<PAGE>
 
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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, 1998
 
                                      OR
 
  [_]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                         Commission File No. 333-43523
 
                        Elgin National Industries, Inc.
            (Exact name of registrant as specified in its charter)
 
               Delaware                              36-3908410
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)
 
     2001 Butterfield Road, Suite 1020, Downers Grove, Illinois 60515-1050
                   (Address of principal executive offices)
 
                        Telephone Number: 630-434-7243
              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. [X] Yes [_] 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. [X]
 
   As of March 26, 1999, 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.
 
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<PAGE>
 
                        ELGIN NATIONAL INDUSTRIES, INC.
                               Table of Contents
 
<TABLE>
<CAPTION>
                                                                          Page
Item                                                                     Number
----                                                                     ------
                                     PART I
 
<S>                                                                      <C>
1. BUSINESS.............................................................    1
 
2. PROPERTIES...........................................................    4
 
3. LEGAL PROCEEDINGS....................................................    4
 
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................    5
 
                                    PART II
 
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
   MATTERS..............................................................    5
 
6. SELECTED FINANCIAL DATA..............................................    5
 
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
   RESULTS OF OPERATIONS................................................    7
 
7A. MARKET RISK.........................................................   15
 
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................   16
 
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
   FINANCIAL DISCLOSURE.................................................   37
 
                                    PART III
 
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................   37
 
11. EXECUTIVE COMPENSATION..............................................   38
 
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......   40
 
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................   41
 
                                    PART IV
 
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....   42
</TABLE>
 
                                      -ii-
<PAGE>
 
                                    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. ("ENI"), 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 Segment's 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 1996, 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
manufactured products 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 segments. Through its Manufactured Products
Segment, 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 Segment, 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 Segment 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 Segment is comprised of Roberts & Schaefer Company ("R&S") and Soros
Associates, Inc. ("Soros").
 
                                       1
<PAGE>
 
Manufactured Products Segment
 
   The Manufactured Products Segment, 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 Segment consist of original
equipment manufacturers ("OEM"), suppliers of after-market parts and services
and manufacturers of components used by original equipment manufacturers.
These businesses have supplied their customers with quality products and
services for an average of over 37 years. Representative end-users of the
products of the Manufactured Products Segment include Consolidation Coal,
Detroit Diesel, General Electric, Mack Truck, Peabody Coal, Newpark Drilling
and R B Logistics. The Manufactured Products Segment has a broad and diverse
customer base, with no single customer accounting for more than 5% of the
Segment's sales in 1998.
 
   The Manufactured Products Segment primary products include specialty
fasteners, various types of centrifuges, incline and horizontal vibrating
screen systems of varying sizes and capacities, specialty high and low voltage
electrical power distribution equipment, electrical switch gear equipment,
power factor control and harmonic correction equipment, underground lighting
and electrical connectors and custom fabrication. The Manufactured Products
Segment also sells after-market parts and services.
 
   Net sales for the Manufactured Products Segment for the year ended December
31, 1998, were $82.1 million. Products are sold through in-house sales
personnel, as well as independent sales representatives, supported by engineer
and technical services support personnel.
 
   The Manufactured Products Segment sells its products primarily based on
product quality and overall customer service. The Manufactured Products
Segment can usually respond to custom or small orders quickly and efficiently,
minimizing their competition. The Manufactured Products Segment does have
competition with larger manufacturers particularly during periods of excess
capacity at their production facilities, as well as small regional shops and
independent suppliers.
 
Engineering Services Segment
 
   The Engineering Services Segment, 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 Segment provided its services primarily
to the United States coal-mining industry. Over the past ten years, the
Engineering Services Segment has diversified into markets which include
aggregates, industrial minerals, base metals and precious metals. Today, the
Engineering Services Segment 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 1998. Net sales for the Engineering
Services Segment for the year ended December 31, 1998 were $73.9 million.
 
   The Engineering Services segment 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, detailed engineering
drawings and extensive engineering support in effecting the realization of a
design. In turnkey projects, the Engineering Services Segment performs all
service activities necessary for project completion, including design,
subcontracting, equipment procurement, construction management and startup.
The Engineering Services Segment 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 the Engineering
Services Segment include coal preparation plants, gold processing plants,
copper processing plants and aggregate and crushed rock processing plants.
They also have a special expertise in offshore terminals, involving bulk
loading and unloading at open
 
                                       2
<PAGE>
 
sea. The Engineering Services Segment 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.
 
   The Engineering Services Segment 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. The Engineering
Services Segment's turnkey services include full project responsibility for
the design and construction of mineral processing and bulk material handling
facilities. The Engineering Services Segment focuses on turnkey projects of
less than $25 million, with most such projects significantly smaller. Total
backlog for the Engineering Service Segment at December 31, 1998 was $50.3
million.
 
   Management believes that targeting projects in the range of $1 million to
$25 million gives the Engineering Services Segment two strategic advantages.
First, this is a niche of the mineral processing and material handling markets
that generally does not attract larger firms, permitting the Engineering
Services Segment to compete with smaller, local and regional contractors that
may lack the Engineering Services Segment's experience and capabilities.
Second, by maintaining a larger portfolio of smaller projects, the Engineering
Services Segment is better able to manage the risk inherent in its business.
 
   The Engineering Services Segment has a broad and diversified customer base,
having executed projects in the aggregates, industrial minerals and base metal
industries. The Engineering Services Segment has also been successful in
further diversifying their markets to include international work. During 1998,
approximately 46% of the net sales of the Engineering Services Segment were
from international projects.
 
   The Engineering Services Segment markets its services through internal
marketing and sales groups located in Chicago and Salt Lake City. Their
management and engineering staff participate in the process to adequately
price and successfully bid on projects. The Engineering Services Segment 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, the Engineering
Services Segment will assume specific responsibility for a particular
component of a larger project.
 
   Primary competitors of the Engineering Services Segment include Watkins
Construction Company (coal, limestone and material handling), Industrial
Resources, Inc. (coal processing and material handling), and McNally Wellman
Co. (coal and limestone handling). Generally, the Engineering Services Segment
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 the Engineering Services
Segment seeks to differentiate itself from its competitors with respect to
each of these factors.
 
Supplies
 
   The Company acquires substantially all of its raw materials from outside
sources. The basic raw materials primarily used in the Manufactured Products
Segment are flat sheet metal, coiled wire or rod and various forms of
stainless steel materials. Additionally, the Manufactured Products Segment
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 Segment 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
 
                                       3
<PAGE>
 
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 December 31, 1998, the Company had approximately 650 employees.
Approximately 27 employees of the Company at CMI's St. Louis, Missouri
facility are represented by District 8 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. 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:
 
<TABLE>
<CAPTION>
                                               Principal   Owned/  Approximate
Business                       Location        Function    Leased Square Footage
--------                  ------------------ ------------- ------ --------------
<S>                       <C>                <C>           <C>    <C>
Elgin.................... Downers Grove, IL  Headquarters  Leased      6,470
Ohio Rod................. Versailles, IN     Manufacturing Owned      93,350
Chandler................. Euclid, OH         Manufacturing Owned      88,000
Mining Controls.......... Beckley, WV        Manufacturing Owned      44,925
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................... Cedar Bluff, VA    Manufacturing Owned      56,300
R & S.................... Chicago, IL &      Office        Leased     16,200
                          Salt Lake City, UT Office        Leased     25,267
Soros.................... Chicago, IL        Office        Leased      5,800
</TABLE>
 
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 early 1999 the Company settled a lawsuit relating to an engineering
contract claim. The Company received approximately $1.8 million in this
settlement. This settlement will be reflected in the Company's 1999 financial
statements.
 
   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.
 
                                       4
<PAGE>
 
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,
although, in the nature of the businesses conducted by the Manufactured
Products Segment, which have been in operation for an average of over 37
years, little invasive testing has been performed at their sites. In addition,
businesses previously operated by the Company have been sold. 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.
 
                                    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, 1998.
 
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, 1997 and 1998 was derived
from the audited consolidated financial statements of the Company. 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.
 
                                       5
<PAGE>
 
<TABLE>
<CAPTION>
                                     Fiscal Year Ended December 31,
                              ------------------------------------------------
                                1994     1995(a)    1996      1997      1998
                              --------  --------  --------  --------  --------
                                         (dollars in thousands)
<S>                           <C>       <C>       <C>       <C>       <C>
Statement of Operations
 Data:
Net sales...................  $197,284  $126,839  $135,651  $139,615  $156,054
Cost of sales...............   167,170   102,654   100,119   102,744   118,390
                              --------  --------  --------  --------  --------
  Gross profit..............    30,114    24,185    35,532    36,871    37,664
Selling, general and
 administrative expenses....    19,356    19,891    21,226    21,840    22,100
Amortization expense........     3,050     3,052     3,085     3,447     2,128
                              --------  --------  --------  --------  --------
  Operating income..........     7,708     1,242    11,221    11,584    13,436
Other expenses (income):
 Interest expense, net......     6,270     4,807     3,340     3,471     8,190
 Gain on the sale of product
  line......................              (2,520)
                              --------  --------  --------  --------  --------
Income (loss) from
 continuing operations
 before income taxes........     1,438    (1,045)    7,881     8,113     5,246
Provision for income taxes..       668       124     3,191     3,187     2,141
                              --------  --------  --------  --------  --------
Income (loss) from
 continuing operations......       770    (1,169)    4,690     4,926     3,105
Income from discontinued
 operations, net of income
 taxes (b)..................       889       876       174       122
                              --------  --------  --------  --------  --------
Income (loss) before
 extraordinary items........     1,659      (293)    4,864     5,048     3,105
Extraordinary loss on early
 extinguishment of debt, net
 of income tax (c)..........                                    (582)
                              --------  --------  --------  --------  --------
Net income (loss)...........  $  1,659  $   (293) $  4,864  $  4,466  $  3,105
                              ========  ========  ========  ========  ========
Other Financial Data:
Gross margin................      15.3%     19.1%     26.2%     26.4%     24.2%
Depreciation and
 amortization (d)...........  $  5,776  $  5,497  $  5,382  $  5,569  $  4,417
Capital expenditures (d)....     1,506     1,501     1,739     1,974     4,215
Net cash provided by
 operating activities.......     8,037       142    17,506     1,008     5,388
Net cash provided by (used
 in) investing activities...       722    24,478     1,935    (1,948)   (3,939)
Net cash used in financing
 activities.................   (11,481)  (22,285)  (10,785)     (714)     (805)
Operating Unit Data:
Net Sales:
 Manufactured Products
  Segment...................  $ 75,698  $ 74,859  $ 78,952  $ 78,592  $ 82,097
 Engineering Services
  Segment...................   121,586    51,980    56,699    61,023    73,957
                              --------  --------  --------  --------  --------
  Total Net Sales...........  $197,284  $126,839  $135,651  $139,615  $156,054
                              ========  ========  ========  ========  ========
Balance Sheet Data (e):
Cash and cash equivalents...  $         $  2,335  $ 10,991  $  9,337  $  9,981
Working capital less cash
 and cash equivalents.......    28,772    16,515     5,129    13,898    15,834
Property, plant and
 equipment, net.............    23,213    14,707    13,741    13,582    15,344
Total assets................   139,082    95,294    95,914   100,351   103,710
Total debt..................    58,567    37,676    26,891    85,751    85,439
Redeemable preferred stock
 and redeemable preferred
 stock units................    30,048    32,714    35,380    13,226    14,152
Stockholders' deficit.......    (1,511)   (4,470)   (2,272)  (31,860)  (29,400)
</TABLE>
--------
(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 Segment that was completed in that year, and which resulted in
    significant operating and control changes in the Engineering Services
    Segment.
(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, 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.
 
                                       6
<PAGE>
 
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 segments. Through its
Manufactured Products Segment, 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
Segment, 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 Segment'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 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
Segment for any period is not necessarily indicative of cash flow for that
period.
 
                                       7
<PAGE>
 
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
                             (dollars in millions)
 
<TABLE>
<CAPTION>
                                      For the Fiscal Year Ended December 31,
                                      -----------------------------------------
                                          1996          1997           1998
                                      ------------  -------------  ------------
<S>                                   <C>    <C>    <C>     <C>    <C>    <C>
Net sales...........................  $135.6 100.0% $139.6  100.0% $156.1 100.0%
Cost of sales.......................   100.1  73.8   102.7   73.6   118.4  75.8
Gross profit........................    35.5  26.2    36.9   26.4    37.7  24.2
Selling, general & administrative
 expenses...........................    21.2  15.6    21.8   15.6    22.1  14.2
Amortization expense................     3.1   2.3     3.4    2.4     2.1   1.4
Operating income....................    11.2   8.3    11.7    8.4    13.5   8.6
Interest expense, net...............     3.3   2.4     3.5    2.5     8.2   5.2
Income from continuing operations
 before income taxes................     7.9   5.9     8.2    5.9     5.3   3.4
Provision for income taxes..........     3.2   2.4     3.2    2.3     2.2   1.4
Income from continuing operations...     4.7   3.5     5.0    3.6     3.1   2.0
Income from discontinued operations,
 net of income taxes................     0.2   0.1     0.1    0.1
Income before extraordinary item....     4.9   3.6     5.1    3.7     3.1   2.0
Extraordinary item, net of income
 taxes..............................                  (0.6)  (0.5)
Net income..........................     4.9   3.6     4.5    3.2     3.1   2.0
</TABLE>
 
                         Manufactured Products Segment
                             (dollars in millions)
 
<TABLE>
<CAPTION>
                                     For the Fiscal Year Ended December 31,
                                    -------------------------------------------
                                        1996           1997           1998
                                    -------------  -------------  -------------
<S>                                 <C>    <C>     <C>    <C>     <C>    <C>
Net sales.......................... $ 78.9  100.0% $ 78.6  100.0% $ 82.2  100.0%
Cost of sales......................   52.8   66.9    51.5   65.5    54.4   66.2
Gross profit.......................   26.1   33.1    27.1   34.5    27.8   33.8
</TABLE>
 
                         Engineering Services Segment
                             (dollars in millions)
 
<TABLE>
<CAPTION>
                                     For the Fiscal Year Ended December 31,
                                    -------------------------------------------
                                        1996           1997           1998
                                    -------------  -------------  -------------
<S>                                 <C>    <C>     <C>    <C>     <C>    <C>
Net sales.......................... $ 56.7  100.0% $ 61.0  100.0% $ 73.9  100.0%
Cost of sales......................   47.3   83.5    51.3   84.0    64.0   86.6
Gross profit.......................    9.4   16.5     9.7   16.0     9.9   13.4
</TABLE>
 
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
 
   Net Sales: Net sales for the Manufactured Products Segment for the year
ended December 31, 1998 increased $3.6 million, or 4.5%, to $82.2 million from
$78.6 million for the corresponding period in 1997. Increased machine sales at
CSI and increased specialty fasteners at Ohio Rod were partially offset with
decreased steel fabrication sales at Clinch.
 
                                       8
<PAGE>
 
   Net sales for the Engineering Services Segment for the year ended December
31, 1998 increased $12.9 million, or 21.2%, to $73.9 million from $61.0
million for the corresponding period in 1997 due primarily to increased size
of some larger projects in process. For the year ended December 31, 1998,
sales of $55.2 million were reported on sixteen larger projects, exceeding
sales of $42.0 million reported on sixteen larger projects for the
corresponding period in 1997.
 
   Cost of Sales: Cost of sales for the Manufacturing Products Segment for the
year ended December 31, 1998 increased $2.9 million, or 5.6%, to $54.4 million
from $51.5 million for the corresponding period in 1997 primarily due to an
overall increased sales level and increased costs of steel fabrication,
partially offset by improved operating efficiencies at CSI and Chandler due to
their increased sales level. The Manufactured Products Segment's cost of sales
as a percentage of net sales increased to 66.2% for the year ended
December 31, 1998 from 65.5% for the corresponding period in 1997.
 
   Cost of sales for the Engineering Services Segment for the year ended
December 31, 1998 increased $12.7 million, or 24.9%, to $64.0 million from
$51.3 million for the corresponding period in 1997 primarily due to the
increased sales level. As a percentage of net sales, the Engineering Services
Segment's cost of sales increased to 86.6% for the year ended December 31,
1998 from 84.0% for the corresponding period in 1997 due to increased costs on
the larger projects in 1998.
 
   Gross Profit: Gross profit for the Manufactured Products Segment for the
year ended December 31, 1998 increased $0.7 million, or 2.3%, to $27.8 million
from $27.1 million for the corresponding period in 1997 due to the increased
sales level, partially offset with a higher costs as a percentage of sales.
The Manufactured Products Segment's gross profit as a percentage of net sales
decreased to 33.8% for the year ended December 31, 1998 from 34.5% for the
corresponding period in 1997. The decrease in the gross profit was primarily
due to decreased margins on screen sales at Tabor and industrial capital
equipment at Mining Controls.
 
   Gross profit of the Engineering Services Segment for the year ended
December 31, 1998 increased $0.2 million, or 1.7%, to $9.9 million from $9.7
million for the corresponding period in 1997 primarily due to increased
project activity. As a percentage of net sales, the Engineering Services
Segment's gross profit decreased to 13.4% for the year ended December 31, 1998
from 16.0% for the corresponding period in 1997 primarily due to increased
sales 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 of $22.1 million for the year ended
December 31, 1998 increased $0.3 million in comparison to $21.8 million for
the corresponding period in 1997. Selling, general and administrative expenses
as a percentage of net sales decreased to 14.2% for the year ended December
31, 1998 from 15.6% for the corresponding period in 1997 due to increased net
sales. Higher selling costs reported by the Engineering Services Segment were
partially offset by decreased selling costs within the Manufactured Products
Segment and decreased corporate costs.
 
   Amortization Expense: Amortization expense of the Company for the year
ended December 31, 1998 decreased $1.3 million, or 38.3%, to $2.1 million from
$3.4 million for the corresponding period in 1997. The decrease in
amortization expense resulted from the completion of the non-compete
amortization in 1998 and the accelerated amortization in 1997 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, 1998 increased $1.8 million, or 16.0%, to $13.5 million from
$11.7 million for the corresponding period in 1997 for the reasons discussed
above. Operating income as a percentage of net sales increased to 8.6% for the
year ended December 31, 1998 from 8.4% for the corresponding period in 1997.
 
   Interest Expense, Net: Net interest expense of the Company for the year
ended December 31, 1998 increased $4.7 million, or 136.0%, from the prior year
to $8.2 million. The increased interest expense was due to the
 
                                       9
<PAGE>
 
issuance of the $85.0 million 11% Senior Notes in November, 1997. The
increased interest expense was partially offset by a lower interest rate
compared to 1997. Net interest expense was further reduced through an increase
in interest income resulting from a higher balance of interest bearing
deposits.
 
   Income from Continuing Operations Before Income Taxes: Income from
continuing operations before income taxes for the year ended December 31, 1998
decreased $2.9 million, or 35.3%, to $5.3 million from $8.2 million for the
corresponding period in 1997 for the reasons discussed above. Income from
continuing operations, before income taxes, as a percentage of net sales
decreased to 3.4% for the year ended December 31, 1998 from 5.9% for the year
ended 1997.
 
   Provision for Income Taxes: Provision for income taxes decreased to $2.2
million for the year ended December 31, 1998 from $3.2 million for the year
ended December 31, 1997. Taxes decreased in 1998 due to a lower earnings
level. Company's effective tax rate increased to 41% in 1998 from 39% in 1997.
 
   Income from Continuing Operations: Income from continuing operations of the
Company for the year ended December 31, 1998 decreased $1.9 million, or 37.0%,
to $3.1 million from $5.0 million for the corresponding period in 1997 for the
reasons discussed above. Income from continuing operations as a percentage of
net sales decreased to 2.0% for the year ended December 31, 1998 from 3.6% for
the corresponding period in 1997.
 
   Income from Discontinued Operations, Net of Income Taxes: Income from
discontinued operations, net of income taxes, for the year ended December 31,
1997 of $0.1 million 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 the
addition of $0.1 million gain. There was no income from discontinued
operations in 1998.
 
   Income Before Extraordinary Item: The Company's income before extraordinary
item for the year ended December 31, 1998 decreased $2.0 million, or 38.5%, to
$3.1 million from $5.1 million for the corresponding period in 1997 for the
reasons discussed above. Income before extraordinary item, net of income
taxes, as a percentage of net sales decreased to 2.0% for the year ended
December 31, 1998 from 3.7% for the corresponding period in 1997.
 
   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,
1998 decreased $1.4 million, or 30.5%, to $3.1 million from $4.5 million for
the year ended December 31, 1997 for the reasons discussed above. Net income
as a percentage of net sales decreased to 2.0% for the year ended December 31,
1998 from 3.2% for the corresponding year ended 1997.
 
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
   Net Sales: Net sales for the Manufactured Products Segment 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 Segment 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
 
                                      10
<PAGE>
 
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 Segment 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 Manufactured Products Segment's sales also
contributed to the lower cost of sales. The Manufactured Products Segment'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 Segment 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 Segment'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 Segment 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 Segment'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 Segment 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 Segment'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 Segment were partially offset by increased
selling costs within the Manufactured Products Segment 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 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.
 
                                       11
<PAGE>
 
   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.
 
Liquidity and Capital Resources
 
   Net cash provided by operating activities for the year ended December 31,
1998 was $5.4 million, due primarily to $7.0 million generated from net income
and non-cash charges partially offset by a net use of cash for operating assets
and liabilities of $1.6 million. 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 Segment, and the timing of payments by
such Segment for products and services.
 
                                       12
<PAGE>
 
   Cash used in investing activities for the year ended December 31, 1998 of
$3.9 million consisted of $4.2 million for capital expenditures, partially
offset with $0.3 million of proceeds from the sale of assets. Included in the
capital expenditures for 1998 was $2.3 million for the purchase of a new
facility for Clinch and the expansion of the Mining Controls' facility. The
Company believes that the additional facilities will result in reduced
production costs and increased sales. The remaining $1.9 million in capital
expenditures in 1998 was made in accordance with the Company's regular
practice of upgrading and maintaining its equipment base and facilities.
 
   Cash used in financing activities for 1998 of $0.8 million included $0.5
million for additional debt issuance costs associated with the $85.0 million
Senior Notes issued in November 1997 and $0.3 million of scheduled debt
repayments.
 
   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 by operations, along with cash on hand, will be adequate to
meet its anticipated debt service requirements, working capital needs and
capital expenditures. The Company has a Senior Credit Facility to provide a
$20.0 million revolving line of credit, subject to borrowing base limitations.
The term is for a three-year period which expires on November 5, 2000. At
December 31, 1998, there were no borrowings under the Senior Credit Facility
(excluding $4.6 million in outstanding letters of credit and excluding payment
and performance bonds).
 
Backlog
 
   The Company's backlog consists primarily of that portion of contracts for
the Engineering Services Segment that have been awarded but not performed and
also includes open orders for the Manufactured Products Segment. Backlog at
December 31, 1998 was $58.5 million. Approximately $8.2 million relates to the
Manufactured Products Segment, with the remainder relating to the Engineering
Services Segment. Within the Engineering Services Segment's backlog at
December 31, 1998, $13.2 million relates to the engineering and procurement of
a lignite handling system, $12.2 million relates to the engineering and
procurement of a coal preparation facility, and $3.8 million relates to the
engineering, procurement and construction management of a crusher additions
project. A majority of the current backlog is expected to be realized within
the next twelve months.
 
Year 2000
 
   The following constitutes a Year 2000 readiness disclosure statement of the
Company.
 
   The Year 2000 (or "Y2K") issue relates to the possible inability of
computers, hardware or software to perform properly due to the inability to
interpret date information correctly before, during or after the Year 2000 and
includes all of the associated consequences of such failures on the Company's
operations. If not corrected, such situations could result in computer-system
failures or miscalculations causing disruptions in the Company's operations.
 
   The Company has developed and is implementing a program (the "Y2K Program")
to address the Y2K issue. The Y2K Program is coordinated at the corporate
level through its Year 2000 committee and is implemented by teams in the
Company's operating units. The Y2K Program is being implemented in three
phases. Phase I is to identify Company systems vulnerable to Y2K issues. Phase
II is the remediation or replacement of critical items. Phase III is the final
testing of each major area to test readiness. Progress of the Y2K Program is
presented on a regular basis to the Company's senior management and to the
Audit Committee of the Company's Board of Directors. In addition the Company
has identified three major areas determined to be critical for successful Y2K
readiness: (1) financial and informational systems applications, (2)
manufacturing applications and (3) third-party relationships.
 
   In accordance with Phase I of the Y2K Program, the Company has conducted an
internal review of systems and has contacted software suppliers to determine
major areas of vulnerability. Critical systems needing to be
 
                                      13
<PAGE>
 
replaced or updated are being identified. In the manufacturing applications
area the Company has sent each operating unit an extensive checklist of items
to review that covers hardware, software, operating systems and embedded
systems. The Company currently believes that no critical systems will need to
be replaced in the manufacturing area in order for the Company to be Y2K
ready, although analysis of this issue is continuing. The Company has
developed a questionnaire in order to assess the Y2K readiness of its critical
vendors. For purposes of the Y2K issue, the Company has identified its
critical vendors as consisting primarily of large volume suppliers, sole
source suppliers, foreign suppliers, and utility companies. The Company has
also compiled a listing of its major customers. The Company has developed a
questionnaire in order to assess its customers' Y2K readiness as it relates to
issuing purchase orders, accepting shipments, and paying invoices on a timely
basis.
 
   In accordance with Phase II of the Y2K Program, the Company has utilized
each operating unit's checklist in monitoring progress towards Y2K readiness.
The Company has already replaced computer and related accounting systems at
four locations, which were deemed to be non-compliant and in need of updated
software. For all other locations, software upgrades and corrective action to
make these locations Y2K ready are scheduled to be completed by the end of
September, 1999. The Company's Y2K plans call for each operating unit to
report its progress towards Y2K readiness to the Company on a periodic basis
using this checklist as a guide.
 
   After Phase II, the remediation phase, is completed, Phase III, the testing
phase, will verify if the affected systems have been properly repaired. If
during this phase it is determined that additional repairs are required, such
repairs will be made, or alternative corrective actions taken. This phase is
scheduled to be completed by the end of November, 1999.
 
   The Company estimates the total cost of its Year 2000 readiness program at
approximately $0.4 million, consisting of both internal and external costs,
primarily for hardware and software upgrades and replacements (although a
substantial portion of the cost of new hardware and software would have been
purchased by the Company through the regular and routine upgrading of
systems). Such hardware and software will be capitalized and depreciated over
the estimated useful lives of the related assets in accordance with the
Company's accounting policy. All other expenditures will be charged to
expense.
 
   The failure to identify and correct a Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. The Company does not expect such failures to have a materially
adverse effect on its results of operations or financial condition. However,
because of the general uncertainty about Year 2000 readiness throughout the
world economy, which results in uncertainties regarding the readiness of
vendors, customers, utilities, municipalities or other matters outside its
control, the Company is currently unable to determine whether Year 2000
problems may have a materially adverse effect on its results of operations or
financial condition. As the Company's Year 2000 readiness progresses, the
level of uncertainty about this matter is being reduced as it relates to
uncertainties about the Company's own degree of Year 2000 readiness and the
readiness of its vendors and customers.
 
   It is not presently possible to describe a reasonably likely "worst case
Year 2000 scenario" without making numerous assumptions. The Company presently
believes that a most likely worst case scenario would make it necessary for
the Company to replace some suppliers, rearrange some work plans, or perhaps
interrupt some of its operations. Assuming that this assessment is correct,
the Company does not believe that such circumstances would have a materially
adverse effect on its financial condition or results of operations, even if it
is necessary to incur additional costs to correct unanticipated readiness
failures.
 
   The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 readiness program by December
31, 1999, or if all or portions of the Y2K Program prove to be inadequate in
addressing the Y2K issue. The Company currently expects, however, to have
completed enough of its readiness work by June 1999 that it will be able to
identify those business areas for which contingency plans will be necessary.
Any contingency plan will be based on its best estimates of numerous factors,
which, in turn will be derived by relying on numerous assumptions about future
events. However, there can be no assurance that these assumptions or estimates
will have been correctly made, or that the Company will have anticipated all
 
                                      14
<PAGE>
 
relevant factors, or that there will not be a delay in or increased costs
associated with the Company's Year 2000 program. Any delay in implementation
of the Year 2000 program could affect the Company's Year 2000 readiness.
Specific factors that might cause the actual outcome to differ from the
projected outcome include, without limitation, the continued availability of
personnel trained in the computer programming skills necessary for the
remediation of Year 2000 problems, the ability to locate and correct all
relevant non-compliant systems, timely and accurate responses by third
parties, and the ability to implement interfaces between new systems and
systems not being replaced.
 
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.
 
Safe Harbor
 
   Statements herein regarding Year 2000, the Company's ability to address
Year 2000 issues, the Company's estimates regarding the magnitude and impact
of Year 2000 issues, the Company's estimate of the total costs of its Year
2000 Program, the Company's ability to meet its liquidity requirements and the
anticipated benefits from the Company's capital expenditures, and the
Company's expected realization of current backlog constitute forward-looking
statements within the meaning of the Securities Act of 1933 and the Securities
Act of 1934. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
With respect to estimated costs, management has made assumptions regarding
among other things, the costs and timing of the system upgrades necessary to
make our internal systems Year 2000 ready and the ability of the Company's
vendors, vendees, utilities and municipalities to meet their Year 2000
readiness timetables. Further, statements herein regarding the Company's
performance in future periods are subject to risks relating to, deterioration
of relationships with, or the loss of material customers or suppliers,
possible product liability claims, decreases in demand for the
Company's'products, and adverse changes in general market and industry
conditions. Management believes these forward looking statements are
reasonable; however, undue reliance should not be placed on such forward
looking statements, which are based on current expectations.
 
ITEM 7A. MARKET RISK
 
   In 1998, approximately 24% of the Company's net sales were attributable to
products sold or services provided outside of the United States. In 1998, the
majority of the Company's foreign sales were to Venezuela, Trinidad, Indonesia
and Thailand. 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 in the transactions.
 
                                      15
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Index to Consolidated Financial Statements of Elgin National Industries, Inc.
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Accountants--Ernst and Young, L.L.P.................   17
 
Report of Independent Accountants--PricewaterhouseCoopers L.L.P...........   18
 
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.   19
 
Consolidated Statements of Income for the years ended December 31, 1998,
 1997 and 1996............................................................   20
 
Consolidated Statements of Changes in Common Stockholder's Deficit for the
 years ended December 31, 1998, 1997 and 1996.............................   21
 
Consolidated Statements of Cash Flows for the years ended December 31,
 1998, 1997 and 1996......................................................   22
 
Notes to Consolidated Financial Statements................................   23
</TABLE>
 
                                       16
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholder
Elgin National Industries, Inc.
 
   We have audited the balance sheet of Elgin National Industries, Inc. and
Subsidiary Companies as of December 31, 1998, and the related consolidated
statements of income, changes in common stockholder's deficit and cash flows
for the year then ended. Our audit also included the financial schedule listed
in the index at Item 14(b). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
 
   We conducted our audit 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 audit provides a reasonable basis
for our opinion.
 
   In our opinion, the consolidated 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,
1998 and the consolidated results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
when considered in relation to the basic statements, taken as a whole, present
fairly in all material respects the information set therein.
 
                                          Ernst & Young LLP
 
Chicago, Illinois
February 26, 1999
 
                                      17
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholder
Elgin National Industries, Inc.
 
   In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in common stockholder's
deficit and cash flows present fairly, in all material respects, the financial
position of Elgin National Industries Inc. and Subsidiary Companies (the
"Company") at December 31, 1997, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
 
PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 1999
 
                                      18
<PAGE>
 
            ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                           December 31, 1998 and 1997
                        (in thousands except share data)
 
<TABLE>
<CAPTION>
                          Assets                              1998      1997
                          ------                            --------  --------
<S>                                                         <C>       <C>
Current assets:
  Cash and cash equivalents................................ $  9,981  $  9,337
  Accounts receivable, net.................................   27,389    27,355
  Inventories, net.........................................   13,880    13,497
  Prepaid expenses and other assets........................    1,318     1,728
  Deferred income taxes....................................    2,811     1,596
                                                            --------  --------
    Total current assets...................................   55,379    53,513
Property, plant and equipment, net.........................   15,344    13,582
Other assets...............................................   24,700    23,334
Goodwill and intangibles...................................    8,287     9,922
                                                            --------  --------
    Total assets........................................... $103,710  $100,351
                                                            ========  ========
<CAPTION>
       Liabilities and Common Stockholder's Deficit
       --------------------------------------------
<S>                                                         <C>       <C>
Current liabilities:
  Current portion of long-term debt........................ $    330  $    311
  Accounts payable & accrued expenses......................   29,234    29,967
                                                            --------  --------
    Total current liabilities..............................   29,564    30,278
Long-term debt less current portion........................   85,109    85,440
Other liabilities..........................................    1,728     1,410
Deferred income taxes......................................    2,557     1,857
                                                            --------  --------
    Total liabilities......................................  118,958   118,985
                                                            --------  --------
Redeemable preferred stock units...........................   11,106    10,379
                                                            --------  --------
Redeemable preferred stock.................................    3,046     2,847
                                                            --------  --------
Common 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, 1998 and 1997
  Retained deficit.........................................  (29,400)  (31,860)
                                                            --------  --------
    Total common stockholder's deficit.....................  (29,400)  (31,860)
                                                            --------  --------
    Total liabilities and stockholder's deficit............ $103,710  $100,351
                                                            ========  ========
</TABLE>
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       19
<PAGE>
 
            ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
              For the Years Ended December 31, 1998, 1997 and 1996
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                                    1998      1997      1996
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Net sales........................................ $156,054  $139,615  $135,651
Cost of sales....................................  118,390   102,744   100,119
                                                  --------  --------  --------
    Gross profit.................................   37,664    36,871    35,532
Selling, general and administrative expenses.....   22,100    21,840    21,226
Amortization expense.............................    2,128     3,447     3,085
                                                  --------  --------  --------
    Operating income.............................   13,436    11,584    11,221
Other expenses (income)
  Interest income................................   (1,093)     (511)     (322)
  Interest expense...............................    9,283     3,982     3,662
                                                  --------  --------  --------
Income from continuing operations before income
 taxes...........................................    5,246     8,113     7,881
Provision for income taxes.......................    2,141     3,187     3,191
                                                  --------  --------  --------
Income from continuing operations................    3,105     4,926     4,690
Discontinued operations
  Income from discontinued operations (less
   applicable income taxes of $33)...............                           51
  Gain on sale of discontinued operations (less
   applicable income taxes of $78 and $77,
   respectively).................................                122       123
                                                  --------  --------  --------
Income before extraordinary item.................    3,105     5,048     4,864
                                                  --------  --------  --------
Extraordinary loss on early extinguishment of
 debt, net of tax benefit of $366................               (582)
                                                  --------  --------  --------
Net income....................................... $  3,105  $  4,466  $  4,864
                                                  ========  ========  ========
</TABLE>
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       20
<PAGE>
 
            ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
       CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S DEFICIT
 
              For the Years Ended December 31, 1998, 1997 and 1996
                        (in thousands except share data)
 
<TABLE>
<CAPTION>
                                                                       Total
                                                Common  Retained   Stockholder's
                                                Stock   (Deficit)     Deficit
                                               -------- ---------  -------------
<S>                                            <C>      <C>        <C>
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 dividends (193,898
 shares at $10.00 per share)..................            (1,939)      (1,939)
Redeemable preferred stock unit dividend
 equivalent...................................              (727)        (727)
                                               -------- --------     --------
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 dividends (173,946
 shares at $8.47 per share; 19,952 shares at
 $10.00 per share)............................            (1,672)      (1,672)
Redeemable preferred stock unit dividend
 equivalent...................................              (727)        (727)
Repurchase Class B and C common stock.........           (30,136)     (30,136)
                                               -------- --------     --------
Balance as of December 31, 1997...............           (31,860)     (31,860)
                                               -------- --------     --------
Net income for the year ended December 31,
 1998.........................................             3,105        3,105
Redeemable preferred stock dividends (19,952
 shares at $10.00 per share)..................              (199)        (199)
Redeemable preferred stock unit dividend
 equivalent, net of tax of $281...............              (446)        (446)
                                               -------- --------     --------
Balance as of December 31, 1998............... $        $(29,400)    $(29,400)
                                               ======== ========     ========
</TABLE>
 
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       21
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             For the Years Ended December 31, 1998, 1997 and 1996
                                (in thousands)
 
<TABLE>
<CAPTION>
                                                    1998      1997      1996
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Cash flows from operating activities:
  Net income...................................... $ 3,105  $  4,466  $  4,864
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation..................................   2,289     2,122     2,479
    Amortization..................................   2,128     4,095     3,204
    (Benefit) provision for deferred income taxes.    (234)              1,716
    Provision for doubtful accounts...............      95       111       187
    Provision for inventories.....................     570       419       751
    Gain on sale of American Fastener Corporation.              (200)     (200)
    Income from pension overfunding...............  (1,125)     (757)     (758)
    Gain on the disposal of assets................    (112)      (16)      (46)
  Changes in assets and liabilities:
    Increase in accounts receivable...............    (129)   (7,578)     (813)
    Increase in inventories.......................    (953)   (1,015)     (633)
    Decrease (increase) in prepaid expenses and
     other assets.................................     169    (2,393)      180
    (Decrease) increase in accounts payable and
     accrued expenses and other liabilities.......    (415)    1,754     6,575
                                                   -------  --------  --------
      Net cash provided by operating activities...   5,388     1,008    17,506
                                                   -------  --------  --------
Cash flows from investing activities:
  Proceeds from the sale of assets................     276        26       214
  Purchase of property, plant and equipment.......  (4,215)   (1,974)   (2,153)
  Proceeds from the sale of American Fastener
   Corporation....................................                       3,874
                                                   -------  --------  --------
      Net cash (used) provided by investing
       activities.................................  (3,939)   (1,948)    1,935
                                                   -------  --------  --------
Cash flows from financing activities:
  Repurchase of redeemable preferred stock........           (24,553)
  Repurchase of common stock......................           (31,655)
  Debt issuance costs.............................    (493)   (3,366)
  Borrowings on long-term debt....................            85,000
  Repayments of long-term debt....................    (312)  (26,140)  (10,785)
                                                   -------  --------  --------
      Net cash used in financing activities.......    (805)     (714)  (10,785)
                                                   -------  --------  --------
Net increase (decrease) in cash...................     644    (1,654)    8,656
Cash and cash equivalents at beginning of period..   9,337    10,991     2,335
                                                   -------  --------  --------
Cash and cash equivalents at end of period........ $ 9,981  $  9,337  $ 10,991
                                                   =======  ========  ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      22
<PAGE>
 
           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 segments.
Through its Manufactured Products Segment, 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 Segment, 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. American
Fastener Corporation, a subsidiary of the Company, was sold in 1996. This
operation has been classified and shown as discontinued operations. (See Note
17.)
 
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
("the 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) Revenue Recognition
 
   Revenues earned through manufactured products are recognized upon shipment
to the customer. Revenues earned through engineering services are recognized
on the percentage-of-completion method measured by
 
                                      23
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
comparing costs incurred to date with total estimated costs on each project.
The lengths of the Company's construction contracts vary, but are 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. Contract costs include direct material and
engineering costs along with indirect costs related to contract performance.
Favorable adjustments to these cost 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
 
   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. Maintenance and repair costs are charged to earnings as incurred. Costs
of major 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. The Company
assesses recoverability of goodwill based on an evaluation of undiscounted
projected cash flows of the acquired business through the remaining
amortization period. If an impairment exists, the amount of such impairment is
calculated based on the estimated fair value of the asset.
 
   Intangibles consist primarily of financing and acquisition costs and are
being amortized using the straight-line method over a period of three to ten
years.
 
 (g) 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, 1998 and 1997 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.
 
 (h) Cash Equivalents
 
   The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
 
 (i) Fair Value of Financial Instruments
 
   The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
 
   Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
 
                                      24
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Accounts receivable and accounts payable: The carrying amounts reported in
the balance sheet for accounts receivable and accounts payable approximate
their fair value.
 
   Long-term debt: The fair values for long-term debt is based on quoted
market prices, except current portion which approximates book value.
 
 (j) Adoption of Accounting Principles
 
   The Company has implemented the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income" which
is 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. The Company does not have any
components of other comprehensive income as set forth in SFAS No. 130 and has
therefore not changed its financial reporting format.
 
   The Company has implemented the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which is effective
for periods beginning after December 15, 1997. SFAS No. 131 specifies
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. The Company adopted this
standard in 1998 by making the required disclosures. The adoption of SFAS No.
131 is solely a disclosure requirement and therefore does not have an effect
on the Company's financial position or results of operations.
 
   The Company has implemented the provisions of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits, requires additional information on changes in the benefit obligation
and fair values of plan assets and eliminates certain disclosures. The
adoption of SFAS No. 132 is solely a disclosure requirement and therefore does
not have an effect on the Company's financial position or results of
operations.
 
   The Company will implement the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" , which will be effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 requires all
derivatives to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. Management believes the adoption of SFAS No. 133
will not have a material effect on the Company.
 
 (k) Reclassification
 
   Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
 
                                      25
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
4. Accounts Receivable
 
   Accounts receivable consist of:
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1997
                                                                ------- -------
                                                                (in thousands)
      <S>                                                       <C>     <C>
      Trade accounts........................................... $10,075 $ 9,183
                                                                ------- -------
      Construction contracts:
        Billed.................................................  13,813  14,009
        Costs and estimated earnings in excess of billings
         on contracts..........................................   1,042   2,830
        Retainage due upon completion of contracts.............   2,619   1,697
                                                                ------- -------
                                                                 17,474  18,536
                                                                ------- -------
      Other receivables........................................     441     214
                                                                ------- -------
                                                                 27,990  27,933
      Less allowance for doubtful accounts.....................     601     578
                                                                ------- -------
                                                                $27,389 $27,355
                                                                ======= =======
</TABLE>
 
   Billings exceeded related costs and gross profit recognized on certain
contracts by $10,126,000 and $9,793,000 as of December 31, 1998 and 1997,
respectively. These amounts are classified as current liabilities in the
accompanying consolidated balance sheets.
 
   It is estimated that the majority of the retainage due upon completion of
contracts at December 31, 1998 will be collected in 1999.
 
   A significant portion of the Company's business activity is concentrated
within the coal mining industry. Accounts receivable at December 31, 1998 and
1997 from companies within the coal mining industry were $10,686,000 and
$7,556,000, respectively.
 
5. Inventories
 
   Inventories consist of:
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1997
                                                                ------- -------
                                                                (in thousands)
      <S>                                                       <C>     <C>
      Finished goods........................................... $ 8,465 $ 8,073
      Work-in-process..........................................   1,635   1,524
      Raw materials............................................   5,822   5,501
                                                                ------- -------
                                                                 15,922  15,098
                                                                ------- -------
      Less excess and obsolete reserve.........................   2,042   1,601
                                                                ------- -------
                                                                $13,880 $13,497
                                                                ======= =======
</TABLE>
 
                                      26
<PAGE>
 
            ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
6. Property, Plant and Equipment
 
   Property, plant and equipment, at cost, consist of:
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1997
                                                                ------- -------
                                                                (in thousands)
      <S>                                                       <C>     <C>
      Land..................................................... $ 1,817 $ 1,560
      Buildings and improvements...............................   6,286   4,660
      Machinery and equipment..................................  18,279  16,585
                                                                ------- -------
                                                                 26,382  22,805
      Less accumulated depreciation............................  11,038   9,223
                                                                ------- -------
                                                                $15,344 $13,582
                                                                ======= =======
</TABLE>
 
   Depreciation expense, including amounts related to discontinued operations,
for the years ended December 31, 1998, 1997 and 1996 was $2,289,000, $2,122,000
and $2,479,000, respectively.
 
7. Goodwill and Intangibles
 
   The components of goodwill and intangibles are as follows:
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1997
                                                                ------- -------
                                                                (in thousands)
      <S>                                                       <C>     <C>
      Goodwill................................................. $ 7,363 $ 7,363
      Non-compete agreements...................................           8,934
      Financing and acquisition costs..........................   4,112   3,619
                                                                ------- -------
                                                                 11,475  19,916
      Less accumulated amortization............................   3,188   9,994
                                                                ------- -------
                                                                $ 8,287 $ 9,922
                                                                ======= =======
</TABLE>
 
   Amortization expense, including amounts related to discontinued operations
and the early extinguishment of debt, was $2,128,000, $4,095,000 and
$3,204,000, for the years ended December 31, 1998, 1997 and 1996, respectively.
 
8. Accounts Payable and Accrued Expenses
 
   Accounts payable and accrued expenses consist of:
 
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1998    1997
                                                                 ------- -------
                                                                 (in thousands)
      <S>                                                        <C>     <C>
      Accounts payable--trade..................................  $ 7,918 $ 7,754
      Accounts payable--other..................................      358     403
      Billings on contracts in excess of costs and gross profit
       recognized..............................................   10,126   9,793
      Accrued payroll and commissions..........................    3,348   3,391
      Other accruals...........................................    7,484   8,626
                                                                 ------- -------
                                                                 $29,234 $29,967
                                                                 ======= =======
</TABLE>
 
                                       27
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
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 of
which their approximate tax effect are as follows:
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                              ----------------
                                                               1998     1997
                                                              -------  -------
                                                              (in thousands)
      <S>                                                     <C>      <C>
      Inventories............................................ $   818  $   631
      Accrued expenses.......................................   1,867    1,814
      Intangibles............................................   2,176    1,971
      Redeemable preferred stock units.......................   3,555    3,182
      State net operating loss carry forward.................     398      448
                                                              -------  -------
          Total deferred tax asset...........................   8,814    8,046
                                                              -------  -------
      Accounts receivable....................................    (272)    (449)
      Prepaid pension........................................  (7,693)  (7,257)
      Property plant & equipment.............................    (595)    (601)
                                                              -------  -------
          Total deferred tax liability.......................  (8,560)  (8,307)
                                                              -------  -------
      Net deferred tax asset (liability)..................... $   254  $  (261)
                                                              =======  =======
</TABLE>
 
   The components of the provision (benefit) for income taxes are:
 
<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                     ---------------------------
                                                       1998      1997     1996
                                                     --------  -------- --------
                                                           (in thousands)
      <S>                                            <C>       <C>      <C>
      Current
        Federal..................................... $  2,015  $  2,142 $  1,167
        State.......................................      253       575      573
        Foreign.....................................      107        38
      Deferred
        Federal.....................................     (192)      118    1,473
        State.......................................      (42)       26       88
                                                     --------  -------- --------
                                                       $2,141  $  2,899 $  3,301
                                                     ========  ======== ========
</TABLE>
 
   Allocation of the provision for income taxes in the 1998, 1997 and 1996
Consolidated Statements of Income include the following:
 
<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                      --------------------------
                                                        1998    1997     1996
                                                      -------- -------- --------
                                                           (in thousands)
      <S>                                             <C>      <C>      <C>
      Continuing operations.......................... $  2,141 $ 3,187  $ 3,191
      Discontinued operations--income from
       discontinued operations.......................                        33
      Discontinued operations--gain on sale of
       discontinued operations.......................               78       77
      Extraordinary loss--tax benefit................             (366)
                                                      -------- -------  -------
                                                       $ 2,141 $ 2,899  $ 3,301
                                                      ======== =======  =======
</TABLE>
 
 
                                      28
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   The Company's effective tax rates of 41%, 39% and 40% for the years ended
December 31, 1998, 1997 and 1996, respectively, differ from the statutory
federal tax rate of 34% as follows:
 
<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                    ---------------------------
                                                      1998     1997      1996
                                                    -------- --------  --------
                                                          (in thousands)
      <S>                                           <C>      <C>       <C>
      Income before income taxes................... $  5,246 $  7,365  $  8,165
                                                    ======== ========  ========
      Statutory federal income tax................. $  1,784 $  2,504  $  2,776
      State taxes net of federal benefit...........      167      455       418
      Foreign sales corporation income tax.........       45       88        54
      Other items..................................      145     (148)       53
                                                    -------- --------  --------
                                                      $2,141 $  2,899  $  3,301
                                                    ======== ========  ========
</TABLE>
 
   The Company made cash payments for income taxes totalling $2,307,000,
$3,201,000 and $1,585,000 during the years ended December 31, 1998, 1997 and
1996, respectively.
 
10. Long-Term Debt
 
   Long-term debt consists of:
 
<TABLE>
<CAPTION>
                                      Interest Rate at           December 31,
                                        December 31,   Year of  ---------------
               Type of Issue                1998       Maturity  1998    1997
               -------------          ---------------- -------- ------- -------
                                                                (in thousands)
      <S>                             <C>              <C>      <C>     <C>
      Fixed rate:
        Senior notes.................      11.00%        2007   $85,000 $85,000
        Notes payable................       6.00%        2000       439     751
      Variable rate:
        Revolver loan................                    2000
                                                                ------- -------
      Total long-term debt...........                            85,439  85,751
      Less current maturities........                               330     311
                                                                ------- -------
      Total non-current long-term
       debt..........................                           $85,109 $85,440
                                                                ======= =======
</TABLE>
 
   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, 1998,
the Company's available borrowing base of $16,302,000 less their outstanding
letters of credit of $4,605,000 resulted in an unused portion of the revolving
credit facility of $11,697,000. 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 receivable 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.
 
                                      29
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Annual principal payments on long-term debt at December 31, 1998 were as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                         Senior   Notes
                                                          Notes  Payable  Total
                                                         ------- ------- -------
      <S>                                                <C>     <C>     <C>
      1999..............................................          $330   $   330
      2000..............................................           109       109
      2001..............................................
      2002..............................................
      2003..............................................
      2004 and thereafter............................... $85,000          85,000
                                                         -------  ----   -------
                                                         $85,000  $439   $85,439
                                                         =======  ====   =======
</TABLE>
 
   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.
 
<TABLE>
<CAPTION>
      Year                                                            Percentage
      ----                                                            ----------
      <S>                                                             <C>
      2002...........................................................  105.500%
      2003...........................................................  103.667%
      2004...........................................................  101.833%
      2005 and thereafter............................................  100.000%
</TABLE>
 
   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.
 
   The Company's interest expense for the years ended December 31, 1998, 1997
and 1996 was $9,283,000, $4,282,000 and $3,662,000, respectively. The Company
made cash payments for interest totalling $9,283,000, $2,964,000 and
$3,760,000, respectively, during 1998, 1997 and 1996.
 
   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 $86,289,000, and $88,938,000 at December 31, 1998 and December 31,
1997, respectively.
 
11. 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 agreement governing the 11% senior notes due
2007.
 
                                      30
<PAGE>
 
            ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The Company had accrued dividend equivalent amounts equal to $3,832,000 and
$3,105,000 at December 31, 1998 and 1997, respectively. The redeemable
preferred stock units accrue at 10% per annum. Principal and accrued dividend
equivalent amounts were $11,106,000 and $10,379,000 at December 31, 1998 and
1997, respectively, and will be paid in tandem with the Company's redeemable
preferred stock dividend and redemption payments.
 
12. 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, 1998. 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 $1,051,000 and $852,000 as of December
31, 1998 and 1997, respectively.
 
13. 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.
 
   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 change in the benefit obligation is as follows for the years ended
December 31:
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                               -------  -------
                                                               (in thousands)
      <S>                                                      <C>      <C>
      Projected benefit obligation at beginning of year....... $18,203  $18,101
      Service cost--benefits earned during the period.........     916      809
      Interest cost on projected benefit obligation...........   1,181    1,127
      Plan amendments.........................................               19
      Actuarial losses........................................   4,074      171
      Benefit payments........................................  (2,448)  (2,024)
                                                               -------  -------
      Projected benefit obligation at end of year............. $21,926  $18,203
                                                               =======  =======
</TABLE>
 
                                       31
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The change in plan assets is as follows for the years ended December 31:
 
<TABLE>
<CAPTION>
                                  1998     1997
                                 -------  -------
                                 (in thousands)
      <S>                        <C>      <C>
      Fair value of plan assets
       at beginning of year..... $39,858  $35,636
      Actual return on plan
       assets...................   5,641    6,174
      Employer contributions....               72
      Benefit payments..........  (2,448)  (2,024)
                                 -------  -------
      Fair value of plan asset
       at end of year........... $43,051  $39,858
                                 =======  =======
 
<CAPTION>
                                  1998     1997
                                 -------  -------
                                 (in thousands)
      <S>                        <C>      <C>
      Plan assets in excess of
       projected benefit
       obligations.............. $21,125  $21,655
      Unrecognized amounts:
        Prior service cost......      91      192
        Net gain................  (2,097)  (3,536)
                                 -------  -------
      Prepaid pension cost...... $19,119  $18,311
                                 =======  =======
</TABLE>
 
   Prepaid pension cost included in other assets at December 31, 1998 and
1997, was $19,916,000 and $18,791,000, respectively. Pension costs included in
other liabilities at December 31, 1998 and 1997, was $797,000 and $480,000,
respectively.
 
   At December 31, 1998 and 1997, respectively, the Company's SERP projected
benefit obligation of $1,437,000 and $1,069,000 was not funded.
 
   Weighted average assumptions as of December 31:
 
<TABLE>
<CAPTION>
                                                                     1998  1997
                                                                     ----  ----
      <S>                                                            <C>   <C>
      Settlement rate............................................... 5.75% 6.25%
      Long term rate of return on assets............................ 9.00  8.00
      Rate of compensation increase................................. 5.50  5.50
</TABLE>
 
   Components of net periodic pension cost are as follows for the years ended:
 
<TABLE>
<CAPTION>
                                                     1998     1997     1996
                                                    -------  -------  -------
                                                        (in thousands)
      <S>                                           <C>      <C>      <C>
      Service cost--benefits earned during the
       period...................................... $   916  $   809  $   823
      Interest cost on projected benefit
       obligation..................................   1,181    1,127    1,071
      Expected return on assets....................  (2,899)  (2,403)  (2,487)
      Net amortization of prior service cost.......      (6)     (11)     (21)
                                                    -------  -------  -------
      Net periodic pension benefit................. $  (808) $  (478) $  (614)
                                                    =======  =======  =======
</TABLE>
 
   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, 1998, 1997 and 1996 was $56,000, $55,000 and $56,000,
respectively.
 
   The Company has a combined 401(k) employee savings and profit sharing plan
for all eligible, full time non-union 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, 1998, 1997 and 1996 was $1,266,000,
$1,325,000 and $1,241,000, respectively.
 
                                      32
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   In addition the Company established during 1995 a non-qualified profit
sharing plan for certain employees whose 401(k) benefits were also limited to
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 1998, 1997 and 1996 was
$37,000, $77,000 and $61,000, respectively.
 
14. 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:
 
<TABLE>
<CAPTION>
      Year                                                        (in thousands)
      ----                                                        -------------
      <S>                                                         <C>
      1999.......................................................    $1,429
      2000.......................................................     1,087
      2001.......................................................       795
      2002.......................................................       668
      2003.......................................................       558
      2004 and thereafter........................................     1,156
                                                                     ------
                                                                     $5,693
                                                                     ======
</TABLE>
 
   Rental expense for the twelve months ended December 31, 1998, 1997 and 1996
was $1,453,000, $1,422,000 and $1,609,000, respectively.
 
15. Related Party Transactions
 
   At December 31, 1998 and 1997, the Company had the following outstanding
notes receivable and note payable with related parties:
 
     (I) Two notes receivable from a limited partnership owned by an officer
  with principal due on each in the amount of $1,000,000 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, 1998, 1997 and
  1996 was $117,000, $55,000 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 $104,000,
  $55,000, and $52,000, respectively, for the years ended December 31, 1998,
  1997 and 1996.
 
     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.
 
                                      33
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
16. 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 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.
 
   In early 1999 the Company settled a lawsuit relating to an engineering
contract claim. The Company received approximately $1.8 million in this
settlement. This settlement will be reflected in the Company's 1999 financial
statements.
 
17. Discontinued Operations
 
   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.
 
   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:
 
<TABLE>
<CAPTION>
                                                                    Years Ended
                                                                    December 31,
                                                                    ------------
                                                                    1997  1996
                                                                    ---- -------
                                                                        (in
                                                                     thousands)
      <S>                                                           <C>  <C>
      Net sales....................................................      $10,240
      Cost and expenses............................................       10,156
                                                                         -------
      Income before income taxes...................................           84
      Provision for taxes..........................................           33
                                                                         -------
      Income from discontinued operations..........................           51
                                                                         -------
      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
                                                                    ==== =======
</TABLE>
 
                                      34
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
18. Segment Information
 
   The Company operates predominantly within the United States, primarily in
two industries, Manufactured Products and Engineering Services. The accounting
policies of the segments are the same as those described in the "Summary of
Significant Accounting Policies." In accordance with the Company's method of
internal reporting, corporate-headquarters costs are not allocated to the
individual segments. Information about the Company by industry is presented
below for the years ended December 31:
 
<TABLE>
<CAPTION>
                                                     1998      1997      1996
                                                   --------  --------  --------
                                                         (In thousands)
<S>                                                <C>       <C>       <C>
Net sales to external customers:
  Manufactured Products..........................  $ 82,097  $ 78,592  $ 78,952
  Engineering Services...........................    73,957    61,023    56,699
                                                   --------  --------  --------
    Total net sales to external customers........  $156,054  $139,615  $135,651
                                                   ========  ========  ========
Net sales to internal customers:
  Manufactured Products..........................  $  2,634  $  2,891  $  1,470
  Engineering Services...........................       656       941       770
                                                   --------  --------  --------
    Total net sales to internal customers........  $  3,290  $  3,832  $  2,240
                                                   ========  ========  ========
Total net sales:
  Manufactured Products..........................  $ 84,731  $ 81,483  $ 80,422
  Engineering Services...........................    74,613    61,964    57,469
                                                   --------  --------  --------
    Total net sales..............................   159,344   143,447   137,891
    Elimination of net sales to internal
     customers...................................     3,290     3,832     2,240
                                                   --------  --------  --------
    Total consolidated net sales.................  $156,054  $139,615  $135,651
                                                   ========  ========  ========
Earnings before interest, taxes and amortization:
  Manufactured Products..........................  $ 16,045  $ 15,537  $ 14,688
  Engineering Services...........................     3,907     4,282     3,915
                                                   --------  --------  --------
    Total segment earnings before interest, taxes
     and amortization............................    19,952    19,819    18,603
Amortization.....................................    (2,128)   (3,447)   (3,085)
Interest income..................................     1,093       511       323
Interest expense.................................    (9,283)   (3,982)   (3,663)
Corporate expenses before interest, taxes and
 amortization....................................    (4,388)   (4,788)   (4,297)
                                                   --------  --------  --------
  Consolidated income from continuing operations
   before income taxes...........................  $  5,246  $  8,113  $  7,881
                                                   ========  ========  ========
Capital expenditures:
  Manufactured Products..........................  $  3,821  $  1,754  $  1,440
  Engineering Services...........................       250       218       199
                                                   --------  --------  --------
    Total segment capital expenditures...........     4,071     1,972     1,639
    Corporate and discontinued operations........       144         2       514
                                                   --------  --------  --------
    Total capital expenditures...................  $  4,215  $  1,974  $  2,153
                                                   ========  ========  ========
Depreciation:
  Manufactured Products..........................  $  2,030  $  1,846  $  1,953
  Engineering Services...........................       224       225       284
                                                   --------  --------  --------
    Total segment depreciation...................     2,254     2,071     2,237
    Corporate and discontinued operations........        35        51       242
                                                   --------  --------  --------
    Total depreciation...........................  $  2,289  $  2,122  $  2,479
                                                   ========  ========  ========
Assets:
  Manufactured Products..........................  $ 37,018  $ 34,710
  Engineering Services...........................    17,730    19,525
                                                   --------  --------
    Total segment assets.........................    54,748    54,235
    Corporate and other..........................    48,962    46,116
                                                   --------  --------
    Total assets.................................  $103,710  $100,351
                                                   ========  ========
</TABLE>
 
 
                                      35
<PAGE>
 
           ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   The following is sales information by geographic area as of and for the
years ended December 31:
 
<TABLE>
<CAPTION>
                                                                 1998     1997
                                                               -------- --------
      <S>                                                      <C>      <C>
      United States........................................... $118,145 $115,466
      Foreign.................................................   37,909   24,149
                                                               -------- --------
                                                               $156,054 $139,615
                                                               ======== ========
</TABLE>
 
   Foreign revenue is based on the final destination of merchandise sold.
There were no sales to a single foreign country that were material to the
consolidated revenues of the Company.
 
20. 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., ("the Guarantors") each a direct, wholly-
owned subsidiary of the Company. The following summarized combined financial
data illustrates the composition of the combined Guarantors.
 
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1998    1997
                                                                 ------- -------
                                                                 (in thousands)
      <S>                                                        <C>     <C>
      Current assets............................................ $29,459 $28,893
      Noncurrent assets.........................................   6,822  11,691
                                                                 ------- -------
          Total assets.......................................... $36,281 $40,584
                                                                 ======= =======
      Current liabilities....................................... $17,996 $20,241
                                                                 ------- -------
          Total liabilities..................................... $17,996 $20,241
                                                                 ======= =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                      -------------------------
                                                        1998     1997    1996
                                                      -------- -------- -------
                                                           (in thousands)
      <S>                                             <C>      <C>      <C>
      Sales, net..................................... $114,888 $101,014 $97,358
      Gross profit...................................   20,200   20,334  20,220
      Income from continuing operations..............    6,663    6,837   6,649
      Net income.....................................    4,073    4,307   4,673
</TABLE>
 
   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.
 
                                      36
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
   A Form 8-K was filed on October 23, 1998 listing Item 4--changes in
Registrant's certifying accountants. There were no financial statements filed
with this report.
 
                                   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:
 
<TABLE>
<CAPTION>
Name                     Age             Position with the Company              Director Since
----                     --- -------------------------------------------------- --------------
<S>                      <C> <C>                                                <C>
Fred C. Schulte.........  52 Chairman of the Board, Chief Executive Officer          1988
                             and Director
 
Charles D. Hall.........  60 President, Chief Operating Officer and Director         1993
 
Wayne J. Conner.........  46 Vice President, Treasurer, Chief Financial Officer      1993
                             and Director
 
Lynn C. Batory..........  40 Vice President, Controller and Secretary
 
David Hall..............  39 Vice President of Manufacturing
 
Mort Maurer.............  81 Director                                                1998
</TABLE>
 
   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.
 
   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 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
 
                                      37
<PAGE>
 
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 in 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 Segment. 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.
 
<TABLE>
<CAPTION>
                                                                 All Other Annual
       Name and Principal Position        Year  Salary   Bonus     Compensation
       ---------------------------        ----  ------   -----   ----------------
<S>                                       <C>  <C>      <C>      <C>
Fred C. Schulte                           1998 $310,070 $267,245   $118,499(1)
 Chairman and Chief Executive Officer     1997  303,876  244,414     31,252(1)
                                          1996  289,406  195,500     41,255(1)
 
Charles D. Hall                           1998  287,163  267,245     73,856(1)
 President and Chief Operating Officer    1997  273,489  244,414     28,699(1)
                                          1996  260,466  195,500     37,397(1)
 
Wayne J. Conner                           1998  165,917  267,245     73,631(1)
 Vice President, Treasurer and Chief      1997  158,016  244,414     16,180(1)
 Financial Officer                        1996  150,491  195,500     26,948(1)
 
Lynn C. Batory                            1998  107,625  110,250     11,102(2)
 Vice President, Controller and Secretary 1997  101,875  105,000     10,569(2)
                                          1996   96,875   60,000     10,062(2)
 
David Hall                                1998  107,625  110,250     11,102(2)
 Vice President of Manufacturing          1997  102,500   75,000     10,569(2)
                                          1996   97,500   35,000     10,000(3)
</TABLE>
--------
(1) Reflects employer contributions to the Company's Profit Sharing Plan (as
    defined) and Supplemental Employee Retirement Plan (as defined), the value
    of term life insurance premiums and certain incidental personal benefits.
    These incidental personal benefits are not described herein because the
    incremental cost to the Company of such benefits is below the Securities
    and Exchange Commission disclosure threshold.
 
                                      38
<PAGE>
 
(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.
 
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 who 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.
 
                            Pension Plan Table (a)
 
<TABLE>
<CAPTION>
                                                   Years of Service
                                      ------------------------------------------
Remuneration (b)                        15      20       25       30       35
----------------                      ------- ------- -------- -------- --------
<S>                                   <C>     <C>     <C>      <C>      <C>
$200,000............................. $20,754 $27,673 $ 34,591 $ 41,509 $ 48,427
$225,000.............................  23,567  31,423   39,278   47,134   54,990
$250,000.............................  26,379  35,173   43,966   52,759   61,552
$300,000.............................  32,004  42,673   53,341   64,009   74,677
$350,000.............................  37,629  50,173   62,716   75,259   87,802
$400,000.............................  43,254  57,673   72,091   86,509  100,927
$450,000.............................  48,879  65,173   81,466   97,759  114,052
$500,000.............................  54,504  72,673   90,841  109,009  127,177
$550,000.............................  60,129  80,173  100,216  120,259  140,302
$600,000.............................  65,754  87,673  109,591  131,509  153,427
</TABLE>
--------
(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, 1998 for the
 
                                      39
<PAGE>
 
   named executive officers is as follows: Mr. Schulte, 9 years; Mr. C. Hall,
   24 years; Mr. Conner, 16 years; Ms. Batory 15 years; and Mr. D. Hall, 2
   years.
 
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 $310,070
for 1998, and will receive annual increases beginning in 1999 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 $287,163 for 1998, and will receive annual increases beginning
in 1999 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 $165,917 for 1998, and will receive annual increases
beginning in 1999 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 expense, 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 schedule
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 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
 
                                       40
<PAGE>
 
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.
 
<TABLE>
<CAPTION>
                          Shares of Common Stock   Shares of Preferred Stock
                            Beneficially Owned       Beneficially Owned (a)
                          -----------------------  -----------------------------
Name                        Number      Percent       Number         Percent
----                      ----------- -----------  --------------- -------------
<S>                       <C>         <C>          <C>             <C>
SHC Investment
 Partnership.............     6,408.3        100%
Fred C. Schulte..........     2,136.1     33 1/3%         11,621.7           58%
Charles D. Hall..........     2,136.1     33 1/3%          4,165.0           21%
Wayne J. Conner..........     2,136.1     33 1/3%          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%
</TABLE>
--------
(a) Does not include preferred stock units.
 
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% interest rate and December, 2007
maturity date. On November 5, 1997, 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 November 5, 1997, 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 November 5, 1997, 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.
 
                                      41
<PAGE>
 
                                    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...............................  44
 
               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
 
                                      42
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholder
Elgin National Industries, Inc.
 
   Our report on the consolidated financial statements of Elgin National
Industries, Inc. and Subsidiary Companies as of December 31, 1997 and for each
of the two years in the period ended December 31, 1997, has been included in
this Form 10-K. In connection with our audits of such financial statements, we
have also audited the related financial statement schedules listed in Item
14(b)(2) of this Form 10-K.
 
   In our opinion, the financial statement schedule referred to above, when
considered in relation to the basis financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
 
PricewaterhouseCoopers LLP
 
Chicago, Illinois
February 26, 1999
 
                                      43
<PAGE>
 
                        ELGIN NATIONAL INDUSTRIES, INC.
 
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                                (in thousands)
 
<TABLE>
<CAPTION>
                                     Additions  Additions
                          Balance at Charged to Charged to            Balance at
                          Beginning  Costs and    other                 End of
      Description         of Period   Expenses   accounts  Deductions   Period
      -----------         ---------- ---------- ---------- ---------- ----------
<S>                       <C>        <C>        <C>        <C>        <C>
Allowance for doubtful
 accounts:
Year ended December 31,
 1996...................    $  547      $187       $ 0        $181      $  553
Year ended December 31,
 1997...................       553       111         0          86         578
Year ended December 31,
 1998...................       578        95         0          72         601
Reserve for inventories:
Year ended December 31,
 1996...................    $1,551      $751       $ 0        $906      $1,396
Year ended December 31,
 1997...................     1,396       419         0         214       1,601
Year ended December 31,
 1998...................     1,601       570         0         129       2,042
</TABLE>
 
   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
 
   A Form 8-K was filed on October 23, 1998 listing Item 4--changes in
Registrant's certifying accountants. There were no financial statements filed
with this report.
 
                                      44
<PAGE>
 
                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 29, 1999.
 
                                          Elgin National Industries, Inc.
 
                                                   /s/ Wayne J. Conner
                                          By __________________________________
                                          Name: Wayne J. Conner
                                          Title: Vice President, Treasurer and
                                              Chief Financial Officer
                                                 (Duly Authorized Officer and
                                                 Principal Financial Officer)
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and on the dates indicated.
 
<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
 
 
<S>                                  <C>                           <C>
      /s/ Fred C. Schulte            Chairman of the Board, Chief    March 29, 1999
____________________________________  Executive Officer and
          Fred C. Schulte             Director
 
      /s/ Charles D. Hall            President, Chief Operating      March 29, 1999
____________________________________  Officer and Director
          Charles D. Hall
 
      /s/ Wayne J. Conner            Vice President, Treasurer,      March 29, 1999
____________________________________  Chief Financial Officer and
          Wayne J. Conner             Director
 
       /s/ Lynn C. Batory            Vice President, Controller      March 29, 1999
____________________________________  and Secretary
           Lynn C. Batory
 
         /s/ David Hall              Vice President of               March 29, 1999
____________________________________  Manufacturing
             David Hall
 
</TABLE>
 
                                       45
<PAGE>
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
  Exhibit                                                             Footnote
  Number                     Document Description                     Reference
  -------                    --------------------                     ---------
 <C>       <S>                                                        <C>
  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)
 27        Financial Data Schedule.................................       (1)
</TABLE>
--------
   *Management contract or compensatory plan or arrangement.
(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.
 
                                      46