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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 27, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM  TO
 COMMISSION FILE NUMBER 0-13198 MORTON INDUSTRIAL GROUP, INC.  Georgia
(State or other jurisdiction of
Incorporation or organization)
    
    38-0811650
(IRS Employer
Identification No.)
 1021 W. Birchwood, Morton, Illinois 61550
(Address of principal executive offices) (309) 266-7176
(Registrants telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes o No x The aggregate market value of the common stock held by non-affiliates of
the registrant (based upon the last reported sale price on the Nasdaq Small Cap
Market) on the last business day of the registrants most recently completed
second fiscal quarter was approximately $850,000. Outstanding as ofMay 6, 2004Class A Common Stock, $.01 par value
    
    
    4,560,547Class B Common Stock, $.01 par value
    
    
    100,000




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TABLE OF CONTENTS  ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. CHANGES IN SECURITIESITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCertificationCertification906 Certification906 Certification    Table of Contents  MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations
For the Three Months Ended March 27, 2004 And March 29, 2003
(Dollars in thousands)
(Unaudited) Three Months EndedMarch 27, 2004
    
    March 29, 2003Net sales
    
    $
    39,920
    
    
    
    32,380Cost of sales
    
    
    34,411
    
    
    
    27,789Gross profit
    
    
    5,509
    
    
    
    4,591Operating expenses:Selling expenses
    
    
    802
    
    
    
    701Administrative expenses
    
    
    2,638
    
    
    
    2,607Total operating expenses
    
    
    3,440
    
    
    
    3,308Operating income
    
    
    2,069
    
    
    
    1,283Other income (expense):Interest expense
    
    
    (571
    )
    
    
    (933
    )Interest on redeemable preferred stock
    
    
    (213
    )
    
    
    Gain on redemption of redeemable preferred stock
    
    
    850
    
    
    
    Other
    
    
    41
    
    
    
    166Total other income (expense)
    
    
    107
    
    
    
    (767
    )Earnings before income taxes and
discontinued operations
    
    
    2,176
    
    
    
    516Income taxes
    
    
    50
    
    
    
    200Earnings before discontinued operations
    
    
    2,126
    
    
    
    316Discontinued operations:Net earnings from operations of discontinued
plastics operations
    
    
    
    
    
    
    225Income taxes
    
    
    
    
    
    
    90
    
    
    
    135Net earnings
    
    
    2,126
    
    
    
    451Accretion of preferred stock discount
    
    
    
    
    
    
    (332
    )Net earnings available to common stockholders
    
    $
    2,126
    
    
    
    119Earnings available to common stockholders per common stock  basic:Earnings from continuing operations
    
    $
    0.46
    
    
    
    0.00Earnings from discontinued operations
    
    
    
    
    
    
    0.03Net earnings available to common stockholders
    
    $
    0.46
    
    
    
    0.03Earnings available to common stockholders per common stock  diluted:Earnings from continuing operations
    
    $
    0.38
    
    
    
    0.00Earnings from discontinued operations
    
    
    
    
    
    
    0.03Net earnings available to common stockholders
    
    $
    0.38
    
    
    
    0.03
 See accompanying notes to condensed consolidated financial statements. 2




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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets
March 27, 2004 And December 31, 2003
(Dollars in thousands) March 27, 2004
    
    December 31, 2003(Unaudited)AssetsCurrent assets:Trade accounts receivable, less allowance for doubtful accounts
of $230 in 2004 and $202 in 2003
    
    $
    10,308
    
    
    
    7,253Unbilled receivables
    
    
    968
    
    
    
    Note receivable
    
    
    
    
    
    
    100Inventories
    
    
    15,798
    
    
    
    13,863Prepaid expenses and other current assets
    
    
    1,955
    
    
    
    1,087Deferred income taxes
    
    
    1,600
    
    
    
    1,600Total current assets
    
    
    30,629
    
    
    
    23,903Property, plant, and equipment, net
    
    
    22,589
    
    
    
    22,432Note receivable
    
    
    1,224
    
    
    
    1,183Intangible assets, at cost, less accumulated amortization
    
    
    2,273
    
    
    
    1,100Other assets
    
    
    160
    
    
    
    204$
    56,875
    
    
    
    48,822Liabilities and Stockholders Equity (Deficit)Current liabilities:Outstanding checks in excess of bank balance
    
    $
    2,116
    
    
    
    943Current installments of long-term debt
    
    
    2,471
    
    
    
    6,210Accounts payable
    
    
    19,865
    
    
    
    17,343Accrued expenses
    
    
    6,015
    
    
    
    5,450Income taxes payable
    
    
    139
    
    
    
    275Redeemable preferred stock
    
    
    500
    
    
    
    500Total current liabilities
    
    
    31,106
    
    
    
    30,721Long-term debt, excluding current installments
    
    
    37,158
    
    
    
    32,331Other liabilities
    
    
    118
    
    
    
    118Redeemable preferred stock
    
    
    8,465
    
    
    
    9,250Warrants payable
    
    
    1,500
    
    
    
    Total liabilities
    
    
    78,347
    
    
    
    72,420Stockholders equity (deficit):Class A common stock
    
    
    46
    
    
    
    46Class B common stock
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    20,895
    
    
    
    20,895Accumulated deficit
    
    
    (42,414
    )
    
    
    (44,540
    )Total stockholders equity (deficit)
    
    
    (21,472
    )
    
    
    (23,598
    )$
    56,875
    
    
    
    48,822
 See accompanying notes to condensed consolidated financial statements. 3




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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 27, 2004 and March 29, 2003
(Dollars in thousands)
(Unaudited) March 27,
    
    March 29,2004
    
    2003Net cash provided by (used in) operating activities
    
    
    (704
    )
    
    
    929Cash flows from investing activities:Capital expenditures
    
    
    (1,441
    )
    
    
    (969
    )Net cash used in investing activities
    
    
    (1,441
    )
    
    
    (969
    )Cash flows from financing activities:Increase in checks issued in excess of bank balance
    
    
    1,173
    
    
    
    1,356Net borrowings (repayments) on revolving debt
    
    
    1,400
    
    
    
    (500
    )Principal payments on long-term debt and capital leases
    
    
    (1,209
    )
    
    
    (516
    )Retirement of revolving debt
    
    
    (14,650
    )
    
    
    Retirement of term debt
    
    
    (22,153
    )
    
    
    Proceeds from issuance of revolving debt
    
    
    7,200
    
    
    
    Proceeds from issuance of long-term debt
    
    
    32,000
    
    
    
    Redemption of preferred stock
    
    
    (150
    )
    
    
    Proceeds from notes receivable
    
    
    100
    
    
    
    Debt issuance costs
    
    
    (1,566
    )
    
    
    (300
    )Net cash provided by financing activities
    
    
    2,145
    
    
    
    40Net 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
    
    $
    565
    
    
    
    525Income taxes
    
    
    186
    
    
    
    
 See accompanying notes to condensed consolidated financial statements 4




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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders Equity (Deficit)
For the Three Months Ended March 27, 2004
(Dollars in thousands)
(Unaudited) Class A
    
    Class Bcommon stock
    
    common stock
    
    AdditionalShares
    
    
    
    
    
    Shares
    
    
    
    
    
    paid-in
    
    Accumulatedissued
    
    Amount
    
    issued
    
    Amount
    
    capital
    
    deficit
    
    TotalBalance, December 31, 2003
    
    
    4,560,547
    
    
    $
    46
    
    
    
    100,000
    
    
    $
    1
    
    
    $
    20,895
    
    
    $
    (44,540
    )
    
    $
    (23,598
    )Net earnings available to common stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,126
    
    
    
    2,126Balance, March 27, 2004
    
    
    4,560,547
    
    
    $
    46
    
    
    
    100,000
    
    
    $
    1
    
    
    $
    20,895
    
    
    $
    (42,414
    )
    
    $
    (21,472
    )
 See accompanying notes to condensed consolidated financial statements. 5




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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 27, 2004 and March 29, 2003
(Unaudited) (1) Nature of Business Through our operating subsidiaries, we are a contract manufacturer and
supplier of high-quality fabricated sheet metal components and subassemblies
for industrial, construction and agricultural original equipment manufacturers
located primarily in the Midwestern and Southeastern United States. (2) Interim Financial Data The Condensed Consolidated Financial Statements at March 27, 2004, and for
the three months ended March 27, 2004 and March 29, 2003, are unaudited and
reflect all adjustments, consisting of normal recurring accruals and other
adjustments which, in the opinion of our management, are necessary for a fair
presentation of the financial position, operating results, and cash flows for
the interim periods indicated. Our fiscal quarters end on a Saturday (nearest
to a quarter end) except for the fourth quarter which ends on December 31. For
the quarters ended March 27, 2004 and March 29, 2003 there were 60 and 62
shipping days, respectively. Results of operations for interim periods are not
necessarily indicative of the results of operations for the full fiscal year.
You should read the condensed consolidated financial statements in connection
with the consolidated financial statements and notes thereto, together with
managements discussion and analysis of financial condition and results of
operations of Morton Industrial Group, Inc. contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003, as filed on March 30,
2004. (3) Discontinued Operations The results from discontinued operations for the three months ended March
29, 2003 reflect the results of Mid-Central Plastics, Inc., which we sold on
June 20, 2003. Resulting from that sale is a note receivable of $1,100,000 due June 20,
2006 which bears interest at 15% per annum. Interest for the period of June 20,
2003 through June 20, 2004 shall be 15% payment-in-kind, with interest payable
in cash beginning in July, 2004. The note receivable, due from the buyer, is
subordinate to required payments due by the buyer to its senior secured lender.
Payments received by the Company are assigned to Harris Trust and Savings Bank,
As Agent, the Companys senior secured lender. (4) Inventories The Companys inventories, in thousands of dollars, at March 27, 2004, and
December 31, 2003, are summarized as follows: March 27,
    
    December 31,2004
    
    2003Raw materials, purchased parts and
manufactured components
    
    $
    6,945
    
    
    $
    4,915Work-in-process
    
    
    4,696
    
    
    
    3,521Finished goods
    
    
    4,157
    
    
    
    5,427$
    15,798
    
    
    $
    13,863
 6




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(5) Earnings Per Share The following reflects the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations: Quarter Ended March 27, 2004
    
    Quarter Ended March 29, 2003Earnings
    
    Shares
    
    Per Share
    
    Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic earnings available to
common stockholders
    
    $
    2,126,000
    
    
    
    4,660,547
    
    
    $
    0.46
    
    
    $
    119,000
    
    
    
    4,660,547
    
    
    $
    0.03Effect of dilutive securities, stock
options and warrants
    
    
    
    
    
    
    866,175
    
    
    
    (0.08
    )
    
    
    
    
    
    
    224,529
    
    
    
    Diluted earnings available to
common stockholders
    
    $
    2,126,000
    
    
    
    5,526,722
    
    
    $
    0.38
    
    
    $
    119,000
    
    
    
    4,885,076
    
    
    $
    0.03
 For the quarters ended March 27, 2004 and March 29, 2003, options and
warrants aggregating 51,650 and 911,620 shares, respectively, were excluded
from the computation of diluted earnings per share due to their anti-dilutive
effect. (6) Segment Reporting Following the June 20, 2003 sale of Mid-Central Plastics, Inc., we have
only one remaining segment  the contract metals fabrication segment. (7) Debt and Warrants On March 26, 2004, the Company entered into a Second Amended and Restated
Credit Agreement with a syndicate of banks led by Harris Trust and Savings
Bank, As Agent, and also on March 26, 2004, entered into a Note and Warrant
Purchase Agreement with BMO Nesbitt Burns Capital (U.S.) Inc., As Agent. These
agreements were effective on March 26, 2004, and provided financing to replace
the revolving credit facility and term note payable previously due to Harris
Trust and Savings Bank, As Agent. In connection with this transaction, the
238,584 warrants to purchase Class A Common Stock were surrendered by the
holders. Under the terms of the new agreements, the Company has: 1) A 4-year secured term loan in the amount of $22 million with variable
rate interest; principal payments are due in quarterly installments of
$500,000 beginning June 30, 2004 through March 31, 2005 and due in quarterly
installments of $750,000 beginning June 30, 2005 through December 31, 2007
with the balance of $11,750,000 due on March 31, 2008. The Company will enter
into interest rate protection contracts on at least 50% of the term loan. 2) A secured revolving credit facility with a limit of $18 million,
variable rate interest, and with an initial revolving credit balance of $8.7
million, and with initial availability of $5.4 million as of March 26, 2004.
The balance is due March 31, 2008. The amount available under the revolving
credit facility is limited to 85% of eligible accounts receivable and 60% of
eligible inventory. The facility requires a commitment fee of 0.50% per annum
on the unused portion of the facility. At the Companys option, for both the secured term loan and the
revolving credit facility, interest will be at either a bank base rate plus
applicable margin, or an adjusted LIBOR plus a LIBOR margin. At inception,
the bank rate plus applicable margin is 6.75% and the adjusted LIBOR plus a
LIBOR margin is 5.35%. 3) A senior secured subordinated note in the amount of $10 million
bearing cash interest of 12% and payment-in-kind interest of 4% with no
principal amortization, and the balance due March 26, 2009. This debt is
subordinated to the term loan and the revolving credit facility with respect
to both payment and lien priority; any default on the senior indebtedness
will create a default on the senior subordinated indebtedness. Related to the senior secured subordinated note, on March 26, 2004 the
Company issued 545,467 warrants to purchase shares of its Class A Common Stock
for $0.02 per share; these warrants expire March 26, 2014. The warrant holder
may exercise the warrants at any time. The warrants may be put to the Company,
at the then fair market value, at the earlier of: a) five years from the date
of issue; b) a change of control; c) a default on the senior secured
subordinated loan; d) a prepayment of 75% or more of the original principal
balance of the senior secured subordinated note. The Company has estimated the fair value of the warrants at the date of
issue to be $1.5 million, and has reported that amount as warrants payable and
as debt discount in the accompanying Condensed Consolidated Balance Sheets.
The debt discount will be amortized using the effective yield method over 5
years, the term of the related senior secured subordinated note. The Company
will update, on a quarterly basis, the fair value of the warrants and record
changes in the fair value as interest expense. The stock purchase warrant includes provisions that will reduce the
545,467 warrants that can be put to the Company if a) a change of control
occurs prior to 5 years from the date of issue and the Company achieves
targeted net equity values; or b) if a change of control has not occurred prior
to 5 years from the date of issue and the Company achieves targeted EBITDA
(earnings before interest, taxes, depreciation and amortization) levels. The
number of warrants could be reduced to several levels, but no lower than
290,278. 7




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In connection with these loans, we have granted the lenders a lien on all
of the Companys accounts receivable, inventory, equipment, land and buildings,
and various other assets. These agreements contain restrictions on capital
expenditures, additional debt or liens, investments, mergers and acquisitions,
asset sales and payments such as dividends or stock repurchases. These
agreements also impose various financial covenants, including financial
performance ratios. Fees associated with the March 26, 2004 transactions,
including underwriting and legal fees, were approximately $1.6 million, paid at
closing. (8) Stock Option Plan The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,and related interpretations. As such, the
Company records compensation expense on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. The Company
issues options at the current market price on the date of issuance and,
accordingly, we have not recognized any stock-based employee compensation cost
for stock options in our financial statements. The per share weighted-average fair value of stock options granted during
the quarter ended March 29, 2003 was $0.13 at the date of grant based on the
Black Scholes option-pricing model with the following weighted-average
assumptions: expected dividend yield of 0%, risk-free interest rate of 6%,
volatility of 91%, and an expected life of 10 years. No options were granted
during the quarter ended March 27, 2004. Had we determined compensation cost based on the fair value at the grant
date for our stock options under SFAS No. 123, Accounting for Stock-Based
Compensation, our net earnings, in thousands of dollars, would have been
reduced to the pro forma amounts indicated below: Quarter
    
    QuarterEnded
    
    EndedMarch
    
    March27, 2004
    
    29, 2003Net earnings available to common stockholders:As reported
    
    $
    2,126
    
    
    
    119Total stock-based employee compensation expense
determined under fair value based method for all
awards
    
    
    (13
    )
    
    
    (36
    )Pro forma
    
    $
    2,113
    
    
    
    83Basic earnings available to common stockholders per
share:As reported
    
    $
    0.46
    
    
    
    0.03Pro forma
    
    $
    0.45
    
    
    
    0.02Diluted earnings available to common stockholders per
share:As reported
    
    $
    0.38
    
    
    
    0.03Pro forma
    
    $
    0.37
    
    
    
    0.02
 (9) Impact of Recently Issued Accounting Standards FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities.FIN 46® or the Interpretation, addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. The Interpretation was issued on December 24,
2003, and replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued on January 17, 2003. The Company does
anticipate that the adoption of Interpretation 46 will have a material impact
on its financial statements. The FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(Statement
150), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Statement 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. FASB Staff Position Financial Accounting
Standard 150-3, Effective Date, Disclosures, and Transition for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interest under FASB Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of both 8




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Liabilities and Equity,defers the effective date of Statement 150 for
certain mandatorily redeemable noncontrolling interests of all entities. The
Company adopted SFAS No. 150 as of July 1, 2003. (10) Redeemable Preferred Stock Pursuant to a 1999 agreement to purchase certain assets of Worthington
Custom Plastics, Inc. (Worthington), the Company issued 10,000 shares of its
preferred stock, without par value, to Worthington. The preferred stock was
mandatorily redeemable on April 15, 2004 at $1,000 per share. The preferred
stock was valued at $4,250,000 at the time of the acquisition and the discount
is being accreted over a five-year period using the effective yield method. The Company and Worthington entered into a stock redemption agreement,
dated December 23, 2003, that provides for 30 monthly redemption payments of
$50,000 each over a three-year period (10 payments each year in 2004, 2005 and
2006) to redeem all of the preferred stock. Each payment will redeem 333 (or
334) shares of the 10,000 shares outstanding and will result in a gain on
redemption of $283,000. Three redemption payments made during the three months
ended March 27, 2004 resulted in the gain on redemption of redeemable
preferred stock of $850,000 which is reported in the accompanying condensed
consolidated statements of operations. If shares are not redeemed under the
provisions of this agreement, the redemption price remains at $1,000 per share.
As part of this agreement, all litigation between the Company and Worthington
was settled and dismissed. (11) Unbilled Receivables During the quarter ended March 27, 2004, the Company incurred increased
costs for the purchase of raw materials as a result of dynamic changes in the
U.S. steel markets. The Companys supplier agreements with key
customers allow surcharges for the passthrough of the additional raw
material costs. The amount of the surcharges relating to the first
quarter was invoiced in April 2004. Accordingly, the Company has
recognized as net sales the surcharge amount and has included those amounts in the accompanying balance sheet as
unbilled receivables. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis describes changes in the Companys
financial condition since December 31, 2003. The analysis of results of
operations compares the quarters ended March 27, 2004 and March 29, 2003. Any
references to December 31, 2003 relate to data found in Form 10-K as filed with
the Securities and Exchange Commission on March 30, 2004. GENERAL We are a contract manufacturer of highly engineered metal components and
subassemblies for construction, agricultural and industrial original equipment
manufacturers. Our largest customers, Caterpillar Inc. and Deere & Co.,
accounted for approximately 85% of our net sales for the quarters ended March
27, 2004, and accounted for approximately 88% and 87% of our net sales in 2003
and 2002, respectively. Historically, the Company has been a fabricator of sheet metal products.
Subsequent to a merger in January, 1998, when the Company became a
publicly-traded entity, the Company acquired six facilities that fabricated
either injection molded or thermoformed plastic components. We acquired two of
the plastics fabrication facilities separately in 1998 and four together in
1999. We sold one of the plastics fabrication facilities acquired in 1998 at
the end of 1999. The four plastics fabrication facilities acquired together in
1999 were sold in December, 2002. These four facilities, operating as Morton
Custom Plastics, LLC, were incurring significant losses and filed for
protection as debtor-in-possession under Chapter 11 of the United States
Bankruptcy Code. At the time of the sale of Morton Custom Plastics, LLC, the
Company determined that is was appropriate to focus solely on its core
competency, sheet metal fabrication, and offered for sale its remaining
plastics fabrication facility, which we sold in June, 2003. In the Companys
accompanying financial statements, all of the plastics fabrication operating
results are reported as discontinued operations. As a part of the 1999 plastics facilities acquisition, the Company issued
$10 million of redeemable preferred stock with a maturity date of April 2004.
The Company negotiated a settlement in December 2003 with the holder of the
preferred stock, and began making redemption payments in January, 2004. If the
redemption payments are paid according to the terms of the settlement
agreement, the payments will aggregate $1.5 million over a three-year period
ending in 2006. Since June, 2003, the Company has focused solely on its core business,
sheet metal fabrication (the Companys continuing operations). The Company
recognized earnings of over $1.2 million from its continuing operations in
2003, but had incurred losses 9




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from its continuing operations in 2001 and 2002 when demand by the
Companys customers was depressed. These losses from continuing operations as
well as the acquisition and subsequent disposition of certain plastics
facilities created pressure on our liquidity. To take advantage of the potential for growth in 2004 and beyond, and to
be able to effectively serve our customers, we must be able to ensure an
adequate flow of raw materials into our production processes, be able to hire
and train additional employees and be able to fund our need for new
manufacturing equipment and meet our other working capital needs. Accordingly,
the Company entered into a new credit facility in March 2004 that is described
below. The new credit facility provided additional availability at the closing
of approximately $5 million. Management believes that the new credit facility
will permit the Company to meet its liquidity requirements driven by raw
material, manpower and capital expenditure requirements through the term of the
facility, which matures in March, 2008. As noted above, two customers account for a significant portion of our net
sales. Caterpillar Inc. and Deere & Co. are both forecasting greater orders for
fabricated parts supplied by Morton Industrial Group, Inc. for 2004. We believe
that this demand is being fueled by the improved economic conditions in the
United States. The Company is responding by hiring additional manpower, adding
capital equipment as necessary and increasing the flow of purchased raw
materials in a difficult steel market. The U.S. steel industry has
restructured, consolidated and is challenged to meet growing domestic and
international demand. The steel industry has been impacted by Chinas growing
consumption of scrap steel and coke, a raw material used in processing steel.
Cosmetically sensitive sheet steel, our core commodity, is on allocation and
has correspondingly seen inflationary pricing; most inflationary steel pricing
becomes the responsibility of the customer. In pricing our products, we consider the volume of the product to be
manufactured, required engineering resources and the complexity of the product.
Our customers typically expect us to offset any manufacturing cost increases
with improvements in production flow, efficiency, productivity or engineering
redesigns. As a part of their supplier development programs, our primary
customers initiate cost improvement efforts on a regular basis. At the
conclusion of any such effort, when savings can be documented, we share the
savings with our customer. RESULTS OF OPERATIONS First quarter, 2004 versus first quarter, 2003 Net sales for the quarter ended March 27, 2004 were $39.9 million compared
to $32.4 million for the quarter ended March 29, 2003, an increase of $7.5
million or 23.3%. The sales increase resulted primarily from increased unit
demand by existing customers of construction-related equipment components. Our
construction-related revenues increased by over 70% for the comparable quarters
and accounted for nearly two-thirds of our first quarter revenue.
Agricultural-related revenues increased modestly for the comparable quarters.
Most of the revenue growth came from sales to our two largest customers, Deere
& Co. and Caterpillar Inc. Based upon customer forecasts and the addition of
new customers, the Company currently anticipates revenue growth for calendar
year 2004 that could exceed 15% compared to calendar year 2003. Our ability to
increase revenues at that rate will be subject to a number of factors,
including the continuing demand that we now forecast, the availability of raw
materials, principally steel, and the availability of working capital to
support that growth. Recently, steel prices have increased as steel supply has
tightened, due in part to the national economic recovery, Chinas growing steel
consumption, and reduced domestic steel production capacity. We expect that
this trend will continue through 2004, and there could be periods when steel is
not available on demand. We will work with our steel suppliers to attempt to
address these issues. Historically we have been able to negotiate with our
customers to have them absorb increases in our raw material costs, and, as
indicated in Note 11 above, we have billed certain cost increases to our
customers. In addition, we have generally passed on reductions in our raw
material costs to our customers. Sales to Caterpillar Inc. and Deere & Co. aggregated approximately 85% and
91% of our net sales for the first quarters of 2004 and 2003, respectively. Gross profit for the quarter ended March 27, 2004 was $5.5 million
compared with $4.6 million for the quarter ended March 29, 2003, an increase of
$918,000 or 20.0%. The Companys gross profit percentage decreased slightly to
13.8% from 14.2%. Although the gross profit dollars are supported by the effect
of absorbing fixed costs over a larger revenue base, as well as our continuing
focus on cost savings programs including 6 Sigma and various lean manufacturing
concepts, the modest decrease in gross profit percentage relates to overtime
and other labor costs due to rapid sales growth, quarter-over-quarter, in
response to customer demand. We use internal metrics to measure our success in
achieving various productivity, quality, on-time delivery and profitability
goals. 10




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Selling and administrative expenses for the quarter ended March 27, 2004
amounted to $3.4 million, or 8.6% of sales, compared with $3.3 million, or
10.2% of sales in the quarter a year ago. This decreased percentage cost
relates primarily to a higher sales volume, and relatively flat selling and
administrative expenses. Interest expense for the quarter ended March 27, 2004 amounted to $571,000
compared to $933,000 in the comparable quarter a year ago. This decrease
resulted from lower average levels of debt in 2004. The debt decreased as a
result of scheduled payments on the Companys term debt and a reduction of
revolving debt upon the sale of the operations of Mid-Central Plastics in June
2003. Interest on redeemable preferred stock relates to the accretion of the
discount on redeemable preferred stock for the quarter ended March 27, 2004.
This classification in other expense resulted from the implementation of FAS
150. For the first quarter of 2003, the accretion was classified as accretion
of preferred stock discount. As a result of the preferred stock settlement agreement, the Company made
three preferred stock redemption payments during the three months ended March
27, 2004, which resulted in the gain on redemption of redeemable preferred
stock of $850,000 in the accompanying condensed consolidated statements of
operations. For the first quarter of 2004, we recognized an income tax expense of
$50,000 related to state income taxes. Related to Federal income taxes, we
have utilized net operating loss carry forwards to the extent of taxable
income, and decreased the valuation allowance accordingly. The income from discontinued operations represents the results of the
operations of Mid-Central Plastics, Inc. which was sold in June 2003. LIQUIDITY AND CAPITAL RESOURCES Historically, we have funded our business with cash flows from operations,
management of our working capital and borrowings under revolving credit and
term loan facilities. Our consolidated working capital at March 27, 2004 was a deficit of
$477,000 compared to a deficit of $6.8 million at December 31, 2003. This
represents an increase in working capital of approximately $6.4 million. This
working capital increase results primarily from a March 26, 2004 refinancing
described below. In May 1998, the Company entered into both a revolving credit facility and
a term loan agreement with a syndicate of banks led by Harris Trust and Savings
Bank (the Harris syndicate). In February 2002, the Company entered into a new secured revolving credit
facility and a secured term loan with the Harris syndicate. This February 2002
credit facility was in effect as of December 31, 2003 and through March 25,
2004. The 2002 agreements have been amended six times, including an amendment
on March 15, 2004. Amendments through February 28, 2003 have been described in
previous filings with the SEC. A summary of the three amendments since February
28, 2003 is as follows:  
    
    An amendment dated June 20, 2003 in connection with the sale of the
operations of Mid-Central Plastics, Inc., including the Harris syndicate
consent to the sale
    
    An amendment dated December 22, 2003 that provided an extension of
the credit facility through April 1, 2005, and provided consent to enter
into a settlement regarding the redeemable preferred stock held by
Worthington Industries, Inc.
    
    An amendment dated March 15, 2004 that amended the definition of the
borrowing base and increased the limitation for capital expenditures for
2003. The two following paragraphs describe the credit facility, as amended on March
15, 2004, that was effective as of December 31, 2003 and through March 25,
2004: The revolving credit agreement permitted the Company to borrow up to a
maximum of $18.8 million. The agreement required payment of a quarterly
commitment fee of .50% per annum of the average daily unused portion of the
revolving credit facility. Interest was due monthly and was based upon bank
prime plus 1.5% (effective rate of 5.75% at December 31, 2003). The Company,
alternatively, could select a LIBOR plus 4.0% interest rate. The amount
available under the revolving credit facility was limited to 85% of qualified
accounts receivable, 60% of eligible inventory, plus $2.1 million of other
assets. The revolving credit agreement was
to mature April 1, 2005. At December 31, 2003, the Company had $13.3
million outstanding and $1.2 million available under this credit facility. 11




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In February 2002, the Company also entered into a secured term loan
arrangement with the Harris syndicate for a term loan of $33.0 million. The
term loan under this financing arrangement was amortized monthly with principal
payments ranging from $500,000 on January 2, 2004, $250,000 for the months of
January through March, 2004 and $500,000 for the months of April 2004 through
March 2005 and the balance of $16.0 million was due on April 1, 2005. Interest
was due monthly and was based upon bank prime plus 1.5% (effective rate of
5.75% at December 31, 2003). The Company, alternatively, could select a LIBOR
plus 4.0% interest rate. In connection with these Harris syndicate loans, we granted the lender a
first lien on all of the Companys accounts receivable, inventory, equipment
and various other assets. These Harris syndicate debt agreements contain
restrictions on capital expenditures, additional debt or liens, investments,
mergers and acquisitions, asset sales and payments such as dividends or stock
repurchases. No amount was available for payment of dividends at December 31,
2003. The agreements also imposed various financial covenants, including
financial performance ratios. These debt agreements contained restrictions on
capital expenditures, incurring additional debt or liens, making investments,
mergers and acquisitions, selling assets or making payments such as dividends
or stock repurchases, as well as various financial covenants. March 26, 2004 Refinancing On March 26, 2004, the Company entered into a Second Amended and Restated
Credit Agreement with a syndicate of banks led by Harris Trust and Savings
Bank, As Agent, and also on March 26, 2004, entered into a Note and Warrant
Purchase Agreement with BMO Nesbitt Burns Capital (U.S.) Inc., As Agent. These
agreements were effective on March 26, 2004, and provided financing to replace
the revolving credit facility and term note payable previously due to Harris
Trust and Savings Bank, As Agent. In connection with this transaction, the
238,584 warrants to purchase Class A Common Stock were surrendered by the
holders. Under the terms of the new agreements, the Company has: 1) A 4-year secured term loan in the amount of $22 million with variable
rate interest; principal payments are due in quarterly installments of
$500,000 beginning June 30, 2004 through March 31, 2005 and due in quarterly
installments of $750,000 beginning June 30, 2005 through December 31, 2007
with the balance of $11,750,000 due on March 31, 2008. 2) A secured revolving credit facility with a limit of $18 million,
variable rate interest, and with an initial revolving credit balance of $8.7
million, and with initial availability of $5.4 million as of March 26, 2004.
The balance is due March 31, 2008. The amount available under the revolving
credit facility is limited to 85% of eligible accounts receivable and 60% of
eligible inventory. The facility requires a commitment fee of 0.50% per annum
on the unused portion of the facility. At the Companys option, for both the secured term loan and the
revolving credit facility, interest will be at either a bank base rate plus
applicable margin, or an adjusted LIBOR plus a LIBOR margin. At inception,
the bank rate plus applicable margin is 6.75% and the adjusted LIBOR plus a
LIBOR margin is 5.35%. The Company entered into swap arrangements on
April 28, 2004 that will fix the interest rate on 50% of the
Companys term loan. 3) A senior secured subordinated note in the amount of $10 million
bearing cash interest of 12% and payment-in-kind interest of 4% with no
principal amortization, and the balance due March 26, 2009. This debt is
subordinated to the term loan and the revolving credit facility with respect
to both payment and lien priority; any default on the senior indebtedness
will create a default on the senior subordinated indebtedness. Related to the senior secured subordinated note, on March 26, 2004, the
Company issued 545,467 warrants to purchase shares of its Class A Common Stock
for $0.02 per share; these warrants expire March 26, 2014. The warrants may be
put to the Company, at the then fair market value, five years from the date of
issue, or upon change of control or upon a default on the senior secured
subordinated loan. In connection with these loans, we have granted the lenders a lien on all
of the Companys accounts receivable, inventory, equipment, land and buildings,
and various other assets. These agreements contain restrictions on capital
expenditures, additional debt or liens, investments, mergers and acquisitions,
asset sales and payments such as dividends or stock repurchases. These
agreements also impose various financial covenants, including financial
performance ratios. Fees associated with the March 26, 2004 transactions,
including underwriting and legal fees, were approximately $1.6 million,
paid at closing. 12




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Historically, we have met our near term liquidity requirements with cash
flows from operations, the Harris line of credit, and management of our working
capital to reflect current levels of operations. Management expects that cash
flows from operations, working capital management and availability under the new
bank revolving line of credit described above will permit us to meet our
liquidity requirements through the term of the new credit facility. Preferred Stock Pursuant to a 1999 agreement to purchase certain assets of Worthington
Custom Plastics, Inc. (Worthington), the Company issued 10,000 shares of its
preferred stock, without par value, to Worthington. The preferred stock was
mandatorily redeemable on April 15, 2004 at $1,000 per share. The Company and
Worthington have entered into a stock redemption agreement, dated December 23,
2003, that provides for 30 monthly redemption payments of $50,000 each over a
three-year period (10 payments each year in 2004, 2005 and 2006) to fully
redeem the preferred stock. Each $50,000 payment and redemption of 333 (or 334)
shares reduces the $10 million face value of the redeemable preferred stock by
$333,000 (or $334,000). If shares are not redeemed under the provisions of this
agreement, the redemption price remains at $1,000 per share. Capital Expenditures We incurred $1.4 million of capital expenditures during the first three
months of 2004, including approximately $850,000 related to expansion
activities and approximately $550,000 for the normal update and replacement of
manufacturing equipment. We estimate that our capital expenditures in 2004 will total approximately
$5.0 million, of which $2.0 will be for expansion activities and the remaining
$3.0 million will be for the normal update and replacement of manufacturing
equipment. Significant Cash Commitments The Company has significant future cash commitments, primarily scheduled
debt payments and scheduled lease payments. The following table summarizes the Companys contractual obligations at
March 27, 2004: Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years(In thousands)Bank indebtednessTerm loan
    
    $
    22,000
    
    
    $
    2,000
    
    
    $
    9,000
    
    
    $
    11,000
    
    
    $
    Revolving line of credit
    
    
    7,200
    
    
    
    
    
    
    
    
    
    
    
    7,200
    
    
    
    Senior subordinated debt
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    Other debt obligations
    
    
    1,928
    
    
    
    471
    
    
    
    1,333
    
    
    
    124
    
    
    
    Operating leases
    
    
    22,822
    
    
    
    6,913
    
    
    
    13,339
    
    
    
    2,570
    
    
    
    Preferred stock redemption
    
    
    1,350
    
    
    
    500
    
    
    
    850
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    65,300
    
    
    $
    9,884
    
    
    $
    24,522
    
    
    $
    30,894
    
    
    $
    
 Under its bank credit facility, the Company had $618,000 standby letters
of credit outstanding at March 27, 2004 in connection with lease obligations.
Management expects that cash flows from operations, working capital management
and availability under its new bank revolving line of credit will permit us to
meet our liquidity requirements through the term of the credit facility. Pursuant to a 1999 agreement to purchase certain assets of Worthington
Custom Plastics, Inc. (Worthington), the Company issued 10,000 shares of its
preferred stock, without par value, to Worthington. The preferred stock was
mandatorily redeemable on April 15, 2004 at $1,000 per share. The Company and
Worthington have entered into a preferred stock redemption agreement, dated
December 23, 2003, that provides for 30 monthly redemption payments of $50,000
each over a three-year period (10 payments each year in 2004, 2005 and 2006) to
fully redeem the preferred stock. Each $50,000 payment and redemption of 333
(or 334) shares reduces the $10 million face value of the redeemable preferred
stock by $333,000 (or $334,000). If shares are not redeemed under the provision
of this agreement, the redemption price remains at $1,000 per share. The
significant cash commitments table above assumes that payments are made over
the next three years and that the redeemable preferred stock is retired for
$1.5 million. 13




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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities.FIN 46® or the Interpretation, addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. The Interpretation was issued on December 24,
2003, and replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued on January 17, 2003. The Company does
anticipate that the adoption of Interpretation 46 will have a material impact
on its financial statements. The FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(Statement
150), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Statement 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. FASB Staff Position Financial Accounting
Standard 150-3, Effective Date, Disclosures, and Transition for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interest under FASB Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity,defers the effective date of Statement 150 for certain
mandatorily redeemable noncontrolling interests of all entities. The Company
adopted SFAS No. 150 as of July 1, 2003. FORWARD LOOKING STATEMENTS Safe Harbor Statement Under The Private Securities Litigation Reform Act
Of 1995: This quarterly report contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements containing the words
anticipates, believes, intends, estimates, expects, projects and
similar words. The forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results to be
materially different from any future results expressed or implied by such
forward looking statements. Such factors include, among others, the following:
the loss of certain significant customers; the cyclicality of our construction
and agricultural sales; the availability of working capital; the orders of our
two major customers; general economic and business conditions, both nationally
and in the markets in which we operate or will operate; competition; and other
factors referenced in the Companys reports and registration statements filed
with the Securities and Exchange Commission. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such forward
looking statements. The forward looking statements contained herein speak only
of the Companys expectation as of the date of this quarterly report. We
disclaim any obligations to update any such factors or publicly announce the
result of any revisions to any of the forward looking statements contained
herein to reflect future events or developments. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company uses variable-rate debt to finance its operations. The debt
obligations expose the Company to variability in interest payments due to
changes in interest rates. Management believes it is prudent to limit the
variability of a portion of its interest payments. To meet this objective,
management sometime enters into interest rate swap agreements to manage
fluctuations in cash flows resulting from interest rate risk. These swaps
change the variable-rate cash flow exposure on the debt obligations to fixed
cash flows. Under the terms of the interest rate swaps, the Company receives
variable interest rate payments and makes fixed interest rate payments, thereby
creating the equivalent of fixed rate debt on a portion of its term loan. The
Company did not have any swap agreements in effect during the first quarter,
2004; however the Company did enter into swap arrangements as of April 28,
2004, that will fix the interest rate on 50% of the Companys term loan as
described above. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures (a) Evaluation of disclosure controls and procedures.The Companys
principal executive officer and principal financial officer have concluded that
the Companys disclosure controls and procedures (as defined in Rule 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended), based on
their evaluation of these controls and procedures as of the end of the period
covered by this Form 10-Q, are effective. 14




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The Companys management, including its principal executive officer and
principal financial officer, does not expect that the Companys disclosure
controls and procedures or its internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgements in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. The design of any system of controls also is based, in part, upon
certain assumptions about the likelihood of future events, and there can only
be reasonable assurance that any design will succeed in achieving its stated
goals under all potential future conditions. (b) Changes in internal controls.There have been no significant changes
in the Companys internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation. Changes in internal controls We seek to maintain a system of internal accounting controls that are
intended to provide reasonable assurances that our books and records accurately
reflect our transactions and that our established policies and procedures are
followed. There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the date we carried out this evaluation. 
 PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS On May 1, 2000, Worthington Industries, Inc. (Worthington) filed suit (in
the United States District Court for the Southern District of Ohio, Eastern
Division (the Court)) against the Company and Morton Custom Plastics, LLC
(MCP, LLC) related to MCP, LLCs 1999 acquisition of the non-automotive
plastics business from Worthington. In connection with the stock redemption
agreement described in Note 10 to the Condensed Consolidated Financial
Statements, all litigation between the Company and Worthington was released. An
order of dismissal of the Worthington lawsuit against the Company was entered
in the Court on January 20, 2004. The Company is also involved in routine litigation. Management does not
believe any legal proceedings would have a material adverse effect on the
Companys financial condition or results of operations. 
 ITEM 2. CHANGES IN SECURITIES On
March 26, 2004, the Company issued its senior subordinated
lender warrants to purchase 545,467 shares
of its Class A Common Stock at an exercise price of $0.02 per
share. The Company relied on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933. The Company issued the
warrants in consideration of the holders advancing funds under the
senior secured subordinated note described above. The warrant holder
may exercise the warrants at any time. These
warrants expire March 26, 2014. These warrants may be put to the Company, at
the then fair market value, five years from the date of issue, or upon change
of control or upon a default on the senior secured subordinated loan. The 238,584 warrants previously outstanding were surrendered by the
holders of those warrants on March 26, 2004. Under the terms of our agreement with our senior secured lender, no
amounts are available for the payment of dividends at March 27, 2004. 15




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits  11.
    
    The computation can be determined from this report.31.1
    
    Certification pursuant to Rule 13a-14(a)31.2
    
    Certification pursuant to Rule 13a-14(a)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (B) Reports on Form 8-K. None 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. MORTON INDUSTRIAL GROUP, INC.By:
    /s/ RODNEY B. HARRISONRodney B. HarrisonDated: May 11, 2004
    
    Vice President of Finance 16