valuation and Qualifying Accounts...................... 46

SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE

Schedule I - Condensed financial information of registrant
Schedule III - Real estate and accumulated depreciation
Schedule IV - Mortgage loans on real estate
Schedule V - Supplemental information concerning property-casualty
insurance operations

-45-

ELGIN NATIONAL INDUSTRIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Additions
Balance at Charged to Additions
Beginning Costs and Charged to Balance at
Description of Period Expenses other accounts Deductions End of Period
----------- ---------- ---------- -------------- ---------- -------------

Allowance for doubtful accounts:

Year ended December 31, 1995 $ 764 $126 $ $ 343 $ 547

Year ended December 31, 1996 547 187 181 553

Year ended December 31, 1997 553 111 86 578

Reserve for inventories

Year ended December 31, 1995 $2,222 $648 $ $1,319 $1,551

Year ended December 31, 1996 1,551 751 906 1,396

Year ended December 31, 1997 1,396 419 214 1,601

-46-

3. Exhibits

(a) A list of exhibits included as part of this Form 10-K is set forth in
the Index to Exhibits that immediately precedes such Exhibits, which is
incorporated herein by reference.

(b) Reports on Form 8-K

The Company did not file a Current Report on Form 8-K during the last
quarter of the period covered by this Report.

-47-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 30, 1998.

ELGIN NATIONAL INDUSTRIES, INC.

By /s/ Wayne J. Conner
-----------------------------------------

Name: Wayne J. Conner
-------------------------------------

Title: Vice President, Treasurer and CFO
-----------------------------------

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 on the dates indicated.

Signature Title Date
--------- ----- -----

/s/ Fred C. Schulte Chairman of the Board, Chief March 30, 1998
- -------------------------------------------- Executive Officer and Director
Fred C. Schulte

/s/ Charles D. Hall President, Chief Operating March 30, 1998
- -------------------------------------------- Officer and Director
Charles D. Hall

/s/ Wayne J. Conner Vice President, Treasurer, Chief March 30, 1998
- -------------------------------------------- Financial Officer and Director
Wayne J. Conner

/s/ Lynn C. Batory Vice President, Controller March 30, 1998
- -------------------------------------------- and Secretary
Lynn C. Batory

/s/ David Hall
- -------------------------------------------- Vice President of Manufacturing March 30, 1998
David Hall

S-1

INDEX TO EXHIBITS

Exhibit Footnote
Number Document Description Reference
- ------- -------------------- ---------

3.1 Certificate of Incorporation of Elgin National Industries, Inc. (3)

3.2 Bylaws of Elgin National Industries, Inc. (3)

4.1 Indenture dated November 5, 1997, between Elgin National Industries, Inc.,
subsidiaries and Norwest Bank Minnesota, as Trustee. (2)

4.2 Form of 11% Senior Note due 2007 (included in Exhibit 4.1). (2)

4.3 Registration Rights Agreement dated November 5, 1997, by and among Elgin
National Industries, Inc., certain of its subsidiaries, and BancAmerica
Robertson Stephens and CIBC Wood Gundy Securities Corp. (3)

4.4 Form of Subsidiary Guaranty (included in Exhibit 4.1). (2)

10.1 Credit Agreement dated as of September 24, 1993, as Amended and Restated as
of November 5, 1997, by and among Elgin National Industries, Inc., various
financial institutions, and Bank of America National Trust and Savings
Association, individually and as agent. (2)

10.2 Employment and Non-Competition Agreement dated as of November 5, 1997,
between Elgin National Industries, Inc. and Fred C. Schulte.* (2)

10.3 Employment and Non-Competition Agreement dated as of November 5, 1997,
between Elgin National Industries, Inc. and Charles D. Hall.* (2)

10.4 Employment and Non-Competition Agreement dated as of November 5, 1997,
between Elgin National Industries, Inc. and Wayne J. Conner.* (2)

10.5 The Elgin National Industries, Inc. Supplemental Retirement Plan dated as of
1995, and effective January 1, 1995.* (3)

21 Subsidiaries of Elgin National Industries, Inc. (2)

23 Consent of Coopers & Lybrand L.L.P. (1)

27 Financial Data Schedule (1)

- -----------------------------------------------------------

(1) Filed herewith.

(2) Incorporated by reference to Pre-Effective Form S-4 Registration Statement
of the Company (File No. 333-43523) filed with the Commission on December
30, 1997.

(3) Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-4
Registration Statement of the Company (File No. 333-43523) filed with the
Commission on January 23, 1998.

* Management contract or compensatory plan or arrangement.