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UNITED STATES SECURITIES AND EXCHANGE COMMISSION  FORM 10-K  [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2004 OR  [   ]
    
    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 0-2762 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) 321-3130Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredNONE
    
    NONE
 Securities registered pursuant to Section 12(g) of the Act: Common stock
    
    Series Three Preferred
Stock(Title of Class)
    
    (Title of Class)
 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 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. [ ] 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 The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2004: $6,717,700. At June 30, 2004, there were 3,101,195 outstanding shares of the Registrants
common stock. Documents Incorporated By Reference Portions of the annual proxy statement for the year ended March 31, 2004 are
incorporated be reference into Part III.    1




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MAXCO, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS ITEM
    
    
    
    PAGE1
    
    Business
    
    
    32
    
    Properties
    
    
    53
    
    Legal Proceedings
    
    
    54
    
    Submission of Matters to a Vote of Security Holders
    
    
    55
    
    Market for Registrants Common Equity and Related Shareholder Matters
    
    
    66
    
    Selected Financial Data
    
    
    77
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    87A
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    148
    
    Financial Statements and Supplemental Data
    
    
    159
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    159A
    
    Controls and Procedures
    
    
    1510
    
    Directors and Executive Officers of the Registrant
    
    
    1611
    
    Executive Compensation
    
    
    1612
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    1613
    
    Certain Relationships and Related Transactions
    
    
    1614
    
    Principal Accountant Fees and Services
    
    
    1615
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    17Signatures
    
    
    19List of Financial Statements
    
    
    21Incentive AgreementBusiness Loan Agreement b/w Capital National BankSubsidiaries of the RegistrantConsent of Rehmann RobsonConsent of Ernst & Young LLPConsent of Moore Stephens Doeren MayhewCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  2




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PART I 
 ITEM 1  BUSINESS Maxco, Inc. (Maxco) is a Michigan corporation incorporated in 1946. Maxco
currently operates in the heat-treating business segment through Atmosphere
Annealing Inc., a production metal heat-treating service company. Maxco also
has investments in real estate and investments representing less than majority
interests in the following businesses: a registered broker-dealer of securities
that is primarily focused on the trading of fixed income investments; a
developer, manufacturer and marketer of microprocessor-based process monitoring
and inspection systems for use in industrial manufacturing environments; and an
energy-related business. References to the Company are defined as Maxco,
Inc. and its wholly owned subsidiary, Atmosphere Annealing, Inc. During the year ended March 31, 2004, Atmosphere Annealing reached an agreement
with a new financial institution to repay a lender with which the Company and
Atmosphere Annealing had previously been in default. The principal amount
repaid was approximately $8.1 million. The new facilities are secured by all of
the assets of Atmosphere Annealing. Also during the year the Company sold land
and a building for approximately $1.3 million, the proceeds of which were
primarily used to retire debt. Additionally, Maxco exercised an option to
exercise warrants to purchase 240,000 shares of Integral Vision, Inc. common
stock at $0.25 per share. In lieu of cash payment, the parties agreed to reduce
a note payable to Maxco by $60,000. The Company sold the shares of stock for
$1.00 per share with the proceeds being used for working capital requirements.
Subsequent to March 31, 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. Also subsequent to
March 31, 2004, the Company received payment of $950,000 on a note related to
the October 1996 sale of Wright Plastic Products. HEAT TREATING Atmosphere Annealing, Inc. Atmosphere Annealing, Inc. provides metal heat treating, phosphate coating and
bar shearing and sawing services to the cold forming, stamping, forging and
casting industries. Its services are sold through Atmospheres own sales
personnel and outside sales representatives, primarily to automotive companies
and automotive suppliers. This units facilities are located in Lansing,
Michigan; Canton, Ohio; and North Vernon, Indiana. Since Atmosphere is a service business, inventory levels for this segment are
traditionally small and consist mainly of steel inventory, various lubricants
and other materials used in the heat treating, phosphate coating or bar
shearing and sawing process. Inventories of this segment represent 100% of
Maxcos total inventories at March 31, 2004. The heat-treating industry is competitive with over 250 heat treaters in
Michigan, Ohio, and Indiana. Atmosphere specializes in high volume, ferrous
heat-treating using large furnaces. In its market niche of this type of
heat-treating, Atmosphere competes with only a limited number of competitors.
Much of the commercial heat treating industry is comprised of smaller companies
that specialize in batch heat-treating such as carburizing, nitriding, tool and
die, brazing, salt bath or induction hardening. This units response time to its customer just-in-time requirements does not
result in significant backlog for this segment. Growth is possible by this unit
in the future due to its customers outsourcing of high volume heat-treating
services. These services are usually outsourced by Atmospheres customers
because of extensive storage requirements, costs, and other issues. Sales for this unit are fairly consistent throughout the year with the
exception of lower volume during model changeovers for its automotive customers
in July, and during the winter holiday season. This segment accounted for 100%
of consolidated net sales for the years ended March 31, 2004, 2003, and 2002. INVESTMENT IN REAL ESTATE 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 March 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 3




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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 prior to
July 2004 by a member of the acquiring entity. After July 2004, L/M Associates
has the ability to require the same member to repurchase the investment.
Approximately $18.2 million of Maxcos guarantees on its real estate debt were
eliminated as a result of the sale of the Master LLC properties. Any real risks on guarantees that Maxco has estimated would be required to be
paid by Maxco have 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 were recognized during
the year ended March 31, 2004 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. OTHER INVESTMENTS In addition to its investments in real estate, the Company has other
investments in 50% or less owned affiliates. Maxcos equity interest is 20% or greater in the following companies and
consequently is accounted for using the equity method: approximately a 36%
interest in Phoenix Financial Group, LTD and its subsidiary Cambridge Group
Investments, LTD (dba Bondpage.com), a registered broker-dealer of securities
that is primarily focused on the trading of fixed income investments; and a 50%
interest in Robinson Oil Company, LLC, which is in the business of acquiring
and developing oil and gas interests. At March 31, 2004, Maxco owned 2,240,605 shares or 17% of Integral Vision, Inc.
common stock. Maxcos ownership of Integral Vision had been greater than 20%
but decreased as Integral Vision stock warrants were exercised in March 2004.
However, Maxco will continue to account for its investment in Integral Vision
under the equity method because of its representation on Integral Visions
Board of Directors. Integral Vision develops, manufactures, and markets
microprocessor-based process monitoring and control systems related to optical
inspection for use in industrial manufacturing environments. Maxco accounts for its investment in Provant, Inc. common stock as securities
available for sale as defined by SFAS 115. Consequently, the securities are
carried at market value with the unrealized gains and losses, net of tax,
reported as a separate component of stockholders equity. In 2004, 2003 and
2002 the Company recognized previously unrealized losses on its investment in
Provant as other than temporary impairments in its statement of operations of
$366,000, $1.4 million and $3.1 million, respectively. In 2003, Maxco received
additional consideration as one of the former shareholders of Strategic
Interactive (Maxcos former 45% owned affiliate sold to Provant, Inc. in
October 1998) in the form of cash and Provant stock. On March 11, 2004 Provant
completed the sale of substantially all its remaining assets. It is in the
process of final liquidation which is expected to be completed by late 2005. DISCONTINUED OPERATIONS Maxcos discontinued operations include Ersco Corporation, which distributes
concrete construction products and accessories, fabricates reinforcing steel
and rents concrete forms used in road and commercial building construction; and
Pak-Sak Industries, Inc., which extrudes polyethylene film and converts it into
a variety of polyethylene bags and packaging materials. For additional information regarding the Companys discontinued operations, see
Note 13 to Notes to Consolidated Financial Statements. RESEARCH AND DEVELOPMENT Expenditures on research activities related to development or improvement of
products were not significant. MAJOR CUSTOMERS 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 year. 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. For the year ended March 31, 2004 sales to
Honda of America Manufacturing, Inc. and GM Powertrain represented 38.3% and
14.3% of consolidated sales, respectively. Amounts due from these customers
represented 43.0% of the respective outstanding trade receivable balance at
March 31, 2004. For the year ended March 31, 2003 sales to Honda of America
Manufacturing, Inc. and GM Powertrain represented 27.2% and 17.3% of
consolidated sales, respectively. Amounts due from these customers represented
41.8% of the respective outstanding trade receivable balance at March 31, 2003.
For the year ended March 31, 2002 sales to Honda of America Manufacturing, Inc.
and GM Powertrain represented 20.1% and 15.7% of consolidated sales,
respectively.  4




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ENVIRONMENTAL FACTORS Compliance by Maxco and its operating subsidiaries with environmental
protection laws had no material effect on capital expenditures, earnings, or
competitive position. EMPLOYEES At March 31, 2004, Maxco and its wholly owned operating subsidiary employed
approximately 260 full time employees. EXPORT SALES AND FOREIGN OPERATIONS The Company and its operating subsidiary had no foreign operations or material
export sales during the years ended March 31, 2004, 2003, or 2002. For additional information regarding industry segment information see Note 11
to Notes to Consolidated Financial Statements. 
 ITEM 2  PROPERTIES The following table provides information relative to the principal properties
owned or leased by the Company and its operating subsidiaries as of March 31,
2004. The Company considers its facilities to be in good operating condition. LOCATION
    
    APPROXIMATE SIZE
    
    OWNED/LEASED
    
    USEHEAT TREATINGAtmosphere Annealing, Inc.Lansing, MI
    
    145,000 sq ft
    
    Leased
    
    Plant and administrative officesLansing, MI
    
    58,000 sq ft
    
    Leased
    
    Heat treating plantCanton, OH
    
    160,000 sq ft on 8 acres
    
    Owned(A)
    
    Heat treating plantN. Vernon, IN
    
    88,000 sq ft on 6 acres
    
    Owned(A)
    
    Heat treating plantCORPORATEMaxco, Inc.Lansing, MI
    
    7,200 sq ft on 1.9 acres
    
    Owned(A)
    
    Executive officesEaton Rapids, MI
    
    9,300 sq ft on 1.5 acres
    
    Owned
    
    Held for sale
 (A)Subject to a mortgage Leases relative to the Companys principal properties expire in December 2004
and are expected to be renewed at substantially the same terms as the present
leases. 
 ITEM 3  LEGAL PROCEEDINGS During the year, Maxco was named as a defendant in certain actions from lenders
as a result of being a guarantor of a real estate investment. The Companys
exposure in these actions is limited to $271,000. The current estimate of the
actual exposure under these actions is $246,000 which has been recorded as a
liability in the accompanying financial statements. 
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 5




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PART II 
 ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Maxcos common stock trades on the Nasdaq SmallCap Market under the symbol MAXC. The approximate number of
record holders of Maxcos common stock at June 30, 2004 was 500. The range of high and low sales prices for the last two fiscal years as reported by NASDAQ were: QUARTER ENDED
    
    HIGH
    
    LOWJune 30, 2002
    
    $
    6.44
    
    
    $
    4.84September 30, 2002
    
    
    6.00
    
    
    
    4.31December 31, 2002
    
    
    7.16
    
    
    
    4.40March 31, 2003
    
    
    6.50
    
    
    
    1.53June 30, 2003
    
    
    4.52
    
    
    
    2.35September 30, 2003
    
    
    3.50
    
    
    
    2.44December 31, 2003
    
    
    3.20
    
    
    
    2.02March 31, 2004
    
    
    3.00
    
    
    
    1.99
 No cash dividends on common stock have been paid during any period. 6




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ITEM 6  SELECTED FINANCIAL DATA Year Ended March 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share data)Net sales(3)
    
    $
    40,798
    
    
    $
    36,827
    
    
    $
    34,696
    
    
    $
    39,560
    
    
    $
    40,700Loss on investments (1)
    
    
    (1,115
    )
    
    
    (9,320
    )
    
    
    (3,103
    )
    
    
    (1,362
    )
    
    
    (860
    )Loss before equity in net (loss) income
of affiliates and discontinued operations
(3)
    
    
    (1,210
    )
    
    
    (10,474
    )
    
    
    (1,299
    )
    
    
    (1,697
    )
    
    
    (508
    )Equity in net (loss) income of affiliates,
net of tax
    
    
    (321
    )
    
    
    (614
    )
    
    
    (528
    )
    
    
    (2,098
    )
    
    
    278(Loss) income from discontinued
operations(3)
    
    
    
    
    
    
    (1,737
    )
    
    
    (2,674
    )
    
    
    (1,010
    )
    
    
    546Net (loss) income
    
    
    (1,531
    )
    
    
    (12,825
    )
    
    
    (4,501
    )
    
    
    (4,805
    )
    
    
    316Net (loss) income per sharedilutedContinuing operations
    
    
    (0.63
    )
    
    
    (3.71
    )
    
    
    (0.72
    )
    
    
    (1.35
    )
    
    
    (0.20
    )Discontinued operations(3)
    
    
    
    
    
    
    (0.56
    )
    
    
    (0.86
    )
    
    
    (0.33
    )
    
    
    0.17Net loss per share(2)
    
    $
    (0.63
    )
    
    $
    (4.27
    )
    
    $
    (1.58
    )
    
    $
    (1.68
    )
    
    $
    (0.03
    )
 At March 31:2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Total assets
    
    $
    35,481
    
    
    $
    38,375
    
    
    $
    87,038
    
    
    $
    97,450
    
    
    $
    102,222Assets of discontinued operations(3)
    
    
    
    
    
    
    474
    
    
    
    29,252
    
    
    
    38,428
    
    
    
    39,786Long-term obligations (net of
current obligations)
    
    
    11,480
    
    
    
    1,113
    
    
    
    11,380
    
    
    
    10,606
    
    
    
    18,004Working capital (deficit)
    
    
    (7,736
    )
    
    
    (19,698
    )
    
    
    (16,846
    )
    
    
    (15,250
    )
    
    
    (10,695
    )
 NOTES  (1)
    
    Includes the following charges for impairment of the Companys investments: Year Ended March 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Provant
    
    $
    366
    
    
    $
    1,360
    
    
    $
    3,103
    
    
    $
    
    
    
    $
    Real estate
    
    
    749
    
    
    
    4,698
    
    
    
    
    
    
    
    
    
    
    
    Foresight Solutions
    
    
    
    
    
    
    2,790
    
    
    
    
    
    
    
    
    
    
    
    Integral Vision
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    1,362
    
    
    
    Vertical VC
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    MYOEM.COM
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    Axson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    860$
    1,115
    
    
    $
    9,320
    
    
    $
    3,103
    
    
    $
    1,362
    
    
    $
    860
  (2)
    
    Net income (loss) per share amounts assume dilution for all years presented.(3)
    
    In accordance with FASB Statement No. 144, the Company reclassified its
results from operations for discontinued operations. See Note 13 to Notes to
Consolidated Financial Statements. No cash dividends on common stock have been paid during any year. The above selected financial data should be read in conjunction with the
consolidated financial statements, which appear in Part II, Item 8 of this
report. 7




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ITEM 7MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting method or its application is generally accepted,
management selects the principle or method that is appropriate in the specific
circumstances. Application of these accounting principles requires the
Companys management to make estimates about the future resolution of existing
uncertainties; as a result, actual results could differ from these estimates.
In preparing these financial statements, management has made its best estimates
and judgments of the amounts and disclosures included in the financial
statements, giving due regard to materiality. The Company does not believe
there is a great likelihood that materially different amounts would be reported
under different conditions or using different assumptions pertaining to the
accounting policies described below. Principles of Consolidation and Transactions With Affiliates The consolidated financial statements include the accounts of Maxco, Inc. and
its majority owned subsidiaries. Upon consolidation, all intercompany accounts
and transactions are eliminated. Investments in greater than 20% owned
unconsolidated investments are accounted for under the equity method.
Investments in less than 20% owned affiliates are accounted for under the cost
method, with the exception of Integral Vision, Inc. which continues to be
accounted for under the equity method as described on page four of this report.
Transactions with equity affiliates are in the ordinary course of business and
are conducted on an arms-length basis. Certain investments in equity
affiliates and other activities may be between related parties and are
conducted on an arms-length basis. On December 20, 2001 the Company sold its 50% equity interest in Mid-State
Industrial Services, Inc. to Maxco President, Max A. Coon, for $1.75 million,
of which $750,000 was paid in cash with the remainder being applied to amounts
due Mr. Coon for advances he had made to the Company and its affiliates.
Additionally, Mid-State retired the $0.5 million obligation it had with Maxco.
A portion of the proceeds from the sale was used to retire certain obligations
not related to Mid-State which were guaranteed by the Company. On August 17, 2001 the Companys previously wholly owned subsidiary, Ersco
Corporation, entered into a sale-leaseback agreement involving some of its
concrete forming products with a limited liability company in which Mr. Coon is
a member. Ersco sold approximately $3.0 million in assets to the LLC that are
now being leased back to Ersco for a period of 60 months. In June 2003 the
Company agreed to assume the lease and as a result, reduced the amount owed to
Contractor Supply Incorporated (the purchaser of Ersco) by $2.3 million. The
Company has recorded the $2.3 million obligation to the leasing company as a
long term obligation in the accompanying financial statements. 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 May 31, 2004. Certain of the debt agreements related to its real
estate investments, which Maxco and other guarantors have guaranteed, are in
default at March 31, 2004. Extensions or forbearance agreements have been
issued by the respective 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 $271,000. The current estimate of the actual exposure under these
agreements is $246,000 which the Company has recorded in the accompanying
financial statements. Investments and Marketable Securities The Company accounts for certain of its investments under SFAS 115 as
securities available-for-sale. 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. The amortized cost of securities in
this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in investment income or
loss. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. The fair value of marketable securities is
based on quoted market value. The Company reviews its investments to determine if the value shows a decline
that has been deemed other than temporary. Maxcos investment in real estate
was reduced by $749,000 and $4.7 million in 2004 and 2003, respectively,
related to other than temporary impairments. Investments in Integral Vision,
Foresight Solutions, Inc., MYOEM.COM, and Vertical VC were impaired in 2003
resulting in a charge of $3.3 million. Maxcos investment in Provant was
impaired by $366,000 in 2004, $1.4 million in 2003 and $3.1 million in fiscal
2002 as a result of the fair value of Provants common stock being less than
the Companys investment. Additionally, the Company recorded a charge of $1.4
million in 2001 to recognize a decline in the value of its investment in
Integral Vision that had been deemed other than temporary. 8




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Revenue Recognition The Company recognizes service revenue and revenue from product sales upon
transfer of title, which is upon shipment. An estimate of reserves is recorded
for anticipated returns and credit memos which will be issued on sales
recognized to date. The SECs Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition, provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. The
Company has concluded its revenue recognition policy is appropriate and in
accordance with generally accepted accounting principles and SAB No. 101. Goodwill, Intangible and Other Long-Lived Assets Property, plant, and equipment, and certain other definite-lived assets are
amortized over their useful lives. Useful lives are based on managements
estimates of the period that the asset will be useful to the Company. Effective April 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), which resulted in the discontinuance of
amortization of goodwill and indefinite-lived intangible assets that were
recorded in connection with previous business combinations, and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No.
144). Goodwill, intangible, and other long-lived assets are reviewed by
management for impairment whenever events or changes in circumstances indicate
the carrying amounts may not be recoverable. If management believes impairment
may exist, an assessment is performed. This assessment consists of comparing
the estimated undiscounted future cash flows with the carrying amount of the
long-lived assets. If the undiscounted future cash flows are less than the
carrying amounts of the long-lived assets, the Company adjusts the carrying
amount of the long-lived assets to their estimated fair value. Fair value is
determined by anticipated future cash flows discounted at a rate commensurate
with the risk involved. All of the Companys goodwill is related to the heat
treating segment. Goodwill totaled approximately $1.4 million at March 31,
2004 and represented 4% of total assets. Amortization expense was $20,000,
$30,000, and $277,000 for the years ended March 31, 2004, 2003, and 2002,
respectively. During 2004, the Company performed the impairment tests of its goodwill,
indefinite-long-lived intangible and other long-lived assets required by SFAS
No. 142 and No. 144. The Companys tests indicated that the fair value of its
heat treating segment, which was determined by using discounted cash flows and
market multiples, exceeded the carrying value. As a result, the Company did not
record an impairment charge for this segment in the accompanying financial
statements. The Company will continue to perform an impairment review on an
annual basis (or more frequently if impairment indicators arise). The following table presents net loss and net loss per share information as if
goodwill were no longer amortized as of April 1, 2001: Year Ended March 31,2004
    
    2003
    
    2002(in thousands, except per share data)Net loss
    
    $
    (1,531
    )
    
    $
    (12,825
    )
    
    $
    (4,342
    )Net loss per common
sharebasic and
diluted
    
    $
    (0.63
    )
    
    $
    (4.27
    )
    
    $
    (1.53
    )
 Derivative Financial Instruments The Company applies hedge accounting pursuant to SFAS 133, as amended, with
respect to interest rate swap agreements. Accordingly, changes in the fair
value of the swap are reported as a component of other comprehensive income and
are not included in operating results. RESULTS OF OPERATIONS The following is a discussion of the major elements relating to Maxcos
financial and operating results for 2004 compared with 2003, and 2003 compared
with 2002. The comments that follow should be read in conjunction with Maxcos
Consolidated Financial Statements and related notes, contained in Part II, Item
8 of this report. Except for the historical information contained herein, the matters discussed
in this report are forward-looking statements made pursuant to the safe harbor
provisions of Section 27A of the securities Act of 1933 and Section 21 E of the
Securities Act of 1934. Such statements are based on managements current
expectations and are subject to a number of factors and uncertainties, which
could cause actual results to differ materially from those described in the
forward-looking statements. These forward-looking statements represent the
Companys best estimates as of the date of this report. The Company assumes no
obligation to update such estimates except as required by the rules and
regulations of the Securities and Exchange Commission. 2004 versus 2003 Net sales increased to $40.8 million in 2004 compared to $36.8 million in 2003.
Operating earnings were $169,000 in 2004 compared to a loss of $534,000 in
2003. Net loss in 2004 was $1.5 million, a loss of $1.9 million after preferred
dividends, or 9




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##### Table of Contents



a loss of $0.63 per share assuming dilution compared to last years net loss of
$12.8 million, a loss of $13.2 million after preferred dividends, or a loss of
$4.27 per share assuming dilution. Sales and operating earnings for the years ending March 31, 2004 and 2003 by
the Companys heat treating and corporate and other segments were as follows: Year Ended
    
    Year EndedMarch 31, 2004
    
    March 31, 2003Operating
    
    
    
    
    
    OperatingEarnings
    
    
    
    
    
    EarningsNet Sales
    
    (Loss)
    
    Net Sales
    
    (Loss)(in thousands)Heat treating
    
    $
    40,754
    
    
    $
    2,137
    
    
    $
    36,740
    
    
    $
    2,147Corporate and other
    
    
    44
    
    
    
    (1,968
    )
    
    
    87
    
    
    
    (2,681
    )
 The increase in net sales at the heat treating segment was due to increased
business with Honda of America Manufacturing, Inc. The decrease in revenue at
corporate was due to a reduction in rental income of $43,000 from the prior
year as a result of the sale of a building in the third quarter. Consolidated gross profit (net sales less cost of sales and operating expenses)
increased $502,000 to $14.0 million from $13.5 million. Consolidated gross
margin (gross profit as a percentage of net sales) decreased to 34.4% from
36.7%. The increase in heat treating sales was the primary reason that gross
profit increased in 2004. Reductions in the costs of labor ($476,000),
supplies ($134,000), maintenance ($272,000), shipping ($87,000), and general
factory costs ($224,000) contributed to the increased gross profit. Natural gas
and nitrogen costs increased by $162,000 in 2004. 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. Selling, general, and administrative (SG&A) expenses decreased $300,000 or
2.7% to $11.0 million from $11.3 million. Employee insurance costs at
Atmosphere increased approximately $650,000 in 2004. Corporate employee
related costs of $202,000 and general insurance of $148,000 were reduced in
2004. The Company recorded a charge in the prior year of approximately
$148,000 to write off certain assets related to the Companys investments. Also
in 2003 the Company incurred fees of approximately $138,000 charged by a
primary lender and costs totaling $248,000 associated with efforts to secure
alternative financing. The Company recognized gains totaling $149,000 from the sale of two of the
Companys buildings in the prior year. Depreciation and amortization expense was comparable to the prior year. Investment
and interest income decreased by $564,000 in 2004. In 2003, the
Company ceased the recording of interest income on certain notes when it was
determined that any further amount would be uncollectible. The carrying value
of the notes and accrued interest were adjusted in 2003 to estimated realizable
values. Gain
on the sale of investments was $1.3 million in 2004 compared to a loss of
$265,000 in 2003. In 2004, the Company recognized gains of $910,000 on the
sale of land, $180,000 on the sale of Integral Vision, Inc. common
stock, and $250,000 to adjust a note receivable to its realizable
value, collected subsequent to March 31, 2004. In
2003, the Company had recorded a charge of $265,000 to adjust this note receivable to
its estimated realizable amount at that time. Interest expense decreased 13.5% to $1.7 million from $1.9 million primarily
due to reduced borrowing levels. The Company recorded the following charges to recognize declines in the value
of its investments that were deemed other than temporary: Year Ended March 31,2004
    
    2003(in thousands)Provant
    
    $
    366
    
    
    $
    1,360Real estate
    
    
    749
    
    
    
    4,698Foresight Solutions
    
    
    
    
    
    
    2,790Integral Vision
    
    
    
    
    
    
    122Vertical VC
    
    
    
    
    
    
    250MYOEM.COM
    
    
    
    
    
    
    100$
    1,115
    
    
    $
    9,320
 10




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##### Table of Contents



Equity in net loss of affiliates consists of Maxcos share of the operating
results of 50% or less owned entities accounted for under the equity method. On
a consolidated basis, equity in net loss of affiliates was $321,000 for the
year ended March 31, 2004, compared to a loss of $614,000, net of tax, for the
prior year comparable period. Due to the uncertainty of future realization of deferred tax assets, a
valuation allowance of $521,000 was recorded in 2004 resulting in a variation
from the statutory rate of 34%. 2003 versus 2002 Net sales increased to $36.8 million in 2003 compared to $34.7 million in 2002.
Operating loss was $534,000 in 2003 compared to a loss of $9,000 for the
comparable period in 2002. Net loss in 2003 was $12.8 million, a loss of $13.2
million after preferred dividends, or a loss of $4.27 per share assuming
dilution compared to a net loss of $4.5 million, a loss of $4.9 million after
preferred dividends, or a loss of $1.58 per share assuming dilution in 2002. Sales and operating earnings for the years ending March 31, 2003 and 2002 by
the Companys heat treating and corporate and other segments were as follows: Year Ended
    
    Year EndedMarch 31, 2003
    
    March 31, 2002Operating
    
    
    
    
    
    OperatingEarnings
    
    
    
    
    
    EarningsNet Sales
    
    (Loss)
    
    Net Sales
    
    (Loss)(in thousands)Heat treating
    
    $
    36,740
    
    
    $
    2,147
    
    
    $
    34,364
    
    
    $
    2,482Corporate and other
    
    
    87
    
    
    
    (2,681
    )
    
    
    332
    
    
    
    (2,491
    )
 The increase in net sales at the heat treating segment was due to increased
business with Honda of America Manufacturing, Inc. Offsetting this increase was
a decrease in sales to a customer who moved a portion of their heat treating
requirements in-house or to another vendor. The decrease in revenue at
corporate was due to a reduction in rental income of $257,000 from 2002 as a
result of the sale of two buildings in the first quarter. Consolidated gross profit (net sales less cost of sales and operating expenses)
decreased $660,000 to $13.5 million from $14.2 million. Consolidated gross
margin (gross profit as a percentage of net sales) decreased to 36.7% from
40.9%. The decrease in heat treating sales to a customer who moved a portion of
their heat treating requirements in-house or to another vendor was the primary
reason that gross profit declined in 2003. Reductions in the costs of labor,
natural gas, and shipping totaling $788,000 were offset by higher maintenance
costs of $559,000. 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. Contributing to the decline in gross profit and gross margin was
the reduction in rental income of $257,000 described above. Selling, general, and administrative (SG&A) expenses increased $277,000 or
2.5% to $11.3 million from $11.0 million. Fees charged by a primary lender of
approximately $138,000 and costs associated with efforts to secure alternative
financing totaling $248,000 were the principal reasons for the increase in
SG&A. Corporate expenses for outside services were reduced by $93,000. SG&A
expenses for the Companys heat-treating segment were comparable to the 2002. The Company recognized gains totaling $149,000 from the sale of two of the
Companys buildings. Depreciation and amortization expense decreased $263,000 to $2.9 million from
$3.2 million primarily due to the discontinuation of the amortization of
goodwill and the reduced depreciation resulting from the sale of the two
buildings. Investment and interest income was higher in 2002 primarily due to the Company
receiving $273,000 from a life insurance company demutualization in that year. Gains on the sale of investments decreased $2.7 million from a gain in 2002 of
$2.4 million to a loss of $265,000 in 2003. In 2003, the Company recorded a
charge of $265,000 to adjust a note receivable to its realizable amount. In
fiscal 2002 the Company recognized income of $2.0 million representing Maxcos
remaining share of the additional consideration to be received as one of the
former shareholders of Strategic Interactive, Inc. (Maxcos former 45% owned
affiliate sold to Provant, Inc. in October 1998). The payment was made to the
Company in cash and common stock in fiscal 2003. The Company also recognized a
gain of approximately $422,000 on the sale of its investment in Mid-State
Industrial Services, Inc. in 2002. Interest expense decreased 7.3% to $1.9 million from $2.1 million. A reduction
in interest expense due to lower borrowing levels was partially offset by
penalty interest charged by a primary lender. 11




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##### Table of Contents



The Company recorded the following charges to recognize declines in the value
of its investments that were deemed other than temporary: Year Ended March 31,2003
    
    2002(in thousands)Provant
    
    $
    1,360
    
    
    $
    3,103Real estate
    
    
    4,698
    
    
    
    Foresight Solutions
    
    
    2,790
    
    
    
    Integral Vision
    
    
    122
    
    
    
    Vertical VC
    
    
    250
    
    
    
    MYOEM.COM
    
    
    100
    
    
    
    $
    9,320
    
    
    $
    3,103
 Equity in net income (loss) of affiliates consists of Maxcos share of the
operating results of 50% or less owned entities accounted for under the equity
method. On a consolidated basis, equity in net loss of affiliates was $614,000,
net of tax, for the year ended March 31, 2003, compared to a loss of $528,000,
net of tax, for 2002. Due to the uncertainty of future realization of deferred tax assets, a
valuation allowance of $3.0 million was recorded in 2003 resulting in a
variation from the statutory rate of 34%. LIQUIDITY AND SOURCES OF CAPITAL Operating
activities for 2004 generated $2.3 million in cash. Earnings, after
non-cash adjustments, generated $1.5 million of that amount. Changes in net
working capital generated approximately $800,000. Overall, the Companys working capital deficit (defined as current assets less
current liabilities) decreased from $19.7 million at March 31, 2003 to $7.7
million at March 31, 2004. The Company had $14.5 million of its debt classified
as short term at March 31, 2003 due to forbearance agreements reached with two
principal lenders. The Company has replaced these lenders with new financial
institutions. The aggregate principal maturities of long-term debt are approximately $2.1
million in 2005, $4.3 million in 2006, and $7.1 million thereafter. The
Company generated approximately $1.1 million in cash from investing activities.
Specifically, during the year, the Company received $1.3 million in cash from
the sale of land held for investment and a building. The Company generated
approximately $240,000 from the sale of Integral Vision common stock.
Atmosphere Annealing purchased approximately $700,000 of equipment during
2004. Net cash used in financing activities during the year amounted to $3.7 million.
In November 2003, Atmosphere Annealing reached an agreement with a new
financial institution to repay a lender with which the Company had previously
been in default. The principal amount repaid was approximately $8.1 million.
The new facilities are comprised of a $6.0 million revolving credit facility
($2.6 million borrowed at March 31, 2004), $6.4 million of term debt with a 5
year amortization period, and $800,000 of term debt with a two year
amortization period. These facilities are secured by all of the assets of
Atmosphere Annealing. Repayments of other long-term and short-term obligations
were $5.0 million. Subsequent to March 31, 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s heat treating segment occupies facilities and uses equipment under
operating lease agreements requiring annual rental payments approximating
$462,000 in 2005, $177,000 in 2006, $87,000 in 2007, and $73,000 in 2008 for a
total commitment aggregating $799,000. At March 31, 2004, the 2,240,605 shares of Integral Vision common stock that
Maxco owns had an aggregate market value of approximately $5.2 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 March 31, 2004, the 2,837,089 shares of Provant common stock that Maxco owns
had an aggregate market value of approximately $85,000. Maxcos investment in
Provant is reflected in Maxcos financial statements as an available-for-sale
security. 12




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##### Table of Contents



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. SEASONAL AND QUARTERLY FLUCTUATIONS The following table sets forth consolidated operating data for each of the
eight quarters ended March 31, 2004. The unaudited quarterly information has
been prepared on the same basis as the annual information and, in managements
opinion, includes all adjustments, consisting of, with the exception of
impairment charges, only normal recurring entries, necessary for a fair
presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any
future period. Quarter EndedFiscal 2003
    
    Fiscal 20046/30/02
    
    9/30/02
    
    12/31/02
    
    3/31/03
    
    6/30/03
    
    9/30/03
    
    12/31/03
    
    3/31/04(in thousands, except per share data)Net sales(3)
    
    $
    8,926
    
    
    $
    8,908
    
    
    $
    8,701
    
    
    $
    10,292
    
    
    $
    9,573
    
    
    $
    9,189
    
    
    $
    10,562
    
    
    $
    11,474Gross profit(3)
    
    
    3,551
    
    
    
    3,146
    
    
    
    3,296
    
    
    
    3,529
    
    
    
    3,421
    
    
    
    3,119
    
    
    
    3,376
    
    
    
    4,108Gain (loss) on sale of investments(1)
    
    
    
    
    
    
    (265
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,340Loss on
investments(2)
    
    
    (80
    )
    
    
    (4,280
    )
    
    
    
    
    
    
    (4,960
    )
    
    
    (283
    )
    
    
    (57
    )
    
    
    (26
    )
    
    
    (749
    )Equity in net income (loss)
of affiliates, net of tax
    
    
    (309
    )
    
    
    (122
    )
    
    
    (76
    )
    
    
    (107
    )
    
    
    
    
    
    
    (90
    )
    
    
    50
    
    
    
    (281
    )Income (loss) from
discontinued operations(3)
    
    
    5
    
    
    
    (1,666
    )
    
    
    151
    
    
    
    (227
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (418
    )
    
    
    (5,224
    )
    
    
    (572
    )
    
    
    (6,611
    )
    
    
    122
    
    
    
    (787
    )
    
    
    (857
    )
    
    
    (9
    )Net income (loss) per common
sharediluted:Continuing operations
    
    $
    (0.17
    )
    
    $
    (1.18
    )
    
    $
    (0.27
    )
    
    $
    (2.09
    )
    
    $
    0.01
    
    
    $
    (0.29
    )
    
    $
    (0.31
    )
    
    $
    (0.04
    )Discontinued operations(3)
    
    
    
    
    
    
    (0.54
    )
    
    
    0.05
    
    
    
    (0.07
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.17
    )
    
    $
    (1.72
    )
    
    $
    (0.22
    )
    
    $
    (2.16
    )
    
    $
    0.01
    
    
    $
    (0.29
    )
    
    $
    (0.31
    )
    
    $
    (0.04
    )
  (1)
    
    Represents gains of $910,000 on the sale of land, $180,000 on the
sale of Integral Vision stock, and adjustments to a note receivable
to a realizable amount of ($265,000) in fiscal 2003 and $250,000 in
fiscal 2004.(2)
    
    Represents the following charges to recognize declines in the value
of the Companys investments that were deemed other than temporary: Quarter EndedFiscal 2003
    
    Fiscal 20046/30/02
    
    9/30/02
    
    12/31/02
    
    3/31/03
    
    6/30/03
    
    9/30/03
    
    12/31/03
    
    3/31/04(in thousands)Provant
    
    $
    (80
    )
    
    $
    (1,280
    )
    
    $
    
    
    
    $
    
    
    
    $
    (283
    )
    
    $
    (57
    )
    
    $
    (26
    )
    
    $
    Real estate
    
    
    
    
    
    
    (3,000
    )
    
    
    
    
    
    
    (1,698
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (749
    )Foresight Solutions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,790
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Integral Vision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vertical VC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MYOEM.COM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (80
    )
    
    $
    (4,280
    )
    
    $
    
    
    
    $
    (4,960
    )
    
    $
    (283
    )
    
    $
    (57
    )
    
    $
    (26
    )
    
    $
    (749
    )
  (3)
    
    In accordance with FASB Statement No. 144, the Company reclassified its
results from operations for discontinued operations. See Note 13 to Notes to
Consolidated Financial Statements. The sum of the quarterly net income per share amounts may not equal the annual
amounts reported. Net income per share is computed independently for each
quarter and the full year and is based on the respective weighted average
common shares outstanding. 13




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##### Table of Contents



Maxcos sales and operating results have varied 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 customer model changeovers 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. IMPACT OF INFLATION Inflation impacts the Companys costs for materials, labor and related costs of
manufacturing. Specifically, 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. NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS In April 2003 the FASB issued SFAS No. 149, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments imbedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative discussed in paragraph 6 (b) of SFAS No. 133, clarifies when a
derivative contains a financing component, amends a definition to conform to
language used in FASB interpretation No. 45, and amends certain other existing
pronouncements. SFAS No. 149 was effective for contracts entered into or
modified after June 30, 2003. The provisions of SFAS No. 149 did not have a
material impact on the financial position, results of operations, or cash flows
of the Company. In May 2003 the FASB issued SFAS No. 150, which established standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 was effective for financial instruments
entered into or modified after May 31, 2003 and otherwise was effective
beginning July 1, 2003. The provisions of SFAS No. 150 did not impact the
consolidated financial position of the Company. In December 2003, the Financial Accounting Standards Board (FASB) issued
revised Financial Interpretation No. (FIN) 46-R Consolidation of Variable
Interest Entities. This standard clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statementsand addresses
consolidation by business enterprises of variable interest entities, more
commonly known as Special Purpose Entities or SPEs. FIN 46-R requires
existing unconsolidated variable interest entities interests to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risk among the parties involved. FIN 46-R also enhances the
disclosure requirements related to variable interest entities. The
interpretation is effective with respect to interests in variable interest
entities created after January 31, 2003. For interests in variable interest
entities created before February 1, 2003, the interpretation applies to the
first interim or annual reporting period beginning after December 15, 2003. The Company reviewed the requirements of FIN 46-R and concluded that the
provisions of FIN 46-R were not applicable to any of its unconsolidated
investments. The Company determined that consolidation of its less than
majority owned investments is not required. The Company believes that its real
risk related to the guaranteed debt of the real estate investment that Maxco
would be required to satisfy is estimated to be $246,000 and has been recorded
in the accompanying financial statements. The Company does not believe that
there is unusual degree of risk related to the guarantees because of sufficient
underlying asset values supporting the respective debt obligations.
Additionally, the assets of the real estate investment are currently being
liquidated and the Company has adjusted the carrying value of this investment
to its estimated net realizable value. Accordingly, it is not expected that the
provisions of FIN 46-R would have a material impact on financial position,
results of operations, or cash flows of the Company. 
 ITEM 7A  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 $6.6 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 $11.9 million at March 31, 2004. A 1% increase from the
prevailing interest rates at March 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 $119,000 based on principal
balances at March 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. 14




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##### Table of Contents



ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The response to this item is submitted in a separate section of this report. 
 ITEM 9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS Effective May 7, 2004, the Company engaged the accounting firm of Rehmann
Robson as its new independent public accountants. Effective May 7, 2004, the
Company dismissed Ernst & Young LLP. The reports of Ernst and Young LLP on the consolidated financial statements of
Maxco for the past two fiscal years ended March 31, 2003 and March 31, 2002 did
not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles,
except that the reports of Ernst & Young LLP on Maxcos financial statements
for the past two fiscal years ended March 31, 2003 and 2002 contained a
modification as to uncertainty concerning Maxcos ability to continue as a
going concern. The decision to change Maxcos accounting firm was approved by the Audit
Committee of the Board of Directors on May 6, 2004. In connection with the audits of Maxcos financial statements for each of the
two fiscal years ended March 31, 2003 and 2002 and in the subsequent interim
periods from March 31, 2003 through and including May 7, 2004, there were no
disagreements between Maxco and its auditors, Ernst & Young LLP on any matter
of accounting principles or practices, consolidated financial statement
disclosure, or auditing scope and procedures, which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make
reference to the matter in its reports. Maxco has not consulted with Rehmann Robson during the last two fiscal years
ended March 31, 2003 and 2002 or during the subsequent interim period from
March 31, 2003 through and including May 7, 2004, on either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on Maxcos consolidated
financial statements. 
 ITEM 9A  CONTROLS AND PROCEDURES a) Evaluation of disclosure controls and procedures The Companys chief executive officer and chief financial officer have each
reviewed and evaluated the effectiveness of our disclosure controls and
procedures (as defined in Securities Exchange Act of 1934 Rules 13a-14(c) and
15d-14(c)) as of a date within 90 days before the filling date of this report.
Based on that evaluation, the chief executive officer and chief financial
officer have each concluded that the Companys current disclosure controls and
procedures are effective to ensure that information required to be disclosed in
its periodic reports filed under the Exchange Act is recorded, processed,
summarized, and reported, in each case, within the time period specified by the
SECs rules and regulations. b) Changes in internal controls There have not been any significant changes in the Companys internal controls
or in other factors that could significantly affect these controls subsequent
to the date of their evaluation. There were no significant deficiencies or
material weakness, and therefore no corrective actions were taken. 15




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##### Table of Contents



PART III 
 ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 10 is hereby incorporated by reference from the Registrants definitive
proxy statement to be filed within 120 days of March 31, 2004. 
 ITEM 11  EXECUTIVE COMPENSATION Item 11 is hereby incorporated by reference from the Registrants definitive
proxy statement to be filed within 120 days of March 31, 2004. 
 ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 12 is hereby incorporated by reference from the Registrants definitive
proxy statement to be filed within 120 days of March 31, 2004. 
 ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 13 is hereby incorporated by reference from the Registrants definitive
proxy statement to be filed within 120 days of March 31, 2004. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Item 14 is hereby incorporated by reference from the Registrants definitive
proxy statement to be filed within 120 days of March 31, 2004. 16




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PART IV 
 ITEM 15  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2)The response to this portion of Item 15 is submitted as a
separate section of this report. (3) Listing of Exhibits  Exhibit Number  3
    
    Restated Articles of Incorporation are hereby
incorporated by reference 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, 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 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
registrants Form 8-K dated January 17, 1997.10.12
    
    Asset Purchase Agreement  Axson North America Inc. is
hereby incorporated by reference from registrants Form 10-Q dated
February 14, 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, 2004.10.37
    
Business Loan Agreement between Capitol National Bank and
Maxco, Inc. dated May 28, 2004.21
    
    Subsidiaries of the Registrant 17




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23.1
    
    Consent of Registered Public Accounting FirmRehmann
Robson (Form S-8 filed June 2, 1992  File No. 33-48351 and Form
S-8 filed November 19, 1998  File No. 333-67539).23.2
    
    Consent of Registered Public Accounting FirmErnst &
Young LLP (Form S-8 filed June 2, 1992  File No. 33-48351 and
Form S-8 filed November 19, 1998  File No. 333-67539).23.3
    
    Consent of Registered Public Accounting FirmMoore
Stephens Doeren Mayhew (Form S-8 filed June 2, 1992  File No.
33-48351 and Form S-8 filed November 19, 1998  File No.
333-67539).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.  (b)
    
    Reports on Form 8-K:None(c)
    
    Exhibits -  Incentive agreement between Sanjeev Deshpande and Maxco, Inc. dated April 20, 2004-  Business Loan Agreement between Capitol National Bank and Maxco, Inc. dated May 28, 2004-  Subsidiaries of the Registrant-  Consent of Registered Public Accounting FirmRehmann Robson-  Consent of Registered Public Accounting FirmErnst & Young LLP-  Consent of Registered Public Accounting FirmMoore Stephens Doeren Mayhew-  Certification of Chief Executive Officer-  Certification of Chief Financial Officer
  (d)
    
    Financial Statement SchedulesNone 18




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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. Date    July 13, 2004

    MAXCO, INC.
By /S/ VINCENT SHUNSKY

Vincent Shunsky, Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer) 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 and in the capacities and on the dates indicated. /S/ MAX A. COON
    
    July 13, 2004
    
    President (Principal Executive Officer) and DirectorMax A. Coon
    
    Date/S/ VINCENT SHUNSKY
    
    July 13, 2004
    
    Vice President of Finance and Treasurer (PrincipalFinancial and Accounting Officer) and DirectorVincent Shunsky
    
    Date/S/ ERIC L. CROSS
    
    July 13, 2004
    
    DirectorEric L. Cross
    
    Date/S/ CHARLES J. DRAKE
    
    July 13, 2004
    
    DirectorCharles J. Drake
    
    Date/S/ JOEL I. FERGUSON
    
    July 13, 2004
    
    DirectorJoel I. Ferguson
    
    Date/S/ RICHARD G. JOHNS
    
    July 13, 2004
    
    DirectorRichard G. Johns
    
    Date/S/ DAVID R. LAYTON
    
    July 13, 2004
    
    DirectorDavid R. Layton
    
    Date/S/ SANJEEV DESHPANDE
    
    July 13, 2004
    
    DirectorSanjeev Deshpande
    
    Date/S/ SAMUEL O. MALLORY
    
    July 13, 2004
    
    DirectorSamuel O. Mallory
    
    Date
 19




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ANNUAL REPORT ON FORM 10-K ITEM 15(a)(1) AND (2), (c), AND (d) FINANCIAL STATEMENTS CERTAIN EXHIBITS YEAR ENDED MARCH 31, 2004 MAXCO, INC. LANSING, MICHIGAN 20




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FORM 10-KITEM 15(a)(1) AND (2) MAXCO, INC. AND SUBSIDIARIES 
 FINANCIAL STATEMENTS The following consolidated financial statements of Maxco, Inc. and subsidiaries
are included in Item 8: Page(s)Reports of Registered Public Accounting Firms
    
    
    22-23Consolidated balance sheets  March 31, 2004 and 2003
    
    
    24Consolidated statements of operations  Years ended March 31, 2004, 2003, and 2002
    
    
    25Consolidated statements of stockholders equity  Years ended March 31, 2004, 2003, and 2002
    
    
    26Consolidated statements of cash flows  Years ended March 31, 2004, 2003, and 2002
    
    
    27Notes to consolidated financial statements  Year ended March 31, 2004
    
    
    28-40
 All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are included in Notes to
Consolidated Financial Statements, are not required under the related
instructions or are inapplicable and, therefore, have been omitted. Financial statements of the Registrants significant unconsolidated affiliate
(Integral Vision, Inc.) are hereby incorporated by reference from the
Integral Vision, Inc. Form 10-K for the year ended December 31, 2003, as
filed with the Securities and Exchange Commission (SEC File Number 0-12728). 21




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REPORT OF REHMANN ROBSON, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders
Maxco, Inc.
Lansing, Michigan We have audited the accompanying consolidated balance sheet of Maxco, Inc. and
subsidiaries as of March 31, 2004, and the related consolidated statements of
operations, stockholders equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We conducted our audit 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Maxco,
Inc. and subsidiaries as of March 31, 2004, and the consolidated results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America. /S/ Rehmann Robson
 Troy, Michigan
July 6, 2004 22




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REPORT OF ERNST & YOUNG, LLP, REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors, Maxco, Inc.: We have audited the accompanying consolidated balance sheet of Maxco, Inc. and
subsidiaries as of March 31, 2003 and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the two years in
the period ended March 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Integral Vision, Inc., (a corporation in which the Company had
approximately a 24% interest) as of December 31, 2002 and for the two years in
the period ended December 31, 2002, have been audited by other auditors whose
report has been furnished to us; insofar as our opinion on the consolidated
financial statements relates to data included for Integral Vision, Inc., it is
based solely on their report. We conducted our audits in accordance with auditing standards generally
accepted in the 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 consolidated financial position of Maxco,
Inc. and subsidiaries at March 31, 2003, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
March 31, 2003, in conformity with accounting principles generally accepted in
the United States. The accompanying consolidated financial statements have been prepared assuming
that Maxco, Inc. will continue as a going concern. As more fully described in
Note 1 to the consolidated financial statements, Maxco, Inc. is currently
negotiating with third parties in an attempt to obtain alternative financing,
which, in managements opinion, would provide adequate cash flows to meet its
debt service requirements. There can be no assurance that the Company will
have sufficient funds to meet current debt service requirements. Uncertainties
inherent in obtaining additional sources of funds raise substantial doubt about
Maxco, Inc.s ability to continue as a going concern. Managements intentions
with respect to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. As discussed in Notes 1 and 13 to the consolidated financial statements, in
2003 the Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, which changed its method of accounting for goodwill and indefinite-lived
intangible assets, and SFAS No. 144, which separately reported discontinued
operations for all years reported. /s/ Ernst & Young LLP
 Detroit, Michigan
June 11, 2003 23




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##### Table of Contents



CONSOLIDATED BALANCE SHEETSMAXCO, INC. AND SUBSIDIARIES March 31,2004
    
    2003(in thousands)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    78
    
    
    $
    391Accounts receivable, less allowance of $134,000 in 2004 and $150,000 in 2003
    
    
    7,629
    
    
    
    7,236Inventories  Note 1
    
    
    408
    
    
    
    176Prepaid expenses and other
    
    
    429
    
    
    
    227Total Current Assets
    
    
    8,544
    
    
    
    8,030Marketable Securities  Note 1
    
    
    2
    
    
    
    312Property and EquipmentLand
    
    
    446
    
    
    
    446Buildings
    
    
    6,170
    
    
    
    6,166Machinery, equipment, and fixtures
    
    
    29,068
    
    
    
    28,40135,684
    
    
    
    35,013Allowances for depreciation
    
    
    (15,265
    )
    
    
    (12,416
    )20,419
    
    
    
    22,597Other AssetsInvestments  Note 9
    
    
    1,138
    
    
    
    1,157Notes and contracts receivable and other, less allowance of $350,000 in 2004 and $600,000 in 2003
    
    
    1,338
    
    
    
    981Advances to affiliate
    
    
    2,200
    
    
    
    3,008Accounts receivable, related parties  Note 2
    
    
    416
    
    
    
    392Intangibles  Note 1
    
    
    1,424
    
    
    
    1,424Non-current assets of discontinued operations  Note 13
    
    
    
    
    
    
    4746,516
    
    
    
    7,436$
    35,481
    
    
    $
    38,375LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesNotes payable  Note 4
    
    $
    4,885
    
    
    $
    18,780Accounts payable  Note 2
    
    
    4,221
    
    
    
    3,425Employee compenstion
    
    
    1,525
    
    
    
    1,221Taxes, interest, and other liabilities
    
    
    3,585
    
    
    
    3,004Current maturities of long-term obligations
    
    
    2,064
    
    
    
    995Current liabilities of discontinued operations  Note 13
    
    
    
    
    
    
    303Total Current Liabilities
    
    
    16,280
    
    
    
    27,728Long-Term Obligations, Less Current Maturities  Note 4
    
    
    11,480
    
    
    
    1,113Total Liabilities
    
    
    27,760
    
    
    
    28,841Stockholders Equity  Notes 5 and 6Preferred stock:Series Three: 10% cumulative callable, $60 face value; 14,784 shares issued and
outstanding
    
    
    678
    
    
    
    678Series Four: 10% cumulative callable, $51.50 face value; 46,414 shares issued and
outstanding
    
    
    2,390
    
    
    
    2,390Series Five: 10% cumulative callable, $120 face value; 6,648 shares issued and outstanding
    
    
    798
    
    
    
    798Series Six: 10% cumulative callable, $160 face value; 20,000 shares authorized, none
issued
    
    
    
    
    
    
    3,866
    
    
    
    3,866Common stock, $1 par value; 10,000,000 shares authorized, 3,101,195 shares issued and outstanding
    
    
    3,101
    
    
    
    3,101Accumulated other comprehensive loss
    
    
    (172
    )
    
    
    (298
    )Retained earnings
    
    
    926
    
    
    
    2,865Total Stockholders Equity
    
    
    7,721
    
    
    
    9,534$
    35,481
    
    
    $
    38,375
 See notes to consolidated financial statements. 24




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CONSOLIDATED STATEMENTS OF OPERATIONS
MAXCO, INC. AND SUBSIDIARIES Year Ended March 31,2004
    
    2003
    
    2002(in thousands, except per share data)Net Sales
    
    $
    40,798
    
    
    $
    36,827
    
    
    $
    34,696Costs and Expenses:Cost of sales and operating expenses
    
    
    26,774
    
    
    
    23,305
    
    
    
    20,514Selling, general, and administrative
    
    
    10,956
    
    
    
    11,256
    
    
    
    10,979Gain on sale of buildings
    
    
    
    
    
    
    (149
    )
    
    
    Depreciation and amortization
    
    
    2,899
    
    
    
    2,949
    
    
    
    3,21240,629
    
    
    
    37,361
    
    
    
    34,705Operating Earnings (Loss)
    
    
    169
    
    
    
    (534
    )
    
    
    (9
    )Other Income (Expense):Investment and interest income
    
    
    150
    
    
    
    714
    
    
    
    887Gain (loss) on sale of investments  Note 9
    
    
    1,340
    
    
    
    (265
    )
    
    
    2,447Loss on sale of assets
    
    
    (72
    )
    
    
    
    
    
    
    Interest expense
    
    
    (1,682
    )
    
    
    (1,944
    )
    
    
    (2,096
    )Loss on investments  Note 9
    
    
    (1,115
    )
    
    
    (9,320
    )
    
    
    (3,103
    )(1,379
    )
    
    
    (10,815
    )
    
    
    (1,865
    )Loss Before Federal Income Taxes, Equity in Net Loss of Affiliates, and
Discontinued Operations
    
    
    (1,210
    )
    
    
    (11,349
    )
    
    
    (1,874
    )Federal income tax benefit  Note 8
    
    
    
    
    
    
    875
    
    
    
    575Loss Before Equity in Net Loss of Affiliates and Discontinued Operations
    
    
    (1,210
    )
    
    
    (10,474
    )
    
    
    (1,299
    )Equity in net loss of affiliates, net of tax  Notes 3, 8, and 9
    
    
    (321
    )
    
    
    (614
    )
    
    
    (528
    )Loss from Continuing Operations
    
    
    (1,531
    )
    
    
    (11,088
    )
    
    
    (1,827
    )Loss from discontinued operations, net of tax  Note 13
    
    
    
    
    
    
    (1,737
    )
    
    
    (2,674
    )Net Loss
    
    
    (1,531
    )
    
    
    (12,825
    )
    
    
    (4,501
    )Less preferred stock dividends
    
    
    (408
    )
    
    
    (408
    )
    
    
    (408
    )Net Loss Applicable to Common Stock
    
    $
    (1,939
    )
    
    $
    (13,233
    )
    
    $
    (4,909
    )Net Loss Per Share  Basic and Diluted  Note 12Continuing operations
    
    $
    (0.63
    )
    
    $
    (3.71
    )
    
    $
    (0.72
    )Discontinued operations
    
    
    
    
    
    
    (0.56
    )
    
    
    (0.86
    )$
    (0.63
    )
    
    $
    (4.27
    )
    
    $
    (1.58
    )
 See notes to consolidated financial statements. 25




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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
MAXCO, INC. AND SUBSIDIARIES Number ofCommon
    
    
    
    
    
    
    
    
    
    Accumulated OtherShares
    
    Preferred
    
    Common
    
    Comprehensive
    
    RetainedOutstanding
    
    Stock
    
    Stock
    
    Loss
    
    Earnings
    
    Totals(in thousands)Balances at April 1, 2001
    
    
    3,101
    
    
    $
    3,866
    
    
    $
    3,101
    
    
    $
    (1,140
    )
    
    $
    21,007
    
    
    $
    26,834Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,501
    )
    
    
    (4,501
    )Net unrealized loss on marketable
securities, net of taxes of $465,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (901
    )
    
    
    
    
    
    
    (901
    )Realized loss on marketable
securities, net of taxes of $1,056,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,047
    
    
    
    
    
    
    
    2,047Unrealized loss on swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    
    
    
    
    (84
    )Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,439
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (408
    )
    
    
    (408
    )Balances at March 31, 2002
    
    
    3,101
    
    
    
    3,866
    
    
    
    3,101
    
    
    
    (78
    )
    
    
    16,098
    
    
    
    22,987Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,825
    )
    
    
    (12,825
    )Net unrealized loss on marketable
securities, net of taxes of $29,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )Realized income on marketable
securities, net of taxes of $2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Unrealized loss on swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158
    )
    
    
    
    
    
    
    (158
    )Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,045
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (408
    )
    
    
    (408
    )Balances at March 31, 2003
    
    
    3,101
    
    
    
    3,866
    
    
    
    3,101
    
    
    
    (298
    )
    
    
    2,865
    
    
    
    9,534Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,531
    )
    
    
    (1,531
    )Net unrealized gain on marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    56Unrealized gain on swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    70Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,405
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (408
    )
    
    
    (408
    )Balances at March 31, 2004
    
    
    3,101
    
    
    $
    3,866
    
    
    $
    3,101
    
    
    $
    (172
    )
    
    $
    926
    
    
    $
    7,721
 See notes to consolidated financial statements. 26




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
MAXCO, INC. AND SUBSIDIARIES Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Operating ActivitiesNet loss
    
    $
    (1,531
    )
    
    $
    (12,825
    )
    
    $
    (4,501
    )Loss from discontinued operations
    
    
    
    
    
    
    1,737
    
    
    
    2,674Loss from continuing operations
    
    
    (1,531
    )
    
    
    (11,088
    )
    
    
    (1,827
    )Advances (to) from discontinued operations
    
    
    
    
    
    
    (1,485
    )
    
    
    4,994Adjustments to reconcile net loss to net cash provided by operating
activities:Depreciation
    
    
    2,879
    
    
    
    2,919
    
    
    
    2,935Amortization
    
    
    20
    
    
    
    30
    
    
    
    277Equity in net loss of affiliates
    
    
    321
    
    
    
    614
    
    
    
    528Deferred federal income taxes (benefit)
    
    
    
    
    
    
    (875
    )
    
    
    293(Gain) loss on sale of investments
    
    
    (1,340
    )
    
    
    265
    
    
    
    (2,447
    )(Gain) loss on sale of property and equipment
    
    
    72
    
    
    
    (149
    )
    
    
    Loss on investments
    
    
    1,115
    
    
    
    9,320
    
    
    
    3,103Changes in operating assets and liabilities:Accounts receivable
    
    
    (370
    )
    
    
    (2,417
    )
    
    
    (787
    )Inventories
    
    
    (232
    )
    
    
    180
    
    
    
    360Income tax refunds
    
    
    
    
    
    
    4,635
    
    
    
    Prepaid expenses and other
    
    
    (202
    )
    
    
    (566
    )
    
    
    (1,596
    )Accounts payable and other current liabilities
    
    
    1,576
    
    
    
    871
    
    
    
    (1,548
    )Net Cash Provided by Operating Activities
    
    
    2,308
    
    
    
    2,254
    
    
    
    4,285Investing ActivitiesSale of businesses
    
    
    
    
    
    
    7,723
    
    
    
    Sale of buildings
    
    
    400
    
    
    
    2,496
    
    
    
    Purchases of property and equipment
    
    
    (698
    )
    
    
    (531
    )
    
    
    (572
    )Sale of investments
    
    
    939
    
    
    
    326
    
    
    
    750Collections of notes receivable
    
    
    99
    
    
    
    1,080
    
    
    
    591Sale of stock
    
    
    240
    
    
    
    
    
    
    
    Other
    
    
    119
    
    
    
    513
    
    
    
    94Net Cash Provided by Investing Activities
    
    
    1,099
    
    
    
    11,607
    
    
    
    863Financing ActivitiesNet proceeds from (repayments on) lines of credit
    
    
    (1,419
    )
    
    
    471
    
    
    
    (500
    )Proceeds from other debt obligations
    
    
    6,881
    
    
    
    4,063
    
    
    
    Repayments on other debt obligations
    
    
    (9,182
    )
    
    
    (18,349
    )
    
    
    (4,833
    )Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    (306
    )Net Cash Used in Financing Activities
    
    
    (3,720
    )
    
    
    (13,815
    )
    
    
    (5,639
    )(Decrease) Increase in Cash
    
    
    (313
    )
    
    
    46
    
    
    
    (491
    )Cash at Beginning of Year
    
    
    391
    
    
    
    345
    
    
    
    836Cash at End of Year
    
    $
    78
    
    
    $
    391
    
    
    $
    345Supplemental cash flows disclosure:Interest paid
    
    $
    1,601
    
    
    $
    1,677
    
    
    $
    2,061
 See notes to consolidated financial statements. 27




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAXCO, INC. AND SUBSIDIARIES Year Ended March 31, 2004 NOTE 1  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: Maxco, Inc. (Maxco) is a Michigan corporation incorporated
in 1946. Maxco currently operates in the heat-treating business segment
through Atmosphere Annealing Inc., a production metal heat-treating service
company. Maxco also has investments in real estate and investments
representing less than majority interests in the following businesses: a
registered broker-dealer of securities that is primarily focused on the trading
of fixed income investments; a developer, manufacturer and marketer of
microprocessor-based process monitoring and inspection systems for use in
industrial manufacturing environments; and an energy-related business. Financial Statement Presentation: 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. Principles of Consolidation: The consolidated financial statements include the
accounts of Maxco, Inc. and its majority owned subsidiaries. Upon
consolidation, all intercompany accounts and transactions are eliminated.
Investments in greater than 20% owned unconsolidated investments are accounted
for under the equity method. Investments in less than 20% owned affiliates are
accounted for under the cost method with the exception of Integral Vision,
Inc., which continues to be accounted for under the equity method because of
Maxcos representation on Integral Vision, Inc.s Board of Directors. Use of Estimates: The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Reclassifications: Certain items in the prior year financial statements have
been reclassified to conform with the presentation used in 2004. Cash and Cash Equivalents: The Company considers cash and other highly liquid
investments, including investments in interest bearing repurchase agreements
with less than 90-day maturities, as cash and cash equivalents. Receivables: Trade accounts receivable represent amounts due from customers in
the automotive industry, primarily in the mid-western United States. The
Company does not require collateral or other security to support outstanding
accounts receivable. Allowance for Uncollectible Accounts Receivable: Accounts receivable have been
reduced by an allowance for amounts that may become uncollectible in the
future. This estimated allowance is based primarily on managements evaluation
of the financial condition of the customer and historical experience. The
following table summarizes changes in the allowance for uncollectible accounts
receivable: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Beginning balance
    
    $
    150
    
    
    $
    143
    
    
    $
    177Charged to costs and expenses
    
    
    12
    
    
    
    7
    
    
    
    24Deductions (A)
    
    
    (28
    )
    
    
    
    
    
    
    (58
    )Ending balance
    
    $
    134
    
    
    $
    150
    
    
    $
    143
 (A) Represents uncollectible accounts written off, less recoveries 28




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Inventories: Inventories are stated at the lower of first-in, first-out cost
or market and at March 31 consisted of the following: 2004
    
    2003(in thousands)Raw materials
    
    $
    174
    
    
    $
    Work in progress
    
    
    190
    
    
    
    156Finished goods
    
    
    44
    
    
    
    20$
    408
    
    
    $
    176
 Marketable Securities: Marketable securities are classified in accordance with
Statement of Financial Accounting No. 115 (SFAS 115) as securities
available-for-sale. 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. The amortized cost of securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains
and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in investment income or loss. The
cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in investment income. The fair value of marketable securities is
based on quoted market value. Maxco accounts for its investment in Provant, Inc. common stock as securities
available for sale as defined by SFAS 115. Consequently, the securities are
carried at market value with the unrealized gains and losses net of tax,
reported as a separate component of stockholders equity. In 2004 and 2003,
the Company realized losses on its investment in Provant common stock as an
other than temporary impairment in its statement of operations of $366,000 and
$1.4 million, respectively. Advances to Affiliates: The Company has advanced amounts to its real estate
investment holding. These advances are unsecured and bear interest. As of
March 31, 2004 and 2003, the Company has advances totaling $2.2 million and
$3.0 million, respectively, to these affiliates. Properties and Depreciation: Property and equipment are stated on the basis of
cost and include expenditures for new facilities, equipment, and those, which
materially extend the useful lives of existing facilities and equipment.
Equipment capitalized under lease agreements is not significant. Expenditures for normal repairs and maintenance are charged to operations as
incurred. Depreciation for financial reporting purposes, including
amortization of capitalized leases, is computed by the straight-line method
based on the useful lives or lease terms of the assets (10 to 40 years for
buildings and 3 to 10 years for equipment). Federal Income Taxes: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes(SFAS 109), which requires the use of the liability method in
accounting for income taxes. Under SFAS 109, deferred tax assets and
liabilities are measured based on differences between the financial reporting
and tax bases of assets and liabilities using enacted tax rates and laws that
will be in effect when differences are expected to reverse. 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 provided for net deferred tax assets if it is more likely than not that
these items will either expire before the Company is able to realize their
benefit, or future deductibility is uncertain. Allowance for Uncollectible Notes Receivable: Notes receivable have been
reduced by an allowance for amounts that may become uncollectible in the
future. This estimated allowance is based primarily on managements evaluation
of the financial condition of the debtor and historical experience. The
following table summarizes changes in the allowance for uncollectible notes
receivable: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Beginning balance
    
    $
    600
    
    
    $
    1,291
    
    
    $
    335Charged to costs and expenses
    
    
    
    
    
    
    521
    
    
    
    290Charged to other accounts (A)
    
    
    
    
    
    
    
    
    
    
    666Deductions (B)
    
    
    (250
    )
    
    
    (1,212
    )
    
    
    Ending balance
    
    $
    350
    
    
    $
    600
    
    
    $
    1,291
 (A) Represents a reclass from the prior year from contingent liability (B) Represents uncollectible accounts written off, less recoveries Intangibles: Effective April 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets, (SFAS No. 142) which resulted in the
discontinuance of amortization of goodwill and indefinite-lived intangible
assets that were recorded in connection with previous business combinations.
Goodwill and other long-lived assets are reviewed by 29




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management for impairment whenever events or changes in circumstances indicate
the carrying amounts may not be recoverable. If management believes impairment
may exist, an assessment is performed. This assessment consists of comparing
the estimated undiscounted future cash flows with the carrying amount of the
long-lived assets. If the undiscounted future cash flows are less than the
carrying amounts of the long-lived assets, the Company adjusts the carrying
amount of the long-lived assets to their estimated fair value. Fair value is
determined by anticipated future cash flows discounted at a rate commensurate
with the risk involved. All of the Companys goodwill is related to the heat
treating segment. Goodwill totaled approximately $1.4 million at March 31,
2004 and represented 4% of total assets. Amortization expense was $20,000,
$30,000, and $277,000 for the years ended March 31, 2004, 2003, and 2002,
respectively. The following table presents net loss and net loss per share information as if
goodwill were no longer amortized as of April 1, 2001: Year Ended March 31,2004
    
    2003
    
    2002(in thousands, except per share data)Net loss
    
    $
    (1,531
    )
    
    $
    (12,825
    )
    
    $
    (4,342
    )Net loss per common
share  basic and diluted
    
    $
    (0.63
    )
    
    $
    (4.27
    )
    
    $
    (1.53
    )
 During 2004, the Company performed the impairment tests of its goodwill and
indefinite-lived intangible assets required by SFAS No. 142. The Companys
tests indicated that the fair value of its heat treating segment, which was
determined by using discounted cash flows and market multiples, exceeded the
carrying value. As a result, the Company did not record an impairment charge
for this segment in the accompanying financial statements. The Company will
continue to perform an impairment review on an annual basis (or more frequently
if impairment indicators arise). Revenue Recognition: The Company recognizes service revenue and revenue from
product sales upon transfer of title, which is upon shipment. Advertising: Advertising costs are expensed as incurred. The amounts were not
material for all years presented. Shipping and Handling Costs: The Company recognizes shipping and handling
costs as a component of cost of sales and operating expenses in the statement
of operations. Interest Rate Swap: The Company entered into an interest rate swap agreement
to modify the interest characteristics of certain of its outstanding debt.
This agreement involves the exchange of amounts based on a fixed interest rate
for amounts based on variable interest rates over the life of the agreement
without an exchange of the notional amount upon which the payments are based.
The interest rate swap agreement is designated with the principal balance and
term of a specific debt obligation. Since the Company applies hedge
accounting pursuant to SFAS 133, as amended, changes in the fair value of the
swap are reported as a component of other comprehensive loss. Fair Value Disclosure: The carrying amounts of certain financial instruments
such as cash and cash equivalents, accounts receivable, marketable securities,
and accounts payable approximate their fair values. Comprehensive Loss: The Company displays comprehensive loss in the
Consolidated Statements of Stockholders Equity. At March 31, 2004,
accumulated other comprehensive loss consisted of the fair value of the
interest rate swap agreement. Stock Options: The Company has elected to follow APB No. 25 Accounting for
Stock Issued to Employees and related interpretations in accounting for its
employee stock options. Under APB 25, because the exercise price of the
Companys employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The Company
has elected to adopt only the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure. There
is no difference between the accompanying income statement following APB No. 25
and the pro forma income statement following SFAS 123. New Financial Accounting
Pronouncements:In April 2003 the FASB issued SFAS No. 149, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments imbedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative discussed in paragraph 6 (b) of SFAS No. 133, clarifies when a
derivative contains a financing component, amends a definition to conform to
language used in FASB interpretation No. 45, and amends certain other existing
pronouncements. SFAS No. 149 was effective for contracts entered into or
modified after June 30, 2003. The provisions of SFAS No. 149 did not have a
material impact on the financial position, results of operations, or cash flows
of the Company. 30




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In May 2003 the FASB issued SFAS No. 150, which established standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 was effective for financial instruments
entered into or modified after May 31, 2003 and otherwise was effective
beginning July 1, 2003. The provisions of SFAS No. 150 did not impact the
consolidated financial position of the Company. In December 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. (FIN) 46-R Consolidation of Variable Interest
Entities. This standard clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statementsand addresses
consolidation by business enterprises of variable interest entities, more
commonly known as Special Purpose Entitiesor SPEs. FIN 46-R requires
existing unconsolidated variable interest entities interests to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risk among the parties involved. FIN 46-R also enhances the
disclosure requirements related to variable interest entities. The
interpretation is effective with respect to interests in variable interest
entities created after January 31, 2003. For interests in variable interest
entities created before February 1, 2003, the interpretation applies to the
first interim or annual reporting period beginning after December 15, 2003. The Company reviewed the requirements of FIN 46-R and concluded that the
provisions of FIN 46-R were not applicable to any of its unconsolidated
investments. The Company determined that consolidation of its less than
majority owned investments is not required. The Company believes that any real
risk or the effect of any guarantees that Maxco would be required to satisfy is
estimated to be $246,000 and has been recorded in the accompanying financial
statements. The Company does not believe that there is unusual degree of risk
related to other guarantees because of sufficient underlying asset values
supporting the respective debt obligations. Additionally, the assets of the
real estate investment are currently being liquidated and the Company has
adjusted the carrying value of this investment to its estimated net realizable
value. Accordingly, it is not expected that the provisions of FIN 46-R would
have a material impact on financial position, results of operations, or cash
flows of the Company. NOTE 2  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 and $127,000 at March 31, 2004 and
2003, respectively, which are due to a stockholder. NOTE 3  INVESTMENT IN INTEGRAL VISION, INC. At March 31, 2004, Maxco owned 2,240,605 shares of Integral Visions common
stock (aggregate market value of $5.2 million), representing approximately 17%
of Integral Visions total common stock outstanding. In 1997 Maxco received warrants to purchase 150,000 shares of Integral Vision
stock with a then conversion price of $6.86. Pursuant to the 1997 Note and
Warrant Purchase agreement, these warrants have been re-priced based on
subsequent warrant issues. As a result, at March 31, 2004, Maxco had the right
to purchase up to 354,573 shares of the Integral Visions common stock at $2.90
per share. In a separate transaction, Maxco purchased $120,000 of Integral
Vision debentures $60,000 of which were outstanding as of March 31, 2004. In
connection with this transaction, Maxco received warrants to purchase 240,000
shares of Integral Vision stock with a conversion price of $0.25 per share,
which were exercised by the Company in March 2004. The Company sold the shares
of stock for $1.00 per share in March 2004. Maxcos investment in Integral
Vision is accounted for under the equity method for all years presented. In accordance with APB 18, the Company recorded a charge of $122,000 in 2003 to
recognize a decline in the value of its investment in Integral Vision that was
deemed other than temporary. The charges are included in loss on investment
for the year ended March 31, 2003. Integral Vision had a net loss of approximately
$2.2 million for the year ended March 31, 2004, a net loss of $1.9 million in
2003, and a net loss of $6.8 million in 2002. Maxcos equity share of Integral Visions losses for the years ended March 31,
2004, 2003 and 2002 were approximately $477,000, $456,000 and $182,000,
respectively, and are recorded net of deferred tax for these periods in equity
in net income (loss) of affiliates, along with the equity results of other 50%
or less owned affiliates accounted for under the equity method. For the years
ended March 31, 2004, 2003, and 2002, Integral Visions sales were $322,000,
$1.7 million and $2.0 million, respectively. 31




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NOTE 4  DEBT At March 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
March 31, 2004, based on these specific collateral levels, Atmosphere could
borrow up to $4.0 million under its line of credit, approximately $2.6 million
of which was borrowed. The line matures in November 2004 and as such is
recorded as current in the accompanying financial statements. A summary of the Companys debt obligations as of March 31 is as follows: 2004
    
    2003(in thousands)Short term obligations:Notes payable (various interest rates)
    
    $
    2,333
    
    
    $
    4,289Revolving line of credit (LIBOR1 + 2.25%)
    
    
    2,552
    
    
    
    3,971Equipment purchase contracts (various interest rates)
    
    
    
    
    
    
    5,895Mortgage note payable (prime1 plus 1.75%)
    
    
    
    
    
    
    463Tax exempt revenue bonds (variable interest rate)
    
    
    
    
    
    
    1,083Taxable revenue bonds (fixed interest rate of 5.34%)
    
    
    
    
    
    
    3,0794,885
    
    
    
    18,780Long term obligations:Term notes (various variable interest rates)
    
    $
    6,720
    
    
    $
    Mortgage note payable (prime1 plus 1.75%)
    
    
    218
    
    
    
    Equipment purchase contracts and capitalized
lease obligations (various interest rates)
    
    
    4,581
    
    
    
    109Subordinated debt (fixed rate of 10.00%)
    
    
    2,025
    
    
    
    1,99913,544
    
    
    
    2,108Less current maturities
    
    
    2,064
    
    
    
    995$
    11,480
    
    
    $
    1,113
 1 At March 31, 2004 the London Interbank Offered Rate
(LIBOR) was 1.125% and the prime rate was 4.00%. On November 14, 2002, Maxco completed an agreement to sell its wholly owned
subsidiary, Ersco Corporation to Contractor Supply Incorporated for cash and
retired certain other debt of Maxco in excess of the sale price resulting in a
short term note payable to the purchaser of approximately $4.1 million. In
June 2003 the Company agreed to assume a lease from Contractor Supply
Incorporated and as a result, reduced the amount owed to Contractor Supply
Incorporated by $2.3 million and the Company has recorded the $2.3 million
obligation to the leasing company as a long term obligation in the accompanying
financial statements. In November 2003, Atmosphere Annealing reached an agreement with a new
financial institution to repay a lender with which the Company and Atmosphere
Annealing had previously been in default. The principal amount repaid was
approximately $8.1 million. The new facilities are comprised of a $6.0 million
revolving credit facility, $6.4 million of term debt with a 5 year amortization
period, and $800,000 of term debt with a two year amortization period. These
facilities are secured by all of the assets of Atmosphere Annealing. Subsequent to March 31, 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. The Company has classified the debt on
the March 31, 2004 balance sheet based on the refinanced terms. The Companys weighted average short-term borrowing rate was 5.4% and 6.2% at
March 31, 2004 and 2003, respectively. Maxco entered into a swap agreement with a notional amount of approximately
$2.7 million. The swap agreement was in a loss position of $172,000 and
$242,000 at March 31, 2004 and 2003, respectively. Notes and contracts payable are generally collateralized by assets purchased
with proceeds of the borrowings. The aggregate principal maturities of
long-term debt are approximately $2.1 million in 2005, $4.3 million in 2006,
$1.6 million in 2007, $1.4 million in 2008, $0.8 million in 2009, and $4.2
million thereafter. 32




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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 May 31, 2004. Certain of the debt agreements related to its real
estate investments, which Maxco and other guarantors have guaranteed, are in
default at March 31, 2004. Extensions or forbearance agreements have been
issued by some of the respective 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 $271,000. The current estimate of the actual exposure under these
agreements is $246,000 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. NOTE 5  PREFERRED STOCK Maxco may issue up to 100,000 shares of preferred stock with terms determined
by Maxcos Board of Directors. Series Three Preferred Stock is voting stock on a par with the common stock,
and has twenty votes per share. Quarterly cumulative dividends are provided at
the annual rate of 10% of face value annually, subject to the restrictions of
Michigan corporate law and the discretion of the Maxco Board of Directors. The
stock is callable at the option of the Company, with the call price declining
at the rate of one percent per year to a minimum price after February 1999,
equal to face value ($60 per share). Series Four Preferred Stock is cumulative, callable at the Companys option, is
non-voting, has no conversion rights, and pays an annual dividend at the rate
of 10% of face value annually. Series Five Preferred shares have a face value of $120, are callable at the
Companys option, are non-voting, have no conversion rights, and pay a
quarterly cumulative dividend at the rate of 10% of face value annually. Series Six Preferred Stock, established February 4, 1999, is voting stock on a
par with the common stock, and has twenty votes per share. Quarterly
cumulative dividends are provided at the annual rate of 10% of face value
annually, subject to the restrictions of Michigan corporate law and the
discretion of the Maxco Board of Directors. The stock is callable, at the
option of the Company, at any time after the second anniversary of their
issuance in whole or in part. The call price will be face value ($160 per
share) plus a declining premium amount, which shall be equal to 5% until the
third anniversary of issuance and shall decline 1% annually thereafter to zero
following the seventh anniversary. 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 $1.0 million
at March 31, 2004, or $.33 per common share. NOTE 6  STOCK OPTIONS Under the terms of Maxcos incentive common stock option plan, options for the
purchase of up to 500,000 shares of common stock may be granted and options are
exercisable upon grant. There were 155,000 stock options outstanding and exercisable at March 31, 2004
with a weighted average price of $7.77 per share and an exercise price ranging
from $7.00 to $8.00. There were no options granted during the years ended
March 31, 2004, 2003, and 2002. The weighted average remaining contractual
life of the outstanding options is approximately four years. The Company has elected to follow APB No. 25 Accounting for Stock Issued to
Employees and related interpretations in accounting for its employee stock
options. Under APB 25, because the exercise price of the Companys employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. The Company has elected to adopt
only the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Pro forma information regarding net income and earnings per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
employee stock options granted subsequent to September 30, 1995 under the fair
value method of SFAS 123. The Company has determined that the difference
between the reported net loss and loss per share and the pro forma net loss and
net loss per share as if the options were accounted for under SFAS 123 was
immaterial for all periods presented. NOTE 7  EMPLOYEE SAVINGS PLAN Company contributions charged to operations under the employee savings plans
were approximately $145,000, $160,000, and $167,000 for the years ended March
31, 2004, 2003 and 2002, respectively. 33




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##### Table of Contents



NOTE 8  FEDERAL INCOME TAXES The benefit for federal income taxes consists of the following components: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Current benefit
    
    $
    
    
    
    $
    
    
    
    $
    868Deferred (expense) benefit
    
    
    
    
    
    
    875
    
    
    
    (293
    )
    
    
    
    875
    
    
    
    575Deferred amount allocated to equity in
income of affiliates
    
    
    
    
    
    
    316
    
    
    
    273Amount allocated to discontinued operations
    
    
    
    
    
    
    890
    
    
    
    1,385$
    
    
    
    $
    2,081
    
    
    $
    2,233
 The reconciliation of the income tax benefit computed at the United States
federal statutory tax rate to income tax (expense) benefit reported in these
financial statements is as follows: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Income tax benefit computed at
United States statutory rate (34%)
    
    $
    521
    
    
    $
    3,859
    
    
    $
    637Valuation allowance
    
    
    (517
    )
    
    
    (3,006
    )
    
    
    Other
    
    
    (4
    )
    
    
    22
    
    
    
    (62
    )$
    
    
    
    $
    875
    
    
    $
    575
 No federal income taxes were paid in 2004, 2003, or 2002. Due to enacted changes in the tax law, the Company carried back its net
operating losses at March 31, 2001 and 2002 against the Companys taxable
income in 1997. As a result, the Company had a $3.9 million income tax
receivable at March 31, 2002. Maxco received $4.6 million in federal income
tax refunds in 2003. As of March 31, 2004, the Company has a net operating
loss (NOL) carryforward of $10.1 million, $8.8 million of which expires in 2023
with the remaining $1.3 million expiring in 2024. In 2004 and 2003, the Company recorded deferred tax asset valuation allowances
of $517,000 and $3.0 million, respectively, due to the uncertainty in the
ultimate realization of its deferred tax assets. The following table
summarizes changes in the deferred tax valuation allowance: Year Ended March 31,2004
    
    2003(in thousands)Beginning balance
    
    $
    3,006
    
    
    $
    Charged to costs and expenses
    
    
    517
    
    
    
    3,006Ending balance
    
    $
    3,523
    
    
    $
    3,006
 34




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##### Table of Contents



Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Companys deferred tax liabilities and assets as of March 31 were as
follows: 2004
    
    2003(in thousands)Deferred Tax Liabilities:Depreciation
    
    $
    2,577
    
    
    $
    2,562Total Deferred Tax Liabilities
    
    
    2,577
    
    
    
    2,562Deferred Tax Assets:Net operating loss carryforwards
    
    
    3,460
    
    
    
    714Allowance for doubtful accounts
    
    
    164
    
    
    
    255Marketable securities
    
    
    996
    
    
    
    1,546Net cumulative unrealized equity losses
    
    
    1,415
    
    
    
    2,587Other
    
    
    65
    
    
    
    466Total Deferred Tax Assets
    
    
    6,100
    
    
    
    5,568Valuation Allowance for Deferred Tax Assets
    
    
    3,523
    
    
    
    3,006Net Deferred Tax Assets
    
    
    2,577
    
    
    
    2,562Net Deferred Tax Assets (Liabilities)
    
    $
    
    
    
    $
    
 NOTE 9  OTHER INVESTMENTS Real Estate: 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 March 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 prior to July 2004 by a member of the acquiring
entity. After July 2004, L/M Associates has the ability to require the same
member to repurchase the investment. Approximately $18.2 million of Maxcos
guarantees on its real estate debt were eliminated as a result of the sale of
the Master LLC properties. Any real risks or guarantees that Maxco would be required to satisfy is estimated at $246,000 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. Technology Related: In addition to its investment in Integral Vision, Inc., the Company has an
equity interest in another technology related business. In October 1998,
Provant, Inc. acquired 100% of the stock of Strategic Interactive. Maxco
received cash and approximately 249,000 shares of Provant, Inc. common stock
in exchange for its 45% equity interest in Strategic Interactive. The sale
also included an earn-out provision. Maxco recognized a total of $2.7 million
as its remaining share of the additional consideration to be paid to the
former shareholders of Strategic Interactive in 2002. A portion of the
payment representing approximately $1.6 million was paid on November 14, 2002
in the form of Provant common stock. The remaining portion of the payment,
approximately $1.1 million, was received in January 2003. Maxco recognized
impairment charges of approximately $366,000, $1.4 million, and $3.1 million
in other income (expense) in 2004, 2003, and 2002, respectively, to recognize
declines in the fair value of its investment that was deemed other than
temporary. On March 11, 2004 Provant completed the sale of substantially all
of its remaining assets. 35




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##### Table of Contents



The Company had a 50% equity interest in Foresight Solutions, Inc., a
developer of accounting and business software for small to medium size
businesses. In 2003, the Company recorded an impairment charge of $2.8
million to adjust its investment to estimated fair value. The assets of
Foresight Solutions, Inc. were sold in June 2004. Energy Related: Maxco has a 50% interest in Robinson Oil Company, LLC, which is in the
business of acquiring and developing oil and gas interests. Other: The Company had a 50% equity interest in and agreed to finance certain debt of
Mid-State Industrial Services, Inc., which is in the business of selling,
leasing, and servicing lift trucks. In December 2001, Maxco sold its interest
in Mid-State to Maxco President Max A. Coon for $1.75 million, of which
$750,000 was paid in cash with the remainder being applied to amounts due Mr.
Coon for advances he had made to the Company and its affiliates.
Additionally, Mid-State retired the $0.5 million obligation it had with Maxco.
A portion of the proceeds from the sale was used to retire certain
obligations not related to Mid-State which were guaranteed by the Company. The
Company recognized a gain of approximately $422,000 on this sale in 2002. Maxco has a 36% equity interest in Phoenix Financial Group, LTD and its
subsidiary Cambridge Group Investments, LTD (dba Bondpage.com), a registered
broker-dealer of securities that is primarily focused on the trading of fixed
income investments over the Internet. The Company has approximately a 6% interest in the common stock of MYOEM.COM,
a company offering a business-to-business vertical web portal designed to
bring solution-seekers together with solution-providers. In 2003, the Company
recorded an impairment charge of $100,000 to write off this investment. The Company has a 16% equity interest in Vertical VC, a limited partnership
that has equity investments in companies focused on the information
technology, telecommunications, and medical technology markets. In 2003, the
Company recorded an impairment charge of $250,000 to write off this
investment. In summary, the Company recorded the following charges to recognize declines in
the value of its investments that were deemed other than temporary: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Provant
    
    $
    366
    
    
    $
    1,360
    
    
    $
    3,103Real estate
    
    
    749
    
    
    
    4,698
    
    
    
    Foresight Solutions
    
    
    
    
    
    
    2,790
    
    
    
    Integral Vision
    
    
    
    
    
    
    122
    
    
    
    Vertical VC
    
    
    
    
    
    
    250
    
    
    
    MYOEM.COM
    
    
    
    
    
    
    100
    
    
    
    $
    1,115
    
    
    $
    9,320
    
    
    $
    3,103
 A significant portion of these adjustments were recorded during the fourth
quarter of each of these fiscal years, and in total served to increase the net
loss per share by $0.36, $3.01, and $1.00 in 2004, 2003, and 2002,
respectively. 36




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##### Table of Contents



The combined results of operations and financial position of the Companys
unconsolidated affiliates are summarized below: Real Estate
    
    Technology Related
    
    Energy Related and OtherMarch 31,
    
    March 31,
    
    March 31,2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002(in thousands)Condensed income statement information:Net sales
    
    $
    4,779
    
    
    $
    79,882
    
    
    $
    18,317
    
    
    $
    322
    
    
    $
    2,191
    
    
    $
    3,357
    
    
    $
    3,866
    
    
    $
    2,292
    
    
    $
    7,200Gross margin
    
    
    3,744
    
    
    
    16,227
    
    
    
    14,308
    
    
    
    (123
    )
    
    
    1,004
    
    
    
    (1,520
    )
    
    
    3,778
    
    
    
    2,204
    
    
    
    2,907Net income (loss)
    
    
    1,825
    
    
    
    5,574
    
    
    
    (625
    )
    
    
    (2,181
    )
    
    
    (2,600
    )
    
    
    (7,310
    )
    
    
    294
    
    
    
    
    
    
    
    435Condensed balance sheet information:Current assets
    
    $
    9,179
    
    
    $
    9,951
    
    
    
    
    
    
    $
    539
    
    
    $
    215
    
    
    
    
    
    
    $
    1,055
    
    
    $
    713Non-current assets
    
    
    25,661
    
    
    
    30,409
    
    
    
    
    
    
    
    337
    
    
    
    1,053
    
    
    
    
    
    
    
    682
    
    
    
    513$
    34,840
    
    
    $
    40,360
    
    
    
    
    
    
    $
    876
    
    
    $
    1,268
    
    
    
    
    
    
    $
    1,737
    
    
    $
    1,226Current liabilities
    
    $
    22,201
    
    
    $
    36,738
    
    
    
    
    
    
    $
    2,970
    
    
    $
    2,609
    
    
    
    
    
    
    $
    366
    
    
    $
    156Non-current liabilities
    
    
    6,093
    
    
    
    4,309
    
    
    
    
    
    
    
    1,645
    
    
    
    5,700
    
    
    
    
    
    
    
    162
    
    
    
    162Minority interest
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    6,546
    
    
    
    (932
    )
    
    
    
    
    
    
    (3,739
    )
    
    
    (7,041
    )
    
    
    
    
    
    
    1,209
    
    
    
    908$
    34,840
    
    
    $
    40,360
    
    
    
    
    
    
    $
    876
    
    
    $
    1,268
    
    
    
    
    
    
    $
    1,737
    
    
    $
    1,226
 NOTE 10  CONTINGENCIES AND COMMITMENTS Maxco and certain operating subsidiaries occupy facilities and use equipment
under operating lease agreements requiring annual rental payments approximating
$462,000 in 2005, $177,000 in 2006, $87,000 in 2007, and $73,000 in 2008 for a
total commitment aggregating $799,000. Rent expense charged to operations,
including short-term leases, aggregated $532,000 in 2004, $643,000 in 2003, and
$687,000 in 2002. The Company is involved in various lawsuits and other claims arising in the
ordinary course of business. While the results of these matters cannot be
predicted with certainty, management, upon advice from counsel, believes that
losses, if any, arising from these proceedings will not have a material adverse
effect on its financial statements. 37




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NOTE 11  INDUSTRY SEGMENT INFORMATION The following summarizes Maxcos industry segment information: 2004
    
    2003
    
    2002(in thousands)Net Sales:Heat treating
    
    $
    40,754
    
    
    $
    36,740
    
    
    $
    34,364Corporate and other
    
    
    44
    
    
    
    87
    
    
    
    332Total Net Sales
    
    $
    40,798
    
    
    $
    36,827
    
    
    $
    34,696Operating Earnings (Loss)Heat treating
    
    $
    2,137
    
    
    $
    2,147
    
    
    $
    2,482Corporate and other
    
    
    (1,968
    )
    
    
    (2,681
    )
    
    
    (2,491
    )Total Operating Earnings (Loss)
    
    $
    169
    
    
    $
    (534
    )
    
    $
    (9
    )Identifiable Assets:Heat treating
    
    $
    29,472
    
    
    $
    29,589
    
    
    $
    31,444Corporate and other
    
    
    2,671
    
    
    
    4,147
    
    
    
    17,316Investments and advances
    
    
    3,338
    
    
    
    4,165
    
    
    
    9,026Discontinued operations
    
    
    
    
    
    
    474
    
    
    
    29,252Total Identifiable Assets
    
    $
    35,481
    
    
    $
    38,375
    
    
    $
    87,038Depreciation and Amortization Expense:Heat treating
    
    $
    2,865
    
    
    $
    2,901
    
    
    $
    2,930Corporate and other
    
    
    34
    
    
    
    48
    
    
    
    282Total Depreciation and Amortization Expense
    
    $
    2,899
    
    
    $
    2,949
    
    
    $
    3,212Capital Expenditures:Heat treating
    
    $
    698
    
    
    $
    531
    
    
    $
    572Corporate and other
    
    
    
    
    
    
    
    
    
    
    Total Capital Expenditures
    
    $
    698
    
    
    $
    531
    
    
    $
    572
 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, export sales, or inter-segment
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 year. 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. For the year ended March 31, 2004 sales to
Honda of America Manufacturing, Inc. and GM Powertrain represented 38.3% and
14.3% of consolidated sales, respectively. Amounts due from these customers
represented 43.0% of the respective outstanding trade receivable balance at
March 31, 2004. For the year ended March 31, 2003 sales to Honda of America
Manufacturing, Inc. and GM Powertrain represented 27.2% and 17.3% of
consolidated sales, respectively. Amounts due from these customers represented
41.8% of the respective outstanding trade receivable balance at March 31, 2003.
For the year ended March 31, 2002 sales to Honda of America Manufacturing,
Inc. and GM Powertrain represented 20.1% and 15.7% of consolidated sales,
respectively. 38




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##### Table of Contents



NOTE 12  LOSS PER SHARE The following table sets forth the computation of basic and diluted loss per share: Year Ended March 31,2004
    
    2003
    
    2002(in thousands except per share data)Numerator:Loss from continuing operations
    
    $
    (1,531
    )
    
    $
    (11,088
    )
    
    $
    (1,827
    )Loss from discontinued operations
    
    
    
    
    
    
    (1,737
    )
    
    
    (2,674
    )Net loss
    
    
    (1,531
    )
    
    
    (12,825
    )
    
    
    (4,501
    )Preferred stock dividends
    
    
    (408
    )
    
    
    (408
    )
    
    
    (408
    )Numerator for basic and diluted earnings
per share 
loss available to common stockholders
    
    $
    (1,939
    )
    
    $
    (13,233
    )
    
    $
    (4,909
    )Denominator:Denominator for basic and diluted earnings
per share
weighted average shares
    
    
    3,101
    
    
    
    3,101
    
    
    
    3,101Basic and Diluted Loss Per ShareContinuing operations
    
    $
    (0.63
    )
    
    $
    (3.71
    )
    
    $
    (0.72
    )Discontinued operations
    
    
    
    
    
    
    (0.56
    )
    
    
    (0.86
    )$
    (0.63
    )
    
    $
    (4.27
    )
    
    $
    (1.58
    )
 NOTE 13  DISCONTINUED OPERATIONS Effective September 27, 2002, Maxco agreed to sell the business and
substantially all the assets (consisting principally of accounts receivable,
inventory and fixed assets) of Maxcos wholly owned subsidiary, Pak Sak
Industries, Inc. to Packaging Personified, Inc. and related parties. The
assets were purchased for cash and an assumption of certain liabilities. The
Company adjusted the carrying value of Pak Sak to the sale price resulting in a
pre-tax charge of $540,000 to discontinued operations in the second quarter of
fiscal 2003. The sale closed on November 27, 2002. On November 14, 2002, Maxco completed an agreement to sell its wholly owned
subsidiary Ersco Corporation to Contractor Supply Incorporated for cash and the
retirement of certain other debt of Maxco in excess of the sale price resulting
in a note payable to the purchaser of approximately $4.1 million. The Company
adjusted the carrying value of Ersco to the estimated sale price resulting in a
pre-tax charge of $2.0 million to discontinued operations in the second quarter
of fiscal 2003. Goodwill at Ersco totaled $579,000 as of the date of sale. Sales and operating earnings for Ersco and Pak Sak for the years ended March
31, 2003 and 2002 were as follows: Year Ended March 31,2003(A)
    
    2002(in thousands)Net sales:Ersco
    
    $
    61,421
    
    
    $
    88,823Pak Sak
    
    
    8,051
    
    
    
    13,033$
    69,472
    
    
    $
    101,856Pre-tax loss:Ersco
    
    $
    (2,056
    )
    
    $
    (3,752
    )Pak Sak
    
    
    (576
    )
    
    
    (307
    )$
    (2,632
    )
    
    $
    (4,059
    )
 (A) Results for the year ended March 31, 2003 are through the respective dates
of sale and include adjustments to the sales price. 39




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##### Table of Contents



Effective April 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The results of operations for
these units have been reported separately as discontinued operations in the
consolidated statements of operations for the current and prior periods. NOTE 14  SUBSEQUENT EVENTS Subsequent to March 31, 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 was used
for working capital requirements. Also subsequent to March 31, 2004, the
Company received payment of $950,000 on a note related to the October 1996 sale
of Wright Plastic Products. In addition, Atmosphere Annealing retired subordinated debt of $1.6 million to a related
party. This was accomplished through additional borrowing under its secured
credit facilities. 40




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##### Table of Contents



MAXCO, INC.
ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX Exhibit No.
    
    Description10.36
    
    Incentive agreement between Sanjeev Deshpande and Maxco, Inc. dated April 20, 200410.37
    
    Business Loan Agreement between Capitol National Bank and
Maxco, Inc. dated May 28, 200421
    
    Subsidiaries of the Registrant23.1
    
    Consent of Registered Public Accounting Firm  Rehmann
Robson (Form S-8 filed June 2, 1992  File No. 33-48351
and Form S-8 filed November 19, 1998  File No. 333-67539)23.2
    
    Consent of Registered Public Accounting Firm  Ernst &
Young LLP (Form S-8 filed June 2, 1992  File No. 33-48351
and Form S-8 filed November 19, 1998  File No. 333-67539)23.3
    
    Consent of Registered Public Accounting Firm  Moore
Stephens Doeren Mayhew (Form S-8 filed June 2, 1992  File
No. 33-48351 and Form S-8 filed November 19, 1998  File
No. 333-67539)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.
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