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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
  Commission File Number 0-2762 MAXCO, INC. (Exact Name of Registrant as Specified in its Charter)
 Michigan
    
    38-1792842(State or other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 1118 Centennial Way, Lansing, Michigan
    
    48917(Address of principal executive offices)
    
    (Zip Code)
 Registrants Telephone Number, including area code:
    
    (517) 321-3130
 Securities 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes      o
    
    No       þ
 The aggregate market value of the registrants common stock, $1.00 par value per share, held by
non-affiliates of the registrant on September 30, 2004, the last business day of the registrants
most recently completed second fiscal quarter, was $2,421,666 (based on the closing sales price of
the registrants common stock on that date). Shares of the registrants common stock held by each
officer and director and each person who owns 5% or more of the outstanding common stock of the
registrant have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
At June 30, 2005, there were 3,446,995 outstanding shares of the Registrants common stock. Documents Incorporated By Reference Portions of the annual proxy statement for the year ended
March 31, 2005 are incorporated by 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, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    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
    
    
    159B
    
    Other Information
    
    
    1510
    
    Directors and Executive Officers of the Registrant
    
    
    1611
    
    Executive Compensation
    
    
    1612
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    1613
    
    Certain Relationships and Related Transactions
    
    
    1614
    
    Principal Accountant Fees and Services
    
    
    1615
    
    Exhibits and Financial Statement Schedules
    
    
    17Signatures
    
    
    19List of Financial Statements
    
    
    21Subsidiaries of the RegistrantConsent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmCertification of Chief Executive Officer to Rule 13a-15(e)Certification of Chief Financial Officer to Rule 13a-15(e)Certification of Chief Executive Officer to 18 U.S.C.Certification of Chief Financial Officer to 18 U.S.C.
 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. 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, 2005. 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 operating segment accounted for 100% of consolidated net sales for the years ended
March 31, 2005, 2004, and 2003. INVESTMENT IN REAL ESTATE (DISCONTINUED AND HELD FOR SALE) Maxco has ownership interests ranging from 31-50% 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, 2005 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.
These real estate investments are discontinued and Maxco is actively pursuing their liquidation. 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
substantially all of 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. Pursuant to the agreement, in July 2004, L/M Associates exercised its option to require
the managing member to repurchase its 16% interest. To date this requirement has not been
satisfied and L/M Associates intends to aggressively pursue other collection remedies. At March 31, 2005 Maxco had guarantees related to its real estate investments of $2.0 million. 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 $350,000 were recognized
during the year ended March 31, 2005 to 3




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further reduce the carrying value of the Companys investment in real estate to its estimated fair
value less costs to sell. Subsequent to March 31,
2005, Maxco purchased an entity which owns two buildings from L/M
Associates and, beginning in June 2005, will be including in its
consolidation the operations of the buildings and vacant land. The
debt associated with this transaction is approximately
$1.8 million which was previously identified as guaranteed debt.
In addition, a purchase agreement is currently being negotiated for
the sale to an outside party of an additional real estate parcel
which will eliminate the remaining debt guarantee. 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. An impairment charge of $260,000 was recognized during the year ended March 31, 2005 to
reduce the carrying value of the Companys investment in Robinson Oil Company, LLC to its estimated
fair value. At March 31, 2005, Maxco owned 2,240,605 shares or 15% of Integral Vision, Inc. common stock.
Maxcos ownership of Integral Vision had been greater than 20% but decreased as Integral Vision
common stock warrants were exercised in March 2004. However, Maxco continues 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
and 2003 the Company recognized previously unrealized losses on its investment in Provant as other
than temporary impairments in its statement of operations of $366,000 and $1.4 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 during fiscal 2006. 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, 2005 sales to
Honda of America Manufacturing, Inc. and GM Powertrain represented 33.3% and 10.7% of consolidated
sales, respectively. Amounts due from these customers represented 31% of the respective
outstanding trade receivable balance at March 31, 2005. 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% 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. 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, 2005, 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, 2005, 2004, or 2003. 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, 2005. 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(A)
    
    Plant and administrative officesLansing, MI
    
    58,000 sq ft
    
    Leased(A)
    
    Heat treating plantCanton, OH
    
    160,000 sq ft on 8 acres
    
    Owned(B)
    
    Heat treating plantN. Vernon, IN
    
    88,000 sq ft on 6 acres
    
    Owned(B)
    
    Heat treating plantCORPORATEMaxco, Inc.Lansing, MI
    
    7,200 sq ft on 1.9 acres
    
    Owned(B)(C)
    
    Executive offices
  (A)
    
    Subsequent to March 31, 2005, Atmosphere Annealing acquired the company that owns these buildings(B)
    
    Subject to a mortgage(C)
    
    Maxco is in the process of negotiating
an agreement to sell this property to an outside party for $1.0 million. The proceeds will
be used to reduce debt. 
 ITEM 3  LEGAL PROCEEDINGS Maxco has been named as a defendant in certain actions from lenders as a result of being a
guarantor of a real estate investment. The Companys current exposure in these actions is limited
to $249,000 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, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES 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, 2005 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, 2003
    
    
    4.52
    
    
    
    2.35September 30, 2003
    
    
    3.50
    
    
    
    2.44December 31, 2003
    
    
    3.20
    
    
    
    2.02March 31, 2004
    
    
    3.00
    
    
    
    1.99June 30, 2004
    
    
    3.50
    
    
    
    2.35September 30, 2004
    
    
    5.58
    
    
    
    2.50December 31, 2004
    
    
    5.02
    
    
    
    3.00March 31, 2005
    
    
    4.30
    
    
    
    3.20
 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 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands, except per share data)Net sales (3)
    
    $
    45,364
    
    
    $
    40,798
    
    
    $
    36,827
    
    
    $
    34,696
    
    
    $
    39,560Loss on investments (1)
    
    
    (610
    )
    
    
    (1,115
    )
    
    
    (9,320
    )
    
    
    (3,103
    )
    
    
    (1,362
    )Income (loss) before equity in net (loss) income of
affiliates and discontinued operations
(3)
    
    
    134
    
    
    
    (1,210
    )
    
    
    (10,474
    )
    
    
    (1,299
    )
    
    
    (1,697
    )Equity in net (loss) income of affiliates, net of
tax
    
    
    
    
    
    
    (321
    )
    
    
    (614
    )
    
    
    (528
    )
    
    
    (2,098
    )Loss from discontinued operations (3)
    
    
    
    
    
    
    
    
    
    
    (1,737
    )
    
    
    (2,674
    )
    
    
    (1,010
    )Net income (loss)
    
    
    134
    
    
    
    (1,531
    )
    
    
    (12,825
    )
    
    
    (4,501
    )
    
    
    (4,805
    )Net loss per sharedilutedContinuing operations
    
    
    (0.09
    )
    
    
    (0.63
    )
    
    
    (3.71
    )
    
    
    (0.72
    )
    
    
    (1.35
    )Discontinued operations (3)
    
    
    
    
    
    
    
    
    
    
    (0.56
    )
    
    
    (0.86
    )
    
    
    (0.33
    )Net loss per share (2)
    
    $
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    (4.27
    )
    
    $
    (1.58
    )
    
    $
    (1.68
    )
 At March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Total assets
    
    $
    33,166
    
    
    $
    35,481
    
    
    $
    38,375
    
    
    $
    87,038
    
    
    $
    97,450Assets of discontinued operations (3)
    
    
    
    
    
    
    
    
    
    
    474
    
    
    
    29,252
    
    
    
    38,428Long-term obligations (net of
current obligations)
    
    
    7,070
    
    
    
    11,480
    
    
    
    1,113
    
    
    
    11,380
    
    
    
    10,606Working capital (deficit)
    
    
    (7,988
    )
    
    
    (7,736
    )
    
    
    (19,698
    )
    
    
    (16,846
    )
    
    
    (15,250
    )
  NOTES
  (1)
    
    Includes the following charges for impairment of the Companys investments: Year Ended March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Robinson Oil
    
    $
    260
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Real estate
    
    
    350
    
    
    
    749
    
    
    
    4,698
    
    
    
    
    
    
    
    Provant
    
    
    
    
    
    
    366
    
    
    
    1,360
    
    
    
    3,103
    
    
    
    Foresight Solutions
    
    
    
    
    
    
    
    
    
    
    2,790
    
    
    
    
    
    
    
    Integral Vision
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    1,362Vertical VC
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    MYOEM.COM
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    $
    610
    
    
    $
    1,115
    
    
    $
    9,320
    
    
    $
    3,103
    
    
    $
    1,362
  (2)
    
    Net 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 generally conducted on an arms-length basis. Certain
investments in equity affiliates and other activities may be between related parties and are
generally 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 recorded the $2.3 million
obligation to the leasing company as a long term obligation in the accompanying financial
statements. In February 2005, Maxco agreed to issue 250,000 shares of common stock valued at $4
per share to Contractor Supply Incorporated to further reduce the Companys obligation to
Contractor Supply Incorporated. As a result, the outstanding principal balance due Contractor
Supply Incorporated at March 31, 2005 was $1.2 million. Additionally, in February 2005, Maxco
issued 95,800 shares of common stock valued at $4 per share to retire another obligation totaling
approximately $383,000. Maxco has provided the guarantee of various debt obligations of certain real estate and other
investments in an aggregate amount of approximately $2.0 million as of March 31, 2005. Certain of
the debt agreements related to its real estate investments, which Maxco and other guarantors have
guaranteed, are in default at March 31, 2005. An extension has been issued by one of the banks and
the applicable entities are currently working to liquidate the properties to satisfy the
requirements of the lenders. The Company does not believe that there is any unusual degree of risk
related to the guarantees because of sufficient underlying asset values supporting the respective
debt obligations. In addition to the $2.0 million mentioned above, the Company has recorded in the accompanying
financial statements amounts that had been previously identified as guarantees. The amounts so
recorded aggregated approximately $249,000 as of March 31, 2005. Subsequent to March 31, 2005, Maxco purchased an entity which owns two buildings from L/M
Associates and, beginning in June 2005, will be including in its consolidation the operations of
the buildings and vacant land. The debt associated with this transaction is approximately $1.8
million which was previously identified as guaranteed debt. In addition, a purchase agreement is
currently being negotiated for the sale to an outside party of an additional real estate parcel
which will eliminate the remaining debt guarantee. 8




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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 $350,000, $749,000, and
$4.7 million in 2005, 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. 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, if material, for anticipated reworks 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, 2005 and
represented 4% of total assets. During 2005, 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). 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. 9




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##### Table of Contents



RESULTS OF OPERATIONS The following is a discussion of the major elements relating to Maxcos financial and operating
results for 2005 compared with 2004, and 2004 compared with 2003. The comments that follow should
be read in conjunction with Maxcos Consolidated Financial Statements and related notes thereto,
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. 2005 versus 2004 Net sales increased to $45.4 million in 2005 compared to $40.8 million in 2004. Operating earnings
were $2.0 million in 2005 compared to $169,000 in 2004. Net income in 2005 was $134,000, a loss of
$274,000 after preferred dividends, or a loss of $0.09 per share assuming dilution compared to last
years net loss of $1.5 million, a loss of $1.9 million after preferred dividends, or a loss of
$0.63 per share assuming dilution. Sales and operating earnings for the years ending March 31, 2005 and 2004 by the Companys heat
treating and corporate and other segments were as follows: Year Ended
    
    
    Year EndedMarch 31, 2005
    
    
    March 31, 2004Operating
    
    
    
    
    
    
    OperatingEarnings
    
    
    
    
    
    
    EarningsNet Sales
    
    
    (Loss)
    
    
    Net Sales
    
    
    (Loss)(in thousands)Heat treating
    
    $
    45,364
    
    
    $
    4,202
    
    
    $
    40,754
    
    
    $
    2,137Corporate and other
    
    
    
    
    
    
    (2,199
    )
    
    
    44
    
    
    
    (1,968
    )
 The increase in net sales at the heat treating segment (Atmosphere Annealing) was due to
increased volume from existing customers as well as an expanded customer base. The decrease in
revenue at corporate was due to a reduction in rental income from the prior year as a result of the
sale of a building in the prior year. Consolidated gross profit (net sales less cost of sales and operating expenses) increased $2.3
million to $16.3 million (36.0% of net sales) from $14.0 million (34.4% of net sales). The
increase in Atmosphere Annealings sales was the primary reason that gross profit increased in
2005. Selling, general, and administrative (SG&A) expenses increased to $11.4 million in 2005 from
$11.0 million in 2004. Atmosphere increased its provision for state and local income taxes by
$273,000 and charged $186,000 to write off receivables that were deemed uncollectible. At the
corporate level, the Company recorded a $650,000 expense in 2005 related to an incentive agreement.
Corporate employee related costs and legal expenses were reduced by $376,000 and $173,000,
respectively. The Company incurred fees to secure financing totaling $76,000 in 2005. Depreciation and amortization expense was comparable to the prior year. The Company recognized no gains or losses on the sale of investments in 2005. 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. Interest expense decreased 9.8% to $1.5 million from $1.7 million primarily due to reduced
borrowing levels. 10




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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 31,2005
    
    
    2004(in thousands)Robinson Oil
    
    $
    260
    
    
    $
    Real estate
    
    
    350
    
    
    
    749Provant
    
    
    
    
    
    
    366$
    610
    
    
    $
    1,115
 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, net of tax, in fiscal 2004. Due to the uncertainty of future realization of deferred tax assets, the Company recorded a
valuation allowance in prior fiscal years. During 2005, primarily as a result of the utilization
of net operating loss (NOL) carryforwards of $2.7 million, the valuation allowance was reduced by
$526,000 resulting in a variation from the federal income tax statutory rate of 34%. 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 a loss of $0.63 per share assuming dilution
compared to 2003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 2003 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 2003 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
2003. Depreciation and amortization expense was comparable for both periods. 11




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##### Table of Contents



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
 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 2003. 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%. LIQUIDITY AND SOURCES OF CAPITAL Operating activities for 2005 generated $4.8 million in cash. Earnings, after non-cash
adjustments, generated $3.7 million of that amount. Changes in net working capital generated
approximately $1.1 million. Overall, the Companys working capital deficit (defined as current assets less current liabilities)
increased from $7.7 million at March 31, 2004 to $8.0 million at March 31, 2005. The aggregate principal maturities of long-term debt are approximately $5.0 million in 2006, $3.1
million in 2007, and $3.9 million thereafter. The Company generated approximately $79,000 in cash from investing activities in 2005.
Specifically, during the year, the Company received $1.0 million in cash from the receipt of
payments on notes receivable. Atmosphere Annealing purchased approximately $1.0 million of
equipment during 2005. Maxco received approximately $57,000 from the sale of land and a building. Net cash used in financing activities during 2005 amounted to $3.2 million. Atmosphere Annealing
borrowed an additional $2.7 million from its primary lender the proceeds of which were used to
repay a significant portion of its obligation to Maxco and other subordinated debt. In May, 2004, the Company reached an agreement with a new financial institution to repay lenders
with which the Company was in default. The principal amount repaid was approximately $2.3 million.
The new debt facility of $2.7 million requires interest only payments and matures in June 2006.
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 $464,000 in 2006, $215,000 in 2007,
$198,000 in 2008, $164,000 in 2009, and $138,000 in 2010 for a total commitment aggregating $1.2
million. 12




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##### Table of Contents



At March 31, 2005, the 2,240,605 shares of Integral Vision common stock that Maxco owns had an
aggregate market value of approximately $3.7 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. In April 2005, Maxco
converted $95,684 of notes receivable from Integral Vision into 127,578 restricted shares of
Integral Vision common stock. Also in April 2005, Maxco received 42,000 restricted shares of
Integral Vision common stock for payment of consulting services. At March 31, 2005, the 2,837,089 shares of Provant common stock that Maxco owns had an aggregate
fair value of approximately $119,000. Maxcos investment in Provant is reflected in Maxcos
financial statements as an available-for-sale security. 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, 2005. 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 2004
    
    
    Fiscal 20056/30/03
    
    
    9/30/03
    
    
    12/31/03
    
    
    3/31/04
    
    
    6/30/04

    
    
    9/30/04
    
    
    12/31/04
    
    
    3/31/05(in thousands, except per share data)Net sales
    
    $
    9,573
    
    
    $
    9,189
    
    
    $
    10,562
    
    
    $
    11,474
    
    
    $
    11,367
    
    
    $
    11,156
    
    
    $
    11,414
    
    
    $
    11,427Gross profit
    
    
    3,421
    
    
    
    3,119
    
    
    
    3,376
    
    
    
    4,108
    
    
    
    3,997
    
    
    
    3,811
    
    
    
    3,977
    
    
    
    4,540Gain (loss) on sale of investments (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,340
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on investments (2)
    
    
    (283
    )
    
    
    (57
    )
    
    
    (26
    )
    
    
    (749
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (610
    )Equity in net income (loss)
of affiliates, net of tax
    
    
    
    
    
    
    (90
    )
    
    
    50
    
    
    
    (281
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    122
    
    
    
    (787
    )
    
    
    (857
    )
    
    
    (9
    )
    
    
    204
    
    
    
    50
    
    
    
    212
    
    
    
    (332
    )Net income (loss) per common sharediluted:
    
    $
    0.01
    
    
    $
    (0.29
    )
    
    $
    (0.31
    )
    
    $
    (0.04
    )
    
    $
    0.03
    
    
    $
    (0.02
    )
    
    $
    0.04
    
    
    $
    (0.14
    )
 
 (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 $250,000.(2)
    
    Represents the following charges to recognize declines in the value of the Companys investments that were deemed other than temporary: Quarter EndedFiscal 2004
    
    
    Fiscal 20056/30/03
    
    
    9/30/03
    
    
    12/31/03
    
    
    3/31/04
    
    
    6/30/04
    
    
    9/30/04
    
    
    12/31/04
    
    
    3/31/05(in thousands)Robinson Oil
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (260
    )Real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (749
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350
    )Provant
    
    
    (283
    )
    
    
    (57
    )
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (283
    )
    
    $
    (57
    )
    
    $
    (26
    )
    
    $
    (749
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (610
    )
 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 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 the
Company. 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. In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151 Inventory Costs, an Amendment of ARB No. 43, Chapter 4. SFAS
151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) be recognized as current period charges. It also
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption
of SFAS 151 will have a material impact on its results of operations or financial position. In December, 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123R which will require the Company to measure the cost of employee services received
in exchange for an award of common stock options as compensation expense in the statement of income
using a fair value method. The Company will begin reporting these
costs by the end of
fiscal 2006. The effect of implementing this new accounting standard has not been determined at
this time, but is not expected to impact reported earnings per share in amounts significantly
different from the pro forma results historically reported. In December 2004, the FASB issued SFAS 153 Exchanges of Nonmonetary Assets, and Amendment of APB
Opinion No.29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain
exceptions to the principle. SFAS 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset
exchanges in fiscal periods beginning after June 15, 2005. The Company does not believe that the
adoption of SFAS 153 will have a material impact on its results of operations or financial
position. 
 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 $3.6 million of Maxcos debt carries a fixed rate of
interest, the Company entered into an interest rate swap agreement based on a notional amount of
$2.7 million to manage its exposure to interest rate changes. The swap involves the exchange of
fixed and variable interest payments without changing the notional principal amount. The Company
had total outstanding variable rate short and long term borrowings of $10.6 million at March 31,
2005. A 1% increase from the prevailing interest rates at March 31, 2005 on the unhedged variable 14




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##### Table of Contents



rate portion of the Companys short and long-term borrowings would increase interest expense on an
annualized basis by approximately $106,000 based on principal balances at March 31, 2005. The Companys heat treating segment experiences fluctuations in the price of natural gas used in
the heat treating process. To the extent feasible in light of competitive factors, the Company has
offset these fluctuations through selective price adjustments. 
 ITEM 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 registered accounting firm of Rehmann Robson as its
new independent public accountants. Effective May 7, 2004, the Company dismissed Ernst & Young
LLP. The report of Ernst and Young LLP on the consolidated financial statements of Maxco for the fiscal
year ended March 31, 2003 did not contain an adverse opinion or a disclaimer of opinion and was 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 fiscal year ended March 31,
2003 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 audit of Maxcos financial statements for the fiscal year ended March 31,
2003 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 had not consulted with Rehmann Robson during the fiscal year ended March 31, 2003 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. 
 ITEM 9B  OTHER INFORMATION None 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
expected to be filed within 120 days of March 31, 2005. 
 ITEM 11  EXECUTIVE COMPENSATION Item 11 is hereby incorporated by reference from the Registrants definitive proxy statement
expected to be filed within 120 days of March 31, 2005. 
 ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS Item 12 is hereby incorporated by reference from the Registrants definitive proxy statement
expected to be filed within 120 days of March 31, 2005. 
 ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 13 is hereby incorporated by reference from the Registrants definitive proxy statement
expected to be filed within 120 days of March 31, 2005. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Item 14 is hereby incorporated by reference from the Registrants definitive proxy statement
expected to be filed within 120 days of March 31, 2005. 16




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##### Table of Contents



PART IV 
 ITEM 15  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (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 Number3
    
    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 is hereby incorporated by reference from Form 10-K dated July 13,
2004.
 17




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##### Table of Contents



Exhibit Number10.37
    
    Business Loan Agreement between Capitol National Bank and Maxco, Inc.
dated May 28, 2004 is hereby incorporated by reference from Form 10-K dated July
13, 2004.21
    
    Subsidiaries of the Registrant23.1
    
    Consent of Independent 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 Independent 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 Independent 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) Exhibits  
    
    Subsidiaries of the Registrant
    
    Consent of Independent Registered Public Accounting FirmRehmann Robson
    
    Consent of Independent Registered Public Accounting FirmErnst & Young LLP
    
    Consent of Independent Registered Public Accounting FirmMoore Stephens Doeren Mayhew
    
    Certification of Chief Executive Officer
    
    Certification of Chief Financial Officer (c) Financial Statement Schedules None 18




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##### Table of Contents



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 14, 2005
    
    MAXCO, INC.By
    
    /S/ VINCENT SHUNSKYVincent 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 14, 2005
    
    President (Principal Executive Officer) and DirectorMax A. Coon
    
    Date/S/ JOEL I. FERGUSON
    
    July 14, 2005
    
    DirectorJoel I. Ferguson
    
    Date/S/ DAVID R. LAYTON
    
    July 14, 2005
    
    DirectorDavid R. Layton
    
    Date/S/ SANJEEV DESHPANDE
    
    July 14, 2005
    
    DirectorSanjeev Deshpande
    
    Date/S/ SAMUEL O. MALLORY
    
    July 14, 2005
    
    DirectorSamuel O. Mallory
    
    Date
 19




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##### Table of Contents



ANNUAL REPORT ON FORM 10-K ITEM 15(a)(1) AND (2), (c), AND (d) CONSOLIDATED FINANCIAL STATEMENTS CERTAIN EXHIBITS YEAR ENDED MARCH 31, 2005 MAXCO, INC. LANSING, MICHIGAN 20




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##### Table of Contents



FORM 10-KITEM 15(a)(1) AND (2) MAXCO, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of Maxco, Inc. and subsidiaries are
included in Item 8: Page(s)Reports of Independent Registered Public Accounting Firms
    
    
    22-23Consolidated balance sheetsMarch 31, 2005 and 2004
    
    
    24Consolidated statements of operationsYears ended March 31, 2005, 2004, and 2003
    
    
    25Consolidated statements of stockholders equityYears ended March 31, 2005, 2004, and 2003
    
    
    26Consolidated statements of cash flowsYears ended March 31, 2005, 2004, and 2003
    
    
    27Notes to consolidated financial statementsYears ended March 31, 2005, 2004, and 2003
    
    
    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, 2004, as filed with the Securities and Exchange Commission (SEC File Number
0-12728). 21




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders
Maxco, Inc.
Lansing, Michigan We have audited the accompanying consolidated balance sheets of Maxco, Inc. and subsidiaries as of
March 31, 2005 and 2004, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the two years 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 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 as of March
31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each
of the two years then ended in conformity with accounting principles generally accepted in the
United States of America. /S/ Rehmann Robson Troy, Michigan
July 14, 2005 22




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors, Maxco, Inc.: We have audited the accompanying consolidated statements of operations, shareholders equity, and
cash flows of Maxco, Inc. and subsidiaries for the year 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 audit. The financial statements of Integral
Vision, Inc., (a corporation in which the Company had approximately a 24% interest) for the year
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 audit in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and 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 results of Maxco, Inc. and subsidiaries operations and their
cash flows for the year ended March 31, 2003, in conformity with U.S. generally accepted accounting
principles. 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 12 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 SHEETS MAXCO, INC. AND SUBSIDIARIES
 March 31,2005
    
    
    2004(in thousands)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,781
    
    
    $
    78Accounts receivable, less allowance of $128,000 in 2005 and $134,000 in 2004
    
    
    6,605
    
    
    
    7,629InventoriesNote 1
    
    
    534
    
    
    
    408Prepaid expenses and other
    
    
    223
    
    
    
    429Total Current Assets
    
    
    9,143
    
    
    
    8,544Marketable SecuritiesNote 1
    
    
    2
    
    
    
    2Property and EquipmentLand
    
    
    437
    
    
    
    446Buildings
    
    
    5,997
    
    
    
    6,170Machinery, equipment, and fixtures
    
    
    30,052
    
    
    
    29,06836,486
    
    
    
    35,684Allowances for depreciation
    
    
    (18,018
    )
    
    
    (15,265
    )18,468
    
    
    
    20,419Other AssetsInvestmentsNote 9
    
    
    878
    
    
    
    1,138Notes and contracts receivable and other, less allowance of $350,000 in 2004
    
    
    994
    
    
    
    1,338Real estate investments held for saleNote 9
    
    
    1,850
    
    
    
    2,200Accounts receivable, related partiesNote 2
    
    
    407
    
    
    
    416IntangiblesNote 1
    
    
    1,424
    
    
    
    1,4245,553
    
    
    
    6,516$
    33,166
    
    
    $
    35,481LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesNotes payableNote 4
    
    $
    2,091
    
    
    $
    4,885Accounts payableNote 2
    
    
    3,870
    
    
    
    4,221Employee compensation
    
    
    1,711
    
    
    
    1,525Incentive compensationNote 10
    
    
    650
    
    
    
    Taxes, interest, and other liabilities
    
    
    3,850
    
    
    
    3,585Current maturities of long-term obligations
    
    
    4,959
    
    
    
    2,064Total Current Liabilities
    
    
    17,131
    
    
    
    16,280Long-Term Obligations, Less Current MaturitiesNote 4
    
    
    7,070
    
    
    
    11,480Total Liabilities
    
    
    24,201
    
    
    
    27,760Stockholders 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, 3,446,995 shares issued and
outstanding (3,101,195 at March 31, 2004)
    
    
    3,447
    
    
    
    3,101Accumulated other comprehensive loss
    
    
    (38
    )
    
    
    (172
    )Retained earnings
    
    
    1,690
    
    
    
    926Total Stockholders Equity
    
    
    8,965
    
    
    
    7,721$
    33,166
    
    
    $
    35,481
 See notes to consolidated financial statements. 24




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS MAXCO, INC. AND SUBSIDIARIES
 Year Ended March 31,2005
    
    
    2004
    
    
    2003(in thousands, except per share data)Net Sales
    
    $
    45,364
    
    
    $
    40,798
    
    
    $
    36,827Costs and Expenses:Cost of sales and operating expenses
    
    
    29,039
    
    
    
    26,774
    
    
    
    23,305Selling, general, and administrative
    
    
    11,396
    
    
    
    10,956
    
    
    
    11,256Gain on sale of buildings
    
    
    
    
    
    
    
    
    
    
    (149
    )Depreciation and amortization
    
    
    2,926
    
    
    
    2,899
    
    
    
    2,94943,361
    
    
    
    40,629
    
    
    
    37,361Operating Earnings (Loss)
    
    
    2,003
    
    
    
    169
    
    
    
    (534
    )Other Income (Expense):Investment, interest, and other income
    
    
    266
    
    
    
    150
    
    
    
    714Gain (loss) on sale of investmentsNote 9
    
    
    
    
    
    
    1,340
    
    
    
    (265
    )Loss on sale of assets
    
    
    (8
    )
    
    
    (72
    )
    
    
    Interest expense
    
    
    (1,517
    )
    
    
    (1,682
    )
    
    
    (1,944
    )Loss on investmentsNote 9
    
    
    (610
    )
    
    
    (1,115
    )
    
    
    (9,320
    )(1,869
    )
    
    
    (1,379
    )
    
    
    (10,815
    )Income (Loss) Before Federal Income Taxes, Equity in Net Loss
of Affiliates, and Discontinued Operations
    
    
    134
    
    
    
    (1,210
    )
    
    
    (11,349
    )Federal income tax benefitNote 8
    
    
    
    
    
    
    
    
    
    
    (875
    )Income (Loss) Before Equity in Net Loss of Affiliates and
Discontinued Operations
    
    
    134
    
    
    
    (1,210
    )
    
    
    (10,474
    )Equity in net loss of affiliates, net of taxNotes 3, 8, and 9
    
    
    
    
    
    
    (321
    )
    
    
    (614
    )Income (Loss) from Continuing Operations
    
    
    134
    
    
    
    (1,531
    )
    
    
    (11,088
    )Loss from discontinued operations, net of taxNote 13
    
    
    
    
    
    
    
    
    
    
    (1,737
    )Net Income (Loss)
    
    
    134
    
    
    
    (1,531
    )
    
    
    (12,825
    )Less preferred stock dividends
    
    
    (408
    )
    
    
    (408
    )
    
    
    (408
    )Net Loss Applicable to Common Stock
    
    $
    (274
    )
    
    $
    (1,939
    )
    
    $
    (13,233
    )Net Loss Per ShareBasic and DilutedNote 12Continuing operations
    
    $
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    (3.71
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.56
    )$
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    (4.27
    )
 See notes to consolidated financial statements. 25




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##### Table of Contents



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, 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 loss 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
    
    
    
    7,721Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    134Unrealized gain on swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    134Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268Conversion of debt to common stock
    
    
    346
    
    
    
    
    
    
    
    346
    
    
    
    
    
    
    
    1,038
    
    
    
    1,384Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (408
    )
    
    
    (408
    )Balances at March 31, 2005
    
    
    3,447
    
    
    $
    3,866
    
    
    $
    3,447
    
    
    $
    (38
    )
    
    $
    1,690
    
    
    $
    8,965
 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 31,2005
    
    
    2004
    
    
    2003(in thousands)Operating ActivitiesNet income (loss)
    
    $
    134
    
    
    $
    (1,531
    )
    
    $
    (12,825
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,737Income (loss) from continuing operations
    
    
    134
    
    
    
    (1,531
    )
    
    
    (11,088
    )Advances to discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,485
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    2,926
    
    
    
    2,879
    
    
    
    2,919Amortization of deferred financing costs
    
    
    
    
    
    
    20
    
    
    
    30Equity in net loss of affiliates
    
    
    
    
    
    
    321
    
    
    
    614Deferred federal income tax benefit
    
    
    
    
    
    
    
    
    
    
    (875
    )(Gain) loss on sale of investments
    
    
    
    
    
    
    (1,340
    )
    
    
    265(Gain) loss on sale of property and equipment
    
    
    8
    
    
    
    72
    
    
    
    (149
    )Loss on investments
    
    
    610
    
    
    
    1,115
    
    
    
    9,320Changes in operating assets and liabilities:Accounts receivable
    
    
    315
    
    
    
    (370
    )
    
    
    (2,417
    )Inventories
    
    
    (126
    )
    
    
    (232
    )
    
    
    180Income tax refunds
    
    
    
    
    
    
    
    
    
    
    4,635Prepaid expenses and other
    
    
    206
    
    
    
    (202
    )
    
    
    (566
    )Accounts payable and other current liabilities
    
    
    725
    
    
    
    1,576
    
    
    
    871Net Cash Provided by Operating Activities
    
    
    4,798
    
    
    
    2,308
    
    
    
    2,254Investing ActivitiesSale of businesses
    
    
    
    
    
    
    
    
    
    
    7,723Sale of property and equipment
    
    
    57
    
    
    
    400
    
    
    
    2,496Purchases of property and equipment
    
    
    (1,042
    )
    
    
    (698
    )
    
    
    (531
    )Sale of investments
    
    
    
    
    
    
    1,179
    
    
    
    326Collections of notes receivable
    
    
    1,013
    
    
    
    99
    
    
    
    1,080Other
    
    
    51
    
    
    
    119
    
    
    
    513Net Cash Provided by Investing Activities
    
    
    79
    
    
    
    1,099
    
    
    
    11,607Financing ActivitiesNet proceeds from (repayments on) lines of credit
    
    
    (2,015
    )
    
    
    (1,419
    )
    
    
    471Proceeds from other debt obligations
    
    
    5,513
    
    
    
    6,881
    
    
    
    4,063Repayments on other debt obligations
    
    
    (6,672
    )
    
    
    (9,182
    )
    
    
    (18,349
    )Net Cash Used in Financing Activities
    
    
    (3,174
    )
    
    
    (3,720
    )
    
    
    (13,815
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    1,703
    
    
    
    (313
    )
    
    
    46Cash and Cash Equivalents at Beginning of Year
    
    

    78
    
    
    
    391
    
    
    
    345Cash and Cash Equivalents at End of Year
    
    $
    1,781
    
    
    $
    78
    
    
    $
    391Supplemental cash flows disclosure:Interest paid
    
    $
    1,655
    
    
    $
    1,601
    

    
    $
    1,677
 See notes to consolidated financial statements. 27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAXCO, INC. AND SUBSIDIARIES
 Year Ended March 31, 2005 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 consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. Significant estimates
include the allowance for doubtful accounts receivable, the valuation of equity method investments,
and the fair value less costs to sell of real estate investments held-for-sale. Reclassifications: Certain items in the prior year consolidated financial statements have
been reclassified to conform with the presentation used in 2005. 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. Approximately $1.4 million of the
Companys cash balance at March 31, 2005 exceeded insured FDIC
limits. 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 31,2005
    
    
    2004
    
    
    2003(in thousands)Beginning balance
    
    $
    134
    
    
    $
    150
    
    
    $
    143Charged to costs and expenses
    
    
    186
    
    
    
    12
    
    
    
    7Deductions (A)
    
    
    (192
    )
    
    
    (28
    )
    
    
    Ending balance
    
    $
    128
    
    
    $
    134
    
    
    $
    150
  (A) Represents uncollectible accounts written off, less recoveries 28




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##### Table of Contents



Inventories: Inventories are stated at the lower of first-in, first-out cost or
market and at March 31 consisted of the following: 2005
    
    
    2004(in thousands)Raw materials
    
    $
    329
    
    
    $
    174Work in progress
    
    
    157
    
    
    
    190Finished goods
    
    
    48
    
    
    
    44$
    534
    
    
    $
    408
 Marketable Securities: Marketable securities are classified in accordance with
Statement of Financial Accounting Standards 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 fair value with the unrealized
gains and losses net of tax, reported as a separate component of stockholders equity. In 2004 and
2003, the Company recognized losses on its investment in Provant common stock as an other than
temporary impairment in the statements of operations of $366,000 and $1.4 million, respectively. Real Estate Investments Held For Sale: The Company has ownership interests in affiliated
entities that hold commercial real estate. In addition, the Company has made cash advances, which
are unsecured and bear interest, to these affiliates. The Company has implemented a plan to
liquidate these investments and their underlying real estate holdings. The Company accounts for
these real estate investments as held-for-sale in these consolidated financial statements. The
carrying amount of $1.9 million and $2.2 million at March 31, 2005 and 2004, respectively,
represents the Companys portion of the fair value, net of estimated costs to sell, of these real
estate interests. 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 31,2005
    
    
    2004
    
    
    2003(in thousands)Beginning balance
    
    $
    350
    
    
    $
    600
    
    
    $
    1,291Charged to costs and expenses
    
    
    
    
    
    
    
    
    
    
    521Deductions (A)
    
    
    (350
    )
    
    
    (250
    )
    
    
    (1,212
    )Ending balance
    
    $
    
    
    
    $
    350
    
    
    $
    600
  (A) 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 29




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##### Table of Contents



assets that were recorded in connection with previous
business combinations. Goodwill 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, 2005 and
2004. During 2005, 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. An estimate of reserves is recorded, if material,
for anticipated reworks and credit memos which will be issued on sales recognized to date. 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, 2005, accumulated other comprehensive loss consisted only of
the fair value of the interest rate swap agreement. Common 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 common 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
statements of operations following APB No. 25 and the pro forma results following SFAS 123. New Financial Accounting Pronouncements:
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 the Company. 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. 30




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In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151 Inventory Costs, an Amendment of ARB No. 43, Chapter
4. SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage) be recognized as current period charges.
It also requires that allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the
adoption of SFAS 151 will have a material impact on its results of operations or financial
position. In December, 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123R which will require the Company to measure the cost of employee services received
in exchange for an award of common stock options as compensation expense in the statement of income
using a fair value method. The Company will begin reporting these
costs by the end of fiscal 2006. The effect of implementing this new accounting standard has not been determined at
this time, but is not expected to impact reported earnings per share in amounts significantly
different from the pro forma results historically reported. In December 2004, the FASB issued SFAS 153 Exchanges of Nonmonetary Assets, and Amendment of APB
Opinion No.29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain
exceptions to the principle. SFAS 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset
exchanges in fiscal periods beginning after June 15, 2005. The Company does not believe that the
adoption of SFAS 153 will have a material impact on its results of operations or financial
position. 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. Vincent Shunsky, Vice President, is indebted to the Company in the principal amount of
approximately $127,000. The indebtedness was incurred at various times prior to April 2002 for the
purchase of affiliate company stock and personal use. This debt carries interest rates up to 8%. As
of March 31, 2005 the amount outstanding was approximately $172,000 including accrued interest. In
October 2004 the Company entered into a Retention Agreement with Mr. Shunsky to provide him with a
bonus of $200,000 to retain his services until at least March 31, 2006. Should he leave the employ
of the Company prior to that date the bonus must be repaid. The Company is expensing the bonus
ratably during the retention period. In June 2003, the Company assumed a lease with CJC Leasing, a limited liability company in which
Company President Max A. Coon is a member, from Contractor Supply Incorporated, the purchaser of
the Companys formerly wholly owned subsidiary, Ersco Corporation. At March 31, 2005 the amount
owed to CJC Leasing was approximately $1.6 million. Included in accounts payable is $107,000 and $128,000 at March 31, 2005 and 2004, respectively,
which are due to entities in which Mr. Coon has an interest. NOTE 3  INVESTMENT IN INTEGRAL VISION, INC. At March 31, 2005, Maxco owned 2,240,605 shares of Integral Visions common stock (aggregate market
value of $3.7 million), representing approximately 15% 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,
through June 30, 2005, Maxco had
the right to purchase up to 551,133 shares of the Integral Visions common stock at $1.86 per
share. Maxco did not exercise any of theses warrants which then
expired on that date. In April 2005, Maxco converted $95,684 of notes receivable from Integral Vision into
127,578 restricted shares of Integral Vision common stock. Maxcos investment in Integral Vision
is accounted for under the equity method for all years presented. Maxco had advanced Integral Vision $138,855 in 2001 to permit Integral Vision to meet its
obligations. This loan was evidenced by a written document and provided for interest at the rate
of prime plus 0.5%. Integral Vision repaid this obligation to Maxco in April 2005. 31




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Additionally, Maxco provides consulting services to Integral Vision. These services include
assistance with financial statement preparation, compliance with governmental filing requirements,
and assistance with certain financing arrangements. Integral Vision and Maxco have agreed on terms
for payment to Maxco for these services. The services for the period ended March 31, 2005 were
satisfied on April 20, 2005 by the issuance of 42,000 shares of unregistered common stock in
Integral Vision which represented $70,000 of service income recorded in fiscal 2005. Effective
April 1, 2005, Integral Vision will pay Maxco $8,750 per month for each month such services are
rendered. 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
net losses of approximately $2.3 million, $2.2 million, and $1.9 million for the twelve months
ended March 31, 2005, 2004, and 2003. Maxcos equity share of Integral Visions losses for the year ended March 31, 2003 was
approximately $456,000, and is recorded net of deferred tax for that period in equity in net income
(loss) of affiliates. At March 31, 2003 and September 30, 2003, the Company adjusted the carrying
value of its investment in Integral Vision, Inc. to its estimated fair value as the Company
determined that the investment was impaired. Since managements estimate of the fair value of this
investment at March 31, 2005 has not changed, the Company has not recognized any further gain or
loss on the investment since September 30, 2003. For the twelve months ended March 31, 2005, 2004,
and 2003, Integral Visions sales were $2.0 million, $322,000 and $1.7 million, respectively. NOTE 4  DEBT At March 31, 2005 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, 2005, based on these specific collateral levels, Atmosphere could borrow
up to $4.0 million under its line of credit, approximately $537,000 of which was borrowed. The
line matures in August 2005 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: 2005
    
    
    2004(in thousands)Short term obligations:Notes payable (various interest rates)
    
    $
    1,554
    
    
    $
    2,333Revolving line of credit (LIBOR1 + 2.0%)
    
    
    537
    
    
    
    2,5522,091
    
    
    
    4,885Long term obligations:Term notes (various variable interest rates)
    
    $
    4,930
    
    
    $
    4,268Mortgage note payable (prime1 plus 1.75%)
    
    
    4,962
    
    
    
    2,670Equipment purchase contracts and capitalized
lease obligations (various interest rates)
    
    
    1,791
    
    
    
    4,581Subordinated debt (fixed rate of 10.00%)
    
    
    346
    
    
    
    2,02512,029
    
    
    
    13,544Less current maturities
    
    
    4,959
    
    
    
    2,064$
    7,070
    
    
    $
    11,480
  1 At March 31, 2005 the London Interbank Offered Rate (LIBOR) was 2.88% and the
prime rate was 5.750%. 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 February 2005, Maxco agreed to
issue 250,000 shares of common stock valued at $4 per share to Contractor Supply Incorporated to
further reduce the Companys 32




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##### Table of Contents



obligation to Contractor Supply Incorporated. As a result, the
outstanding principal balance due Contractor Supply Incorporated at March 31, 2005 was $1.2
million. 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. During the year ended March 31, 2005, 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 and matures in June 2006. The remaining proceeds of approximately $400,000 were used for
working capital requirements. Maxco is in the process of negotiating
an agreement to sell its corporate
office building. The proceeds from the sale will be used to reduce the debt facility to $1.95
million. The Companys weighted average short-term borrowing rate was 7.0% and 5.4% at March 31, 2005 and
2004, 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 $38,000 and $172,000 at March 31, 2005 and 2004, 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 $5.0 million in
2006, $3.1 million in 2007, $1.7 million in 2008, $825,000 in 2009, $261,000 in 2010, and $1.1
million thereafter. Maxco has provided the guarantee of various debt obligations of certain real estate and other
investments in an aggregate amount of approximately $2.0 million as of March 31, 2005. Certain of
the debt agreements related to its real estate investments, which Maxco and other guarantors have
guaranteed, are in default at March 31, 2005. An extension has been issued by one of the banks and
the applicable entities are currently working to liquidate the properties to satisfy the
requirements of the lenders. The Company does not believe that there is any unusual degree of risk
related to the guarantees because of sufficient underlying asset values supporting the respective
debt obligations. In addition to the $2.0 million mentioned above, the Company has recorded in the accompanying
financial statements amounts that had been previously identified as guarantees. The amounts so
recorded aggregated approximately $249,000 as of March 31, 2005. Subsequent to March 31, 2005, Maxco purchased an entity which owns two buildings from L/M
Associates, an affiliate, and, beginning in June 2005, will be including in its consolidation the
operations of the buildings and vacant land. The debt associated with this transaction is
approximately $1.8 million which was previously identified as guaranteed debt. In addition, a
purchase agreement is currently being negotiated for the sale to an outside party of an additional
real estate parcel which will eliminate the remaining 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. 33




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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 $1.4 million at March 31, 2005, or $.41 per common share. NOTE 6  COMMON 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. Any such options are immediately exercisable upon
grant. There were 132,500 stock options outstanding and exercisable at March 31, 2005 with a weighted
average price of $7.74 per share and an exercise price ranging from $7.00 to $8.00. There were no
options granted during the years ended March 31, 2005, 2004, or 2003. 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
there is no difference between the reported net loss and loss per share and the pro forma net loss
and net loss per share if the options were accounted for under SFAS 123 for all periods presented. NOTE 7  EMPLOYEE SAVINGS PLANS Company contributions charged to operations under the employee savings plans were approximately
$178,000, $145,000, and $160,000 for the years ended March 31, 2005, 2004, and 2003, respectively. NOTE 8  FEDERAL INCOME TAXES The benefit for federal income taxes consists of the following components: Year Ended March 31,2005
    
    
    2004
    
    
    2003(in thousands)Current benefit
    
    $
    
    
    
    $
    
    
    
    $
    Deferred benefit
    
    
    
    
    
    
    
    
    
    
    (875
    )
    
    
    
    
    
    
    
    (875
    )Deferred amount allocated to equity in
income of affiliates
    
    
    
    
    
    
    
    
    
    
    (316
    )Amount allocated to discontinued operations
    
    
    
    
    
    
    
    
    
    
    (890
    )$
    
    
    
    $
    
    
    

    $
    (2,081
    )
 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 31,2005
    
    
    2004
    
    
    2003(in thousands)Income tax expense (benefit) computed at
United States statutory rate (34%)
    
    $
    45
    
    
    $
    (521
    )
    
    $
    (3,859
    )Increase (reduction) in valuation allowance
    
    
    (169
    )
    
    
    517
    
    
    
    3,006Other
    
    
    124
    
    
    
    4
    
    
    
    (22
    )$
    
    
    
    $
    
    
    
    $
    (875
    )
 No federal income taxes were paid in 2005, 2004, or 2003. 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, 2005, the Company has net operating loss (NOL) carryforwards of $7.3 million, $7.1 million of which
expires in 2023 with the remaining $372,000 expiring in 2024. During fiscal 2005, the Company utilized approximately $2.8 million of NOL carryforwards, which led
to an income tax benefit of $169,000 resulting from the reversal of the deferred income tax
valuation allowance. In 2004 34




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##### Table of Contents



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 31,2005
    
    
    2004
    
    
    2003(in thousands)Beginning balance
    
    $
    3,523
    
    
    $
    3,006
    
    
    $
    Charged (credited) to costs and expenses
    
    
    (169
    )
    
    
    517
    
    
    
    3,006Ending balance
    
    $
    3,354
    
    
    $
    3,523
    
    
    $
    3,006
 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: 2005
    
    
    2004(in thousands)Deferred Tax Liabilities:Depreciation
    
    $
    2,424
    
    
    $
    2,577Total Deferred Tax Liabilities
    
    
    2,424
    
    
    
    2,577Deferred Tax Assets:Net operating loss carryforwards
    
    
    2,498
    
    
    
    3,460Allowance for doubtful accounts
    
    
    51
    
    
    
    164Marketable securities
    
    
    1,101
    
    
    
    996Net cumulative unrealized impairment losses
    
    
    1,874
    
    
    
    1,415Other
    
    
    254
    
    
    
    65Total Deferred Tax Assets
    
    
    5,778
    
    
    
    6,100Valuation Allowance for Deferred Tax Assets
    
    
    3,354
    
    
    
    3,523Net Deferred Tax Assets
    
    
    2,424
    
    
    
    2,577Net Deferred Tax Assets (Liabilities)
    
    $
    
    
    
    $
    
 NOTE 9  OTHER INVESTMENTS Real Estate (Discontinued and Held For Sale): Maxco has ownership interests ranging from 31-50% 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, 2005 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. These real estate investments are discontinued and Maxco is actively pursuing their
liquidation. 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
substantially all of 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. Pursuant to the agreement, in July 2004, L/M Associates exercised its option to
require the managing member to repurchase its 16% interest. To date this requirement has not been
satisfied and L/M Associates intends to aggressively pursue other collection remedies. At March 31, 2005 Maxco had guarantees related to its real estate investments of $2.0 million.
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 $350,000 were
recognized during the year ended March 31, 2005
to further reduce the carrying value of the Companys investment in real estate to its estimated
fair value less costs to sell. Subsequent to
March 31, 2005, Maxco purchased an entity which owns two
buildings from L/M Associates and, beginning in June 2005, will be
including in its consolidation the operations of the buildings and
vacant land. The debt associated with this transaction is
approximately $1.8 million which was previously identified as
guaranteed debt. In addition, a purchase agreement is currently being
negotiated for the sale to an outside party of an additional real
estate parcel which will eliminate the remaining debt guarantee. 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 35




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##### Table of Contents



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 recorded impairment charges of approximately
$366,000 and $1.4 million in other income (expense) in 2004 and 2003, 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. 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 (Robinson), which is in the business of
acquiring and developing oil and gas interests. An impairment charge of $260,000 was recognized
during the year ended March 31, 2005 to reduce the carrying value of the Companys investment in
Robinson to its estimated fair value. Other: Maxco has a 36% equity interest in Phoenix Financial Group, LTD and its subsidiary Cambridge Group
Investments, LTD, dba Bondpage.com (Cambridge), 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 31,2005
    
    
    2004
    
    
    2003(in thousands)Robinson Oil
    
    $
    260
    
    
    $
    
    
    
    $
    Real estate
    
    
    350
    
    
    
    749
    
    
    
    4,698Provant
    
    
    
    
    
    
    366
    
    
    
    1,360Foresight Solutions
    
    
    
    
    
    
    
    
    
    
    2,790Integral Vision
    
    
    
    
    
    
    
    
    
    
    122Vertical VC
    
    
    
    
    
    
    
    
    
    
    250MYOEM.COM
    
    
    
    
    
    
    
    
    
    
    100$
    610
    
    
    $
    1,115
    
    
    $
    9,320
 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 $0.19, $0.36, and
$3.01 in 2005, 2004, and 2003, respectively. The composition of the net carrying value of non-real estate related investments is summarized as
follows: March 31,2005
    
    
    2004(in thousands)Cambridge
    
    $
    576
    
    
    $
    576Integral Vision
    
    
    211
    
    
    
    211Robinson
    
    
    91
    
    
    
    351$
    878
    
    
    $
    1,138
 36




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##### Table of Contents



The combined results of operations and financial position of the Companys unconsolidated
affiliates not held for sale or disposal are summarized below: Real Estate
    
    
    Technology Related
    
    
    Energy Related and OtherMarch 31,
    
    
    
    
    
    
    March 31,
    
    
    
    
    
    
    
    
    
    
    March 31,2003
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003(in thousands)Condensed income statement information:Net sales
    
    $
    79,882
    
    
    $
    1,972
    
    
    $
    322
    
    
    $
    2,191
    
    
    $
    4,426
    
    
    $
    3,866
    
    
    $
    2,292Gross margin
    
    
    16,227
    
    
    
    506
    
    
    
    (123
    )
    
    
    1,004
    
    
    
    4,426
    
    
    
    3,778
    
    
    
    2,204Net income (loss)
    
    
    5,574
    
    
    
    (2,284
    )
    
    
    (2,181
    )
    
    
    (2,600
    )
    
    
    50
    
    
    
    294
    
    
    
    Condensed balance sheet information:Current assets
    
    $
    9,951
    
    
    $
    737
    
    
    $
    539
    
    
    $
    215
    
    
    $
    992
    
    
    $
    1,055
    
    
    $
    713Non-current assets
    
    
    30,409
    
    
    
    160
    
    
    
    337
    
    
    
    1,053
    
    
    
    558
    
    
    
    682
    
    
    
    513$
    40,360
    
    
    $
    897
    
    
    $
    876
    
    
    $
    1,268
    
    
    $
    1,550
    
    
    $
    1,737
    
    
    $
    1,226Current liabilities
    
    $
    36,738
    
    
    $
    2,949
    
    
    $
    2,970
    
    
    $
    2,609
    
    
    $
    243
    
    
    $
    366
    
    
    $
    156Non-current
liabilities
    
    
    4,309
    
    
    
    2,369
    
    
    
    1,645
    
    
    
    5,700
    
    
    
    40
    
    
    
    162
    
    
    
    162Minority interest
    
    
    245
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    (932
    )
    
    
    (4,421
    )
    
    
    (3,739
    )
    
    
    (7,041
    )
    
    
    1,267
    
    
    
    1,209
    
    
    
    908$
    40,360
    
    
    $
    897
    
    
    $
    876
    
    
    $
    1,268
    
    
    $
    1,550
    
    
    $
    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 $464,000 in
2006, $215,000 in 2007,
$198,000 in 2008, $164,000 in 2009 and $138,000 in 2010 for a total commitment
aggregating $1.2 million. Rent expense
charged to operations, including short-term leases, aggregated $445,000 in 2005, $422,000 in 2004,
and $643,000 in 2003. In April 2004 the Company entered into an incentive agreement with the President of its
wholly-owned subsidiary Atmosphere Annealing, Inc. The agreement provides for compensation to the
officer based on the increased value, as defined, of the subsidiary by March 31, 2006. The
incentive is equal to 1% of the first $25 million in value plus 10% above that base amount. Any
incentive so earned is payable by Maxco, Inc. in cash assuming a sale by March 31, 2006. If no
such sale occurs by that date, at the option of Maxco the incentive is payable in cash or its
equivalent in stock of Atmosphere Annealing, Inc. held by Maxco. As party to the agreement, Maxco,
Inc. is recognizing incentive compensation expense on a pro-rata basis under the terms of the
agreement. The amount accrued during the year ended March 31, 2005 was $650,000. 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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##### Table of Contents



NOTE 11  INDUSTRY SEGMENT INFORMATION The following summarizes Maxcos industry segment information: 2005
    
    
    2004
    
    
    2003(in thousands)Net Sales:Heat treating
    
    $
    45,364
    
    
    $
    40,754
    
    
    $
    36,740Corporate and other
    
    
    
    
    
    
    44
    
    
    
    87Total Net Sales
    
    $
    45,364
    
    
    $
    40,798
    
    
    $
    36,827Operating Earnings (Loss)Heat treating
    
    $
    4,202
    
    
    $
    2,137
    
    
    $
    2,147Corporate and other
    
    
    (2,199
    )
    
    
    (1,968
    )
    
    
    (2,681
    )Total Operating Earnings (Loss)
    
    $
    2,003
    
    
    $
    169
    
    
    $
    (534
    )Identifiable Assets:Heat treating
    
    $
    27,081
    
    
    $
    29,472
    
    
    $
    29,589Corporate and other
    
    
    3,357
    
    
    
    2,671
    
    
    
    4,147Investments and advances
    
    
    2,728
    
    
    
    3,338
    
    
    
    4,165Discontinued operations
    
    
    
    
    
    
    
    
    
    
    474Total Identifiable Assets
    
    $
    33,166
    
    
    $
    35,481
    
    
    $
    38,375Depreciation and Amortization Expense:Heat treating
    
    $
    2,900
    
    
    $
    2,865
    
    
    $
    2,901Corporate and other
    
    
    26
    
    
    
    34
    
    
    
    48Total Depreciation and Amortization Expense
    
    $
    2,926
    
    
    $
    2,899
    
    
    $
    2,949Capital Expenditures:Heat treating
    
    $
    1,041
    
    
    $
    698
    
    
    $
    531Corporate and other
    
    
    1
    
    
    
    
    
    
    
    Total Capital Expenditures
    
    $
    1,042
    
    
    $
    698
    
    
    $
    531
 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 heat treating 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,
2005 sales to Honda of America Manufacturing, Inc. and GM Powertrain represented 33.3% and 10.7% of
consolidated sales, respectively. Amounts due from these customers represented 31% of the
respective outstanding trade receivable balance at March 31, 2005. 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. 38




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##### Table of Contents



NOTE 12  INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted income (loss) per share: Year Ended March 31,2005
    
    
    2004
    
    
    2003(in thousands except per share data)Numerator:Income (loss) from continuing operations
    
    $
    134
    
    
    $
    (1,531
    )
    
    $
    (11,088
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,737
    )Net income (loss)
    
    
    134
    
    
    
    (1,531
    )
    
    
    (12,825
    )Preferred stock dividends

    
    
    (408
    )
    
    
    (408
    )
    
    
    (408
    )Numerator for basic and diluted earnings per share 
loss available to common stockholders
    
    $
    (274
    )
    
    $
    (1,939
    )
    
    $
    (13,233
    )Denominator:Denominator for basic and diluted earnings per shareweighted average shares
    
    
    3,132
    
    
    
    3,101
    
    
    
    3,101Basic and Diluted Loss Per ShareContinuing operations
    
    $
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    (3.71
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.56
    )$
    (0.09
    )
    
    $
    (0.63
    )
    
    $
    (4.27
    )
 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 year ended March 31, 2003 were as
follows: Year EndedMarch 31,2003(A)(in thousands)Net sales:Ersco
    
    $
    61,421Pak Sak
    
    
    8,051$
    69,472Pre-tax loss:Ersco
    
    $
    (2,056
    )Pak Sak
    
    
    (576
    )$
    (2,632
    )
  (A) Results for the year ended March 31, 2003 are through the respective dates of
sale and include adjustments to the sales price. 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. 39




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##### Table of Contents



NOTE 14  SUBSEQUENT EVENTS Maxco provides consulting services to Integral Vision. These services include assistance with
financial statement preparation, compliance with governmental filing requirements, and assistance
with certain financing arrangements. Integral Vision and Maxco have agreed on terms for payment to
Maxco for these services. The services for the six months ended March 31, 2005 was satisfied on
April 20, 2005 by the issuance of 42,000 shares of unregistered common stock in Integral Vision.
Effective April 1, 2005, Integral Vision will pay Maxco $8,750 per month for each month such
services are rendered. Maxco had advanced Integral Vision $138,855 in 2001 to permit Integral Vision to meet its
obligations. This loan was evidenced by a written document and provided for interest at the rate
of prime plus 0.5%. Integral Vision repaid this obligation to Maxco in April 2005. 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
were re-priced based on subsequent warrant issues. As a result, through June 30, 2005, Maxco had
the right to purchase up to 551,133 shares of the Integral Visions common stock at $1.86 per
share. Maxco did not exercise any of these warrants which then expired on that date. In April 2005, Maxco converted $95,684 of notes receivable from Integral Vision into 127,578
restricted shares of Integral Vision common stock. Subsequent to March 31, 2005, the Company acquired BCGW, Inc. (BCGW), the entity that owns the
buildings the Company currently leases in Lansing, Michigan. Max A. Coons spouse was a 25%
shareholder of BCGW. At March 31, 2004, the Company owed BCGW $1.6 million on an outstanding loan
obligation which carried an interest rate of 10%. In May 2004 Atmosphere retired that obligation;
Atmosphere and BCGW entered into an agreement whereby BCGW agreed to accept as payment in full the
remaining outstanding balance less a discount of approximately $94,000. The amount the Company
charged to rent expense related to the two buildings leased from BCGW totaled approximately
$253,000 and $373,000 for the years ended March 31, 2005 and 2004, respectively. The interest on
the debt to BCGW was charged to interest expense in the accompanying financial statements and
totaled $3,000 and $181,000 for the years ended March 31, 2005 and 2004, respectively. Subsequent to March 31, 2005, Maxco purchased an entity which owns two buildings from L/M
Associates and, beginning in June 2005, will be including in its consolidation the operations of
the buildings and vacant land. 40




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##### Table of Contents



MAXCO, INC.
ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX Exhibit No.
    
    Description21
    
    Subsidiaries of the Registrant23.1
    
    Consent of Independent 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 Independent 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 Independent 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.
 41