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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-13198

Morton Industrial Group, Inc.

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to section 12(g) of the Act:

Class A Common Stock, par value $.01 per share

     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.     þ

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      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 day business day of the registrant’s most recently completed second fiscal quarter was approximately $850,000.

      As of March 19, 2004, the aggregate market value of the Class A Common Stock held by non-affiliates was approximately $2,000,000 and there were 4,560,547 shares of Class A Common Stock and 100,000 shares of Class B Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held in June 2004 are incorporated by reference into Part III hereof.

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      “Safe Harbor” Statement Under The Private Securities Litigation Reform Act Of 1995: This annual 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; 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 annual 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.

PART I

General Development of Business

      On January 20, 1998, Morton Metalcraft Holding Co. and its subsidiaries (“Morton”) merged (the “Merger”) with MLX Corp. (“MLX”), with MLX being the surviving corporation. As a result of the Merger, Morton ceased to exist as a separate corporate entity and MLX amended its Articles of Incorporation to change the corporate name of MLX to Morton Industrial Group, Inc. (the Company). Morton was engaged in the business of manufacturing fabricated metal components for construction and agricultural original equipment manufacturers and other industrial customers.

      On April 15, 1999, we acquired from Worthington Custom Plastics three manufacturing facilities that produced plastic components for industrial original equipment manufacturers. The Worthington acquisition expanded our plastic product offerings to include appliance parts, electronics housings and other injection molded and thermoformed plastic products. These plastics facilities operated as Morton Custom Plastics, LLC (MCP, LLC). On November 1, 2002, MCP, LLC, filed for protection as debtor-in-possession under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Before filing, MCP, LLC had negotiated the terms of an agreement for sale of substantially all of its assets to Wilbert, Inc., pursuant to an Asset Purchase Agreement. Under the agreement, Wilbert, Inc. was also to assume the liabilities of MCP, LLC under certain of their contracts and leases. This sales transaction closed on December 24, 2002, with the cash consideration applied to the reduction of MCP, LLC’s senior secured debt. The Company also operated an injection molding business in Iowa until that operation was sold in June, 2003. These sales allowed the Company to focus on its core competency, manufacturing fabricated sheet metal components.

      The Company operates its metal fabrication operations in five facilities in Illinois, North Carolina and South Carolina.

Narrative Description of Business

      We are a contract manufacturer of highly engineered metal components and subassemblies for industrial, construction, agricultural and recreational vehicle original equipment manufacturers (“OEM’s”). Our metal products include cabs, engine enclosures, panels, platforms, frames and complex weldments used in backhoes, excavators, tractors, motor homes, beverage coolers and similar industrial equipment. Our largest customers

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      Customers use our products in industrial, construction, agricultural and recreational vehicle equipment. As OEM’s in these industries have intensified their focus on core competencies, they have increasingly outsourced more of their production parts to reduce costs. To effectively manufacture products for OEMs, suppliers must invest in technologically advanced equipment, develop in-house design capabilities, and coordinate manufacturing and product delivery with their customers.

      Historically, our largest customers, Deere and Caterpillar, have been supplied by a large number of local suppliers that would each produce a small number of products. As these OEMs have increased the complexity of their equipment and become more dependent on component and subassembly suppliers, they have reduced the size of their supplier base and have established close relationships with a smaller number of sophisticated suppliers who can provide a range of services, including design engineering, prototyping, sophisticated quality systems, and just-in-time delivery. The high levels of service necessary to serve these customers, coupled with significant tooling investments, have resulted in the sole-sourcing of many products rather than dual or multi-sourcing. Currently, we are the sole-source provider of over 85% of the products that we supply to our customers. As these customers continue to reduce the size of their supplier base and outsource a growing percentage of their product needs, we expect to become the sole-source provider on an increasing number of products.

      Virtually all of our customers are located in the United States, and we do not have material sales to foreign customers.

      We produce a range of components and subassemblies for equipment used in a variety of industrial applications. Our products are used in store fixtures and power generators. Customers in the industrial equipment area generally serve stable or growth markets, and these customers include Caterpillar and Hallmark. Industrial equipment products account for approximately 22% of our 2003 net sales.

      The $18 billion U.S. construction equipment industry includes construction, earth moving and forestry equipment, as well as some material handling equipment, lifts, off-highway trucks and a variety of machines for specialized industrial applications. Caterpillar and Deere dominate the U.S. construction equipment industry, and together accounted for approximately 50% of total unit sales in 2003. We supply metal components and subassemblies, such as engine enclosures, cabs, platforms, frames and complex weldments. Our customers use these products in backhoes, excavators, wheel loaders, skid-steer loaders, lifts and similar construction equipment. Our sales per construction equipment vehicle range from $500 to $2,500. Construction equipment products account for approximately 65% of our 2003 net sales.

      The $15 billion U.S. agricultural equipment industry includes large, relatively expensive products such as tractors, combines and other farming equipment. Deere and Caterpillar accounted for approximately 35% of total agricultural equipment unit sales in 2003. We supply metal components and subassemblies such as steps, grills, and landing decks. Our sales per agricultural equipment vehicle range from $200 to $3,000. Agricultural equipment products account for approximately 13% of our 2003 net sales.

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      Our investments in modern equipment and systems have allowed us to produce a broad line of highly engineered components and subassemblies. We strive to meet customers’ needs for design engineering, prototyping, product fabrication and just-in-time delivery.

      Our sheet metal fabrication capabilities include laser and plasma cutting, forming, punching, welding, painting and assembly processes. Our sheet metal fabrication processes operate on information created by CAD/ CAM software, utilize optic laser cutting machines to cut parts at high speeds and use robotic welders to complement manual welding operations. Our painting operations are capable of producing the wide variety of paint finishes required by customers.

      Fabricated Sheet Metal Products Include:

	•	Sheet Metal Enclosures and Boxes — generator set enclosures, electrical and battery boxes, panels, doors, hoods and covers used in backhoes, excavators and tractors.
	•	Special Weldments — lift arms, seat modules, frames, guards, platforms, step assemblies and cabs used in backhoes, excavators, crawlers, tractors and skid steer loaders; and components for refuse haulers.
	•	Fabricated Steel Tanks — fuel and hydraulic fluid reservoirs used in motor graders, trucks, crawlers, wheel loaders and excavators.
	•	Sheet Metal Component Packages — laser cut and formed parts that are used in higher level assemblies at customer locations. These products include brackets, plates and frame components that are used in a wide variety of customer end products.
	•	Store Fixtures — backframes, lights and brackets used in store displays and commercial refrigeration units.

      We offer our customers a number of services described below:

      This service category includes design, development, analysis and costing for our products. We prefer to and often work with customers in the early stages of designing their products.

      This service category includes prototyping, tooling and pre-production steps in the manufacturing process. Our dedicated prototype and tooling departments work with customers throughout development efforts, allowing for a smooth introduction of new products.

      This service category includes a number of decorating operations such as liquid and powder coat painting and decal application.

      This service category includes providing customers the ability to order products in low lot sizes with minimal lead time enabling them to reduce their overall order cycle time. We also provide deliveries that are specially sequenced to customers’ manufacturing schedules.

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      Engineering capabilities have become increasingly emphasized as suppliers provide design services for new projects. Computer aided design capabilities include Pro/ENGINEER, Anvil 1000/5000, Apollo, Merry Mechanization and CADKEY. We have focused our computer aided design investment on the Pro/ENGINEER system during the last several years because Pro/ENGINEER is the preferred system of the majority of our customers. Computer aided design allows us to download completed and approved designs directly to production equipment in most plants. The resulting direct interaction between customers’ designers and our engineers facilitates joint development of new components and redesigns of old parts.

      Consistent with our emphasis on technology, computer systems and controls are an integral part of our operating strategy. We have invested heavily in management information systems and computer aided design capabilities and control functions, particularly during the last several years. We also use computer systems to provide timely performance measurements of shop floor quality and activity, daily actual cost information for each factory, electronic data interchange with major customers, real-time dispatching of work orders, integration of purchasing information with production scheduling, capacity management and inventory information.

Sales and Marketing

      To better serve our customers, we have combined our sales and engineering organizations. The sales and engineering group has primary responsibility for managing relationships with customers and working with them to design new products. Our customers are serviced by account teams led by an account manager and include representatives from our primary functional areas. These areas include engineering and customer service. Account teams work with the customer to design products and produce prototypes, schedule production and monitor quality and customer satisfaction. Our account managers also lead the new business development process, working with customers to obtain details of new outsourcing programs, new products currently being designed and existing products which will be redesigned. We believe that the structure of our sales and marketing organization helps to ensure cooperation in product design and helps us to gain repeat and new business from our customers.

Manufacturing/ Production

      We use a range of manufacturing processes to serve the needs of our customers. Using these processes, we can manufacture products ranging from simple metal parts to more complex metal subassemblies. Our design and engineering capabilities provide us with a competitive edge in obtaining and maintaining preferred supplier status with our customers.

      Sheet Metal Fabrication. Our sheet metal fabrication capabilities include laser cutting, punching, forming, folding, welding, painting and assembly processes. Our sheet metal fabrication processes, operating on information created by Pro/ENGINEERING software, use optic laser cutting machines to cut parts at high speeds. We use robotic welders to complement our manual welding operations. Our painting operations are capable of producing the wide variety of paint finishes required by our customers.

Raw Materials

      The primary raw materials that we use are sheet steel, assembly parts and paint. Prices of these raw materials fluctuate, although the price of our most significant raw material, steel, has been slowly increasing since 2002. 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. In addition, we have generally passed on reductions in our raw material costs to our customers. We also participate in the steel

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Competition

      The manufacturing and supplying of highly engineered metal products to original equipment manufacturers is a fragmented and highly competitive business, with no single supplier having significant market share. We believe suppliers with a strong management team, a range of capabilities, modernized facilities and technologically sophisticated equipment like us are more likely to benefit from original equipment manufacturers’ increased outsourcing of production than other participants in the industry lacking such assets. However, competitive pressures or other factors could cause us to lose market share or could result in a significant price erosion with respect to our products.

Regulatory/ Environmental Matters

      Our operations are subject to numerous federal, state and local environmental and worker health and safety laws and regulations. We believe that we are in substantial compliance with such laws and regulations and have not budgeted any material capital expenditures for environmental control facilities.

Financial Information about Industry Segments

      We have one continuing reportable segment — contract metal fabrication. The contract metal fabrication segment provides full-service fabrication of parts and sub-assemblies for the construction, agricultural, and industrial equipment industry.

Backlog

      Our backlog of orders was approximately $99 million at December 31, 2003, and $95 million at December 31, 2002. We anticipate that we will substantially fill all of the December 31, 2003, backlog orders during the current year.

Patents, Trademarks, Licenses, Franchises, and Concessions; Research and Development

      We hold no material patents, trademarks, franchises, or concessions. We are the licensee under a number of software licenses that we use in our design, production, and other business operations. All of these licenses have customary terms and conditions. Our research and development expenditures are not material.

Working Capital Items

      Our working capital requirements reflect several business factors. Our working capital requirements are typically greater during the second half of the calendar year because both Deere & Co. and Caterpillar, Inc. suspend operations for two weeks of vacation time during July and/or August. Production operations of both of these customers also slow during the last two weeks of December. During these periods, we must rely more heavily on our credit facilities for liquidity. Additional discussion regarding working capital can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Employees

      As of February 28, 2004, we employed 1,167 employees, of which 977 were hourly and 190 were salaried. None of these employees was subject to a collective bargaining agreement. We believe our relationship with our employees is good.

Internet

      You can find our web site at www.mortongroup.com. At this website, “click” on the Annual Report link; you can choose to view the latest Annual Report on file, or you can “click” SEC Offsite Filings to link to the SEC website that provides all of the Company’s SEC filings since 1997.

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      The following table presents summary information regarding our facilities. The properties are owned except where indicated by the word “leased”. Lease terms for these facilities expire between 2004 and 2008. Our facilities are generally located in close proximity to our customers.

      In addition to manufacturing operations, our 1021 W. Birchwood Street complex in Morton, Illinois, houses the senior management of the Company.

      While we own much of the equipment used in our operations, we also use customer-owned tooling and equipment as well as equipment under operating leases. We believe our facilities are adequate to satisfy current and reasonably anticipated production requirements.

Worthington

      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 us and Morton Custom Plastics, LLC (“MCP, LLC”) related to MCP, LLC’s 1999 acquisition of the non-automotive plastics business from Worthington. Worthington claimed that it was owed additional amounts under the sale agreement and a related service agreement, and that it was owed dividends on shares of our preferred stock that it received. We believed that certain warranties and representations made by Worthington at the time of acquisition were breached and that amounts claimed by Worthington were not due. We had filed a counterclaim against Worthington related to these matters. In connection with a preferred stock redemption agreement dated December 23, 2003, the parties settled all litigation between the Company and Worthington. The Court entered an order of dismissal of the Worthington lawsuit 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, results of operations or cash flows.

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      Not applicable

PART II

      Effective April 11, 2001, the Company’s ticker symbol on the Nasdaq Small Cap Market was MGRP. Effective August 1, 2002, trading of the Company’s Class A common stock moved to the OTC Bulletin Board (the Company elected not to appeal a notice from the Nasdaq Listing Qualifications Department to delist the Company’s Class A common stock). Subsequent to this change, the Company’s ticker symbol was changed to MGRPE. Effective September 27, 2002, the trading of the Company’s Class A common stock was moved to OTC. Upon this change, the Company’s ticker symbol changed to MGRP.

      The following table sets forth for 2002 and 2003 the quarterly high and low bid prices and, with respect to the OTC market high and low bid quotations. OTC market quotations reflect interdealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions.

      We obtained the foregoing information from research services made available by Nasdaq for the first two quarters of 2002, and by Pink Sheets for the last two quarters of 2002 and all of 2003.

      As of March 19, 2004 there were 3,293 holders of record and 1,690 beneficial holders of our Class A Common Stock.

      We did not declare or pay any common stock dividends in our fiscal years ended December 31, 2003 and 2002. Our credit agreements preclude the payment of dividends.

      During the year ended December 31, 2003, we did not issue any shares of capital stock that were unregistered under the Securities Act of 1933.

      On September 20, 2000, the Company issued warrants to purchase 238,548 shares of its Class A common stock to its bank lenders. The warrants, as amended, were exercisable at any time through December 31, 2006 at an exercise price of $.01 per share. On March 26, 2004, in connection with a refinancing described in Item 7, the holders surrendered these warrants.

      On March 26, 2004, in connection with the refinancing described in Item 7, we issued our lenders 545,467 warrants to purchase Class A shares of common stock at an exercise price of $0.02 per share. The warrants expire March 26, 2014.

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      As of December 31, 2003, under our 1997 Stock Option Plan, issued and outstanding stock options are as follows:

      In addition to these options, we could grant an additional 327,561 options.

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Selected Historical Financial Data

      Set forth below are certain selected historical financial data. This information should be read in conjunction with our financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein. The financial data is derived from our audited financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

      The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report.

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 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. Two of the plastics fabrication facilities were acquired separately in 1998, and four were acquired together in 1999. One of the plastics fabrication facilities acquired in 1998 was sold 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 was sold in June, 2003. In the Company’s accompanying financial statements, all of the plastics fabrication 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 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

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      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 Metalcraft Co. 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

      The following table presents certain historical financial information expressed as a percentage of our net sales.

      Net sales for the year ended December 31, 2003 were $131.4 million compared to $116.6 million for the year ended December 31, 2002, an increase of $14.8 million or 12.8%. The sales increase resulted primarily from increased unit demand by existing customers of construction-related equipment components. Our construction-related revenues increased by over 25% and accounted for nearly two-thirds of our 2003 revenue, while our agricultural-related revenues declined over 35%. Most of the revenue growth came from sales to our two largest customers, Deere & Co. and Caterpillar. Based upon customer forecasts and the addition of new customers, the Company currently anticipates revenue growth for 2004 that could exceed 15%. 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. In addition, we have generally passed on reductions in our raw material costs to our customers.

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      Sales to Caterpillar and Deere were approximately 88% and 87% of our net sales for 2003 and 2002, respectively.

      Gross profit for the year ended December 31, 2003 was $18.1 million compared with $15.0 million for the year ended December 31, 2002, an increase of $3.1 million or 20.0%. The Company’s gross profit percentage increased to 13.8% from 12.9%. The gross profit amount and percentage increased as a result of our 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. We use internal metrics to measure our success in achieving various productivity, quality, on-time delivery and profitability goals.

      Selling and administrative expenses for the year ended December 31, 2003 amounted to $13.3 million, or 10.2% of sales, compared with $12.2 million, or 10.5% of sales in the prior year. This increased cost relates primarily to a higher sales volume.

      Interest expense in the year ended December 31, 2003 amounted to $3.1 million compared to $4.2 million in 2002. This decrease resulted from lower average levels of debt from year-to-year. 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.

      Other income of $442,000 for the year ended December 31, 2003, resulted primarily from an unrealized gain on interest rate swaps of $337,000 and interest income of $105,000 on the notes receivable related to the sale of the operations Mid-Central Plastics. Other income for the year ended December 31, 2002 resulted primarily from an unrealized gain of $365,000 on the Company’s interest rate swaps.

      “Interest on redeemable preferred stock” relates to the accretion of the discount on redeemable preferred stock for the six months ended December 31, 2003. This classification in other expense resulted from the implementation of FAS 150. For the first six months of 2003, the accretion was classified as “accretion of discount on preferred shares”.

      We recognized total income tax expense of $481,000 in 2003 on the total of pre-tax income from both continuing and discontinued operations; this represents income tax expense of $330,000 for Federal alternative minimum tax and state income taxes. Also included in the tax expense is $151,000 representing a decrease in the overall deferred tax asset recognized. The deferred tax assets represent the estimated utilization of Federal net operating loss carryforwards in 2004.

      The income from discontinued operations represents the results of the operations of Mid-Central Plastics, Inc. until the sale of those operations in June 2003.

      Net sales for the year ended December 31, 2002 were $116.6 million compared to $127.1 million for the year ended December 31, 2001, a decrease of $10.5 million or 8.3%. The sales decrease resulted primarily from decreased unit demand by customers, the soft status of the general economy and some continuing modest pricing pressure from major customers.

      Sales to Caterpillar and Deere were approximately 87% and 91% of our net sales for 2002 and 2001, respectively.

      Gross profit for the year ended December 31, 2002 was $15.0 million compared with $15.7 million for the year ended December 31, 2001, a decrease of $0.7 million or 4.4%. The Company’s gross profit percentage increased to 12.9% from 12.4%. The gross profit percentage was reduced by increased raw materials costs, but offset by reduced manufacturing costs resulting from various manufacturing costs saving initiatives.

      Selling and administrative expenses for the year ended December 31, 2002 amounted to $12.2 million, or 10.4% of sales, compared with $13.1 million, or 10.3% of sales in the prior year, a decrease of nearly $1.0 million or 7.3%. This decreased expense related primarily to a continuing effort to achieve appropriate employment levels for selling and administration functions.

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      Interest expense in the year ended December 31, 2002 amounted to $4.2 million compared to $6.7 million in 2001. This decrease resulted from both lower average levels of debt and lower average interest rates.

      Other income for the year ended December 31, 2002 resulted primarily from an unrealized gain of $365,000 on the Company’s interest rate swaps. Other expense of $610,000 for the year ended December 31, 2001, resulted primarily from an unrealized loss on the Company’s interest rate swap.

      We recognized an income tax benefit of approximately $0.3 million in 2002, which represents a Federal income tax refund. Deferred tax assets were decreased to reflect lower anticipated utilization of income tax net operating loss carryforwards than we estimated at the preceding year end, due significantly to the sale of Morton Custom Plastics, LLC. The charge related to the decrease in deferred tax assets is included in discontinued operations. The utilization of the income tax net operating loss carryforwards, and the realization of deferred tax assets, is based upon the Company’s future ability to generate the estimated taxable income.

      The net income of discontinued operations of approximately $6.8 million includes a gain on disposal of approximately $17.8 million, operating losses of approximately $8.9 million, an income tax benefit related to Federal income tax refunds of approximately $1.2 million and an income tax charge related to the decrease in deferred income tax assets of approximately $3.4 million. The operating losses of discontinued operations were comparable to the 2001 total of $8.6 million. The discontinued operations are discussed in more detail in Note 2 of the accompanying financial statements.

      In accordance with SFAS No. 142, the Company has not amortized goodwill during the year ended December 31, 2002. Had goodwill not been amortized during 2001, net earnings (loss) available to common stockholders for the year 2001 would have been $(17.4) million, or $(3.78) per share.

      Net loss available to common stockholders decreased from $(17.8) million for the year ended December 31, 2001 to $(3.3) million for the year ended December 31, 2002. This decreased net loss resulted primarily from improved manufacturing processes on reduced sales, reduced interest costs on lower debt levels, the benefits of a Federal income tax refund, and a gain recognized on the disposal of discontinued plastics operations, reduced by the cumulative effect of change in an accounting principal of $8.1 million to recognize impairment of goodwill.

Financial Position and Liquidity

      Historically, we have funded our business with cash generated from operations, management of our working capital and borrowings under revolving credit and term loan facilities. In the years ended December 31, 2001, 2002 and 2003 we generated cash from operating activities of $12.4 million, $7.4 million and $10.3 million, respectively. Our capital expenditures for the years ended December 31, 2001, 2002 and 2003 were $4.4 million, $4.0 million and $4.1 million, respectively. These capital expenditures were principally for additions to improve or maintain our manufacturing capacity and efficiency. We reduced total debt by over $10.0 million in 2003, including term loan reductions of $4.5 million, and a reduction of the revolving line of credit of $5.3 million. The line of credit reduction related primarily to the sale of the operations of Mid-Central Plastics, Inc.

      Our consolidated working capital at December 31, 2003 was a deficit of $6.8 million compared to a working capital deficit of $2.3 million at December 31, 2002. This represents a decrease in working capital of approximately $4.5 million. This working capital decrease results from several factors, including the increase in accounts payable related to business growth, and the balance sheet reclassifications resulting from the sale of the operations of Mid-Central Plastics, and the above referenced reduction in long-term debt. The Company has addressed the need for improved working capital by entering into an amended and restated credit facility effective March 26, 2004.

      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 is the credit facility that was in effect as of December 31, 2003 and

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	•	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 requires 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.

      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 new Harris syndicate term loan arrangement replaced existing term loans and did not provide additional availability. 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 is 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, 2002 and 2003.

      The agreements also impose various financial covenants, including financial performance ratios. These debt agreements contain 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 containing various financial covenants.

      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 fully accreted $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.

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      We incurred $4.1 million of capital expenditures during 2003, primarily for updating and purchases of manufacturing equipment. Of the $4.1 million of capital expenditures, $3.9 million related to continuing operations.

      We estimate that our capital expenditures for continuing operations in 2004 will total approximately $5.0 million, of which $2.0 million will be for new production equipment and the remaining $3.0 million will be for normal replacement items.

      Historically, we have met our near term liquidity requirements for our businesses with cash flow from operations, the Harris line of credit, and management of our working capital to reflect current levels of operations.

      Management expects that cash flow from operations, working capital management and availability under the new bank revolving line of credit described below will permit us to meet our liquidity requirements through the term of the new credit facility.

      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 $13.25 million revolving credit facility with the Harris syndicate and the $23.3 million term note payable to the Harris syndicate as described in Note 8 in the accompanying financial statements. 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 PIK interest of 4% with no principal amortization, and the balance due March 26, 2009.

      Related to the senior secured subordinated note, the Company will issue 545,467 warrants to purchase shares of its Class A Common Stock at $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 $1.5 million, paid at closing.

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Quarterly Financial Information

      Selected quarterly financial information for the years ended December 31, 2003 and 2002 is as follows:

Off-Balance Sheet Arrangements

      The Company has no significant off-balance sheet arrangements, other than the operating lease obligations described below, nor has it given any guarantees for any unconsolidated entities.

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Significant Cash Commitments

      The Company has significant future cash commitments, primarily scheduled debt payments and scheduled lease payments. The commitments related to debt payments and lease payments are fully described in Notes 8 and 9 of the accompanying financial statements.

      The following table summarizes the Company’s contractual obligations at December 31, 2003:

      Under its bank credit facility, the Company had $618,000 standby letters of credit outstanding at December 31, 2003 in connection with lease obligations. Management expects that cash flow 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 fully accreted $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.

Seasonality

      Our operating results vary significantly from quarter to quarter due to, among other things, the purchasing schedules of our key customers. Our sales and profits historically have been higher in the first half of the calendar year due to our largest customers’ preparation in the first two quarters for increased demand during the warmer months of the year.

Critical Accounting Policies

      In the preparation of the financial statements in accordance with generally accepted accounting principles, management must often make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Some of these estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Such estimates and assumptions affect the Company’s most critical accounting policies: the allowance for doubtful accounts, inventory valuation and the recoverability of deferred tax assets.

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      The Company provides for an allowance for doubtful accounts based on expected collectability of trade receivables. The allowance for doubtful accounts is determined based on the Company’s analysis of customer credit-worthiness, historical loss experience and general economic conditions and trends.

      Inventories are valued at the lower of cost or market. The Company evaluates its inventories for excess or slow moving items based on sales order activity and expected market changes. If circumstances indicate the cost of inventories exceed their recoverable value, inventory is adjusted to its net realizable value.

      In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment, and the valuation allowance is adjusted as appropriate.

Impact of New Accounting Standards

      In January 2003, FASB issued Interpretation 46, Consolidation of Variable Interest Entities (“Interpretation 46”), which addresses consolidation of certain variable interest entities and is effective January 31, 2003. The Company does not anticipate that the adoption of Interpretation 46 will have a material impact on its financial statements.

      The FASB also recently 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 and that adoption has had the following classification impact on the Company’s Condensed Consolidated Financial Statements:

	(i) related to the Condensed Consolidated Balance Sheet as of December 31, 2003, the redeemable preferred stock, previously reported as temporary equity is classified as a current liability.
	(ii) related to the Condensed Consolidated Statements of Operations, the expense reported in previous periods as “accretion of discount on preferred shares” is classified as “interest on redeemable preferred stock” from July 1, 2003 to December 31, 2003.

      On December 23, 2003, the Company entered into a stock redemption agreement for the redeemable preferred stock. See note 11 related to the terms of the redemption agreement

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      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, the last of which expired June 30, 2003. These swaps changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company received variable interest rate payments and made fixed interest rate payments, thereby creating the equivalent of fixed rate debt during the first six months of 2003. The Company recorded other income (expense) of $(671,000), $418,000 and $337,000 for its interest rate swap contracts for the years ended December 31, 2001, 2002 and 2003 respectively.

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

INDEX

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of Morton Industrial Group, Inc. and Subsidiaries as of December 31, 2002 and 2003, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2003. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Morton Industrial Group, Inc. and Subsidiaries as of December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

      As discussed in note 6 to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets.

/s/ KPMG LLP

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS