MAXCO INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarter Ended September 30, 2004

Commission File Number 0-2762

MAXCO, INC.

(Exact Name of Registrant as Specified in its Charter)


Michigan		38-1792842

(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)


1118 Centennial Way Lansing, Michigan		48917

(Address of principal executive offices)		(Zip Code)

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.


Class		Outstanding at October 31, 2004

Common Stock		3,101,195 shares

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
Maxco, Inc. and Subsidiaries


	September 30,			March 31,
	2004			2004
	(Unaudited)
	(in thousands)
ASSETS
Current Assets
Cash and cash equivalents	$	323		$	78
Accounts and notes receivable, less allowance of $68,000 ($134,000 at March 31, 2004)		6,205			7,629
Inventory—Note 9		288			408
Prepaid expenses and other		442			429

Total Current Assets		7,258			8,544
Marketable Securities—Long Term—Note 2		2			2
Property & Equipment
Land		437			446
Buildings		6,008			6,170
Machinery, equipment, and fixtures		29,614			29,068

		36,059			35,684
Allowances for depreciation		(16,587	)		(15,265	)

		19,472			20,419
Other Assets
Investments		1,138			1,138
Notes and contracts receivable and other, less allowance of $0 ($350,000 at March 31, 2004)		1,034			1,338
Advances to affiliate		2,200			2,200
Accounts receivable—related parties		416			416
Intangibles		1,424			1,424

		6,212			6,516

	$	32,944		$	35,481

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


	September 30,			March 31,
	2004			2004
	(Unaudited)
	(in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable—Note 6	$	4,107		$	4,885
Accounts payable		4,138			4,221
Employee compensation		1,433			1,525
Taxes, interest, and other liabilities		3,692			3,585
Current maturities of long-term obligations		5,044			2,064

Total Current Liabilities		18,414			16,280
Long-Term Obligations, Less Current Maturities—Note 6		6,681			11,480

Total Liabilities		25,095			27,760
Stockholders’ Equity
Preferred stock:
Series Three: 10% cumulative redeemable, $60 face value; 14,784 shares issues and outstanding		678			678
Series Four: 10% cumulative redeemable, $51.50 face value; 46,414 shares issues and outstanding		2,390			2,390
Series Five: 10% cumulative redeemable, $120 face value; 6,648 shares issues and outstanding		798			798
Series Six: 10% cumulative callable, $160 face value; 20,000 shares authorized, issued — none		—			—

		3,866			3,866
Common stock, $1 par value; 10,000,000 shares authorized, 3,101,195 shares issued and outstanding		3,101			3,101
Accumulated comprehensive loss		(94	)		(172	)
Retained earnings		976			926

Total Stockholders’ Equity		7,849			7,721

	$	32,944		$	35,481

See notes to consolidated financial statements

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


	Three Months Ended September 30,
	2004			2003
	(in thousands, except per share data)
Net Sales	$	11,156		$	9,189
Costs and Expenses:
Cost of sales and operating expenses		7,345			6,070
Selling, general and administrative		2,732			2,626
Depreciation and amortization		743			702

		10,820			9,398

Operating Income (Loss)		336			(209	)
Other Income (Expense)
Investment, interest, and other income (loss), net		16			(18	)
Gain on sale of assets		56			—
Interest expense		(358	)		(470	)

Income (Loss) Before Equity in Loss of Affiliates		50			(697	)
Equity in loss of affiliates		—			(90	)

Net Income (Loss)		50			(787	)
Less preferred stock dividends		(102	)		(102	)

Net Loss Applicable to Common Stock	$	(52	)	$	(889	)

Net Loss Per Common Share—Basic and Diluted	$	(0.02	)	$	(0.29	)

See notes to consolidated financial statements

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


	Six Months Ended September 30,
	2004			2003
	(in thousands, except per share data)
Net Sales	$	22,523		$	18,762
Costs and Expenses:
Cost of sales and operating expenses		14,715			12,222
Selling, general and administrative		5,510			5,435
Depreciation and amortization		1,487			1,453

		21,712			19,110

Operating Income (Loss)		811			(348	)
Other Income (Expense)
Investment, interest, and other income (loss), net		151			(266	)
Gain on sale of assets		57			912
Interest expense		(765	)		(873	)

Income (Loss) Before Equity in Loss of Affiliates		254			(575	)
Equity in loss of affiliates, net of tax		—			(90	)

Net Income (Loss)		254			(665	)
Less preferred stock dividends		(204	)		(204	)

Net Income (Loss) Applicable to Common Stock	$	50		$	(869	)

Net Income (Loss) Per Common Share—Basic and Diluted	$	0.02		$	(0.28	)

See notes to consolidated financial statements

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


	Six Months Ended September 30,
	2004			2003
	(in thousands)
Operating Activities
Net income (loss)	$	254		$	(665	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net gains on sale of assets		(57	)		(912	)
Non-cash investment losses		—			340
Depreciation and other non-cash items		1,487			1,543
Changes in operating assets and liabilities		616			3,029

Net Cash Provided By Operating Activities		2,300			3,335
Investing Activities
Collections on notes receivable		1,003			—
Proceeds from sale of assets		57			939
Purchases of property and equipment		(537	)		(254	)
Other		8			(13	)

Net Cash Provided By Investing Activities		531			672
Financing Activities
Net repayments on line of credit		(752	)		(1,737	)
Net repayments on other debt obligations		(1,834	)		(2,053	)

Net Cash Used In Financing Activities		(2,586	)		(3,790	)

Increase in Cash and Cash Equivalents		245			217
Cash and Cash Equivalents at Beginning of Period		78			391

Cash and Cash Equivalents at End of Period	$	323		$	608

Supplemental cash flow disclosure:
Interest paid	$	724		$	696

See notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maxco, Inc. and Subsidiaries
September 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 Note 6 and 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:


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
	(in thousands, except per share data)
NUMERATOR:
Net income (loss)	$	50		$	(787	)	$	254		$	(665	)
Preferred stock dividends		(102	)		(102	)		(204	)		(204	)

Numerator for basic and diluted earnings per share—income (loss) available to common stockholders	$	(52	)	$	(889	)	$	50		$	(869	)
DENOMINATOR:
Denominator for basic and diluted earnings per share—weighted average shares		3,101			3,101			3,101			3,101

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE	$	(0.02	)	$	(0.29	)	$	0.02		$	(0.28	)

NOTE 4 — COMPREHENSIVE INCOME

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


	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2004		2003			2004		2003
	(in thousands)
Net income (loss)	$	50	$	(787	)	$	254	$	(665	)
Unrealized gain on swap agreement		14		39			78		39

Comprehensive income (loss)	$	64	$	(748	)	$	332	$	(626	)

Accumulated comprehensive loss, net of related tax was $94,000 at September 30, 2004 and $172,000 at March 31, 2004 and consists of an unrealized loss on an interest rate swap agreement.

NOTE 5 — INDUSTRY SEGMENT INFORMATION

The following summarizes Maxco’s industry segment information:


	September 30,		March 31,
	2004		2004
	(in thousands)
Identifiable Assets:
Heat treating	$	27,856	$	29,472
Corporate and other		1,750		2,671
Investments and advances		3,338		3,338

Total Identifiable Assets	$	32,944	$	35,481


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
	(in thousands)
Net Sales:
Heat treating	$	11,156		$	9,145		$	22,523		$	18,718
Corporate and other		—			44			—			44

Total Net Sales	$	11,156		$	9,189		$	22,523		$	18,762

Operating Earnings (Loss):
Heat treating	$	705		$	188		$	1,668		$	640
Corporate and other		(369	)		(397	)		(857	)		(988	)

Total Operating Earnings (Loss)	$	336		$	(209	)	$	811		$	(348	)

Depreciation and Amortization Expense:
Heat treating	$	735		$	693		$	1,471		$	1,436
Corporate and other		8			9			16			17

Total Depreciation and Amortization Expense	$	743		$	702		$	1,487		$	1,453

Capital Expenditures:
Heat treating	$	406		$	75		$	537		$	254
Corporate and other		—			—			—			—

Total Capital Expenditures	$	406		$	75		$	537		$	254

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.

NOTE 6 — DEBT

At September 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 September 30, 2004, based on these specific collateral levels, Atmosphere could borrow up to $3.5 million under its line of credit, approximately $1.8 million of which was borrowed. The facility matures in August 2005 and, as such, outstanding borrowings are recorded as current in the accompanying balance sheets.

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


	September 30,		March 31,
	2004		2004
	(in thousands)
Short term obligations:
Notes payable (various interest rates)	$	2,306	$	2,333
Revolving line of credit (LIBOR¹ + 2.25%)		1,801		2,552

	$	4,107	$	4,885

Long term obligations:
Term notes (various variable interest rates)	$	6,683	$	4,268
Mortgage note payable (LIBOR¹ + 2.5%)		2,359		2,670
Equipment purchase contracts and capitalized lease obligations (various interest rates)		2,311		4,581
Subordinated debt (fixed rate of 10.00%)		372		2,025

		11,725		13,544
Less current maturities		5,044		2,064

	$	6,681	$	11,480

¹ At September 30, 2004 the London Interbank Offered Rate (LIBOR) was 1.875%

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 $2.7 million as of September 30, 2004. Certain of the debt agreements related to its real estate investments, which Maxco and other guarantors have guaranteed, are in default at September 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 $225,000 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

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 six months of fiscal 2005.

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 $1.2 million at September 30, 2004.

NOTE 9 — INVENTORIES

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


	September 30,		March 31,
	2004		2004
	(in thousands)
Raw materials	$	168	$	174
Work in progress		99		190
Finished goods		21		44

	$	288	$	408

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 September 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 and as such, the member and L/M Associates are currently negotiating revised payment and collateral terms to enhance collectibility of this asset.

Any real risks or guarantees that Maxco would be required to satisfy is estimated at $225,000 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.

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 September 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 $2.3 million for the six months. Earnings, after non-cash adjustments, generated $1.7 million while changes in working capital components generated $616,000.

Cash was generated by investing activities during the six month 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 $537,000 of equipment during the six month period.

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 $752,000 on its line of credit during the period. Net repayments on other debt obligations amounted to $1.8 million for the six 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 $11.1 million at September 30, 2004. This is primarily due to the fact that $2.7 million of debt became due within one year during the period. 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 September 30, 2004, the 2,240,605 shares of Integral Vision (formerly Medar) common stock that Maxco owns had an aggregate market value of approximately $2.5 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 September 30, 2004, the 2,837,089 shares of Provant common stock that Maxco owns had an aggregate market value of approximately $28,000. 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.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 Compared to 2003

Net sales increased to $11.2 million compared to $9.2 million in last year’s second quarter. Second quarter results reflect operating income of $336,000 compared to a loss of $209,000 for the comparable period in 2003. Net income was $50,000 or a loss of $.02 per share after preferred dividends assuming dilution compared to last year’s net loss of $787,000 or $0.29 per share after preferred dividends assuming dilution.

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


	Three Months Ended					Three Months Ended
	September 30, 2004					September 30, 2003
			Operating					Operating
	Net Sales		Earnings (Loss)			Net Sales		Earnings (Loss)
	*(in thousands)*
Heat treating	$	11,156	$	705		$	9,145	$	188
Corporate and other		—		(369	)		44		(397	)

	$	11,156	$	336		$	9,189	$	(209	)

The increase in net sales at the Company’s heat treating segment, Atmosphere Annealing (Atmosphere), was due in part 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) was approximately $3.8 million in the current quarter compared to $3.1 million in the prior year. Gross margin (gross profit as a percentage of net sales) was 34% for both periods. The increase in heat treating sales was the primary reason that gross profit increased from the prior year.

Selling, general, and administrative increased to $2.7 million from $2.6 million in the prior year period. Atmosphere experienced reductions in the cost of health and general insurances of approximately $93,000. Conversely, employee related costs ($76,000), state income taxes ($57,000), and professional services ($48,000) increased over the prior year. Additionally, bad debt expense at Atmosphere increased $74,500 over the prior year period to provide for receivables that are no longer expected to be collected. Maxco’s corporate segment saw employee costs lowered by $22,000 and legal costs lowered by $31,000.

As a result of the above, operating earnings increased to $336,000 from a loss of $209,000 in last year’s comparable period.

Investment, interest, and other income (loss), net increased from a loss of $18,000 to income of $16,000. In the prior year quarter, the Company recorded a charge of $57,000 as an other than temporary impairment to the value of its investment in Provant. Interest expense decreased from $470,000 to $358,000 primarily due to reduced borrowing levels.

In the prior year quarter, the Company recorded $90,000 in equity in losses of affiliates to adjust its investment in Integral Vision to an estimated realizable amount. No such adjustment was made in the current year.

Six Months Ended September 30, 2004 Compared to 2003

Net sales increased to $22.5 million compared to $18.8 million in last year’s comparable period. Results from this period reflect operating earnings of $811,000 compared to a loss of $348,000 for the comparable period in 2003. Net income was $254,000 or $.02 per share after preferred dividends assuming dilution compared to last year’s net loss of $665,000 or $0.28 per share after preferred dividends assuming dilution.

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


	Six Months Ended					Six Months Ended
	September 30, 2004					September 30, 2003
			Operating					Operating
	Net Sales		Earnings (Loss)			Net Sales		Earnings (Loss)
	*(in thousands)*
Heat treating	$	22,523	$	1,668		$	18,718	$	640
Corporate and other		—		(857	)		44		(988	)

	$	22,523	$	811		$	18,762	$	(348	)

Consolidated gross profit (net sales less cost of sales and operating expenses) increased to $7.8 million from $6.5 million. Gross margin (gross profit as a percentage of net sales) was approximately 35% for both periods. The increase in heat treating sales was the primary reason that gross profit increased from the prior year.

Selling, general, and administrative increased to $5.5 million from $5.4 million in the prior year period. Atmosphere experienced reductions in the cost of health and general insurances of approximately $40,000. Conversely, employee related costs ($115,000), state income taxes ($52,000), and professional services ($81,000) increased over the prior year period. Additionally, bad debt expense at Atmosphere increased $97,000 over the prior year period to provide for receivables that are no longer expected to be collected. Maxco’s corporate segment saw lower employee costs ($69,000), health and general insurances ($32,000), and legal costs ($67,000).

As a result of the above, operating earnings increased to $811,000 from a loss of $348,000 in last year’s comparable period.

Investment, interest, and other income (loss), net increased from a loss of $266,000 to income of $151,000. Atmosphere received a discount of $94,000 as a result of paying off a note in the current period. In the prior year period, the Company recorded a charge of $340,000 as an other than temporary impairment to the value of its investment in Provant. Interest expense decreased from $873,000 to $765,000 primarily due to reduced borrowing levels.

Gain on sale of assets includes $57,000 for a gain on the sale of a building in the current year and $910,000 for a gain on sale of land in the prior year.

In the prior year, the Company recorded $90,000 in equity in losses of affiliates to adjust its investment in Integral Vision to an estimated realizable amount. No such adjustment was made in the current year.

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 $4.7 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 $11.1 million at September 30, 2004. A 1% increase from the prevailing interest rates at September 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 $110,000 based on principal balances at September 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. 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 September 30, 2004.

PART II

OTHER INFORMATION


Item 1. Legal Proceedings

		None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

		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

3		Restated Articles of Incorporation are hereby incorporated from Form 10-Q dated February 13, 1998.

3.1		By-laws are hereby incorporated by reference from Form S-4 dated November 4, 1991 (File No. 33-43855).

4.2		Resolution establishing Series Three Preferred Shares is hereby incorporated by reference from Form S-4 dated November 4, 1991 (File No. 33-43855).

4.3		Resolution authorizing the redemption of Series Two Preferred Stock and establishing Series Four Preferred Stock and the terms of the subordinated notes is hereby incorporated by reference from Form 10-Q dated February 14, 1997.

4.4		Resolution establishing Series Five Preferred Shares is hereby incorporated by reference from Form 10-K dated June 5, 1997.

4.5		Resolution establishing Series Six Preferred Shares is hereby incorporated by reference from Form 10-K dated June 23, 1999.

10.1		Incentive stock option plan adopted August 15, 1983, including the amendment (approved by shareholders August 25, 1987) to increase the authorized shares on which options may be granted by two hundred fifty thousand (250,000), up to five hundred thousand (500,000) shares of the common stock of the company is hereby incorporated by reference from the registrant’s annual report on Form 10-K for the fiscal year ended March 31, 1988.

10.11		Asset purchase agreement for the purchase of Atmosphere Annealing, Inc. is hereby incorporated by reference from Form 8-K dated January 17, 1997.


10.18		Maxco, Inc. 1998 Employee Stock Option Plan is hereby incorporated by reference from Form 10-Q dated November 12, 1998.

10.29		Obligor assignment agreement among Contractor Supply Incorporated, Maxco, Inc., and Ersco Corporation dated November 14, 2002 is hereby incorporated by reference from Form 10-Q dated November 25, 2002.

10.30		Stock purchase agreement between Ersco Corporation, Maxco, Inc., and Contractor Supply Incorporated dated November 14, 2002 is hereby incorporated by reference from Form 10-Q dated November 25, 2002.

10.31		Asset Purchase Agreement between Pak Sak Industries, Inc., Maxco, Inc., P-S Business Acquisition, Inc., and P&D Real Estate, LLC and Packaging Personified, Inc. dated September 27, 2002 is hereby incorporated by reference from Form 10-Q dated February 14, 2003.

10.32		First Amendment to Asset Purchase Agreement between Pak Sak Industries, Inc., Maxco, Inc., P-S Business Acquisition, Inc., and P&D Real Estate, LLC and Packaging Personified, Inc. dated October 30, 2002 is hereby incorporated by reference from Form 10-Q dated February 14, 2003.

10.33		Second Amendment to Asset Purchase Agreement between Pak Sak Industries, Inc., Maxco, Inc., P-S Business Acquisition, Inc., and P&D Real Estate, LLC and Packaging Personified, Inc. dated November 25, 2002 is hereby incorporated by reference from Form 10-Q dated February 14, 2003.

10.34		Credit Agreement between Atmosphere Annealing, Inc. and Huntington National Bank dated November 18, 2003 is hereby incorporated by reference from Form 10-Q dated November 19, 2003.

10.35		Subordination Agreement between Maxco, Inc., Atmosphere Annealing, Inc. and Comerica Bank and Huntington National Bank dated November 18, 2003 is hereby incorporated by reference from Form 10-Q dated November 19, 2003.

10.36		Incentive agreement between Sanjeev Deshpande and Maxco, Inc. dated April 20, 2004 is hereby incorporated by reference from Form 10-K dated July 13, 2004.

10.37		Business Loan Agreement between Capitol National Bank and Maxco, Inc. dated May 28, 2004 is hereby incorporated by reference from Form 10-K dated July 13, 2004.

31.1		Certification of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e) or Rule 15d-15(e).

31.2		Certification of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e) or Rule 15d-15(e).

32.1		Certification of Chief Executive Officer of periodic report pursuant to 18 U.S.C. §1350.

32.2		Certification of Chief Financial Officer of periodic report pursuant to 18 U.S.C. §1350.


EXHIBIT NO.		DESCRIPTION
31.1		Certification of Chief Executive Officer pursuant to Section 302

31.2		Certification of Chief Financial Officer pursuant to Section 302

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

MAXCO, INC.

November 15, 2004

/s/ VINCENT SHUNSKY

Vincent Shunsky, Vice President-Finance

and Treasurer (Principal Financial and Accounting Officer)


			PAGE
Part I — Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets		3
		Consolidated Statements of Operations		5
		Consolidated Statement of Stockholders' Equity		7
		Consolidated Statements of Cash Flows		8
		Notes to Consolidated Financial Statements		9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		15
	Item 4.	Controls and Procedures		15
Part II — Other Information
	Item 1.	Legal Proceedings		16
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		16
	Item 3.	Defaults Upon Senior Securities		16
	Item 4.	Submission of Matters to a Vote of Security Holders		16
	Item 5.	Other Information		16
	Item 6.	Exhibits		16
Signatures				18
Certifications				19
Certification of Chief Executive Officer Pursuant to Section 302
Certification of Chief Financial Officer Pursuant to Section 302
Certification Pursuant to 18 U.S.C. Section 1350
Certification Pursuant to 18 U.S.C. Section 1350


	Number of
	Common						Accumulated
	Shares		Preferred		Common		Comprehensive			Retained
	Outstanding		Stock		Stock		Loss			Earnings			Totals
	(in thousands, except number of common shares outstanding)
Balances at April 1, 2004		3,101,195	$	3,866	$	3,101	$	(172	)	$	926		$	7,721
Net income for the year											254			254
Unrealized gain on swap agreement								78						78

Total Comprehensive income														332
Preferred stock dividends											(204	)		(204	)

Balances at September 30, 2004		3,101,195	$	3,866	$	3,101	$	(94	)	$	976		$	7,849