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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

COMMISSION FILE NUMBER 0-13198

MORTON INDUSTRIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

1021 W. Birchwood, Morton, Illinois 61550
(Address of principal executive offices)

(309) 266-7176
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

Class A Common Stock, par value $.01 per share
(Title of class)

        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. ý

        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. ý

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

        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 $440,000.

        As of March 19, 2003, the aggregate market value of the Class A Common Stock held by non-affiliates was approximately $440,000 and there were 4,460,547 shares of Class A Common Stock and 200,000 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 2003 are incorporated by reference into Part III hereof.

        "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; risks associated with our acquisition strategy; 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

Item 1. Business

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.

        Since the date of Merger, we have made four acquisitions in 1998, and one acquisition in 1999. We have had one disposition at the end of 1999, one disposition at the end of 2002 and currently have one reporting unit being held for sale.

        We established our Morton Custom Plastics Division in March 1998 through the acquisition of Carroll George Inc., located in Northwood, Iowa, a manufacturer of thermoformed acoustic products for construction and agricultural original equipment manufacturers. We expanded our plastic manufacturing capabilities and capacity with the acquisition of Mid-Central Plastics in May 1998. Operating out of West Des Moines, Iowa, this facility specializes in manufacturing injection molded plastic products for construction and agricultural original equipment manufacturers as well as other industrial customers. We sold the assets of Carroll George Inc. on December 31, 1999. Mid-Central Plastics, Inc. is currently being held for sale.

        In April 1998, we acquired B&W Metal Fabricators, a sheet metal fabricator with a facility in Welcome, North Carolina. Through the acquisition of B&W Metal Fabricators, we expanded our presence in the southeastern United States, allowing us to better serve our existing customers. We also acquired certain assets of SMP Steel Corporation in 1998, including its sheet metal fabrication facility in Honea Path, South Carolina. The acquisition of these assets added metal fabrication capacity for our growing business in the southeastern United States.

        On April 15, 1999, we acquired from Worthington Custom Plastics three manufacturing facilities that produce plastic components for industrial original equipment manufacturers. The Worthington acquisition expanded our plastic product offerings to include appliance parts, electronics housings and other injection

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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. also assumed the liabilities of MCP, LLC under certain of their contracts and leases. This sales transaction was completed on December 24, 2002, with the cash consideration applied to the reduction of MCP, LLC's senior secured debt. As a result of the sale, the registrant received no proceeds. The results of the MCP, LLC operations are reported as discontinued operations.

        Subsequent to this series of transactions, the Company now operates its metal fabrications operations in Illinois, North Carolina and South Carolina. The Company also continues to operate its injection molding business in Iowa, which is held for sale and reported as a discontinued operation.

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Narrative Description of Business

BUSINESS

Overview

        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 and similar industrial equipment. Our largest customers include Deere & Co. ("Deere") and Caterpillar Inc. ("Caterpillar"). Our seven manufacturing facilities are located in the Midwestern and southeastern United States in close proximity to their customers. Our plastics business that is being held for sale manufactures plastic components and subassemblies in one facility for use by manufacturers of off-road recreational vehicles. We have not yet entered into any agreements or commitments with respect to the sale of the plastics business.

MARKETS

        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.

Industrial Equipment

        We produce a range of components and subassemblies for equipment used in a variety of industrial applications. Our products are used in store fixtures, power generators and recreational vehicles. Customers in the industrial equipment area generally serve stable or growth markets, and these customers include Caterpillar, Hallmark and Arctic Cat. Industrial equipment products account for approximately 20% of our 2002 net sales.

Construction Equipment

        The $22 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 2002. We supply metal components and subassemblies, such as engine enclosures, cabs, platforms, frames and complex

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weldments as well as plastic components such as interior cab dash surround panels, air ducts and handles. 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 58% of our 2002 net sales.

Agricultural Equipment

        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 2002. We supply metal components and subassemblies such as steps, feeder housings, grills, and landing decks as well as plastic components such as fenders, tool boxes, facia and covers used in tractors, combines and other agricultural equipment. Our sales per agricultural equipment vehicle range from $200 to $4,000. Agricultural equipment products account for approximately 22% of our 2002 net sales.

PRODUCTS AND SERVICES

Products

        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.

Sheet Metal Fabrication

        Our sheet metal fabrication capabilities include laser cutting, forming, press 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; components for refuse haulers and recreational vehicles.



•

Fabricated Steel Tanks—fuel and hydraulic fluid reservoirs used in motor graders, trucks, crawlers, wheel loaders and excavators.



•

Feeder Housings—feeder housings and other combine components manufactured for agricultural equipment.



•

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.

Injection Molded Plastic Components (Operation held for sale)

        Our injection molded plastic capabilities include such secondary and assembly processes as ultrasonic and hot plate welding, adhesive and solvent bonding, insert staking, snapfit and fastener assembly. Our

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capabilities in injection molded processes include a wide range of injection molding machine press sizes and gas assist units.

        Plastic Components include:

•

Off-Road Work and Recreational Vehicle Parts and Subassemblies—fenders, covers, enclosures and functional components such as brackets and hoppers that are used on tractors and farm equipment. This product category also includes body panels, racks, bumpers, roofs, windshield support assemblies and seat bases for golf carts, snowmobiles, personal watercraft and off-road all terrain vehicles.



•

Off-Road Vehicle Interiors—consoles, control panels and subassemblies, such as ventilation, lighting and entertainment systems, that are installed in construction, agricultural and specialty equipment.

SERVICES

        We offer our customers a number of services described below:

Product Design and Development

        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.

Prototyping/Tooling

        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.

Part Decorating and Exterior Finishing

        This service category includes a number of decorating operations such as pad printing, hot stamping, liquid and powder coat painting and decal application.

Just-In-Time Delivery

        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. Morton also provides deliveries that are specially sequenced to customers' manufacturing schedules.

Engineering and Design Capabilities

        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.

Systems and Controls

        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

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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, quality assurance 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. In 2001, a corporate "new business team" was established to drive customer diversification.

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 and plastic parts to more complex metal and plastic 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, forming, press punching, 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.

        Injection Molded Plastic Components.    Our injection molded plastic capabilities include secondary operations such as ultrasonic and hot plate welding, adhesive and solvent bonding, insert staking, snapfit and fastener assembly. Our injection molded processes use injection molding machine presses and gas assist units. As noted above, we are holding our plastics business for sale.

Raw Materials

        The primary raw materials that we use are sheet steel, compounded injection molding resins, assembly parts and paint. Prices of these raw materials fluctuate, although the price of our most significant raw material, steel, had dropped over the past several years, until 2002, when we experienced some increases in pricing. 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 purchase programs of certain major customers which lowers our cost for steel. Generally, we purchase our raw materials from multiple suppliers, and we believe that the prices we obtain are competitive.

Competition

        The manufacturing and supplying of highly engineered metal and plastic 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

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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 for continuing operations was approximately $95 million at December 31, 2002, and $90 million at December 31, 2001. We anticipate that we will substantially fill all of the December 31, 2002, backlog orders during the current year.

Patents, Trademarks, Licenses, Franchises, and Concessions

        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.

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.

Employees

        As of March 1, 2003, we employed 977 employees in our continuing operations, of which 798 were hourly and 179 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 page at www.mortongroup.com. We posted our 2001 Annual Report on Form 10-K and our Annual Report to Shareholders on our web page, and we intend to post this Annual Report on Form 10-K and the 2002 Annual Report to Shareholders as well. We have not begun posting quarterly and other SEC filings.

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Item 2. Properties

        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 2003 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.

Item 3. Legal Proceedings

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) 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. The case has been stayed because of the bankruptcy of MCP, LLC (discussed immediately below), although it appears that Worthington may attempt to continue the litigation against us on the dividend matter.

Morton Custom Plastics, LLC

        On November 1, 2002, Morton Custom Plastics, LLC (MCP, LLC), Morton Holdings, LLC (Holdings) and Morton Lebanon Kentucky IBRB, LLC (Kentucky), three of our subsidiaries, filed as debtors-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 and Kentucky had negotiated the terms of an agreement for sale of substantially all of their assets to Wilbert, Inc., pursuant to an Asset

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Purchase Agreement. Under the agreement, Wilbert, Inc. also agreed to assume the liabilities of MCP, LLC and Kentucky under certain of their contracts and leases.

        The sale of MCP, LLC's, Holding's and Kentucky's assets was completed on December 24, 2002, in accordance with Section 363 of the United States Bankruptcy Code. The proceeds from the sale were used to retire a portion of the then-existing debt and pay expenses of the sale. The registrant received no proceeds from the sale.

Other

        On January 30, 2001, Victory Lane Productions, LLC filed suit against MCP, LLC (in the Circuit Court of Rankin County, Mississippi) related to a breach of contract for failure to deliver ordered product. The plaintiff was seeking compensatory and punitive damages, and MCP, LLC, filed a counterclaim. The case was stayed as a result of the bankruptcy of MCP, LLC.

        We are also involved in routine litigation. We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 4. Submission of Matters to Vote of Security Holders

        Not applicable

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

        From January 1 through October 19, 2000, our Class A common stock traded on the Nasdaq Small Cap Market under the symbol "MGRP". Effective October 20, 2000, the Company's Class A common stock began trading on the Nasdaq Small Cap Market under the symbol "MGRPC". Effective April 11, 2001, the Company's ticker symbol on the Nasdaq Small Cap Market was restored to MGRP. Effective August 1, 2002, trading of the Company's Class A common stock moved to the OTC Bulletin Board from the Nasdaq Small Cap Market (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. Effective with this change, the Company's ticker symbol returned to MGRP.

        The following table sets forth for 2001 and 2002 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.

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        We obtained the foregoing information from research services made available by Nasdaq for 2001 and the first two quarters of 2002, and by Pink Sheets for the last two quarters of 2002.

        As of March 18, 2003 there were 3,348 holders of record and 1,814 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, 2002 and 2001. Our credit agreements preclude the payment of dividends.

        During the year ended December 31, 2002, 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 the members of the Harris syndicate pursuant to a credit agreement amendment. The warrants are exercisable at any time through December 31, 2005 at an exercise price of $.01 per share.

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Item 6. Selected Financial Data

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 for, and as of the end of, the fiscal years ended December 31, 1998, 1999, 2000, 2001 and 2002 are derived from our audited financial statements.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        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 87% of our 2002 net sales.

        We price our fabricated metal products on a cost plus basis. 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.

Year Ended December 31, 2002 versus Year Ended December 31, 2001

        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. Based upon forecasts and the addition of new customers, the Company currently anticipates modest revenue growth for 2003.

        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 cost saving initiatives.

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        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 and the elimination of goodwill amortization of $0.4 million due to the implementation of SFAS 142.

        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 from continuing operations in 2002, which represents a Federal income tax refund recovered under the carryback provisions of the Jobs Creation and Worker Assistance Act of 2002. We did not provide a tax benefit on the continuing operations loss of $1.0 million. The impact of the net operating loss carryforward from continuing operations was offset by a change in the valuation allowance. The deferred tax asset valuation allowance was also increased to reflect lower anticipated utilization of income tax net operating loss carryforwards due to the discontinuation of the plastics operations. The increase in the valuation allowance related to discontinued operations is offset by Federal income tax refunds of $1.2 million. 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 asset 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 3 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.

Year Ended December 31, 2001 versus Year Ended December 31, 2000

        Net sales for the year ended December 31, 2001 were $127.1 million compared to $147.4 million for the year ended December 31, 2000, a decrease of $20.3 million or 13.8%. The sales decrease resulted primarily from a significant project completed in 2000 that did not repeat in 2001, decreased unit demand by customers, the soft status of the general economy and from some continuing modest pricing pressure from major customers.

        Sales to Caterpillar and Deere were approximately 91% and 89% of our net sales for 2001 and 2000, respectively.

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        Gross profit for the year ended December 31, 2001 was $15.7 million compared with $19.4 million for the year ended December 31, 2000, a decrease of $3.7 million or 18.9%. The Company's gross profit percentage decreased to 12.4% from 13.2%. The gross profit dollar decrease and percentage decrease were reduced primarily by the decrease in sales and related increased amounts of manufacturing variances.

        Selling and administrative expenses for the year ended December 31, 2001 amounted to $13.1 million, or 10.3% of sales, compared with $12.9 million, or 8.7% of sales in the prior year, an increase of $0.3 million or 2.0%. The increased percentage related primarily to the decrease in sales.

        The Company recognized a restructuring charge of $1.3 million in the fourth quarter, 2001, associated with the restructuring and consolidation of certain of its Illinois plants. The restructuring included $510,000 for costs associated with certain leased facilities which will no longer be used, and a $813,000 impairment charge for the abandonment of certain leasehold improvements.

        Interest expense in the year ended December 31, 2001 amounted to $6.7 million compared to $7.4 million in 2000. This decrease resulted from both lower average levels of debt and lower average interest rates.

        Other expense for the year ended December 31, 2001 resulted primarily from an unrealized loss of $610,000 on the Company's interest rate swaps. Other expense of $248,000 for the year ended December 31, 2000, resulted primarily from an unrealized loss on the Company's interest rate swap.

        We recognized income tax expense of approximately $1.2 million from continuing operations in 2001, which represents an increase in our deferred tax asset valuation allowance. The deferred tax asset valuation allowance was increased to reflect lower anticipated utilization of income tax net operating loss carryforwards than estimated at the preceding year end. An additional income tax charge 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 loss of discontinued operations of approximately $9.5 million includes operating losses of approximately $8.6 million and an income tax charge related to the decrease in deferred income tax assets of approximately $0.9 million. This loss, compared to operating income in 2000 of $0.5 million from discontinued operations resulted primarily from a significant decrease in sales volume. The discontinued operations are discussed in more detail in Note 3 of the accompanying financial statements.

        Net loss available to common stockholders increased from $(0.3) million for the year ended December 31, 2000 to $(17.8) million for the year ended December 31, 2001. This increased net loss resulted primarily from reduced sales, the net loss related to discontinued operations and the reduction of the deferred tax assets, offset by reduced interest costs on lower debt levels.

Financial Position and Liquidity

        Historically, we have funded our business with cash generated from operations and borrowings under revolving credit and term loan facilities. In the years ended December 31, 2000, 2001 and 2002 we generated cash from operating activities of $2.9 million, $12.4 million and $7.5 million, respectively. Our capital expenditures for the years ended December 31, 2000, 2001 and 2002 were $6.7 million, $4.4 million and $4.0 million, respectively. These capital expenditures were principally for additions to improve or maintain our manufacturing capacity and efficiency.

        Our consolidated working capital at December 31, 2002 was a deficit of $2.3 million compared to a working capital deficit of $1.5 million at December 31, 2001. This represents a decrease in working capital of approximately $0.8 million. This working capital decrease results from several factors, including the impacts of discontinued operations.

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        In February 2002, the Company entered into a new secured revolving credit facility with the Harris syndicate. The revolving credit agreement permits the Company to borrow up to a maximum of $21.0 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 is due monthly and is based upon bank prime plus 1.5% (effective rate of 5.75% at December 31, 2002). The Company, alternatively, could select a LIBOR plus 4.0% interest rate. The amount available under the revolving credit facility is limited to 85% of qualified accounts receivable, 50% of eligible inventory, plus $2.5 million of other assets. The revolving credit agreement was originally set to mature on July 1, 2003. As described below, that date has been extended to April 1, 2004. At December 31, 2002, the Company had $18.6 million outstanding and $262,000 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 $32.9 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 is amortized monthly with principal payments ranging from $235,000 to $500,000 and the balance of $24.9 million due originally on July 1, 2003 (now extended to April 1, 2004). Interest is due monthly and is based upon bank prime plus 1.5% (effective rate of 5.75% at December 31, 2002). The Company, alternatively, could select a LIBOR plus 4.0% interest rate.

        In connection with these Harris syndicate loans, we have 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, 2001 and 2002. The agreements also impose various financial covenants, including financial performance ratios.

        The February, 2002 Harris syndicate agreement has been amended three times, most recently on February 28, 2003. Among the key provisions of the amendments: (i) extension of the maturity date to April 1, 2004; (ii) revisions in the monthly amortization of principal, with $50,000 payable on February 28, 2003, $100,000 payable on March 31, 2003, $350,000 payable on April 30, 2003, and $500,000 payable each month end thereafter until December 31, 2003, and $250,000 payable each month end thereafter until the April 1, 2004 maturity date, at which time the term loan balance of $22.2 million will be due. Also, effective February 28, 2003 under the revolving credit facility, the limit of eligible inventory was increased to 60% and the amount of other assets eligible became $3.5 million. The Company intends to obtain loans or funding support from other sources, or extend its existing credit facility, by the maturity date of the current agreement.

        Should the Mid-Central Plastics, Inc. operations be sold prior to maturity of the Harris syndicate loans, a portion of the net cash proceeds from the sale are required to be applied against the balance of the revolving line of credit.

        In connection with the Harris financing, we have two fixed interest rate swap agreements with a commercial bank (the "counter party"). The first agreement has a notional principal amount of $2.8 million and a termination date of May 31, 2003. The second agreement has a notional principal amount of $13.9 million and a termination date of June 30, 2003. The notional principal amount declines over the term of both agreements based upon a defined amortization schedule. The counter party waived its unilateral right to cancel both agreements as of June 30, 2001. As described in Item 7A below, these agreements are for the purpose of limiting the effects of interest rate increases on half of the Company's floating rate term debt.

        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. The national economic slowdown, which our reduced revenues reflect, has increased pressure on these sources of liquidity. We anticipate that the February, 2002 agreements with the Harris syndicate,

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as amended on February 28, 2003, will assist us in meeting our liquidity requirements through the term of these agreements.

        As part of the financing for the 1999 Morton Custom Plastics, LLC acquisition, we issued 10,000 shares of redeemable preferred stock, which becomes redeemable on April 15, 2004 at $1,000 per share plus any dividends accrued since April 15, 1999. The $10 million face value preferred stock was recorded at its fair value of $4.25 million. We are accreting the discount over a five year period using the effective yield method. Dividends are payable in kind at the rate of 8% per annum. Certain provisions of the agreement with Worthington preclude the payment of dividends, and no dividends have been accrued since 1999. There are legal proceedings related to certain Worthington matters as described in Part I, Item 3. We plan to continue negotiations with Worthington to resolve all of the issues presented by the preferred stock, within the limitations of our available liquidity in 2004, but there are no assurances that we will be successful in our efforts.

        We incurred $4.0 million of capital expenditures during 2002, primarily for updating and purchases of manufacturing equipment. Of the $4.0 million of capital expenditures, $2.3 million related to continuing operations.

        We estimate that our capital expenditures for continuing operations in 2003 will total approximately $2.4 million, of which $1.0 million will be for new production equipment and the remaining $1.4 million will be for normal replacement items.

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Selected Quarterly Financial Information (Unaudited)

        Selected quarterly financial information for the years ended December 31, 2002 and 2001 is as follows:

        The fourth quarter, 2001 includes a restructuring charge of $1,323 and reflects lower sales volume and the related unfavorable manufacturing variances.

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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 9 and 10 of the accompanying financial statements.

        The following table summarizes the Company's contractual obligations at December 31, 2002

        Under its bank credit facility, the Company has $618,000 standby letters of credit outstanding at December 31, 2002 in connection with lease obligations. Management expects that cash flow from operations and availability under its bank revolving line of credit will assist us in meeting our liquidity requirements through the term of its bank credit facility. At December 31, 2002, we had $262,000 in unused availability under the bank revolving line of credit.

        As described previously in the Financial Position and Liquidity section of this Form 10-K, the preferred stock issued by the Company becomes redeemable on April 15, 2004. There are legal proceedings related to certain Worthington matters as described in Part I, Item 3. We plan to continue negotiations with Worthington to resolve all of the issues presented by the preferred stock, within the limitations of our available liquidity in 2004, but there are no assurances that we will be successful in our efforts.

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.

Allowance for Doubtful Accounts

        The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on customer credit-worthiness, historical write-off experience and general economic conditions and trends. Account balances are charged off against the allowance after all means of collection have been exhausted

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and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.

Inventories

        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, inventories are reduced to their net realizable value.

Fixed Asset Impairment

        The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Recoverability of Deferred Tax Assets

        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 June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires companies recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not believe the adoption of this statement will have a material impact on its financial position, results of operations, or cash flows.

        On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,  Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not currently have plans to change to the fair value method of accounting for our stock based compensation. The disclosure requirements are now effective.

        In November 2002, FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("Interpretation 45"), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. Interpretation 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees.

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        Interpretation 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The Company has adopted the disclosure requirements of Interpretation 45 and will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002.

        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.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

        We are exposed to interest rate changes primarily as a result of our lines of credit and long-term debt used for maintaining liquidity, funding capital expenditures and expanding our operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flow and to lower overall borrowing costs. To achieve our objectives, we entered into a financing agreement with a group of banks. The financing arrangement contains a term loan and a revolving credit facility. Interest is based on our lead bank's prime rate plus an applicable variable margin. We have also entered into two interest rate swap agreements, as required by our bank financing arrangement, to limit the effect of increases in the interest rates on half of our floating rate term debt. We do not enter into interest rate transactions for speculative purposes. Under the swap agreements, which expire May 31, 2003 to June 30, 2003, the interest rate component of the interest rate is limited to 5.875% on half of our $27.8 million term loans under the financing arrangement.

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Item 8. Financial Statements and Supplementary Data

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Index

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Independent Auditors' Report

The Board of Directors and Stockholders
Morton Industrial Group, Inc.:

We have audited the accompanying consolidated balance sheets of Morton Industrial Group, Inc. and Subsidiaries as of December 31, 2001 and 2002, 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, 2002. 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, 2001 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, 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 7 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.

Indianapolis, Indiana
March 21, 2003

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2001 and 2002
(Dollars in thousands, except share data)

See accompanying notes to consolidated financial statements.

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2000, 2001 and 2002
(Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements.

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (Deficit)

Years ended December 31, 2000, 2001 and 2002
(Dollars in thousands)

See accompanying notes to consolidated financial statements.

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2000, 2001 and 2002
(Dollars in thousands)

See accompanying notes to consolidated financial statements.

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MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2001 and 2002

(Dollars in thousands, except per share data)

(1)    Description of Business and Summary of Significant Accounting Policies

(a)  Description of Business

Morton Industrial Group, Inc. and subsidiaries is a contract manufacturer and supplier of high-quality fabricated sheet metal and plastic components and subassemblies for construction, agricultural, industrial and recreational equipment manufacturers located primarily in the Midwestern and Southeastern United States. Sales for the year ended December 31, 2002, were approximately as follows: construction—58%, agricultural—22% and industrial—20%. The Company's raw materials are readily available, and the Company is not dependent on a single supplier or only a few suppliers.

(b)  Principles of Consolidation

The consolidated financial statements include the financial statements of Morton Industrial Group, Inc. (the Company) and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

(c)  Use of Estimates in Preparing Financial Statements

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

(d)  Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on customer credit-worthiness, historical write-off experience and general economic conditions and trends. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.

(e)  Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for all inventories.

(f)    Property, Plant, and Equipment

Property, plant, and equipment are stated at cost less accumulated depreciation. Equipment under capital leases is stated at the lower of the net present value of the minimum lease payments at the beginning of the lease term or fair value at the inception of the lease.

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Depreciation of plant and equipment is calculated over the estimated useful lives of the respective assets using straight-line and accelerated methods. The equipment held under capital leases is amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.

(g)  Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

In connection with SFAS No. 142's transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company was required to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit within six months of January 1, 2002. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, the Company would be required to perform the second step of the transitional impairment test, as this is an indication that the reporting unit goodwill may be impaired. The second step was required for one reporting unit. In this step, the Company compared the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which were measured as of the date of adoption. The implied fair value of goodwill was determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation was the implied fair value of the reporting unit goodwill. The carrying amount of this reporting unit exceeded its implied fair value and the Company was required to recognize an impairment loss.

Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 40 years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operation. All other intangible assets were amortized on a straight-line basis from 3 to 10 years. The amount of goodwill and other intangible asset impairment was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds.

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(h)  Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(i)    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, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. All options are issued at the current market price on the date of issuance and, accordingly, no stock-based employee compensation cost has been recognized for its stock options in the financial statements.

The per share weighted-average fair value of stock options granted during 2000, 2001 and 2002 was $3.70, $1.67 and $0.29 on the date of grant using 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.

Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net earnings would have been reduced to the pro forma amounts indicated below:

(j)    Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events

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or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(k)  Revenue Recognition

Generally, revenue from sales is recognized when the goods are shipped to the customer. In certain cases, at the customer's written request, the Company enters into bill and hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. The Company recognizes revenues associated with the bill and hold arrangements when the product is complete, ready to ship, and hold criteria have been met.

(l)    Interest Rate Swaps

As required by one of its financing arrangements, the Company enters into interest rate swap agreements to limit the effect of increases in the interest rates on certain floating rate debt. The difference between the floating rate on the Company's debt and the rate on the swap agreements is accrued as interest rates change and is recorded in interest expense. During 1998, the Company entered into two swap agreements, expiring May 31, 2003 to June 30, 2003, with an initial aggregate notional amount of $27,500. The effect of these agreements is to limit the LIBOR interest rate component to 5.87% on half of the Company's $27,930 term loans under the applicable financing arrangement. As a result of these swap agreements, interest expense was decreased by $161 in 2000 and increased by $291 and $709 in 2001 and 2002, respectively.

(m)  Fair Value of Financial Instruments

The Company believes the recorded value of cash, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short maturity of these financial instruments. The Company believes the recorded value of notes payable and long-term debt approximates fair value because their respective interest rates fluctuate with market rates or approximate current market rates.

Interest rate swaps are stated at fair value, which is the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparties. At December 31, 2001 and 2002, the Company estimates it would have paid $755 and $337 to terminate the agreements, respectively.

(n)  Earnings (Loss) Per Share

Earnings (loss) per share is computed under the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share. Amounts reported as earnings (loss) per share reflect the

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earnings available to common stockholders for the year divided by the weighted average number of Class A and Class B common shares outstanding during the year.

(o)  Impact of Recently Issued Accounting Standards

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires companies recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not believe the adoption of this statement will have a material impact on its financial position, results of operations, or cash flows.

On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not currently have plans to change to the fair value method of accounting for stock-based compensation. The disclosure requirements have been implemented.

In November 2002, FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("Interpretation 45"), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. Interpretation 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees.

Interpretation 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The Company does not anticipate that the adoption of Interpretation 45 will have a material impact on its financial statements.

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.

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(2)    Sale of Businesses

        During 2000, the Company sold the assets and certain liabilities of a product line and a machining division from the contract plastics fabrication segment. The Company received $2,915 of cash for net assets with a book value at the dates of sale of $2,595, resulting in a gain on the sales of $320.

(3)    Discontinued Operations

        The financial results from discontinued operations reflect two significant events during 2002: (i) the bankruptcy and subsequent sale of the assets of Morton Custom Plastics, LLC, and (ii) the Board of Directors' decision to divest the only other remaining plastics operations facility in the Company, Mid-Central Plastics, Inc. The accompanying consolidated statements of operations for 2000 and 2001 have been reclassified to reflect the results of operations of both Morton Custom Plastics, LLC and Mid-Central Plastics, Inc. as discontinued operations.

        On November 1, 2002, Morton Custom Plastics LLC (MCP, LLC), Morton Holdings, LLC (Holdings) and Morton Lebanon Kentucky IBRB, LLC (Kentucky) filed as debtors-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 and Kentucky had negotiated the terms of an agreement for sale of substantially all of their assets to Wilbert, Inc., pursuant to an Asset Purchase Agreement. Under the agreement, Wilbert, Inc. also agreed to assume the liabilities of MCP, LLC and Kentucky under certain of their contracts and leases. Based on its filing under Chapter 11, the Company did not include Morton Custom Plastics, LLC's results in its consolidated financial statements subsequent to November 1, 2002.

        The sale of MCP's, Holding's and Kentucky's assets was completed on December 24, 2002, in accordance with Section 363 of the United States Bankruptcy Code. The proceeds from the sale were used to retire a portion of the then-existing debt and pay expenses of the sale. The registrant received no proceeds from the sale.

        The Company is actively seeking a buyer for Mid-Central Plastics, Inc. (Mid-Central) and is in discussions with several potential acquirers. The Company expects to sell Mid-Central in 2003. The assets of Mid-Central have been reduced to their estimated fair value less costs to sell, resulting in an impairment charge of $325 for the year ended December 31, 2002.

        Summary financial data of the discontinued operations is presented below: