e10vkza

10-K/A 1 c05829e10vkza.htm AMENDMENT TO ANNNUAL REPORT e10vkza

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Fiscal Year Ended December 31, 2005

or

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

		For the Transition Period From to

Commission file number 0-13198

Morton Industrial Group, Inc.

www.mortongroup.com

(Exact name of registrant as specified in its charter)


Georgia		38-0811650
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)
1021 W. Birchwood, Morton, Illinois 61550		(309) 266-7176 (Registrant’s telephone number, including area code)
(Address of principal executive offices)

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (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 $10,500,000.

As of March 3, 2006, the aggregate market value of the Class A Common Stock held by non-affiliates was approximately $10,500,0000 and there were 4,880,878 shares of Class A Common Stock and 100,000 shares of Class B Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

MORTON INDUSTRIAL GROUP, INC.

Items Amended


Part III
	Item 9A.	Controls and Procedures	46
	Item 11.	Executive Compensation	48
	Item 14.	Principal Accountant Fees and Services	58
Signatures			64
Exhibit 31.1 Certification Pursuant to Rule 15d-14(a) of the Securities and Exchange Act of 1934
Exhibit 31.2 Certification Pursuant to Rule 15d-14(a) of the Securities and Exchange Act of 1934
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350

TEXT OF AMENDMENT

Explanatory Note:

This Form 10-K/A is filed to amend Form 10-K filed with the Securities and Exchange Commission on March 31, 2006, and to amend Form 10-K/A filed with the Securities and Exchange Commission on April 25, 2006.

These amendments have been made in response to an SEC review of Preliminary Proxy Statement on Schedule 14A, and Preliminary Transaction Statement on Schedule 13E-3, both filed with the Securities and Exchange Commission on April 26, 2005.

“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, industrial, 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


Item 1.	*Business*

Merger Agreement Disclosure

As we previously disclosed, on March 22, 2006, Morton Industrial Group, Inc. (the Company) entered into an Agreement and Plan of Merger (“Merger Agreement”) under which MMC Precision Merger Corp. (“Merger Sub”), a wholly owned subsidiary of MMC Precision Holdings Corp. (“Parent”), will merge with and into the Company with the Company being the surviving corporation and a direct wholly owned subsidiary of Parent. The shareholders of Parent will include a private equity fund that is an affiliate of Brazos Private Equity Partners, LLC, which will hold a majority of the shares of Parent, and five persons who are (i) William D. Morton, the Company’s Chairman, President and Chief Executive Officer, (ii) through his affiliate Eastover Group, LLC, Mark W. Mealy, a director of the Company, (iii) Daryl R. Lindemann, the Company’s Senior Vice President of Finance, (iv) Brian L. Geiger, Senior Vice President of Operations of Morton Metalcraft Co., and (v) Brian R. Doolittle, Senior Vice President of Sales and Engineering of Morton Metalcraft Co. In the Merger, each outstanding share of common stock of the Company, other than shares to be contributed to Parent by Mr. Morton, Mr. Mealy, and the other three officers concurrently with the closing of the Merger, will be converted to the right to receive $10.00 cash per share.

Narrative Description of Business


	*Business*


	Overview

We are a contract manufacturer of highly engineered metal components and subassemblies for construction, industrial, and agricultural original equipment manufacturers (“OEM’s”). Our products include engine enclosures, panels, platforms, frames, tanks and other components used in backhoes, excavators, tractors, wheel loaders, power generators, turf care equipment and similar industrial equipment. Our products are typically highly engineered, cosmetically sensitive, require structural strength and contain complex weldments.

Our largest customers include Deere & Co. (“Deere”) and Caterpillar Inc. (“Caterpillar”) who together generated 91% of our 2005 net sales. Our five manufacturing facilities are located in the Midwestern and Southeastern United States in close proximity to our customers. We have no foreign operations.


	*Markets*

Customers use our products in construction, industrial, and agricultural 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 90% 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. Considering our relatively low volume of parts manufactured, the cosmetic sensitivity of those parts, and the bulk involved in shipping those parts, we believe that our customers prefer to source those parts domestically.


	Construction Equipment

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 an estimated 50% of total U.S. unit sales in 2005. We supply metal components and subassemblies, such as engine enclosures, 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 up to $2,500. Construction equipment products accounted for approximately 64% of our 2005 net sales.


	Industrial Equipment

We produce a range of components and subassemblies for equipment used in a variety of industrial applications, including store fixtures, motor homes, turf care equipment and power generators. Customers in the industrial equipment area generally serve stable or growth markets, and these customers include Caterpillar, Deere, Kubota, Hallmark, Winnebago and JLG Industries Inc. Industrial equipment products accounted for approximately 19% of our 2005 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 an estimated 35% of total U.S. agricultural equipment unit sales in 2005. 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 accounted for approximately 17% of our 2005 net sales.


	*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 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 — seat modules, frames, guards, platforms, step assemblies and cabs used in backhoes, excavators, crawlers, tractors and skid steer loaders.

	•	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 — back frames, lights and brackets used in store displays and commercial refrigeration units.


	*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 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. We also provide 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 redesign 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 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, increased dramatically during 2004 and stabilized in 2005. The prices have increased modestly in 2006. The steel supply tightened, due in part to the national economic recovery, China’s growing steel consumption, and reduced domestic steel production capacity. We were able to negotiate with our customers to have them absorb substantial amounts of the increases in our raw material costs in 2004 and 2005. Effective in 2005 and through early 2006, the price increases have been incorporated into unit prices for those parts manufactured for 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 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 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 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 industries.

Backlog

Our backlog of orders was approximately $135.0 million at December 31, 2005, and $120.0 million at December 31, 2004. We anticipate that we will substantially fill all of the December 31, 2005 backlog orders during 2006.

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 and Caterpillar suspend operations for two weeks of vacation time during July and/or August. Production operations of both of these customers also slow down 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 25, 2006, we had 1,370 employees, of whom 1,152 were hourly and 218 were salaried. None of these employees are 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.

Significant Past Events of the 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.


Item 1A.	*Risk Factors*

We are subject to various risk factors, the exercise of which could have a material adverse effect on our business, financial condition, and results of operations, including:


	•	The loss of either of our two largest customers or the material reduction in purchases by either or both of them.

	•	Significant industry-wide declines in the sales of construction, industrial, or agricultural equipment.

	•	The unavailability of raw materials such as steel in volumes or at times required to meet production needs and customer orders.

	•	Increases in the prices of raw materials that cannot be passed through to customers in full or material part.

	•	The lack of sufficient working capital to meet production requirements or growth opportunities.

	•	Increases in interest rates that increases the costs of our indebtedness and the reduce the availability of capital.

	•	General economic conditions and the cyclicality of our customers’ businesses.


Item 1B.	*Unresolved Staff Comments*

None


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 2006 and 2008. Our facilities are generally located in close proximity to our customers.


	Approx.
Location	Sq. Ft.	Products Manufactured

1021 West Birchwood Street, Morton, IL	284,000	Sheet metal enclosures and boxes, sheet metal component packages, store fixtures and tractor frames
400 Detroit Avenue, Morton, IL (leased)	155,000	Special weldments, including seat modules, cabs and fabricated steel tanks
231 Detroit Avenue, Morton, IL (leased)	40,000	Raw materials and components storage
Apex, NC (leased)	100,000	Special weldments, sheet metal enclosures and boxes, sheet metal component packages and fabricated steel tanks
Honea Path, SC	30,000	Store fixtures and sheet metal component packages
Welcome, NC	185,000	Sheet metal enclosures and boxes, special weldments, fabricated steel tanks and sheet metal component packages

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 future 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 (“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 preferred stock redemption agreement dated December 23, 2003 provides for 30 monthly redemption payments of $50,000 each (totaling $1.5 million) over a three year period (10 payments each year in 2004, 2005 and 2006) to fully redeem the $10.0 million face value of the redeemable preferred stock. Each $50,000 payment and redemption of 333 (or 334) shares reduces the outstanding balance of the redeemable preferred stock by $333,000 (or $334,000). As of March 24, 2006, the Company has paid timely 23 of the 30 scheduled redemption payments. The redemption payments made in 2004 and 2005 resulted in the recognition of a gain

on redemption of preferred stock of $2,833,000 for each of the years ended December 31, 2004 and 2005, which is reflected in the accompanying Consolidated Statements of Operations.

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.


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.*

The trading of the Company’s Class A common stock is on the OTC Bulletin Board. The Company’s ticker symbol is MGRP.OB.

The following table sets forth for 2005 and 2004 the quarterly high and low closing bids. OTC closing bids reflect interdealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions.


		High	Low

2005
	October 1 to December 31	$7.75	$6.00
	July 1 to September 30	$7.40	$6.05
	April 1 to June 30	$6.85	$5.50
	January 1 to March 31	$6.90	$5.20


		High		Low

2004
	October 1 to December 31	$	5.95	$	4.30
	July 1 to September 30	$	5.10	$	3.55
	April 1 to June 30	$	4.05	$	2.20
	January 1 to March 31	$	1.90	$	0.50

We obtained the foregoing information from research services made available by Pink Sheets, LLC.

As of March 16, 2006, there were 2,347 holders of record and 1,470 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, 2005 and 2004. Our credit agreements preclude the payment of dividends.

During the year ended December 31, 2005, we did not issue any shares of capital stock that were unregistered under the Securities Act of 1933.

On March 26, 2004, in connection with the refinancing described in Item 7, we issued to our lenders 545,467 warrants (which expire March 26, 2014) to purchase Class A shares of common stock at an exercise price of $0.02 per share. The number of warrants may decline over the first five years following the related refinancing agreements based on the Company achieving specified EBITDA (earnings before interest, taxes, depreciation and amortization) levels, or achieving certain stated levels of net equity. The Company achieved the specified EBITDA levels for 2004 and 2005, and, accordingly, the maximum number of warrants that can be exercised is 415,128. None of these warrants have been exercised as of March 24, 2006.

As of December 31, 2005, under our 1997 Stock Option Plan (which was approved by our shareholders), issued and outstanding stock options are as follows:


						Number of
Number of		Exercise				Shares
Shares		Price		Expiration Date		Exercisable

	51,650	$	1.875		February 2011		51,650
	38,334		0.325		June 2012		38,334
	316,336		0.150		February 2013		116,333
	30,000		0.250		April 2013		30,000
	72,500		0.250		August 2013		72,500
	10,000		0.300		November 2013		6,666

	518,820						315,483

In addition to these options, we have reserved for future grants an additional 327,561 shares.


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 consolidated 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.


	Year Ended December 31,

	2001			2002			2003			2004			2005

Operating data:
Net sales	$	127,103		$	116,567		$	131,431		$	185,469		$	196,276
Cost of sales		111,358			101,522			113,318			161,910			169,445
Gross profit		15,745			15,045			18,113			23,559			26,831
Selling and administrative expenses		13,131			12,170			12,583			14,401			15,835
Restructuring charges		1,323			—			—			—			—
Operating income		1,291			2,875			5,530			9,158			10,996
Other income (expense)		(610	)		365			442			172			60
Interest expense, net		(6,706	)		(4,228	)		(3,863	)		(4,922	)		(6,180	)
Interest on redeemable preferred stock		—			—			(427	)		(250	)		—
Gain on redemption of preferred stock		—			—			—			2,833			2,833
Earnings (loss) before income taxes, accounting change and discontinued operations		(6,025	)		(988	)		1,682			6,991			7,709
Income taxes (benefit)		1,242			(288	)		426			(5,775	)		(4,017	)
Earnings (loss) before discontinued operations and cumulative effect of change in accounting principle		(7,267	)		(700	)		1,256			12,766			11,726
Net income (loss) from operations of discontinued plastics operations		(9,454	)		6,790			85			—			—
Earnings (loss) before cumulative effect of accounting change		(16,721	)		6,090			1,341			12,766			11,726
Cumulative effect of change in accounting principle		—			(8,118	)		—			—			—
Net earnings (loss)		(16,721	)		(2,028	)		1,341			12,766			11,726
Accretion of discount on preferred shares		(1,066	)		(1,265	)		(715	)		—			—
Net earnings (loss) available to common shareholders		(17,787	)		(3,293	)		626			12,766			11,726


		Year Ended December 31,

		2001			2002			2003			2004			2005

Earnings (loss) per share — basic:
	Earnings (loss) from continuing operations	$	(1.81	)		(0.42	)		0.12			2.73			2.37
	Earnings (loss) from discontinued operations		(2.06	)		1.46			0.02			—			—
Cumulative effect of a change in accounting principle			—			(1.75	)		—			—			—

	Total earnings (loss) per share — basic	$	(3.87	)		(0.71	)		0.14			2.73			2.37

Earnings (loss) per share — diluted:
	Earnings (loss) from continuing operations	$	(1.81	)		(0.42	)		0.11			2.16			1.98
	Earnings (loss) from discontinued operations		(2.06	)		1.46			0.02			—			—
Cumulative effect of a change in accounting principle			—			(1.75	)		—			—			—

	Total earnings (loss) per share — diluted	$	(3.87	)		(0.71	)		0.13			2.16			1.98

Financial position (at end of year):
Working capital		$	(1,475	)	$	(2,294	)	$	(6,818	)	$	6,428		$	2,428
Total assets			106,517			56,853			48,822			67,145			73,794
Total debt			79,138			45,102			38,541			43,575			38,903
Stockholders’ equity (deficit)		$	(20,944	)	$	(24,224	)	$	(23,598	)	$	(10,804	)	$	949


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, industrial and agricultural original equipment manufacturers. Our largest customers, Caterpillar and Deere, accounted for approximately 91% and 87% of our net sales in 2005 and 2004, 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, in 2002, 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 consolidated statements of operations for 2003, all of the plastics fabrication results are reported as discontinued operations.

As a part of the 1999 plastics facilities acquisition, the Company issued $10.0 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. Through March 24, 2006, all scheduled payments have been made timely; twenty-three of the thirty scheduled redemption payments have been made.

Since June 2003, the Company has focused solely on its core business, sheet metal fabrication (the Company’s continuing operations). The Company recognized earnings from its continuing operations in 2003, 2004 and 2005, but had incurred losses from its continuing operations in 2001 and 2002 when demand by the Company’s customers was depressed.

To take advantage of the potential for growth in 2004 and beyond, and to be able to effectively serve our customers, we needed to be able to ensure an adequate flow of raw materials into our production processes, hire and train additional employees, 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 $5.0 million. Management believes that the new credit facility has permitted to date, and will continue to permit, the Company to meet its liquidity requirements which are driven by raw material, manpower and capital expenditure requirements, through the term of the facility, which matures in March 2008.

As noted above, two customers account for a significant portion of our net sales. Caterpillar and Deere continue to forecast greater orders for fabricated parts supplied by Morton Metalcraft Co. We believe that this demand is being fueled by the improved economic conditions in the United States. The Company has responded 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, has seen significant price increases; most steel price increases have been passed through to our customers.

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.

On March 22, 2006, Morton Industrial Group, Inc. (the Company) entered into an Agreement and Plan of Merger (“Merger Agreement”) under which MMC Precision Merger Corp. (“Merger Sub”), a wholly owned subsidiary of MMC Precision Holdings Corp. (“Parent”), will merge with and into the Company with the Company being the surviving corporation and a direct wholly owned subsidiary of Parent. The shareholders of Parent will include a private equity fund that is an affiliate of Brazos Private Equity Partners, LLC, which will hold a majority of the shares of Parent, and five persons who are (i) William D. Morton, the Company’s Chairman, President and Chief Executive Officer, (ii) through his affiliate Eastover Group, LLC, Mark W. Mealy, a director of the Company, (iii) Daryl R. Lindemann, the Company’s Senior Vice President of Finance, (iv) Brian L. Geiger, Senior Vice President of Operations of Morton Metalcraft Co., and (v) Brian R. Doolittle, Senior Vice President of Sales and Engineering of Morton Metalcraft Co.. In the Merger, each outstanding share of common stock of the Company, other than shares to be contributed to Parent by Mr. Morton, Mr. Mealy, and the other three officers concurrently with the closing of the Merger, will be converted to the right to receive $10.00 cash per share.

Results of Operations

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


	Year Ended December 31,

	2003			2004			2005

Statements of Operations Data:
Net sales		100.0	%		100.0	%		100.0	%
Gross profit		13.8			12.7			13.7
Selling and administrative expenses		9.6			7.8			8.1
Operating income		4.2			4.9			5.6
Interest expense, net		2.9			2.7			3.1
Earnings before income taxes and discontinued operations		1.3			3.8			3.9

The following table presents certain historical information (000’s):


Operating income	5,530	9,158	10,996
Depreciation and amortization of plant and equipment and intangible assets	5,694	5,804	5,422
Capital expenditures	4,119	5,365	6,492


	*Year Ended December 31, 2005 versus Year Ended December 31, 2004*

Net sales for the year ended December 31, 2005 were $196.3 million compared to $185.5 million for the year ended December 31, 2004, an increase of $10.8 million or 5.8%. The increase in sales dollars is attributable primarily to steel surcharges as described below. Unit sales dollars remained relatively flat in 2005 compared with 2004. Our 2005 construction-related revenues increased by approximately $9.9 million over the comparable year and accounted for nearly 64% of our 2005 revenue. Industrial related revenues decreased by approximately $5.8 million and agricultural-related revenues increased by $6.7 million in 2005. Sales for 2005 and 2004 included steel surcharges passed through to our customers of approximately $28.6 million and

$18.2 million, respectively. Sales to Caterpillar and Deere were approximately 91% and 87% of our net sales for 2005 and 2004, respectively.

Based upon customer forecasts, the Company currently anticipates modest revenue growth for calendar year 2006. Our ability to generate sales at these higher levels is 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. During 2004, steel prices increased as the steel supply tightened, due in part to the national economic recovery, China’s growing steel consumption, and reduced domestic steel production capacity. Steel prices stabilized in 2005 at relatively high levels, and are increasing modestly in 2006. Generally we have been able to negotiate with our customers to have them absorb increases in our raw material costs.

Gross profit for the year ended December 31, 2005 was $26.8 million compared with $23.6 million for the year ended December 31, 2004, an increase of $3.2 million or 13.9%. The Company’s gross profit percentage increased to 13.7% from 12.7%. The gross profit amount increased primarily as a result of the increased sales; while the percentage increased as a result of the Company’s continuing focus on cost savings programs including 6 Sigma and various lean manufacturing concepts. The gross profit percentage was negatively impacted by approximately 2.3% by passing through to customers, at cost with no margin, the impact of increased steel prices in the form of surcharges described above. The Company believes that certain cost efficiencies will be achievable in 2006 that will continue to strengthen the gross margins. The Company also anticipates continued pricing pressure from its customers in 2006 that will offset some of the cost efficiencies. 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, 2005 amounted to $15.8 million, or 8.1% of sales, compared with to $14.4 million, or 7.8% of sales in the prior year. This increased cost, and the increase in selling and administrative expenses as a percentage of sales relates to the increase in sales and to non-recurring expenses of $0.5 million related to exploring recapitalization opportunities.

Interest expense in 2005 amounted to $6.2 million compared to $4.9 million in 2004. The Company refinanced its debt on March 26, 2004 as described below. The refinancing includes senior subordinated debt with cash interest at 12% and payment-in-kind interest at approximately 4%. Interest expense for 2005 also includes charges related to amortization of debt discount of $376,000 (compared to $341,000 in 2004) and the increase in the value of the warrants liability of $1,081,000 (compared to $291,000 in 2004); both of these charges relate to warrants issued in March 2004. Interest expense for 2005 also includes the amortization of deferred financing costs of $448,000 (compared to $396,000 in 2004).

Other income of $60,000 and $172,000 in 2005 and 2004, respectively, resulted from interest income on the notes receivable related to the 2003 sale of the operations Mid-Central Plastics, Inc.

“Interest on redeemable preferred stock” relates to the accretion of the discount on redeemable preferred stock during the first four months of 2004, at which time the stock was fully accreted. This classification in other expense resulted from the implementation of SFAS Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150).

Gain on redemption of preferred stock of $2,833,000 in each of the years ended December 31, 2005 and 2004, resulted from the preferred stock redemption described above. This redemption process began in January 2004.

We recognized an income tax benefit of $4.0 million in 2005; this represents the recognition of deferred Federal and state income tax benefits of $5.1 million, net of provisions of $140,000 for Federal tax and $940,000 for state income taxes. Net deferred tax assets, increased from $8.1 million at December 31, 2004 to $13.2 million at December 31, 2005 as a result of a reduction in the deferred tax asset valuation allowance. Realization of the $13.2 million of deferred tax assets is dependent upon generation of future taxable income of approximately $34 million.


	*Year Ended December 31, 2004 versus Year Ended December 31, 2003*

Net sales for the year ended December 31, 2004 were $185.5 million compared to $131.4 million for the year ended December 31, 2003, an increase of $54.1 million or 41.1%. The volume portion of the sales increase, totaling approximately $35.9 million, resulted primarily from increased unit demand by existing customers of construction-related equipment components and an increase in industrial components to new customers. Our 2004 construction-related revenues increased by approximately $25.0 million over the comparable year and accounted for nearly 65% of our 2004 revenue. Industrial related revenues increased by approximately $7.3 million and agricultural-related revenues increased modestly in 2004. In addition, sales for 2004 included steel surcharges passed through to our customers of approximately $18.2 million. Most of the revenue growth came from increased unit sales to our two largest customers, Deere & Co. and Caterpillar Inc. Sales to Caterpillar and Deere were approximately 87% and 88% of our net sales for 2004 and 2003, respectively.

Gross profit for the year ended December 31, 2004 was $23.6 million compared with $18.1 million for the year ended December 31, 2003, an increase of $5.5 million or 30.1%. The Company’s gross profit percentage decreased to 12.7% from 13.8%. The gross profit amount increased primarily as a result of the increased sales; while the percentage decreased as a result of incremental costs incurred during a period of significant growth, including overtime, training and material handling. The gross profit percentage was negatively impacted by approximately 1.4% by passing through to customers, at cost with no margin, the effect of increased steel prices in the form of surcharges described above.

Selling and administrative expenses for the year ended December 31, 2004 amounted to $14.4 million, or 7.8% of sales, compared with $12.6 million, or 9.6% of sales in the prior year. This increased cost, and the reduction in selling and administrative expenses as a percentage of sales relates primarily to the increase in sales.

Interest expense in 2004 amounted to $4.9 million compared to $3.9 million in 2003. The Company refinanced its debt on March 26, 2004 as described below. The refinancing includes senior subordinated debt with cash interest at 12% and payment-in-kind interest at approximately 4%; interest expense for 2004 also includes charges related to amortization of debt discount of $341,000 and the increase in the value of the warrants liability of $291,000; both of these charges relate to warrants issued in March 2004. Interest expense for 2004 also includes the amortization of deferred financing costs of $396,000 (compared to $779,000 in 2003).

Other income of $172,000 in 2004 resulted from interest income on the notes receivable related to the sale of the operations Mid-Central Plastics. Other income in 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 of Mid-Central Plastics.

“Interest on redeemable preferred stock” relates to the accretion of the discount on redeemable preferred stock during the first four months of 2004, at which time the stock was fully accreted, and for the six months ended December 31, 2003. This classification in other expense resulted from the implementation of SFAS Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). For the first six months of 2003, the accretion was classified as “accretion of discount on preferred shares”.

Gain on redemption of preferred stock of $2,833,000 results from the preferred stock redemption described above. This redemption process began in January 2004.

We recognized an income tax benefit of $5.8 million in 2004; this represents the recognition of deferred Federal and state income tax benefits of $6.5 million, net of provisions of $185,000 for Federal tax and $540,000 for state income taxes. Net deferred tax assets, increased from $1.6 million at December 31, 2003 to $8.1 million at December 31, 2004 as a result of a reduction in the deferred tax asset valuation allowance. Realization of the $8.1 million of deferred tax assets is dependent upon generation of future taxable income of approximately $22.0 million.

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

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, 2003 and 2005 we generated cash from operating activities of $10.3 million and $11.1 million, respectively. In 2004, we used $0.2 million of cash in operations. We generated cash from operations in 2005 primarily as a result of earning nearly $11.0 million of operating income and having a use of cash to support increases in inventories and receivables, net of an offsetting increase in accounts payable. Our capital expenditures for the years ended December 31, 2003, 2004 and 2005 were $4.1 million, $5.4 million and $6.5 million, respectively. These capital expenditures were principally for additions or to improve our manufacturing capacity and efficiency.

Our consolidated working capital at December 31, 2005 was $2.4 million compared with $6.4 million at December 31, 2004. This represents a decrease in working capital of approximately $4.0 million. This working capital decrease results primarily from the inclusion of $3.7 million of debt prepayments required as a result of excess cash flows (described below) in current installments of long-term debt.


	*March 26, 2004 Refinancing*

On March 26, 2004, the Company entered into a Second Amended and Restated Credit Agreement with a syndicate of banks led by Harris Trust and Savings Bank, As Agent (referred to as the Harris syndicate), and also on March 26, 2004, entered into a Note and Warrant Purchase Agreement with BMO Nesbitt Burns Capital (U.S.) Inc., As Agent. These agreements were effective on March 26, 2004, and provided financing to replace the revolving credit facility and term note payable due to a former Harris syndicate. In connection with this transaction, the 238,584 warrants to purchase Class A Common Stock were surrendered by the holders; and, as described below, new warrants were issued on March 26, 2004.

On June 23, 2004, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement and also on June 23, 2004, entered into an Amended and Restated Note and Warrant Purchase Agreement with BMO Nesbitt Burns Capital (U.S.) Inc., As Agent. The effect of the June 23, 2004 amendments was to increase the amount due to BMO Nesbitt Burns Capital (U.S.) Inc., As Agent, by $2,000,000, reduce the balance outstanding under the four-year secured term loan described below by $1,000,000 and reduce the balance outstanding under the secured revolving credit facility described below by $1,000,000.

Under the terms of the new agreements and subsequent amendments, effective as of June 23, 2004, and as of December 31, 2005, the Company has:


	1) A four-year secured term loan in the original principal amount of $21,000,000 with variable rate interest; principal payments were due in quarterly installments of $500,000 which began June 30, 2004 and continued through March 31, 2005, and due in quarterly installments of $750,000 beginning June 30, 2005 through December 31, 2007 with the balance of $6,427,000 due on March 31, 2008. Mandatory principal payments of $633,000 related to the 2003 sale of the assets of Mid-Central Plastics, Inc. have been made. The term loan requires excess cash flow repayments of $1,734,000 and $1,958,000 to be paid on March 31, 2006 and May 31, 2006, respectively. The excess cash flow payments are equal to 75% of the amount by which earnings before interest, income taxes, depreciation and amortization (EBITDA) exceed interest expense paid in cash, income taxes paid in cash, principal payments on all indebtedness and capital expenditures. No estimate has been made for any excess cash flow payment that could become due on March 31, 2007.

	2) A secured revolving credit facility with a limit of $18,000,000 with variable rate interest. At December 31, 2005, the Company has a revolving credit balance of $9,700,000 and availability of $7,042,000 under this facility. 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 inventories. 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 secured revolving credit facility, interest will be at either a bank base rate plus applicable margin, or an adjusted LIBOR plus a LIBOR applicable margin. At inception, the bank rate plus applicable margin was 6.75% and the adjusted LIBOR plus a LIBOR applicable margin was 5.35%. At December 31, 2004 those rates were 7.75% and 6.78%, respectively, and at December 31, 2005, those rates were 9.25% and 7.97%, respectively.

      The Company entered into a swap agreement effective June 30, 2004 related to $10,750,000 (the original notional amount) of its term debt. The swap agreement is for the purpose of limiting the effects of interest rate increases on approximately one-half of the Company’s variable rate term debt. Under this agreement, the Company pays a fixed rate of 3.72% on the notional amount, which is payable quarterly. In accordance with the term loan agreement, the Company also pays an interest margin which adjusts in steps based on achieved operating and leverage metrics (4.00% during the first three months of 2005, and then reducing to 3.50%). The notional amount as of December 31, 2005 was $8,875,000. The swap agreement expires March 31, 2008

      3) Senior secured subordinated notes totaling $12,000,000 with cash interest of 12% and payment-in-kind interest of 2% or 4% with no principal amortization, and the balances due March 26, 2009. This debt is subordinated to the secured term loan and the revolving credit facility with respect to both payment and lien priority. The balance as of December 31, 2005 is $12,771,000 (reported as $11,988,000, reflecting a discount of $783,000).

      Related to the senior secured subordinated note, on March 26, 2004, the Company issued 545,467 warrants to purchase shares of its Class A Common Stock for $0.02 per share; these warrants expire March 26, 2014. The warrant holder may exercise the warrants at any time. The warrants may be put to the Company, at their then fair market value, at the earlier of: a) five years from the date of issue; b) a change of control; c) a default on the senior secured subordinated loan; or d) a prepayment of 75% or more of the original principal balance of the senior secured subordinated loan.

The stock purchase warrant includes provisions that will reduce the number of warrants that can be put to the Company below 545,467 if a) a change of control occurs prior to 5 years from the date of issue and the Company achieves specified net equity levels; or b) if a change of control has not occurred prior to 5 years from the date of issue and the Company achieves specified EBITDA (earnings before interest, taxes, depreciation and amortization) levels. The number of warrants could be reduced to any one of several levels, but no lower than 290,278. For the years ended December 31, 2004 and 2005, the Company achieved the EBITDA level that would reduce the maximum number of warrants outstanding. The maximum number of warrants that may be put or exercised has been reduced to 415,128 as of December 31, 2005.

The Company has provided bank letters of credit totaling approximately $2,086,000 to two creditors. One letter of credit is in support of operating lease payments; this letter of credit is for $388,000 and will be in effect through the entire term of certain leases that expire in December 2011, unless released earlier; the other letters of credit, in the aggregate amount of $1,698,000 support future potential payments by the Company related to workers’ compensation claims. These letters of credit will renew on an annual basis until the need for the letters of credit expires. Based on workers’ compensation claims experience, the amount of these letters of credit is subject to adjustment on December 31, 2006. The outstanding letters of credit decrease, on a dollar-for-dollar basis, the amount of revolving line of credit available under the secured revolving credit facility.

In connection with these loans, the Company has granted the lenders a lien on all of the Company’s accounts receivable, inventories, equipment, land and buildings, and various other assets. These agreements contain restrictions on capital expenditures, additional debt or liens, investments, mergers and acquisitions, and asset sales and prohibit payments such as dividends or stock repurchases. These agreements also contain various financial covenants, including financial performance ratio requirements. The Company is in compliance with these financial covenants. Fees associated with the March 26, 2004 and June 23, 2004 transactions, including underwriting and legal fees, totaled approximately $1,801,000.

Historically, we have met our near term liquidity requirements with cash flows from operations, funds available under the Harris line of credit, and management of our working capital to reflect current levels of operations. Management expects that cash flows from operations, working capital management and availability under the new bank revolving line of credit described above will permit us to meet our liquidity requirements through the term of the new credit facility.


	Redeemable Preferred Stock

Pursuant to a 1999 agreement to purchase certain assets of Worthington Custom Plastics, Inc. (“Worthington”), the Company issued 10,000 shares of its preferred stock, without par value, to Worthington. The preferred stock was mandatorily redeemable on April 15, 2004 at $1,000 per share. The Company and Worthington entered into a stock redemption agreement, dated December 23, 2003, that provides for 30 monthly redemption payments of $50,000 each over a three-year period (10 payments each year in 2004, 2005 and 2006) to fully redeem the preferred stock. Each $50,000 payment and redemption of 333 (or 334) shares reduces the outstanding balance of the redeemable preferred stock by $333,000 (or $334,000). Redemption payments made during the years ended December 31, 2004 and 2005 resulted in the recognition of a“gain on redemption of redeemable preferred stock” of $2,833,000 in each year which is reported in the accompanying consolidated statements of operations. If shares are not redeemed in accordance with the provisions of this agreement, the redemption price remains at $1,000 per share.


	Capital Expenditures

We incurred $6.5 million of capital expenditures during 2005, including approximately $3.3 million related to expansion activities and approximately $3.2 million for the normal update and replacement of manufacturing equipment.

We estimate that our capital expenditures in 2006 will total approximately $6.8 million, of which $4.3 will be for expansion activities and the remaining $2.5 million will be for the normal update and replacement of manufacturing equipment.

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.

Quarterly Financial Information

Selected quarterly financial information for the years ended December 31, 2005 and 2004 is as follows:


	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year

	(In thousands, except per share data)
2005
Net sales	$	54,123	$	53,558	$	43,339	$	45,256	$	196,276
Gross profit		7,134		7,589		5,430		6,678		26,831
Operating income		3,595		3,685		1,645		2,071		10,996
Net earnings available to common shareholders		3,001		2,714		738		5,273		11,726
Earnings per share of common stock — basic:	$	0.62	$	0.54	$	0.15	$	1.06	$	2.37
Earnings per share of common stock — diluted:	$	0.50	$	0.46	$	0.13	$	0.89	$	1.98


	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year

	(In thousands, except per share data)
2004
Net sales	$	39,920	$	50,706	$	46,146	$	48,697	$	185,469
Gross profit		5,509		6,145		5,318		6,587		23,559
Operating income		2,168		2,730		1,888		2,372		9,158
Net earnings available to common shareholders		2,126		2,228		965		7,447		12,766
Earnings per share of common stock — basic:	$	0.46	$	0.48	$	0.20	$	1.59	$	2.73
Earnings per share of common stock — diluted:	$	0.38	$	0.38	$	0.15	$	1.25	$	2.16

Off-Balance Sheet Arrangements

The Company has the following significant off-balance sheet arrangements:


	(i) The Company’s operating lease obligation amounts are shown in the significant cash commitments table below. The Company enters into operating leases for larger units of manufacturing equipment related to many of its operations, including the laser cutting of sheet metal and the forming of sheet metal. Most parts fabricated by the Company are either laser cut, or formed, or both. The Company has operating leases that are scheduled to expire in 2006-2011; as these leases expire, it is likely that the Company will either extend those operating leases for the same units of manufacturing equipment or enter into new operating lease arrangements for replacement manufacturing units.

	(ii) The Company has provided bank letters of credit totaling approximately $2,086,000 to two creditors. One letter of credit is in support of operating lease payments; this letter of credit is for $388,000 and will be in effect through the entire term of certain leases that expire in December 2011, unless released earlier; the other letters of credit, in the total amount of $1,698,000 support future potential payments by the Company related to workers’ compensation claims. These letters of credit will renew on an annual basis until the need for the letters of credit expires. Based on workers’ compensation claims experience, the amount of these letters of credit are subject to adjustment on December 31, 2006. The outstanding letters of credit decrease, on a dollar-for-dollar basis, the amount of revolving line of credit available under the secured revolving credit facility.

	(iii) The Company entered into a swap agreement effective June 30, 2004 as described above in this Item 7 and also below in Item 7A. The swap agreement is for the purpose of limiting the effects of interest rate increases on approximately one-half of the Company’s variable rate term debt.

The Company has not given any guarantees for any unconsolidated entities.

Significant Cash Commitments

The Company has significant future cash commitments, primarily scheduled debt and related interest payments and scheduled lease payments. The commitments related to debt payments and lease payments are fully described in Notes 7 and 8 of the accompanying consolidated financial statements.

The following table summarizes the Company’s contractual obligations at December 31, 2005:


	Payments Due by Period

			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years

	(In thousands)
Term loan	$	16,118	$	6,637	$	9,481	$	—		—
Revolving line of credit		9,700		—		9,700		—		—
Senior subordinated debt		12,771		—		—		12,771		—
Other debt obligations		1,223		502		721		—		—
Interest — estimated		11,100		3,700		6,800		600		—
Operating leases		22,634		7,142		12,937		2,555		—
Preferred stock redemption		500		500		—		—		—

Total contractual cash obligations	$	74,046	$	18,481	$	39,639	$	15,926		—

Under its bank credit facility, the Company had $2,086,000 standby letters of credit outstanding at December 31, 2005 in connection with lease obligations and its workers compensation program.

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 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 outstanding balance of the redeemable preferred stock by $333,000 (or $334,000). As of March 24, 2006, the Company has made 23 of the 30 scheduled redemption payments. 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 during 2006 and that the redeemable preferred stock is retired for an additional $0.5 million.

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

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 U.S. 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, accrued group health care costs, valuation of warrants and the recoverability of deferred tax assets.


	*Allowance for Doubtful Accounts*

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*

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.


	*Group Health Care Costs*

Reserves for group health care costs are based upon an estimate of benefit claims incurred but not reported, using historical trends as a basis for the estimate.


	*Valuation of Warrants*

The valuation of the warrants issued in March 2004 is based upon management’s estimates of the ultimate number of warrants to be put to the Company, considering the likelihood of a change of control and an estimate of the Company’s ability to achieve certain earnings goals in 2006 and 2007. Other factors included in the estimate are a future business enterprise valuation factor based upon a multiple of estimated future EBITDA (earnings before interest, taxes, depreciation and amortization), estimated future debt levels and a discount rate used to reduce that future enterprise value to its present value.


	*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 deferred tax asset valuation allowance is adjusted as appropriate.

Recently Issued Accounting Standards

In December 2004, Statement of Financial Accounting Standards (SFAS) Statement No. 123R (revised 2004), Share-Based Payment, was issued. SFAS No. 123R addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This Statement is a revision to Statement 123 and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires the fair value of all stock option awards issued to employees to be recorded as compensation expense over the related vesting period. This Statement also requires the recognition of compensation expense of the remaining portion of the fair value of any unvested stock option awards outstanding at the date of adoption, as the options vest. The Company estimates the adoption of Statement 123R will result in the recognition of compensation costs for stock options of $27,000 in 2006. This statement will be adopted by the Company effective January 1, 2006, as permitted by rules adopted by the Securities and Exchange Commission.

In December 2004, SFAS No. 151, Inventory Costs was issued. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this Statement, such items will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for the Company’s fiscal year beginning January 1, 2006. The adoption of this Statement will not have a significant impact on the Company’s financial statements.

In May 2005, SFAS No. 154, Accounting Changes and Error Corrections was issued. SFAS No. 154 requires retrospective application for voluntary changes in accounting principle unless impractical to do so. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used. This Statement is effective for any accounting changes and error corrections occurring after January 1, 2006.


Item 7A.	*Quantitative and Qualitative Disclosures about Market Risk*

Interest Rate Risk

The Company uses both variable-rate debt and fixed rate debt to finance its operations. The variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. The variable-rate debt includes both our revolving credit facility ($9.7 million at December 31, 2005) and our term note payable ($16.1 million at December 31, 2005).

The Company entered into a swap agreement effective June 30, 2004 related to $10,750,000 (the original notional amount) of its term debt. The swap agreement expires March 31, 2008. The swap agreement is for the purpose of limiting the effects of interest rate increases on approximately one-half of the Company’s variable rate term debt. Under this agreement, the Company pays a fixed rate of 3.72% on the notional amount, which is payable periodically. In accordance with the term loan agreement, the Company also pays an interest margin which adjusts in steps based on achieved operating and leverage metrics (3.50% since April 1, 2005). The notional amount as of December 31, 2005 was $8,875,000.

The interest on the other portion of the term loan is currently determined at the applicable margin described above plus a LIBOR rate. The Company has elected to use 1, 2 and 3 month LIBOR agreements in an effort to reduce the variability of interest payments related to this portion of the term debt. At December 31, 2005 the “all-in” rate including the LIBOR rate and applicable margin related to this portion of the term debt was approximately 7.97%.

The interest on the revolving credit facility is determined primarily at the applicable margin plus LIBOR rates. The Company has elected, at December 31, 2005, to use 1, 2 and 3 month LIBOR agreements in an effort to reduce the variability of interest payments related to the revolving debt. The LIBOR agreements totaled $11.0 million at December 31, 2005; the corresponding average “all-in” rates including the LIBOR rates and applicable margin related to the revolving debt were approximately 7.97%. The applicable margin plus the bank base rate is paid on the revolving debt in excess of $11.0 million; at December 31, 2005 this rate was 9.25 %.

If market rates of interest on our variable rate had been 100 basis points higher in 2005, our interest expense would have been approximately $300,000 higher.

The interest rates on the senior subordinated debt and the subordinated debt are fixed as described above.

Steel Commodity Risk

We are also subject to commodity price risk with respect to purchases of steel, which accounts for a significant portion of our cost of sales. 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, increased dramatically during 2004 and stabilized in 2005. The prices have increased modestly in 2006. The steel supply tightened, due in part to the national economic recovery, China’s growing steel consumption, and reduced domestic steel production capacity. We were able to negotiate with our customers to have them absorb substantial amounts of the increases in our raw material costs in 2004 and 2005. Effective in 2005 and through early 2006, the price increases have been incorporated into unit prices for those parts manufactured for 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.


Item 8.	*Financial Statements and Supplementary Data*

MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

INDEX


	Page

Report of Independent Registered Public Accounting Firm		24
Consolidated Balance Sheets as of December 31, 2004 and 2005		25
Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005		26
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2003, 2004 and 2005		27
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005		28
Notes to Consolidated Financial Statements		29
Schedule
Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2003, 2004 and 2005		45

Report of Independent Registered Public Accounting Firm

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, 2004 and 2005, 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, 2005. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related 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.


	/s/ KPMG LLP

Indianapolis, Indiana

March 27, 2006

MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2004 and 2005


			2004			2005

			(Dollars in thousands,
			except per share data)
ASSETS
Current assets:
	Trade accounts receivable, less allowance for doubtful accounts of $160 in 2004 and $192 in 2005		$	9,788		$	12,714
	Unbilled receivables			2,741			801
	Inventories			19,218			20,631
	Prepaid expenses and other current assets			1,324			824
	Deferred income taxes			2,700			2,583

		Total current assets		35,771			37,553
Property, plant, and equipment, net				22,390			23,432
Note receivable				1,102			—
Intangible assets, at cost, less accumulated amortization				649			570
Deferred income taxes				5,400			10,617
Other assets				1,833			1,622

			$	67,145		$	73,794


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Outstanding checks in excess of bank balance		$	2,801		$	3,050
	Current installments of long-term debt			3,295			7,139
	Accounts payable			17,860			19,295
	Accrued payroll and payroll taxes			1,782			2,226
	Other accrued expenses			2,905			2,416
	Income taxes payable			200			499
	Redeemable preferred stock			500			500

		Total current liabilities		29,343			35,125
Long-term debt, excluding current installments				40,280			31,764
Other liabilities				368			250
Redeemable preferred stock				6,167			2,834
Warrants payable				1,791			2,872

		Total liabilities		77,949			72,845

Stockholders’ equity (deficit):
	Class A common stock — $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,723,878 shares in 2004 and 4,880,878 in 2005			47			49
	Class B common stock — $0.01 par value. Authorized 200,000 shares; issued and outstanding 100,000 in 2004 and 2005			1			1
	Additional paid-in capital			20,922			20,947
	Accumulated deficit			(31,774	)		(20,048	)
		Total stockholders’ equity (deficit)		(10,804	)		949

			$	67,145		$	73,794

See accompanying notes to consolidated financial statements.

MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2003, 2004, and 2005


				2003			2004			2005

				(Dollars in thousands,
				except per share data)
Net sales				$	131,431		$	185,469		$	196,276
Cost of sales					113,318			161,910			169,445

		Gross profit			18,113			23,559			26,831

Operating expenses:
	Selling expenses				2,948			3,211			3,092
	Administrative expenses				9,635			11,190			12,743

		Total operating expenses			12,583			14,401			15,835

		Operating income			5,530			9,158			10,996

Other income (expense):
	Interest expense				(3,863	)		(4,922	)		(6,180	)
	Interest on redeemable preferred stock				(427	)		(250	)		—
	Gain on redemption of preferred stock				—			2,833			2,833
	Other				442			172			60

		Total other expense			(3,848	)		(2,167	)		(3,287	)

		Earnings before income taxes and discontinued operations			1,682			6,991			7,709
Income taxes					426			(5,775	)		(4,017	)

		Earnings from continuing operations			1,256			12,766			11,726

Discontinued operations:
	Earnings from operations of discontinued plastics operations				140			—			—
	Income taxes				55			—			—

					85			—			—

			Net earnings		1,341			12,766			11,726
Accretion of discount on preferred shares					(715	)		—			—

			Net earnings available to common shareholders	$	626		$	12,766		$	11,726

Earnings available to common shareholders per common share — basic:
	Earnings from continuing operations			$	0.12			2.73			2.37
	Earnings from discontinued operations				0.02			—			—

			Earnings per common share — basic	$	0.14		$	2.73		$	2.37

Earnings available to common shareholders per common share — diluted:
	Earnings from continuing operations			$	0.11		$	2.16		$	1.98
	Earnings from discontinued operations				0.02			—			—

			Earnings per common share — diluted	$	0.13		$	2.16		$	1.98

See accompanying notes to consolidated financial statements.

MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity (Deficit)

Years ended December 31, 2003, 2004, and 2005


		Class A				Class B
		Common Stock				Common Stock											Total
												Additional		Retained			Stockholders’
		Shares				Shares						Paid-In		Earnings			Equity
		Issued		Amount		Issued			Amount			Capital		(Deficit)			(Deficit)

		(Dollars in thousands)
Balance, December 31, 2002			4,460,547	$	45		200,000		$	2		$	20,895	$	(45,166	)	$	(24,224	)
	Net earnings		—		—		—			—			—		1,341			1,341
	Accretion of discount on preferred shares		—		—		—			—			—		(715	)		(715	)
	Conversion of shares of Class B common stock into shares of Class A common stock		100,000		1		(100,000	)		(1	)		—		—			—

Balance, December 31, 2003			4,560,547		46		100,000			1			20,895		(44,540	)		(23,598	)
	Net earnings		—		—		—			—			—		12,766			12,766
	Stock options exercised		163,331		1		—			—			27		—			28

Balance, December 31, 2004			4,723,878		47		100,000			1			20,922		(31,774	)		(10,804	)
	Net earnings		—		—		—			—			—		11,726			11,726
	Stock options exercised		157,000		2		—			—			25		—			27

Balance, December 31, 2005			4,880,878	$	49		100,000		$	1		$	20,947	$	(20,048	)	$	949

See accompanying notes to consolidated financial statements.

MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2004, and 2005


						2003			2004			2005

						(Dollars in thousands)
Cash flows from operating activities:
	Net earnings					$	1,341		$	12,766		$	11,726
	Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
			Depreciation and amortization				5,694			5,804			5,422
			Other amortization				427			1,253			2,400
			Provision for bad debts				310			145			394
			Provision for deferred income taxes				151			(6,500	)		(5,100	)
			Loss (gain) on sale of property and equipment				(12	)		2			(7	)
			Gain on sale of discontinued business				(8	)		—			—
			Unrealized loss (gain) on derivative instruments				—			40			(205	)
			Gain on redemption of preferred stock				—			(2,833	)		(2,833	)
			Changes in operating assets and liabilities:
				Increase in accounts receivable			(2,115	)		(2,680	)		(3,320	)
				Decrease (increase) in unbilled receivables			—			(2,741	)		1,940
				Decrease (increase) in inventories			583			(5,355	)		(1,413	)
				Decrease (increase) in prepaid expenses and other assets			431			(286	)		349
				Increase (decrease) in income taxes payable			275			(75	)		299
				Increase in accrued payroll and payroll taxes			274			257			444
				Increase in accounts payable			2,856			817			1,435
				Increase (decrease) in accrued expenses and other			53			(810	)		(402	)

					Net cash provided by (used in) operating activities		10,260			(196	)		11,129

Cash flows from investing activities:
	Capital expenditures						(4,119	)		(5,365	)		(6,492	)
	Proceeds from sale of property, plant and equipment						67			54			70
	Proceeds from sale of business discontinued						4,800			—			—
	Payment received on note receivable for sale of discontinued operations						99			100			1,102

					Net cash provided by (used in) investing activities		847			(5,211	)		(5,320	)

Cash flows from financing activities:
	Increase (decrease) in checks issued in excess of bank balance						(346	)		1,858			249
	Net advances (repayments) on revolving debt						(5,350	)		5,600			(1,700	)
	Principal payments on long-term debt and capital leases						(4,961	)		(4,246	)		(3,844	)
	Retirement of revolving debt in connection with refinancing						—			(14,650	)		—
	Retirement of term debt in connection with refinancing						—			(22,153	)		—
	Proceeds from issuance of revolving debt						—			7,200			—
	Proceeds from issuance of long-term debt						—			34,071			—
	Redemption of preferred stock						—			(500	)		(500	)
	Proceeds from issuance of common stock						—			28			27
	Debt issuance costs paid						(450	)		(1,801	)		(41	)

					Net cash provided by (used in) financing activities		(11,107	)		5,407			(5,809	)

					Net change in cash		—			—			—
Cash at beginning of year							—			—			—

Cash at end of year						$	—		$	—		$	—

Supplemental disclosures of cash flow information:
	Cash paid during the year for:
		Interest				$	3,296		$	3,481		$	3,979
		Income taxes					48			550			785

See accompanying notes to consolidated financial statements.

MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2004 and 2005

(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 components and subassemblies for construction, agricultural and industrial equipment manufacturers located primarily in the Midwestern and Southeastern United States. Sales in 2005 were approximately as follows: construction — 64%, agricultural — 17% and industrial — 19%. 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. and its subsidiaries (together, the Company). 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 U.S. generally accepted accounting principles. 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. Equipment held under capital leases is stated at the net present value of the minimum lease payments at the beginning of the lease term.

Depreciation of plant and equipment is recognized over the estimated useful lives of the respective assets using straight-line and accelerated methods. 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 net assets of businesses acquired. The Company adopted the provisions of Statement of Financial Accounting Standards (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 are 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.


*(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. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets when it is more likely than not that all or a portion of deferred tax assets will not be realized.


*(i)*	*Stock Option Plan*

The Company has applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense has been recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of SFAS No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, through December 31, 2005, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123, as amended.

The per share weighted average fair value of stock options granted during 2003 was $0.15 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. No stock options were granted during 2004 or 2005.

The following table illustrates the effect on net earnings if the fair-value-based method had been applied to all outstanding and unvested awards in each year.


		2003			2004			2005

Net earnings available to common shareholders:
	As reported	$	626		$	12,766		$	11,726
	Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(112	)		(49	)		(37	)

	Pro forma	$	514		$	12,717		$	11,689

Basic earnings available to common shareholders per share:
	As reported	$	0.14		$	2.73		$	2.37
	Pro forma		0.11			2.72			2.36
Diluted earnings available to common shareholders per share:
	As reported		0.13			2.16			1.98
	Pro forma		0.10			2.15			1.97

See recently issued accounting standards in section (o) of this footnote below.


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

In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are 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 estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of the reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value 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 is the implied fair value of the reporting unit goodwill.


*(k)*	*Revenue Recognition*

Revenue from sales is recognized when the goods are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable and the sales price is fixed or determinable.

Beginning in 2004, the Company incurred increased costs for the purchase of raw materials as a result of dynamic changes in the U.S. steel markets. The Company’s supplier agreements with key customers allow surcharges for the passthrough of the additional raw material costs. The Company has recognized as net sales, and also recognized an identical amount as cost of sales, surcharge amounts of approximately $18,239 and $28,550 in 2004 and 2005, respectively. The Company has classified unbilled surcharges in the accompanying consolidated balance sheet as “unbilled receivables.” The surcharges are generally invoiced to the Company’s customers within weeks following the month end in which the related product is sold. As of December 31, 2004 and 2005, the unpaid amount of billed surcharges included in accounts receivable was $1,292 and $1,033, respectively.


*(l)*	*Interest Rate Swaps*

As required by one of its financing arrangements, the Company has entered into an interest rate swap agreement 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 agreement is accrued as interest rates change and is recorded in interest expense.

During 2004, the Company entered into a swap agreement, expiring March 2008, with an initial aggregate notional amount of $10,750. Under this agreement, the Company pays a fixed rate of 3.72% on the notional amount. In accordance with a term loan agreement, the Company also pays an interest margin, which adjusts in steps based on operating and leverage metrics achieved by the Company (3.5% since April 1, 2005).


*(m)*	*Fair Value of Financial Instruments*

The Company believes the recorded value of notes receivable, notes payable and long-term debt approximates fair value because their respective interest rates fluctuate with market rates or approximate

current market rates. The recorded value of redeemable preferred stock of $6,667 and $3,334 at December 31, 2004 and 2005, respectively, exceeds its estimated fair value of $908 and $461, respectively (see note 10).

Interest rate swaps are reported 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.


*(n)*	*Earnings Per Share*

Earnings per share is computed under the provisions of SFAS No. 128, Earnings Per Share. Amounts reported as earnings per share reflect the earnings available to common shareholders for the period divided by the weighted average number of Class A and Class B common shares outstanding during the year. Basic per share information is calculated by dividing earnings by the weighted average number of common shares outstanding. Diluted per share information is calculated by also considering the impact of potential common shares.


*(o)*	*Recently Issued Accounting Standards*

In December 2004, SFAS No. 123R (revised 2004), Share-Based Payment was issued. SFAS No. 123R addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This Statement is a revision to Statement 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires the fair value of all stock option awards issued to employees to be recorded as compensation expense over the related vesting period. This Statement also requires the recognition of compensation expense of the remaining portion of the fair value of any unvested stock option awards outstanding at the date of adoption, as the options vest. The Company estimates the adoption of Statement 123R will result in the recognition of compensation costs for stock options of $27 in 2006. This Statement will be adopted by the Company effective January 1, 2006, as permitted by rules adopted by the Securities and Exchange Commission.

In December 2004, SFAS No. 151, Inventory Costs was issued. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this Statement, such items will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for the Company’s fiscal year occurring after January 1, 2006.

In May 2005, SFAS No. 154, Accounting Changes and Error Corrections was issued. SFAS No. 154 requires retrospective application for voluntary changes in accounting principle unless impractical to do so. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used. This Statement is effective for the Company for any accounting changes and error corrections occurring after January 1, 2006.


*(p)*	*Reclassifications*

The Company reclassified certain deferred financing costs as other assets, instead of intangible assets, in the accompanying December 31, 2004 balance sheet to conform with the 2005 presentation.

Also, amortization expense related to the deferred financing costs has been reclassified as interest expense, rather than as general and administrative costs for all periods presented in the accompanying consolidated statements of operations.


(2)	Discontinued Operations

The financial results from discontinued operations reflect the results of Mid-Central Plastics, Inc. The Company sold the assets of Mid-Central Plastics, Inc. on June 20, 2003. The sales price, subsequent to a working capital adjustment, was $6,100, with $4,800 received in cash at closing plus notes receivable from the buyer totaling $1,296. The notes receivable have all been collected as of December 31, 2005.

Summary financial data of the discontinued operations is presented below:


		2003

Net sales		$	9,124
Operating expense			8,819

	Operating income		305
Interest expense			(165	)

	Earnings from operations of discontinued operations		140
Income taxes			55

	Net earnings from discontinued operations	$	85


(3)	Inventories

A summary of inventories follows:


	December 31

	2004		2005

Finished goods	$	8,361	$	9,025
Work in process		4,765		4,082
Raw materials		6,092		7,524

	$	19,218	$	20,631


(4)	Property, Plant, and Equipment

A summary of property, plant, and equipment at December 31, including assets held under capital leases as described in note 8, is as follows:


		Depreciable		December 31
		Lives
		(In years)		2004		2005

Land and land improvements			15	$	1,769	$	1,781
Buildings and leasehold improvements			15 – 39		8,991		9,655
Machinery and vehicles			5 – 12		29,421		32,194
Tooling			3		4,696		5,317
Office equipment			5 – 10		6,712		7,574
Construction in progress			—		99		27

					51,688		56,548
Less accumulated depreciation					29,298		33,116

	Property, plant, and equipment, net			$	22,390	$	23,432


(5)	Intangible Assets

A summary of intangible assets is as follows:


		December 31

		2004		2005

Goodwill		$	1,200	$	1,200
Other			847		847

			2,047		2,047
Less accumulated amortization			1,398		1,477

	Net intangible assets	$	649	$	570

For amortizable intangible assets, the total amortization expense in 2003, 2004, and 2005 was $76, $76, and $79, respectively. The estimated amortization expense for each of the next five years ending December 31 is as follows:


Year Ending:

2006	$	60
2007		20
2008		18
2009		12
2010		—


(6)	Derivative Instruments and Hedging Activities

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 has entered into an interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk. The swap changes the variable-rate cash flow exposure on the debt obligations to fixed cash flows.

Under the terms of the interest rate swap, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed rate debt.

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138, requires that all derivative instruments be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company reports its interest rate swap agreements at fair value. The Company recognized unrealized gains (losses) on interest rate swaps as a component of interest expense of $(40) and $205 in 2004 and 2005, respectively, as they did not qualify for hedge accounting.


(7)	Long-term Debt

A summary of long-term debt follows:


	December 31

	2004		2005

Revolving credit facility with the current Harris syndicate	$	11,400	$	9,700
Senior subordinated debt, net of debt discount of $1,159 in 2004 and $783 in 2005		11,166		11,988
Note payable to the current Harris syndicate, with variable rate interest (6.45% and 7.97% as of December 31, 2004 and 2005, respectively)		19,418		16,118
Subordinated note payable with interest payable at 7.0%, discounted $393 to yield 10.0%, due in quarterly payments with the balance due April 8, 2008		1,396		1,035
Note payable, electric cooperative, non-interest bearing, due in monthly payments with the balance due November 1, 2006		85		41
Capital lease obligations		81		18
Notes payable, miscellaneous		29		3

	$	43,575	$	38,903
Less current installments		3,295		7,139

	$	40,280	$	31,764


	*Financing in effect as of January 1, 2004*

The financing arrangements with Harris Trust and Savings Bank (referred to as the former Harris Syndicate), were as follows as of January 1, 2004:

In February 2002, the Company entered into a secured revolving credit facility with the former Harris syndicate. The revolving credit agreement permitted the Company to borrow up to a maximum of $21,000. The agreement required payment of a quarterly commitment fee of 0.50% per annum of the average daily unused portion of the revolving credit facility. Interest was due monthly and was based upon the bank prime rate plus 1.5%. The revolving credit agreement was originally due on July 1, 2003, and as amended, was extended to April 1, 2005.

In February 2002, the Company also entered into a secured term loan arrangement with the former Harris syndicate for a term loan of $32,965. The term loan under this financing arrangement was amortized monthly with principal payments ranging from $235 to $500 and the balance of $24,930 due originally on July 1, 2003, and as amended, was extended to April 1, 2005. Interest was due monthly and was based upon the bank prime rate plus 1.5%. The agreement was secured by a first lien on all of the Company’s accounts receivable, inventories, equipment and various other assets, other than the assets of Morton Custom Plastics, LLC.

In addition, under this agreement, 238,584 warrants issued on September 20, 2000 to purchase Class A Common Stock at an exercise price of $0.01 per share remained outstanding.


	*March 26, 2004 Refinancing and Subsequent Amendments*

Under the terms of the new agreements and subsequent amendments, effective as of June 23, 2004, and as of December 31, 2005, the Company has:


	1) A four-year secured term loan in the original principal amount of $21,000,000 with variable rate interest; principal payments were due in quarterly installments of $500,000 which began June 30, 2004 and continued through March 31, 2005, and due in quarterly installments of $750,000 beginning June 30, 2005 through December 31, 2007 with the balance of $6,427,000 due on March 31, 2008. Mandatory principal payments of $633,000 related to the 2003 sale of the assets of Mid-Central Plastics, Inc. have been made. The term loan requires excess cash flow repayments of $1,734,000 and $1,958,000 to be paid on March 31, 2006 and May 31, 2006, respectively. The excess cash flow payments are equal to 75% of the amount by which earnings before interest, income taxes, depreciation and amortization (EBITDA) exceed interest expense paid in cash, income taxes paid in cash, principal payments on all indebtedness and capital expenditures. No estimate has been made for any excess cash flow payment that could become due on March 31, 2007.

	2) A secured revolving credit facility with a limit of $18,000,000, with variable rate interest. At December 31, 2005, the Company has a revolving credit balance of $9,700,000 and availability of $7,042,000 under this facility. 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 inventories. 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 secured revolving credit facility, interest will be at either a bank base rate plus applicable margin, or an adjusted LIBOR plus a LIBOR applicable margin. At inception, the bank rate plus applicable margin was 6.75% and the adjusted LIBOR plus a LIBOR applicable margin was 5.35%. At December 31, 2004 those rates were 7.75% and 6.78%, respectively, and at December 31, 2005, those rates were 9.25% and 7.97%, respectively.

	The Company entered into a swap agreement effective June 30, 2004 related to $10,750,000 (the original notional amount) of its term debt. The swap agreement is for the purpose of limiting the effects of interest rate increases on approximately one-half of the Company’s variable rate term debt. Under this agreement, the Company pays a fixed rate of 3.72% on the notional amount, which is payable quarterly. In accordance with the term loan agreement, the Company also pays an interest margin which adjusts in steps based on achieved operating and leverage metrics (4.00% during the first three months of 2005, and then reducing to 3.50%). The notional amount as of December 31, 2005 was $8,875,000. The swap agreement expires March 31, 2008.

	3) Senior secured subordinated notes totaling $12,000,000 with cash interest of 12% and payment-in-kind interest of 2% or 4% with no principal amortization, and the balances due March 26, 2009. This debt is subordinated to the secured term loan and the revolving credit facility with respect to both payment and lien priority. The balance as of December 31, 2005 is $12,771,000 (reported as $11,988,000, reflecting a discount of $783,000).

	Related to the senior secured subordinated note, on March 26, 2004, the Company issued 545,467 warrants to purchase shares of its Class A Common Stock for $0.02 per share; these warrants expire March 26, 2014. The warrant holder may exercise the warrants at any time. The warrants may be put to the Company, at their then fair market value, at the earlier of: a) five years from the date of issue; b) a change of control; c) a default on the senior secured subordinated loan; or d) a prepayment of 75% or more of the original principal balance of the senior secured subordinated loan.

The Company estimated the fair value of the warrants at the date of issue, and as of December 31, 2004 and 2005, to be $1,500,000, $1,791,000 and $2,872,000, respectively. These estimates are reported as warrants payable in the accompanying consolidated balance sheets for 2004 and 2005. The fair value allocated to the warrants at the date of issue resulted in the recognition of an equal amount of debt discount, which is being amortized using the effective yield method over 5 years, the term of the related senior secured subordinated note. The Company reports the warrants at fair value and records changes in the fair value as interest expense. The valuation of the warrants issued in March 2004 is based upon management’s estimate of the ultimate number of warrants to be put to the Company, considering the likelihood of a change of control and an estimate of the Company’s ability to achieve certain earnings goals in 2006 and 2007. Other factors included in the estimate are a future business enterprise valuation factor based upon a multiple of estimated future EBITDA (earnings before interest, taxes, depreciation and amortization), estimated future debt levels and a discount rate used to reduce that future enterprise value to its present value.

The Company has provided bank letters of credit totaling approximately $2,086 to two creditors. One letter of credit is in support of operating lease payments; this letter of credit is for $388 and will be in effect through the entire term of certain leases that expire in December 2011, unless released earlier; the other letters of credit, in the aggregate amount of $1,698 support future potential payments by the Company related to workers’ compensation claims. These letters of credit will renew on an annual basis until the need for the letters of credit expires. Based on workers’ compensation claims experience, the amount of these letters of credit is subject to adjustment on December 31, 2006. The outstanding letters of credit decrease, on a dollar-for-dollar basis, the amount of revolving line of credit available under the secured revolving credit facility.

The aggregate amounts of contractual long-term debt maturities and principal payments (based upon the amended credit facilities described above) for each of the five years subsequent to December 31, 2005 are as follows:


Year:

2006	$	7,139
2007		3,472
2008		16,303
2009		11,989
2010		—

	$	38,903


(8)	Leases

The Company is obligated under various capital leases for certain machinery. At December 31, the gross amount of equipment and related amortization recorded under capital leases was as follows:


		2004		2005

Machinery		$	299	$	299
	Less accumulated amortization		136		244

		$	163	$	55

Assets under capital leases are included in property, plant, and equipment and amortization of assets held under capital leases is included in depreciation expense.

The present value of future minimum capital lease payments at December 31, 2005 was as follows:


Year 2006	$	19
Less amount representing interest (from 6.0% to 7.9%)		1

Present value of net minimum capital lease payments	$	18

The Company also has operating leases for several of its plants, certain warehouse space, and manufacturing and computer equipment. Rental expense for operating leases was $6,317, $6,516 and $7,380 in 2003, 2004 and 2005, respectively.

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2005 are:


Year:

	2006	$	7,142
	2007		5,508
	2008		4,567
	2009		2,862
	2010		1,934
	Thereafter		621

Total minimum lease payments		$	22,634


(9)	Income Taxes

Total income tax expense (benefit) for the periods presented was allocated as follows:


	December 31

	2003		2004			2005

Earnings before discontinued operations	$	426	$	(5,775	)	$	(4,017	)
Discontinued operations		55		—			—

	$	481	$	(5,775	)	$	(4,017	)

Income tax expense (benefit) from continuing operations consists of the following:


		Current		Deferred			Total

Year ended December 31, 2003:
Federal		$	80	$	151		$	231
State			195		—			195

		$	275	$	151		$	426

Year ended December 31, 2004:
	Federal	$	185	$	(6,050	)	$	(5,865	)
	State		540		(450	)		90

		$	725	$	(6,500	)	$	(5,775	)

Year ended December 31, 2005:
	Federal	$	140	$	(4,185	)	$	(4,045	)
	State		943		(915	)		28

		$	1,083	$	(5,100	)	$	(4,017	)

Total income tax expense (benefit) attributable to earnings from continuing operations differed from the amounts computed by applying the U.S. Federal corporate income tax rate of 34% for all periods to earnings before income taxes as a result of the following:


	December 31

	2003			2004			2005

Computed “expected” tax expense (benefit)	$	572		$	2,377		$	2,621
State income tax expense, net of Federal income tax benefit		129			59			18
Non-deductible interest on redeemable preferred stock		146			85			—
Non-deductible change in fair value of warrants		—			99			368
Non-taxable gain on redemption of preferred stock		—			(963	)		(963	)
Decrease in valuation allowance		(719	)		(7,441	)		(5,856	)
Other, net		298			9			(205	)

	$	426		$	(5,775	)	$	(4,017	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2005, are presented below:


			December 31

			2004			2005

Deferred tax assets attributable to:
	Net operating loss and credit carryforwards		$	22,677		$	21,232
	Accrued vacation pay			345			339
	Reserves and other			398			259

		Total gross deferred tax assets		23,420			21,830
Less valuation allowance				(13,043	)		(7,187	)

		Total deferred tax assets		10,377			14,643

Deferred tax liabilities attributable to:
	Plant and equipment, principally due to differences in depreciation			(2,174	)		(1,366	)
	Excess of tax over book amortization			(34	)		(27	)
	Debt discount			(69	)		(50	)

		Total deferred tax liabilities		(2,277	)		(1,443	)

		Net deferred tax asset	$	8,100		$	13,200

In assessing the realizability 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 the generation of future taxable income during the periods in which those 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. In order to fully realize the net deferred tax asset, the Company will need to generate future taxable income of approximately $34,000 prior to the expiration of the net operating loss carryforwards in 2007 – 2024. In addition, the Company has alternative minimum tax credit carryforwards at approximately $1,017, which are available to reduce future Federal regular income taxes, if any, over an indefinite period. Management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2005, based upon anticipated profitability over the period of years that the temporary differences are expected to become tax deductions. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

At December 31, 2005, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $56,000 which are available to offset future federal taxable income. These net operating losses expire in various years from 2007 through 2024.


(10)	Redeemable Preferred Stock

Pursuant to a 1999 agreement to purchase certain assets of Worthington Custom Plastics, Inc. (Worthington), the Company issued 10,000 shares of its preferred stock, without par value, to Worthington. The preferred stock was mandatorily redeemable on April 15, 2004 at $1,000 per share. The preferred stock was valued at $4,250 at the time of the acquisition and the discount was accreted over a five-year period using the effective yield method. See also note 18 related to litigation regarding Worthington.

The Company and Worthington entered into a stock redemption agreement, dated December 23, 2003, that provides for 30 monthly redemption payments of $50 each over a three-year period (10 payments each year in 2004, 2005, and 2006) to fully redeem the preferred stock. Each payment redeems 333 (or 334) shares of the 10,000 shares outstanding and results in a gain on redemption of $283. Redemption payments made during 2004 and 2005 resulted in a gain on redemption of redeemable preferred stock of $2,833 in each year,

which is reported in the accompanying consolidated statements of operations. If shares are not redeemed in accordance with the provisions of this agreement, the redemption price remains at $1,000 per share. As part of this agreement, all litigation between the Company and Worthington was settled and dismissed.


(11)	Stockholders’ Equity

The Company’s capital stock consists of Class A and Class B common stock. The Class A and Class B shares have the same rights and preferences, except that the Class B shares guarantee the holders certain special voting rights. The holders of the Class B common stock are ensured that the total votes available to be cast by the holders, when combined with Class A common stock held, will be at least 24% of the votes available to be cast by all holders of common stock.

The board of directors is also authorized to issue one or more series of preferred stock, with the number of shares, dividend rate, voting rights, redemption features, and other rights to be determined by the board of directors.


(12)	Stock Option Plans

In 1998, the Company adopted a stock option plan (the Plan) pursuant to which the Company’s board of directors may grant stock options to officers and key employees. The Plan authorizes grants of options to purchase up to 1,166,896 shares of authorized but unissued Class A common stock. Stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. All stock options under the Plan have ten-year terms and vest and become fully exercisable after three years from the date of grant. At both December 31, 2004 and 2005, there were 327,561 additional shares available for grant under the Plan.

Stock option activity during the periods indicated is as follows:


				Weighted
				Average
	Number of			Exercise
	Shares			Price

Outstanding at December 31, 2002		1,167,871		$	12.290
Issued		712,500			0.166
Exercised		—			—
Forfeited		(1,041,220	)		13.675

Outstanding at December 31, 2003		839,151			0.286
Issued		—			—
Exercised		(163,331	)		0.180
Forfeited		—			—

Outstanding at December 31, 2004		675,820		$	0.311
Issued		—			—
Exercised		(157,000	)		0.159
Forfeited		—			—

Outstanding at December 31, 2005		518,820		$	0.357

The following is summary information about the Company’s stock options outstanding at December 31, 2005:


						Number of
Number of Shares		Exercise Price		Expiration Date		Shares Exercisable

	51,650	$	1.875		February 2011		51,650
	38,334		0.325		June 2012		38,334
	316,336		0.150		February 2013		116,333
	30,000		0.250		April 2013		30,000
	72,500		0.250		August 2013		72,500
	10,000		0.300		November 2013		6,666

	518,820						315,483


(13)	Concentration of Sales

Sales to customers in excess of 10% of total net sales for 2003, 2004, and 2005 are as follows:


		Customer A			Customer B

Years ended:
	December 31, 2003		38	%		50	%
	December 31, 2004		35			52
	December 31, 2005		34			57

Trade accounts receivable with these customers totaled $5,965 and $8,836 at December 31, 2004 and 2005, respectively.


(14)	Employee Participation Plan

The Company’s Employee Participation Plan allows substantially all employees to defer up to 15% of their income through payroll deduction of pre-tax contributions under section 401(k) of the Internal Revenue Code. The Company matches 100% of the first 2%, and 25% of the next 4%, of pre-tax income contributed by each employee. Employees may also make contributions of after-tax income. Additionally, the Company may make discretionary contributions to the plan for the benefit of participating employees. The expense charged to operations related to defined contribution plans was $230, $299, and $517 in 2003, 2004 and 2005, respectively.


(15)	Earnings Per Share

The following reflects the reconciliation of the numerators and denominators of the basic and diluted earnings (loss) available to common shareholders per share computations:


			2003		2004		2005

Numerator:
	Earnings from continuing operations, including accretion of discount on preferred shares		$	541	$	12,766	$	11,726
	Earnings from discontinued operations			85		—		—

		Net earnings available to common shareholders	$	626	$	12,766	$	11,726

Denominator:
	Weighted average common shares outstanding — basic			4,660,547		4,670,374		4,950,819
	Dilutive potential common shares — stock options and warrants			430,300		1,228,647		985,037

		Weighted average common stock outstanding — diluted		5,090,847		5,899,021		5,935,856

Basic earnings per share:
	Earnings from continuing operations		$	0.12	$	2.73	$	2.37
	Earnings from discontinued operations			0.02		—		—

	Earnings available to common shareholders — basic		$	0.14	$	2.73	$	2.37

Diluted earnings per share:
	Earnings from continuing operations		$	0.11	$	2.16	$	1.98
	Earnings from discontinued operations			0.02		—		—

		Earnings available to common shareholders — diluted	$	0.13	$	2.16	$	1.98


(16)	Segment Reporting

Subsequent to the previously reported sale of Mid-Central Plastics, Inc., the Company has only one remaining segment — the contract metal fabrication segment.


(17)	Selected Quarterly Financial Data (Unaudited)

Selected quarterly financial information for 2005 and 2004 is as follows:


		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter		Total Year

2005:
	Net sales	$	54,123	$	53,558	$	43,339	$	45,256	$	196,276
	Gross profit		7,134		7,589		5,430		6,678		26,831
	Operating income		3,595		3,685		1,645		2,071		10,996
	Net earnings available to common shareholders		3,001		2,714		738		5,273		11,726
	Earnings per share of common stock — basic	$	0.62	$	0.54	$	0.15	$	1.06	$	2.37

	Earnings per share of common stock — diluted	$	0.50	$	0.46	$	0.13	$	0.89	$	1.98


		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter		Total Year

2004:
	Net sales	$	39,920	$	50,706	$	46,146	$	48,697	$	185,469
	Gross profit		5,509		6,145		5,318		6,587		23,559
	Operating income		2,168		2,730		1,888		2,372		9,158
	Net earnings available to common shareholders		2,126		2,228		965		7,447		12,766
	Earnings per share of common stock — basic	$	0.46	$	0.48	$	0.20	$	1.59	$	2.73

	Earnings per share of common stock — diluted	$	0.38	$	0.38	$	0.15	$	1.25	$	2.16


(18)	Litigation

On May 1, 2000, Worthington Industries, Inc. (Worthington) filed suit (in the United States District Court for the Southern District of Ohio, Eastern Division (the Court)) against the Company and Morton Custom Plastics, LLC (MCP, LLC) related to MCP, LLC’s 1999 acquisition of the nonautomotive plastics business from Worthington. In connection with the stock redemption agreement described in note 10 above, all litigation between the Company and Worthington was released. An order of dismissal of the Worthington lawsuit against the Company was entered in the Court on January 20, 2004.

The Company is also involved in various other claims and legal actions, including environmental issues, in the normal course of business. Management does not believe the resolution of any such matters will have a material adverse effect on the Company’s financial condition or results of operations.


(19)	Subsequent Event — Entry into a Material Definitive Agreement that Will Take the Company Private

On March 22, 2006, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) under which MMC Precision Merger Corp., a wholly owned subsidiary of MMC Precision Holdings Corp. (“Parent”), will merge with and into the Company, with the Company being the surviving corporation and a direct wholly owned subsidiary of Parent.

This transaction will take the Company private.

The shareholders of Parent will include a private equity fund that is an affiliate of Brazos Private Equity Partners, LLC, which will hold a majority of the shares of Parent, and five current directors or officers of the Company or its subsidiaries. In the merger, each outstanding share of common stock of the Company, other than shares to be contributed to Parent by the current officers or directors concurrently with the closing of the merger, will be converted to the right to receive $10.00 cash per common share.

The merger is subject to several conditions, including approval by the Company’s stockholders, voting together as one class; approval by Company stockholders who are not interested stockholders with respect to the merger transaction; and the receipt of financing and regulatory approval. The Company’s board of directors and a special committee, appointed by the board of directors to represent the non-interested shareholders in the negotiation of the merger, have approved the merger and Merger Agreement.

MORTON INDUSTRIAL GROUP, INC. AND SUBSIDIARIES

Schedule II — Valuation and Qualifying Accounts

Years ended December 31, 2003, 2004 and 2005


		Balance at		Charged to							Balance at
		Beginning		Costs and							End of
Description		of Period		Expenses		Deductions			Other		Period

Allowance for doubtful accounts:
	Year ended December 31, 2003	$	84	$	310	$	(192	)	$	—	$	202
	Year ended December 31, 2004		202		145		(187	)		—		160
	Year ended December 31, 2005		160		394		(362	)		—		192


Item 9A.	*Controls and Procedures*

Evaluation of disclosure controls and procedures. The Company’s principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(c) under the Securities Exchange Act of 1934, as amended), and have concluded that those disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives, and have also concluded that those controls are effective at a reasonable assurance level (as discussed in the following paragraph) as of the end of the period covered by this Form 10-K.

The Company’s management, including its principal executive officer and principal financial officer, does not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control.

Changes in internal controls. There have been no significant changes in the Company’s internal controls over financial reporting that occurred in the fourth quarter of 2005 that may have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None

PART III


Item 10.	*Directors and Executive Officers of the Registrant.*

The age, any position with us, period of service as a director, business experience during the past five years, and directorships in other public companies as of March 31, 2006, for each of our directors are:

William D. Morton, 58, served as Chairman, Chief Executive Officer, President and a director of Morton Metalcraft Co. from 1989 until its merger into Morton Industrial Group, Inc. in 1998. At that time, he became Chairman, Chief Executive Officer, President and a director of Morton Industrial Group, Inc.

Fred W. Broling, 70, is retired as Chairman of the Board and Chief Executive Officer of US Precision Glass Company, a position he held from 1998-2002. He served as Chairman of the Board and Chief Executive Officer of PurTec Corporation and its predecessors from 1993 to 1998. Mr. Broling served as a director of Morton Metalcraft Co. from 1989 until its merger into Morton Industrial Group, Inc. in 1998. At that time, he became a director of Morton Industrial Group, Inc. Mr. Broling is a member of our Audit Committee and our Compensation and Stock Option Committee.

Mark W. Mealy, 48, was a Managing Director of Wachovia Securities, Inc., and its predecessors from 1989 until October 15, 2004. Since leaving Wachovia, Mr. Mealy’s principal occupation is serving as the managing member of Eastover Group, LLC, a firm engaged in the business of making private equity investments. Mr. Mealy served as a director of Morton Metalcraft Co. from 1995 until its merger into Morton Industrial Group, Inc. At that time, he became a director of Morton Industrial Group, Inc. Mr. Mealy is a member of our Audit Committee and our Compensation and Stock Option Committee. Mr. Mealy served as out lead independent director from January 1, 2005, through July 31, 2005. when he resigned from the position. Mr. Mealy is a director of American Reprographics Company, a provider of document management services, where he serves on the company’s Audit Committee.

Audit Committee. We have a two person Audit Committee of our Board of Directors comprised of Mr. Mealy, the Chairman of the committee, and Mr. Broling. The committee’s function is covered by its charter, a copy of which was an exhibit to the Company’s definitive proxy statement for our 2005 annual meeting of shareholders. Our Board of Directors has not determined that either of the two members of the Audit Committee is an “audit committee financial expert” as that term is defined in the rules of the Securities and Exchange Commission. We have not identified and recruited candidates that satisfy Securities and Exchange Commission requirements for that role. Since the two members of the Audit Committee constitute a majority of the Board of Directors, the Board has not determined independently their independence. The Company and the Board of Directors believe, however, that the committee’s members are independent within the meaning of the term under the rules of the Securities and Exchange Commission and within the meaning of NASD Rule 4022 (a) (15).

Nomination of Directors. The Board of Directors does not have a nominating committee for the nomination of directors. The Board believes that the small size of the Board makes it appropriate for all of the directors to consider candidates and designate nominees. The Board of Directors will consider director candidates recommended by shareholders. Shareholders wishing to make a recommendation for the 2007 Annual Meeting should submit them by December 31, 2006, in writing to:


	Morton Industrial Group, Inc.
	1021 West Birchwood
	Morton, Illinois 61550
	Attention: Secretary

The Board of Directors has not established specific or minimum qualifications for nominees and directors. The members of the Board will use subjective processes for evaluating nominees based on the information available to them and their perception of the needs of the Board.

Executive Officers. During 2005, our executive officers were Mr. Morton, Daryl R. Lindemann, and Rodney B. Harrison.

Mr. Lindemann, age 51, has served as our Secretary since January 1998, and as Chief Financial Officer of the Company since June 8, 2004. He served as the Vice President of Finance & Support Services of Morton Metalcraft Co. from July 1, 2001, to June 8, 2004, after serving as its Chief Financial Officer from January 1, 2000, to July 1, 2001. Between September 1, 1998, and January 1, 2000, Mr. Lindemann was our Vice President of Business Development and Acquisitions. From January 1998 to September, 1998, he served as our Vice President of Finance and Treasurer. Mr. Lindemann joined Morton Metalcraft Co. in 1990 as Vice President of Finance, Treasurer, and Secretary.

Mr. Harrison, 54, has served as Vice President of Finance since February 3, 2003. From January 1, 2000, until assuming his present position, Mr. Harrison served as our Director of Finance, and from January 15, 1998, through December 31, 1999, he was a corporate analyst for the Company. Before joining us, Mr. Harrison was the Chief Financial Officer of the ROHN Division of UNR Industries.

Code of Ethics. The Company has adopted a Code of Ethics that applies to all of its employees, officers and directors, including the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics contains written standards that the Company believes are reasonably designed to deter wrongdoing and to promote appropriate corporate citizenship, including, but not limited to:


	•	Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest in business or personal relationships;

	•	Accurate record-keeping and accurate and timely public disclosure and reporting to the Securities and Exchange Commission;

	•	Compliance with applicable governmental laws, rules and regulations;

	•	The prompt internal reporting of illegal behavior or violations of the Code to an appropriate person or persons named in the Code; and


	•	The encouragement of open communications among employees and the adherence by senior officers to the requirements of the Code.

A copy of the Code of Ethics was an exhibit to our definitive proxy statement for our 2005 annual meeting of shareholders. The Company will provide to any person without charge, upon request, a copy of our Code of Ethics. Requests for a copy of the Company’s Code of Ethics should be made to the Secretary at 1021 West Birchwood, Morton, Illinois 61550. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the Code definition enumerated in Securities and Exchange Commission, Regulation S-K, Item 406(b) by posting such information on our Web site at http://www.mortongroup.com within five business days following the date of the amendment or waiver.

Section 16(a) Beneficial Ownership Reporting Compliance. The Company is not aware of any executive officer, director or ten percent shareholder who failed to file on a timely basis any report required to be filed by Section 16(a) of the Securities Exchange Act of 1934 during 2005.


Item 11.	*Executive Compensation*

Summary Compensation Table.


											Long-Term Compensation

											Awards

				Annual Compensation									Securities		Payouts
											Restricted		Underlying
								Other Annual			Stock		Options/		LTIP		All Other
Name and Principal Position		Year		Salary ($)		Bonus ($)		Compensation			Award(s) ($)		SARs (#)		Payouts ($)		Compensation ($)

William D. Morton			2005	$	400,000	$	200,000	$	3,093	(1)		0		0		0	$	9,131	(2)
	Chairman, Chief Executive		2004		380,000		200,000	$	2,785	(3)		0		0		0		5,565	(4)
	Officer And President		2003		360,000		150,000		13,675	(5)		0		0		0		22,280	(6)
Daryl R. Lindemann			2005		165,000		75,000		8,532	(8)		0		0		0		22,033	(9)
	Chief Financial Officer and		2004		160,000		50,000		4,885	(10)		0		0		0		690	(11)
	Secretary(7)		2003		155,000		39,195		6,965	(12)		0		100,000		0		1,050	(13)
Rodney B. Harrison			2005		130,000		36,000		6,748	(15)		0		0		0		580	(16)
	Vice President of Finance(14)		2004		125,000		30,000		1,107	(17)		0		0		0		524	(18)
			2003		120,000		15,000		0			0		20,000		0		690	(19)


	(1)	Represents a tax gross up for imputed income related to a car allowance.

	(2)	Represents a life insurance premium we paid in the amount of $1,290 and $7,841 imputed income related to a car allowance.

	(3)	Represents a tax gross up for imputed income related to a car allowance.

	(4)	Represents a life insurance premium we paid in the amount of $1,290 and $4,275 of imputed income related to a car allowance.

	(5)	Represents (i) a tax gross up in the amount of $9,847 for imputed income related to a split dollar life insurance policy and (ii) a tax gross up in the amount of $3,828 for imputed income related to a car allowance. The parties agreed to terminate the split dollar policy in 2003.

	(6)	Represents (i) a life insurance premium we paid in the amount of $1,290, (ii) imputed income in the amount of $15,114 with regard to split dollar life insurance coverage, and (iii) $5,876 of imputed income related to a car allowance. The parties agreed to terminate the split dollar coverage in 2003.

	(7)	Mr. Lindemann, age 51, has served as our Secretary since January 1998 and as Chief Financial Officer since June 8, 2004. He was our Senior Vice President of Finance & Support Services of Morton Metalcraft Co. from July 1, 2001 to June 8, 2004, after serving as its Chief Financial Officer from January 1, 2000 to July 1, 2001. Between September 1, 1998, and January 1, 2000, Mr. Lindemann was our Vice President of Business Development and Acquisitions. During the rest of 1998 following the

Merger, he served as our Vice President of Finance and Treasurer. He joined Morton Metalcraft Co. in 1990 as Vice President of Finance, Treasurer, and Secretary and held the same positions in Morton before the merger.

(8) Represents payments made under our variable incentive plan.

(9) Represents a $690 life insurance payment we made and a tax gross up of $21,343 for income realized upon termination of an insurance policy.


(10)	Represents payments made under our variable incentive plan.

(11)	Represents a life insurance payment we made.

(12)	Represents (i) a $6,676 payment under our variable incentive plan and (ii) a tax gross up in the amount of $298 for imputed income related to a split dollar life insurance policy. The parties agreed to terminate the split dollar policy in 2003.

(13)	Represents (i) a $450 life insurance premium we paid and (ii) imputed income in the amount of $600 with respect to split dollar life insurance coverage. The parties agreed to terminate the split dollar coverage in 2003.

(14)	Mr. Harrison began serving the indicated position on February 3, 2003

(15)	Represents payments under our variable incentive plan.

(16)	Represents a life insurance premium we paid.

(17)	Represents payments under our variable incentive plan.

(18)	Represents a life insurance premium we paid.

(19)	Represents a life insurance premium we paid.

Compensation of Directors. We paid our directors, other than Mr. Morton, $36,000 each for their services as directors in 2005. We also paid Mr. Mealy $16,000 for his service as chair of our Audit Committee and $11,667 for his service as lead independent director. We did not separately compensate Mr. Morton for his services as a director.

Option Grants in Last Fiscal Year.

We did not grant any options in 2005.

Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option/ SAR Values.

The following table provides information concerning options exercised during the fiscal year ended December 31, 2005, by each of the named executive officers and the value of unexercised options held by such executive officers on December 31, 2005.

Aggregated Option Exercises in Last Fiscal Year

And Fiscal Year-end Options Values


					Number of Securities				Value of Unexercised in-
					Underlying Unexercised				the-Money Options at
					Options/ SARs (#)				December 31, 2005(1) ($)
	Shares Acquired		Value
Name	On Exercise (#)		Realized ($)		Exercisable		Unexercisable		Exercisable		Unexercisable

William D. Morton		—		—		—		—		—		—
Daryl R. Lindemann		33,333	$	194,998		19,167		33,334	$	104,690	$	228,338
Rodney B. Harrison		6,666		38,996		2,500		6,668	$	12,813	$	45,676


(1)	Based upon the per share price of the Class A common stock of $7.00 on the OTC Bulletin Board on December 31, 2005, the last reported transaction in 2005, less the exercise price.

Employment Agreement.

On January 20, 1998, we entered into employment agreements with Mr. Morton and Mr. Lindemann. Mr. Morton’s employment agreement provides that he will serve as our Chairman and Chief Executive Officer for an initial term of ten years and continue thereafter year to year unless and until either party gives the other six months advance written notice of termination of the employment agreement. Mr. Morton’s employment agreement provided for an annual base salary in 1998 in the amount of $280,000 and a minimum increase thereafter of 5% annually.

Under the terms of his employment agreement, Mr. Morton will:


	•	Participate in our incentive compensation plans as in effect from time to time;

	•	Be entitled to certain fringe benefits; and

	•	Participate in all employee benefit, retirement and welfare plans that we maintain and that are applicable generally to our executives,

subject to the generally applicable eligibility and other provisions. Mr. Morton’s employment agreement also contains non-solicitation, confidentiality and non-supply provisions. In the event of the termination of Mr. Morton’s employment:


	•	by us for cause, as defined in his employment agreement;

	•	by him, other than a constructive termination, as defined in his employment agreement; or

	•	due to death or disability, as defined in his employment agreement.

Mr. Morton will receive his base salary and benefits through the date of termination. If we terminate Mr. Morton’s employment for any other reason or if Mr. Morton terminates it due to a constructive termination, we will pay Mr. Morton’s salary, and Mr. Morton will be eligible to continue participation in all medical, dental, hospitalization, disability and life insurance plans, through:


	•	December, 31, 2007, if the termination occurs on or prior to June 30, 2007; or

	•	Six months from the date of termination if the termination occurs after June 30, 2007,

subject to the terms of his employment agreement, including continued compliance with any applicable non-solicitation, confidentiality or non-supply provisions.

Mr. Lindemann’s employment agreement provides for a three year term and continues thereafter year to year unless and until either party gives the other six months advance written notice of termination.

Mr. Lindemann’s employment agreement provides for an annual base salary in 1998 of $95,000, annual raises of not less than $5,000 and an annual bonus in an amount to be determined, based on the attainment of certain performance targets. Mr. Lindemann’s employment agreement entitles him to participate in all employee benefit plans, incentive plans and fringe benefits offered to our employees that are applicable generally to our employees, subject to the generally applicable eligibility and other provisions. Mr. Lindemann’s employment agreement contains non-solicitation, confidentiality and non-supply provisions. Mr. Lindemann’s employment agreement also provides that if his employment is terminated:


	•	by us for cause, as defined in his employment agreement;

	•	by him other than due to a constructive termination, as defined in his employment agreement; or

	•	due to death or disability, as defined in his employment agreement.

Mr. Lindemann will receive his base salary and benefits through the date of termination. If we terminate Mr. Lindemann’s employment without cause, as defined in his employment agreement, or if Mr. Lindemann terminates it due to a constructive termination, as defined in his employment agreement, Mr. Lindemann will receive his base salary, and will continue participation in all of our medical, dental, hospitalization, disability

and life insurance plans, for six months, subject to the terms of the employment agreement, including continued compliance with any applicable non-solicitation, confidentiality or non-supply provisions.

Stock Performance Graph.

The following graph compares the yearly percentage change in the cumulative total shareholder return on the Corporation’s common stock during the five years ended December 31, 2005, with the cumulative total return on the Nasdaq Stock Market and on Nasdaq non-financial stocks. The Comparison assumes $100 was invested on December 31, 2000, in the Company’s publicly traded common stock and in each of the two indices and assumes the reinvestment of dividends.

Compensation Committee Interlocks and Insider Participation.

Mr. Fred Broling and Mr. Mark Mealy served on the Compensation and Stock Option Committee of the Board of Directors during 2005. Neither is or has served as a Company officer. No officer or director of the Company serves or has served on a compensation committee of an employer of Mr. Broling or Mr. Mealy.

Report on Executive Compensation by Representatives

Of the Compensation and Stock Option Committees

This Report of the Compensation and Stock Option Committee covers the following topics:


	•	The role of the Committee in the Company’s executive compensation program

	•	Executive compensation principles

	•	Components of the compensation program

	•	Compensation of the Chief Executive Officer

	•	Role of the Compensation and Stock Option Committee

Role of the Compensation and Stock Option Committee

During 2005, two non-employee directors served on the Committee: Mr. Broling and Mr. Mealy. The Committee reviews overall compensation principles annually. This review includes each element described below and an assessment of the overall effectiveness of the program. The Committee examines, establishes, and modifies the individual compensation levels of the Company’s executive officers. The Committee also administers the Company’s stock option plan and awards options under it.

Executive Compensation Principles

The Company’s compensation program is intended to motivate and retain the key talent it needs to be a market leader in its industry. The Committee’s primary goal is to develop and administer a compensation program that will support the Company’s strategy of pursuing growth through manufacturing excellence, customer satisfaction, acquisitions, and internal growth. Guiding our development of the compensation program is the desire to obtain superior short term performance from the Company’s executive officers by aligning their cash compensation with the annual performance of the Company. We also seek to foster the long-term development of the Company and growth in shareholder value through the award of stock options.

Components of the Compensation Program

The Components of our compensation program are:


	•	Base salary

	•	Short term bonus and other incentives

	•	Long term incentives


1.	Base Salary

Base salaries for our executive officers other than the Chief Executive Officer are based upon amounts set in employment agreements or terms of employment and increases of $5,000 each year. The base salary amounts are those that we, with the advice of the Chief Executive Officer, believe are sufficient to attract and retain qualified persons.


2.	Short Term Bonus an Other Incentives

We will use the annual bonus component of incentive compensation to align our executive officers’ pay with short-term (annual) performance of the Company. We will also use bonus payments to recognize and encourage outstanding individual performance. We intend to set Company performance targets and individual performance goals that will guide us in determining the amount of the bonuses. In 1998 we implemented a special compensation program under which our executive officers will receive monthly, quarterly or annual bonuses based on the Company’s EBITDA performance (earnings before interest, taxes, depreciation, and amortization) which must be in excess of 95% of the Company’s EBITDA target for the year. The Company paid bonuses aggregating $311,000 for 2005. See the Summary Compensation Table for additional information. We plan to continue this program in 2006.

Our executive officers other than the Chief Executive Officer also participate in the Company-wide variable incentive plan. Under this plan most of the Company’s employees receive payments based upon the Company’s attaining monthly performance goals.


3.	Long Term Incentives: Stock Options

We use grants under the Company’s stock option plan to strengthen the linkage between executive compensation and shareholder return, provide additional incentives to executive officers tied to the growth of the stock price over time, and encourage continued employment with the Company and its subsidiaries. The options generally have a term of ten years and become exercisable over three years and the exercise price is the market price for the Company’s Class A common stock on the date of the option grant. We will base option awards on the individual executive officer’s scope of responsibility, the Company’s performance, and our subjective evaluation of the individual’s performance. We will not attach specific weight to these factors. We may also assist management in attracting new officers by including options in the compensation package that the Company offers.

In 2005, we did not grant any options to our executive officers.

Compensation of the Chief Executive Officer

In 2005, the Company’s most highly compensated executive officer was William D. Morton, the Company’s Chairman, Chief Executive Officer, and President. Mr. Morton and the Company entered into an employment agreement on January 20, 1998, that set his base compensation for 1998 at $280,000. That base amount increases a minimum 5% per year during the term of the contract. For 2005, the increase over 2004 was 5.3%. We review Mr. Morton’s contract annually for potential cost of living and performance adjustments. We have not made any such adjustments since the inception of the contract. For 2005, we granted Mr. Morton a bonus of $200,000 based upon his leadership of the Company during a year of improved economic performance.

Unlike all other employees, Mr. Morton does not participate in the Company’s variable incentive plan, and we did not grant any options to him in 2005.

Respectfully submitted,

Fred W. Broling

Mark W. Mealy


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

The following sets forth certain information regarding the beneficial ownership of our Class A common stock, par value $.01 per share, and Class B common stock, par value $.01 per share (the Class A common stock and the Class B common stock are referred to as the “common stock”), as of April 14, 2006, by (i) all our shareholders who are known by us who own more than 5% of our common stock, (ii) each director who is a shareholder, (iii) our executive officers who are shareholders, and (iv) all directors and executive officers as a group, as determined in accordance with Rule 13(d) under the Securities Exchange Act of 1934. William D. Morton, our Chairman, President and Chief Executive Officer, currently has the ability to cast 72.2% of our shareholder votes on most matters. The address for each of our directors and executive officers is 1021 West Birchwood, Morton, Illinois 61550.


				Percentage of Beneficial
	Amount and Nature of			Ownership of Class A
Name and Address of Beneficial Owner	Beneficial Ownership(1)			Common Stock(1)

William D. Morton		3,798,851	(2)(3)		69.0	%
Mark W. Mealy		1,259,146	(3)(4)		25.5	%
Fred W. Broling		276,673	(5)		5.4	%
Rodney B. Harrison		23,700	(6)		*
Daryl R. Lindemann		168,697	(7)		3.4	%
Tontine Capital Partners, L.P. and Affiliates(8)		293,800			6.0	%
All directors and executive officers as a Group (5 persons)		3,798,851			69.0	%


	*	less than 1%

(1)

For the purposes of the computation of percentages of our common stock presented in this table and under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or direct the voting of such security, or “investment power,” which includes the power to dispose of or direct the disposition of such security. A holder is also deemed to beneficially own all shares that the holder may acquire upon the exercise of options or other rights exercisable within 60 days. Such shares that the holder may acquire (but no shares that any other holder may acquire upon the exercise of options held by such other holder) are deemed to be outstanding. Under these rules, more than one person may be deemed a beneficial owner of the same

securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

(2) Mr. Morton is the holder of record of, and he has sole voting power with respect to, 1,253,990 shares of issued and outstanding Class A common stock and 100,000 shares of issued and outstanding Class B common stock. His directly owned Class A and Class B shares constitute 27.2% of the issued and outstanding common stock and 31.0% of the voting power of the issued and outstanding common stock. Included in Mr. Morton’s beneficial ownership set out in the table are (i) the issued and outstanding shares he directly owns, (ii) the 1,921,584 issued and outstanding Class A shares described in note 3 that are subject to the Mealy shareholders agreement or the 1998 voting agreement, (iii) 515,487 outstanding options exercisable within 60 days of April 14, 2006, each of which will be subject to the 1998 voting agreement if exercised or issued, and (iv) 7,790 shares issuable under the Directors’ Plan, each of which will be subject to the 1998 voting agreement if issued. These beneficially owned shares would constitute 70.5% of the total voting power of the common stock if all options were exercised and 7,790 shares were issued under the directors’ plan identified in clause (iv).


	One hundred thousand (100,000) of Mr. Morton’s directly owned shares are Class B common stock. The remainder of his directly owned shares are shares of Class A common stock. Based on the number of shares outstanding as of the record date, each share of Class B common stock will have 3.72909 votes at the special meeting.

(3)

As discussed in this note, Mr. Morton has beneficial but not record ownership of 1,921,584 shares or 38.6% of the issued and outstanding shares of common stock (with 36.6% of the voting power on most issues) by virtue of certain proxies granted to him. He has shared voting power with respect to 1,021,678 of those issued and outstanding shares (pursuant to the Mealy shareholders agreement) and sole voting power with respect to the remaining 899,906 shares pursuant to the 1998 voting agreement. In connection with the merger, Mr. Morton does not have the power to vote the group of 1,021,678 shares subject to the Mealy shareholders agreement and he has waived his right to vote the group of 899,906 shares subject to the 1998 voting agreement.


	On August 27, 2003, Mr. Mealy, a director of the Company, acquired all of the Class A and Class B common stock owned by Three Cities Holdings Limited and its affiliates. As a result of the purchase, Mr. Mealy’s Class B shares automatically converted to shares of Class A common stock with one vote per share, and Mr. Mealy acquired a total of 1,021,678 shares of Class A common stock in the transaction. Mr. Morton and Mr. Mealy have shared voting power with respect to 985,678 of these shares. In March 2004, Mr. Mealy made gifts, using 36,000 shares of Class A common stock, to certain family members. Mr. Mealy transferred 1,020,678 shares of Class A common stock on December 16, 2004, and 38,333 shares of Class A common stock on, January 7, 2005, to Eastover Group LLC, a limited liability company of which he is the controlling member and sole manager. 985,678 of these shares (together with the 36,000 shares held by Mr. Mealy’s family members) remain subject to the Mealy shareholders agreement, and the remaining 176,906 shares, 56,667 options exercisable within 60 days and 3,895 shares of Class A common stock issuable under the Directors’ Plan held by Mr. Mealy are subject to the 1998 voting agreement. Eastover Group LLC’s address is 4201 Congress Street, Suite 160, Charlotte, North Carolina 28209.

	The shares of Class A common stock and Class B common stock held by Mr. Morton and Mr. Mealy are subject to certain transferability and conversion restrictions pursuant to the Mealy shareholders agreement. In the case of a merger, Mr. Mealy and Eastover have the ability to vote the 1,021,678 shares subject to the Mealy shareholders agreement. In connection with the merger, Mr. Morton has waived his right to vote Mr. Mealy’s shares of Class A common stock and shares of Class A common stock issuable upon the exercise of options held by Mr. Mealy subject to the 1998 voting agreement.

(4)

Included in this group are 985,678 shares of Class A common stock owned by Eastover Group LLC of which Mr. Mealy has shared voting and shared dispositive powers, 176,906 shares of Class A common stock owned directly and of which he has shared voting and shared dispositive powers, 56,667 exercisable options of which he has shared voting and shared dispositive powers, 36,000 shares of Class A common stock owned by Mr. Mealy’s family members over which Mr. Mealy has voting power but no dispositive

power, and 3,895 shares of Class A common stock issuable under the Director’s Plan, of which he has shared voting and shared dispositive powers when issued.

(5) Consists of 177,778 shares of Class A common stock, 95,000 options exercisable within 60 days and 3,895 shares of Class A common stock issuable under the Directors’ Plan, all of which are subject to the 1998 voting agreement as to which Mr. Morton has waived his voting rights in connection with the merger.

(6) Consists of 14,532 shares of Class A common stock and options exercisable within 60 days for 9,168 shares, all of which are subject to the 1998 voting agreement as to which Mr. Morton has waived his voting rights in connection with the merger.

(7) Consists of 116,196 shares of Class A common stock and options exercisable within 60 days for 52,501 shares, all of which are subject to the 1998 voting agreement as to which Mr. Morton has waived his voting rights in connection with the merger.

(8) On a schedule 13G filed November 19, 2004, Tontine Capital Partners, L.P., Tontine Capital Management, L.L.C., Tontine Overseas Associates, L.L.C., and Jeffrey L. Gendell (collectively “Tontine”) reported beneficial ownership of an aggregate of 268,800 shares of our Class A common stock. The address of the three entities and individual is 55 Railroad Avenue, 3rd Floor, Greenwich, Connecticut 06830. The Schedule 13G states that these beneficial owners had shared voting and dispositive powers. Mr. Morton does not have any voting power with respect to these securities. The Company’s stock records showed Tontine’s total ownership at 293,800 shares of Class A common stock on April 15, 2005.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table shows information as of December 31, 2005, about our equity compensation plans.

Number of Securities

Remaining Available

to be Issued

Weighted Average

for Future Issuance

Upon Exercise of

Exercise Price of

Under Equity Compensation

Outstanding Options,

Outstanding Options

Plans (Excluding Securities

Warrants and Rights

Reflected in Column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

518,820

327,561

Equity compensation plans not approved by security holders

15,580

—

Total

534,400

327,561

Our Non-Employee Directors Compensation Plans, adopted in 1998 without shareholder approval, reserved a small number of shares for issuance to our non-employee directors annually. Each such director was to receive a grant to receive $30,000 of shares per year (valued at the date of grant), with the shares to be issued when the director ceased to serve as a director or attained age 70. We granted each director rights to receive 3,895 shares for 1999, and we have not granted any additional rights since then. No shares have been issued under this plan.

Subsequent Change of Control

On March 23, 2006, the Company announced its entry into a definitive merger agreement (“Merger Agreement”) dated as of March 22, 2006 that will take the Company private. The Merger Agreement and related agreements are described on Form 8-K filed with the Securities and Exchange Commission on March 23, 2006 and on Form 8-K/A filed with the Securities and Exchange Commission on March 29, 2006. Additional information related to the Merger Agreement will be included in a Schedule 14A and Schedule 13E-3 to be filed with the Securities and Exchange Commission.


Item 13.	*Certain Relationships and Related Transactions*

Certain Relationships and Related Transactions


	*Shareholders’ Agreement*

Mr. Morton, Mr. Mealy and Eastover Group, L.L.C. (“Eastover”, a limited liability company in which Mr. Mealy is the managing member) are parties to a shareholders’ agreement that was originally among Mr. Morton and Three Cities Holdings Limited and certain of its affiliates. Under the shareholders’ agreement, Mr. Mealy, Eastover, and three donees of Mr. Mealy as successors to Three Cities Holdings Limited and its and its affiliates, have granted Mr. Morton a proxy to vote all of the Class A common stock and all of the Class B common stock owned by either of them. Mr. Morton’s proxy covers all matters to be voted upon by our shareholders except:


	•	the liquidation of our company;

	•	any sale of all, or substantially all, of our assets; or

	•	any merger or consolidation involving our company if immediately thereafter, our shareholders (including Mr. Morton) do not hold the power to vote at least 60% of the votes entitled to elect the directors of the company surviving such merger or consolidation.

In the event that:


	•	Mr. Mealy and Eastover are entitled to vote for any such sale, merger or consolidation described immediately above;

	•	Mr. Mealy and Eastover fail to vote in favor of such transaction; and

	•	The transaction is not approved by our shareholders;

Mr. Morton may elect to cause Mr. Mealy and Eastover to purchase all (but not less than all) of the Class A common stock and Class B common stock then owned by Mr. Morton and his affiliates for a purchase price equal to fair market value of the assets he would have received in such proposed transaction. If Mr. Morton would have retained any stock in the proposed transaction, then the purchase price for such stock will be equal to the fair market value of such stock.

Mr. Morton’s proxy will terminate upon the earliest of the following dates or events:


	•	January 20, 2008;

	•	Mr. Morton’s death or disability, as defined in his employment agreement;

	•	termination of Mr. Morton’s employment with us, other than a constructive termination, as defined in his employment agreement;

	•	termination of Mr. Morton’s employment by us for cause as defined in his employment agreement; or

	•	if Mr. Morton’s ownership of Class A common stock falls below 1,096,425 shares, including for this purpose shares issuable upon conversion or exercise, as adjusted to reflect stock splits.

The shareholders’ agreement also includes the following restriction on transfers of our stock:


	•	Mr. Mealy, Eastover, Mr. Morton and certain of their respective affiliates will not purchase additional shares of Class A common stock or Class B common stock without the approval of both the other party and our Board of Directors.

This limitation does not apply to the purchase of shares by Mr. Morton and certain of his affiliates pursuant to options that may be issued to Mr. Morton pursuant to our 1997 Stock Option Plan.

The shareholders’ agreement also contains the following restrictions on transfers of Class A common stock; none of Mr. Mealy, Eastover, or Mr. Morton or certain of their respective affiliates can transfer any shares of Class A common stock without complying with the following procedure and requirements:


	•	prior to making any such transfer, Mr. Mealy, Eastover, Mr. Morton and certain of the respective affiliates must give notice to the other group of its intention to make such sale and state the amount of shares proposed to be transferred;

	•	if the recipient of the transfer notice does not notify the sender of the transfer notice of its intention to also sell shares of Class A common stock, the sender of the transfer notice can sell such shares in an amount up to a number agreed to by the parties pursuant to the shareholders’ agreement; and

	•	if the recipient of the transfer notice notifies the sender of the transfer notice that it also intends to transfer shares of Class A common stock, both groups can transfer Class A common stock up to each group’s respective agreed upon number.

Any transfers made pursuant to this provision must be concluded within 60 days of the date that the transfer notice is provided. The parties to the shareholders’ agreement agreed that the limitation on the number of shares either group could sell would be calculated as follows:


	•	if the maximum sale number (which equals the number of shares of Class A common stock that can be sold without causing a “change in ownership,” as defined in section 283 of the Internal Revenue Code of 1986, as amended) is less than the number of shares of Class A common stock owned by Mr. Mealy, Eastover and certain of his affiliates and Mr. Morton and certain of his affiliates, each group shall be permitted to sell a number of shares equal to its pro rata share of the maximum sale number, based upon each group’s ownership of the outstanding number of shares of Class A common stock at the time;

	•	if the maximum sale number is greater than the number of shares of Class A common stock owned by Mr. Mealy, Eastover and certain of his affiliates and Mr. Morton and certain of his affiliates, in the case of Mr. Mealy, Eastover and certain of his affiliates, the number of shares they can sell equals the number of shares of Class A common stock owned by them at such time; and in the case of Mr. Morton and certain of his affiliates, the number of shares they can sell equals the maximum sale number minus the number of shares of Class A common stock owned by them at such time.

For purposes of any calculation made under these provisions, the number of shares of Class A common stock owned by Mr. Morton and certain of his affiliates is deemed to be 388,990 shares less any such shares sold by Mr. Morton and certain of his affiliates after the effectiveness of the Merger but not less than zero. The permitted number for Mr. Morton and certain of his affiliates may exceed 388,990 under this calculation.

Voting Agreement

Commencing on January 20, 1998, and at later dates Mr. Morton entered into voting agreements with certain directors and current and former officers of our Company and our subsidiaries, and an individual who acquired shares of Class A common stock from Mr. Morton. This group currently includes Mr. Broling, Mr. Mealy, Mr. Lindemann, Mr. Harrison and all officers of our Company and of our subsidiaries who own shares of Class A common stock or hold options to purchase Class A common stock, as well as several officers who have left the employment of the Company, the three donees and one individual. Under the voting agreement, these individuals granted Mr. Morton an irrevocable proxy to vote their shares of Class A common stock (including shares subsequently obtained upon the exercise of options) on all matters presented to our shareholders for a vote. We expect that future options granted to our officers and officers of our subsidiaries will be subject to this voting agreement. The proxy terminates upon the earliest of:


	•	January 20, 2008;

	•	Mr. Morton’s death or disability, as defined in his employment agreement;


	•	Mr. Morton’s terminating his employment with us, other than a constructive termination, as defined in his employment agreement; or

	•	our termination of Mr. Morton’s employment for cause, as defined in his employment agreement.

As of March 31, 2006, the voting agreement applies to 897,906 outstanding shares of Class A common stock, options to purchase 518,820 shares of Class A common stock, of which 515,486 are exercisable or become exercisable within 60 days of March 31, 2006, and 7,790 Director Shares. Mr. Morton has waived the application of the Voting Agreement in the vote on the merger described in Item 12 under the heading “Subsequent Change of Control.”


Item 14.	*Principal Accountant Fees and Services*

Audit Fees

KPMG LLP, the Company’s independent registered public accounting firm in 2005 and 2004, billed the Company aggregate fees of approximately $429,000 and $432,000 for professional services provided in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2005 and 2004 respectively, and for reviews of the financial information included in the Company’s quarterly reports on Form 10-Q for the first three quarters of these fiscal years.

Audit-Related Fees

During the fiscal years ended December 31, 2005, and 2004, KPMG did not bill the Company for any audit-related services. Audit-related fees are those that are reasonably related to the performance of the audit or review of our financial statements that are not included in the audit fees disclosed above.

Tax Fees

KPMG billed the Company aggregate fees of $45,000 and $42,000 for tax services provided in the fiscal years ended December 31, 2005 and 2004, respectively. These fees resulted primarily from the preparation of the Company’s tax returns for the fiscal years ended December 31, 2004 and 2003, and assistance with sales tax recoveries and advice about employee payroll tax matters. The Audit Committee of the Board of Directors considered these activities to be compatible with the maintenance of KPMG’s independence.

All Other Fees (Including Financial Information Systems Design and Implementation Fees)

During the fiscal years ended December 31, 2005 and 2004, the Company did not engage KPMG to perform any services other than the audit, audit-related, and tax services described above.

The Audit Committee approves any engagement of auditors in advance of the engagement.

Report of the Audit Committee of the Board of Directors

The Audit Committee of the Board has two members, each of whom the Company and the Board of Directors believe is “independent” as NASD Rule 4200(a)(14) defines such term. The Committee is responsible for providing independent, objective oversight of the Company’s accounting functions and internal controls. The Audit Committee operates under a written charter that was approved by the Board of Directors. A copy of the charter was attached to our proxy statement for our 2005 annual meeting.

Management is responsible for the Company’s internal controls and financial reporting process. The independent accountants are responsible for performing an independent audit and expressing an opinion on the conformity of the Company’s consolidated financial statements with generally accepted accounting principles.

In connection with these responsibilities, the Audit Committee met with the Company’s management and independent accountants to review and discuss the Company’s December 31, 2005 financial statements. The Audit Committee also discussed with the independent accountants the matters required by Statement on Auditing Standards No. 61 (Communications with Audit Committees). The Audit Committee received written disclosures from the independent accountants required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with the independent accountants that firm’s independence.

Based on the Audit Committee’s review and discussions with management and the independent accountants discussed above, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission.

Respectfully submitted,

Fred W. Broling

Mark W. Mealy

PART IV


Item 15.	*Exhibits, Financial Statement Schedules, and Reports on Form 8-K.*

(a) The following documents are filed as a part of this report:


	1. Financial Statements.

	The following financial statements of the Company are included in Item 8:


	a. Report of KPMG LLP, Independent Registered Public Accounting Firm

	b. Consolidated Balance Sheets as of December 31, 2004 and 2005


	c. Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005

	d. Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2003, 2004 and 2005

	e. Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005


	f. Notes to Consolidated Financial Statements


	2. Financial Statement Schedules


	The following financial statement schedule of the Company is included in Item 8:


	Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2003, 2004 and 2005


				Filed
		Exhibit Number and Document Title	Incorporated by Reference to	Herewith

2.1 and 10.1	—	Agreement and Plan of Merger Between MLX Corp. and Morton Metalcraft Holding Co., dated as of October 20, 1997	Annex B to the Definitive Proxy Statement on Schedule 14A filed by MLX Corp. with the Securities and Exchange Commission (“SEC”) on January 6, 1998.
2.2 and 10.2	—	Securities Purchase Agreement Among MLX Corp. and Security Holders of Morton Metalcraft Holding Co., dated as of October 20, 1997	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
2.3 and 10.65	—	Agreement and Plan of Merger among Morton Industrial Group, Inc., MMC Precision Holdings Corp. and MMC Precision Merger Corp. dated as of March 22, 2006	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 8-K filed with the SEC on March 23, 2006
3.1 and 4.1	—	Articles of Incorporation of the registrant as Amended prior to January 20, 1998	MLX Corp. Form 10-Q for the quarter ended June 30, 1993 Exhibit 3 to Morton Industrial Group, Inc.
3.2 and 4.2	—	Articles of Amendment to Articles of Incorporation of the Registrant Effective January 20, 1998	Report on Form 8-K filed with the SEC on February 4, 1998
3.2 and 4.2	—	Bylaws of the Registrant, as Amended	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.7	—	Limited Indemnification Agreement dated as of October 20, 1997, among MLX Corp., William D.Morton, and Other Morton Metalcraft Shareholders and Option Holders	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.10	—	Lease between Agracel, Inc., and Morton Metalcraft Co. dated November 6, 1996.	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.11	—	Employment Agreement dated as of January 20, 1998, between the Registrant and William D. Morton	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.12	—	Employment Agreement dated as of January 20, 1998, between the Registrant and Daryl R. Lindemann	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.13	—	MLX Corp. 1997 Stock Option Plan	Appendix C to the Definitive Proxy Statement on Schedule 14A filed by MLX Corp. with the SEC on January 6, 1998.


				Filed
		Exhibit Number and Document Title	Incorporated by Reference to	Herewith

10.14	—	MLX Corp. 1995 Stock Option Plan	MLX Corp. Definitive Proxy Statement on Schedule 14A for the 1995 Annual Meeting of Stockholders
10.15	—	Master Lease Agreement between Morton Metalcraft Co. and General Electric Capital Corporation dated August 7, 1996	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.16	—	Guaranty of Master Lease Agreement by Morton Metalcraft Holding Co., dated August 7, 1996	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.23	—	Death Benefit Agreement between Morton Metalcraft Co. and William D. Morton	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.24	—	Salary Continuation Agreement between Morton Metalcraft Co. and William D. Morton dated February 26, 1996.	Morton Industrial Group, Inc. Form 10-K for the year ended December 31, 1997
10.26	—	Stock Purchase Agreement among the Company, Joseph T. Buie, Jr., and Ernest J. Butler, dated April 8, 1998.	Exhibit 10.2 to Morton Industrial Group, Inc. Report on Form 8-K filed with the SEC on April 14, 1998
10.27	—	Non-negotiable Promissory Note (subordinated) of the Company, Joseph T. Buie, Jr., dated April 8, 1998.	Exhibit 10.3 to Morton Industrial Group, Inc. Report on Form 8-K filed with the SEC on April 14, 1998
10.28	—	Non-negotiable Promissory Note (subordinated) of the Company to Ernest. J. Butler, dated April 8, 1998.	Exhibit 10.4 to Morton Industrial Group, Inc. Report on Form 8-K filed with the SEC on April 14, 1998
10.41	—	Amended and Restated Agreement with Harris Trust and Savings Bank, As Agent	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on April 1, 2002
10.42	—	First Amendment to Amended and Restated Agreement with Harris Trust and Savings Bank, As Agent	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2003
10.43	—	Second Amendment to Amended and Restated Agreement with Harris Trust and Savings Bank, As Agent	Exhibit 99.2 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2003
10.44	—	Third Amendment to Amended and Restated Agreement with Harris Trust and Savings Bank, As Agent	Exhibit 99.3 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2003
10.45	—	Asset Purchase Agreement between Morton Custom Plastics, LLC and Wilbert, Inc.	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 10-Q filed with SEC on November 4, 2002
10.47	—	Fourth Amendment to Amended and Restated Credit Agreement with Harris Trust & Savings Bank, As Agent	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 10-Q filed with SEC on August 11, 2003.


				Filed
		Exhibit Number and Document Title	Incorporated by Reference to	Herewith

10.48	—	Fifth Amendment to Amended and Restated Credit Agreement with Harris Trust & Savings Bank, As Agent	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 8-K filed with SEC on December 29, 2003.
10.49	—	Sixth Amendment to Amended and Restated Credit Agreement with Harris Trust & Savings Bank, As Agent	Exhibit 10.49 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 30, 2004
10.50	—	Second Amended and Restated Credit Agreement	Exhibit 10.50 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 30, 2004
10.51	—	Note and Warrant Purchase Agreement	Exhibit 10.51 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 30, 2004
10.52	—	Settlement Agreement	Exhibit 99.2 to Morton Industrial Group, Inc. Report on Form 8-K filed with SEC on December 29, 2003.
10.53	—	Stock Redemption Agreement	Exhibit 99.3 to Morton Industrial Group, Inc. Report on Form 8-K filed with SEC on December 29, 2003.
10.54	—	Agreement with Innovative Injection Technologies, Inc.	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 8-K/A filed with SEC on July 7, 2003.
10.55	—	First Amendment to Agreement with Innovative Injection Technologies, Inc.	Exhibit 99.2 to Morton Industrial Group, Inc. Report on Form 8-K/A filed with SEC on July 7, 2003.
10.56	—	Investor Rights Agreement	Exhibit 10.56 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 30, 2004
10.57	—	First Amendment to the Second Amended and Restated Credit Agreement	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 10-Q filed with SEC on August 6, 2004
10.58	—	Amended and Restated Note and Warrant Purchase Agreement	Exhibit 99.2 to Morton Industrial Group, Inc. Report on Form 10-Q filed with SEC on August 6, 2004
10.59	—	Amendment to By-Laws	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 8-K filed with SEC on December 14, 2004
10.60	—	Second Amendment to Second Amended and Restated Credit Agreement	Exhibit 10.60 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2006
10.61	—	First Amendment to Amended and Restated Note and Warrant Purchase Agreement	Exhibit 10.61 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2006
10.62	—	Third Amendment to Second Amended and Restated Credit Agreement	Exhibit 10.62 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2006


				Filed
		Exhibit Number and Document Title	Incorporated by Reference to	Herewith

10.63	—	Fourth Amendment to Amended and Restated Credit Agreement	Exhibit 10.63 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2006
10.64	—	Second Amendment to Amended and Restated Note and Warrant Purchase Agreement	Exhibit 10.64 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2006
10.65	—	Agreement and Plan of Merger among Morton Industrial Group, Inc., MMC Precision Holdings Corp. and MMC Precision Merger Corp. dated as of March 22, 2006	Exhibit 99.1 to Morton Industrial Group, Inc. Report on Form 8-K filed with the SEC on March 23, 2006
13	—	Annual Report	Exhibit 13 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2006
16.2	—	Letter re: change in certifying accountant	Exhibit 16.1 to Morton Industrial Group, Inc. Report on Form 8-K filed with the SEC on February 18, 1999
21.1	—	Subsidiaries of Registrant	Exhibit 21.1 to Morton Industrial Group, Inc. Report on Form 10-K filed with SEC on March 31, 2006
23.1	—	Consent of independent registered public accounting firm		X
31.1	—	Certification pursuant to 18 U.S.C. Section 1350, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		X
31.2	—	Certification pursuant to 18 U.S.C. Section 1350, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		X
32.1	—	Certification pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		X

(b) Reports on Form 8-K

Form 8-K was filed on November 15, 2005 related to the Company’s earnings release for the quarterly period ended October 1, 2005.

Form 8-K was filed on March 23, 2006 related to the Company’s entry into an Agreement and Plan of Merger.

Form 8-K/A was filed on March 29, 2006 related to a Contribution Agreement, Voting and Support Agreements and a Waiver of Voting Agreement related to the Agreement and Plan of Merger.

Form 8-K was filed on March 31, 2006 related to the Company’s earnings release for the year and quarterly period ended December 31, 2005.

Form 8-K was filed on April 4, 2006 describing a complaint filed in the Superior Court of Fulton County, Georgia against Morton Industrial Group, Inc., the members of the Company’s board of directors and others.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	MORTON INDUSTRIAL GROUP, INC.


	By:	/s/ WILLIAM D. MORTON



	William D. Morton
	Chairman, Chief Executive Officer and President

Dated: June 7, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.


Name	Title	Date


/s/ WILLIAM D. MORTON William D. Morton	Chairman, Chief Executive Officer and President	June 7, 2006

/s/ DARYL R. LINDEMANN Daryl R. Lindemann	Chief Financial Officer, Secretary and Principal Accounting Officer	June 7, 2006

/s/ FRED W. BROLING Fred W. Broling	Director	June 7, 2006

/s/ MARK W. MEALY Mark W. Mealy	Director	June 7, 2006

SHAREHOLDER INFORMATION

CORPORATE OFFICES

Morton Industrial Group, Inc.

1021 W. Birchwood

Morton, Illinois 61550-0429

Phone: 309-266-7176 Fax: 309-263-1841

INVESTOR INFORMATION

Shareholders and prospective investors are welcome to call or write with questions or requests for additional information. Please direct inquiries to Van Negris at:

Van Negris & Company, Inc.

1120 Avenue of the Americas,

Suite 4100

New York, New York 10036

Telephone: 212-759-0290

E-mail: info@vnegris.com

FORM 10-K

A copy of Form 10-K, the Annual Report which the Company is required to file with the Securities and Exchange Commission, is available without charge upon request to the Company at the above address.

STOCK TRANSFER AGENT AND REGISTRAR

For inquiries about stock transfers or address changes, shareholders may contact:

American Stock Transfer & Trust Co.

59 Maiden Lane

New York, NY 10038

Phone: 800-937-5449

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

KPMG LLP

Indianapolis, Indiana

STOCK MARKET INFORMATION

The common stock of Morton Industrial Group, Inc. is traded on the OTC Market under the ticker symbol MGRP.OB.

BOARD OF DIRECTORS

William D. Morton

Chairman, Chief Executive Officer and President

Morton Industrial Group, Inc.

Fred W. Broling

Retired President and CEO

US Precision Glass

Mark W. Mealy

Managing Member

Eastover Group LLC

CORPORATE OFFICERS

William D. Morton

Chairman, Chief Executive Officer and President

Daryl R. Lindemann

Chief Financial Officer and Secretary

Rodney B. Harrison

Vice President of Finance and Treasurer


		Merger, he served as our Vice President of Finance and Treasurer. He joined Morton Metalcraft Co. in 1990 as Vice President of Finance, Treasurer, and Secretary and held the same positions in Morton before the merger.

	(8)	Represents payments made under our variable incentive plan.

	(9)	Represents a $690 life insurance payment we made and a tax gross up of $21,343 for income realized upon termination of an insurance policy.


	securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

(2)	Mr. Morton is the holder of record of, and he has sole voting power with respect to, 1,253,990 shares of issued and outstanding Class A common stock and 100,000 shares of issued and outstanding Class B common stock. His directly owned Class A and Class B shares constitute 27.2% of the issued and outstanding common stock and 31.0% of the voting power of the issued and outstanding common stock. Included in Mr. Morton’s beneficial ownership set out in the table are (i) the issued and outstanding shares he directly owns, (ii) the 1,921,584 issued and outstanding Class A shares described in note 3 that are subject to the Mealy shareholders agreement or the 1998 voting agreement, (iii) 515,487 outstanding options exercisable within 60 days of April 14, 2006, each of which will be subject to the 1998 voting agreement if exercised or issued, and (iv) 7,790 shares issuable under the Directors’ Plan, each of which will be subject to the 1998 voting agreement if issued. These beneficially owned shares would constitute 70.5% of the total voting power of the common stock if all options were exercised and 7,790 shares were issued under the directors’ plan identified in clause (iv).


	power, and 3,895 shares of Class A common stock issuable under the Director’s Plan, of which he has shared voting and shared dispositive powers when issued.

(5)	Consists of 177,778 shares of Class A common stock, 95,000 options exercisable within 60 days and 3,895 shares of Class A common stock issuable under the Directors’ Plan, all of which are subject to the 1998 voting agreement as to which Mr. Morton has waived his voting rights in connection with the merger.

(6)	Consists of 14,532 shares of Class A common stock and options exercisable within 60 days for 9,168 shares, all of which are subject to the 1998 voting agreement as to which Mr. Morton has waived his voting rights in connection with the merger.

(7)	Consists of 116,196 shares of Class A common stock and options exercisable within 60 days for 52,501 shares, all of which are subject to the 1998 voting agreement as to which Mr. Morton has waived his voting rights in connection with the merger.

(8)	On a schedule 13G filed November 19, 2004, Tontine Capital Partners, L.P., Tontine Capital Management, L.L.C., Tontine Overseas Associates, L.L.C., and Jeffrey L. Gendell (collectively “Tontine”) reported beneficial ownership of an aggregate of 268,800 shares of our Class A common stock. The address of the three entities and individual is 55 Railroad Avenue, 3rd Floor, Greenwich, Connecticut 06830. The Schedule 13G states that these beneficial owners had shared voting and dispositive powers. Mr. Morton does not have any voting power with respect to these securities. The Company’s stock records showed Tontine’s total ownership at 293,800 shares of Class A common stock on April 15, 2005.