ALLIED PRODUCTS CORP /DE/, 10-K405/A, 2000-02-29

ALLIED PRODUCTS CORP /DE/
10-K405/A, 2000-02-29
FARM MACHINERY & EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A-2

<TABLE>
<S> <C>
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

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ------- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 1-5530
</TABLE>

ALLIED PRODUCTS CORPORATION

(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 38-0292230
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

10 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
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(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code (312) 454-1020

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

<TABLE>
<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
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COMMON STOCK--$.01 PAR VALUE NEW YORK AND PACIFIC
</TABLE>

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

_X_

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 such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

Yes ___ No _X_

As of March 31, 1999, 11,818,639 shares of common stock were outstanding, and
the aggregate market value of the shares of common stock (based upon the closing
price on the New York Stock Exchange) held by nonaffiliates of the Company was
approximately $30,226,239. Determination of common stock ownership by affiliates
was made solely for the purpose of responding to this requirement, and the
Registrant is not bound by this determination for any other purpose.

The Company's definitive Proxy Statement (which will be filed at a later date)
for the Annual Meeting of Stockholders scheduled to be held June 18, 1999 and
Annual Report to security holders for the year ended December 31, 1998 are
incorporated by reference in Part III and Part IV herein.

The Exhibit Index is located on page 54.

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PART I

ITEM 1. BUSINESS

Allied Products Corporation (Company) was organized under Delaware law in
1967 as the successor to a Michigan corporation which was formed in 1928. Its
principal executive offices are at 10 South Riverside Plaza, Chicago, Illinois
60606 and its telephone number is (312) 454-1020.

On July 15, 1999, the Company and CC Industries, Inc., a privately held firm
headquartered in Chicago, signed a letter of intent to form a joint venture for
the ownership and operation of the Company's Agricultural Products Group. On
October 26, 1999 the Company announced that it had signed a definitive agreement
to sell 80.1% of the Agricultural Products Group for approximately $120,000,000,
which was reduced on February 10, 2000 to approximately $112,100,000. If the
transaction is approved by the Company's shareholders, Bush Hog L.L.C., a new
joint-venture company, will acquire the business, assets and certain liabilities
of the division within the Agricultural Products Group. Under the final
agreement, the Company will sell an 80.1% interest in Bush Hog L.L.C. to an
affiliate of C.C. Industries, Inc. Final shareholder approval and closing of the
transaction is not expected to occur until the first quarter of 2000.

Approximately 3%, 6% and 16% of the Company's net sales in 1998, 1997 and
1996, respectively, were exported principally to Canada and Mexico.

AGRICULTURAL PRODUCTS GROUP

PRODUCTS. The Bush Hog division offers a comprehensive line of implements
and machinery used by farmers, ranchers, large estate owners, commercial turf
mowing and landscape contractors, golf courses and municipalities. Implements
and machinery sold by Bush Hog include rotary cutters, tractor mounted loaders,
hay mowers, tillers, cultivators, backhoes, zero-turn mowers, landscape tools,
and turf and golf course mowing equipment.

Bush Hog-Registered Trademark- rotary cutters are used to shred stalks after
the crop has been harvested, to mow pasture, for land maintenance and for
governmental right-of-way mowing. The use season for rotary cutters extends from
early spring to late fall, and even longer in warmer climates. Bush Hog has a
major market share (approximately 40%) of rotary cutters sold in North America.

Front end loaders are used by farmers and ranchers for material handling.
Cultivators are used for weed control after crops have been planted.

In April 1998, the Company purchased the assets of Great Bend Manufacturing
Company (Great Bend) located in Great Bend, Kansas. Great Bend is a manufacturer
of front end loaders with significant geographical marketing emphasis in the
Midwest, Southwest and high plains areas of the United States. Like Bush Hog,
Great Bend offers a complete line of quality front end loaders, with particular
emphasis on high lift loaders which adapt to higher horsepower tractors.

Due to the separation of dealer networks, the Company's plans are to take
advantage of both Bush Hog and Great Bend trade names by maintaining separate
manufacturing and marketing identities. Certain products have been selected for
cross marketing under both name brands and joint engineering efforts will be
utilized in specific new product development.

The Company believes that the combined sales of front end loaders generated
by Bush Hog and Great Bend places it among the top five front end loader
manufacturers in total North America market share.

In addition to the acquisition of Great Bend, the Company also acquired in
April 1998 the assets of Universal Turf Corporation (Universal Turf) located in
Opp, Alabama. Universal Turf is a manufacturer of turf maintenance products for
golf courses, athletic complexes and sod farms. Products manufactured by
Universal Turf include reel mowers, verti-cut mowers, chemical sprayers and reel
grinders.

The acquisition of Universal Turf not only broadened Bush Hog's turf
equipment offering but also provides additional manufacturing capacity for
components utilized in the manufacturing of agricultural implements at Bush
Hog's two facilities in Selma, Alabama.

Implements tend to have a shorter life than tractors and other
self-propelled machines, and purchases of implements are less likely to be
deferred in times of economic uncertainty, somewhat dampening cyclical swings in
demand. Sales of replacement parts accounted for approximately 14% of the
Agricultural Products Group's revenue in 1998.

In order to maintain and expand their market position, the divisions of the
Agricultural Products Group

2
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continually update and improve their product offerings. This is done through a
combination of internal development and external acquisition of technology.

Contributing to Bush Hog's record sales in 1998 were several new products
released during the past twenty-four months. Products of major significance were
a series of five, six, seven and eight-foot rotary cutters, which received
widespread customer acceptance. A new line of backhoes, which are used by
farmers and contractors, was released in 1998, and also gained widespread
customer acceptance. The introduction of the acquired Universal Turf product
line under the Bush Hog-Registered Trademark- name complemented the
revolutionary new mulching mower which Bush Hog introduced to the golf industry
in 1998. A network of forty turf product distributors has been established to
market the broadened line of turf maintenance products.

Other products that were developed in 1998 and are expected to generate
substantial sales in 1999 include an eight-foot mulching mower, a new line of
five, six, and seven-foot economy rotary cutters, and a new line of zero-turn
mowers for use by homeowners and landscape mowing contractors. Zero-turn mowers
were previously outsourced from other manufacturers. The new line of zero-turn
mowers will be manufactured by Bush Hog at its Selfield manufacturing operation
in Selma, Alabama.

In keeping with Bush Hog's philosophy of being among the industry leaders in
new product introductions, currently twenty-eight new product or product
enhancement projects are scheduled for release during the next twenty-four
months.

MARKETING. Bush Hog and Great Bend market their products, except for
commercial turf and golf course mowing equipment, through commissioned
manufacturer's representatives, operating as independent contractors within
defined territories. The Bush Hog sales force consists of fifty-eight
representatives and the Great Bend sales force consists of thirty
representatives. None of the total eighty-eight representatives market both
lines. The manufacturer's representatives call on dealers located within their
territories which have been approved to carry either Bush
Hog-Registered Trademark- or Great Bend product lines. In all, there are
approximately 2,600 Bush Hog-Registered Trademark- dealers and 1,000 Great Bend
dealers. In general, the dealers are independent, local businessmen who have an
established local clientele developed over the years and represent almost 50% of
the total farm equipment dealerships in the United States and Canada. The Bush
Hog-Registered Trademark- brand name is particularly strong in the southeastern
and southwestern states while the Great Bend name is strong in the southwestern,
high plains, and portions of the Midwestern states.

Bush Hog has also contracted with independent distributors to market
commercial turf and golf course mowing equipment within defined territories.

The retail season for most farm equipment begins in March/April and,
depending upon the product, ends in September/October. Due to capacity and
shipping constraints, the Company cannot build and ship $130 million of products
during this time frame. To manage these constraints, the Company levels out its
factory production schedule and offers dealers extended payment terms with cash
discount incentives for their orders, to benefit both the Company and the
dealers. The extended payment terms are offered in the form of floor plan
financing which is customary within the industry. The dealer cash discount
provides the dealer with an incentive to sell the equipment as early as possible
or pay for the equipment early in the floor plan financing period in order to
take advantage of the cash discount. The Company retains a security interest in
the inventory held by dealers. Under certain state and provincial statutes, a
dealer may return floor plan equipment to a manufacturer upon termination of the
dealership.

Bush Hog services its network of dealers through three manufacturing
facilities and eight service parts distribution centers strategically located in
the United States and Canada. Great Bend services its dealer network through its
manufacturing facility in Great Bend, Kansas.

COMPETITION. Competition for the type of equipment sold by Bush Hog and
Great Bend includes the major line manufacturers of tractors and landscape
equipment, along with several hundred companies producing one or more models of
shortline farm or landscape implements and machinery. Price, quality, service
and availability are all factors in brand selection. The objective of Bush Hog
and Great Bend is to be a low cost producer of high quality products. To do this
they continue to modernize their facilities to improve efficiency.

INDUSTRY. The agricultural equipment industry in North America is a mature
industry engaged in producing replacement equipment for a declining number of
farmers. It is dominated by a small number of major line manufacturers, which
market a full range of farm machinery, including tractors, grain combines and
various implements through their own dealer organizations and account for
approximately 60% of the dollar volume of industry shipments. The remaining 40%
of the market is shared by approximately 700 companies that generally
concentrate their production on shortline implements such as plows, harrows,
cultivators, livestock equipment, grain handling equipment or hay equipment.

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INDUSTRIAL PRODUCTS GROUP

PRODUCTS. The Verson division manufactures a broad line of both medium and
large technologically advanced mechanical and hydraulic metal forming presses.
These products are used in the manufacture of components for the automotive,
appliance, office equipment, farm equipment, ordnance, aerospace and general
metal working industries. A transfer press is a specialized mechanical press
that combines a series of operations by transferring a work piece from one
station to another inside of a single press. Each station in the press has a
separate die that is individually adjustable. This process allows all
operations, from initial draw to finished product, to take place in one press,
resulting in increased output and reduced labor expense. Prices vary by type and
size. Size categories for transfer presses range from "A" (largest) to "D"
(smallest). An "A" transfer press is generally 13 to 15 feet wide, 80 to 90 feet
long and stands four stories tall. By comparison, a "B" transfer press is
approximately 10 feet wide, 60 feet long and four stories tall. The difference
between these machines is the component part size they stamp. Investment in a
large transfer press can range from $15-$35 million.

Approximately 10-15% of Verson's revenue was generated by customer special
services. Items included in the special services area are: repair parts,
complete remanufacturing of used presses, contract machining and manufacturing,
die consultation and training. In addition to the fabrication and machining of
components, Verson provides complete tooling and engineering services necessary
for turnkey systems.

Complimenting the manufacturing of presses by Verson, a new division of
Allied Products, Precision Press Industries (PPI), began operation in November
1997. PPI is engaged in the fabrication of large components weighing up to
240,000 pounds and is located in a 40,000 square foot facility in Hobart,
Indiana. The Company believes PPI uses some of the most sophisticated welding
machinery and processes available. Supplier agreements, production scheduling
and control methods enable PPI to work in a just-in-time format. Extensive
employee training and ongoing process documentation activities are intended to
provide that PPI operates in accordance with ISO9000 guidelines. The division
currently does work exclusively for the Verson division, but retains the
capability to perform custom fabrication work for third party customers.

During the fourth quarter of 1998, the Company announced that its Verson
division formed a joint venture with Theodor Grabener GmbH & Co. KG of Germany
and Automatic Feed Company of Napoleon, Ohio, that will help the two American
companies more effectively penetrate the European market for large stamping
presses and related systems. The new entity, Verson Pressentechnik GmbH, is
located in Netphen-Werthenbach, Germany, and is expected to benefit from the
resources of the Grabener group of companies.

The joint venture, in which Verson holds a 60% stake, will act as the main
commercial and technical support arm for the activities of both Verson and
Automatic Feed in Europe. Its European staff will have the responsibility of
marketing Verson and Automatic Feed products to customers throughout Europe.
Drawing on the strengths of the Grabener group of companies, the joint venture
also will assist in customizing Verson and Automatic Feed equipment to meet the
requirements of European customers, and it will provide ongoing training and
service support once the equipment is up and running at a customer's plant.

On October 14, 1997, the Company sold its Coz division. Coz provided a
complete line of thermoplastic resins and related services to the plastic
molding and extrusion industry.

MARKETING. Verson's marketing group department is headed by a Vice
President of Marketing and Sales, with responsibility for all Verson products
and services. Verson sells and promotes its products by using a direct sales
force that concentrates in strategically significant markets and contract
representatives which focus on lower volume potential markets.

Verson's major customers are the U.S. automobile manufacturers (both U.S.
and foreign owned) and first and second tier automotive parts producing
companies, which, on average, account for approximately 85% of Verson's annual
revenue. The other major market served by Verson is the appliance industry where
the division's customers include all major brand names.

The Company believes Verson is the technology leader, having designed the
world's first transfer press in 1939, the world's first electronic feed in 1981,
a cross bar feed in 1992 which significantly improves production, and most
recently, a Dynamic Orientation-TM- system which further improves production and
saves space.

COMPETITION. There are only a few companies in the world that supply large
transfer press systems similar to those provided by Verson. Verson is now the
only American owned company competing in this upper end segment. Principal
competition comes from German and Japanese manufacturers. Press manufacturers
compete on the basis of technology, capability, reliability and price. The
barriers to entry for new competitors are high due to the large capital
expenditures required.

4
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INDUSTRY. Domestic automobile manufacturers are seeking to become more
cost-effective by requiring quality parts, implementing just-in-time concepts,
obtaining price reductions from suppliers, redesigning cost out of automobiles,
and restructuring and automating their manufacturing processes.

Demand from the appliance industry remains strong as the major manufacturers
seek to increase capacity, reduce costs and gear up to produce water conserving
clothes washers.

The Company believes the Verson division is in a strong position to
capitalize on major retooling and modernization programs as they come on stream.
The second wave of this demand is being felt now as the major suppliers to the
automakers convert to new technology. In response to these market factors and an
unprecedented incoming order rate in 1994, the Verson division completed a
40,000 square foot expansion of its assembly facilities in 1995. An additional
117,000 square foot expansion of its assembly facilities was completed at the
end of 1998. These additions have and will significantly expand the division's
capacity for manufacturing large transfer presses.

SALES BACKLOG

Sales backlog as of December 31, 1998 was $180,617,000 compared to
$204,988,000 at December 31, 1997. Over 80% of the backlog orders are expected
to be filled prior to the end of 1999.

EMPLOYEES

The Company currently employs approximately 1,800 individuals, including
approximately 500 employees in the Verson division who are represented by a
union. While the Company considers its relations with its Verson Division
employees to be satisfactory, the Company suffered a strike during the summer of
1997 at the expiration of the last union contract. The contract agreed to upon
settlement of the strike expires in June 2000.

RAW MATERIALS AND SOURCES OF SUPPLY

The principal raw materials used by all of the Company's manufacturing
operations include steel and other metals and purchased components. During 1998,
the materials needed by Allied Products generally were available from a variety
of sources in adequate quantities and at prevailing market prices. No one
supplier is responsible for supplying more than 10% of the principal raw
materials used by Allied Products.

PATENTS, TRADEMARKS AND LICENSES

Allied Products owns the federally registered trademarks "Bush Hog," which
is used on its agricultural, landscape, and turf and golf course equipment,
"Verson," which is used on its metal forming presses, and "ETF", "MultiMode" and
"Dynamic Orientation" which are used on the electronically controlled transfer
feeds manufactured by the Verson division. Allied Products considers each of the
above registered trademarks to be material to its business. While Allied
Products believes that the other trademarks used by each of its operations are
important, none of the patents, licenses, franchises or such other trademarks
are considered material to the operations of its business.

MAJOR CUSTOMERS

Approximately 26%, 31% and 39% of the Company's net sales in 1998, 1997 and
1996, respectively, were derived from sales by the Industrial Products Group to
the three major U.S. automobile manufacturers. During 1998, General Motors
accounted for approximately 10.9% of net sales and Daimler-Chrysler and Ford
each accounted for less than 10% of net sales. With the exception of the three
major automobile manufacturers, no material part of the Company's business is
dependent upon a single customer.

SEASONALITY

Retail sales of and cash collected for farm equipment tend to occur during
or just preceding the use seasons previously described. Sales and cash receipts
for the other divisions are not affected by seasonality.

ENVIRONMENTAL FACTORS

Reference is made to Note 10 of Notes to Consolidated Financial Statements
regarding environmental factors and matters.

FORWARD-LOOKING STATEMENTS

Some of the information contained in the above discussion may contain
forward-looking statements that are subject to certain risks, uncertainties and
assumptions. Such forward-looking statements are intended to be identified in
this document by the words "anticipate," "expect," "estimate," "objective,"
"possible" and similar expressions. Actual results may vary. Reference is made
to the "Safe Harbor Statement" contained under Item 7--Management Discussion and
Analysis of Financial Condition and Results of Operations.

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EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names and ages of the Company's Executive
Officers, together with all positions and offices held with the Company by such
officers as of March 31, 1999.

<TABLE>
<CAPTION>
NAME POSITION WITH ALLIED PRODUCTS AGE
---- ----------------------------- --------
<S> <C> <C>
Richard A. Drexler.................. Chairman, President and Chief Executive Officer 51
Bobby M. Middlebrooks............... Senior Vice President 63
Robert J. Fleck..................... Vice President--Accounting, Chief Accounting and Administrative
Officer 51
Mark C. Standefer................... Vice President, General Counsel and Secretary 44
</TABLE>

No family relationships exist among the executive officers, however,
Mr. Richard A. Drexler is the son of Lloyd A. Drexler, a director of the
Company. In early 1999, Richard W. Metzger resigned from the Company.

Each executive officer has been employed by Allied Products for over 10
years. Pursuant to Allied Products' By-laws, each officer is elected annually by
the Board of Directors.

Mr. Drexler, who became Chairman in 1993, has been President and a Director
of Allied Products since 1982 and has been Chief Executive Officer since 1986.
Mr. Drexler served as Acting Chief Financial Officer from 1991 to 1992, Chief
Financial Officer from 1989 to 1990 and Chief Operating Officer from 1981 to
1986. He was also Chief Financial Officer from 1977 to 1987. Prior to becoming
President, Mr. Drexler served as Executive Vice President, Senior Vice President
of Administration, Vice President of Administration, Staff Vice
President--Development, and Director of Planning. Mr. Drexler is also acting
Chairman and Chief Executive Officer of the Verson division of the Industrial
Products Group.

Mr. Middlebrooks has been Senior Vice President since 1985 and was Vice
President of Allied Products from 1984 to 1985 in charge of the former
Agricultural Equipment Group. Prior to that, he was President--Bush Hog
Implements Division. He joined Bush Hog in 1955.

Mr. Fleck has been Vice President--Accounting since 1985, Chief Accounting
Officer since 1986 and Chief Administrative Officer since 1997. From 1983 to
1985 he was Staff Vice President--Accounting and prior to that he served as
Corporate Controller and in various other accounting positions for Allied
Products. Prior to joining Allied Products in 1974, he was an internal auditor
with Marquette Cement Company, a national cement manufacturing company.

Mr. Standefer was elected Vice President, General Counsel and Secretary in
1997. From 1995 to 1997 he was Staff Vice President, Assistant General Counsel
and Assistant Secretary, and from 1986 to 1995 Assistant General Counsel and
Assistant Secretary. Mr. Standefer joined Allied Products in 1984 as Staff
Attorney. Prior to joining Allied Products, he was Staff Attorney for Sun
Electric Corporation.

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ITEM 2. PROPERTIES

Allied Products leases one and owns five manufacturing facilities in four
states for the production of its various products and maintains warehouse
facilities in various locations throughout the United States and Canada.

Management is of the opinion that all facilities are of sound construction,
in good operating condition and are adequately equipped for carrying on the
business of the Company.

Operations of the Agricultural Products Group are conducted in Selma and
Opp, Alabama and Great Bend, Kansas in three owned facilities and one leased
facility containing approximately 940,000 square feet in total. The group also
maintains several leased facilities in various states and Canada which are used
as warehouses and parts depots. Operations of the Industrial Products Group are
conducted in Chicago, Illinois and Hobart, Indiana in owned facilities
containing approximately 561,000 square feet. In addition, a small office
located in Netphen-Werthenbach, Germany is being leased by Verson
Pressentechnik.

ITEM 3. LEGAL PROCEEDINGS

In May 1999 and June 1999, the Company was served with two complaints
purporting to be class action lawsuits on behalf of shareholders who purchased
the Company 's common stock between February 6, 1997 and March 11, 1999. The
complaints, which were filed in the United States District Court for the
Northern District of Illinois, appear to be virtually identical. They allege
various violations of the federal securities laws, including misrepresentation
or failure to disclose material information about the Company's results of
operations, financial condition, weakness in its financial internal controls,
accounting for long-term construction contracts and employee stock option
compensation expense. In August 1999, the District Court ordered that the two
cases be consolidated for all purposes. A Consolidated Amended Complaint was
filed on October 12, 1999. The claims in the Consolidated Amended Complaint
appear to be virtually identical to the claims in the prior complaints filed in
May 1999 and June 1999. The Company filed a Motion to Dismiss on December 13,
1999.

Reference is made to Note 10 of Notes to Consolidated Financial Statements
with respect to the Company's involvement in legal proceedings as a defending
party.

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

None.

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PART II

ITEM 5. MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS

The Company's common stock is listed on the New York and Pacific Stock
Exchanges. The price range of the common stock on the New York Stock Exchange,
as adjusted for the three-for-two stock split effected on August 15, 1997, is as
follows:

<TABLE>
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BEGINNING OF
1998 YEAR END OF YEAR 1998 QTR HIGH LOW DIVIDEND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common $24 $ 6 5/16 1 $25 3/16 $20 1/4 $.0400
- ---------------------------------------------------------------------------------------------------------------
2 24 3/4 20 1/16 .0400
- ---------------------------------------------------------------------------------------------------------------
3 22 7/8 6 3/16 .0400
- ---------------------------------------------------------------------------------------------------------------
4 8 7/8 5 7/8 .0400
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
BEGINNING OF
1997 YEAR END OF YEAR 1997 QTR HIGH LOW DIVIDEND
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Common $19 13/16 $24 1 $21 13/16 $18 1/2 $.0333
- ---------------------------------------------------------------------------------------------------------------
2 23 5/16 18 9/16 .0333
- ---------------------------------------------------------------------------------------------------------------
3 26 21 3/16 .0400
- ---------------------------------------------------------------------------------------------------------------
4 27 23 1/4 .0400
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

As of March 31, 1999, the approximate number of holders of record of the
Company's common stock ($.01 par value) was 2,200.

The Company paid no dividends from 1982 until 1995. Restrictions from paying
dividends were removed in 1995. Subsequent to the end of 1995, the Company
increased its quarterly dividend from $.0167 per share to $.0333 per share.
During the third quarter of 1997, the Company increased its quarterly dividend
to $.04 per share. Subsequent to the end of 1998, dividend payments are limited
to $2,000,000 per year under the Second Amended and Restated Credit Agreement
and the First Amendment and Waiver to the Credit Agreement--see Note 5 of Notes
to Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales from continuing
operations......................... $273,834,000 $270,562,000 $274,414,000 $260,861,000 $215,529,000
Income (loss) from continuing
operations......................... $(14,113,000) $ 15,646,000(C) $ 16,089,000(C) $ 33,989,000 $ 19,687,000
Earnings (loss) per common share
(diluted) from continuing
operations (A)(B).................. $(1.19) $1.27(C) $1.17(C) $2.34 $1.28
Total assets......................... $275,804,000 $195,064,000(C) $172,509,000(C) $167,303,000(C) $150,555,000
Long-term debt (including capitalized
leases and redeemable preferred
stock)............................. $ 2,298,000 $ 670,000 $ 489,000 $ 315,000 $ 12,130,000
Cash dividend declared per common
share (A).......................... $.16 $.147 $.133 $.05 $--
</TABLE>

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

(A) Restated prior to 1997 to reflect the effect of a three-for-two stock split
in 1997.

(B) Restated prior to 1997 to reflect the effect of adopting SFAS 128--Earnings
per Share--in 1997.

The accompanying Notes to Consolidated Financial Statements
are an integral part of this summary.

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

OVERVIEW

In August, 1996 and April, 1997, the Company's Verson division received
major orders from Ford and General Motors, respectively, for the design and
manufacture of a total of six automated, multi-station stamping presses. Ford
ordered two and General Motors ordered four of the presses. All six of the
presses incorporated a new state-of-the-art "three-slide" design which was
considered superior in speed and efficiency to any transfer press previously
manufactured. Verson believes that it was the first manufacturer to design and
manufacture a stamping press incorporating this design. These orders were to be
completed over a three-year period from 1997 through 1999. The contracts for the
two presses to be manufactured for Ford specified delivery in January and April
of 1998, while the contracts for the four presses to be manufactured for General
Motors specified delivery in February, April, August, and October of 1999. By
agreement, the specified delivery dates were revised to May, August, September,
and December of 1999 shortly after the orders were accepted. Projected revenues
from the orders for the six presses approximated $120 million. In June, 1997 and
May, 1998, Verson received orders from Chrysler Corporation totaling
approximately $75 million for four identical large automated multi-station
stamping presses with two slides only, but incorporating other new design
features. The orders called for completion of these presses during 1998 and
1999. Specifically, the contract for the press ordered by Chrysler in June of
1997 required delivery in June of 1999. While we were designing and building
these multi-slide presses described above, Verson also accepted orders to
manufacture and deliver approximately 15 smaller presses. Most of these presses
were to be delivered between November of 1998 and September of 1999. While these
presses were of a smaller and less complicated design, the combined impact on
engineering and production was significant. In hindsight, it appears that when
added to Verson's other press business, the orders for the ten large, newly
designed multi-slide presses severely strained Verson's then existing press
manufacturing capacity. During 1997 and 1998 the Company took steps to expand
Verson's facility, hire more engineering and manufacturing staff and increase
its total capacity. The cost of the physical expansion at Verson was
approximately $30,000,000, and included the addition of approximately 117,000
square feet to the Verson assembly building plus other infrastructure
improvements. The expansion was not completed early enough to alleviate
production scheduling difficulties, however. The expansion in fixed assets
together with significant increases in indirect labor increased Verson's
overhead costs. In addition, Verson experienced significant difficulties during
1998 in the manufacture of the multi-slide and other presses under the
above-described orders in a timely and cost effective manner. The decline in
manufacturing efficiency was traceable in part to overcrowded conditions and in
part to the inefficiencies which can occasionally arise in the manufacture of
new products. These manufacturing delays in turn caused delays and additional
costs in the manufacture of virtually all presses in 1998 and led Verson to rely
heavily on subcontractors for the manufacture of certain components in order to
meet delivery commitments. As described in more detail below, difficulties
primarily associated with the manufacture of presses under the three orders
described above and the resulting stresses on manufacturing capacity caused
Verson and the Company to incur losses in 1998. These difficulties, along with
an increased cost structure which has adversely affected margins on new press
orders during 1999 and is expected to continue to adversely affect margins in
the near future, are expected to continue to have a negative impact on earnings
in 2000.

Verson began work in 1997 on the two presses covered by the Ford order. As
work progressed on the first press, several component parts had to be
re-engineered and reworked, significantly increasing costs. In view of these
difficulties, Verson revised its cost estimates on these presses by $3,700,000
in February, 1998 and at the same time increased its cost estimates on other
presses by $1,600,000.

By the third quarter of 1998, the first Ford press was assembled and was in
the final test phase. In the testing process, the electronic controls furnished
by subcontractors proved to be incompatible, causing the press to physically
crash on more than one occasion, resulting in extensive damage to the press and
requiring replacement of many press components. The crashes caused a significant
escalation in Verson's costs and resulted in a production bottleneck, delaying
the work on the presses being manufactured behind it and requiring Verson to
incur overtime and increase the amount of work subcontracted out rather than
done in house. Verson ultimately delivered the first Ford press approximately
one year after the original specified delivery date, and the second Ford press
approximately four months after the original specified delivery date.

Also during the third quarter of 1998, in view of its experiences on the two
Ford presses, Verson significantly revised its cost estimates on all six of the
three-slide presses (the Ford and GM orders), as well as on other presses. As a
consequence, the Company

9
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announced the recognition of a pretax charge of approximately $16,000,000.
Approximately $5,300,000 of this charge was subsequently recorded in 1997 as
noted below. In the fourth quarter of 1998, events of the third quarter
continued to have a significant negative impact on costs to complete projects.
Given these ongoing circumstances and concern over further escalation of costs,
Verson undertook a comprehensive review of the compilation of costs and revenue
recognition associated with each press in relation to revised delivery
schedules, current estimated costs to complete the presses in production and
available manufacturing capacity. Verson recorded additional changes to cost
estimates of approximately $21,000,000 to reflect the recognition of estimated
losses on certain orders in process and a revision of estimated costs on other
orders. The Company restated its financial statements for 1997 and for the first
three quarters of 1998. Reference is made to Note 13 of Notes to Consolidated
Financial Statements.

The Verson division's gross loss for 1998 for the six "three-slide" transfer
presses under construction for Ford and General Motors totaled approximately
$14 million, including reserves for future losses of approximately $10 million.
This more than offset gross profits of approximately $4 million on the remainder
of the division's operations in 1998. The Company's cumulative loss on the
"three-slide" design presses, taking into account a gross profit of
approximately $8 million in 1997 is approximately $6,000,000 through
December 31, 1998.

The Company believes that the identifiable factors contributing to its
failure to generate positive gross margins and instead to incur losses on the
six "three-slide" transfer presses included, in particular, unanticipated
subcontracting costs and increases in overhead costs.

Verson's increased workload translated into the need for additional
manufacturing, office and hourly personnel and to increases in recruitment costs
and exempt and hourly wages along with related fringe benefits. The pressure to
meet delivery schedules resulted in increased shop overtime and the new facility
added higher depreciation costs. A prolonged computer system implementation and
the lower productivity associated with recently hired employees altered the
historical relationship between direct and indirect hours.

The Company believes that the reduction in gross margins for its standard
press business during 1998 was also attributable primarily to unanticipated
subcontracting costs associated with the overload in the Verson factory and
increases in overhead costs.

Verson's backlog as of December 31, 1998, composed of revenues to be
recorded in future years on orders received, included revenues of approximately
$50,000,000 on orders for which estimated losses were recorded in 1998 and on
which no gross margin is expected to be recognized in 1999 and 2000.
Uncertainties associated with these contracts make it reasonably possible that
additional losses could occur. The December 31, 1998 backlog for Verson also
included future revenue of approximately $95,000,000 to be recorded principally
in 1999 for which Verson anticipates gross margins lower than historical levels.

In view of the difficulties in estimating costs encountered by Verson in
1998, the Company has determined that on press orders where margin levels could
not be reasonably estimated, the Company will not recognize any gross profit
margin until the particular press in process reaches a point in production where
the gross profit margin can be reasonably estimated. Reference is made to
Note 1 of Notes to Consolidated Financial Statements Revenue Recognition and
Inventories. This method of accounting for gross margins on presses will be
continued until such time as Verson is satisfied that its methods of estimating
costs have been validated.

The backlog of low margin and no margin work in process as of December 31,
1998, will have a substantial negative effect on Verson's earnings in 1999 and,
to a lesser extent, in 2000 and 2001. In addition, the deferral of the
recognition of gross margins until the later stages of the production of a press
may result in fluctuations in quarter-to-quarter results.

Because of the difficulties Verson encountered in 1998, Verson has failed to
meet delivery date requirements provided in several press orders. Verson
reserved for penalties of approximately $1.2 million in 1998 as a result of
delays in shipments. The Company may receive additional claims for significant
penalty payments or damages in the remainder of 1999 and 2000. In the second
quarter of 1999, the Company established an additional reserve of $750,000 for
these potential claims. Reference is made to Note 10 of Notes to Consolidated
Financial Statements. The Company's difficulties in completing orders during
1998 and 1999 could adversely affect its relationships with one or more of its
customers and therefore could have a negative impact on the Company's ability to
obtain future business from such customers. In particular, the Company
experienced delays in completing presses for each of the three major auto
manufacturers during 1998 and 1999. Together these customers accounted for
approximately 26% of the Company's (52% of the Industrial Products Group) sales.
The Company also experienced delays in completing many of its smaller presses.
In response to General

10
<PAGE>

Motors' concerns that the Company's cash flow problems would further delay or
preclude the Company from completing four presses that were in various stages of
production, in the fourth quarter of 1999 the Company and General Motors agreed
to amend the General Motors purchase orders. The aggregate sales price of the
presses covered by these purchase orders exceeds $75 million.

Under the terms of the amended purchase orders, the Company and General
Motors agreed to revised shipping, payment and testing schedules that allow the
Company to ship components of, and receive payments for, the first two of the
four presses earlier than it would have been able to under the terms of the
original purchase orders. Most of the components of the first press were shipped
in the fall of 1999, approximately five months later than the specified delivery
date. The components for the second press will be shipped in the near future,
approximately six months later than the specified delivery date. Payment terms
for the third and fourth presses were largely unchanged from the original order
(i.e., 90% upon completion, testing and shipment), however, delivery dates (and
related payments) have been extended so that the components of the last press
will not be shipped until the fourth quarter of 2000 and final payment will not
be received until the first quarter of 2002, following completion of assembly
and testing at the General Motors facility. The third press must be assembled
and tested at Verson by the end of January, 2001, approximately nine months
later than the specified delivery date. Upon fulfillment of certain conditions
set forth in the amended purchase orders, General Motors will waive and release
the Company from all claims arising from or attributable to the Company's
alleged late delivery defaults on all presses and will accept delivery of the
last two (2) presses covered by this order. Among the conditions set forth in
the amended purchase orders was the requirement that the Company complete the
sale of the Agricultural Products Group by the earlier of the expiration of the
Company's financing arrangements with its secured lenders or December 31, 1999.
Final shareholder approval and closing of the sale of the Agricultural Products
Group is not expected to occur until the first quarter of 2000. The Company and
its lenders recently amended the Second Amended and Restated Credit Agreement to
extend the maturity date of this agreement to the earlier of the termination of
the purchase agreement or March 7, 2000. Therefore, in the first quarter of
2000, the Company and General Motors again amended their purchase orders to
reflect the change in the projected closing date of the sale of the Agricultural
Products Group. The amendment requires the Company to complete the sale and
establish a commitment for sufficient working capital by March 7, 2000.

In addition, during the latter half of 1999, the Company also had
discussions with some of its suppliers who have expressed concern that the
Company's financial condition has caused increasingly slower payment on
invoices. To date, the Company has been able to convince its major suppliers to
continue to supply the Company with the raw materials necessary for the Company
to fulfill its press orders, but there can be no assurance that such deliveries
will continue if the Company is unable to timely pay its suppliers.

RESTATEMENT OF PRIOR PERIOD FINANCIALS

Subsequent to the end of 1998, the Company determined that the accounting
for certain stock option exercise transactions during 1996 and 1997 was
incorrect. Compensation expense for certain stock option exercises during 1996
and 1997 should have been recognized for cashless stock option exercises and
treasury stock transactions involving non-mature stock option shares acquired by
the Company. Compensation expense which was not recognized in previously issued
financial statements is now reflected in the accompanying restated financial
statements. The periods restated were the only periods where material exercises
occurred that gave rise to the restatement.

As described in the Overview section above, the Company also determined that
gross profit margins at the Verson division of the Industrial Products Group
required restatement in 1997. During December 1998 through March 1999, Verson
undertook a comprehensive review of the compilation of costs and revenue
recognition associated with each press in production during 1998. In connection
with that review, Verson's auditors advised corporate management that because
information regarding increased February 1998 cost estimates with respect to the
two Ford jobs was available to Verson Division personnel prior to the release of
the Company's Form 10-K for 1997 (but after the public release of the Company's
earnings for 1997), that under these circumstances the effect of the increased
cost estimates of the Ford jobs should have been reflected in the Company's 1997
financial statements. Since the cost estimates on the Ford jobs were revised in
February 1998 following the release of the Company's earnings for 1997,
management mistakenly believed that the revised cost estimates on those jobs
should be reflected in the financial statements issued subsequent to the
revisions using the reallocation method. As interpreted by management, the
accounting rules permitted the use of the reallocation method of accounting for
these changes in estimates. Consequently, the Company prorated the increase in
costs for the Ford jobs over the remaining months of production for each job.
The information regarding the increased cost estimates was not excluded from the
Company's periodic remaining cost estimation.

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<PAGE>
As noted above, the Company was subsequently informed by its auditors that the
reallocation method was not generally accepted and that the Company should have
used the cumulative catch-up method, which immediately recognizes these changes
in estimates, rather than the reallocation method. The effect of the change to
the cumulative catch-up method was included in the restated 1997 financial
statements as well as in the restated quarterly results for 1998. Reference is
made to Note 1 of Notes to Consolidated Financial Statements for a
reconciliation of the amounts previously reported to the amounts currently being
reported in the consolidated statements of income (loss) for the years ended
December 31, 1997 and 1996. Reference is also made to Note 13 of Notes to
Consolidated Financial Statements regarding the reconciliation of amounts
previously reported to the amounts currently being reported in the quarterly
consolidated statements of income (loss) for the years ended December 31, 1998
and 1997.

It was further determined that the Company should have accrued for product
liability claims incurred but not reported prior to 1996. The product liability
adjustment ($1,040,000 net of tax) had no impact on operating results reported
on within this report, had no impact on the appropriateness of the revenue
recognition associated with related sales and is reflected as an adjustment to
retained earnings at December 31, 1995. The products to which the claims
primarily relate are products currently manufactured by the Company's
Agricultural Products Group and products related to discontinued operations for
which the Company contractually retained certain product liability claims,
generally claims arising prior to sale of the related business. To reasonably
estimate the liability for such claims, the Company historically used estimates
provided by legal counsel based on existing claims experience in all years, and
in 1998 also obtained actuarial information which was based on the Company's
historical claim experience to estimate incurred but not reported claims for the
period December 31, 1995 to December 31, 1998. The results of such analysis
supported the Company's accrual estimates for periods subsequent to
December 31, 1995.

OPERATING RESULTS

Reference is made to Note 11 of Notes to Consolidated Financial Statements
regarding the disclosure of segmental information with respect to the Company's
operations. The Company's operations consist of two business segments, the
Agricultural Products Group and the Industrial Products Group. The Agricultural
Products Group consists of the Company's Bush Hog division (including products
manufactured by Universal Turf which was acquired in 1998) and the recently
acquired Great Bend division. As described in Part I, Item 2 above, the Company
has entered into an agreement to sell 80.1% of the Agricultural Products Group.
Since the sale of the Company's Coz division in 1997, the Industrial Products
Group consists of the Company's Verson, Precision Press Industries (PPI) and
Verson Pressentechnik operations. PPI was established in the fourth quarter of
1997 and is engaged in the fabrication of large components for the Verson
division. In October 1998, the Company's Verson division formed a joint venture
with Theodor Grabener GmbH & Co. KG of Germany and Automatic Feed Company of
Napoleon, Ohio, that will help the two American companies more effectively
penetrate the European market for large stamping presses and related systems.
The new entity, Verson Pressentechnik GmbH, is located in Netphen-Werthenbach,
Germany.

1998 COMPARED TO 1997

Net sales for 1998 were $273,834,000 compared to net sales of $270,562,000
reported in 1997. Loss before taxes in 1998 was $21,643,000 compared to income
before taxes of $24,835,000 in 1997. The net loss in 1998 was $14,113,000 ($1.19
per diluted share) versus net income of $15,646,000 ($1.27 per diluted share) in
1997.

Within the Agricultural Products Group, net sales in 1998 increased to
$136,814,000 from $119,471,000 in 1997. Approximately half of the increase was
related to the acquisitions of the Great Bend and Universal Turf operations in
the second quarter of 1998. The remainder of the increase was principally
associated with increased cutter sales by the Bush Hog division to cattle
ranchers, particularly in the first half of the year. Cattle ranchers use the
cutters for grazing pasture maintenance. Cutter sales in 1998 were also
favorably affected by new/redesigned products for the turf and landscaping
market for utilization by commercial turf (sod) growers and by golf courses for
maintenance. During the last half of 1998, sales were negatively affected by
lower prices for major crops (corn, wheat, soybeans) and livestock commodities
(cattle and hogs), which reduced farm income. Strong crop yields in the Midwest
and fewer exports are expected to keep crop and livestock prices at a low level
in 1999. Within the Agricultural Products Group, income before taxes decreased
slightly in 1998 compared to the prior year. Gross profit margins decreased
slightly in 1998. Decreases were principally related to increased discounts
offered to dealers and the impact of the mix of products sold. These decreases
were partially offset by favorable manufacturing variances resulting from
increased facility utilization and increased labor efficiencies at the Bush Hog
division in 1998 and the effect of increased sales volume noted above from the
acquisitions of Great Bend and Universal Turf. Selling and administrative
expenses increased in 1998 within the

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<PAGE>
Agricultural Products Group compared to the prior year. The majority of the
increase related to the acquired operations of Great Bend and Universal Turf.
Other increases were associated with increased commissions (due to increased
sales volume) and advertising costs in 1998.

Within the Industrial Products Group, sales decreased in 1998 to
$137,020,000 compared to net sales of $151,091,000 reported in 1997. The entire
decrease was related to the loss of revenue from the Coz division which was sold
in the early part of the fourth quarter of 1997. Revenue and profits are
recognized on a percentage of completion basis at the Verson division. Loss
before taxes for the Industrial Products Group was $23,129,000 in 1998 compared
to income before taxes of $16,584,000 in 1997. Operating results in 1998 and
1997 were favorably affected by the Company's recovery of a claim associated
with prior periods of $5,000,000 in 1998 and $2,500,000 in 1997.

Selling and administrative expenses increased approximately $3,700,000
within the Industrial Products Group in 1998 due to staff expansions in these
areas at the Verson division. During 1997, Verson established an international
sales and marketing department, resulting in increased salaries and travel
costs.

Corporate expenses consisted primarily of administrative charges and other
(income) expense. Administrative expenses decreased due to a reduction in
staffing levels, the subleasing of a portion of the Corporate Office during 1998
and decreased compensation expense related to stock option exercises--see
Note 11 of Notes to Consolidated Financial Statements. Reference is made to
Note 12 of Notes to Consolidated Financial Statements for an analysis of other
(income) expense in 1998 and 1997.

Interest expense in 1998 was $6,201,000 compared to interest expense of
$3,306,000 in the prior year. Increased borrowing needs were related to higher
consolidated receivable levels (associated with increases at all manufacturing
operations of the Company) and increased inventory levels (primarily associated
with the Verson division where orders for a total of 9 multi-station transfer
presses are currently in production and shipment and production delays have
occurred). Other borrowing needs include fixed asset additions over the past
year ($38,837,000 including the Verson plant expansion), the acquisitions of
Great Bend and Universal Turf in the second quarter of 1998 and the impact of
the stock buyback program from the prior years. Interest expense in 1998 was
partially offset by the capitalization of $979,000 of interest costs relating to
the Company's building expansion project at the Verson division.

Reference is made to Note 4 of Notes to Consolidated Financial Statements
for an analysis and explanation of the current and deferred provision (benefit)
for income taxes in 1998 and 1997.

1997 COMPARED TO 1996

The Company's net sales in 1997 were $270,562,000 compared to net sales of
$274,414,000 in 1996. The decrease in consolidated net sales in 1997 was
associated with the effects of the sale of the Coz division as noted above. Net
sales of the Coz division for 1997 were $11,000,000 less than net sales of the
prior year. Income before taxes in 1997 was $24,835,000 compared to income
before taxes of $25,223,000 for the prior year. Net income in 1997 was
$15,646,000 ($1.27 per diluted share) compared to net income of $16,089,000
($1.17 per diluted share) in 1996. Earnings per common share and weighted
average shares outstanding for 1996 have been adjusted to reflect the effects of
a three-for-two stock split which occurred during the third quarter of 1997.

Net sales within the Agricultural Products Group increased to $119,471,000
in 1997 compared to net sales of $108,355,000 in 1996. The majority of the
increase was associated with the cutter and loader product lines. Sales
increases in the cutter and loader product lines were associated with the upturn
in cow/calf prices in the spring of 1997. Cattle ranchers use the cutters and
loaders for grazing pasture and feed lot maintenance, respectively. Cutter sales
were also favorably affected by new/redesigned products introduced in prior
years aimed at the turf and landscaping market for utilization by commercial
turf (sod) growers and for maintenance of golf courses. Service parts sales also
increased in 1997. Gross profits and gross profit margins increased within the
Agricultural Products Group in 1997 compared to the prior year. Approximately
half of the increase in the gross profit was associated with the increased sales
volume discussed above. The improved gross profit margin resulted primarily from
continued improvements in the manufacturing process resulting in greater direct
labor efficiencies and better control of overhead costs. The group also
benefitted from increased facility utilization during 1997. Selling and
administrative expenses decreased within the Agricultural Products Group in
1997. These decreases were associated with a commission rate decrease in 1997
and lower advertising costs.

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<PAGE>
At the Industrial Products Group, net sales decreased to $151,091,000 in
1997 compared to net sales of $166,059,000 reported in 1996. The decrease in net
sales was associated with the effects of the disposition of the Coz division in
the fourth quarter of 1997 and lower revenue recognized on press production at
the Verson division due to the mix of products in process during each respective
year. Revenue and profits are recognized on a percentage of completion basis for
press production at the Verson division. During the first quarter of 1997,
production was completed on the last press of an order for three "A" size
transfer presses for Chrysler. The first two presses related to this order were
produced and shipped in 1996. Production in 1997 reflected a smaller portion of
production against this order and a larger portion of production related to
smaller presses with lower margins. Production was also affected in 1997 by a
four week strike in the middle of the year. Production continued on a limited
basis during the strike through the use of supervisory employees. Gross profits
and gross profit margins decreased within the Industrial Products Group in 1997
compared to 1996. The decrease in gross profits and gross profit margins was
primarily associated with decreased facility utilization at the Verson division
in 1997. Production hours decreased by 14% in 1997 due to the effects of the
impact of outsourced production, a four week strike and the mix of products
manufactured as noted above. Also impacting gross profits and margins were
increased overtime costs necessary to meet delivery schedules following the
strike and costs associated with a program undertaken to identify improvements
in the manufacturing process. These cost increases were offset in part by the
recovery of a claim associated with prior periods of $2,500,000 and lower
warranty costs. Selling and administrative expenses increased within the
Industrial Products Group in 1997. These increases included the effect of the
establishment of an international sales and marketing department at the Verson
division during 1997 resulting in personnel and travel cost additions.
Administrative staffing levels were also increased at this operation during
1997. These increases were partially offset by the effect of the sale of the Coz
division as noted above.

Corporate expenses consisted primarily of administrative charges and other
(income) expense. Administrative expenses decreased due to a reduction in
compensation expenses related to stock option exercises--see Note 11 of Notes to
Consolidated Financial Statements. Reference is made to Note 12 of Notes to
Consolidated Financial Statements for an analysis of other (income) expense in
1997 and 1996.

Interest expense in 1997 increased to $3,306,000 from $1,557,000 in the
prior year. Increased borrowing needs were associated with the Verson division
where the number of presses in process increased and the division was awaiting
final payment on presses being installed. The Company also purchased over
$21,500,000 of treasury stock during 1997 as a part of a program to purchase up
to 2,250,000 shares of the Company's common stock.

Reference is made to Note 4 of Notes to Consolidated Financial Statements
for an analysis and explanation of the current and deferred provisions for
income taxes in 1997 and 1996.

FINANCIAL CONDITION
1998

Working capital at December 31, 1998 was $(14,955,000) and the current ratio
was .92 to 1.00. Net accounts receivable increased by $14,098,000 since the end
of 1997. Approximately two-thirds of this increase was related to the
Agricultural Products Group. Receivable levels within this group have been
impacted by the overall downturn in the agricultural economy in the United
States brought about by lower commodity prices, excess grain inventory levels
and decreased exports of grain, particularly to the far eastern countries. These
economic factors have led to decreased agricultural equipment sales by dealers
and, in turn increased dealer receivable levels. Other factors leading to
increased receivables within the Agricultural Products Group include record
sales to dealers by the Bush Hog division and the effect of the acquisitions of
the Great Bend and Universal Turf operations during 1998. The Company acquired
these operations for $10,953,000 in cash and the assumption of $1,369,000 of
liabilities. These acquisitions were funded through increased borrowings under
the Company's existing bank credit agreement. The remainder of the net
receivable increase was associated with the Industrial Products Group where a
large press order was shipped in the last quarter of 1998. Net inventory levels
increased by $23,421,000 during 1998. Approximately 30% of this increase was
related to the Agricultural Products Group. Cutter sales at the Bush Hog
division decreased in the last half of 1998 beyond production expectations
resulting in increased inventory levels. The previously mentioned acquisitions
in 1998 also contributed to the group's inventory level increase. Within the
Industrial Products Group, inventory levels also increased as a large number of
presses were in production at the end of 1998.

Fixed asset additions ($38,837,000) included construction costs associated
with an assembly building expansion project at the Verson division. The project
approximately doubled the size of Verson's assembly facility and is expected to
increase the division's assembly capacity by approximately 30%. A new powder
paint

14
<PAGE>
system was installed at the Bush Hog division during 1998. The system is
expected to result in a higher quality finish on equipment manufactured and
overall reduced paint costs and environmental emissions. Remaining capital
expenditures included improved production machinery and equipment, which are
expected to result in reduced manufacturing costs and improvements in product
quality, and upgrades in computer hardware and software. Funds to finance these
additions include borrowings under the Amended and Restated Credit Agreement.
Other than the sale of the former White-New Idea facility in Coldwater, Ohio
(which had been leased to the purchaser of the operation since 1994), there were
no major asset dispositions in 1998.

The changes in the net deferred tax assets (classified as both current and
other assets) were associated with changes in timing differences between book
and tax income. The Company continued to evaluate the appropriateness of the net
deferred tax asset valuation allowance associated with net operating loss and
tax credit carryforwards, particularly in light of current operating results.
Such evaluation is performed periodically in conjunction with the Company's
periodic financial reporting. Reference is made to Note 4 of Notes to
Consolidated Financial Statements regarding the Company's current tax position.

Net borrowings under the Amended and Restated Credit Agreement increased by
$68,900,000 since the end of 1997. These borrowings were used to finance working
capital needs and fixed asset additions as described above, the acquisitions of
the Great Bend and Universal Turf operations and the purchase of approximately
145,000 treasury shares during 1998. During 1998, the Company completed the
purchase of treasury shares under a plan announced in 1996 to purchase 2,250,000
shares of common stock. During the third quarter of 1998, the Company announced
the authorization to purchase an additional 500,000 shares, of which
approximately 74,000 shares have been purchased through the end of 1998.
Subsequent to the end of 1998, the Company entered into a Second Amended and
Restated Credit Agreement and a subsequent amendment thereto--see Note 5 of
Notes to Consolidated Financial Statements--replacing the then current Amended
and Restated Credit Agreement. Under the terms of the new agreement, the
purchase of additional shares of the Company's common stock is not permitted.

1997

Working capital at December 31, 1997 was $46,213,000 and the current ratio
was 1.48 to 1.0. Net accounts receivables increased by $1,815,000 in 1997.
Within the Agricultural Products Group, net receivables increased by
approximately $7,000,000 in 1997. Net sales levels increased to record levels in
1997, including an increase in net sales of over 20% in the fourth quarter,
resulting in increased receivable levels at the end of 1997. Within the
Industrial Products Group, net receivables decreased in 1997. The majority of
the decrease was related to the sale of the Coz division as noted above. On a
consolidated basis, net inventories increased by $16,633,000 in 1997.
Agricultural Products Group inventories decreased slightly in 1997. Within the
Industrial Products Group, inventories increased by over $17,000,000 in 1997.
The entire increase was associated with the Verson division. While the level of
accumulated costs of presses in process decreased at the end of 1997, the level
of customer deposits and progress payments decreased by a greater amount (over
$36,000,000) at the end of 1997, resulting in a net increase in the work in
process inventory level. The above noted increase was partially offset by the
effects of the sale of the Coz division as noted above.

Fixed asset additions ($15,334,000) included the purchase of a 40,000 square
foot facility for the PPI division (for manufacturing capabilities and the
opportunity to expand the Verson business with the manufacturing of other
related equipment), the upgrade of the Verson engineering area and new machinery
and equipment at the Bush Hog and Verson operations (to reduce manufacturing
costs and improve product quality). During the fourth quarter of 1997, the
Company announced a $28,000,000 capital expansion project as part of a
three-year program to increase production capacity at the Verson division. This
project more than doubled the size of Verson's assembly facility and is expected
to increase the division's capacity by approximately 30%. This expansion was
completed at the end of 1998. Funds to finance these additions include
borrowings under the Amended and Restated Credit Agreement. Other than the sale
of the Coz division (cash proceeds in excess of $14,700,000), there were no
major asset dispositions in 1997.

The changes in the net deferred tax assets (classified as both current and
other assets) were associated with changes in timing differences between book
and tax income. The continued earnings history of the Company and prospects for
future earnings makes it more likely than not that the Company will utilize the
benefits arising from the deferred tax assets noted above. See Note 4 of Notes
to Consolidated Financial Statements.

Net borrowings under the Amended and Restated Credit Agreement increased by
$23,400,000 since the end of 1996. These borrowings, along with the proceeds
from the sale of the Coz division and internally generated cash, were used to
finance working capital needs and fixed asset additions described above and the
purchase of approximately 975,000 treasury shares during 1997. Through the end
of 1997, the Company had purchased approximately 2,182,000 shares of its common

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stock under the 1996 authorization to repurchase up to 2,250,000 shares of the
common stock. Some treasury shares purchased have been reissued upon the
exercise of stock options.

During the third quarter of 1997, the Company's Board of Directors
authorized a three-for-two stock split for stockholders of record on August 15,
1997. The Board also authorized a dividend increase of 20% over the second
quarter's dividend.

LIQUIDITY AND CAPITAL RESOURCES

At the end of 1998, the Company's sales backlog was $180,617,000. The
majority of this amount was related to the Industrial Products Group and
consists of orders for new presses as well as revenue not yet recorded
representing the uncompleted portion of presses currently being manufactured.
Production against these orders (and orders received subsequent to the end of
1998) extends out to the middle part of 2000. Accumulated production costs of
these orders are not invoiced until shipment of the related press. Orders for
new presses recorded in 1998 exceeded $100,000,000 and a significant portion of
the new orders were accompanied by deposits and/or progress payments. Cash
requirements for these new press orders will be less dependent on internally
generated cash and borrowings under current loan arrangements. However, the
production and delivery of many press orders currently in process have been
delayed by numerous factors including late delivery of subcontracted and
internally manufactured components, capacity constraints in the assembly area
related to the number of presses in this phase of production and revised
delivery schedules at the request of customers. These situations will result in
delayed invoicing of the presses and final collection of amounts due as well as
the possible cancellations of orders, imposition of penalties or claims for
damages under certain contracts.

Within the Agricultural Products Group, cash collections associated with
machine sales generally occur upon the retail sale of the product by the dealer.
The retail season for most farm equipment begins in March/ April and, depending
upon the product, ends in September/October. Due to capacity and shipping
constraints, the Company cannot build and ship $130 million of products during
this time frame. To manage these constraints, the Company levels out its factory
production schedule and offers dealers extended payment terms with cash discount
incentives for their orders, to benefit both the Company and the dealers. The
extended payment terms are offered in the form of floor plan financing which is
customary within the industry. The dealer cash discount provides the dealer with
an incentive to sell the equipment as early as possible or pay for the equipment
early in the floor plan financing period in order to take advantage of the cash
discount. The Company retains a security interest in the inventory held by
dealers. This approach to managing the capacity and shipping constraints reduces
the Company's inventory carrying costs, as it requires less warehouse space. As
a result, the Agricultural Products Group typically experiences a build up of
receivables and inventory beginning in the fourth quarter through the first
quarter. This seasonal fluctuation is typical in the agricultural equipment
business. The Company does, however, try to reduce the seasonality where it can.
For instance, the Company has expanded its loader business, which is less
seasonal, through the acquisition of Great Bend and the development of new
loader products. The Company also has made capital equipment expenditures to
reduce manufacturing lead times and coordinated production plans with its
vendors, thus allowing both the Company and its vendors to react more quickly.
Net farm cash income decreased in 1998 as prices for major crops (corn, wheat,
soybeans) decreased. This condition was brought about by strong crop yields in
the Midwest and a significant reduction in commodity exports to the Far East.
Livestock (cattle and hogs) prices also decreased during 1998. Extreme weather
conditions (flooding in California, severe drought in Texas and Oklahoma and
moderate drought conditions in the South) also resulted in lower crop yields and
loss of income to farmers during 1998. The Company expects farm income to
continue to decline in 1999 despite a recently enacted emergency government aid
package and anticipates that retail demand for agricultural equipment will
decline in 1999. The Company anticipates that the Agricultural Products Group's
financial results for 1999 will be adversely affected by decreased production of
certain product lines associated with the lower level of demand. These decreases
may be partially offset by expansions within the loader product line and
improved sales in the turf and landscape product lines associated with new
products developed in 1998.

Due to significant losses in the last quarter, no current Federal tax
provision was recorded in 1998. Reference is made to Note 4 of Notes to
Consolidated Financial Statements for an explanation of the $5,639,000 deferred
tax benefit recorded in 1998. The Company projects that future Federal income
tax provisions and payments will be based upon the Alternative Minimum Tax rate
as substantial tax loss carryforwards still exist for tax reporting purposes.

Reference is made to Note 10 of Note to Consolidated Financial Statements
for a current discussion of outstanding environmental and legal issues and other
contingent liabilities. To the extent that any of these claims are not covered
by insurance or are ultimately

16
<PAGE>
resolved for amounts in excess of the Company's applicable insurance coverage,
it could have a significant negative impact on the Company's cash flow and its
ability to finance its operations.

Subsequent to the end of 1998, the Company entered into a Second Amended and
Restated Credit Agreement replacing the former Amended and Restated Credit
Agreement. This new agreement was amended in April 1999. Reference is made to
Note 5 of Notes to Consolidated Financial Statements for a description of the
major terms of this agreement. The loan agreement as amended obligates the
Company to repay all outstanding borrowings on expiration of the agreement on
February 28, 2000 (subsequently extended to March 7, 2000). If the proposed
transaction regarding the Agricultural Products Group is not consummated before
that date the Company must either negotiate an extension of the loan with its
current lenders, refinance the loan with other lenders or develop other sources
of liquidity to repay the loan. The Company's ability to achieve any of these
three options may depend upon the results of its operations during 1999.

As of December 31, 1998, the Company had cash and cash equivalents of
$727,000 and additional funds of $23,863,000 available under its Amended and
Restated Credit Agreement. Had the Second Amended and Restated Credit Agreement
and the related amendment been in effect at December 31, 1998, additional funds
of $18,863,000 would have been available under this agreement. The Company
believes that its expected operating cash flow and funds available under the
Second Amended and Restated Credit Agreement and the related amendment are
adequate to finance its operations and capital expenditures in 1999. At the end
of the third and fourth quarters of 1998, the Company was not in compliance with
certain provisions under the Amended and Restated Credit Agreement. Subsequent
to the end of each of these quarters, the lenders waived compliance.

MARKET RISK

The Company's market risk is the exposure to adverse changes in interest
rates. From time to time, the Company enters into interest rate swap agreements
as a vehicle to manage its exposure related to the ratio of fixed to floating
rate debt with the objective of achieving a mix that management believes is
appropriate. At December 31, 1998, the Company's total debt outstanding
(revolving credit agreement and capitalized leases) totaled $122,225,000.
Capitalized lease debt ($2,925,000) is represented by fixed rate financing and
is not subject to market rate fluctuations. The remaining portion of the
Company's debt at December 31, 1998 ($119,300,000) was subject to the terms of
the Amended and Restated Credit Agreement that provides for interest rates at
either a floating prime or fixed LIBOR rate, plus 1.5%. The base interest rates
are periodically agreed to with the lender for fixed periods of 30 to 90 days.
With the interest rate swap agreement entered into during 1998, the Company
effectively capped increases in LIBOR base interest rates at 7.49% on
$50,000,000 of its outstanding borrowings under the Credit Agreement through May
2001. The swap fair market value at December 31, 1998 was a negative $1,100,000.
The remaining balance of the Credit Agreement debt outstanding at December 31,
1998 of $69,300,000 was not covered by the swap agreement and approximates fair
market value. A hypothetical immediate 10% increase in interest rates would
adversely affect 1999 earnings and cash flows by approximately $485,000 based on
the composition of debt levels at December 31, 1998.

The interest rate swap was terminated subsequent to the end of the second
quarter of 1999 at no cost to the Company.

The Company may enter into interest rate swap agreements from time to time
in the future to the extent management determines such agreements are an
appropriate vehicle to manage interest rate market risk.

IMPACT FROM NOT YET EFFECTIVE RULES

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133--Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. The Company is in the
process of evaluating the impact of this statement on its financial reporting.

YEAR 2000 COMPLIANCE

Many older computer software programs refer to years in terms of their final
two digits only. Such programs may interpret the year 2000 to mean the year 1900
instead. If not corrected, these programs could cause date-related transaction
failures. The Company's program to address this year 2000 compliance issue is
broken down into the following major categories:

1. Financial related hardware/software.

2. Manufacturing/engineering process controls.

3. Equipment manufactured for sale.

4. Outside source suppliers.

The general phases of the year 2000 compliance program common to all of the
above categories are:

1. Identifying items that are not year 2000 compliant.

17
<PAGE>
2. Assigning priorities to identified items, including the assessment of
items material to the operations of the Company.

3. Repairing or replacing material items determined not to be year 2000
compliant.

4. Testing of material items repaired or replaced.

The Company has completed the identification process in relation to the four
categories noted above. Outside service bureau financial software currently in
place has been determined and tested to be year 2000 compliant. The Company
recently purchased and installed financial software which is year 2000
compliant. Divisions not currently using year 2000 compliant software will be
utilizing these new programs during 1999. Payroll services for the Company are
currently being provided by an outside service. Payroll software is not year
2000 compliant. The Company is in the process of having this software upgraded
and anticipates that it will be year 2000 compliant by June 1999. Compliance
certificates have been received for non personal computer systems owned/leased
by the Company. Compliance testing is currently being conducted. The majority of
all personal computers used within the Company (both financial and non financial
applications) have been purchased within the last two years and have been
successfully tested for compliancy. Remaining non compliant personal computers
will be replaced with year 2000 compliant units during 1999 as a part of the
Company's normal upgrade program.

Manufacturing/engineering process controls and equipment includes equipment
to manufacture and design products sold by the Company. Design equipment used in
the engineering of agricultural equipment has been tested and determined to be
year 2000 compliant. At the Verson division, year 2000 compliance certificates
have been received on all major purchased hardware and software applications for
designing equipment and programs. While the intent of the division is to rely on
these certificates (due to the quality of the information received and the
reputation of the vendors involved), some testing will take place in 1999. The
Company is giving consideration to the use of outside experts in the testing of
the related software and hardware. The process will be completed in 1999. The
majority of internally developed design software at Verson has been determined
not to contain date fields. Programs which do contain date fields have been
determined to be year 2000 compliant. The Company does not have a significant
amount of manufacturing equipment with embedded computer chips or
hardware/software which would present a problem at the beginning of the year
2000. Compliancy certificates have been received from the majority of equipment
manufacturers and testing, where necessary, should be completed by the end of
the first half of 1999.

None of the equipment manufactured by the Agricultural Products Group
include hardware/software or embedded computer chips. Stamping presses
manufactured by the Verson division contain software and embedded computer
chips. Compliance certificates have been received on all software included in
the presses sold. Some internal testing has also been performed. The Company
believes that it has little, if any, exposure related to equipment manufactured
by its divisions in relation to the year 2000 issue.

The Company has identified key outside vendors which provide services which,
if not year 2000 compliant, could have an effect on the operations of the
Company. Sources include banking, investment, pension obligations, insurance,
utilities, etc. businesses. During 1999, these service providers will be asked
to update the Company on the status of their year 2000 compliance. The Company
will then need to evaluate these responses and determine if a contingency plan
would be necessary should the vendor not be compliant.

The total cost associated with required modifications to become year 2000
compliant (both incurred to date and to be incurred in the future) is not
expected to be material to the Company's financial position. This total cost
does not include the cost of internal efforts to complete the project. The costs
associated with the replacement of computerized systems, substantially all of
which were capitalized, are not included in the above estimate as such
replacements or upgrades were necessary to operate efficiently and such costs
would have been incurred even if year 2000 compliance was not an issue. The
Company anticipates that additional amounts will be spent in completing the year
2000 compliance project. These costs are being funded through operating cash
flow. The Company's year 2000 compliance program is an ongoing process and the
estimates of costs and completion dates for various components of the program
described above are subject to change. Other major system projects have not been
deferred due to the year 2000 compliance project.

The risk to the Company from the failure of suppliers of goods and services
(over which the Company does not have control) to attain year 2000 compliance is
the same to other business enterprises generally. Failure of information systems
by financial institutions (banks, service bureaus, insurance companies, etc.)
would disrupt the flow of funds to and from the Company until systems can be
remedied or replaced by these providers. Failure of delivery of critical
components by suppliers and subcontractors resulting from non year 2000
compliance could result in disruptions of manufacturing processes with delays in
the delivery of our products to our customers until non-compliant conditions or
components can be remedied or replaced. The Company has identified major
suppliers of goods and services and is in

18
<PAGE>
the process of determining their year 2000 compliance status. Alternate
suppliers of critical components are also in the process of being identified.
The Company believes it is taking the necessary steps to resolve year 2000
issues. However, given the possible consequences of failure to resolve
significant year 2000 issues, there can be no assurance that any one or more
such failures would not have a material adverse effect on the Company. The
Company is currently assessing the need for contingency planning. The Company
believes, however, that with the completion of the year 2000 project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.

SAFE HARBOR STATEMENT

Statements contained within the description of the business of the Company
contained in Item 1, the Management Discussion and Analysis of Financial
Conditions and Results of Operations as well as within the non 10-K portion of
the 1998 Annual Report that relate to future operating periods are subject to
risks and uncertainties that could cause actual results to differ from
management's projections. Operations of the Company include the manufacturing
and sale of agricultural and industrial machinery. In relation to the
Agricultural Products Group, forward-looking statements involve certain factors
that are subject to change. These elements encompass interrelated factors that
affect farmers and cattle ranchers' confidence, including demand for
agricultural products, grain stock levels, commodity prices, weather conditions,
crop and animal diseases, crop yields, farm land values and government farm
programs. Other factors affecting all operations of the Company include actions
of competitors in the industries served by the Company, production difficulties
including capacity and supply constraints, labor relations, interest rates and
other risks and uncertainties. The Company's outlook is based upon assumptions
relating to the factors discussed above.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated herein by reference to
the section entitled, "Market Risk" in the Company's Management's Discussion and
Analysis of Financial Condition and Results of Operations.

19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of Allied Products Corporation

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income (loss), shareholders' investment and cash
flows listed in the index appearing under Part IV of Form 10-K (Item 14(a)1),
present fairly, in all material respects, the consolidated financial position of
Allied Products Corporation and its subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 (1997 and prior as
restated--see Note 1), in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Part IV of Form 10-K (Item 14(a)2) presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule 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.

As discussed in Note 1 to the consolidated financial statements, Allied
Products Corporation has restated previously issued consolidated financial
statements to change its accounting for certain stock option exercises,
revisions to contract cost estimates impacting the percentage of completion
gross profit margin computation and unreported product liability claims.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chicago, Illinois

April 15, 1999

20
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales....................................... $ 273,834,000 $270,562,000 $274,414,000
Cost of products sold........................... 250,169,000 210,033,000 209,118,000
------------- ------------ ------------
Gross profit.................................. $ 23,665,000 $ 60,529,000 $ 65,296,000
------------- ------------ ------------
Other costs and expenses:
Selling and administrative expenses........... $ 38,145,000 $ 35,499,000 $ 37,885,000
Interest expense.............................. 6,201,000 3,306,000 1,557,000
Other (income) expense, net................... 962,000 (3,111,000) 631,000
------------- ------------ ------------
$ 45,308,000 $ 35,694,000 $ 40,073,000
------------- ------------ ------------
Income (loss) before taxes...................... $ (21,643,000) $ 24,835,000 $ 25,223,000
Provision (benefit) for income taxes:
Current....................................... 109,000 1,195,000 921,000
Deferred...................................... (7,639,000) 7,994,000 8,213,000
------------- ------------ ------------
Net income (loss)............................... $ (14,113,000) $ 15,646,000 $ 16,089,000
============= ============ ============
Earnings (loss) per common share:
Basic......................................... $(1.19) $1.29 $1.19
------ ---- ----
------ ----- -----
Diluted....................................... $(1.19) $1.27 $1.17
------ ---- ----
------ ----- -----
Weighted average shares outstanding:
Basic......................................... 11,895,000 12,107,000 13,505,000
============= ============ ============
Diluted....................................... 11,895,000 12,353,000 13,718,000
============= ============ ============
</TABLE>

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

21
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 727,000 $ 609,000
------------ ------------
Notes and accounts receivable, less allowances of
$519,000 and $531,000, respectively..................... $ 68,827,000 $ 54,729,000
------------ ------------
Inventories:
Raw materials........................................... $ 11,529,000 $ 6,193,000
Work in process......................................... 68,296,000 52,811,000
Finished goods.......................................... 17,019,000 14,419,000
------------ ------------
$ 96,844,000 $ 73,423,000
------------ ------------
Deferred tax asset........................................ $ 15,060,000 $ 12,773,000
------------ ------------
Prepaid expenses.......................................... $ 406,000 $ 415,000
------------ ------------
Total current assets.................................. $181,864,000 $141,949,000
------------ ------------
Plant and Equipment, at cost:
Land...................................................... $ 2,430,000 $ 2,243,000
Buildings and improvements................................ 57,022,000 40,750,000
Machinery and equipment................................... 69,196,000 51,339,000
------------ ------------
$128,648,000 $ 94,332,000
Less--Accumulated depreciation and amortization........... 48,181,000 48,811,000
------------ ------------
$ 80,467,000 $ 45,521,000
------------ ------------
Other Assets:
Deferred tax asset........................................ $ 4,165,000 $ 4,631,000
Deferred charges (goodwill), net of amortization.......... 6,154,000 1,491,000
Other..................................................... 3,154,000 1,472,000
------------ ------------
$ 13,473,000 $ 7,594,000
------------ ------------
$275,804,000 $195,064,000
============ ============
</TABLE>

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

22
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' INVESTMENT

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities:
Revolving credit agreement................................ $119,300,000 $ 50,400,000
Current portion of long-term debt......................... 627,000 268,000
Accounts payable.......................................... 52,634,000 19,923,000
Accrued expenses.......................................... 24,258,000 25,145,000
------------ -------------
Total current liabilities............................. $196,819,000 $ 95,736,000
------------ -------------
Long-term debt, less current portion shown above............ $ 2,298,000 $ 670,000
------------ -------------
Other long-term liabilities................................. $ 4,957,000 $ 10,105,000
------------ -------------
Commitments and Contingencies
Shareholders' Investment:
Preferred stock:
Undesignated--authorized 1,500,000 shares at
December 31, 1998 and 1997; none issued............... $ -- $ --
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued 14,047,249 shares at
December 31, 1998 and 1997.............................. 140,000 140,000
Additional paid-in capital................................ 98,377,000 98,518,000
Retained earnings......................................... 16,131,000 32,148,000
------------ -------------
$114,648,000 $ 130,806,000
Less: Treasury stock, at cost: 2,228,640 and 2,144,263
shares at December 31, 1998 and 1997, respectively...... (42,918,000) (42,253,000)
------------ -------------
Total shareholders' investment........................ $ 71,730,000 $ 88,553,000
------------ -------------
$275,804,000 $ 195,064,000
============ =============
</TABLE>

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

23
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................. $(14,113,000) $ 15,646,000 $ 16,089,000
Adjustments to reconcile net income (loss) to
net cash provided from (used for) operating
activities:
Gains on sales of operating and nonoperating
assets..................................... (1,936,000) (1,662,000) (106,000)
Depreciation and amortization............... 6,096,000 5,026,000 5,075,000
Amortization of deferred charges............ 356,000 177,000 177,000
Deferred income tax provision (benefit)..... (7,639,000) 7,994,000 7,964,000
Provision for inventory valuation........... 8,813,000 -- --
Stock option compensation................... 1,119,000 1,375,000 4,485,000
Changes in noncash assets and liabilities,
net of effects of assets/businesses
acquired or sold and noncash transactions:
(Increase) in accounts receivable......... (11,577,000) (5,976,000) (8,835,000)
(Increase) in inventories................. (29,395,000) (20,615,000) (4,384,000)
(Increase) decrease in prepaid expenses... 27,000 (294,000) 132,000
Increase (decrease) in accounts payable
and accrued expenses..................... 30,635,000 (3,230,000) (6,621,000)
Other, net.................................. (975,000) (456,000) 478,000
------------ ------------ ------------
Net cash provided from (used for) operating
activities................................... $(18,589,000) $ (2,015,000) $ 14,454,000
------------ ------------ ------------
Cash Flows from Investing Activities:
Additions to plant and equipment.............. $(38,837,000) $(15,334,000) $ (4,684,000)
Payment for businesses acquired, net of cash
acquired..................................... (10,953,000) -- --
Proceeds from sales of plant and equipment.... 3,426,000 504,000 207,000
Proceeds from sales of assets/businesses...... -- 14,737,000 --
------------ ------------ ------------
Net cash used for investing activities........ $(46,364,000) $ (93,000) $ (4,477,000)
------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings under revolving credit
agreements.................................. $186,000,000 $122,000,000 $119,650,000
Payments under revolving credit agreements.... (117,100,000) (98,600,000) (103,850,000)
Payments of short and long-term debt.......... (392,000) (270,000) (696,000)
Common stock issued........................... -- -- 1,501,000
Purchases of treasury stock................... (1,624,000) (21,572,000) (25,993,000)
Dividends paid................................ (1,904,000) (1,770,000) (1,808,000)
Stock option transactions..................... 91,000 2,096,000 1,308,000
------------ ------------ ------------
Net cash provided from (used for) financing
activities................................... $ 65,071,000 $ 1,884,000 $ (9,888,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... $ 118,000 $ (224,000) $ 89,000
Cash and cash equivalents at beginning of
year........................................... 609,000 833,000 744,000
------------ ------------ ------------
Cash and cash equivalents at end of year........ $ 727,000 $ 609,000 $ 833,000
============ ============ ============
</TABLE>

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

24
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<C> <S> <C> <C> <C>
Supplemental Information:
(A) Noncash investing and financing activities:
1. Assets acquired through the assumption of
debt.......................................... $1,559,000 $ 526,000 $ 442,000
========== ========== ==========
2. Treasury shares received in lieu of cash for
stock option exercise......................... $ -- $ -- $ 86,000
========== ========== ==========
3. Treasury shares issued for non cash exercise of
stock options................................. $ -- $ -- $ 773,000
========== ========== ==========
(B) Interest paid during year....................... $6,033,000 $3,225,000 $1,636,000
========== ========== ==========
(C) Income/franchise taxes paid during year, net of
refunds....................................... $1,072,000 $1,313,000 $1,291,000
========== ========== ==========
</TABLE>

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

25
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT

COMMON AND TREASURY STOCK

<TABLE>
<CAPTION>
COMMON TREASURY
($.01 PAR VALUE STOCK,
PER SHARE) AT COST
--------------- -------------
<S> <C> <C>
Balance at December 31, 1995................................ $ 91,000 $ --
Issuance of 226,500 common shares in connection with the
exercises of stock options............................... 3,000 --
Purchase of 1,016,309 common shares for treasury
purposes................................................. -- (26,079,000)
Treasury shares issued (111,238) in connection with the
exercises of stock options............................... -- 2,540,000
-------- -------------
Balance at December 31, 1996................................ $ 94,000 $ (23,539,000)
Issuance of 4,682,405 common shares in connection with a
three-for-two stock split................................ 46,000 --
Purchase of 974,930 common shares for treasury purposes... -- (21,572,000)
Treasury shares issued (188,273) in connection with the
exercises of stock options............................... -- 2,858,000
-------- -------------
Balance at December 31, 1997................................ $140,000 $ (42,253,000)
Purchase of 144,943 common shares for treasury purposes... -- (1,624,000)
Treasury shares issued (60,566) in connection with the
exercises of stock options............................... -- 959,000
-------- -------------
Balance at December 31, 1998................................ $140,000 $ (42,918,000)
======== =============
</TABLE>

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

26
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
ADDITIONAL PAID-IN CAPITAL AND RETAINED EARNINGS

<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PAID-IN EARNINGS
CAPITAL (DEFICIT)
----------- ------------
<S> <C> <C>
Balance at December 31, 1995, as previously reported........ $93,143,000 $ 5,031,000
Restatement for the cumulative effect on prior years
related to product liability reserves, net of tax........ -- (1,040,000)
----------- ------------
Balance at December 31, 1995, as restated................... $93,143,000 $ 3,991,000
Net income for the year................................... -- 16,089,000
Common dividends declared and paid--$.133 per share....... -- (1,808,000)
Issuance of 226,500 common shares in connection with the
exercises of stock options............................... 4,912,000 --
Treasury shares issued in connection with the exercises of
stock options............................................ (597,000) --
Tax benefit associated with stock option exercises........ 128,000 --
----------- ------------
Balance at December 31, 1996................................ $97,586,000 $ 18,272,000
Net income for the year................................... -- 15,646,000
Common dividends declared and paid--$.147 per share....... -- (1,770,000)
Issuance of 4,682,405 common shares in connection with a
three-for-two stock split................................ (46,000) --
Treasury shares issued in connection with the exercises of
stock options............................................ 613,000 --
Tax benefit associated with stock option exercises........ 365,000 --
----------- ------------
Balance at December 31, 1997................................ $98,518,000 $ 32,148,000
Net loss for the year..................................... -- (14,113,000)
Common dividends declared and paid--$.16 per share........ -- (1,904,000)
Treasury shares issued in connection with the exercises of
stock options............................................ (141,000) --
----------- ------------
Balance at December 31, 1998................................ $98,377,000 $ 16,131,000
=========== ============
</TABLE>

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

27
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS--

Subsequent to the end of 1998, the Company determined that the accounting
for certain stock option exercise transactions during 1996 and 1997 was
incorrect. Compensation expense for certain stock option exercises during 1996
and 1997 should have been recognized for cashless stock option exercises and
treasury stock transactions involving non-mature stock option shares acquired by
the Company. Compensation expense which was not recognized in previously issued
financial statements is now reflected in the accompanying restated financial
statements. Periods restated were the only periods where material exercises
occurred of the type that gave rise to the restatement.

The Company also determined that the percentage of completion gross profit
margins on contracts at the Verson division of the Industrial Products Group
required restatement in 1997 and interim periods in 1998 (See Note 13). Certain
significant contract cost estimate revisions should have been recognized at
December 31, 1997. During December 1998 through March 1999, Verson undertook a
comprehensive review of the compilation of costs and revenue recognition
associated with each press in production during 1998. In connection with that
review, Verson's auditors advised corporate management that because information
regarding increased February 1998 cost estimates with respect to the two Ford
jobs was available to Verson Division personnel prior to the release of the
Company's Form 10-K for 1997 (but after the public release of the Company's
earnings for 1997), that under these circumstances the effect of the increased
cost estimates of the Ford jobs should have been reflected in the Company's 1997
financial statements. Additionally, revisions in contract cost estimates
impacting the percentage of completion gross profit margin computation were
computed using the reallocation method, which allocates the revisions in the
contract cost estimates over the remaining life of the contract, rather than the
cumulative catch-up method, which immediately recognizes these changes in
estimates.

The following table reconciles the amounts previously reported to the
amounts currently being reported in the consolidated statement of income (loss)
for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
EARNINGS EARNINGS
INCOME TAX (LOSS) PER (LOSS) PER
BEFORE PROVISION NET COMMON COMMON
TAXES (BENEFIT) INCOME SHARE--BASIC SHARE--DILUTED
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1997
As previously reported..... $31,489,000 $11,518,000 $19,971,000 $1.65 $1.62
Restatement associated with
Verson gross profit
margin.................... 5,279,000) (1,848,000) (3,431,000)(1) (.28) (.28)
Restatement associated with
stock option
compensation.............. (1,375,000) (481,000) (894,000) (.08) (.07)
----------- ----------- ----------- ----- -----
As restated................ $24,835,000 $ 9,189,000 $15,646,000 $1.29 $1.27
=========== =========== =========== ===== =====
1996
As previously reported..... $29,708,000 $10,704,000 $19,004,000 $1.41 $1.39
Restatement associated with
stock option
compensation.............. 4,485,000) (1,570,000) (2,915,000) (.22) (.22)
----------- ----------- ----------- ----- -----
As restated................ $25,223,000 $ 9,134,000 $16,089,000 $1.19 $1.17
=========== =========== =========== ===== =====
</TABLE>

(1) Amount attributable to changing from the reallocation method to the
cumulative catch-up method was ($1,018). For quarterly amounts in 1997 and
1998, see Note 13.

It was further determined that the Company should have accrued, prior to
1996, for product liability claims incurred but not reported. This adjustment
($1,600,000 less a tax benefit of $560,000)

28
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

had no impact on the operating results reported on for the years ended
December 31, 1998, 1997 and 1996 and is reflected as an adjustment to retained
earnings at December 31, 1995. The products to which the claims relate are
products currently manufactured by the Company's Industrial Products Group and
Agricultural Products Group and products related to discontinued operations for
which the Company contractually retained certain product liability claims,
generally claims arising prior to sale of the related business. To reasonably
estimate the liability of such claims, the Company historically used estimates
provided by legal counsel based on existing claims experience in all years, and
in 1998 also obtained actuarial information which was based on the Company's
historical claim experience to estimate incurred but not reported claims for the
period December 31, 1995 to December 31, 1998. The results of such analysis
supported the Company's accrual estimates for periods subsequent to December 31,
1995. The impact of the restatement associated with Verson's gross profit
margins in 1997 was offset in the current year by a like amount resulting in a
restatement of operating results for the first three quarters of 1998--see
Note 13. Operating results for the first quarter of 1998 were also restated for
compensation expense not previously recognized in connection with certain stock
option exercises during this period--see Note 13.

PRINCIPLES OF CONSOLIDATION--

The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany items and
transactions have been eliminated.

NATURE OF OPERATIONS--

Allied Products Corporation manufactures large metal stamping presses
(through its Industrial Products Group) and implements and machinery used in
agriculture, landscaping and ground maintenance businesses (through its
Agricultural Products Group). The Company's Coz division, which was part of the
Industrial Products Group and supplied thermoplastic compounds and additives,
was sold in the fourth quarter of 1997. All manufacturing operations are within
the United States. Implements and machinery manufactured by the Agricultural
Products Group are primarily sold through dealerships in the United States with
some limited export sales to Canada. Metal stamping presses produced by the
Industrial Products Group are sold directly to the end users which include
automobile manufacturers, first and second tier automotive parts producing
companies and the appliance industry. Automobile manufacturers and automotive
parts producing companies account for approximately 85% of the Industrial
Products Group's revenues in 1998. Press sales generally are concentrated in the
United States and Mexico.

USE OF 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 and
disclosure of contingent 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. Due to the
nature of percentage of completion estimates, it is reasonably possible that
cost estimates will be revised in the near term.

REVENUE RECOGNITION--

Sales by the Agricultural Products Group are recorded when products are
shipped to independent dealers in accordance with industry practices. Provisions
for sales incentives and other sales related expenses are made at the time of
the sale.

Revenue and costs related to press manufacturing within the Industrial
Products Group are recognized on the percentage of completion method. Prior to
1997, the Company's basis for measuring progress on contracts was based
primarily on internal labor hours. At the time, labor hours of Company employees
was considered a reasonable indicator of the progress on the contract. In late
1996, because of a significant increase in the Company's backlog, significantly
more subcontracting was starting to be initiated on each project. In the first
quarter of 1997, it was concluded that using

29
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Verson labor hours as a basis for measuring progress was not consistent with how
business was being done. The Company concluded that it was more appropriate to
use a production milestone approach by individual press in the first quarter of
1997. This approach to measuring progress focused on engineering, manufacturing
and final check-out as the key measures on individual presses manufactured under
one contract. At the beginning of each job, cost and revenue estimates were made
for both engineering and manufacturing work. Estimates were also made on the
amount of time the engineering and manufacturing work would take to complete.

Under this contract milestone approach, the key progress measures were based
on the estimated timeframe associated with the engineering and production
process of each individual press. The determination of progress was based upon
the months of engineering or production incurred, compared to total engineering
or production scheduled for each individual press.

Verson personnel monitored progress on individual presses on an ongoing
basis. Such monitoring would result in changes based upon changes in the
estimated time to complete engineering and manufacturing work.

In the fourth quarter of 1998, the Company undertook a comprehensive review
of the compilation of costs and revenue recognition associated with each press
and recorded additional changes to cost estimates of approximately $21 million.
The Company determined that, in an environment where there were significant
production delays, sub-contract delays, internal space constraints, cost
overruns and inefficiencies, reassessment of the appropriateness of measuring
progress based on contract milestones was required. Commencing in the fourth
quarter of 1998, the Company discontinued using contact milestones to measure
contract progress and began measuring progress on contracts based on the
percentage that incurred costs to date bear to the total estimated costs after
giving effect to the most recent estimates of total costs. The cumulative impact
of revisions in total cost estimates during the manufacturing process is
reflected in the period in which the changes become known. On press orders where
margin levels cannot be reasonably estimated, the Company does not recognize any
gross profit margin until the particular press in process reaches a point in
production where the gross profit margin can be reasonably estimated. Margins
are then recognized over the remaining period of production. Certain press
orders contain penalties for late delivery. Such penalties are considered part
of the cost of the press when late delivery of the press appears probable.
Losses expected to be incurred on jobs in process are charged to income as soon
as such losses are known. The Company has recorded contract losses of
$12,079,000 (including reserves of $8,813,000 for estimated future losses
expected to be incurred on jobs in process) associated with several jobs in
process having a total sales value of $104,734,000 at December 31, 1998. While
these contracts contain no penalty provision for late delivery, other
uncertainties associated with these contacts make it reasonably possible that
additional losses could occur in the near term -- see Note 10.

ACCOUNTS RECEIVABLE--

Current accounts receivables for the Agricultural Products Group are net of
provisions for sales incentive programs and returns and allowances. Extended
payment terms (up to one year) are offered to dealers in the form of floor plan
financing which is customary within the industry. Such receivables (with the
exception of receivables associated with service parts) are generally not
collected until the dealer sells the related piece of equipment to a retail
customer. The Company maintains a security interest in the equipment related to
such receivables to minimize the risk of loss.

INVENTORIES--

The basis of all of the Company's inventories is determined by using the
lower of FIFO cost or market method.

Included in work in process inventory are accumulated costs ($70,400,000 at
December 31, 1998 and $47,256,000 at December 31, 1997) associated with
contracts under which the Company recognizes revenue on a percentage of
completion basis. These balances include unbilled actual production

30
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

costs incurred plus a measure of estimated profit ($695,000 at December 31, 1998
and $13,883,000 at December 31, 1997) recognized in relation to the sales
recorded, less customer payments ($25,902,000 at December 31, 1998 and
$7,357,000 at December 31, 1997) associated with the work in process inventory.
A significant portion of the work in process inventory will be completed,
shipped and invoiced prior to the end of the following year.

PLANT AND EQUIPMENT--

Expenditures for the maintenance and repair of plant and equipment are
charged to expense as incurred. Expenditures for major replacement or betterment
are capitalized. Interest costs of $979,000 were capitalized in 1998 (none in
1997 or 1996) in relation to the construction of a building addition at the
Verson division of the Industrial Products Group. The cost and related
accumulated depreciation of plant and equipment replaced, retired or otherwise
disposed of is removed from the accounts and any gain or loss is reflected in
earnings.

DEPRECIATION--

Depreciation of the original cost of plant and equipment is charged to
expense over the estimated useful lives of such assets calculated under the
straight-line method. Estimated useful lives are 20 to 40 years for buildings
and improvements and 3 to 12 years for machinery and equipment.

DEFERRED CHARGES (GOODWILL)--

Deferred charges (goodwill) associated with the 1998 acquisition of the
Great Bend Manufacturing Company (approximately $5,019,000) and the 1986
acquisition of Verson (approximately $13,113,000) are being amortized on a
straight line basis over a period of 20 years. The Company assesses at each
balance sheet date whether there has been a permanent impairment in the value of
goodwill. Such assessment includes obsolescence, demand, new technology,
competition and other pertinent economic factors and trends that may have an
impact on the value of remaining useful life of goodwill.

STOCK SPLIT--

On July 24, 1997, the Company announced that the Board of Directors
authorized a three-for-two stock split effected by means of a stock dividend to
shareholders of record on August 15, 1997. A total of 4,682,405 additional
common shares were issued in conjunction with the stock split. The Company
distributed cash in lieu of fractional shares resulting from the stock split.
All applicable share and per share data have been adjusted for the stock split.

EARNINGS (LOSS) PER COMMON SHARE--

During 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128)--Earnings per
Share. Basic earnings (loss) per common share is based on the average number of
common shares outstanding--11,895,000, 12,107,000 and 13,505,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Diluted earnings (loss)
per common share is based on the average number of common shares outstanding, as
noted above, increased by the dilutive effect of outstanding stock
options--246,000 and 213,000 for the years ended December 31, 1997 and 1996,
respectively. For the year ended December 31, 1998, dilutive securities were
excluded from the calculation of diluted loss per share as their effect would
have been antidilutive.

INCOME TAXES--

Income taxes are accounted for under the asset and liability method in
accordance with FASB SFAS 109--Accounting for Income Taxes. See Note 4.

STATEMENT OF CASH FLOWS--

For purposes of the Consolidated Statements of Cash Flows, the Company
considers investments with original maturities of three months or less to be
cash equivalents.

31
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FINANCIAL INSTRUMENTS--

The fair value of cash and cash equivalents approximates the carrying value
of these assets due to the short maturity of these instruments. The fair value
of the Company's debt, current and long-term, is estimated to approximate the
carrying value of these liabilities based upon borrowing rates currently
available to the Company for borrowings with similar terms.

RECENTLY ISSUED ACCOUNTING STANDARDS--

In June 1998, the FASB issued SFAS 133--Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. The Company is in the
process of evaluating the impact of this statement on its financial reporting.

2. ACCRUED EXPENSES:

The Company's accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Salaries and wages.......................................... $ 6,573,000 $ 5,560,000
Warranty.................................................... 5,794,000 4,938,000
Self insurance accruals..................................... 2,905,000 2,858,000
Pensions, including retirees' health........................ 4,644,000 6,439,000
Taxes, other than income taxes.............................. 888,000 1,158,000
Environmental matters....................................... 1,225,000 1,810,000
Other....................................................... 2,229,000 2,382,000
----------- -----------
$24,258,000 $25,145,000
=========== ===========
</TABLE>

3. ACQUISITIONS AND DISPOSITIONS:

ACQUISITIONS--

In April 1998, the Company acquired for cash substantially all of the assets
and assumed certain liabilities of Great Bend Manufacturing Company (Great Bend)
located in Great Bend, Kansas. Great Bend manufactures and sells tractor-mounted
front end loaders which are used principally in agricultural applications. The
Company also acquired for cash in April 1998 substantially all of the assets of
Universal Turf Equipment Corporation (Universal Turf) located in Opp, Alabama.
Universal Turf manufactures and sells turf maintenance implements including reel
mowers, verti-cut mowers, reel grinders and spraying equipment. Both operations
acquired are part of the Agricultural Products Group. Total cash purchase price
for both of these operations was $10,953,000.

In October 1998, the Company's Verson division formed a joint venture with
Theodor Grabener GmbH & Co. KG of Germany and Automatic Feed Company of
Napoleon, Ohio, that will help the two American companies more effectively
penetrate the European market for large stamping presses and related systems.
The new entity, Verson Pressentechnik GmbH, is located in Netphen-Werthenbach,
Germany. This operation, in which Verson holds a 60% stake, is part of the
Industrial Products Group. These acquisitions, taken individually and in the
aggregate, are not material to the Company's consolidated operations.

DISPOSITIONS--

During the fourth quarter of 1997, the Company sold for cash (approximately
$14,700,000) substantially all of the assets of its Coz division. The purchaser
also assumed certain specified liabilities associated with this division. The
sale resulted in a pretax gain of approximately $1,530,000

32
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

and is included in Other (income) expense under the caption "Net gain on sales
of operating and non-operating assets"--see Note 12.

At the end of 1993, the Company sold for cash substantially all of the
assets and liabilities of the White-New Idea Farm Equipment division. In
connection with this sale, the purchaser was required to purchase the real
estate located in Coldwater, Ohio upon the issuance of a covenant not to sue and
related no further action letter by the Ohio Environmental Protection Agency.
The Company completed the necessary environmental remediation during 1997 and,
in 1998, the purchaser acquired the real estate for cash resulting in a gain of
approximately $1,947,000, which is included in Other (income) expense under the
caption "Net gain on sales of operating and non-operating assets"--see Note 12.

RESTRUCTURING COSTS--

Prior to 1994, the Company provided $14,700,000 for the impact of an
operational restructuring plan designed to reduce operating losses by closing,
consolidating or scaling back certain operations. The restructuring of the
Company was substantially completed during 1996 with the remaining reserve being
allocated to accruals associated with certain noncontinuing businesses. Net
charges to the restructuring reserve in 1996 was $748,000.

4. INCOME TAXES:

Provision (benefit) for income taxes in 1998, 1997 and 1996 consists of the
following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Federal--current.................................. $ -- $ 617,000 688,000
Federal--deferred................................. (7,639,000) 7,994,000 8,213,000
State--current.................................... 109,000 578,000 233,000
------------ ---------- ----------
Total provision (benefit)......................... $ (7,530,000) $9,189,000 $9,134,000
============ ========== ==========
</TABLE>

The provision (benefit) for income taxes in 1998, 1997 and 1996 differs from
amounts computed by applying the statutory rate to pretax income as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory
rate............................................. $ (7,575,000) $8,692,000 $8,828,000
Current net operating loss not benefitted......... 5,598,000 -- --
State income tax, net of federal tax benefit...... 71,000 376,000 151,000
Permanent book over tax differences on acquired
assets........................................... 62,000 62,000 104,000
Reversal of deferred tax liability................ (5,639,000) -- --
Other, net........................................ (47,000) 59,000 51,000
------------ ---------- ----------
Total provision (benefit)......................... $ (7,530,000) $9,189,000 $9,134,000
============ ========== ==========
</TABLE>

33
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The significant components of net deferred tax assets were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss and tax credit carryforwards......... $ 52,052,000 $ 52,845,000
Self-insurance accruals................................. 2,507,000 2,424,000
Inventories............................................. 4,635,000 2,421,000
Receivables............................................. 172,000 417,000
Sale/leaseback transaction.............................. 1,557,000 1,557,000
Employee benefits, including pensions................... 4,338,000 4,928,000
Warranty................................................ 2,096,000 1,803,000
Sales allowances........................................ 3,107,000 2,616,000
Environmental matters................................... 447,000 658,000
Other................................................... 366,000 580,000
------------- -------------
Net deferred tax asset before valuation allowance....... $ 71,277,000 $ 70,249,000
Valuation allowance..................................... (52,052,000) (52,845,000)
------------- -------------
Net deferred tax asset.................................. $ 19,225,000 $ 17,404,000
============= =============
</TABLE>

The prospects for future earnings of the Company makes it more likely than
not that the Company will utilize the benefits arising from the net deferred tax
asset noted above. During 1998, the Company recorded a deferred tax benefit of
$5,639,000 as a part of the current year's tax provision. This benefit
represents a reversal of a tax liability accumulated in years prior to 1998. The
net operating loss carryforwards expire between 1999 and 2013, and investment
tax credit carryforwards of $1,217,000 expire between 1999 and 2004.

The Company provided a valuation allowance in both 1998 and 1997 for
deferred tax assets related to net operating loss and tax credit carryforwards
based upon a determination that current negative evidence out weighs positive
evidence with respect to realization being more likely than not in the future
for this component of the net deferred tax asset. The Company projects that
future Federal income tax provisions and payments will be based upon the
Alternative Minimum Tax rate as substantial tax loss carryforwards still exist
for tax reporting purposes.

Tax returns for the years subsequent to 1994 are potentially subject to
audit by the Internal Revenue Service.

34
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. FINANCIAL ARRANGEMENTS:

The Company's debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
Capitalized lease obligations, at interest rates up to 12%
(weighted average of 7.8% and 10.4% at December 31, 1998
and 1997, respectively), due in varying amounts through
2004 (Note 6).............................................. $2,925,000 $938,000
Less current portion........................................ 627,000 268,000
---------- --------
$2,298,000 $670,000
========== ========
</TABLE>

Scheduled maturities of the noncurrent portion of long-term debt at
December 31, 1998 are due as follows:

During 1996, the Company entered into an Amended and Restated Credit
Agreement with two banks. The Amended and Restated Credit Agreement was
subsequently amended during 1997 and 1998. The amended agreement provided for up
to $145,000,000 of borrowings and/or letters of credit at either a floating
prime or fixed LIBOR (with the rate dependent on the ratio of Funded Debt to
Operating Cash Flow) rate. Under the Amended and Restated Credit Agreement, the
Company was required to meet certain periodic financial tests, including minimum
net worth, debt coverage and fixed charge coverage ratio and maximum funded
debt/operating cash flow ratio. Beginning in 1998, the Company was required to
reduce revolving loans under this agreement to $60,000,000 or less for thirty
(30) consecutive days during each fiscal year while the agreement remained in
effect. At the end of the third and fourth quarters of 1998, the Company was not
in compliance with certain provisions under the Amended and Restated Credit
Agreement. Subsequent to the end of each of these quarters, the lenders waived
compliance.

During 1998, the Company entered into an interest rate lock in anticipation
of a private debt placement of up to $75,000,000. The Company anticipated that
by entering into a private placement agreement, favorable fixed interest rates
could be obtained on a long-term basis and that exposure to floating interest
rates under the Amended and Restated Credit Agreement would be reduced. During
the fourth quarter of 1998, the Company suspended efforts to secure financing
through a private placement. Hedging losses of $3,005,000 were incurred in 1998
in the final settlement of the interest rate lock and are included in Other
(income) expense under the caption "Treasury lock settlement"--see Note 12.

During 1998, the Company entered into an interest rate swap agreement for a
notional amount of $50,000,000, expiring May 2001. Under the terms of the swap
agreement, the Company paid the counterparty a fixed rate of interest (5.99%)
and received in return a floating rate based on LIBOR. This interest rate swap
had the effect of turning $50,000,000 of the Company's floating rate debt under
its credit agreement into a fixed rate obligation. At December 31, 1998, the
fixed interest rate paid by the Company under the swap agreement exceeded the
average borrowing rate under the Credit Agreement by .64%. This rate
differential was recorded as interest expense on a monthly basis. The swap fair
market value at December 31, 1998 was a negative $1,100,000. The Company's

35
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

weighted average interest rate, independent of the interest paid on the interest
rate swap, was approximately 7% at December 31, 1998 (7.2% including the
interest paid on the interest rate swap). Subsequent to the end of the second
quarter of 1999, the interest rate swap was terminated at no cost to the
Company.

The weighted average interest rate on borrowings outstanding at
December 31, 1998 and 1997 were 7.2% and 6.9%, respectively.

SUBSEQUENT EVENT--

Effective February 1, 1999, the Company entered into a Second Amended and
Restated Credit Agreement ("Credit Agreement") with the same two banks,
replacing the Amended and Restated Credit Agreement. Effective April 15, 1999,
the Company entered into a First Amendment and Waiver to the Credit Agreement
("First Amendment"). The amended agreement provides for up to $140,000,000
(decreasing at specified dates through January 31, 2000 to $110,000,000) of
borrowings and/or letters of credit at either a floating prime or fixed LIBOR
(LIBOR plus 3.5%) rate. The amount available under this agreement is determined
monthly by a borrowing base formula related to receivable, inventory and
machinery and equipment balances plus an over advance allowance of $40,000,000
initially, increasing to $47,600,000 in June 1999 then decreasing over the next
seven months to $27,800,000 in January 2000. Under this agreement, the Company
must, on or before May 15, 1999, grant a lien upon and security interests in all
of the assets (except real estate) of the Company and its subsidiaries to the
lenders and meet certain periodic financial tests, including minimum debt
coverage, operating cash flow and fixed charge coverage ratio. Upon the grant of
the lien and security interests to the lenders, the ratios to be met by the
Company are lowered. Capital expenditures, stock purchases and dividends
(limited to $2,000,000 in 1999) are also limited on an annual basis throughout
the term of the loan. The agreement, which expires on February 28, 2000, permits
the lenders to accelerate the obligations in the event of a material adverse
event and requires prepayment in certain circumstances. The terms of the
interest rate swap agreement described above as a part of the Amended and
Restated Credit Agreement are applicable to the Credit Agreement and First
Amendment. If the Credit Agreement and First Amendment had been in effect as of
December 31, 1998, the Company had the capacity to borrow up to $18,863,000.

6. LEASES:

CAPITAL LEASES--

The Company leases various types of manufacturing, office and transportation
equipment.

Capital leases included in Machinery and equipment in the accompanying
balance sheets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Capitalized cost................................... $3,622,000 $2,490,000
Less--Accumulated amortization..................... 1,081,000 1,528,000
---------- ----------
$2,541,000 $ 962,000
========== ==========
</TABLE>

See Note 5 for information as to future debt payments relating to the above
leases.

36
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

OPERATING LEASES--

Rent expense for operating leases, which is charged against income, was as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals........................ $1,215,000 $1,989,000 $1,943,000
Contingent rentals..................... 87,000 41,000 79,000
---------- ---------- ----------
$1,302,000 $2,030,000 $2,022,000
========== ========== ==========
</TABLE>

Contingent rentals are composed primarily of truck fleet unit charges for
actual usage. Some leases contain renewal and purchase options. The leases
generally provide that the Company pay taxes, maintenance, insurance and certain
other operating expenses.

At December 31, 1998, future minimum rental payment commitments under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year are as follows:

<TABLE>
<CAPTION>
NET
MINIMUM MINIMUM
ANNUAL SUBLEASE ANNUAL
RENTAL RENTAL RENTAL
PAYMENTS INCOME PAYMENTS
------------ ------------ -----------
<S> <C> <C> <C>
Year ending December 31,
1999............................. $ 1,376,000 $ (728,000) $ 648,000
2000............................. 1,424,000 (794,000) 630,000
2001............................. 594,000 (64,000) 530,000
2002............................. 447,000 (67,000) 380,000
2003............................. 403,000 (68,000) 335,000
Later............................ 123,000 (22,000) 101,000
------------ ------------ -----------
$ 4,367,000 $ (1,743,000) $ 2,624,000
============ ============ ===========
</TABLE>

7. PREFERRED STOCK:

The Company has 2,000,000 shares of authorized preferred stock of which
350,000 shares are designated as Series B Variable Rate Cumulative Preferred
Stock and 150,000 shares are designated as Series C Cumulative Preferred Stock.
All shares of the Series B and Series C Preferred Stock have been redeemed. The
remaining 1,500,000 shares of authorized preferred stock are undesignated and
unissued at December 31, 1998.

8. COMMON STOCK AND OPTIONS:

The Company has an incentive stock plan (the 1977 plan) which authorizes
stock incentives for key employees in the form of stock awards, stock
appreciation rights and stock options. Options under the 1977 plan, which are
granted at fair market value at date of grant, are non-qualified options (not
"incentive stock options" as defined by the Internal Revenue Code). Options
currently outstanding under the 1977 plan become exercisable to the extent of
25% one year from date of grant and 25% in each of the next three years, and
expire 10 years from the date of grant. There were no stock awards issued under
this plan in 1998, 1997 or 1996. No stock appreciation rights have been granted
to date under this plan. There are 22,065 options outstanding under this plan at
December 31, 1998 and are included in the following table. Additional stock
incentives will not be issued under this plan.

In 1990, the Company's Board of Directors approved a new incentive stock
plan, the 1990 Long Term Incentive Stock Plan (the 1990 plan) which authorizes
stock incentives for key employees in the form of stock awards and stock
options. The 1990 plan, as amended, authorizes the issuance of up to 1,500,000
shares of the Company's Common Stock. Options under the 1990 plan, which are
granted at

37
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

fair market value at date of grant, may be granted as either incentive stock
options or non-statutory stock options. Options granted become exercisable to
the extent of 50% one year from date of grant and the remaining 50% two years
from date of grant. Since the inception of the 1990 plan, the Company has issued
options to purchase 1,436,252 shares (net of forfeitures) of the Company's
Common Stock at prices between $1.00 and $19.00 per share. There are 347,025
options outstanding under this plan at December 31, 1998 and are included in the
following table. At December 31, 1998, the Company has the capacity to issue an
additional 63,748 stock incentives under the 1990 plan.

In 1994, shareholders approved a new incentive plan, the 1993 Directors
Incentive Plan (the 1993 plan) which authorizes the issuance of stock options to
members of the Board of Directors who are not employees of the Company. Options
under the 1993 plan, which are granted at fair market value at date of grant,
are granted as non-statutory stock options. Options granted become exercisable
to the extent of 50% one year from date of grant and the remaining 50% two years
from date of grant. Since the inception of the 1993 plan, the Company has issued
options to purchase 114,750 shares of the Company's Common Stock at prices
between $8.34 and $19.01 per share. All options issued are outstanding under
this plan at December 31, 1998 and are included in the table below.

In 1997, shareholders approved a new incentive stock plan, the 1997
Incentive Stock Plan (the 1997 plan) to replace the 1990 plan and the 1993 plan
described above. The 1997 plan permits a committee of the Company's Board of
Directors to grant incentive awards in the form of non-qualified stock options,
incentive stock options, stock awards including restricted stock, stock
appreciation rights and performance units to key employees and non-employee
directors. The 1997 plan authorizes the issuance of up to 750,000 shares of the
Company's Common Stock pursuant to the grant or exercise of stock options, stock
appreciation rights, restricted stock and performance units. Non-qualified stock
options issued under this plan were granted at fair market value at date of
grant. Options granted become exercisable over a period of up to three years
from date of grant with no option exercisable prior to one year from date of
grant. Since the inception of the 1997 plan, the Company has issued options to
purchase 576,100 shares (net of forfeitures) of the Company's Common Stock at
prices between $7.9375 and $24.875. All options issued under this plan (net of
forfeitures) are outstanding at December 31, 1998 and are included in the table
below. At December 31, 1998, the Company has the capacity to issue an additional
173,900 stock incentives under the 1997 plan.

Stock option transactions in 1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 810,360 $13.89 931,758 $12.15 1,148,025 $ 7.71
Granted................... 369,100 8.31 110,000 24.65 413,250 16.18
Exercised................. (111,520) 12.09 (188,273) 11.14 (627,018) 6.69
Expired................... -- -- (375) 16.09 -- --
Forfeited................. (8,000) 16.41 (42,750) 15.87 (2,499) 9.50
--------- ------ --------- ------ ---------- ------
Outstanding at end of
year....................... 1,059,940 $12.11 810,360 $13.89 931,758 $12.15
========= ====== ========= ====== ========== ======
Options exercisable at end
of year.................... 610,340 $13.09 523,529 $10.93 474,509 $ 9.60
Weighted average fair value
of options granted during
the year................... $ 1.89 $ 6.60 $ 3.81
</TABLE>

38
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Risk free interest rate.................................. 4.29% 6.10% 5.80%
Dividend yield........................................... 0.97% 0.70% 0.80%
Expected lives........................................... 4 years 4 years 4 years
Volatility............................................... 22.50% 23.00% 22.00%
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGES OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------- --------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$1.75-3.84 30,525 3.0 years $ 2.62 30,525 $ 2.62
7.9375-12.92 606,850 8.0 years 8.31 252,750 8.83
15.26-24.875 422,565 7.7 years 18.27 327,065 17.37
--------- -------
$1.75-24.875 1,059,940 7.7 years $12.11 610,340 $13.09
========= =======
</TABLE>

At December 31, 1998, the Company has four stock options plans, which are
described above. The Company applied Accounting Principles Board (APB)
Opinion 25 and related interpretations in accounting for these plans.
Compensation costs recognized in relation to certain stock option exercises
discussed in Note 1 amounted to $1,119,000, $1,375,000 and $4,485,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. No compensation
costs have been recognized for the years ended December 31, 1998, 1997 and 1996
in relation to the issuances of options in each of the respective years. Had
compensation costs for the Company's stock option plans been determined based on
the fair value at the grant date for options granted under these plans
consistent with the method of SFAS 123--Accounting for Stock-Based Compensation,
the Company's net income (loss) and earnings (loss) per share would have been
revised to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) As reported $(14,113,000) $15,646,000 $16,089,000
Pro forma (14,978,000) 15,135,000 15,666,000
Basic earnings (loss) per share As reported $ (1.19) $ 1.29 $ 1.19
Pro forma (1.26) 1.25 1.16
Diluted earnings (loss) per share As reported $ (1.19) $ 1.27 $ 1.17
Pro forma (1.26) 1.23 1.14
</TABLE>

On February 15, 1991, the Company declared a dividend distribution of one
right ("Right") to purchase an additional 1.5 shares of the Company's Common
Stock for $50 on each 1.5 shares of Common Stock outstanding. The Rights become
exercisable 10 days after a person or group acquires, or tenders for, 20% or
more of the Company's Common Stock. The Company is entitled to redeem the Rights
at $.01 per Right at any time until 10 days after any person or group has
acquired 20% of the Common Shares. If a person or group acquires 20% or more of
the Company's Common Stock (other than pursuant to an acquisition from the
Company or pursuant to a tender offer deemed fair by the Board of Directors),
then each Right, other than Rights held by the acquiring person or group,
entitles the holder to purchase for $50 that number of shares of the Company's
Common Stock having a

39
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

current market value of $100. If a person or group acquires 20% or more of the
Company's Common Stock and prior to the person or group acquiring 50% of such
outstanding stock, the Company may convert each outstanding Right, other than
the Rights held by the acquiring person or group, into 1.5 new shares of the
Company's Common Stock. If a person or group acquiring more than 20% of the
Company's Common Stock merges with the Company or engages in certain other
transactions with the Company, each Right, other than Rights held by the
acquiring person or group, entitles the holder to purchase shares of common
stock of the acquiring person or group having a current market value of $100 for
$50. The Rights attach to all of the Company's Common Stock outstanding as of
February 15, 1991, or subsequently issued, and have a term of 10 years. The
Rights also expire upon a merger or acquisition of the Company undertaken with
the consent of the Company's Board of Directors.

9. RETIREMENT, PENSION AND POSTRETIREMENT HEALTH PLANS:

In 1998, the Company adopted the revised disclosure requirements of SFAS
132--Employers' Disclosures about Pensions and Other Postretirement Benefits.
SFAS 132 standardized the disclosures of pensions and other postretirement
benefits into a combined format, but did not change the accounting for these
benefits. Prior years' information has been reclassified to conform to the 1998
disclosure format.

The Company sponsors several defined benefit pension plans which cover
certain union and office employees. Benefits under these plans generally are
based on the employee's years of service and compensation during the years
immediately preceding retirement. The Company's general funding policy is to
contribute amounts deductible for Federal income tax purposes.

The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ending
December 31, 1998, and a statement of the financial status as of December 31,
1998 and 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year........ $38,606,000 $33,762,000
Service cost................................... 718,000 758,000
Interest cost.................................. 2,684,000 2,717,000
Amendments..................................... 56,000 --
Actuarial losses............................... 2,227,000 3,797,000
Benefits paid.................................. (3,690,000) (2,428,000)
----------- -----------
Benefit obligation at end of year.............. $40,601,000 $38,606,000
=========== ===========
Change in Plan Assets:
Fair value of plan assets at beginning of
year......................................... $46,162,000 $41,270,000
Actual return on plan assets................... (6,849,000) 7,320,000
Employer contributions......................... 1,145,000 --
Benefits paid.................................. (3,690,000) (2,428,000)
----------- -----------
Fair value of plan assets at end of year....... $36,768,000 $46,162,000
=========== ===========
Funded Status:
Funded status at end of year................... $(3,833,000) $ 7,556,000
Unrecognized transition obligation............. (482,000) (954,000)
Unrecognized prior service cost................ 1,927,000 2,147,000
Adjustment for minimum liability............... -- (289,000)
Unrecognized net actuarial (loss).............. (772,000) (13,196,000)
----------- -----------
Accrued pension cost at end of year............ $(3,160,000) $(4,736,000)
=========== ===========
</TABLE>

40
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The projected benefit obligation and accumulated benefit obligation for
pension plans with accumulated benefit obligations in excess of plan assets were
$1,484,000 and $802,000, respectively, as of December 31, 1998 and $2,200,000
and $1,815,000, respectively, as of December 31, 1997. There were no assets
associated with these related plans.

The expected long-term rate of return used in determining the net periodic
pension cost in all years was 7.5%. The actuarial present value of the benefit
obligation was determined using a discount rate of 6.75% in 1998, 7.5% in 1997
and 7.75% in 1996. The rate of compensation increase used to measure the benefit
obligation in three plans was 5%. All other plans are based on current
compensation levels.

The plans' assets include common stocks, fixed income securities, short-term
investments and cash. Common stock investments include approximately 281,810 and
246,000 shares of the Company's Common Stock at December 31, 1998 and 1997.

The following table provides the amounts recognized in the balance sheet as
of December 31, 1998 and 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accrued benefit liability................................... $ (3,299,000) $ (5,026,000)
Intangible asset............................................ 139,000 290,000
------------ ------------
Accrued pension cost at end of year......................... $ (3,160,000) $ (4,736,000)
============ ============
</TABLE>

Net periodic pension costs as they relate to defined benefit plans were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
----------- --------------------- -----------
<S> <C> <C> <C>
Service cost................................ $ 718,000 $ 758,000 $ 658,000
Interest cost............................... 2,684,000 2,717,000 2,438,000
Expected return on plan assets.............. (2,938,000) (2,678,000) (2,274,000)
Amortization of transition obligation....... (472,000) (473,000) (473,000)
Amortization of prior service costs......... 277,000 328,000 153,000
Amortization of actuarial (gain) loss....... (409,000) (327,000) 123,000
----------- ----------- -----------
Net periodic pension cost (income).......... $ (140,000) $ 325,000 $ 625,000
Curtailment loss............................ -- 210,000 --
----------- ----------- -----------
Net periodic pension cost (income) after
curtailment............................... $ (140,000) $ 535,000 $ 625,000
=========== =========== ===========
</TABLE>

Curtailment loss in 1997 was related to the retirement of certain Corporate
executives.

Certain employees of the Company are also eligible to become participants in
the Save Money and Reduce Taxes (SMART) 401(k) plan. Under terms of the plan,
the trustee is directed by each employee on how to invest the employee's
deposit. Investment alternatives include a money market fund, four mutual funds
and a fixed income fund. As of December 31, 1998 and 1997, assets of the SMART
plan include approximately 434,000 and 511,000 shares, respectively, of the
Company's Common Stock.

Effective October 1, 1998, the Company instituted the Allied Products
Corporation Savings Incentive 401(k) Plan for Bush Hog salaried employees.
Except for supplemental contributions that are payable under the SMART Plan,
terms of the plan are identical to those of the SMART plan. Employees eligible
under the new plan are not eligible for the SMART plan.

41
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Also effective October 1, 1998, the Company instituted a matching provision
for voluntary deposits by employees (up to 6% of their salaries) on the basis of
$1 for every $2 deposited. This matching feature is available to participants in
the SMART plan and the Allied Products Corporation Savings Incentive Plan.
Matching funds are allocated by the employee to the investment alternatives
noted above. The Company's total contribution into these plans amounted to
$205,000 in 1998.

Effective January 1, 1998, the Company instituted a supplemental
contribution feature to the SMART plan described above. This discretionary
noncontributory feature replaces the Target Benefit Plan and a defined
contribution plan--see below. Currently, all employees eligible for the SMART
plan receive an allocation which is based upon a percentage of the earnings of
the employees. This supplemental contribution is allocated by the employee to
the same investment alternatives as the SMART plan. The Company's total
supplemental contribution amounted to $680,000 in 1998.

Effective January 1, 1995, the Company instituted a noncontributory defined
contribution retirement plan called the Target Benefit Plan. All non union
employees not covered by pension plans were covered under the Target Benefit
Plan. Under the terms of the Target Benefit Plan, the Company made an
actuarially determined annual contribution based upon each eligible employee's
years of service and earnings as defined. Employee investment alternatives
include a money market fund, four mutual funds and a fixed income fund.
Provisions for the contribution to this plan in 1997 and 1996 were $664,000 and
$773,000, respectively. Effective January 1, 1998, this plan was terminated. On
this date, all employees previously receiving benefits under this plan now
receive benefits under the SMART plan described above. Benefits earned under the
Target Benefit Plan were transferred to the SMART plan.

The Company also has a defined contribution retirement plan which covers
certain employees. There are no prior service costs associated with this plan.
The Company follows the policy of funding retirement contributions under this
plan as accrued. Contributions to this plan were $222,000 in 1997 and $217,000
in 1996. Benefits under this plan were frozen effective January 1, 1998. On this
date, all employees previously receiving benefits under this plan now receive
benefits under the SMART plan described above.

The Company provides medical benefits for retirees and their spouses at one
operating division and certain other former employees of several discontinued
operations. Accruals for such costs are recognized in the financial statements
over the service lives of these employees. Contributions are required of most
retirees for medical coverage. The current obligation was determined by
application of the terms of the related medical plans, including the effects of
established maximums on covered costs, together with relevant actuarial
assumptions and health-care cost trend rates projected at annual rates ranging
ratably from 7.4% for retirees under age 65 (7% for retirees age 65 and older)
in 1999 to 5.5% over 22 years. The effect of a 1% annual increase (decrease) in
these assumed cost trend rates would increase the accumulated postretirement
benefit obligation by approximately $68,000 and $74,000 for the years ended
December 31, 1998 and 1997, respectively. The annual service and interest costs
would not be materially affected.

42
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table provides a reconciliation of the changes in the plans'
benefit obligations over the two year period ending December 31, 1998 and a
statement of the financial status as of December 31, 1998 and 1997:

Net periodic postretirement benefit costs include the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Service cost................................................ $ 55,000 $ 50,000 $ 50,000
Interest cost............................................... 56,000 56,000 53,000
Amortization of unrecognized net (gains) losses............. (10,000) (11,000) (4,000)
Amortization of prior plan amendments....................... 1,000 1,000 1,000
-------- -------- --------
Net periodic postretirement benefit cost.................... $102,000 $ 96,000 $100,000
======== ======== ========
</TABLE>

Measurement of the postretirement benefit obligation was based on a discount
rate of 6.75% in 1998, 7.5% in 1997 and 7.75% in 1996.

10. ENVIRONMENTAL, LEGAL AND CONTINGENT LIABILITIES:

ENVIRONMENTAL MATTERS--

The Company's manufacturing plants generate both hazardous and nonhazardous
wastes, the treatment, storage, transportation and disposal of which are subject
to federal, state and local laws and regulations. The Company believes that its
manufacturing plants are in substantial compliance with the various federal,
state and local laws and regulations, and does not anticipate any material
expenditures to remain in compliance.

Under the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended (CERCLA), and other statutes, the United States
Environmental Protection Agency (EPA) and the states have the authority to
impose liability on waste generators, site owners and operators, and others
regardless of fault or the legality of the original disposal activity.
Accordingly, the Company has been named as a potentially responsible party
(PRP), or may otherwise face potential liability for environmental remediation
or cleanup, in connection with the sites described below that are in various
stages of investigation or remediation. Under applicable law, the Company, along
with each other PRP, could be held jointly and severally liable for the total
remediation costs of PRP sites.

43
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At one site, the Company is one of seven PRP's because of its apparent
absentee ownership of four parcels of land from 1967 to 1969 which may have held
part or all of one or more settling ponds operated by a tenant business. The
Company has already paid $85,000 as its share of a settlement of an EPA demand
for $415,000 in past response costs, and the EPA has sought payment from the
PRP's of an additional $572,000 in response costs. The Company is not aware of
any other parties' inability to pay. The EPA has ordered the Company and one
other PRP to undertake the design and construction of the remediation project.
All PRP's have agreed to undertake the design and construction of the
remediation project pursuant to a financial participation agreement. The EPA
estimates the present value of the cost to implement its selected cleanup method
to be approximately $1,869,000. The Company has accrued its estimated share of
the remaining cleanup cost which is not considered significant. The Company has
also filed a claim against its insurers.

Pursuant to a consent decree entered into in November 1991 with the U.S.
Department of Justice, the Company closed and remediated a landfill leased by
the Company and formerly used for the disposal of spent foundry sands. During
1995, remedial action required by the consent decree was completed, and the EPA
approved the Remedial Action Report submitted by the Company. The Company's
remaining obligations under the consent decree include periodic inspections,
monitoring and maintenance as needed.

The Company has also been named as a PRP, along with numerous parties, at
various hazardous waste sites undergoing cleanup or investigation for cleanup.
The Company believes that at each of these sites, it has been improperly named
or will be considered to be a "de minimis" party.

The Company is a defendant in an action filed in July 1991 in the United
States District Court, Northern District of New York where a private party, ITT
Commercial Finance Corp., seeks recovery of costs associated with an
environmental cleanup at a site formerly owned by the Company. At this site,
which the Company or one of its subsidiaries owned from 1968 until 1976, the
plaintiff and current owner seeks to recover in excess of $4,000,000, including
attorney fees, from the Company and other defendants. The Company has denied
liability and asserted cross-claims against the co-defendants. The Company has
also filed claims against its insurers.

The Company is in the process of investigating or has determined the need to
perform environmental remediation or clean up at certain manufacturing sites
formerly operated and still owned by the Company. At the sites where the Company
has determined that some remediation or cleanup is required, the Company has
provided for the estimated cost for such remediation or cleanup.

One site, located in Coldwater, Ohio, was sold to the purchaser of the
White-New Idea business. That sale was contingent on the issuance of a covenant
not to sue and related no further action letter by the State of Ohio under the
Ohio Voluntary Action Program. The Company completed all necessary investigation
and remediation, and expended approximately $1,300,000 in this effort. Upon
submission of the final report, a covenant not to sue and no further action
letter was issued by the Ohio Environmental Protection Agency. While this
project was underway, the Company entered into a series of agreements for
financial contribution with both the prior owner and the purchaser of the
facility, and recovered approximately 50% of the $1,300,000 spent.

During 1998, 1997 and 1996, the Company recorded credits of approximately
$151,000, $1,181,000 and $418,000, respectively, toward various environmental
matters discussed above. At December 31, 1998, the Company has accruals on a
non-discounted basis, including those discussed above, of $1,225,000 for the
estimated cost to resolve its potential liability with the above and other, less
significant, matters. Additional liabilities are possible and the ultimate
outcome of these matters may have an effect on the financial position or results
of operations in a future period. However, the Company believes that the above
accruals are adequate for the resolution of known environmental matters and the
outcome of these matters is not expected to have a material adverse effect on
the Company's financial position or its ongoing results of operations.

44
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

OTHER--

In connection with the sale of the business and assets of the Littell
division in 1991, the Company entered into a "License Agreement" pursuant to
which the Company licensed certain technology to the purchaser for which the
purchaser agreed to pay royalties totaling $8,063,000 plus interest, in minimum
quarterly installments of $312,500 commencing in November 1992, with a final
lump sum payment of approximately $7,300,000 due May 22, 1996. The purchaser's
payment obligation was secured by the technology license and was guaranteed by
the purchaser's parent. The Company initially recorded this agreement as a
long-term note receivable. In 1995, however, the Company established a reserve
of $7,699,000 (reduced to $7,165,000 at December 31, 1996) against the
receivable, due to published adverse financial information about the purchaser
and its parent which raised serious concerns about the collectability of the
receivable. During 1997, the Company entered into a settlement agreement with
the purchaser of the business. Under the terms of the agreement, the purchaser
agreed to pay the Company $3,000,000 and all parties agreed to the
dismissal/release of certain actions, claims and security interests. All amounts
due under this agreement were collected in 1998 ($610,000) and 1997
($2,390,000).

In January 1998, an adversary proceeding was filed against the Company in
United States Bankruptcy Court, Southern District of Texas, Houston Division by
Cooper Manufacturing Corp. a debtor in a bankruptcy proceeding. The transactions
and occurrences on which the adversary proceeding is based are the Company's
sale of the assets of a former division and certain financial transactions
related thereto. Causes of action described in the adversary proceeding include
accounting, turnover, fraudulent transfers, "alter ego," economic duress, unjust
enrichment and restitution. One case pending against the Company in the United
States District Court for the Northern District of Alabama, Southern Division,
is a race discrimination class action lawsuit brought by seven plaintiffs who
are current or former employees. The complaint, which was filed in May 1998, but
not served on the Company until October 1998, alleges discrimination with
respect to compensation, promotions, job assignments, discipline and other terms
and conditions of employment and seeks injunctive relief, back pay, compensatory
and punitive damages, attorney fees and costs. The potential class identified by
plaintiffs could include several hundred current or former employees. No class
certification hearing has been held and no order has been entered. The Company
denies the allegations of the plaintiffs and is vigorously defending this claim.
No estimate can currently be made as to the ultimate outcome of these two
claims, however, an unfavorable outcome in either of these two claims could have
a material adverse effect on the Company's financial position and results of
operations.

The Company is involved in a number of other legal proceedings as a
defending party, including product liability claims for which additional
liability is reasonably possible. It is the Company's policy to reserve on a
non-discounted basis for all known and estimated unreported product liability
claims, with necessary reserves ($4,674,000 and $4,200,000 at December 31, 1998
and 1997, respectively) determined in consultation with independent insurance
companies and legal counsel. Payment of these claims may take place over the
next several years. Additional liabilities are possible and the ultimate outcome
of these matters may have an effect on the financial position or results of
operations in a future period. For one product liability claim filed in December
of 1998 in the Circuit Court of Hinds County, Mississippi, First Judicial
District, the amount of damages claimed against all defendants is $100 million,
which exceeds the Company's liability insurance limits of $50 million. Although
there is no guarantee that the ultimate outcome of this claim against the
Company will not exceed such limits, the Company currently believes that the
ultimate outcome of this claim will not exceed its insurance coverage. However,
changes in the estimate in the near term could be material to the financial
position and results of operations if an unfavorable outcome were to occur. For
all other matters,

As described in Note 1, the Verson division may not be able to meet delivery
schedules for certain presses currently on order or in production. Certain
customers of this division have advised the

45
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Company that they will seek to recover damages for late delivery, which could
include downtime, lost sales and lost profit. The Company cannot at this time
determine the amount of any potential claim that may be asserted due to late
delivery, however, such claims could have a material adverse effect on the
financial position and results of operations in the near term, if an unfavorable
outcome were to occur.

At December 31, 1998, the Company was contingently liable for approximately
$1,632,000 primarily relating to outstanding letters of credit.

The Company has entered into agreements with certain executive officers of
the Company which provide that, if within one year following a defined change in
ownership or control of the Company there shall be an involuntary termination of
such executive's employment, or if there shall be defined patterns of activity
during such period by the Company causing such executive to resign, then,
subject to prevailing tax laws and regulations, the executive shall be entitled
to payments of up to approximately three years' compensation.

11. OPERATIONS BY INDUSTRY SEGMENT:

During 1998, the Company adopted SFAS 131--Disclosures about Segments of a
Business Enterprise and Related Information. The determination of business
segments is based upon the nature of the products manufactured and current
management and internal financial reporting. The prior years' segment
information has been restated to reflect its business segments noted below.

The Company's operations are divided into two business segments--the
Agricultural Products Group (which consists of the Bush Hog and Great Bend
divisions) and the Industrial Products Group (which consists of the Verson,
Precision Press Industries and Verson Pressentechnik operations) as well as the
Coz division (net sales and pretax income of $22,887,000 and $1,093,000,
respectively, for the year ended December 31, 1997 and net sales and pretax
income of $33,892,000 and $2,419,000, respectively, for the year ended December
31, 1996) which was sold in the last quarter of 1997. The nature of the products
offered by the Company's operations is described elsewhere in this Annual
Report.

Approximately 3%, 6% and 16% of the Company's net sales in 1998, 1997 and
1996, respectively, were exported principally to Canada (48%, 46% and 15% of
export sales in 1998, 1997 and 1996, respectively) and Mexico (48%, 43% and 84%
of export sales in 1998, 1997 and 1996, respectively).

Approximately 26%, 31% and 39% of the Company's total net sales in 1998,
1997 and 1996, respectively, were derived from sales by the Industrial Products
Group to the three major U.S. automobile manufacturers.

46
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Information relating to operations by industry segment follows (in thousands
of dollars):

<TABLE>
<CAPTION>
AGRICULTURAL INDUSTRIAL
PRODUCTS PRODUCTS CORPORATE CONSOLIDATED
------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
1998
Net sales to unaffiliated customers..... $136,814 $137,020 $ -- $273,834
Income (loss) before taxes (a).......... 18,570(c) (23,129) (17,084)(d) (21,643)
Depreciation and amortization........... 2,780 2,988 328 6,096
Capital expenditures.................... 9,603 30,438 355 40,396
Total assets............................ 102,069 149,911 21,824(b) 273,804
1997
Net sales to unaffiliated customers..... $119,471 $151,091 $ -- $270,562
Income (loss) before taxes (a).......... 19,735(c) 16,584 (11,484)(d) 24,835
Depreciation and amortization........... 2,159 2,254 613 5,026
Capital expenditures.................... 4,902 10,709 249 15,860
Total assets............................ 71,700 101,061 22,303(b) 195,064
1996
Net sales to unaffiliated customers..... $108,355 $166,059 $ -- $274,414
Income (loss) before taxes (a).......... 12,256(c) 29,382 (16,415)(d) 25,223
Depreciation and amortization........... 2,048 2,249 778 5,075
Capital expenditures.................... 1,055 3,898 173 5,126
Total assets............................ 62,256 83,457 26,796(b) 172,509
</TABLE>

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

(a) Segment income (loss) before taxes does not reflect an allocation or charge
for general corporate income or expenses, or interest expense.

(b) Corporate assets consist principally of cash, deferred income taxes, other
assets, properties not used in operations and investment in a unconsolidated
joint venture.

(d) Corporate income (loss) before taxes consists of the following:

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
General corporate income and expense....... $ (6,845) $ (6,853) $ (10,377)
Treasury lock settlement (Note 5).......... (3,005) -- --
Stock option compensation (Note 1)......... (1,119) (1,375) (4,485)
Interest expense........................... (6,201) (3,306) (1,557)
Interest income............................ 86 50 4
--------- --------- ---------
Total...................................... $ (17,084) $ (11,484) $ (16,415)
========= ========= =========
</TABLE>

47
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. SUMMARY OF OTHER (INCOME) EXPENSE:

Other (income) expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Interest income............................... $ (197,000) $ (127,000) $ (112,000)
Goodwill amortization......................... 355,000 177,000 177,000
Loan cost expenses/amortization............... 284,000 -- 333,000
Environmental related expenses (credits)...... (151,000) (1,181,000) (418,000)
Net gain on sales of operating and non-
operating assets............................. (1,936,000) (1,662,000) (106,000)
Provision (credit) for collectability
(recovery) of long-term note receivable
(Note 10).................................... (610,000) (2,390,000) (534,000)
Idle facility income.......................... (183,000) (368,000) (147,000)
Litigation settlements/insurance provisions... -- 2,125,000 1,512,000
Treasury lock settlement...................... 3,005,000 -- --
Other miscellaneous........................... 395,000 315,000 (74,000)
----------- ----------- ----------
$ 962,000 $(3,111,000) $ 631,000
=========== =========== ==========
</TABLE>

13. QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized restated quarterly financial data for 1998 and 1997 are as
follows (in thousands of dollars, except per share data):

<TABLE>
<CAPTION>
QUARTER ENDING
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Net sales............................ $62,831 $88,985 $77,184 $44,834
Gross profit (loss).................. 19,155 19,215 956 (15,661)
Net income (loss).................... 5,330 7,101 (7,148) (19,396)
Net income (loss) per common share--
diluted............................. .44 .59 (.60) (1.64)
1997
Net sales............................ $72,881 $76,902 $63,714 $57,065
Gross profit......................... 18,258 18,337 16,621 7,313
Net income (loss).................... 5,506 5,399 5,287 (546)
Net income (loss) per common share--
diluted............................. .44 .44 .43 (.05)
</TABLE>

48
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Subsequent to the end of 1998 and as discussed in Note 1, the Company
determined that the accounting for certain stock option exercise transactions
during 1997 and 1998 was incorrect. Compensation expense for certain option
exercises during each of these periods should have been recognized. The Company
also determined that gross profit margins at the Verson division were incorrect
in all quarters of 1997 and the first three quarters of 1998. The following
table reconciles the quarterly operating results as previously reported to the
restated amounts presented above:

<TABLE>
<CAPTION>
QUARTER ENDING
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1998
Gross profit (loss):
As previously reported....................... $18,857 $19,077 $ (3,887) (1)
Net change associated with Verson gross
profit margins............................. 298 138 4,843 (1)
------- ------- -------- -------
Restated..................................... $19,155 $19,215 $ 956 (1)
======= ======= ======== =======
Net income (loss):
As previously reported....................... $ 5,865 $ 7,010 $(10,296) (1)
Net change associated with Verson gross
profit margins............................. 298(2) 138(2) 4,843(3) (1)
Net change associated with stock option
compensation............................... (1,119) -- -- (1)
Tax impact of above changes.................. 286 (47) (1695) (1)
------- ------- -------- -------
Restated..................................... $ 5,330 $ 7,101 $ (7,148) (1)
======= ======= ======== =======
1997
Gross profit:
As previously reported....................... $17,655 $19,579 $ 16,199 $12,375
Net change associated with Verson gross
profit margins............................. 603(2) (1,242)(2) 422(2) (5,062)(4)
------- ------- -------- -------
Restated..................................... $18,258 $18,337 $ 16,621 $ 7,313
======= ======= ======== =======
Net income (loss):
As previously reported....................... $ 5,171 $ 6,206 $ 5,013 $ 3,581
Net change associated with Verson gross
profit margins............................. 603(2) (1,242)(2) 422(2) (5,062)(4)
Net change associated with stock option
compensation............................... (87) (1,288)
Tax impact of above changes.................. (181) 435 (148) 2,223
------- ------- -------- -------
Restated..................................... $ 5,506 $ 5,399 $ 5,287 $ (546)
======= ======= ======== =======
</TABLE>

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

(1) No restatements occurred during this quarter.

(2) Entire amount was attributable to changing from the reallocation method to
the cumulative catch-up method.

(3) Amount attributable to changing from the reallocation method to the
cumulative catch-up method was $582. The balance was attributable to a
subsequent event that affected 1997 (See Note 1).

(4) Amount attributable to changing from the reallocation method to the
cumulative catch-up method was ($801). The balance was attributable to a
subsequent event that affected 1997 (See Note 1).

49
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Operating results in the fourth quarter of 1998 included the effects of
charges to cost of sales for increased estimated costs on contracts of
$9,324,000, reduced estimated gross profit margins on contracts to reflect the
lower end of the range of margin of $3,516,000 and an additional contract loss
estimate of $8,538,000. It also included a $3,005,000 charge to other (income)
expense related to hedging losses associated with an interest rate lock see --
Note 5.

14. SUBSEQUENT EVENTS (UNAUDITED)

During this first quarter of 1999, the Company entered into a Second Amended
and Restated Credit Agreement replacing the former Amended and Restated Credit
Agreement. This new agreement was amended in April 1999. Effective July 31,
1999, the Company entered into a Second Amendment and Waiver to the Second
Amended and Restated Credit Agreement ("Second Amendment"). Under the terms of
the Second Amendment, the maximum indebtedness under the agreement may remain at
$135,000,000 from July 31 through November 29, 1999 rather than decrease on
specific dates to $110,000,000 as originally scheduled. Interest rates related
to amounts outstanding under this amendment have also been increased. The final
maturity date of the agreement was accelerated from February 28, 2000 to
November 30, 1999. The Second Amendment refers to the below noted letter of
intent between CC Industries, Inc. and the Company. The Second Amendment
specifies that termination of or a materially adverse change in the letter of
intent or in any succeeding agreement will constitute an event of default under
the credit agreement. The Second Amendment also provides for a waiver of
noncompliance by the Company as of June 30, 1999 with the minimum consolidated
operating cash flow provision of the agreement. See Note 5 of Notes to
Consolidated Financial Statements for more detailed explanation of financial
arrangements. The amendment dated July 31, 1999 was subsequently modified on
October 15, 1999, and in return for a waiver of non-compliance with certain
covenants, the banks required that events of default under the credit agreement
be expanded to include (i) termination or material amendment of the letter of
intent or any agreement succeeding the letter of intent, or (ii) any other event
which materially adversely affects the Company's receipt on or before
December 31, 1999 of the cash proceeds contemplated under the letter of intent.
In addition, the final maturity date of the indebtedness under the credit
agreement was accelerated from February 28, 2000 to December 31, 1999. Effective
December 15, 1999, the Company entered into a Fourth Amendment and Waiver to the
Second Amended and Restated Credit Agreement to extend the maturity date to
February 15, 2000 (subsequently extended to the earlier of the termination of
the Purchase Agreement or March 7, 2000). Therefore, our failure to complete the
Joint Venture by March 7, 2000, will be an event of default under our bank
agreement, and could also lead, among other things, to cancellation of one or
more of the major press orders of our Industrial Products Group.

On July 29, 1999, the Company announced that its Board of Directors approved
the redemption of its current Common Share Purchase Rights and adopted a new
Stockholder Rights Plan. The new plan is designed to continue the assurance of
fair and equal treatment of all stockholders in the event of any proposed
takeover. The plan involves the distribution of the new rights and a redemption

50
<PAGE>
ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
payment for current rights to all common stockholders of record as of July 30,
1999. Those stockholders will receive one purchase right for a new series of
junior preferred stock for each outstanding share of the Company's common stock
and a redemption payment on August 10, 1999 of $0.01 per share for the Common
Share Purchase Rights declared under a 10-year rights agreement adopted in
January 1990. Each Preferred Share Purchase Right entitles the holder to
purchase from the Company under certain circumstances one one-thousandth of a
share of the new junior preferred stock. The rights may be exercised if a person
or group announces its intention to acquire or acquires 15% or more of Allied
Products' common stock. However, an exception is made for certain significant
stockholders of the Company who are holding the Company's common stock for
investment purposes. They may acquire up to 20% of Allied Product's common stock
without triggering the Rights Plan. Under certain circumstances, the holders of
the rights will be entitled to purchase at below market value either shares of
common stock of Allied Products Corporation or the common stock of the acquiring
company. Unless redeemed or exchanged earlier, the Preferred Share Purchase
Rights will expire in 10 years.

In response to General Motors' concerns that the Company's cash flow
problems would further delay or preclude the Company from completing four
presses that were in various stages of production, the Company recently entered
into two amendments to purchase orders with General Motors. The aggregate sales
price of the presses covered by these purchase orders exceeds $75 million. Under
the terms of the first amendment, the Company and General Motors agreed to
revised shipping, payment and testing schedules that allow the Company to ship
components of, and receive payments for, the first two of the four presses
earlier than it would have been able to under the terms of the original purchase
orders. Payment terms for the third and fourth presses were largely unchanged
from the original order (i.e., 90% upon completion, testing and shipment),
however, delivery dates (and related payments) have been extended so that the
last press will not be shipped until the first quarter of 2001 and final payment
will not be received until the first quarter of 2002. Upon fulfillment of
certain conditions set forth in the first amendment, General Motors will waive
and release the Company from all claims arising from or attributable to the
Company's alleged late delivery defaults on all presses and will accept delivery
of the last two (2) presses covered by this order. Among the conditions set
forth in the first amendment was the requirement that the Company complete the
sale of the Agricultural Products Group by the earlier of the expiration of the
Company's financing arrangements with its secured lenders or December 31, 1999.
Final shareholder approval and closing of the sale of the Agricultural Products
Group is not expected to occur until the first quarter of 2000. The Company has
recently amended the Second Amended and Restated Credit Agreement to extend the
maturity date of this agreement to the earlier of the termination of the
Purchase Agreement or March 7, 2000. The Company and General Motors have
recently entered into a second amendment to their purchase order to reflect the
change in the projected closing date of the sale of the Agricultural Products
Group. The amendment requires the Company to complete the sale and establish a
commitment for sufficient working capital by February 29, 2000. The Company has
requested that General Motors extend that date to at least March 7, 2000.

As discussed in Note 10, Cooper Manufacturing Corp., a debtor in a
bankruptcy proceeding had filed an adversary proceeding against the Company. On
November 4, 1999, the Company entered into an agreement to settle the adversary
proceeding. Under the terms of the agreement, the Company paid $615,000, plus
interest accruing at the rate of 8% per annum on any amount unpaid after
November 12, 1999. Final payment of the entire settlement amount, plus accrued
interest, has been made.

51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

See the Company's Proxy Statement incorporated by reference as part of this
Part III, under the caption "Proposal 1: Election of Directors" for information
with respect to the directors. In addition, see the information under the
caption "Executive Officers of the Company" as part of Part I, Item 1 of this
Report which is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

See the Company's Proxy Statement incorporated by reference as part of Part
III, Item 10 of this report, under the captions "Management Compensation" for
information with respect to executive compensation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) Security Ownership of Certain Beneficial Owners.

See the Company's Proxy Statement incorporated by reference as part of Part
III, Item 10 of this report, under the captions "Outstanding Stock and Voting
Rights", "Beneficial Owners" and "Principal Stockholders and Management
Ownership" for information with respect to the ownership of certain beneficial
owners of Common Stock of the Company.

(b) Security Ownership of Management.

See the Company's Proxy Statement incorporated by reference as part of Part
III, Item 10 of this report, under the caption "Principal Stockholders and
Management Ownership" for information with respect to the beneficial ownership
by management of Common Stock of the Company.

There is no arrangement known to the Company, the operation of which may at
a subsequent date result in a change in control of the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See the Company's Proxy Statement incorporated by reference as part of Part
III, Item 10 of this report, under the captions "Proposal 1: Election of
Directors" and "Management Compensation" for information with respect to certain
relationships and related transactions with management.

PART IV

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

(a) 1. FINANCIAL STATEMENTS
Included in Part II of this report:

Report of Independent Accountants

Consolidated statements of income (loss) for the years ended
December 31, 1998, 1997 and 1996

Consolidated balance sheets as of December 31, 1998 and 1997

Consolidated statements of cash flows for the years ended December 31,
1998, 1997 and 1996

Consolidated statements of shareholders' investment for the years ended
December 31, 1998, 1997 and 1996

Notes to consolidated financial statements

52
<PAGE>
(a) 2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:

Schedule II-Valuation and qualifying accounts for the years ended
December 31, 1998, 1997 and 1996

(a) 3. EXHIBITS
The following exhibits are incorporated by reference as noted below:

<TABLE>
<S> <C>
3(a) The Registrant's Restated Certificate of Incorporation, as
amended, is incorporated by reference to Exhibit 3 of the
Company's 1988 Annual Report on Form 10-K (File
No. 1-5530).

3(b) The Registrant's Amendments to Restated Certificate of
Incorporation is incorporated by reference to Exhibit 3 of
the Company's 1990 Annual Report on Form 10-K (File
No. 1-5530).

3(c) The Registrant's By-Laws of the Company, as amended, are
incorporated by reference to Exhibit 3 of the Company's
1989 Annual Report on Form 10-K (File No. 1-5530).

10(a) The Registrant's 1977 Incentive Stock Plan is incorporated
by reference to Exhibit 10(a) of the Company's 1980 Annual
Report on Form 10-K (File No. 1-5530).

10(b) The Registrant's SMART Plan is incorporated by reference to
Exhibit 10(d) of the Company's 1984 Annual Report on
Form 10-K (File No. 1-5530).

10(c) The Registrant's 1990 Long-Term Incentive Stock Plan is
incorporated by reference to Exhibit 10 of the Company's
1991 Annual Report on Form 10-K (File No. 1-5530).

10(d) The Registrant's Agreement for the sale of the assets of the
White-New Idea Farm Equipment Division of Allied Products
Corporation is incorporated by reference to
Exhibit (c)(2)(a)(i) of the Company's report on Form 8-K
dated January 14, 1994 (File No. 1-5530).

10(e) The Registrant's Allied Products Corporation Executive
Retirement Plan dated April 4, 1994 is incorporated by
reference to Exhibit 10(a) of the Company's 1994 Annual
Report on Form 10-K (File No. 1-5530).

10(f) The Registrant's Executive Officer's Agreement in Event of
Change in Control or Ownership of Allied Products
Corporation dated April 1, 1994 is incorporated by
reference to Exhibit 10(b) of the Company's 1994 Annual
Report on Form 10-K (File No. 1-5530).

10(g) The Registrant's Allied Products Corporation Retirement Plan
dated as of December 31, 1993 is incorporated by reference
to Exhibit 10(d) of the Company's 1994 Annual Report on
Form 10-K (File No. 1-5530).

10(h) The Registrant's Bush Hog Segment of the Allied Products
Corporation Combined Retirement Plan effective
December 31, 1993 is incorporated by reference to
Exhibit 10(e) of the Company's 1994 Annual Report on
Form 10-K (File No. 1-5530).

10(i) The Registrant's Verson Segment of the Allied Products
Corporation Combined Retirement Plan effective
December 31, 1993 is incorporated by reference to
Exhibit 10(f) of the Company's 1994 Annual Report on
Form 10-K (File No. 1-5530).

10(j) The Registrant's Littell Segment of the Allied Products
Corporation Combined Retirement Plan effective
December 31, 1993 is incorporated by reference to
Exhibit 10(g) of the Company's 1994 Annual Report on
Form 10-K (File No. 1-5530).
</TABLE>

53
<PAGE>
<TABLE>
<S> <C>
10(k) The Registrant's Amended and Restated Credit Agreement dated
as of August 23, 1996 among Allied Products Corporation,
the banks named herein and Bank of America Illinois,
individually and as Agent is incorporated by reference to
Exhibit 10A of the Company's 1996 Annual Report on
Form 10-K (File No. 1-5530).

10(l) The Registrant's Consent to Stock Repurchases dated as of
November 27, 1996 is incorporated by reference to
Exhibit 10B of the Company's 1996 Annual Report on
Form 10-K (File No. 1-5530).

10(m) The Registrant's 1997 Incentive Stock Plan is incorporated
by reference to Exhibit 10 of the Company's June 30, 1997
Quarterly Report on Form 10-Q (File No. 1-5530).

10(n) The Registrant's Amendment No. 2 to the Registrant's Amended
and Restated Credit Agreement dated as of August 23, 1996
among Allied Products Corporation, the banks named herein
and Bank of America National Trust and Savings Association
(as successor by merger to Bank of America Illinois)
individually and as Agent is incorporated by reference to
Exhibit 10A of the Company's 1997 Annual Report on
Form 10-K (File No. 1-5530).

10(o) The Registrant's Amendment No. 3 to the Registrant's Amended
and Restated Credit Agreement dated as of August 23, 1996
among Allied Products Corporation, the banks named herein
and Bank of America National Trust and Savings Association
(as successor by merger to Bank of America Illinois)
individually and as Agent is incorporated by reference to
Exhibit 10 of the Company's quarterly report on Form 10-Q
dated August 13, 1998 (File No. 1-5530).

10(p) The Registrant's Amendment No. 4 to the Registrant's Amended
and Restated Credit Agreement dated as of August 23, 1996
among Allied Products Corporation, the banks named herein
and Bank of America National Trust and Savings Association
(as successor by merger to Bank of America Illinois)
individually and as Agent is incorporated by reference to
Exhibit 10 of the Company's quarterly report on Form 10-Q
dated November 13, 1998 (File No. 1-5530).
</TABLE>

The following exhibits are attached only to the copies of this report filed
with the Securities and Exchange Commission:

<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<C> <S>
3 By-Laws of Allied Products Corporation.*
10A Material Contract-Second Amended and Restated Credit
Agreement.*
10B First Amendment and Waiver to Credit Agreement.*
21 Subsidiaries of the Registrant.*
23 Consent of Independent Accountants.
24 Power of Attorney.*
27 Financial Data Schedules.*
</TABLE>

* Previously filed.

Other financial statements, schedules and exhibits not included above have
been omitted as inapplicable or because the required information is included in
the consolidated financial statements or notes thereto.

54
<PAGE>
(b) REPORTS ON FORM 8-K

On October 6, 1998, the Company filed a report under Item 5--Other Events.
This report was filed in connection with a press release dated September 24,
1998, reporting that the Registrant would record a pretax charge of
approximately $16 million in the third quarter of 1998. No financial statements
were filed with this report.

ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts--
Current receivables:
Balance at beginning of year............. $ 531,000 $ 629,000 $ 948,000
Add (deduct)--
Provision charged to income............ 129,000 114,000 214,000
Allowance applicable to receivables
acquired............................. 47,000 -- --
Receivables charged off as bad debts,
net of recoveries.................... (188,000) (212,000) (533,000)
----------- ---------- -----------
Balance at end of year................... $ 519,000 $ 531,000 $ 629,000
=========== ========== ===========
Long-term receivables:
Balance at beginning of year............. $ 610,000 $7,165,000 $ 7,699,000
Add (deduct)--
Provision charged to income............ -- -- --
Receivables charged off as bad debts,
net of recoveries.................... (610,000) (6,555,000) (534,000)
----------- ---------- -----------
Balance at end of year................... $ -- $ 610,000 $ 7,165,000
=========== ========== ===========
</TABLE>

55
<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 Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
ALLIED PRODUCTS CORPORATION
(Registrant)

February 29, 2000 By: /s/ RICHARD A. DREXLER
-----------------------------------------
RICHARD A. DREXLER, CHAIRMAN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Allied Products Corporation
registration statement on Form S-8 (File No. 33-60058) of our report, dated
April 15, 1999, on our audits of the consolidated financial statements and
financial statement schedule of Allied Products Corporation and consolidated
subsidiaries as of December 31, 1998 and 1997 and for the three years in the
period December 31, 1998, which report is included in the 1998 Annual Report of
Form 10-K/A-2.

PricewaterhouseCoopers LLP

Chicago, Illinois
February 29, 2000