##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)
/X/
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 26, 2004OR / /
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM  TO
 COMMISSION FILE NUMBER 0-13198 MORTON INDUSTRIAL GROUP, INC.  Georgia
(State or other jurisdiction of
Incorporation or organization)
    
    38-0811650
(IRS Employer
Identification No.)
 1021 W. Birchwood, Morton, Illinois 61550
(Address of principal executive offices) (309) 266-7176
(Registrants telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes o No x The aggregate market value of the common stock held by non-affiliates of
the registrant (based upon the last reported sale price on the OTC Market) on the last business day of the registrants most recently completed
second fiscal quarter was approximately $6,700,000. Outstanding as ofJuly 30, 2004Class A Common Stock, $.01 par value
    
    
    4,560,547Class B Common Stock, $.01 par value
    
    
    100,000




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 26, 2004 and June 28, 2003
(Dollars in thousands, except per share data)
(Unaudited) Three Months Ended
    
    Six Months EndedJune 26, 2004
    
    June 28, 2003
    
    June 26, 2004
    
    June 28, 2003Net sales
    
    $
    50,706
    
    
    
    34,398
    
    
    
    90,626
    
    
    
    66,778Cost of sales
    
    
    44,561
    
    
    
    29,388
    
    
    
    78,972
    
    
    
    57,177Gross profit
    
    
    6,145
    
    
    
    5,010
    
    
    
    11,654
    
    
    
    9,601Operating expenses:Selling expenses
    
    
    785
    
    
    
    712
    
    
    
    1,587
    
    
    
    1,413Administrative expenses
    
    
    2,729
    
    
    
    2,600
    
    
    
    5,367
    
    
    
    5,207Total operating expenses
    
    
    3,514
    
    
    
    3,312
    
    
    
    6,954
    
    
    
    6,620Operating income
    
    
    2,631
    
    
    
    1,698
    
    
    
    4,700
    
    
    
    2,981Other income (expense):Interest expense
    
    
    (1,159
    )
    
    
    (936
    )
    
    
    (1,730
    )
    
    
    (1,869
    )Interest on redeemable preferred stock
    
    
    (36
    )
    
    
    
    
    
    
    (249
    )
    
    
    Gain on redemption of preferred stock
    
    
    850
    
    
    
    
    
    
    
    1,700
    
    
    
    Other
    
    
    42
    
    
    
    171
    
    
    
    83
    
    
    
    337Total other income (expense)
    
    
    (303
    )
    
    
    (765
    )
    
    
    (196
    )
    
    
    (1,532
    )Earnings before income taxes and
discontinued operations
    
    
    2,328
    
    
    
    933
    
    
    
    4,504
    
    
    
    1,449Income taxes
    
    
    100
    
    
    
    360
    
    
    
    150
    
    
    
    560Earnings before discontinued operations
    
    
    2,228
    
    
    
    573
    
    
    
    4,354
    
    
    
    889Discontinued operations:Net loss from operations of discontinued
plastics operations
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    140Income taxes
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    55
    
    
    
    (50
    )
    
    
    
    
    
    
    85Net earnings
    
    
    2,228
    
    
    
    523
    
    
    
    4,354
    
    
    
    974Accretion of discount on preferred shares
    
    
    
    
    
    
    (383
    )
    
    
    
    
    
    
    (715
    )Net earnings available to common stockholders
    
    $
    2,228
    
    
    
    140
    
    
    
    4,354
    
    
    
    259Earnings per common share  basic:Earnings from continuing operations
    
    $
    0.48
    
    
    
    0.04
    
    
    
    0.94
    
    
    
    0.04Earnings (loss) from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.02Net earnings available to common stockholders
    
    $
    0.48
    
    
    
    0.03
    
    
    
    0.94
    
    
    
    0.06Earnings per common share  diluted:Earnings from continuing operations
    
    $
    0.38
    
    
    
    0.03
    
    
    
    0.76
    
    
    
    0.03Earnings (loss) from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.02Net earnings available to common stockholders
    
    $
    0.38
    
    
    
    0.02
    
    
    
    0.76
    
    
    
    0.05
 See accompanying notes to condensed consolidated financial statements. 2




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TABLE OF CONTENTS  ITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. CHANGES IN SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCertificationCertificationCertificationCertificationFirst Amendment to the Second Amended and Restated Credit AgreementAmended and Restated Note and WarrantPurchase Agreement    Table of Contents  MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
June 26, 2004 and December 31, 2003
(Dollars in thousands) Assets
    
    June 26, 2004
    
    December 31, 2003(Unaudited)Current assets:Trade accounts receivable, less allowance for doubtful accounts
of $175 in 2004 and $202 in 2003
    
    $
    16,472
    
    
    
    7,253Unbilled receivables
    
    
    2,196
    
    
    
    Notes receivable
    
    
    
    
    
    
    100Inventories
    
    
    17,275
    
    
    
    13,863Prepaid expenses and other current assets
    
    
    2,532
    
    
    
    1,087Deferred income taxes
    
    
    1,600
    
    
    
    1,600Total current assets
    
    
    40,075
    
    
    
    23,903Property, plant, and equipment, net
    
    
    22,831
    
    
    
    22,432Note receivable
    
    
    1,265
    
    
    
    1,183Intangible assets, at cost, less accumulated amortization
    
    
    2,355
    
    
    
    1,100Other assets
    
    
    117
    
    
    
    204$
    66,643
    
    
    
    48,822Liabilities and Stockholders Equity (Deficit)Current liabilities:Outstanding checks in excess of bank balance
    
    $
    1,246
    
    
    
    943Current installments of long-term debt
    
    
    3,284
    
    
    
    6,210Accounts payable
    
    
    21,859
    
    
    
    17,343Accrued expenses
    
    
    5,701
    
    
    
    5,450Income taxes payable
    
    
    23
    
    
    
    275Redeemable preferred stock
    
    
    500
    
    
    
    500Total current liabilities
    
    
    32,613
    
    
    
    30,721Long-term debt, excluding current installments
    
    
    44,096
    
    
    
    32,331Other liabilities
    
    
    118
    
    
    
    118Redeemable preferred stock
    
    
    7,500
    
    
    
    9,250Warrants payable
    
    
    1,560
    
    
    
    Total liabilities
    
    
    85,887
    
    
    
    72,420Stockholders equity (deficit):Class A common stock
    
    
    46
    
    
    
    46Class B common stock
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    20,895
    
    
    
    20,895Accumulated deficit
    
    
    (40,186
    )
    
    
    (44,540
    )Total stockholders equity (deficit)
    
    
    (19,244
    )
    
    
    (23,598
    )$
    66,643
    
    
    
    48,822
 See accompanying notes to condensed consolidated financial statements. 3




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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 26, 2004 and June 28, 2003
(Dollars in thousands)
(Unaudited) Six Months EndedJune 26, 2004
    
    June 28, 2003Net cash
provided by (used in) operating activities
    
    $
    (5,567
    )
    
    
    1,932Cash flows from investing activities:Proceeds from sale of business
    
    
    
    
    
    
    4,800Capital expenditures
    
    
    (3,008
    )
    
    
    (1,929
    )Net cash provided by (used in) investing activities
    
    
    (3,008
    )
    
    
    2,871Cash flows from financing activities:Increase in checks issued in excess of bank balance
    
    
    303
    
    
    
    1,339Net borrowings (repayments) on revolving debt
    
    
    8,100
    
    
    
    (4,200
    )Principal payments on long-term debt and capital leases
    
    
    (2,265
    )
    
    
    (1,642
    )Retirement of revolving debt in connection with refinancing
    
    
    (14,650
    )
    
    
    Retirement of term debt in connection with refinancing
    
    
    (22,153
    )
    
    
    Proceeds from issuance of revolving debt
    
    
    7,200
    
    
    
    Proceeds from issuance of long-term debt
    
    
    34,000
    
    
    
    Redemption of preferred stock
    
    
    (300
    )
    
    
    Proceeds from notes receivable
    
    
    100
    
    
    
    Debt issuance costs
    
    
    (1,760
    )
    
    
    (300
    )Net cash provided by (used in) financing activities
    
    
    8,575
    
    
    
    (4,803
    )Net change in cash
    
    
    
    
    
    
    Cash at beginning of period
    
    
    
    
    
    
    Cash at end of period
    
    $
    
    
    
    
    Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    793
    
    
    
    1,373Income taxes
    
    $
    314
    
    
    
    
 See accompanying notes to condensed consolidated financial statements. 4




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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders Equity (Deficit)
For the Six Months Ended June 26, 2004
(Dollars in thousands)
(Unaudited) Class A
    
    Class Bcommon stock
    
    common stock
    
    AdditionalShares
    
    
    
    
    
    Shares
    
    
    
    
    
    paid-in
    
    Accumulatedissued
    
    Amount
    
    issued
    
    Amount
    
    capital
    
    (deficit)
    
    TotalBalance, December 31, 2003
    
    
    4,560,547
    
    
    $
    46
    
    
    
    100,000
    
    
    $
    1
    
    
    $
    20,895
    
    
    $
    (44,540
    )
    
    $
    (23,598
    )Net earnings available to common stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,354
    
    
    
    4,354Balance, June 26, 2004
    
    
    4,560,547
    
    
    $
    46
    
    
    
    100,000
    
    
    $
    1
    
    
    $
    20,895
    
    
    $
    (40,186
    )
    
    $
    (19,244
    )
 See accompanying notes to condensed consolidated financial statements. 5




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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 26, 2004 and June 28, 2003
(Unaudited) (1) Nature of Business Through our operating subsidiaries, we are a contract manufacturer and
supplier of high-quality fabricated sheet metal components and subassemblies
for construction, industrial and agricultural original equipment manufacturers
located primarily in the Midwestern and Southeastern United States. (2) Interim Financial Data The Condensed Consolidated Financial Statements at June 26, 2004, and for
the three and six months ended June 26, 2004 and June 28, 2003, are unaudited
and reflect all adjustments, consisting of normal recurring accruals and other
adjustments which, in the opinion of our management, are necessary for a fair
presentation of the financial position, operating results, and cash flows for
the interim periods indicated. Our fiscal quarters end on a Saturday (nearest
to a quarter end) except for the fourth quarter which ends on December 31. For
both the quarters ended June 26, 2004 and June 28, 2003 there were 64 shipping
days. For the six months ended June 26, 2004, there were 124 shipping days, and
for the six months ended June 28, 2003, there were 126 shipping days. Results
of operations for interim periods are not necessarily indicative of the results
of operations for the full fiscal year. You should read the condensed
consolidated financial statements in connection with the consolidated financial
statements and notes thereto, together with managements discussion and
analysis of financial condition and results of operations of Morton Industrial
Group, Inc. contained in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003, as filed on March 30, 2004. (3) Discontinued Operations The results from discontinued operations for the three and six months
ended June 28, 2003 reflect the results of Mid-Central Plastics, Inc., which we
sold on June 20, 2003. Resulting from that sale is a note receivable of $1,100,000 due June 20,
2006 which bears interest at 15% per annum. Interest for the period of June 20,
2003 through June 20, 2004 was 15% payment-in-kind, with interest payable
monthly in cash beginning in July, 2004. The note receivable, due from the
buyer, is subordinate to required payments due by the buyer to its senior
secured lender. Payments received by the Company are assigned to Harris Trust
and Savings Bank, As Agent, the Companys senior secured lender. (4) Inventories The Companys inventories, in thousands of dollars, at June 26, 2004, and
December 31, 2003, are summarized as follows: June 26,
    
    December 31,2004
    
    2003Raw materials, purchased parts and
manufactured components
    
    $
    7,099
    
    
    $
    4,915Work-in-process
    
    
    4,874
    
    
    
    3,521Finished goods
    
    
    5,302
    
    
    
    5,427$
    17,275
    
    
    $
    13,863
 6




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(5) Earnings Per Share The following reflects the reconciliation of the components of the basic
and diluted earnings per common share computations: Quarter Ended June 26, 2004
    
    
    Quarter Ended June 28, 2003Earnings
    
    Shares
    
    Per Share
    
    Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic earnings
available to common
stockholders
    
    $
    2,228,000
    
    
    
    4,660,547
    
    
    $
    0.48
    
    
    $
    140,000
    
    
    
    4,660,547
    
    
    $
    0.03Effect of dilutive
securities, stock
options and
warrants
    
    
    
    
    
    
    1,300,571
    
    
    
    (0.10
    )
    
    
    
    
    
    
    230,739
    
    
    
    (0.01
    )Diluted earnings
available to common
stockholders
    
    $
    2,228,000
    
    
    
    5,961,118
    
    
    $
    0.38
    
    
    $
    140,000
    
    
    
    4,891,286
    
    
    $
    0.02
 Six Months Ended June 26, 2004
    
    
    Six Months Ended June 28, 2003Earnings
    
    Shares
    
    Per Share
    
    Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic earnings
available to common
stockholders
    
    $
    4,354,000
    
    
    
    4,660,547
    
    
    $
    0.94
    
    
    $
    259,000
    
    
    
    4,660,547
    
    
    $
    0.06Effect of dilutive
securities, stock
options and
warrants
    
    
    
    
    
    
    1,106,696
    
    
    
    (0.18
    )
    
    
    
    
    
    
    228,563
    
    
    
    (0.01
    )Diluted earnings
available to common
stockholders
    
    $
    4,354,000
    
    
    
    5,767,243
    
    
    $
    0.76
    
    
    $
    259,000
    
    
    
    4,889,110
    
    
    $
    0.05
 For the quarter and six months ended June 28, 2003, options and warrants
aggregating 1,053,915 and 1,058,634 shares, respectively, were excluded from
the computation of diluted earnings per share due to their anti-dilutive
effect. No options or warrants were excluded from the computation of diluted
earnings for the quarter and six months ended June 26, 2004. (6) Segment Reporting Following the June 20, 2003 sale of Mid-Central Plastics, Inc., we have
only one remaining segment  the contract metals fabrication segment. (7) Debt and Warrants On March 26, 2004, the Company entered into a Second Amended and Restated
Credit Agreement with a syndicate of banks led by Harris Trust and Savings
Bank, As Agent, and also on March 26, 2004, entered into a Note and Warrant
Purchase Agreement with BMO Nesbitt Burns Capital (U.S.) Inc., As Agent. These
agreements were effective on March 26, 2004, and provided financing to replace
the revolving credit facility and term note payable previously due to Harris
Trust and Savings Bank, As Agent. In connection with this transaction, the
238,584 warrants to purchase Class A Common Stock were surrendered by the
holders; as described below, new warrants were issued on March 26, 2004. On June 23, 2004, the Company entered into the First Amendment to the
Second Amended and Restated Credit Agreement and also on June 23, 2004, entered
into an Amended and Restated Note and Warrant Purchase Agreement with BMO
Nesbitt Burns Capital (U.S.) Inc., As Agent. The effect of the June 23, 2004
amendments was to increase the amount due to BMO Nesbitt Burns Capital (U.S.)
Inc., As Agent, by $2,000,000, reduce the four-year secured term loan described
below by $1,000,000 and reduce the secured revolving credit facility described
below by $1,000,000. 7




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Under the terms of the new agreements and amendments, at June 26, 2004 the
Company has: 1) A four-year secured term loan in the amount of $21 million with
variable rate interest; principal payments are due in quarterly installments
of $500,000 beginning June 30, 2004 through March 31, 2005 and due in
quarterly installments of $750,000 beginning June 30, 2005 through December
31, 2007 with the balance of $10,750,000 due on March 31, 2008. 2) A secured revolving credit facility with a limit of $18 million, with
variable rate interest, and with an initial revolving credit balance of $8.7
million, and with initial availability of $5.4 million as of March 26, 2004.
At June 26, 2004, the Company has a revolving credit balance of $13.9 million
and availability of $4.1 million (based on an $18 million limit). The balance
is due March 31, 2008. The amount available under the revolving credit
facility is limited to 85% of eligible accounts receivable and 60% of
eligible inventory. The facility requires a commitment fee of 0.50% per annum
on the unused portion of the facility. At the Companys option, for both the secured term loan and the secured
revolving credit facility, interest will be at either a bank base rate plus
applicable margin, or an adjusted LIBOR plus a LIBOR margin. At inception,
the bank rate plus applicable margin is 6.75% and the adjusted LIBOR plus a
LIBOR margin is 5.35%. At June 26, 2004, and in connection with the June 23,
2004 amendments, those rates are the same as at inception. 3) A senior secured subordinated note in the amount of $12 million
bearing cash interest of 12% and payment-in-kind interest of 4% with no
principal amortization, and the balance due March 26, 2009. This debt is
subordinated to the secured term loan and the revolving credit facility with
respect to both payment and lien priority. Related to the senior secured subordinated note, on March 26, 2004 the
Company issued 545,467 warrants to purchase shares of its Class A Common Stock
for $0.02 per share; these warrants expire March 26, 2014. The warrant holder
may exercise the warrants at any time. The warrants may be put to the Company,
at the then fair market value, at the earlier of: a) five years from the date
of issue; b) a change of control; c) a default on the senior secured
subordinated loan; d) a prepayment of 75% or more of the original principal
balance of the senior secured subordinated loan. The Company has estimated the fair value of the warrants at the date of
issue, and at June 26, 2004, to be $1.5 million, and has reported that amount
as warrants payable and as debt discount in the accompanying Condensed
Consolidated Balance Sheets. The debt discount is being amortized using the
effective yield method over 5 years, the term of the related senior secured
subordinated note. The Company will update, on a quarterly basis, the fair
value of the warrants and record changes in the fair value, if any, as interest
expense. The stock purchase warrant includes provisions that will reduce the
545,467 warrants that can be put to the Company if a) a change of control
occurs prior to 5 years from the date of issue and the Company achieves
specified net equity levels; or b) if a change of control has not occurred
prior to 5 years from the date of issue and the Company achieves specified
EBITDA (earnings before interest, taxes, depreciation and amortization) levels.
The number of warrants could be reduced to several levels, but no lower than
290,278. In connection with these loans, the Company has granted the lenders a lien
on all of the Companys accounts receivable, inventory, equipment, land and
buildings, and various other assets. These agreements contain restrictions on
capital expenditures, additional debt or liens, investments, mergers and
acquisitions, asset sales and payments such as dividends or stock repurchases.
These agreements also impose various financial covenants, including financial
performance ratios. Fees associated with the March 26, 2004 and June 23, 2004
transactions, including underwriting and legal fees, were approximately $1.75
million, paid at the respective closings. (8) Stock Option Plan The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,and related interpretations. As such, the
Company records compensation expense on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. The Company
issues options at the current market price on the date of issuance and,
accordingly, has not recognized any stock-based employee compensation cost for
stock options in the financial statements. The per share weighted-average fair value of stock options granted during
the six months ended June 28, 2003 was $0.13 at the date of grant based on the
Black Scholes option-pricing model with the following weighted-average
assumptions: expected dividend 8




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yield of 0%, risk-free interest rate of 6%, volatility of 91%, and an
expected life of 10 years. No options were granted during the six months ended
June 26, 2004. Had we determined compensation cost based on the fair value at the grant
date for our stock options under SFAS No. 123, Accounting for Stock-Based
Compensation, our net earnings, in thousands of dollars, would have been
reduced to the pro forma amounts indicated below: Quarter
    
    QuarterEnded
    
    EndedJune 26,
    
    June 28,2004
    
    2003Net earnings available to common stockholders:As reported
    
    $
    2,228
    
    
    
    140Total stock-based employee compensation
expense determined under fair value based
method for all awards
    
    
    (12
    )
    
    
    (38
    )Pro forma
    
    $
    2,216
    
    
    
    102Basic earnings available to common stockholders per share:As reported
    
    $
    0.48
    
    
    
    0.03Pro forma
    
    $
    0.48
    
    
    
    0.02Diluted earnings available to common stockholders per share:As reported
    
    $
    0.38
    
    
    
    0.02Pro forma
    
    $
    0.38
    
    
    
    0.02
 Six Months
    
    Six MonthsEnded
    
    EndedJune 26,
    
    June 28,2004
    
    2003Net earnings available to common stockholders:As reported
    
    $
    4,354
    
    
    
    259Total stock-based employee compensation
expense determined under fair value based
method for all awards
    
    
    (25
    )
    
    
    (74
    )Pro forma
    
    $
    4,329
    
    
    
    185Basic earnings available to common stockholders per share:As reported
    
    $
    0.94
    
    
    
    0.06Pro forma
    
    $
    0.93
    
    
    
    0.04Diluted earnings available to common stockholders per share:As reported
    
    $
    0.76
    
    
    
    0.05Pro forma
    
    $
    0.75
    
    
    
    0.04
 (9) Impact of Recently Issued Accounting Standards FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R or the Interpretation), addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. The Interpretation was issued on December 24,
2003, and replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued on January 17, 2003. The Company has
adopted Interpretation 46 with no impact on its financial statements. The FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(SFAS 150),
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. FASB Staff Position Financial Accounting Standard 150-3,
Effective Date, Disclosures, and Transition for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable 9




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Noncontrolling Interest under FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity,defers the effective date of Statement 150 for certain mandatorily
redeemable noncontrolling interests of all entities. The Company adopted SFAS
150 as of July 1, 2003. (10) Redeemable Preferred Stock Pursuant to a 1999 agreement to purchase certain assets of Worthington
Custom Plastics, Inc. (Worthington), the Company issued 10,000 shares of its
preferred stock, without par value, to Worthington. The preferred stock was
mandatorily redeemable on April 15, 2004 at $1,000 per share. The preferred
stock was valued at $4,250,000 at the time of the acquisition and the discount
was being accreted over a five-year period using the effective yield method.
The period of accretion was completed in April, 2004. The Company and Worthington entered into a stock redemption agreement,
dated December 23, 2003, that provides for 30 monthly redemption payments of
$50,000 each over a three-year period (10 payments each year in 2004, 2005 and
2006) to redeem all of the preferred stock. Each payment will redeem 333 (or
334) shares of the 10,000 shares outstanding and will result in a gain on
redemption of $283,000. Redemption payments made each month during the three
and six months ended June 26, 2004 resulted in the gain on redemption of
redeemable preferred stock of $850,000 and $1,700,000, respectively, which is
reported in the accompanying condensed consolidated statements of operations.
If shares are not redeemed in accordance with the provisions of this agreement,
the redemption price remains at $1,000 per share. As part of this agreement,
all litigation between the Company and Worthington was settled and dismissed. (11) Unbilled Receivables During the six months ended June 26, 2004, the Company incurred increased
costs for the purchase of raw materials as a result of dynamic changes in the
U.S. steel markets. The Companys supplier agreements with key customers allow
surcharges for the passthrough of the additional raw material costs. The
Company has recognized as net sales, and also recognized an identical amount as
cost of sales, surcharge amounts of approximately $7 million for the six months
ended June 26, 2004. The Company has classified unbilled surcharges in
accompanying balance sheet as unbilled receivables. The surcharges are
generally invoiced to the Companys customers within weeks following the month
end in which those surcharges are identified. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis describes changes in the Companys
financial condition since December 31, 2003. The analysis of results of
operations compares the quarters and six months ended June 26, 2004 and June
28, 2003. Any references to December 31, 2003 relate to data found in Form 10-K
as filed with the Securities and Exchange Commission on March 30, 2004. GENERAL We are a contract manufacturer of highly engineered metal components and
subassemblies for construction, industrial and agricultural original equipment
manufacturers. Our largest customers, Caterpillar Inc. and Deere & Co.,
accounted for approximately 85% of our net sales for the quarter and six months
ended June 26, 2004, and accounted for approximately 88% and 87% of our net
sales in 2003 and 2002, respectively. Historically, the Company has been a fabricator of sheet metal products.
Subsequent to a merger in January, 1998, when the Company became a
publicly-traded entity, the Company acquired six facilities that fabricated
either injection molded or thermoformed plastic components. We acquired two of
the plastics fabrication facilities separately in 1998 and four together in
1999. We sold one of the plastics fabrication facilities acquired in 1998 at
the end of 1999. The four plastics fabrication facilities acquired together in
1999 were sold in December, 2002. These four facilities, operating as Morton
Custom Plastics, LLC, were incurring significant losses and filed for
protection as debtor-in-possession under Chapter 11 of the United States
Bankruptcy Code. At the time of the sale of Morton Custom Plastics, LLC, the
Company determined that is was appropriate to focus solely on its core
competency, sheet metal fabrication, and offered for sale its remaining
plastics fabrication facility, which we sold in June, 2003. In the Companys
accompanying financial statements, all of the plastics fabrication operating
results are reported as discontinued operations. As a part of the 1999 plastics facilities acquisition, the Company issued
$10 million of redeemable preferred stock with a maturity date of April 2004.
The Company negotiated a settlement in December 2003 with the holder of the
preferred stock, and began making 10




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##### Table of Contents



redemption payments in January, 2004. If the redemption payments are paid
according to the terms of the settlement agreement, the payments will aggregate
$1.5 million over a three-year period ending in 2006. Since June, 2003, the Company has focused solely on its core business,
sheet metal fabrication (the Companys continuing operations). The Company
recognized earnings of over $1.2 million from its continuing operations in
2003, but had incurred losses from its continuing operations in 2001 and 2002
when demand by the Companys customers was depressed. These losses from
continuing operations as well as the acquisition and subsequent disposition of
certain plastics facilities created pressure on our liquidity. To take advantage of the potential for growth in 2004 and beyond, and to
be able to effectively serve our customers, we must be able to ensure an
adequate flow of raw materials into our production processes, be able to hire
and train additional employees and be able to fund our need for new
manufacturing equipment and meet our other working capital needs. Accordingly,
the Company entered into a new credit facility in March, 2004, and an amendment
to that facility in June, 2004, that are described below. The new credit
facility (March, 2004) provided additional availability at the closing of
approximately $5 million. Management believes that the new credit facility will
permit the Company to meet its liquidity requirements driven by raw material,
manpower and capital expenditure requirements through the term of the facility,
which matures in March, 2008. As noted above, two customers account for a significant portion of our net
sales. Caterpillar Inc. and Deere & Co. are both forecasting greater orders for
fabricated parts supplied by Morton Industrial Group, Inc. for 2004. We believe
that this demand is being fueled by the improved economic conditions in the
United States. The Company is responding by hiring additional manpower, adding
capital equipment as necessary and increasing the flow of purchased raw
materials in a difficult steel market. The U.S. steel industry has
restructured, consolidated and is challenged to meet growing domestic and
international demand. The steel industry has been impacted by Chinas growing
consumption of scrap steel and coke, a raw material used in processing steel.
Cosmetically sensitive sheet steel, our core commodity, is on allocation and
has correspondingly seen inflationary pricing; most inflationary steel pricing
becomes the responsibility of the Companys customers. One
of our largest customers, Caterpillar Inc., operates certain of its
manufacturing facilities with United Auto Worker (UAW) employees.
Caterpillar Inc. presented to the UAW, on August 5, 2004, an offer
described in a press release as a last, best and final offer. We
currently understand that a ratification vote will be held on August
15, 2004. In pricing our products, we consider the volume of the product to be
manufactured, required engineering resources and the complexity of the product.
Our customers typically expect us to offset any manufacturing cost increases
with improvements in production flow, efficiency, productivity or engineering
redesigns. As a part of their supplier development programs, our primary
customers initiate cost improvement efforts on a regular basis. RESULTS OF OPERATIONS Second quarter, 2004 versus second quarter, 2003 Net sales for the quarter ended June 26, 2004 were $50.7 million compared
to $34.4 million for the quarter ended June 28, 2003, an increase of $16.3
million or 47.4%. The sales
increase resulted primarily from increased unit demand by existing customers of
construction-related equipment components and an increase in industrial
components to new customers. Our construction-related revenues increased by
nearly $11.0 million for the comparable quarters and accounted for nearly
two-thirds of our second quarter revenue. Industrial related revenues increased
by approximately $4.5 million and agricultural-related revenues increased modestly for the
comparable quarters. Sales for the quarter ended June 26, 2004 included surcharges
passed through to our customers of approximately $6.0 million. Most
of the revenue growth came from increased unit sales to our two
largest customers, Deere & Co. and Caterpillar Inc. Based upon customer
forecasts and the addition of new customers, the Company currently anticipates
revenue growth for calendar year 2004 that could exceed 25% compared to
calendar year 2003. Our ability to increase revenues at that rate will be
subject to a number of factors, including the continuing demand that we now
forecast, the availability of raw materials, principally steel, and the
availability of working capital to support that growth. Recently, steel prices
have increased as steel supply has tightened, due in part to the national
economic recovery, Chinas growing steel consumption, and reduced domestic
steel production capacity. We expect that this trend will continue through the
remainder of 2004, and there could be periods when steel is not available on
demand. We will work with our steel suppliers to attempt to address these
issues. Historically we have been able to negotiate with our customers to have
them absorb increases in our raw material costs, and, as indicated in Note 11
above, we have billed certain cost increases to our customers. Sales to Caterpillar Inc. and Deere & Co. aggregated approximately 85% and
92% of our net sales for the second quarters of 2004 and 2003, respectively. 11




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##### Table of Contents



Gross profit for the quarter ended June 26, 2004 was $6.1 million compared
with $5.0 million for the quarter ended June 26, 2003, an increase of $1.1
million or 22.7%. The Companys gross profit percentage decreased to 12.2% from
14.6%. Although the gross profit dollars are supported by the effect of
absorbing fixed costs over a larger revenue base, as well as our continuing
focus on cost savings programs including 6 Sigma and various lean manufacturing
concepts, the decrease in gross profit percentage results from overtime and
other labor costs due to rapid sales growth, quarter-over-quarter, in response
to customer demand. The gross profit percentage is also decreased
approximately 1.5% by passing through to customers, at cost with no margin, the
increased steel costs described in Note 11 above. We use internal metrics to
measure our success in achieving various productivity, quality, on-time
delivery and profitability goals. Selling and administrative expenses for the quarter ended June 26, 2004
amounted to $3.5 million, or 7.0% of sales, compared with $3.3 million, or 9.7%
of sales in the quarter a year ago. This decreased expense percentage relates
primarily to a higher sales volume, and relatively flat selling and
administrative expenses. Interest expense for the quarter ended June 26, 2004 amounted to $1.1
million compared to $0.9 million in the comparable quarter a year ago. This
increase resulted from higher average levels of debt in 2004, as well as higher
interest rates in the second quarter of 2004 vs. the second quarter of 2003.
The debt increase results from the new credit facility which has provided
necessary working capital for the Companys operations, as well as higher
interest rates associated with the new credit facility compared to the credit
facility in place in the comparable period in 2003. Interest on redeemable preferred stock relates to the accretion of the
discount on redeemable preferred stock for the quarter ended June 26, 2004.
This classification in other expense resulted from the implementation of SFAS
150. For the first quarter of 2003, the accretion was classified as accretion
of preferred stock discount. The accretion period ended in April, 2004. As a result of a preferred stock settlement agreement, the Company made
three preferred stock redemption payments during the three months ended June
26, 2004, which resulted in the gain on redemption of redeemable preferred
stock of $850,000 in the accompanying condensed consolidated statements of
operations. For the second quarter of 2004, we recognized an income tax expense of
$100,000 related to state income taxes. Related to Federal income taxes, we
have utilized net operating loss carry forwards to the extent of taxable
income, and decreased the valuation allowance accordingly. The income from discontinued operations represents the results of the
operations of Mid-Central Plastics, Inc. which was sold in June 2003. First six months, 2004 versus first six months, 2003 Net sales for the six months ended June 26, 2004 were $90.6 million
compared to $66.8 million for the six months ended June 28, 2003, an increase
of $23.8 million or 35.8%. The sales increase resulted primarily from increased unit demand by
existing customers of construction-related equipment components and an increase
in industrial components to new customers. Our construction-related revenues
increased by over $16.5 million for the comparable six month periods and
accounted for nearly two-thirds of our six month revenue. Industrial related
revenues increased by nearly $6.0 million and agricultural-related revenues
increased modestly for the comparable periods. Sales for the six months ended June 26, 2004
included surcharges passed through to our customers of approximately
$7.0 million. Most of the revenue growth came
from increased unit sales to our two largest customers, Deere & Co. and Caterpillar Inc. Sales to Caterpillar Inc. and Deere & Co. aggregated approximately 85% and
91% of our net sales for the first six months of 2004 and 2003, respectively. Gross profit for the six months ended June 26, 2004 was $11.7 million
compared with $9.6 million for the six months ended June 26, 2003, an increase
of $2.1 million or 21.4%. The Companys gross profit percentage decreased to
12.9% from 14.4%. Although the gross profit dollars are supported by the effect
of absorbing fixed costs over a larger revenue base, as well as our continuing
focus on cost savings programs including 6 Sigma and various lean manufacturing
concepts, the decrease in gross profit percentage results from overtime and
other labor costs due to rapid sales growth, quarter-over-quarter, in response
to customer demand. The gross profit percentage is also decreased
approximately 1.0% by passing through to customers, at cost with no margin, the
increased steel costs described in Note 11 above. We use internal metrics to
measure our success in achieving various productivity, quality, on-time
delivery and profitability goals. 12




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##### Table of Contents



Selling and administrative expenses for the six months ended June 26, 2004
amounted to $7.0 million, or 7.7% of sales, compared with $6.6 million, or
10.0% of sales in the comparable period a year ago. This decreased expense
percentage relates primarily to a higher sales volume, and relatively flat
selling and administrative expenses. Interest expense for the six months ended June 26, 2004 amounted to $1.7
million compared to $1.9 million in the comparable period a year ago. This
increase results from a combination of changing factors in the two quarter of
2004. During the first quarter of 2004 compared to the first quarter of 2003,
the Company had lower average debt levels and comparable interest rates.
Resulting from the March 2004 financing transaction, the Company experienced
higher average levels of debt in the second quarter of 2004, as well as higher
interest rates in the second quarter of 2004 vs. the second quarter of 2003.
The debt increase results from the new credit facility which has provided
necessary working capital for the Companys operations. Interest on redeemable preferred stock relates to the accretion of the
discount on redeemable preferred stock for the six months ended June 26, 2004.
This classification in other expense resulted from the implementation of SFAS
150. For the first six months of 2003, the accretion was classified as
accretion of preferred stock discount. The accretion period ended in April,
2004. As a result of the preferred stock settlement agreement, the Company made
six preferred stock redemption payments during the six months ended June 26,
2004, which resulted in the gain on redemption of redeemable preferred stock
of $1,700,000 in the accompanying condensed consolidated statements of
operations. For the first six months of 2004, we recognized an income tax expense of
$150,000 related to state income taxes. Related to Federal income taxes, we
have utilized net operating loss carry forwards to the extent of taxable
income, and decreased the valuation allowance accordingly. The income from discontinued operations represents the results of the
operations of Mid-Central Plastics, Inc. which was sold in June 2003. LIQUIDITY AND CAPITAL RESOURCES Historically, we have funded our business with cash flows from operations,
management of our working capital and borrowings under revolving credit and
term loan facilities. Our consolidated working capital at June 26, 2004 was $7.5 million
compared to a deficit of $6.8 million at December 31, 2003. This represents an
increase in working capital of approximately $14.3 million. This working
capital increase results primarily from a March 26, 2004 refinancing described
below, and the growth of inventories and accounts receivable classified as
current assets. March 26, 2004 Refinancing On March 26, 2004, the Company entered into a Second Amended and Restated
Credit Agreement with a syndicate of banks led by Harris Trust and Savings
Bank, As Agent, and also on March 26, 2004, entered into a Note and Warrant
Purchase Agreement with BMO Nesbitt Burns Capital (U.S.) Inc., As Agent. These
agreements were effective on March 26, 2004, and provided financing to replace
the revolving credit facility and term note payable previously due to Harris
Trust and Savings Bank, As Agent. In connection with this transaction, the
238,584 warrants to purchase Class A Common Stock were surrendered by the
holders. On June 23, 2004, the Company entered into the First Amendment to the
Second Amended and Restated Credit Agreement and also on June 23, 2004, entered
into an Amended and Restated Note and Warrant Purchase Agreement with BMO
Nesbitt Burns Capital (U.S.) Inc., As Agent. The effect of the June 23, 2004
amendments was to increase the amount due to BMO Nesbitt Burns Capital (U.S.)
Inc., As Agent, by $2,000,000, reduce the four-year secured term loan described
below by $1,000,000 and reduce the secured revolving credit facility described
below by $1,000,000. 13




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##### Table of Contents



Under the terms of the new agreements and amendments, the Company has: 1) A 4-year secured term loan in the amount of $21 million with variable
rate interest; principal payments are due in quarterly installments of
$500,000 beginning June 30, 2004 through March 31, 2005 and due in quarterly
installments of $750,000 beginning June 30, 2005 through December 31, 2007
with the balance of $10,750,000 due on March 31, 2008. The Company has
entered into an interest rate protection contract (swap agreement) on
$10,750,000 of the term loan effective June 30, 2004. 2) A secured revolving credit facility with a limit of $18 million, with
variable rate interest, and with an initial revolving credit balance of $8.7
million, and with initial availability of $5.4 million as of March 26, 2004.
At June 26, 2004, the Company has a revolving credit balance of $13.9 million
and availability of $4.1 million (based on an $18 million limit). The balance
is due March 31, 2008. The amount available under the revolving credit
facility is limited to 85% of eligible accounts receivable and 60% of
eligible inventory. The facility requires a commitment fee of 0.50% per annum
on the unused portion of the facility. At the Companys option, for both the secured term loan and the secured
revolving credit facility, interest will be at either a bank base rate plus
applicable margin, or an adjusted LIBOR plus a LIBOR margin. At inception,
the bank rate plus applicable margin is 6.75% and the adjusted LIBOR plus a
LIBOR margin is 5.35%. At June 26, 2004, and in connection with the June 23,
2004 amendments, those rates are the same as at inception. Also, under the
swap agreement referenced above, the adjusted LIBOR rate plus the applicable
LIBOR margin is 7.72% as of June 26, 2004. The swap agreement does not
qualify as a hedge under SFAS 133; accordingly, mark-to-market adjustments
related to that swap agreement could impact interest expense during the term
of the swap agreement, which expires March 31, 2008. 3) A senior secured subordinated note in the amount of $12 million
bearing cash interest of 12% and payment-in-kind interest of 4% with no
principal amortization, and the balance due March 26, 2009. This debt is
subordinated to the secured term loan and the revolving credit facility with
respect to both payment and lien priority. Related to the senior secured subordinated note, on March 26, 2004 the
Company issued 545,467 warrants to purchase shares of its Class A Common Stock
for $0.02 per share; these warrants expire March 26, 2014. The warrant holder
may exercise the warrants at any time. The warrants may be put to the Company,
at the then fair market value, at the earlier of: a) five years from the date
of issue; b) a change of control; c) a default on the senior secured
subordinated loan; d) a prepayment of 75% or more of the original principal
balance of the senior secured subordinated loan. The Company has estimated the fair value of the warrants at the date of
issue, and at June 26, 2004, to be $1.5 million, and has reported that amount
as warrants payable and as debt discount in the accompanying Condensed
Consolidated Balance Sheets. The debt discount is being amortized using the
effective yield method over 5 years, the term of the related senior secured
subordinated note. The Company will update, on a quarterly basis, the fair
value of the warrants and record changes in the fair value, if any, as interest
expense. The stock purchase warrant includes provisions that will reduce the
545,467 warrants that can be put to the Company if a) a change of control
occurs prior to 5 years from the date of issue and the Company achieves
specified net equity levels; or b) if a change of control has not occurred
prior to 5 years from the date of issue and the Company achieves specified
EBITDA (earnings before interest, taxes, depreciation and amortization) levels.
The number of warrants could be reduced to several levels, but no lower than
290,278. In connection with these loans, the Company has granted the lenders a lien
on all of the Companys accounts receivable, inventory, equipment, land and
buildings, and various other assets. These agreements contain restrictions on
capital expenditures, additional debt or liens, investments, mergers and
acquisitions, asset sales and payments such as dividends or stock repurchases.
These agreements also impose various financial covenants, including financial
performance ratios. Fees associated with the March 26, 2004 and June 23, 2004
transactions, including underwriting and legal fees, were approximately $1.75
million, paid at the respective closings. Historically, we have met our near term liquidity requirements with cash
flows from operations, the Harris line of credit, and management of our working
capital to reflect current levels of operations. Management expects that cash
flows from operations, working capital management and availability under the
new bank revolving line of credit described above will permit us to meet our
liquidity requirements through the term of the new credit facility. 14




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##### Table of Contents



Preferred Stock Pursuant to a 1999 agreement to purchase certain assets of Worthington
Custom Plastics, Inc. (Worthington), the Company issued 10,000 shares of its
preferred stock, without par value, to Worthington. The preferred stock was
mandatorily redeemable on April 15, 2004 at $1,000 per share. The Company and
Worthington have entered into a stock redemption agreement, dated December 23,
2003, that provides for 30 monthly redemption payments of $50,000 each over a
three-year period (10 payments each year in 2004, 2005 and 2006) to fully
redeem the preferred stock. Each $50,000 payment and redemption of 333 (or 334)
shares reduces the $10 million face value of the redeemable preferred stock by
$333,000 (or $334,000). If shares are not redeemed in accordance with the
provisions of this agreement, the redemption price remains at $1,000 per share. Capital Expenditures We incurred $3.0 million of capital expenditures during the first six
months of 2004, including approximately $1.8 million related to expansion
activities and approximately $1.2 million for the normal update and replacement
of manufacturing equipment. We estimate that our capital expenditures in 2004 will total approximately
$5.0 million, of which $2.0 will be for expansion activities and the remaining
$3.0 million will be for the normal update and replacement of manufacturing
equipment. Significant Cash Commitments The Company has significant future cash commitments, primarily scheduled
debt payments and scheduled lease payments. The following table summarizes the Companys contractual obligations at
June 26, 2004: Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years(In thousands)Bank indebtedness
Term loan
    
    $
    21,000
    
    
    $
    2,000
    
    
    $
    9,000
    
    
    $
    10,000
    
    
    $
    Revolving line of
credit
    
    
    13,900
    
    
    
    
    
    
    
    
    
    
    
    13,900
    
    
    
    Senior
subordinated debt
    
    
    12,107
    
    
    
    
    
    
    
    
    
    
    
    12,107
    
    
    
    Other debt
obligations
    
    
    1,865
    
    
    
    533
    
    
    
    1,208
    
    
    
    124
    
    
    
    Operating leases
    
    
    22,966
    
    
    
    6,826
    
    
    
    13,450
    
    
    
    2,692
    
    
    
    Preferred stock
redemption
    
    
    1,200
    
    
    
    500
    
    
    
    700
    
    
    
    
    
    
    
    Total contractual
cash obligations
    
    $
    73,038
    
    
    $
    9,859
    
    
    $
    24,358
    
    
    $
    38,823
    
    
    $
    
 Under its bank credit facility, the Company had $618,000 standby letters
of credit outstanding at June 26, 2004 in connection with lease obligations.
Management expects that cash flows from operations, working capital management
and availability under its new bank revolving line of credit will permit us to
meet our liquidity requirements through the term of the credit facility. Pursuant to a 1999 agreement to purchase certain assets of Worthington
Custom Plastics, Inc. (Worthington), the Company issued 10,000 shares of its
preferred stock, without par value, to Worthington. The preferred stock was
mandatorily redeemable on April 15, 2004 at $1,000 per share. The Company and
Worthington have entered into a preferred stock redemption agreement, dated
December 23, 2003, that provides for 30 monthly redemption payments of $50,000
each over a three-year period (10 payments each year in 2004, 2005 and 2006) to
fully redeem the preferred stock. Each $50,000 payment and redemption of 333
(or 334) shares reduces the $10 million face value of the redeemable preferred
stock by $333,000 (or $334,000). If shares are not redeemed under the provision
of this agreement, the redemption price remains at $1,000 per share. The
significant cash commitments table above assumes that payments are made over
the next three years and that the redeemable preferred stock is retired for
$1.5 million. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R or the Interpretation), addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. The Interpretation was issued on December 24,
2003, and replaces 15




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##### Table of Contents



FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
which was issued on January 17, 2003. The Company has adopted Interpretation 46
with no impact on its financial statements. The FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(SFAS 150),
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. FASB Staff Position Financial Accounting Standard 150-3,
Effective Date, Disclosures, and Transition for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interest under FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity,defers the effective date of Statement 150 for certain mandatorily
redeemable noncontrolling interests of all entities. The Company adopted SFAS
150 as of July 1, 2003. FORWARD LOOKING STATEMENTS Safe Harbor Statement Under The Private Securities Litigation Reform Act
Of 1995: This quarterly report contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements containing the words
anticipates, believes, intends, estimates, expects, projects and
similar words. The forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results to be
materially different from any future results expressed or implied by such
forward looking statements. Such factors include, among others, the following:
the loss of certain significant customers; the cyclicality of our construction
and agricultural sales; the availability of working capital; the orders of our
two major customers; general economic and business conditions, both nationally
and in the markets in which we operate or will operate; competition; and other
factors referenced in the Companys reports and registration statements filed
with the Securities and Exchange Commission. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such forward
looking statements. The forward looking statements contained herein speak only
of the Companys expectation as of the date of this quarterly report. We
disclaim any obligations to update any such factors or publicly announce the
result of any revisions to any of the forward looking statements contained
herein to reflect future events or developments. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company uses variable-rate debt to finance its operations. The debt
obligations expose the Company to variability in interest payments due to
changes in interest rates. Management believes it is prudent to limit the
variability of a portion of its interest payments. To meet this objective,
management has entered into an interest rate swap agreements to manage
fluctuations in cash flows resulting from interest rate risk. The swap changes
the variable-rate cash flow exposure on certain debt obligations to fixed cash
flows. Under the terms of the interest rate swap, the Company receives variable
interest rate payments and makes fixed interest rate payments, thereby creating
the equivalent of fixed rate debt on a portion of its term loan. The Company
entered into a swap arrangement effective June 30, 2004, that will fix the
interest rate on approximately 50% of the Companys term loan described above. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures (a) Evaluation of disclosure controls and procedures.The Companys
principal executive officer and principal financial officer have concluded that
the Companys disclosure controls and procedures (as defined in Rule 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended), based on
their evaluation of these controls and procedures as of the end of the period
covered by this Form 10-Q, are effective. 16




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The Companys management, including its principal executive officer and
principal financial officer, does not expect that the Companys disclosure
controls and procedures or its internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgements in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. The design of any system of controls also is based, in part, upon
certain assumptions about the likelihood of future events, and there can only
be reasonable assurance that any design will succeed in achieving its stated
goals under all potential future conditions. It is the responsibility
of the Company's management to assess and remedy any such development. (b) Changes in internal controls.There have been no significant changes
in the Companys internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation. Changes in internal controls We seek to maintain a system of internal accounting controls that are
intended to provide reasonable assurances that our books and records accurately
reflect our transactions and that our established policies and procedures are
followed. There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the date we carried out this evaluation. 
 PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The Company is involved in routine litigation. Management does not believe
any legal proceedings would have a material adverse effect on the Companys
financial condition or results of operations. 
 ITEM 2. CHANGES IN SECURITIES On March 26, 2004, the Company issued its senior subordinated lender
warrants to purchase 545,467 shares of its Class A Common Stock at an exercise
price of $0.02 per share. The Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. The Company issued the
warrants in consideration of the holders advancing funds under the senior
secured subordinated note described above. The warrant holder may exercise the
warrants at any time. These warrants expire March 26, 2014. These warrants may
be put to the Company, at the then fair market value, five years from the date
of issue, or upon change of control or upon a default on the senior secured
subordinated loan. The June 23, 2004 credit facility amendments had no impact
on the number of warrants. 17




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The 238,584 warrants previously outstanding were surrendered by the
holders of those warrants on March 26, 2004. Under the terms of our agreement with our senior secured lender, no
amounts are available for the payment of dividends at June 26, 2004. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Morton Industrial Group, Inc., held its Annual Meeting on June 8, 2004 to:  1.
    
    Elect three directors to serve for one-year terms until the Annual
Meeting of Shareholders in 2005.2.
    
    Consider and act upon a proposal to ratify the selection of KPMG, LLP
as independent auditors of the Company for 2004. The results of the shareholders votes on each of these matters appear in
the following tables. Election of Directors: For
    
    Against
    
    Abstained
    
    TotalWilliam D. Morton
    
    
    4,683,226
    
    
    
    12,222
    
    
    
    
    
    
    
    4,695,448Fred W. Broling
    
    
    4,683,263
    
    
    
    12,185
    
    
    
    
    
    
    
    4,695,448Mark W. Mealy
    
    
    4,683,147
    
    
    
    12,301
    
    
    
    
    
    
    
    4,695,448
 Ratification of Selection of Independent Auditor: For
    
    Against
    
    Abstained
    
    TotalKPMG LLP
    
    
    4,650,149
    
    
    
    44,416
    
    
    
    883
    
    
    
    4,695,448
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 11.
    
    The computation can be determined from this report.31.1
    
    Certification pursuant to Rule 13a-14(a)31.2
    
    Certification pursuant to Rule 13a-14(a)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.99.1
    
    First Amendment to Second Amended and Restated Credit Agreement99.2
    
    Amended and Restated Note and Warrant Purchase Agreement
 (B) Reports on Form 8-K. Form 8-K dated May 14, 2004 reporting results of operations for the
quarter ended March 27, 2004. 18




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. MORTON INDUSTRIAL GROUP, INC. By: /s/ Daryl R. Lindemann
Daryl R. Lindemann
Chief Financial Officer Dated: August 6, 2004 19