** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

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** **

**FORM 10-Q**

**(MarkOne)**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For theQuarterly Period Ended March 30, 2002**

**OR**

** **
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**FOR THETRANSITION PERIOD FROM                 TO **

 

**COMMISSIONFILE NUMBER 0–13198**

 

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**MORTON INDUSTRIAL GROUP, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Georgia**  (State or other jurisdiction of  Incorporation or organization) |   | **38-0811650**(IRS Employer  Identification No.) |
|------------------------------------------------------------------------------|--------|--------------------------------------------------|

 

 

**1021 W.Birchwood, Morton, Illinois 61550**

(Address ofprincipal executive offices)

 

 

**(309) 266–7176**

(Registrant’stelephone number, including area code)

 

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Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý  No o

 

|                                       |   | **Outstanding  as of  April 26, 2002** |
|--------------------------------------------|--------|----------------------------------------|
| Class A Common  Stock, $.01 par value |   | 4,400,850                              |
| Class B Common  Stock, $.01 par value |   | 200,000                                |

 

 

 

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**PART 1 — FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Operations**

**For the Three Months Ended March 30, 2002 and March 31, 2001**

**(Dollars in thousands, except per share data)**

**(Unaudited)**

 
|                                                               |   | **Three Months Ended** |   |
|--------------------------------------------------------------------|--------|------------------------|--------|
|                                                               |   | **March 30, 2002**     |   | **March 31, 2001** |   |
|                                                               |   |                   |   |   |   |
| Net sales                                                          |   | $                      | 54,410 |   | 74,404 |   |
| Cost of sales                                                      |   | 46,790                 |   | 64,827 |   |
| Gross profit                                                       |   | 7,620                  |   | 9,577 |   |
|                                                               |   |                   |   |   |   |
| Operating expenses:                                                |   |                   |   |   |   |
| Selling expenses                                                   |   | 1,276                  |   | 1,641 |   |
| Administrative expenses                                            |   | 4,657                  |   | 5,340 |   |
| Total operating expenses                                           |   | 5,933                  |   | 6,981 |   |
|                                                               |   |                   |   |   |   |
| Operating income                                                   |   | 1,687                  |   | 2,596 |   |
|                                                               |   |                   |   |   |   |
| Other income (expense):                                            |   |                   |   |   |   |
| Interest expense                                                   |   | (1,853                 | )      | (2,564 | ) |
| Other                                                              |   | 17                     |   | 2 |   |
| Total other income (expense)                                       |   | (1,836                 | )      | (2,562 | ) |
|                                                               |   |                   |   |   |   |
| Earnings (loss) before income taxes                                |   | (149                   | )      | 34 |   |
|                                                               |   |                   |   |   |   |
| Income taxes                                                       |   | —                 |   | — |   |
|                                                               |   |                   |   |   |   |
| Net earnings (loss)                                                |   | (149                   | )      | 34 |   |
|                                                               |   |                   |   |   |   |
| Accretion of discount on preferred shares                          |   | (279                   | )      | (235 | ) |
|                                                               |   |                   |   |   |   |
| Net earnings (loss) available to common stockholders               |   | $                      | (428   | ) | (201 | ) |
|                                                               |   |                   |   |   |   |
| Earnings (loss) available to common stockholders per share-basic   |   | $                      | (0.09  | ) | (0.04 | ) |
|                                                               |   |                   |   |   |   |
| Earnings (loss) available to common stockholders per share-diluted |   | $                      | (0.09  | ) | (0.04 | ) |
|                                                               |   |                   |   |   |   |
| Weighted average number of common shares                           |   |                   |   |   |   |
| Basic                                                              |   | 4,600,850              |   | 4,600,850 |   |
|                                                               |   |                   |   |   |   |
| Diluted                                                            |   | 4,600,850              |   | 4,600,850 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

2

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**MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**March 30, 2002 and December 31, 2001**

**(Dollars in thousands)**

 

 
|                                                                                                 |   | **March 30, 2002** |       | **December 31, 2001** |       |
|------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-----------------------|------------|
|                                                                                                 |   | **(Unaudited)**    |       |                  |       |
| **Assets**                                                                                           |   |               | ** ** |                  | ** ** |
|                                                                                                 |   |               |       |                  |       |
| Current assets:                                                                                      |   |               | ** ** |                  | ** ** |
| Trade accounts receivable, less allowance for doubtful****accounts of $296 in 2002  and $381 in 2001 |   | $                  | 20,905     |                  | 19,519     |   |
| Inventories                                                                                          |   | 23,270             |       | 22,570                |       |
| Prepaid expenses                                                                                     |   | 3,537              |       | 2,816                 |       |
| Deferred income taxes                                                                                |   | 800                |       | 800                   |       |
|                                                                                                 |   |               |       |                  |       |
| Total current assets                                                                                 |   | 48,512             |       | 45,705                |       |
|                                                                                                 |   |               |       |                  |       |
| Property, plant, and equipment, net                                                                  |   | 45,062             |       | 46,462                |       |
| Intangible assets, at cost, less accumulated amortization                                            |   | 11,162             |       | 10,353                |       |
| Deferred income taxes                                                                                |   | 4,148              |       | 4,148                 |       |
| Other assets                                                                                         |   | 1,052              |       | 1,086                 |       |
|                                                                                                 |   |               |       |                  |       |
|                                                                                                 |   | $                  | 109,936    |                  | 107,754    |   |
|                                                                                                 |   |               |       |                  |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                             |   |               | ** ** |                  | ** ** |
|                                                                                                 |   |               |       |                  |       |
| Current liabilities:                                                                                 |   |               |       |                  |       |
| Outstanding checks in excess of bank balance                                                         |   | $                  | 2,509      |                  | 4,021      |   |
| Current installments of long-term debt                                                               |   | 5,343              |       | 5,268                 |       |
| Accounts payable                                                                                     |   | 29,877             |       | 30,133                |       |
| Accrued expenses                                                                                     |   | 7,205              |       | 6,804                 |       |
|                                                                                                 |   |               |       |                  |       |
| Total current liabilities                                                                            |   | 44,934             |       | 46,226                |       |
|                                                                                                 |   |               |       |                  |       |
| Long-term debt, excluding current installments                                                       |   | 76,731             |       | 73,870                |       |
| Other liabilities                                                                                    |   | 822                |       | 280                   |       |
|                                                                                                 |   |               |       |                  |       |
| Total liabilities                                                                                    |   | 122,487            |       | 120,376               |       |
|                                                                                                 |   |               |       |                  |       |
| Redeemable preferred stock                                                                           |   | 7,622              |       | 7,343                 |       |
|                                                                                                 |   |               |       |                  |       |
| Stockholders’ equity (deficit):                                                                 |   |               |       |                  |       |
| Class A common stock                                                                                 |   | 44                 |       | 44                    |       |
| Class B common stock                                                                                 |   | 2                  |       | 2                     |       |
| Additional paid-in capital                                                                           |   | 20,883             |       | 20,883                |       |
| Retained deficit                                                                                     |   | (40,567            | )          | (40,139               | )          |
| Accumulated other comprehensive loss                                                                 |   | (535               | )          | (755                  | )          |
|                                                                                                 |   |               |       |                  |       |
| Total stockholders’ equity (deficit)                                                            |   | (20,173            | )          | (19,965               | )          |
|                                                                                                 |   |               |       |                  |       |
|                                                                                                 |   | $                  | 109,936    |                  | 107,754    |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

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**MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statements of Cash Flows**

**For the Three Months Ended March 30, 2002 and March 31, 2001**

**(Dollars in thousands)**

**(Unaudited)**

 
|                                                           |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                           |   |     |   |     |   |
| Net cash provided by (used in) operating activities            |   | $        | (128   | )        | 3,859  |   |
|                                                           |   |     |   |     |   |
| Cash flows from investing activities:                          |   |     |   |     |   |
| Proceeds from sale of machinery and equipment                  |   | 65       |   | —   |   |
| Capital expenditures                                           |   | (805     | )      | (1,371   | )      |
| Net cash used in investing activities                          |   | (740     | )      | (1,371   | )      |
|                                                           |   |     |   |     |   |
| Cash flows from financing activities:                          |   |     |   |     |   |
| Net borrowings (repayments) under revolving credit facility    |   | (2,641   | )      | (539     | )      |
| Increase (decrease) in checks issued in excess of bank balance |   | (1,512   | )      | 119      |   |
| Proceeds from issuance of long-term debt                       |   | 6,003    |   | —   |   |
| Increase in financing fees                                     |   | (691     | )      | —   |   |
| Principal payments on long-term debt and capital leases        |   | (291     | )      | (2,068   | )      |
| Net cash (used in) provided by financing activities            |   | 868      |   | (2,488   | )      |
|                                                           |   |     |   |     |   |
| 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                                                       |   | $        | 1,393  |     | 2,564  |   |
|                                                           |   |     |   |     |   |
| Income taxes                                                   |   | $        | — |     | 24     |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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**MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statements of Stockholders’ Equity(Deficit)**

**For the Three Months Ended March 30, 2002**

**(Dollars in thousands)**

**(Unaudited)**

 

 
|                                                      |   | **Class A**      |       | **Class B**      |       |           |       |         |       | **Accumulated** |       |          |       |
|-----------------------------------------------------------|--------|------------------|------------|------------------|------------|----------------|------------|--------------|------------|-----------------|------------|---------------|------------|
|                                                      |   | **common stock** |       | **common stock** |       | **Additional** |       | **Retained** |       | **other**       |       |          |       |
|                                                      |   | **Shares**       |       |             |       | **Shares**     |       |         |       | **paid-in**     |       | **earnings**  |       | **comprehensive** |   |   |   |
|                                                      |   | **issued**       |       | **Amount**       |       | **issued**     |       | **Amount**   |       | **capital**     |       | **(deficit)** |       | **loss** |   | **Total** |   |
|                                                      |   |             | ** ** |             | ** ** |           | ** ** |         | ** ** |            | ** ** |          | ** ** |   | ** ** |   | ** ** |
| Balance, December 31, 2001                                |   | 4,400,850        |       | $                | 44         |           | 200,000    |         | $          | 2               |       | $             | 20,883     |   | $ | (40,139 | ) | $ | (755 | ) | $ | (19,965 | ) |
|                                                      |   |             |       |             |       |           |       |         |       |            |       |          |       |   |   |   |   |
| Comprehensive income (loss):                              |   |             |       |             |       |           |       |         |       |            |       |          |       |   |   |   |   |
| Net (loss)                                                |   | —           |       | —           |       | —         |       | —       |       | —          |       | (149          | )          | — |   | (149 | ) |
| Other comprehensive income, gainon derivative instruments |   | —           |       | —           |       | —         |       | —       |       | —          |       | —        |       | 220 |   | 220 |   |
| Total comprehensive income (loss)                         |   |             |       |             |       |           |       |         |       |            |       |          |       |   |   | 71 |   |
| Accretion of discount onpreferred shares                  |   | —           |       | —           |       | —         |       | —       |       | —          |       | (279          | )          | — |   | (279 | ) |
|                                                      |   |             |       |             |       |           |       |         |       |            |       |          |       |   |   |   |   |
| Balance, March 30, 2002                                   |   | 4,400,850        |       | $                | 44         |           | 200,000    |         | $          | 2               |       | $             | 20,883     |   | $ | (40,567 | ) | $ | (535 | ) | $ | (20,173 | ) |

 

 

See accompanying notes to condensedconsolidated financial statements.

 

5

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**MORTONINDUSTRIAL GROUP, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 30,2002 and March 31, 2001**

**(Unaudited)**

 

 

**(1) Nature of Business.**

 

The Company,operating through its subsidiaries, is a contract manufacturer and supplier ofhigh-quality fabricated sheet metal and plastic components and subassembliesfor industrial, construction, agricultural, and recreational vehicle originalequipment manufacturers located primarily in the Midwestern and SoutheasternUnited States.

 

**(2) Interim Financial Data.**

 

The CondensedConsolidated Financial Statements at March 30, 2002, and for the three monthsended March 30, 2002 and March 31, 2001, are unaudited and reflect alladjustments, consisting of normal recurring accruals which are, in the opinionof management, necessary for a fair presentation of the financial position,operating results, and cash flows for the interim periods indicated. TheCompany’s fiscal quarters end on a Saturday (nearest to a quarter end) exceptfor the fourth quarter which ends on December 31. For  the quarter ended March 30, 2002, there were63 shipping days, and for the quarter ended March 31, 2001, there were 64shipping days.  Results of operationsfor the interim periods are not necessarily indicative of the results ofoperations for the full fiscal year. The condensed consolidated financialstatements should be read in connection with the consolidated financialstatements and notes thereto, together with management’s discussion andanalysis of financial condition and results of operations of Morton IndustrialGroup, Inc. contained in the Company’s Annual Report on Form 10–Kfor the year ended December 31, 2001.

 

**(3)  Inventory.**

 

                The Company’s inventory, in thousands of dollars, asof March 30, 2002, and December 31, 2001, is summarized as follows:

 
|                                                        |   | **March 30,  2002** |   | **December  31, 2001** |   |
|-------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                                        |   |                |   |                   |   |
| Raw materials,  purchased parts and manufactured components |   | $                   | 11,271 |                   | $      | 9,626 |   |
| Work-in-process                                             |   | 4,021               |   | 4,847                  |   |
| Finished goods                                              |   | 7,978               |   | 8,097                  |   |
|                                                        |   |                |   |                   |   |
|                                                        |   | $                   | 23,270 |                   | $      | 22,570 |   |

 

6

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**(4)  Earnings PerShare.**

 

The followingreflects the reconciliation of the numerators and denominators of the earningsper share and the earnings per share assuming dilution computations:

 
|                                                      |   | **Quarter  Ended March 30, 2002** |     | **Quarter  Ended March 31, 2001** |      |
|-----------------------------------------------------------|--------|-----------------------------------|----------|-----------------------------------|-----------|
|                                                      |   | **(Loss)  (Numerator)**           |     | **Shares  (Denominator)**         |      | **Per Share  Amount** |   | **(Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                                      |   |                              |     |                              |      |   |   |   |   |   |   |   |   |
| Basic earnings (loss) available to common shareholders    |   | $                                 | (428,000 | )                                 | 4,600,850 |   | $ | (.09 | ) | $ | (201,000 | ) | 4,600,850 |   | $ | (.04 | ) |
|                                                      |   |                              |     |                              |      |   |   |   |   |   |   |   |   |
| Effect of dilutive securities, stock options and warrants |   | —                            |     | —                            |      | — |   | — |   | — |   | — |   |
|                                                      |   |                              |     |                              |      |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) available to common shareholders  |   | $                                 | (428,000 | )                                 | 4,600,850 |   | $ | (.09 | ) | $ | (201,000 | ) | 4,600,850 |   | $ | (.04 | ) |

 

At both March 30, 2002and March 31, 2001, 307,504 options and warrants were excluded from thecomputation of diluted earnings per share due to their anti-dilutive effect.

 

**(5) Segment Reporting.**

 

                Prior to the first quarter, 2002, the Companypresented two reportable segments, contract metal fabrication and contractplastic fabrication. The contract metal fabrication segment provides fullservice fabrication of parts and sub–assemblies for the industrial,construction, agricultural and recreational vehicle equipment industry. Thecontract plastic fabrication segment provides full–service vacuum formedand injected–molded parts and sub–assemblies for the construction,agricultural and industrial equipment industry.

 

Due to the need toclosely monitor liquidity and compliance with debt covenants, the Company haschanged its internal financial reports. Accordingly, effective with this first quarter, 2002, the Company ispresenting segment data based upon the results of operations by applicablecredit facility.  The Company’s twoseparate credit facilities are described in more detail in these footnotes andin the Liquidity and Capital Resources section of  Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

7

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The followingsegment data, in thousands of dollars, is for the quarters ended March 30, 2002and March 31, 2001 (restated):

 
|                              |   | **Harris  Trust &  Savings Bank  Credit Facility** |   | **General  Electric  Capital Corp.  Credit Facility** |   | **Total** |   |
|-----------------------------------|--------|--------------------------------------------------------|--------|-------------------------------------------------------|--------|-----------|--------|
|                              |   |                                                   |   |                                                  |   |      |   |
| **Quarter  Ended March 30, 2002** |   |                                                   |   |                                                  |   |      |   |
| Revenues from external customers  |   | $                                                      | 36,345 |                                                  | $      | 18,065    |   | $ | 54,410 |   |
| Segment operating income (loss)   |   | 1,803                                                  |   | (116                                                  | )      | 1,687     |   |
| Interest expense                  |   | 1,313                                                  |   | 540                                                   |   | 1,853     |   |
|                              |   |                                                   |   |                                                  |   |      |   |
| **Quarter Ended March 31, 2001**  |   |                                                   |   |                                                  |   |      |   |
| Revenues from external customers  |   | $                                                      | 49,726 |                                                  | $      | 24,678    |   | $ | 74,404 |   |
| Segment operating income          |   | 1,972                                                  |   | 624                                                   |   | 2,596     |   |
| Interest expense                  |   | 1,820                                                  |   | 744                                                   |   | 2,564     |   |

 

 

**(6) Debt.**

 

 

**                TheCompany has two separate credit facilities. One facility is with Harris Trust and Savings Bank, as Agent(Harris).  This credit facility financesthe Company’s corporate operations, as well as its  contract metal fabrication operations in Illinois, North Carolinaand South Carolina and its contract plastics fabrication operations inIowa.  The second facility is withGeneral Electric Capital Corporation (GECC). This credit facility finances the Company’s contract plastic fabricationoperations in North Carolina, South Carolina and Kentucky.  The two credit facilities are separatelysecured by the assets of the operations they support.   Harris has no recourse against the assets secured by GECC;neither does GECC have recourse against the assets secured by Harris.**

** **

                The debt agreements related tothese credit facilities contain restrictions on capital expenditures, incurringadditional debt or liens, making investments, mergers and acquisitions, sellingassets or making payments such as dividends or stock repurchases, as well ascontaining various financial covenants.

 

*The HarrisTrust and Savings Bank Credit Facility*

 

                In February 2002, theCompany entered into an amended and restated secured revolving credit facilitywith the Harris syndicate. The revolving credit agreement permits the Companyto borrow up to a maximum of $21,000,000. The agreement requires payment of aquarterly commitment fee of .50% per annum of the average daily unused portionof the revolving credit facility. Interest is due monthly and is based on LIBORplus 4.0% (effective rate of 6.25% at March 30, 2002). The Company,alternatively, could select a domestic interest rate. The amount availableunder the revolving credit facility is limited to 85% of qualified accountsreceivable, 50% of eligible inventory, plus $2,500,000 of other assets. Therevolving credit agreement expires July 1, 2003.  At March 30, 2002, the Company had $17,400,000 outstanding and $1,547,000available under its Harris revolving credit facility.

 

8

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                In February 2002, theCompany entered into an amended and restated secured term loan arrangement withthe Harris syndicate for a term loan of $32,965,000.  The term loan under this financing arrangement is amortizedmonthly with principal payments ranging from $235,000 to $500,000, and thebalance of $24,930,000 is due July 1, 2003. Interest is due monthly and isbased upon LIBOR plus 4.0% (effective rate of 6.25% at March 30, 2002). TheCompany, alternatively, could select a domestic interest rate. The agreement issecured by a first lien on all of the Company’s accounts receivable, inventory,equipment and various other assets, other than the assets of Morton CustomPlastics LLC. The Company intends to obtain additional loans or fundingsupport from other sources by the end of the term of this arrangement, whichmay not be available on acceptable terms and conditions. Failure to do so couldhave a material adverse effect on the operations.

 

                The new Harris revolving creditfacility and terms loans replaced existing credit facilities and did notprovide additional availability. However, the repayment and fee terms were modified, and the short-termprincipal payments and fees were reduced.

 

                In connection with the Harris loans, we have grantedthe lender a first lien on all of the Company's accounts receivable, inventory,equipment and various other assets, except for the assets of Morton CustomPlastics, LLC.

 

*The GeneralElectric Capital Corporation Credit Facility*

 

                In March 2002, MortonCustom Plastics LLC entered into an amended and restated  revolving credit facility and an amended andrestated senior credit facility with GECC.

 

                The new GECC revolving creditfacility allows for borrowings up to a maximum of $10,000,000. Of the amountavailable under the revolver, $1,000,000 is held back as reserve fordiscretionary use approved by the lender. The Company also incurs a fee basedupon the unused revolving credit facility. The amount available under therevolving credit facility is generally limited to 85% of qualified accountsreceivable and 60% of eligible inventory. The revolving credit agreementexpires August 30, 2006.  AtMarch 30, 2002, the Company had $8,761,000 outstanding or committed and$1,239,000 available, including the discretionary use reserve, under its GECCrevolving credit facility.

 

                The new GECC senior creditfacility includes three term loans with initial balances of $10,000,000(Term A), $7,000,000 (Term B) and $5,000,000 (Term C),respectively. The maturity date on the new senior credit facility isAugust 30, 2006.

 

                The new GECC revolving creditfacility and term loans total $32,000,000 and replaced a similar facility whichtotaled $28,000,000, providing additional availability.

 

                The GECC loans are secured by afirst priority security interest in all of the Morton Custom Plastics LLCassets, including, but not limited to, accounts receivable, inventories,leaseholds, fixed assets, intangible assets and trade names.

 

                The interest on the GECCrevolving credit facility, Term A and Term B is at LIBOR plus450 basis points, with a LIBOR floor of 3% (effective rate of 7.25% atMarch 30, 2002). The Company, alternatively, could select an index rate.Interest is to be paid monthly on these loans. The interest on Term C is13% payment-in-kind. Unpaid interest on Term C is due at maturity.

 

                The principal on Term A andTerm B amortizes quarterly in various amounts beginning onSeptember 30, 2002 for Term A and June 30, 2002 for Term B.Final installments for Term A and Term B are due at maturity, whichis August 30, 2006. The principal on the revolving credit facility andTerm C are due at maturity, which is August 30, 2006.

 

9

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*Warrant*

 

                In conjunction with the newcredit facility, the Company issued to GECC a common stock warrant to purchase70% (“Warrant Ownership Percentage”) of the outstanding ownership interests (ona fully diluted basis) of Morton Custom Plastics LLC. This warrant relatesonly to Morton Custom Plastics, LLC and does not relate to either the Class Aor Class B Common Stock of Morton Industrial Group, Inc.** **The Warrant Ownership Percentage shall be reduced to 35% ifthe loan is repaid in full before March 25, 2004. If adjusted EBITDA forthe year ending December 31, 2003, as defined in the agreement, is atleast $8,000,000 and the Warrant Ownership Percentage has not already beenreduced, the Warrant Ownership Percentage shall be reduced to 51%.

 

                At any time on or after theoccurrence of (i) the scheduled maturity date, (ii) an event ofdefault, or (iii) the date of indefeasible prepayment in full of the loansand cancellation of letters of credit and permanent reduction of revolving loancommitment to zero (“Trigger Events”), the holder has the right to require theCompany to purchase all or any part of the warrant (“Put Feature”). The Companyalso has the right to repurchase all, but not less than all, of the outstandingwarrant and equity interests of the holder subsequent to a Trigger Event (“CallFeature”). The Put Feature and Call Feature each have a purchase price equal tothe greater of the applicable floor price and the fair market value asdetermined in good faith by the board and subject to approval by the holder.The initial floor price is $500,000, increasing to $4,000,000 by the debtmaturity date in August, 2006 and to $13,000,000 at the warrant expiration datein March, 2012.

 

                The warrant is accounted forunder EITF 00-19 "Accounting for Derivative Financial Instruments Indexedto, and Potentially Settled in, a Company's Own Stock."  Since the warrant can be settled for cash atthe holder's option, it is recorded as a liability and as a discount on the relateddebt at its estimated fair value of $135,000. This instrument will be adjusted to fair value each period with acorresponding charge or credit to earnings. The fair value of the warrant wasestimated using a multiple of projected EBITDA, less total debt. No value wasassigned to the "Put Feature" at this time. The estimated value ofthis instrument could change significantly in the future based on changes inprojected EBITDA or the estimated value of the "Put Feature".

 

**(7)  Goodwill.**

 

                The Company adopted SFAS No.142, Goodwill and OtherIntangible Assets, effective January 1, 2002, and accordingly, no goodwillamortization was recorded for the quarter ended March 30, 2002.  As of March 30, 2002, the Company hasunamortized goodwill in the amount of $8.3 million which is subject to thetransition provisions of SFAS 141 and 142. Because of the extensive effortneeded to comply with adopting SFAS 141 and 142, it is not practicable toreasonably estimate the impact of adopting these Statements on the Company’sfinancial statements at the date of this report, including whether it will berequired to recognize any transitional impairment losses as the cumulativeeffect of a change in accounting principle.

 

                Goodwill amortization totaled$95,000 for the first quarter of 2001. Had goodwill not been amortized during 2001, net earnings (loss)available to common stockholders per share for the quarter ended March 31, 2001 would have been $(0.02).

 

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

                The following discussion and analysis describeschanges in the Company’s financial condition since December 31, 2001. Theanalysis of results of operations compares the quarters ended March 30, 2002and March 31, 2001:

 

**RESULTS OF OPERATIONS**

 

**FIRST QUARTER, 2002 VERSUS FIRSTQUARTER, 2001**

 

                Our net revenues for the first quarter, 2002 were$54.4 million compared to $74.4 million for the first quarter of2001, a decrease of $20.0 million, or 26.9%.  The sales decrease resulted primarily from decreased demand byexisting customers.

 

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                Our sales to Deere & Company andCaterpillar Inc., were approximately 57% and 59% of our revenues for thefirst quarters, 2002 and 2001, respectively. Revenues from these customers decreased approximately 28% from the sameperiod in 2001.

 

                Our gross profits for the first quarter, 2002decreased by approximately $2.0 million, a decrease of 20.4%, versus thesame three months in 2001. The overall gross profit percentage increased to14.0% for the first quarter of 2002 from 12.9% for the first quarter of 2001.The decrease in gross profit dollars resulted primarily from the decrease insales.  The increase in the gross profitpercentage resulted primarily from continuing cost management efforts,including right-sizing the number of employees and the continued implementationof lean manufacturing processes.

 

                Our selling and administrative expenses for the firstquarter, 2002 amounted to $5.9 million, or 10.9% of net sales compared to$7.0 million, or 9.4% of net sales for the first quarter of 2001.  The percentage increase related to thedecrease in sales.  The $1.1 milliondecrease in expenses related to continuing cost management efforts.

 

                Our interest expense was $1.9 million for thefirst quarter of  2002, compared with$2.6 million for the first quarter of 2001. Although our overall debt level has increased slightly from a year ago,decreases in the average interest rates for the comparable quarters hassignificantly reduced interest expense.

 

                For the first quarter of 2002, we did not provide atax benefit on the pre–tax loss of $149 thousand.  For the first quarter of 2001, we did notprovide a tax provision on $34 thousand of pre-tax income.  For both periods, the impact on the netoperating loss carryforward was offset by changes in the valuation allowancewith no impact on the net deferred tax assets.

 

                In accordance with SFAS No. 142, the Company has notamortized goodwill during the first quarter of 2002. Goodwill amortization totaled $95,000 for the first quarter of2001.  Had goodwill not been amortizedduring 2001, net earnings (loss) available to common stockholders per share forthe quarter ended March 31, 2001 would have been $(0.02).

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

                Our consolidated working capital at March 30, 2002was $3.6 million compared to a deficit of $0.5 million atDecember 31, 2001, an increase in working capital of approximately $4.1million.  The increase in workingcapital relates primarily to increases in accounts receivable and inventorylevels since year end, and was funded by an increase in long-term debt.

 

                The Company has two separate credit facilities.  One facility is with Harris Trust andSavings Bank, as Agent (Harris).  Thiscredit facility finances the Company’s corporate operations, as well asits  contract metal fabricationoperations in Illinois, North Carolina and South Carolina and its contractplastics fabrication operations in Iowa. The second facility is with General Electric Capital Corporation (GECC).  This credit facility finances the Company’scontract plastic fabrication operations in North Carolina, South Carolina andKentucky.  The two credit facilities areseparately secured by the assets of the operations they support.   Harris has no recourse against the assetssecured by GECC; neither does GECC have recourse against the assets secured byHarris.

 

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*The HarrisTrust and Savings Bank Credit Facility*

 

                In February, 2002, the Companyentered into an amended and restated secured revolving credit facility withHarris Trust and Savings Bank, as Agent (Harris). The revolving creditagreement permits the Company to borrow up to a maximum of $21,000,000. Theagreement requires payment of a quarterly commitment fee of .50% per annum ofthe average daily unused portion of the revolving credit facility. Interest isdue monthly and is based on LIBOR plus 4.0% (totalling 6.25% at March 30,2002). We, alternatively, could select an interest rate of bank prime plus1.5%. The amount available under the revolving credit facility is limited to85% of qualified accounts receivable, 50% of eligible inventory, plus$2,500,000 of other assets. The revolving credit agreement expires July 1,2003. At March 30, 2002, the Company had $17,400,000 outstanding and $1,547,000available under its Harris revolving credit facility.

 

                In February, 2002, the Companyentered into an amended and restated secured term loan arrangement with Harrisfor a term loan of $32,965,000. This term loan is amortized monthly withprincipal payments ranging from $235,000 to $500,000 and the balance of$24,930,000 due July 1, 2003. Interest is due monthly and is based uponLIBOR plus 4.0% (totalling 6.25% at March 30, 2002). We, alternatively, couldselect an interest rate of bank prime plus 1.5%. These Harris debt agreementshave maturity dates of July 1, 2003. The Company intends to obtain loansto refinance the debt from other sources by the end of the term of thisarrangement, which may not be available on acceptable terms and conditions.Failure to do so could have a material adverse effect on the Company’soperations.

 

                In connection with these Harrisloans, we have granted the lender a first lien on all of the Company’s accountsreceivable, inventory, equipment and various other assets, except for theassets of Morton Custom Plastics, LLC. These Harris debt agreements, whichfinance the contract metal fabrication segment and one of the contract plasticfabrication segment locations, contain restrictions on capital expenditures,additional debt or liens, investments, mergers and acquisitions, asset salesand payments such as dividends or stock repurchases. The agreements also imposevarious financial covenants.  Under theterms of this credit facility, no amounts have been available for payment ofdividends.

 

                In connection with the Harrisfinancing, we have two fixed interest rate swap agreements with a commercialbank (the “counter party”). The first agreement has a notional principal amountof $5.0 million and a termination date of May 31, 2003. The secondagreement has a notional principal amount of $14.1 million and atermination date of June 30, 2003. The notional principal amount declinesover the term of both agreements based upon a defined amortization schedule.The counter party waived its unilateral right to cancel both agreements as ofJune 30, 2001. As described in Item 7A below, these agreements arefor the purpose of limiting the effects of interest rate increases on half ofthe Company’s floating rate term debt with Harris.

 

                Historically, we have met ournear term liquidity requirements for our businesses financed by Harris withcash flow from operations, the Harris line of credit, and management of ourworking capital to reflect current levels of operations. The national economicslowdown, which our reduced revenues reflect, has increased pressure on thesesources of liquidity. The new Harris revolving credit facility and term loansreplaced existing credit facilities and did not provide additionalavailability. However, the repayment and fee terms were modified, and theshort-term principal payments and fees were reduced. We anticipate that theamended and restated agreements with Harris will assist us in meeting ourliquidity requirements through the term of these agreements.

 

*The GeneralElectric Capital Corporation Credit Facility*

 

                In March, 2002, to restructurethe financing related to the Morton Custom Plastics, LLC operations, theCompany entered into an amended and restated revolving credit facility and anamended and restated senior credit facility with its existing lender, GeneralElectric Capital Corp. (GECC).

 

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                The new revolving creditfacility allows for borrowings up to a maximum of $10,000,000. Of the amountavailable under the revolver, $1,000,000 is held back as a reserve fordiscretionary use approved by the lender. The amount available under therevolving credit facility is generally limited to 85% of qualified accountsreceivable and 60% of eligible inventory. The revolving credit agreementexpires August 30, 2006. At March 30, 2002, the Company had$8,761,000 outstanding or committed and $1,239,000 available, including thediscretionary use reserve, under its GECC revolving credit facility.

 

                The new senior credit facilityincludes three term loans with initial balances of $10 million (Term A),$7 million (Term B) and $5 million (Term C),  respectively.  The maturity date on the new senior credit facility is August 30,2006.

 

                The loans are secured by a firstpriority security interest in all of the Morton Custom Plastics, LLCassets, including, but not limited to, accounts receivable, inventories,leaseholds, fixed assets, intangible assets and tradenames. The GECC agreementcontains restrictions on capital expenditures, additional debt or liens,investments, mergers and acquisitions, asset sales and payments such asdividends or stock repurchases. The agreement also imposes various financialcovenants.  Under the terms of thiscredit facility, no amounts have been available for payment of dividends.

 

                The interest on the revolvingcredit facility, Term A and Term B is LIBOR plus 450 basis points, with a LIBORfloor of 3%. The Company, alternatively, could select an Index rate. Interestis to be paid monthly on these loans. The interest on Term C is 13%payment-in-kind. Unpaid interest on Term C is due at maturity.

 

                The principal on Term A and TermB amortizes quarterly in various amounts beginning on September 30, 2002for Term A and June 30, 2002 for Term B. Final installments for Term A andTerm B are due at maturity, which is August 30, 2006. The principal on therevolving credit facility and Term C are due at maturity, which isAugust 30, 2006.

 

                Historically, we have met ournear term liquidity requirements for our businesses financed by GECC with cashflow from operations, the GECC line of credit, and management of our workingcapital to reflect current levels of operations. The national economicslowdown, which Morton Custom Plastics, LLC’s reduced revenues reflect,has increased pressure on these sources of liquidity. The new GECC revolvingcredit facility and term loans total $32 million and replaced a similarfacility which totaled approximately $28 million, providing additionalavailability. Additionally, repayment terms were modified and short-termprincipal payments were reduced. We anticipate that the amended and restatedagreements with GECC will assist the Company in meeting its near term liquidityrequirements.

 

*Warrant*

 

                In conjunction with the newcredit facility, the Company issued to GECC a common stock warrant to purchase70% (“Warrant Ownership Percentage”) of the outstanding ownership interests (ona fully diluted basis) of Morton Custom Plastics LLC. This warrant relatesonly to Morton Custom Plastics, LLC and does not relate to either the Class Aor Class B Common Stock of Morton Industrial Group, Inc.** **The Warrant Ownership Percentage shall be reduced to 35% ifthe loan is repaid in full before March 25, 2004. If adjusted EBITDA forthe year ending December 31, 2003, as defined in the agreement, is atleast $8,000,000 and the Warrant Ownership Percentage has not already beenreduced, the Warrant Ownership Percentage shall be reduced to 51%.

 

 

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                At any time on or after theoccurrence of (i) the scheduled maturity date, (ii) an event ofdefault, or (iii) the date of indefeasible prepayment in full of the loansand cancellation of letters of credit and permanent reduction of revolving loancommitment to zero (“Trigger Events”), the holder has the right to require theCompany to purchase all or any part of the warrant (“Put Feature”). The Companyalso has the right to repurchase all, but not less than all, of the outstandingwarrant and equity interests of the holder subsequent to a Trigger Event (“CallFeature”). The Put Feature and Call Feature each have a purchase price equal tothe greater of the applicable floor price and the fair market value asdetermined in good faith by the board and subject to approval by the holder.The initial floor price is $500,000, increasing to $4,000,000 by the debtmaturity date in August, 2006 and to $13,000,000 at the warrant expiration datein March, 2012.

 

                The warrant is accounted forunder EITF 00-19 "Accounting for Derivative Financial Instruments Indexedto, and Potentially Settled in, a Company's Own Stock."  Since the warrant can be settled for cash atthe holder's option, it is recorded as a liability and as a discount on therelated debt at its estimated fair value of $135,000.  This instrument will be adjusted to fair value each period with acorresponding charge or credit to earnings. The fair value of the warrant wasestimated using a multiple of projected EBITDA, less total debt. No value wasassigned to the "Put Feature" at this time. The estimated value ofthis instrument could change significantly in the future based on changes inprojected EBITDA or the estimated value of the "Put Feature".

 

*Preferred Stock*

 

                As part of the financing for the1999 Morton Custom Plastics, LLC acquisition, we issued 10,000 shares ofredeemable preferred stock, which we must redeem in April, 2004 at $1,000 pershare plus any dividends accrued since April 15, 1999. The $10 millionface value preferred stock was recorded at its fair value of$4.25 million. We are accreting the discount over a five year period usingthe effective yield method. Dividends are payable in kind at the rate of 8% perannum. We believe that certain provisions of the agreement with Worthingtonpreclude the payment of dividends, and no dividends have been accrued in 2000,2001 or 2002. There are current legal proceedings related to certainWorthington matters as described in Part II, Item 1.

 

# ***Capital Expenditures***

 

                We incurred $0.8 million ofcapital expenditures during the first quarter of 2002, primarily for the updateand purchase of manufacturing equipment.

 

                We estimate that our capitalexpenditures in 2002 will total approximately $4.2 million, of which$1.2 million will be for new production equipment and the remaining$3.0 million will be for normal replacement items.

 

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**IMPACT OF RECENTLY ISSUED ACCOUNTINGSTANDARDS**

 

                In July 2001, the FASB issuedSFAS No. 141, *Business Combinations*, and SFASNo. 142, *Goodwill and Other Intangible Assets*. SFAS 141 requiresthat the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001 as well as all purchase method businesscombinations completed after June 30, 2001. SFAS 141 also specifiescriteria intangible assets acquired in a purchase method business combinationmust meet to be recognized and reported apart from goodwill, noting that anypurchase price allocable to an assembled workforce may not be accounted forseparately. SFAS 142 will require that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead tested forimpairment at least annually in accordance with the provisions ofSFAS 142. SFAS 142 will also require that intangible assets withestimable useful lives be amortized over their respective estimated usefullives to their estimated residual values, and reviewed for impairment.

 

                The Company was required toadopt the provisions of SFAS 141 immediately and adopted SFAS 142effective January 1, 2002 Accordingly, no goodwill amortization was recorded for the quarter endedMarch 30, 2002.  In connection withSFAS 142’s transitional goodwill impairment evaluation, the Statement willrequire the Company to perform an assessment of whether there is an indicationthat goodwill is impaired as of the date of adoption. To accomplish this, theCompany must identify its reporting units and determine the carrying value ofeach reporting unit by assigning the assets and liabilities, including theexisting goodwill and intangible assets, to those reporting units as of thedate of adoption. The Company will then have up to six months from the date ofadoption to determine the fair value of each reporting unit and compare it tothe reporting unit’s carrying amount. To the extent a reporting unit’s carryingamount exceeds its fair value, an indication exists that the reporting unit’sgoodwill may be impaired and the Company must perform the second step of thetransitional impairment test. In the second step, the Company must compare theimplied fair value of the reporting unit’s goodwill, determined by allocatingthe reporting unit’s fair value to all of its assets (recognized and unrecognized)and liabilities in a manner similar to a purchase price allocation inaccordance with SFAS 141, to its carrying amount, both of which would bemeasured as of the date of adoption. This second step is required to becompleted as soon as possible, but no later than the end of the year ofadoption. Any transitional impairment loss will be recognized as the cumulativeeffect of a change in accounting principle in the Company’s statement ofoperations.

 

                As of March 30, 2002, the Company has unamortizedgoodwill in the amount of $8.3 million which is subject to the transitionprovisions of SFAS 141 and 142. Because of the extensive effort needed tocomply with adopting SFAS 141 and 142, it is not practicable to reasonablyestimate the impact of adopting these Statements on the Company’s financialstatements at the date of this report, including whether it will be required torecognize any transitional impairment losses as the cumulative effect of achange in accounting principle.

 

                In August 2001, theFinancial Accounting Standards Board issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, whichsupersedes both SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of* and the accounting andreporting provisions of APB Opinion No. 30, *Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions*(Opinion 30), for the disposal of a segment of a business (as previouslydefined in that Opinion). SFAS 144 retains the fundamental provisions inSFAS 121 for recognizing and measuring impairment losses on long-livedassets held for use and long-lived assets to be disposed of by sale, while alsoresolving significant implementation issues associated with SFAS 121.

 

                The Company adoptedSFAS 144 on January 1, 2002. The adoption of SFAS 144 for long-lived assets held for use did nothave a material impact on the Company’s financial statements because theimpairment assessment under SFAS 144 is largely unchanged fromSFAS 121. The provisions of the Statement for assets held for sale orother disposal generally are required to be applied prospectively after theadoption date to newly initiated disposal activities. Therefore, managementcannot determine the potential effects that adoption of SFAS 144 will haveon the Company’s future financial results.

 

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**FORWARD LOOKING STATEMENTS**

 

                “Safe Harbor”Statement Under The Private Securities Litigation Reform Act Of 1995: Thisannual report contains “forward looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, including statements containing the words“anticipates,” “believes,” “intends,” “estimates,” “expects,” “projects” andsimilar words. The forward looking statements involve known and unknown risks,uncertainties and other factors that may cause our actual results to bematerially different from any future results expressed or implied by suchforward looking statements. Such factors include, among others, the following:the loss of certain significant customers; the cyclicality of our constructionand agricultural sales; risks associated with our acquisition strategy; generaleconomic and business conditions, both nationally and in the markets in whichwe operate or will operate; competition; and other factors referenced in theCompany’s reports and registration statements filed with the Securities andExchange Commission. Given these uncertainties, prospective investors arecautioned not to place undue reliance on such forward looking statements. Theforward looking statements contained herein speak only of the Company’sexpectation as of the date of this annual report. We disclaim any obligationsto update any such factors or publicly announce the result of any revisions toany of the forward looking statements contained herein to reflect future eventsor developments.

 

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

                We are exposed to interest rate changes primarily asa result of our lines of credit and long term debt used for maintainingliquidity, funding capital expenditures, and expanding our operations. TheCompany’s interest rate risk management objective is to limit the impact ofinterest rate changes on earnings and cash flow and to lower overall borrowingcosts. To achieve our objectives, we entered into two separate financing agreementswith a group of banks and another lender. Both financing arrangements contain term loans and revolving creditfacilities.  Interest is based on ourlead bank’s or lender’s prime rate plus an applicable variable margin.  We have also entered into two interest rateswap agreements, as required by one of our bank financing arrangements, tolimit the effect of increases in the interest rates on half of its floatingrate term debt. Under the swap agreements, which expire May 31, 2003 to June30, 2003, a LIBOR-equivalent interest rate component of the interest rate islimited to 5.875% on half of the Company’s $32.7 million term loans.  If interest rates moved 100 basis points,the effect on income before income taxes would be $327,000.

 

                The Company does not enter intointerest rate transactions for speculative purposes.

 

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**PARTII — OTHER INFORMATION**

 

 

**ITEM 1.  LEGALPROCEEDINGS**

 

                There have been no significant changes in the statusof the Worthington Industries, Inc. suit referenced in the Company’s Form 10-Kfor 2000 filed with the Securities and Exchange Commission on April 2, 2001.

 

 

**ITEM 2.  CHANGES IN**SECURITIES

 

                On September 20, 2000, the Company issued warrants topurchase 238,548 shares of its Class A Common Stock at an exercise price of$.01 per share.  Under the terms of theFebruary, 2002 amendment with Harris Bank, the warrants may be exercised at anytime through December 31, 2003.

 

 

 
| **ITEM 6.  EXHIBITS AND REPORTS ON FORM 8–K** |
|---------------------------------------------------------|
|                                                    |   |
| (A)                                                     | Exhibits |
|                                                    |   |
|                                                    | 11.       The computation can be determined  from this report. |
|                                                    |   |
| (B)                                                     | Reports on Form  8–K. |
|                                                    |   |
|                                                    | None |

 

 

 

**SIGNATURES**

 

                Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   | MORTON INDUSTRIAL  GROUP, INC. |
|--------|--------------------------------|
|   |                           |
|   | By:                            | /s/ THOMAS D. LAUERMAN |
|   |                           |   |
|   |                           | Thomas D. Lauerman*Vice  President of Finance* |

 

Dated: May 14, 2002

 

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