##### 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 September 25, 2004 OR o
    
    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 ofOctober 22, 2004Class A Common Stock, $.01 par value
    
    
    4,560,547Class B Common Stock, $.01 par value
    
    
    100,000




---



TABLE OF CONTENTS  ITEM 1. FINANCIAL STATEMENTSCondensed Consolidated Statements of OperationsCONDENSED CONSOLIDATED BALANCE SHEETSCondensed Consolidated Statements of Cash FlowsCondensed Consolidated Statement of Stockholders Equity (Deficit)NOTES TO CONDENSED CONSOLIDATED 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 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCertificationCertificationSection 906 CertificationSection 906 Certification    Table of Contents  
 ITEM 1. FINANCIAL STATEMENTS 
 MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 25, 2004 and September 27, 2003
(Dollars in thousands, except per share data)
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 25, 2004
    
    September 27, 2003
    
    September 25, 2004
    
    September 27, 2003Net sales
    
    $
    46,146
    
    
    
    31,452
    
    
    
    136,772
    
    
    
    98,230Cost of sales
    
    
    40,828
    
    
    
    27,389
    
    
    
    119,800
    
    
    
    84,566Gross profit
    
    
    5,318
    
    
    
    4,063
    
    
    
    16,972
    
    
    
    13,664Operating expenses:Selling expenses
    
    
    802
    
    
    
    728
    
    
    
    2,389
    
    
    
    2,141Administrative expenses
    
    
    2,727
    
    
    
    2,449
    
    
    
    8,094
    
    
    
    7,656Total operating expenses
    
    
    3,529
    
    
    
    3,177
    
    
    
    10,483
    
    
    
    9,797Operating income
    
    
    1,789
    
    
    
    886
    
    
    
    6,489
    
    
    
    3,867Other income (expense):Interest expense
    
    
    (1,405
    )
    
    
    (612
    )
    
    
    (3,135
    )
    
    
    (2,481
    )Interest on redeemable preferred stock
    
    
    
    
    
    
    (213
    )
    
    
    (249
    )
    
    
    (213
    )Gain on redemption of preferred stock
    
    
    566
    
    
    
    
    
    
    
    2,266
    
    
    
    Other
    
    
    40
    
    
    
    45
    
    
    
    123
    
    
    
    382Total other income (expense)
    
    
    (799
    )
    
    
    (780
    )
    
    
    (995
    )
    
    
    (2,312
    )Earnings before income taxes and
discontinued operations
    
    
    990
    
    
    
    106
    
    
    
    5,494
    
    
    
    1,555Income taxes
    
    
    25
    
    
    
    
    
    
    
    175
    
    
    
    560Earnings before discontinued operations
    
    
    965
    
    
    
    106
    
    
    
    5,319
    
    
    
    995Discontinued operations:Net earnings from operations of discontinued
plastics operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    85Net earnings
    
    
    965
    
    
    
    106
    
    
    
    5,319
    
    
    
    1,080Accretion of discount on preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (715
    )Net earnings available to common stockholders
    
    $
    965
    
    
    
    106
    
    
    
    5,319
    
    
    
    365Earnings per common share  basic:Earnings from continuing operations
    
    $
    0.20
    
    
    
    0.02
    
    
    
    1.14
    
    
    
    0.08Earnings from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings available to common stockholders
    
    $
    0.20
    
    
    
    0.02
    
    
    
    1.14
    
    
    
    0.08Earnings per common share  diluted:Earnings from continuing operations
    
    $
    0.15
    
    
    
    0.02
    
    
    
    0.91
    
    
    
    0.05Earnings from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net earnings available to common stockholders
    
    $
    0.15
    
    
    
    0.02
    
    
    
    0.91
    
    
    
    0.07
 See accompanying notes to condensed consolidated financial statements. 2




---



##### Table of Contents



MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets
September 25, 2004 and December 31, 2003
(Dollars in thousands)
 September 25, 2004
    
    December 31, 2003(Unaudited)AssetsCurrent assets:Trade accounts receivable, less allowance for doubtful accounts
of $240 in 2004 and $202 in 2003
    
    $
    12,630
    
    
    
    7,253Unbilled receivables
    
    
    2,778
    
    
    
    Note receivable
    
    
    
    
    
    
    100Inventories
    
    
    19,037
    
    
    
    13,863Prepaid expenses and other current assets
    
    
    2,179
    
    
    
    1,087Deferred income taxes
    
    
    1,600
    
    
    
    1,600Total current assets
    
    
    38,224
    
    
    
    23,903Property, plant, and equipment, net
    
    
    22,706
    
    
    
    22,432Note receivable
    
    
    1,102
    
    
    
    1,183Intangible assets, at cost, less accumulated amortization
    
    
    2,270
    
    
    
    1,100Other assets
    
    
    74
    
    
    
    204$
    64,376
    
    
    
    48,822Liabilities and Stockholders Equity (Deficit)Current liabilities:Outstanding checks in excess of bank balance
    
    $
    1,606
    
    
    
    943Current installments of long-term debt
    
    
    3,523
    
    
    
    6,210Accounts payable
    
    
    21,618
    
    
    
    17,343Accrued expenses
    
    
    5,112
    
    
    
    5,450Income taxes payable
    
    
    25
    
    
    
    275Redeemable preferred stock
    
    
    500
    
    
    
    500Total current liabilities
    
    
    32,384
    
    
    
    30,721Long-term debt, excluding current installments
    
    
    41,697
    
    
    
    32,331Other liabilities
    
    
    118
    
    
    
    118Redeemable preferred stock
    
    
    6,836
    
    
    
    9,250Warrants payable
    
    
    1,620
    
    
    
    Total liabilities
    
    
    82,655
    
    
    
    72,420Stockholders equity (deficit):Class A common stock
    
    
    46
    
    
    
    46Class B common stock
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    20,895
    
    
    
    20,895Accumulated deficit
    
    
    (39,221
    )
    
    
    (44,540
    )Total stockholders equity (deficit)
    
    
    (18,279
    )
    
    
    (23,598
    )$
    64,376
    
    
    
    48,822
 See accompanying notes to condensed consolidated financial statements. 3




---



##### Table of Contents



MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 25, 2004 and September 27, 2003
(Dollars in thousands)
(Unaudited) Nine Months EndedSeptember 25, 2004
    
    September 27, 2003Net cash provided by (used in) operating activities
    
    $
    (2,312
    )
    
    
    4,254Cash flows from investing activities:Proceeds from sale of business
    
    
    
    
    
    
    4,800Proceeds from sale of equipment
    
    
    30
    
    
    
    Cash received on notes receivable
    
    
    100
    
    
    
    99Capital expenditures
    
    
    (4,217
    )
    
    
    (2,629
    )Net cash provided by (used in) investing activities
    
    
    (4,087
    )
    
    
    2,270Cash flows from financing activities:Increase in checks issued in excess of bank balance
    
    
    663
    
    
    
    1,777Net borrowings (repayments) on revolving debt
    
    
    6,418
    
    
    
    (4,650
    )Principal payments on long-term debt and capital leases
    
    
    (2,882
    )
    
    
    (3,351
    )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
    
    
    (400
    )
    
    
    Debt issuance costs
    
    
    (1,797
    )
    
    
    (300
    )Net cash provided by (used in) financing activities
    
    
    6,399
    
    
    
    (6,524
    )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
    
    $
    1,447
    
    
    
    2,452Income taxes
    
    $
    387
    
    
    
    
 See accompanying notes to condensed consolidated financial statements. 4




---



##### Table of Contents



MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders Equity (Deficit)

For the Nine Months Ended September 25, 2004
(Dollars in thousands)
(Unaudited)
 Class A
    
    Class Bcommon stock
    
    common stockAdditionalShares
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,319
    
    
    
    5,319Balance, September 25, 2004
    
    
    4,560,547
    
    
    $
    46
    
    
    
    100,000
    
    
    $
    1
    
    
    $
    20,895
    
    
    $
    (39,221
    )
    
    $
    (18,279
    )
 See accompanying notes to condensed consolidated financial statements. 5




---



##### Table of Contents



MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 25, 2004 and September 27, 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 September 25, 2004, and
for the three and nine months ended September 25, 2004 and September 27, 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 the quarter ended September 25, 2004 there were 63 shipping
days and for the quarter ended September 27, 2003 there were 64 shipping days.
For the nine months ended September 25, 2004, there were 187 shipping days, and
for the nine months ended September 27, 2003, there were 189 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 nine months ended
September 27, 2003 reflect the results of Mid-Central Plastics, Inc., for the
period from January 1, 2003 through June 20, 2003, the date on which those
operations were sold. 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 buyer prepaid $165,000 in September
2004 (an amount equal to the payment-in-kind interest). This amount had
previously been recorded as interest income. 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 September 25, 2004,
and December 31, 2003, are summarized as follows: September 25,
    
    December 31,2004
    
    2003Raw materials, purchased parts and manufacturedComponents
    
    $
    8,758
    
    
    $
    4,915Work-in-process
    
    
    4,634
    
    
    
    3,521Finished goods
    
    
    5,645
    
    
    
    5,427$
    19,037
    
    
    $
    13,863
 6




---



##### Table of Contents



(5) Earnings Per Share The following reflects the reconciliation of the components of the basic
and diluted earnings per common share computations: Quarter Ended September 25, 2004
    
    Quarter Ended September 27, 2003Earnings
    
    Shares
    
    Per Share
    
    Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic earnings
available to common
stockholders
    
    $
    965,000
    
    
    
    4,660,547
    
    
    $
    0.20
    
    
    $
    106,000
    
    
    
    4,660,547
    
    
    $
    0.02Effect of dilutive
securities, stock
options and
warrants
    
    
    
    
    
    
    1,321,752
    
    
    
    (0.05
    )
    
    
    
    
    
    
    633,981
    
    
    

    Diluted earnings
available to common
stockholders
    
    $
    965,000
    
    
    
    5,982,299
    
    
    $
    0.15
    
    
    $
    106,000
    
    
    
    5,294,528
    
    
    $
    0.02
 Nine Months Ended September 25, 2004
    
    Nine Months Ended September 27, 2003Earnings
    
    Shares
    
    Per Share
    
    Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic earnings
available to common
stockholders
    
    $
    5,319,000
    
    
    
    4,660,547
    
    
    $
    1.14
    
    
    $
    365,000
    
    
    
    4,660,547
    
    
    $
    0.08Effect of dilutive
securities, stock
options and
warrants
    
    
    
    
    
    
    1,191,165
    
    
    
    (0.23
    )
    
    
    
    
    
    
    458,328
    
    
    
    (0.01
    )Diluted earnings
available to common
stockholders
    
    $
    5,319,000
    
    
    
    5,851,712
    
    
    $
    0.91
    
    
    $
    365,000
    
    
    
    4,889,110
    
    
    $
    0.07
 For the quarter and nine months ended September 27, 2003, options and
warrants not in-the-money aggregating 304,685 and 236,982 shares, respectively, were excluded
from the computation of diluted earnings per share. No options or warrants were excluded from the computation of diluted
earnings for the quarter and nine months ended September 25, 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 balance outstanding under the
four-year secured term loan described below by $1,000,000 and reduce the
balance outstanding under the secured revolving credit facility described below
by $1,000,000. Under the terms of the new agreements and amendments, effective as of June
23, 2004, and as of September 25, 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 which began June 30, 2004 and continue through March 31, 2005 and
due in quarterly installments of $750,000 beginning June 30, 2005 through
December 31, 2007 with the balance of $10,667,500 due on March 31, 7




---



##### Table of Contents



2008. A mandatory principal payment of $82,500 (one-half of the
prepayment received as described above in Note 3) was made in September 2004. 2) A secured revolving credit facility with a limit of $18 million, with
variable rate interest, with an initial revolving credit balance of $8.7
million, and with initial availability of $5.4 million as of March 26, 2004.
At September 25, 2004, the Company has a revolving credit balance of $12.2
million and availability of $5.1 million. 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 applicable margin. At
inception, the bank rate plus applicable margin was 6.75% and the adjusted
LIBOR plus a LIBOR applicable margin was 5.35%. At September 25, 2004, those
rates were 7.25% and 5.87%, respectively. The Company entered into a swap agreement effective June 30, 2004 on
$10,750,000 (the original notional amount) of its term debt. Under this
agreement, the Company pays a fixed LIBOR rate of 3.72% on the notional
amount, which is payable quarterly. In accordance with the term loan
agreement, the Company also pays an interest margin which adjusts in steps
based on achieved operating and leverage metrics (4.25% during 2004). The
notional amount for the period from June 30 through September 30, 2004 was
$10,750,000. The swap agreement expires March 31, 2008. As described in
Item 3 below, the swap agreement is for the purpose of limiting the effects
of interest rate increases on approximately one-half of the Companys
variable rate term debt.
Quarterly, the Company determines the fair value of the swap agreement.
As of September 25, 2004, and for the three months then ended, the Company
recorded interest expense of $135,000, and a corresponding liability, to
mark-to-market the fair value of the swap agreement. 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; or d) a prepayment of 75% or more of the original principal
balance of the senior secured subordinated loan. The Company estimated the fair value of the warrants at the date of issue,
and as of September 25, 2004 to be $1.5 million, and $1.62 million,
respectively. The $1.62 million estimate is reported as warrants payable in the
accompanying Condensed Consolidated Balance Sheets. The fair value at the date
of issue was recorded as debt discount, and is being amortized using the
effective yield method over 5 years, the term of the related senior secured
subordinated note. The Company updates, on a quarterly basis, the fair value of
the warrants and records 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, totaled approximately
$1.75 million, paid at the respective closings. 8




---



##### Table of Contents



(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 nine months ended September 27, 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 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 nine months ended September 25, 2004. Had we determined compensation cost based on the fair value at the grant
date for our stock options under Financial Accounting Standards Board (FASB)
Statement 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 Ended
    
    Quarter EndedSeptember 25, 2004
    
    September 27, 2003Net earnings available to common stockholders:As reported
    
    $
    965
    
    
    
    106Total stock-based employee compensation expense determined
under fair value based method for all awards
    
    
    (12
    )
    
    
    (20
    )Pro forma
    
    $
    953
    
    
    
    86Basic earnings available to common stockholders per share:As reported
    
    $
    0.20
    
    
    
    0.02Pro forma
    
    $
    0.20
    
    
    
    0.02Diluted earnings available to common stockholders per share:As reported
    
    $
    0.15
    
    
    
    0.02Pro forma
    
    $
    0.15
    
    
    
    0.02
 Nine Months
    
    Nine MonthsEnded
    
    EndedSeptember 25, 2004
    
    September 27, 2003Net earnings available to common stockholders:As reported
    
    $
    5,319
    
    
    
    365Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (36
    )
    
    
    (94
    )Pro forma
    
    $
    5,283
    
    
    
    271Basic earnings available to common stockholders per share:As reported
    
    $
    1.14
    
    
    
    0.08Pro forma
    
    $
    1.13
    
    
    
    0.06Diluted earnings available to common stockholders per share:As reported
    
    $
    0.91
    
    
    
    0.07Pro forma
    
    $
    0.90
    
    
    
    0.05
 (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 9




---



##### 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
RedeemableNoncontrolling 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, and that adoption had the following classification
impact on the Companys financial statements:  (i)
    
    Redeemable preferred stock, previously reported as
neither a liability nor as equity, is classified as a liability,
and(ii)
    
    The expense reported in previous periods as
accretion of discount on preferred shares is classified as
interest on redeemable preferred stock. (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 nine months ended September 25, 2004 resulted in the gain on redemption of
redeemable preferred stock of $566,000 and $2,266,000, 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 nine months ended September 25, 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 costof sales, surcharge amounts of approximately $12.4
million for the nine months ended September 25, 2004. The Company has
classified unbilled surcharges in the accompanying condensed consolidated
balance sheet as unbilled receivables. The surcharges are generally invoiced
to the Companys customers within weeks following the month end in which the
related product is sold. As of September 25, 2004, the unpaid amount of
surcharges included in accounts receivable is $1.9 million. 
 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 nine months ended September 25, 2004 and
September 27, 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. 10




---



##### Table of Contents



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 nine months ended
September 25, 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 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. 11




---



##### Table of Contents



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, and $1 million additional availability under the June 2004
amendment. 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. Based upon newspaper reports, the
UAW rejected the Caterpillar, Inc. final offer. Members of the UAW are working
without a contract as of the date of this report. 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 Third quarter, 2004 versus third quarter, 2003 Net sales for the quarter ended September 25, 2004 were $46.1 million
compared to $31.5 million for the quarter ended September 27, 2003, an increase
of $14.6 million or 46.7%. The volume portion of the sales increase, totaling
approximately $9.2 million, 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 approximately $6.4 million for the comparable quarters and
accounted for nearly 65% of our third quarter revenue. Industrial related
revenues increased by approximately $2.1 million and agricultural-related
revenues increased modestly for the comparable quarters. In addition, sales for
the quarter ended September 25, 2004 included surcharges passed through to our
customers of approximately $5.4 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 (excluding revenue related to
surcharges). Our ability to increase revenues at that rate is 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. Over the past three quarters, 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 into 2005, 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. 12




---



##### Table of Contents



Sales to Caterpillar Inc. and Deere & Co. aggregated approximately 89% and
85% of our net sales for the third quarters of 2004 and 2003, respectively. Gross profit for the quarter ended September 25, 2004 was $5.3 million
compared with $4.1 million for the quarter ended September 27, 2003, an
increase of $1.2 million or 30.9%. The Companys gross profit percentage
decreased to 11.5% from 12.9%. 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 1.6% 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 September 25,
2004 amounted to $3.5 million, or 7.6% of sales, compared with $3.2 million, or
10.1% of sales in the same 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 September 25, 2004 amounted to $1.4
million compared to $0.6 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 third quarter of 2004 vs. the third 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 expense for the quarter ended
September 25, 2004 also includes: (i) $135,000 of a mark-to-market adjustment
on its interest rate swap agreements as described above; (ii) $75,000 of debt
discount amortization; and (iii) a $60,000 adjustment related to the valuation
of the warrants liability. As a result of a preferred stock settlement agreement, the Company made
two preferred stock redemption payments during the three months ended September
25, 2004, which resulted in the gain on redemption of redeemable preferred
stock of $566,000 in the accompanying condensed consolidated statements of
operations. For the third quarter of 2004, we recognized income tax expense of $25,000
related to state income taxes. For Federal income taxes, we have utilized net
operating loss carry forwards to the extent of taxable income, and decreased
the valuation allowance accordingly. First nine months, 2004 versus first nine months, 2003 Net sales for the nine months ended September 25, 2004 were $136.8 million
compared to $98.2 million for the nine months ended September 27, 2003, an
increase of $38.6 million or 39.2%. The volume portion of the sales increase,
totaling approximately $26.2 million, 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 $19.1 million for the comparable nine month periods
and accounted for nearly 64% of our nine month revenue. Industrial related
revenues increased by nearly $7.9 million and agricultural-related revenues
increased modestly for the comparable periods. In addition, sales for the nine
months ended September 25, 2004 included surcharges passed through to our
customers of approximately $12.4 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
89% of our net sales for the first nine months of 2004 and 2003, respectively. Gross profit for the nine months ended September 25, 2004 was $17.0
million compared with $13.7 million for the nine months ended September 25,
2003, an increase of $3.3 million or 24.2%. The Companys gross profit
percentage decreased to 12.4% from 13.9%. 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 in
response to customer demand. The gross profit percentage is also decreased
approximately 1.3% by passing through to customers, at cost with no margin, the
increased steel costs described in Note 11 above. 13




---



##### Table of Contents



Selling and administrative expenses for the nine months ended September
25, 2004 amounted to $10.5 million, or 7.7% of sales, compared with $9.8
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 nine months ended September 25, 2004 amounted to
$3.1 million compared to $2.5 million in the comparable period a year ago. This
increase results from a combination of changing factors during the nine months
ended September 25, 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 and third
quarters of 2004, as well as higher interest rates in the second and third
quarters of 2004 versus the comparable quarters of 2003. The debt increase
results from the new credit facility which has provided necessary working
capital for the Companys operations. Interest expense for the nine months
ended September 25, 2004 also includes: (i) $135,000 of a mark-to-market
adjustment on the interest rate swap agreements as described above; (ii)
150,000 of debt discount amortization; and (iii) a $120,000 adjustment related
to the valuation of the warrants liability. Interest on redeemable preferred stock relates to the accretion of the
discount on redeemable preferred stock for the nine months ended September 25,
2004. This classification in other expense resulted from the implementation of
SFAS 150. For the first nine months of 2003, the accretion was classified as
accretion of discount on preferred shares. The accretion period ended in
April 2004. As a result of the preferred stock settlement agreement, the Company made
eight preferred stock redemption payments during the nine months ended
September 25, 2004, which resulted in the gain on redemption of redeemable
preferred stock of $2,266,000 in the accompanying condensed consolidated
statements of operations. For the first nine months of 2004, we recognized income tax expense of
$175,000 related to state income taxes. For 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 September 25, 2004 was $5.8 million
compared to a deficit of $6.8 million at December 31, 2003. This represents an
increase in working capital of approximately $12.6 million. This working
capital increase results primarily from a March 26, 2004 refinancing described
below, and the growth of inventories and accounts receivable (financed by
long-term debt). 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; 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 balance outstanding under the
four-year secured term loan described below by $1,000,000 and reduce the
balance outstanding under the secured revolving credit facility described below
by $1,000,000. Under the terms of the new agreements and amendments, effective as of June
23, 2004, and as of September 25, 2004, the Company has: 14




---



##### Table of Contents



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 which began June 30, 2004 and continue through March 31, 2005 and
due in quarterly installments of $750,000 beginning June 30, 2005 through
December 31, 2007 with the balance of $10,667,500 due on March 31, 2008. A
mandatory principal payment of $82,500 (one-half of the prepayment received
as described above in Note 3) was made in September 2004. 2) A secured revolving credit facility with a limit of $18 million, with
variable rate interest, with an initial revolving credit balance of $8.7
million, and with initial availability of $5.4 million as of March 26, 2004.
At September 25, 2004, the Company has a revolving credit balance of $12.2
million and availability of $5.1 million. 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 applicable margin. At
inception, the bank rate plus applicable margin was 6.75% and the adjusted
LIBOR plus a LIBOR applicable margin was 5.35%. At September 25, 2004, those
rates were 7.25% and 5.87%, respectively. The Company entered into a swap agreement effective June 30, 2004 on
$10,750,000 (the original notional amount) of its term debt. Under this
agreement, the Company pays a fixed LIBOR rate of 3.72% on the notional
amount, which is payable quarterly. In accordance with the term loan
agreement, the Company also pays an interest margin which adjusts in steps
based on achieved operating and leverage metrics (4.25% during 2004). The
notional amount for the period from June 30 through September 30, 2004 was
$10,750,000. The swap agreement expires March 31, 2008. As described in
Item 3 below, the swap agreement is for the purpose of limiting the effects
of interest rate increases on approximately one-half of the Companys
variable rate term debt.
Quarterly, the Company determines the fair value of the swap agreement.
As of September 25, 2004, and for the three months then ended, the Company
recorded interest expense of $135,000, and a corresponding liability, to
mark-to-market the fair value of the swap agreement. 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; or d) a prepayment of 75% or more of the original principal
balance of the senior secured subordinated loan. The Company estimated the fair value of the warrants at the date of issue,
and as of September 25, 2004 to be $1.5 million, and $1.62 million,
respectively. The $1.62 million estimate is reported as warrants payable in the
accompanying Condensed Consolidated Balance Sheets. The fair value at the date
of issue was recorded as debt discount, and is being amortized using the
effective yield method over 5 years, the term of the related senior secured
subordinated note. The Company updates, on a quarterly basis, the fair value of
the warrants and records 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 15




---



##### Table of Contents



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, totaled 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. 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 $4.2 million of capital expenditures during the first nine
months of 2004, including approximately $2.5 million related to expansion
activities and approximately $1.7 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 $3.0 will be for expansion activities and the remaining
$2.0 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 estimates the Companys contractual obligations at
September 25, 2004: Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years(In thousands)Bank indebtednessTerm loan
    
    $
    20,418
    
    
    $
    3,000
    
    
    $
    17,418
    
    
    $
    
    
    
    $
    Revolving line of credit
    
    
    12,218
    
    
    
    
    
    
    
    12,218
    
    
    
    
    
    
    
    Senior subordinated debt
    
    
    12,216
    
    
    
    
    
    
    
    
    
    
    
    12,216
    
    
    
    Other debt obligations
    
    
    2,101
    
    
    
    523
    
    
    
    1,340
    
    
    
    238
    
    
    
    Operating leases
    
    
    24,864
    
    
    
    7,008
    
    
    
    14,780
    
    
    
    3,076
    
    
    
    Preferred stock redemption
    
    
    1,100
    
    
    
    500
    
    
    
    600
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    72,917
    
    
    $
    11,031
    
    
    $
    46,356
    
    
    $
    15,530
    
    
    $
    
 Under its bank credit facility, the Company had $618,000 standby letters
of credit outstanding at September 25, 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 16




---



##### Table of Contents



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. Eight of the 30 redemption payments have been paid
as of September 25, 2004. 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, industrial
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 fixed the
interest rate on approximately 50% of the Companys term loan as described in
Note 7 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. 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. 17




---



##### Table of Contents



(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 to 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 default on the senior secured
subordinated loan. The June 23, 2004 credit facility amendments had no impact
on the number of warrants. 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 September 25, 2004. 
 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.
  (B)
    
    Reports on Form 8-K. Form 8-K dated August 13, 2004 reporting results of operations for the
quarter ended June 26, 2004. 18




---



##### Table of Contents



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. LindemannChief Financial OfficerDated: November 8, 2004
 19