UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2004

Commission File Number 0-2762

MAXCO, INC.

Registrant’s Telephone Number, including area code: (517) 321-3130

Indicate by check mark whether the registrant (1) has filed all annual, quarterly and other reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to the filing requirements for at least the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
Maxco, Inc. and Subsidiaries

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CONDENSED CONSOLIDATED BALANCE SHEETS — CONTINUED
Maxco, Inc. and Subsidiaries

See notes to consolidated financial statements

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Maxco, Inc. and Subsidiaries
(Unaudited)

See notes to consolidated financial statements

4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Maxco, Inc. and Subsidiaries
(Unaudited)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maxco, Inc. and Subsidiaries
June 30, 2004
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods covered have been included. For further information, refer to the consolidated financial statements and notes thereto included in Maxco’s annual report on Form 10-K for the year ended March 31, 2004.

The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. Maxco’s sales and operating results have varied substantially from quarter to quarter. Net sales are typically lower in the second and third quarters. The most significant factors affecting these fluctuations are the seasonal buying patterns of the Company’s customers due to a customer changeover and the reduced number of business days during the holiday season. In addition, the timing of acquisitions or the occasional sale of corporate investments may cause substantial fluctuations of operating results from quarter to quarter. Maxco expects its net sales and operating results to continue to fluctuate from quarter to quarter.

NOTE 2 – MARKETABLE SECURITIES

The Company classifies its investments in equity securities with readily determinable fair values as securities available for sale under FASB 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity.

NOTE 3 – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

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NOTE 4 – COMPREHENSIVE INCOME

The components of comprehensive income for the three months ended June 30, 2004 and 2003 are as follows:

Accumulated comprehensive loss, net of related tax at June 30, 2004 and March 31, 2004 consists of an unrealized loss on an interest rate swap agreement.

NOTE 5 – INDUSTRY SEGMENT INFORMATION

The following summarizes Maxco’s industry segment information:

Accounting policies of the business segments are consistent with those described in the summary of significant accounting policies (see Note 1).

Identifiable assets are those assets that are used in Maxco’s operations in each industry segment. Corporate assets are principally cash, notes receivable, investments, and corporate office properties.

Maxco has no significant foreign operations or export sales.

The nature of the Company’s services may produce sales to one or a small number of customers in excess of 10% of total sales in any one period. It is possible that the specific customers reaching this threshold may change from year to year. Loss of any one of these customers could have a material impact on the Company’s results of operations.

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NOTE 6 – DEBT

At June 30, 2004 the Company’s heat treating segment, Atmosphere Annealing (Atmosphere), had a $6 million line of credit facility. This facility is secured by Atmosphere’s assets. The amount that can be borrowed under this facility is dependent on certain accounts receivable levels at Atmosphere. At June 30, 2004, based on these specific collateral levels, Atmosphere could borrow up to $3.5 million under its line of credit, approximately $1.6 million of which was borrowed. The agreement matures in November 2004 and, as such, outstanding borrowings are recorded as current in the accompanying balance sheets.

A summary of the Company’s debt obligations as of June 30, 2004 and March 31, 2004 is as follows:

¹ At June 30, 2004 the London Interbank Offered Rate
(LIBOR) was 1.125% and the prime rate was 4.25%.

In May 2004, the Company reached an agreement with a new financial institution to repay lenders with which the Company was in default. The principal amount repaid was approximately $2.3 million. The new debt facility of $2.7 million requires interest only payments for one year and matures in May 2005. The remaining proceeds of approximately $400,000 were used for working capital requirements.

Maxco has provided the guarantee of various debt obligations of certain real estate and other investments in an aggregate amount of approximately $3.0 million as of June 30, 2004. Certain of the debt agreements related to its real estate investments, which Maxco and other guarantors have guaranteed, are in default at June 30, 2004. An extension has been issued by one of the banks and the applicable entities are currently working to liquidate the properties to satisfy the requirements of the lenders. The Company does not believe that there is any unusual degree of risk related to the guarantees because of sufficient underlying asset values supporting the respective debt obligations.

Maxco and other interested parties, as guarantors, have reached agreements with two lenders. As a result, Maxco’s guarantee exposure under these agreements is limited to $257,000. The current estimate of the actual exposure under these agreements is $232,000 which the Company has recorded in the accompanying financial statements. Additionally, the Company has recorded an additional $85,000 related to the anticipated exposure under another real estate guarantee.

The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Although there is concern about the Company’s ability to operate as a going concern due to current debt service requirements and recurring losses, Management believes it has substantially reduced the risk as debt previously in

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default has been refinanced and the Company’s exposures relative to outstanding guarantees have been significantly reduced. The Company’s ability to meet its short term and long term debt service and other obligations (including compliance with financial covenants) will continue to be dependent upon its future operating performance. This dependency will be subject to financial, business and other factors, certain of which, such as prevailing economic conditions, are beyond the Company’s control. The Company believes that funds generated by its operations, funds available under its credit facilities, and funds that could be available under other credit facilities will be sufficient to finance near term capital needs, as well as to fund existing operations for the reasonably foreseeable future. Additionally the Company has long term equity investments that could be liquidated to meet its debt service requirements.

NOTE 7 – FEDERAL INCOME TAXES

The Company assumed the utilization of net operating loss carryforwards to offset taxable income in the first quarter of fiscal 2004.

NOTE 8 – PREFERRED STOCK DIVIDENDS

Effective January 1, 2002, the Maxco Board of Directors suspended the payment of dividends on all preferred stock. These dividend payments have been accrued in the accompanying financial statements and totaled approximately $1.1 million at June 30, 2004.

NOTE 9 – INVENTORIES

Inventories are stated at the lower of first-in, first-out cost or market and consisted of the following:

NOTE 10 – ADVANCES TO AFFILIATE (SALE OF REAL ESTATE PORTFOLIO)

Maxco has ownership interests ranging from 25-50% in primarily two LLC’s which have been involved in the development and ownership of real estate in central Michigan. Effective January 1, 2000, a Master LLC (L/M Associates II) was formed consisting of the majority of the stabilized buildings in which Maxco and others had an ownership interest. At June 30, 2004 Maxco’s effective ownership interest in the Master LLC was approximately 31%. The other LLC (L/M Associates) includes properties that are not fully leased or individual properties not included in the Master LLC.

In early 2002, Maxco, as managing member of L/M Associates, which is the managing member of L/M Associates II, began negotiations to sell substantially all of the properties in the real estate portfolio of L/M Associates II. In June 2002, L/M Associates II entered into an agreement to sell the properties within the Master LLC to an outside investor. The transaction was approved by more than 75% of the member interests in July 2002. This transaction was completed in January 2003. As part of this transaction, L/M Associates agreed to reinvest a portion of its distributable share of the proceeds to acquire approximately a 16% interest in the acquiring entity. By agreement, this investment may be repurchased by a member of the acquiring entity. However, pursuant to the agreement, in July 2004, L/M Associates exercised its option to require the same member to repurchase the investment. The member has 60 days to respond.

Any real risks or guarantees that Maxco would be required to satisfy is estimated at $233,000 and has been recorded in the accompanying financial statements and Maxco’s investment has been adjusted to the net realizable value of the remaining assets. Impairment charges totaling $749,000 and $4.7 million were recognized during the years ended March 31, 2004 and 2003, respectively, to further reduce the carrying value of the Company’s investment in real estate to the estimated net realizable value.

This real estate investment is discontinued and Maxco is actively pursuing its liquidation.

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NOTE 11 – ACCOUNTS RECEIVABLE AND PAYABLE—RELATED PARTIES

Accounts receivable, related parties consists primarily of unsecured cash advances to officers, stockholders, and affiliates. Certain of the amounts are non-interest bearing. The ultimate settlement of the balances is generally expected to be made in cash, although not necessarily within the next year.

Included in accounts payable is $128,000 at both June 30, 2004 and March 31, 2004, which is due to entities in which Company President Max A. Coon has an interest.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MATERIAL CHANGES IN FINANCIAL CONDITION

Cash provided by operating activities amounted to $1.9 million for the three months. Earnings, after non-cash adjustments, generated $947,000 while changes in working capital components generated $948,000.

Cash was generated by investing activities during the period from the receipt of payments on certain notes receivable, primarily $950,000 from the purchaser of the Company’s formerly wholly owned subsidiary, Wright Plastic Products. These proceeds were used primarily for working capital requirements. The Company’s heat treating segment purchased approximately $131,000 of equipment during the quarter.

In May 2004, the Company reached an agreement with a new financial institution to repay lenders with which the Company was in default. The new debt facility of $2.7 million requires interest only payments for one year and matures in May 2005. Atmosphere Annealing repaid $941,000 on its line of credit during the quarter. Net repayments on other debt obligations amounted to $3.8 million for the three month period.

Overall, the Company’s working capital deficit (defined as current assets less current liabilities) increased from $7.7 million at March 31, 2004 to $10.6 million at June 30, 2004. This is primarily due to the fact that $2.7 million of debt became due within one year during the current quarter. While this debt is due in May 2005, the Company anticipates it will be able to extend the maturity date.

The Company’s ability to meet its short term and long term debt service and other obligations (including compliance with financial covenants) will continue to be dependent upon its future operating performance. This dependency will be subject to financial, business and other factors, certain of which, such as prevailing economic conditions, are beyond the Company’s control. The Company believes that funds generated by its operations, funds available under its credit facilities, and funds that could be available under other credit facilities will be sufficient to finance near term capital needs, as well as to fund existing operations for the reasonably foreseeable future. Additionally the Company has long term equity investments that could be liquidated to meet its debt service requirements.

At June 30, 2004, the 2,240,605 shares of Integral Vision (formerly Medar) common stock that Maxco owns had an aggregate market value of approximately $3.9 million. Maxco’s investment in Integral Vision is reflected in Maxco’s financial statements under the equity method for all periods presented as the Company maintains representation on Integral Vision’s Board of Directors.

At June 30, 2004, the 2,837,089 shares of Provant common stock that Maxco owns had an aggregate market value of approximately $57,000. Maxco’s investment in Provant is reflected in Maxco’s financial statements under the cost method as an available-for-sale security as the Company owns less than 20% of Provant’s outstanding stock.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2004 Compared to 2003

Net sales increased to $11.4 million compared to $9.6 million in last year’s first quarter. First quarter results reflect operating earnings of $475,000 compared to a loss of $139,000 for the comparable period in 2003. Net income was $204,000 or $.03 per share after preferred dividends assuming dilution compared to last year’s net income of $122,000 or $.01 per share after preferred dividends assuming dilution.

Sales and operating earnings for the three months ending June 30, 2004 and 2003 by the Company’s heat treating and corporate and other segments were as follows:

The increase in net sales of $1.8 million at the Company’s heat treating segment, Atmosphere Annealing (Atmosphere), was due to increased business with Honda of America Manufacturing, Inc. An expanded customer base also contributed to the increase in sales.

Consolidated gross profit (net sales less cost of sales and operating expenses) increased to $4.0 million from $3.4 million. Gross margin (gross profit as a percentage of sales) decreased to 35% from 36%. The increase in sales at Atmosphere was the primary reason that gross profit increased over the prior year. However, gross margin decreased primarily as a result of the increased sales to Honda. By agreement, the Company is required to purchase and bill Honda for the steel used in the heat treating process resulting in lower margins. Atmosphere experienced increases in the costs of labor of $147,000 and maintenance of $94,000. Other general factory expenses at Atmosphere decreased $28,000.

Selling, general, and administrative and depreciation and amortization expenses were comparable to the prior year.

As a result of the above, operating earnings increased to $475,000 from a loss of $139,000 in the prior year.

Investment, interest, and other income (loss), net increased from a loss of $246,000 to income of $135,000. Atmosphere received a discount of $94,000 as a result of paying off a note in the quarter. In the prior year quarter, the Company recorded a charge of $283,000 as an other than temporary impairment to the value of its investment in Provant.

Gain on sale of assets includes $910,000 for a gain on sale of land in the prior year quarter.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s variable interest expense is sensitive to changes in the general level of United States interest rates. While approximately $4.8 million of Maxco’s debt carries a fixed rate of interest, the Company entered into an interest rate swap agreement based on a notional amount of $2.7 million to manage its exposure to interest rate changes. The swap involves the exchange of fixed and variable interest payments without changing the notional principal amount. The Company had total outstanding variable rate short and long term borrowings of $11.6 million at June 30, 2004. A 1% increase from the prevailing interest rates at June 30, 2004 on the unhedged variable rate portion of the Company’s short and long-term borrowings would increase interest expense on an annualized basis by approximately $116,000 based on principal balances at June 30, 2004.

The Company’s heat treating segment experiences fluctuations in the price of natural gas used in the heat treating process. To the extent feasible in light of competitive factors, the Company has offset these fluctuations through selective price adjustments.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer believe Maxco’s disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), are effective. This conclusion was reached after an evaluation of these controls and procedures as of June 30, 2004.

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

The annual meeting of shareholders is delayed more than 30 days later than it is traditionally held. An announcement will be made when the date is determined.

Item 6(a)       Exhibits

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Item 6(b)       Reports on Form 8-K

None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX