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 December 31, 2004

Commission File Number 0-2762

MAXCO, INC.

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.

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MAXCO, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

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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

4

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

See notes to consolidated financial statements

5

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

See notes to consolidated financial statements

6

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Maxco, Inc. and Subsidiaries
(Unaudited)

See notes to consolidated financial statements

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

See notes to consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maxco, Inc. and Subsidiaries
December 31, 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 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 and nine months ended December 31, 2004 and 2003 are as follows:

Accumulated comprehensive loss, net of related tax was $63,000 at December 31, 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:

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.

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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 December 31, 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 December 31, 2004, based on these specific collateral levels, Atmosphere could borrow up to $3.0 million under its line of credit, approximately $1.9 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 December 31, 2004 and March 31, 2004 is as follows:

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 December 31, 2004. Certain of the debt agreements related to its real estate investments, which Maxco and other guarantors have guaranteed, are in default at December 31, 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.

In addition to the $2.7 million mentioned above, the Company has recorded in the accompanying financial statements amounts that had been previously identified as guarantees. The amounts so recorded aggregated approximately $281,000 as of December 31, 2004.

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, 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

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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 nine months of fiscal 2005.

NOTE 8 – 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 $1.3 million at December 31, 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 – SALE OF REAL ESTATE PORTFOLIO

Maxco has ownership interests of not more than 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 December 31, 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. To date this requirement has not been satisfied and L/M Associates intends to aggressively pursue other collection remedies.

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.

Vincent Shunsky, Vice President, is indebted to The Company in the principal amount of approximately $127,000. The indebtedness was incurred at various times prior to April 2002 for the purchase of affiliate company stock and personal use. This debt carries interest rates up to 8%. As of January 31, 2005 the amount outstanding was approximately $171,000 including accrued interest. In October 2004 the Company entered into a Retention

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Agreement with Mr. Shunsky to provide him with a bonus of $200,000 to retain his services until at least March 31, 2006. Should he leave the employ of the Company prior to that date the bonus must be repaid.

In June 2003, the Company assumed a lease with CJC Leasing, a limited liability company in which Company President Max A. Coon is a member, from Contractor Supply Incorporated, the purchaser of the Company’s formerly wholly owned subsidiary, Ersco Corporation. At December 31, 2004 the amount owed to CJC Leasing was approximately $1.7 million.

Included in accounts payable is $128,000 at both December 31, 2004 and March 31, 2004, which is due to entities in which Mr. Coon has an interest.

NOTE 12—NEW ACCOUNTING PRONOUNCEMENTS

In December, 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R which will require the Company to measure the cost of employee services received in exchange for an award of common stock options as compensation expense in the statement of income using a fair value method. The Company will begin reporting these costs in the second quarter of fiscal 2006. The effect of implementing this new accounting standard has not been determined at this time, but is not expected to impact reported earnings per share in amounts significantly different from the pro forma results historically reported.

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 $3.2 million for the nine months. Earnings, after non-cash adjustments, generated $2.6 million while changes in working capital components generated $592,000.

Cash was generated by investing activities during the nine 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 $685,000 of equipment during the nine 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 $696,000 on its line of credit during the period. Net repayments on other debt obligations amounted to $2.9 million for the nine 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 $10.9 million at December 31, 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 December 31, 2004, the 2,240,605 shares of Integral Vision common stock that Maxco owns had an aggregate fair value of approximately $5.4 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 December 31, 2004, the 2,837,089 shares of Provant common stock that Maxco owns had an aggregate fair value of approximately $85,000. 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 December 31, 2004 Compared to 2003

Net sales increased to $11.4 million compared to $10.6 million in last year’s third quarter. Third quarter results reflect operating earnings of $581,000 compared to a loss of $314,000 for the comparable period in 2003. Net income was $212,000 or $.04 per share after preferred dividends assuming dilution compared to last year’s net loss of $857,000 or $.31 per share after preferred dividends assuming dilution.

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Sales and operating earnings for the three months ended December 31, 2004 and 2003 by the Company’s heat treating and corporate and other segments were as follows:

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 $4.0 million (35% of net sales) in the current quarter compared to $3.4 million (32% of net sales) in the prior year. The increase in heat treating sales was the primary reason that gross profit increased from the prior year.

Selling, general, and administrative decreased to $2.6 million from $2.9 million in the prior year period. Atmosphere experienced reductions in the cost of health insurance of approximately $180,000. Conversely, employee related costs ($27,000), state income taxes ($24,000), and professional services ($26,000) increased over the prior year. Maxco’s corporate segment saw employee costs lowered by $53,000 and legal costs lowered by $48,000. Additionally, in the prior year quarter, the corporate segment recorded a charge of $123,000 for an anticipated workers compensation claim.

As a result of the above, operating earnings increased to $581,000 from a loss of $314,000 in last year’s comparable period.

Investment, interest, and other income (loss), net increased from a loss of $51,000 in the prior year to a net $0 in the current year. 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 $468,000 to $371,000 primarily due to reduced borrowing levels.

In the prior year quarter, the Company recorded $50,000 in equity in earnings of affiliates to record its share of earnings from an unconsolidated investment.

Nine Months Ended December 31, 2004 Compared to 2003

Net sales increased to $33.9 million compared to $29.3 million in last year’s comparable period. Results from this period reflect operating earnings of $1.4 million compared to a loss of $662,000 for the comparable period in 2003. Net income was $466,000 or $.05 per share after preferred dividends assuming dilution compared to last year’s net loss of $1.5 million or $.59 per share after preferred dividends assuming dilution.

Sales and operating earnings for the nine months ended December 31, 2004 and 2003 by the Company’s heat treating and corporate and other segments were as follows:

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.

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Consolidated gross profit (net sales less cost of sales and operating expenses) increased to $11.8 million from $9.9 million. Gross margin (gross profit as a percentage of net sales) was approximately 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 decreased to $8.2 million from $8.4 million in the prior year period. Atmosphere experienced reductions in the cost of health and general insurances of approximately $228,000. Conversely, employee related costs ($136,000), state income taxes ($76,000), and professional services ($106,000) increased over the prior year period. Additionally, bad debt expense at Atmosphere increased $150,000 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 ($89,000), health and general insurances ($70,000), and legal costs ($114,000). Additionally, in the prior year quarter, the corporate segment recorded a charge of $123,000 for an anticipated workers compensation claim.

As a result of the above, operating earnings increased to $1.4 million from a loss of $662,000 in last year’s comparable period.

Investment, interest, and other income (loss), net increased from a loss of $317,000 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 $1.3 million to $1.1 million 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 and $50,000 in equity in earnings of affiliates to record its share of earnings from an unconsolidated investment.

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 $4.6 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 $10.3 million at December 31, 2004. A 1% increase from the prevailing interest rates at December 31, 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 $101,000 based on principal balances at December 31, 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 December 31, 2004.

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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 has been delayed more than 30 days later than it is traditionally held. The meeting will be held on March 15, 2005.

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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

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