**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

----

 

**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 September 29, 2001**

**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**

 

----

 

**MORTON INDUSTRIAL GROUP, INC.**

(Exactname of registrant 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**

(Addressof principal executive offices)

 

 

**(309)266–7176**

(Registrant'stelephone number, including area code)

 

----

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during 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  November 1, 2001** |   |
|--------------------------------------------|--------|------------------------------------------|--------|
|                                       |   |                                     |   |
| Class A Common Stock, $.01 par  value |   | 4,400,850                                |   |
| Class B Common Stock, $.01 par  value |   | 200,000                                  |   |

 

 

 

**PART I -- FINANCIAL INFORMATION**

ITEM 1.  FINANCIAL STATEMENTS

 

 

MORTON INDUSTRIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three andNine Months Ended September 29, 2001 and September 30, 2000

(Dollars InThousands, Except Per Share Data)

(Unaudited)

 
|                                                |   | **Three Months Ended** |   | **Nine Months Ended**   |   |
|-----------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
|                                                |   | **September 29, 2001** |   | **September  30, 2000** |   | **September  29, 2001** |   | **September  30, 2000** |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Net sales                                           |   | $                      | 52,373 |                    | $      | 67,575 |   | $ | 188,495 |   | $ | 212,556 |   |
| Cost of sales                                       |   | 45,844                 |   | 59,802                  |   | 165,432 |   | 183,796 |   |
| Gross profit                                        |   | 6,529                  |   | 7,773                   |   | 23,063 |   | 28,760 |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Operating expenses                                  |   |                   |   |                    |   |   |   |   |   |
| Selling expenses                                    |   | 1,227                  |   | 1,724                   |   | 4,238 |   | 4,875 |   |
| Administrative expenses                             |   | 4,202                  |   | 4,189                   |   | 13,887 |   | 14,803 |   |
| Total operating expenses                            |   | 5,429                  |   | 5,913                   |   | 18,125 |   | 19,678 |   |
| Operating income                                    |   | 1,100                  |   | 1,860                   |   | 4,938 |   | 9,082 |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Other income (expense)                              |   |                   |   |                    |   |   |   |   |   |
| Interest expense                                    |   | (2,331                 | )      | (2,688                  | )      | (7,307 | ) | (8,009 | ) |
| Other                                               |   | 14                     |   | 22                      |   | 63 |   | 363 |   |
| Total other income (expense)                        |   | (2,317                 | )      | (2,666                  | )      | (7,244 | ) | (7,646 | ) |
| Income (loss) before income taxes                   |   | (1,217                 | )      | (806                    | )      | (2,306 | ) | 1,436 |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Income taxes                                        |   | -                      |   | (320                    | )      | - |   | 550 |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Net earnings (loss)                                 |   | (1,217                 | )      | (486                    | )      | (2,306 | ) | 886 |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Accretion of discount on preferred shares           |   | (279                   | )      | (235                    | )      | (787 | ) | (662 | ) |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Net income (loss) available to common  shareholders |   | $                      | (1,496 | )                       | $      | (721 | ) | $ | (3,093 | ) | $ | 224 |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Earnings (loss) per common share                    |   |                   |   |                    |   |   |   |   |   |
| Basic                                               |   | $                      | (0.33  | )                       | $      | (0.16 | ) | $ | (0.67 | ) | $ | 0.05 |   |
| Diluted                                             |   | $                      | (0.33  | )                       | $      | (0.16 | ) | $ | (0.67 | ) | $ | 0.05 |   |
|                                                |   |                   |   |                    |   |   |   |   |   |
| Weighted average number of common shares            |   |                   |   |                    |   |   |   |   |   |
| Basic                                               |   | 4,600,850              |   | 4,587,193               |   | 4,600,850 |   | 4,541,561 |   |
| Diluted                                             |   | 4,600,850              |   | 4,587,193               |   | 4,600,850 |   | 4,662,996 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

 

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

 

**CONDENSED CONSOLIDATED BALANCESHEETSSeptember 29, 2001 and December 31, 2000(Dollars in thousands)**

 
|                                                                                                     |   | **September 29, 2001** |       | **December 31, 2000** | ** ** |
|----------------------------------------------------------------------------------------------------------|--------|------------------------|------------|-----------------------|------------|
|                                                                                                     |   | **(Unaudited)**        | ** ** |                  | ** ** |
| **Assets**                                                                                               |   |                   | ** ** |                  | ** ** |
|                                                                                                     |   |                   |       |                  |       |
| Current assets:                                                                                          |   |                   |       |                  |       |
| Trade accounts receivable, less  allowance for doubtful accounts of $304 in 2001 and $1,324 in 2000 |   | $                      | 23,494     |                  | $          | 28,198 |   |
| Inventories                                                                                              |   | 25,611                 |       | 29,429                |       |
| Prepaid expenses                                                                                         |   | 3,957                  |       | 2,474                 |       |
| Deferred income taxes                                                                                    |   | 1,650                  |       | 1,650                 |       |
|                                                                                                     |   |                   |       |                  |       |
| Total current assets                                                                                     |   | 54,712                 |       | 61,751                |       |
|                                                                                                     |   |                   |       |                  |       |
| Property, plant, and equipment, net                                                                      |   | 48,831                 |       | 51,555                |       |
| Intangible assets, at cost, less  accumulated amortization                                               |   | 10,242                 |       | 11,186                |       |
| Deferred income taxes                                                                                    |   | 5,398                  |       | 5,398                 |       |
| Other assets                                                                                             |   | 483                    |       | 643                   |       |
|                                                                                                     |   |                   |       |                  |       |
|                                                                                                     |   | $                      | 119,666    |                  | $          | 130,533 |   |
|                                                                                                     |   |                   |       |                  |       |
| **Liabilities and Stockholders' Equity (Deficit)**                                                       |   |                   |       |                  |       |
|                                                                                                     |   |                   |       |                  |       |
| Current liabilities:                                                                                     |   |                   |       |                  |       |
| Outstanding checks in excess of bank  balance                                                            |   | $                      | 2,567      |                  | $          | 2,792 |   |
| Current installments of long-term debt                                                                   |   | 12,340                 |       | 10,201                |       |
| Accounts payable                                                                                         |   | 31,905                 |       | 30,735                |       |
| Accrued expenses                                                                                         |   | 5,338                  |       | 5,165                 |       |
|                                                                                                     |   |                   |       |                  |       |
| Total current liabilities                                                                                |   | 52,150                 |       | 48,893                |       |
|                                                                                                     |   |                   |       |                  |       |
| Long-term debt, excluding current installments                                                           |   | 67,117                 |       | 78,156                |       |
| Other liabilities                                                                                        |   | 327                    |       | 280                   |       |
|                                                                                                     |   |                   |       |                  |       |
| Total liabilities                                                                                        |   | 119,594                |       | 127,329               |       |
|                                                                                                     |   |                   |       |                  |       |
| Redeemable preferred stock                                                                               |   | 7,064                  |       | 6,277                 |       |
|                                                                                                     |   |                   |       |                  |       |
| 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                                                                                         |   | (27,095                | )          | (24,002               | )          |
| Accumulated other comprehensive loss                                                                     |   | (826                   | )          | -                     |       |
|                                                                                                     |   |                   |       |                  |       |
| Total stockholders’ equity (deficit)                                                                |   | (6,992                 | )          | (3,073                | )          |
|                                                                                                     |   |                   |       |                  |       |
|                                                                                                     |   | $                      | 119,666    |                  | $          | 130,533 |   |
|                                                                                                          |        |                        |            |                       |            |  |  |  |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

 

MORTON INDUSTRIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

For the Nine MonthsEnded September 29 , 2001 and September 30, 2000

(Dollars In Thousands)

(Unaudited)

 
|                                                                 |   | **2001** |   | **2000** |   |
|----------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                 |   |     |   |     |   |
| Net cash provided by operating activities                            |   | $        | 13,248 |     | $      | 1,005 |   |
|                                                                 |   |     |   |     |   |
| Cash flows from investing activities                                 |   |     |   |     |   |
| Capital expenditures                                                 |   | (3,918   | )      | (4,987   | )      |
| Increase in intangible assets                                        |   | (205     | )      | (219     | )      |
| Proceeds from sale of business unit                                  |   | -        |   | 2,915    |   |
| Net cash used in investing activities                                |   | (4,123   | )      | (2,291   | )      |
|                                                                 |   |     |   |     |   |
| Cash flows from financing activities                                 |   |     |   |     |   |
| Net borrowings (repayments) under revolving  credit facility         |   | (3,447   | )      | 6,310    |   |
| Cash received on exercised options                                   |   | -        |   | 39       |   |
| Principal payments on long-term debt                                 |   | (5,453   | )      | (8,930   | )      |
| Increase (decrease) in outstanding checks in  excess of bank balance |   | (225     | )      | 3,867    |   |
| Net cash provided by (used in) financing  activities                 |   | (9,125   | )      | 1,286    |   |
|                                                                 |   |     |   |     |   |
| Net increase in cash                                                 |   | -        |   | -        |   |
|                                                                 |   |     |   |     |   |
| Cash at beginning of period                                          |   | -        |   | -        |   |
|                                                                 |   |     |   |     |   |
| Cash at end of period                                                |   | $        | -      |     | $      | - |   |
|                                                                 |   |     |   |     |   |
| Supplemental disclosure of cash flow information                     |   |     |   |     |   |
| Cash paid during the period for:                                     |   |     |   |     |   |
| Interest                                                             |   | $        | 7,301  |     | $      | 7,501 |   |
| Income taxes                                                         |   | $        | -      |     | $      | - |   |

          

Seeaccompanying notes to condensed consolidated financial statements.

 

 

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

 

**Condensed ConsolidatedStatements of Stockholders’ Equity (Deficit)For the Nine Months Ended September 29, 2001(Dollars in thousands)(Unaudited)**

 
|                                                          |   | **Class A  common stock**                   |       | **Class B  common stock** |       |               |       |       |       |                             |       |                              |       |
|---------------------------------------------------------------|--------|---------------------------------------------|------------|---------------------------|------------|--------------------|------------|------------|------------|----------------------------------|------------|-----------------------------------|------------|
|                                                          |   | **     Shares  issued** |       | **Amount**                |       | **Shares  issued** |       | **Amount** |       | **Additional  paid-in  capital** |       | **Retained  earnings  (deficit)** |       | **Accumulated  other  comprehensive  loss** |   | **Total** | ** ** |
|                                                          |   |                                        | ** ** |                      | ** ** |               | ** ** |       | ** ** |                             | ** ** |                              | ** ** |   | ** ** |   | ** ** |
|                                                          |   |                                        |       |                      |       |               |       |       |       |                             |       |                              |       |   |   |   |   |
| Balance,  December 31, 2000                                   |   | 4,400,850                                   |       | $                         | 44         |               | 200,000    |       | $          | 2                                |       | $                                 | 20,883     |   | $ | (24,002 | ) | $ | — |   | $ | (3,073 | ) |
|                                                          |   |                                        |       |                      |       |               |       |       |       |                             |       |                              |       |   |   |   |   |
| Comprehensive  (loss):                                        |   |                                        |       |                      |       |               |       |       |       |                             |       |                              |       |   |   |   |   |
| Net earnings  (loss)                                          |   | —                                      |       | —                    |       | —             |       | —     |       | —                           |       | (2,306                            | )          | — |   | (2,306 | ) |
| Other  comprehensive (loss),(loss) on  derivative instruments |   | —                                      |       | —                    |       | —             |       | —     |       | —                           |       | —                            |       | (742 | ) | (742 | ) |
| Total  comprehensive (loss)                                   |   |                                        |       |                      |       |               |       |       |       |                             |       |                              |       |   |   | (3,048 | ) |
| Transition  adjustment resultingfrom  adoption of FASB 133    |   | —                                      |       | —                    |       | —             |       | —     |       | —                           |       | —                            |       | (84 | ) | (84 | ) |
| Accretion of  discount on   preferred shares             |   | —                                      |       | —                    |       | —             |       | —     |       | —                           |       | (787                              | )          | — |   | (787 | ) |
|                                                          |   |                                        |       |                      |       |               |       |       |       |                             |       |                              |       |   |   |   |   |
| Balance,  September 29, 2001                                  |   | 4,400,850                                   |       | $                         | 44         |               | 200,000    |       | $          | 2                                |       | $                                 | 20,883     |   | $ | (27,095 | ) | $ | (826 | ) | $ | (6,992 | ) |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

 

**MORTONINDUSTRIAL GROUP, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For theThree and Nine Months Ended September 29, 2001 and September 30, 2000**

**(Unaudited)**

 

 

**(1)  Nature of Business.**

 

TheCompany, operating through its subsidiaries, is a contract manufacturer andsupplier of high–quality fabricated sheet metal and plastic componentsand subassemblies for construction, agricultural, and industrial originalequipment manufacturers located primarily in the Midwestern and SoutheasternUnited States.

 

**(2)  Interim Financial Data.**

 

TheCondensed Consolidated Financial Statements at September 29, 2001, andSeptember 30, 2000, and for the three months and nine months then ended areunaudited and reflect all adjustments, consisting of normal recurring accrualswhich are, in the opinion of management, necessary for a fair presentation ofthe financial position, operating results, and cash flows for the interimperiods indicated. The Company's fiscal quarters end on a Saturday (nearest toa quarter end) except for the fourth quarter which ends on December 31.For both the quarters ended September 29, 2001, and September 30, 2000, therewere 63 shipping days.  For the ninemonths ended September 29, 2001 and September 30, 2000, there were 191 and 192shipping days, respectively.  Results ofoperations for the interim periods are not necessarily indicative of theresults of operations for the full fiscal year. The condensed consolidatedfinancial statements should be read in connection with the consolidatedfinancial statements and notes thereto, together with management's discussionand analysis of financial condition and results of operations of MortonIndustrial Group, Inc. contained in the Company's Annual Report onForm 10–K for the year ended December 31, 2000.

 

**(3)  Inventory**

 

            The Company's inventory, inthousands of dollars, as of September 29, 2001, and December 31, 2000, issummarized as follows:

 

|                                                        |   | **September  29, 2001** |   | **December  31, 2000** |   |
|-------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                        |   |                    |   |                   |   |
| Raw  materials, purchased parts and manufactured components |   | $                       | 11,448 |                   | $      | 12,753 |   |
| Work-in-process                                             |   | 7,212                   |   | 7,121                  |   |
| Finished  goods                                             |   | 6,951                   |   | 9,555                  |   |
|                                                        |   | $                       | 25,611 |                   | $      | 29,429 |   |

 

 

**(4)  Earnings Per Share.**

 

Thefollowing reflects the reconciliation of the numerators and denominators of theearnings per share and the earnings per share assuming dilution computations:

 
|                                                      |   | **Quarter  Ended September 29, 2001** |       | **Quarter  Ended September 30, 2000** |      |
|-----------------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|-----------|
|                                                      |   | **(Loss)  (Numerator)**               |       | **Shares  (Denominator)**             |      | **Per  Share Amount** |   | **(Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per  Share Amount** |   |
|                                                      |   |                                  |       |                                  |      |   |   |   |   |   |   |   |   |
| Basic earnings (loss) available to  common shareholders   |   | $                                     | (1,496,000 | )                                     | 4,600,850 |   | $ | (.33 | ) | $ | (721,000 | ) | 4,587,193 |   | $ | (.16 | ) |
|                                                      |   |                                  |       |                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive securities, stock  options             |   |                                  |       | -                                     |      | - |   |   |   | - |   | - |   |
| Diluted earnings (loss) available to  common shareholders |   |                                  |       | 4,600,850                             |      | $ | (.33 | ) |   |   | 4,587,193 |   | $ | (.16 | ) |
|                                                           |        |                                       |            |                                       |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 
|                                                       |   | **Nine  Months Ended September 29, 2001** |       | **Nine  Months Ended September 30, 2000** |      |
|------------------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------------|-----------|
|                                                       |   | **(Loss)  (Numerator)**                   |       | **Shares  (Denominator)**                 |      | **Per  Share Amount** |   | **Earnings  (Numerator)** |   | **Shares  (Denominator)** |   | **Per  Share Amount** |   |
|                                                       |   |                                      |       |                                      |      |   |   |   |   |   |   |   |   |
| Basic earnings (loss) available to  common shareholders    |   | $                                         | (3,093,000 | )                                         | 4,600,850 |   | $ | (.67 | ) | $ | 224,000 |   | 4,541,561 |   | $ | .05 |   |
|                                                       |   |                                      |       |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive securities, stock  options and warrants |   |                                      |       | -                                         |      | – |   |   |   | 121,435 |   | - |   |
| Diluted earnings (loss) available to  common shareholders  |   |                                      |       | 4,600,850                                 |      | $ | (.67 | ) |   |   | 4,662,996 |   | $ | .05 |   |

 

Atboth September 29, 2001 and September 30, 2000, 307,504 options and warrantswere excluded from the computation of diluted earnings per share due to theiranti-dilutive effect.

 

 

**(5)  Segment Reporting.**

 

TheCompany has two reportable segments, contract metal fabrication and contractplastic fabrication. The contract metal fabrication segment provides fullservice fabrication of parts and sub–assemblies for the construction,agricultural and industrial equipment industry. The contract plasticfabrication segment provides full–service vacuum formed and injected–moldedparts and sub–assemblies for the construction, agricultural andindustrial equipment industry. The following segment data is for the quarterand nine months ended September 29, 2001 and September 30, 2000:

 

|                                        |   | **Contract  Metal  Fabrication** |   | **Contract  Plastic  Fabrication** |   | **Total** |   |
|---------------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|-----------|--------|
|                                        |   |                             |   |                               |   |      |   |
| ** Quarter Ended  September 29, 2001** |   |                             |   |                               |   |      |   |
| Revenues from external customers            |   | $                                | 27,508 |                               | $      | 24,865    |   | $ | 52,373 |   |
| Segment operating income (loss)             |   | 1,498                            |   | (398                               | )      | 1,100     |   |
| ** Quarter Ended  September 30, 2000** |   |                             |   |                               |   |      |   |
| Revenues from external customers            |   | $                                | 34,957 |                               | $      | 32,618    |   | $ | 67,575 |   |
| Segment operating income                    |   | 1,141                            |   | 719                                |   | 1,860     |   |

** **

|                                           |   | **Contract  Metal  Fabrication** |    | **Contract  Plastic  Fabrication** |   | **Total** |   |
|------------------------------------------------|--------|----------------------------------|---------|------------------------------------|--------|-----------|--------|
|                                           |   |                             |    |                               |   |      |   |
| ** Nine Months Ended September 29, 2001** |   |                             |    |                               |   |      |   |
| Revenues from external customers               |   | $                                | 104,300 |                               | $      | 84,195    |   | $ | 188,495 |   |
| Segment operating income (loss)                |   | 6,447                            |    | (1,509                             | )      | 4,938     |   |
| ** Nine Months Ended September 30, 2000** |   |                             |    |                               |   |      |   |
| Revenues from external customers               |   | $                                | 117,649 |                               | $      | 94,907    |   | $ | 212,556 |   |
| Segment operating income                       |   | 7,687                            |    | 1,395                              |   | 9,082     |   |

 

**(6)  Derivative Instruments**

** **

**               **TheCompany adopted Statement of Financial Accounting Standards No. 133 “Accountingfor Derivative Instruments and Hedging Activities” (SFAS 133) as amended bySFAS No. 137 and No. 138 on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded  on the balance sheet at their fairvalue.  Gains or losses resulting fromchanges in the values of those derivatives would be accounted for depending onthe use of the derivative and whether it qualifies for hedge accounting.    The Company uses derivative financialinstruments (interest rate swaps) to mitigate its interest rate risk on arelated financial instrument.  SFAS 133requires that changes in the fair value of derivatives that qualify as a cashflow hedge be recognized in other comprehensive income while the ineffectiveportion of the derivative’s change in fair value be recognized immediately inearnings. SFAS 133 requires that unrealized gains and losses on that portion ofderivatives not qualifying for hedge accounting be recognized currently inearnings.  The cumulative effect ofchange in accounting principle due to the adoption of SFAS 133 as of January 1,2001 was $84 and was recorded in accumulated other comprehensive income (loss)as a transition adjustment.  The Companyrecorded a net loss of $742 in other comprehensive income (loss) for itsinterest rate swap contracts qualifying for hedge accounting for the nine monthperiod ended September 29, 2001.

 

**(7)  Debt**

 

     OnMay 28, 1998, we entered into a credit agreement with Harris Trust and SavingsBank (Harris), as Agent. The credit agreement, as last amended in September,2001, provides a credit facility with the following components: (i) a$21 million secured revolving credit facility; (ii) a$25 million secured term loan that matures in May, 2003; and (iii) a$30 million secured term loan that matures in May, 2005.  Both term loans fully amortize over theirrespective terms with quarterly payments. Under the terms of the September, 2001 amendment, principal payments inthe amount of $1.2 million originally scheduled for September 30, 2001, are nowscheduled for payment on December 15, 2001, along with $450 thousand ofamendment fees.  An additional principalpayment in the amount of $1.2 million is scheduled for payment on December 31,2001.  We are currently seekingadditional loans or funding support from other sources to assure our ability tosatisfy these obligations.  Inconnection with these efforts, we expect to ask Harris to defer the principalpayments and fees due in December, 2001, until the first quarter, 2002. Thereare no assurances that Harris will agree to a payment deferral.  Although we intend to obtain additionalloans or funding support by the end of the current fiscal year, we may not beable to obtain the funding on acceptable terms and conditions, and funding maynot be available before the principal and fee payments must be made.  Failure to do so could have a materialadverse effect on our operations.

** **

**ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Thefollowing discussion and analysis describes changes in the Company's financialcondition since December 31, 2000. The analysis of results of operationscompares the quarters and nine months ended September 29, 2001 and September30, 2000:

** **

**RESULTSOF OPERATIONS**

 

 

**THIRDQUARTER, 2001 VERSUS THIRD QUARTER, 2000**

 

Ournet revenues for the third quarter, 2001 were $52.4 million compared to$67.6 million for the third quarter of 2000, a decrease of$15.2 million, or 22.5%.  Thedecrease in revenues is related primarily to a general economic slowdown in theUnited States.

 

Oursales to Deere & Company and Caterpillar Inc., were approximately54% and 52% of our revenues for the third quarters, 2001 and 2000,respectively.  Revenues from thesecustomers decreased approximately 20% compared with the same period in 2000.

 

Ourgross profits for the third quarter, 2001 decreased by approximately$1.2 million, a decrease of 16.0%, versus the same three months in 2000.The overall gross profit percentage increased to 12.5% for the third quarter of2001 from 11.5% for the third quarter of 2000. The decrease in gross profitdollars resulted primarily from the decrease in revenues.  The increase in the gross profit percentageresulted from aggressive cost management practices.

 

Ourselling and administrative expenses for the third quarter, 2001 amounted to$5.4 million, or 10.4% of net sales compared to $5.9 million, or 8.8%of net sales for the third quarter of 2000. Although the actual spending decreased for the comparable periods, theexpenses as a percentage of sales increased because of the decrease inrevenues.

 

                Our interest expense wasapproximately $2.3 million for the third quarter of  2001, compared to $2.7 million for the thirdquarter of 2000.  For the third quarterof 2001, the Company had both lower average levels of debt and lower interestrates than during the comparable quarter in 2000.

 

                For the third quarter of 2001,no income tax benefit was recognized on a pre-tax loss of $1.2 million. Theadditional net operating loss carryforward created in the third quarter of 2001was offset by an increase in the valuation allowance.  For the third quarter of 2000, we recognized an income taxbenefit of $320 thousand on a pre-tax loss of $806 thousand.

 

# **FIRST NINE MONTHS,2001 VERSUS FIRST NINE MONTHS, 2000**

 

Ournet revenues for the first nine months of 2001 were $188.5 millioncompared to $212.6 million for the first nine months of 2000, a decreaseof $24.1 million, or 11.3%.  Thedecrease in revenues is related primarily to a general economic slowdown in theUnited States, and a large customer contract completed during the first quarterof 2000 that was not nearly as significant in 2001.

 

Oursales to Deere & Company and Caterpillar Inc., were approximately56% and 55% of our revenues for the first nine months, 2001 and 2000,respectively.  Revenues from thesecustomers decreased approximately 8% compared with the same period in 2000.

 

                Our gross profits for the firstnine months of 2001 decreased by approximately $5.7 million, a decrease of19.8%, versus the same nine months in 2000. The overall gross profit percentagedecreased to 12.2% for the first nine months of 2001 from 13.5% for the firstnine months of 2000. The decrease in gross profit dollars and percentageresulted primarily from the decrease in revenues.

 

                Our selling and administrativeexpenses for the first nine months of 2001 amounted to $18.1 million, or 9.7%of net sales compared to $19.7 million, or 9.3% of net sales for the first ninemonths of 2000.  Although the actualspending decreased for the comparable periods, the expenses as a percentage ofsales increased because of the decrease in revenues.

 

                Our interest expense wasapproximately $7.3 million for the first nine months of  2001, compared to $8.0 million for the firstnine months of 2000.  For the first ninemonths of 2001, the Company had both lower average levels of debt and lower interestrates than during the comparable period in 2000.

 

                For the first nine months of2001, no income tax benefit was recognized on a pre-tax loss of $2.3 million.The additional net operating loss carryforward created in the first nine monthsof 2001 was offset by an increase in the valuation allowance.  For the first nine months of 2000, weprovided $550 thousand of income taxes on pre-tax income of $1.4 million.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Ourconsolidated working capital at September 29, 2001 was $2.6 millioncompared to $12.9 million at December 31, 2000, a decrease in workingcapital of approximately $10.3 million. The decrease in working capital relates primarily to decreases in bothaccounts receivable and inventory associated with lower revenues.

 

                We have two separate creditfacilities. The first facility is with Harris Trust and Savings Bank (Harris),and serves the company's operations other than the operations acquired fromWorthington Custom Plastics, Inc. (Worthington). The second facility, withGeneral Electric Capital Corporation (GECC), serves the operations acquiredfrom Worthington during the second quarter, 1999. These facilities are separateand provide financing for the named operations. The two credit facilities areseparately secured by the assets of the operations they support.

 

                On May 28, 1998, we entered intoa credit agreement with Harris, as Agent. The credit agreement, as last amendedin September, 2001, provides a credit facility with the following components:(i) a $21 million secured revolving credit facility; (ii) a$25 million secured term loan that matures in May, 2003; and (iii) a$30 million secured term loan that matures in May, 2005.  Both term loans fully amortize over theirrespective terms with quarterly payments. Under the terms of the September, 2001 amendment, principal payments inthe amount of $1.2 million originally scheduled for September 30, 2001, are nowscheduled for payment on December 15, 2001, along with $450 thousand ofamendment fees.  An additional principalpayment in the amount of $1.2 million is scheduled for payment on December 31,2001.  We are currently seekingadditional loans or funding support from other sources to assure our ability tosatisfy these obligations, and expect to request our lenders to defer theprincipal payments and fees due in December, 2001 until the first quarter,2002. There are no assurances that Harris will agree to a paymentdeferral.  Although we intend to obtainadditional loans, funding support or principal deferrals by the end of thecurrent fiscal year, we may not be able to obtain alternatives on aceptableterms and conditions, or they may not be available before the principal and feepayments must be made.  Failure to do socould have a material adverse effect on our operations.  The interest rates on the loans vary from 1%to 3.75% above the lender's prime rate. We used the proceeds under the facilityto refinance the then existing indebtedness, to finance the 1998 acquisitions,and for general corporate purposes.

 

                Theamount of revolving credit availability is calculated using a borrowing base ofqualified accounts receivable and inventory. As of September 29, 2001, we had additional availability ofapproximately $1.0 million under the Harris facility. We are paying this lendera fee of .125% per month based upon the amount of the revolving creditcommitment and the balance of the term loans.

 

                In connection with the Harris financing, we have twofixed interest rate swap agreements with a commercial bank (the "counterparty"). The first agreement has a notional principal amount of $6.3million and a termination date of May 31, 2003. The second agreement has anotional principal amount of $14.2 million and a termination date of June 30,2003. The notional principal amount declines over the term of both agreementsbased upon a defined amortization schedule. As described below, these agreements are for the purpose of limiting theeffects of interest rate increases on half of the Company's floating rate termdebt.

 

                Historically, we have met our near term liquidityrequirements for our businesses not acquired from Worthington with cash flowfrom operations, the bank line of credit, and management of our working capitalto reflect current levels of operations. The national economic slowdown, which our reduced revenues reflect, hasincreased pressure on these sources of liquidity, and as discussed above, weare seeking additional loans or funding support from sources other than ourbank group.  We have also acceleratedour efforts to reduce costs.  We areunable to predict the outcome of these efforts.

 

                Our separate financingarrangements for the operations acquired from Worthington are described below.

 

                On April 15, 1999, weentered into a financing agreement with GECC. The agreement contains a 4 1/2year secured revolving credit facility with maximum availability of$24 million and a $26 million secured term loan with a 4 1/2year term. The amount of availability is based upon a borrowing base ofqualified accounts receivable and inventory. Both of the facilities bearinterest at variable interest rates based on the prime rate, plus variablemargins. We also incur a fee based upon a certain percentage of the unusedrevolving credit facility. The term loan facility amortizes quarterlythroughout its term.   The $1.0 millionprincipal payment due under the term loan originally scheduled for payment onSeptember 29, 2001, has been rescheduled and will be paid in four equal quarterlyinstallments beginning on September 30, 2002, in addition to the principalpayments already scheduled for those dates. We must also prepay certain amounts from the sale of assets, theissuance of new equity capital and from "excess cash flow", asdefined in the agreement.

 

                As of September 29, 2001, we hadadditional availability of $0.4 million under the GECC credit facility. Webelieve that the agreement with GECC, as amended in September, 2001, willprovide the necessary term and revolving financing, and along with cash flowsfrom operations, and aggressive cash management and cost reductions, willprovide the necessary levels of liquidity for the operations acquired fromWorthington.

 

                As part of the financing for theWorthington acquisition, we issued 10,000 shares of redeemable preferred stock,which we must redeem in April, 2004 at $1,000 per share plus any dividendsaccrued since April 15, 1999. The $10 million face value preferredstock was recorded at its fair value of $4.25 million. We are accretingthe discount over a five year period using the effective yield method.Dividends are payable in kind at the rate of 8% per annum. We believe thatcertain provisions of the agreement with Worthington preclude the payment ofdividends, and no dividends have been accrued since December 31, 1999. Thereare current legal proceedings related to certain Worthington matters asdescribed in Form 10-K filed with the Securities and Exchange Commission onApril 2, 2001.

 

                On November 3, 2000, theCompany entered into an agreement with First Union Securities, Inc.("FUSI"), under which FUSI will act as the Company's exclusivefinancial advisor with respect to possible debt or equity financings orrecapitalizations. The Company is exploring potential financing alternatives.  A director of the Company is a ManagingDirector at FUSI.

 

                We incurred $3.9 million ofcapital expenditures during the first nine months of 2001, primarily forpurchases and upgrades of manufacturing equipment.

 

                We estimate that our capitalexpenditures in 2001 will total approximately $4.6 million of which $1.5million will be for new production equipment and the remaining $3.1 millionwill be for normal replacement items.

 

**IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS**

 

                In July 2001, the FinancialAccounting Standards Board (FASB) issued Statement No. 141, “BusinessCombinations”, and Statement No. 142, "Goodwill and Other IntangibleAssets”.  Statement No. 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. Statement No. 142 requires that goodwill and intangible assets withindefinite useful lives no longer be amortized, but, instead, tested forimpairment at least annually in accordance with the provisions of Statement142.  The Company is required to adoptthe provisions of Statement 141 immediately, and Statement 142 effectiveJanuary 1, 2002.

 

                As of the date of adoption, theCompany expects to have unamortized goodwill in the amount of approximately$8.6 million which will be subject to the transition provisions of Statements141 and 142.  Amortization expenserelated to goodwill was approximately $0.6 million and $0.4 million for the yearended December 31, 2000 and the nine months ended September 29, 2001,respectively.  Because of the extensiveeffort needed to comply with adopting the new rules, 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 anytransitional impairment losses will be required to be recognized as thecumulative effect of a change in accounting principle.

 

                On October 3, 2001, the FASBissued Statement No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets, which addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. While Statement No. 144 supersedes Statement No. 121, Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, itretains many of the fundamental provisions of that Statement.  Statement No. 144 also supersedes theaccounting and reporting provisions of APB Opinion No. 30, Reporting the Resultsof Operations-Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions, forthe disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to reportseparately discontinued operations and extends that reporting to a component ofan entity that either has been disposed of (by sale, abandonment, or in adistribution to owners) or is classified as held for sale.  Statement No. 144 is effective for theCompany in 2002 and because of the extensive effort needed to comply withadopting Statement 144, it is not practicable to reasonably estimate the impactof adoption on the Company’s financial statements at the date of this report.

 

 

**FORWARD LOOKING STATEMENTS**

 

                "Safe Harbor"Statement Under The Private Securities Litigation Reform Act Of 1995: This Form10–Q contains "forward looking statements" within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, including statements containing the words"anticipates," "believes," "intends,""estimates," "expects," "projects" and similarwords. 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; ability to obtain a deferral of theprincipal payments and fees due in December, 2001, until the first quarter,2002, or obtain additional funding support from other sources to satisfy theseobligations prior to December, 2001, and other factors referenced in theCompany's reports and registration statements filed with the Securities and ExchangeCommission. Given these uncertainties, prospective investors are cautioned notto place undue reliance on such forward-looking statements. The forward-lookingstatements contained herein speak only of the Company's expectation as of thedate of this quarterly report. We disclaim any obligations to update any suchfactors or publicly announce the result of any revisions to any of the forwardlooking statements contained herein to reflect future events or developments.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

                The Company is exposed tointerest rate changes primarily as a result of its line of credit and long termdebt used for maintaining liquidity, funding capital expenditures, andexpanding our operations. The Company's interest rate risk management objectiveis to limit the impact of interest rate changes on earnings and cash flow andto lower overall borrowing costs. To achieve its objectives, the Company hasentered into two separate financing agreements, as described more fully above,for term loans and revolving credit facilities. The Company has also enteredinto two interest rate swap agreements, as required by its Harris financingarrangements, to limit the effect of increases in the interest rates on half ofits floating rate term debt. Under the swap agreements, which expire May 31,2003 to June 30, 2003, a LIBOR-equivalent interest rate component of theinterest rate is limited to 5.875% on half of the Company's $33.0 million termloans.  If interest rates moved 100 basispoints, the effect on income before income taxes would be $330,000.

 

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

 

 

**PARTII – OTHERINFORMATION**

 

 

**ITEM1.  LEGAL PROCEEDINGS**

 

     There have been no significant changes inthe status of the Worthington Industries, Inc. suit referenced in the Company'sForm 10-K for 2000 filed with the Securities and Exchange Commission on April2, 2001.

 

 

# **ITEM 2. CHANGES IN SECURITIES**

 

     On September 20, 2000, the Company issuedwarrants to purchase 238,548 shares of its Class A Common Stock at an exerciseprice of $.01 per share.  Those warrantswere scheduled to expire on  September28, 2001.  Under the terms of theSeptember, 2001 amendment with Harris Bank, the warrants may be exercised atany time through September 30, 2002.

 

 

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8–K**

 

(A)      Exhibits

 

11.              The computation can be determinedfrom this report.

 

(B)       Reports on Form 8–K.

 

None

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

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

 

Dated:November 13, 2001