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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 2004 Commission File Number 0-2762 MAXCO, INC. (Exact Name of Registrant as Specified in its Charter)
 Michigan
    
    38-1792842(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)1118 Centennial WayLansing, Michigan
    
    48917(Address of principal executive offices)
    
    (Zip Code)Registrants Telephone Number, including area code:
    
    (517) 321-3130
 Indicate by check mark whether the registrant (1) has filed all annual, quarterly and other reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding twelve months and (2) has been subject to the filing requirements for at least the past
90 days. Yes þ       No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o       No þ Indicate the number of shares outstanding for each of the issuers classes of common stock, as
of the latest practicable date. Class
    
    Outstanding at January 31, 2005Common Stock
    
    3,101,195 shares
   1




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MAXCO, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q PAGEPart I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    5Consolidated Statement of Stockholders Equity
    
    
    7Consolidated Statements of Cash Flows
    
    
    8Notes to Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15Part II  Other InformationItem 1. Legal Proceedings
    
    
    16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 3. Defaults Upon Senior Securities
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    16Item 5. Other Information
    
    
    16Item 6. Exhibits
    
    
    16Signatures
    
    
    18Certifications
    
    
    19Certification of Chief Executive Officer Pursuant to Section 302Certification of Chief Financial Officer Pursuant to Section 302Certification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906
  2




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PART I
FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 CONDENSED CONSOLIDATED BALANCE SHEETS
Maxco, Inc. and Subsidiaries December 31,2004
    
    
    March 31,(Unaudited)
    
    
    2004(in thousands)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    129
    
    
    $
    78Accounts and notes receivable, less allowance of
$98,000 ($134,000 at March 31, 2004)
    
    
    5,987
    
    
    
    7,629InventoryNote 9
    
    
    387
    
    
    
    408Prepaid expenses and other
    
    
    404
    
    
    
    429Total Current Assets
    
    
    6,907
    
    
    
    8,544Marketable SecuritiesLong TermNote 2
    
    
    2
    
    
    
    2Property & EquipmentLand
    
    
    437
    
    
    
    446Buildings
    
    
    6,008
    
    
    
    6,170Machinery, equipment, and fixtures
    
    
    29,761
    
    
    
    29,06836,206
    
    
    
    35,684Allowances for depreciation
    
    
    (17,330
    )
    
    
    (15,265
    )18,876
    
    
    
    20,419Other AssetsInvestments
    
    
    1,138
    
    
    
    1,138Notes and contracts receivable and other, less allowance
of $0 ($350,000 at March 31, 2004)
    
    
    1,032
    
    
    
    1,338Advances to affiliate
    
    
    2,200
    
    
    
    2,200Accounts receivablerelated parties
    
    
    411
    
    
    
    416Intangibles
    
    
    1,424
    
    
    
    1,4246,205
    
    
    
    6,516$
    31,990
    
    
    $
    35,481
 3




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CONDENSED CONSOLIDATED BALANCE SHEETS  CONTINUED
Maxco, Inc. and Subsidiaries December 31,2004
    
    
    March 31,(Unaudited)
    
    
    2004(in thousands)LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesNotes payableNote 6
    
    $
    4,167
    
    
    $
    4,885Accounts payable
    
    
    3,686
    
    
    
    4,221Employee compensation
    
    
    1,538
    
    
    
    1,525Taxes, interest, and other liabilities
    
    
    3,918
    
    
    
    3,585Current maturities of long-term obligations
    
    
    4,546
    
    
    
    2,064Total Current Liabilities
    
    
    17,855
    
    
    
    16,280Long-Term Obligations, Less Current Maturities
    
    
    6,145
    
    
    
    11,480Total Liabilities
    
    
    24,000
    
    
    
    27,760Stockholders EquityPreferred stock:Series Three: 10% cumulative redeemable, $60 face
value; 14,784 shares issues and outstanding
    
    
    678
    
    
    
    678Series Four: 10% cumulative redeemable, $51.50 face
value; 46,414 shares issues and outstanding
    
    
    2,390
    
    
    
    2,390Series Five: 10% cumulative redeemable, $120 face
value; 6,648 shares issues and outstanding
    
    
    798
    
    
    
    798Series Six: 10% cumulative callable, $160 face
value; 20,000 shares authorized, issued  none
    
    
    
    
    
    
    3,866
    
    
    
    3,866Common stock, $1 par value; 10,000,000 shares
authorized, 3,101,195 shares issued and outstanding
    
    
    3,101
    
    
    
    3,101Net unrealized losses
    
    
    (63
    )
    
    
    (172
    )Retained earnings
    
    
    1,086
    
    
    
    926Total Stockholders Equity
    
    
    7,990
    
    
    
    7,721$
    31,990
    
    
    $
    35,481
 See notes to consolidated financial statements 4




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Maxco, Inc. and Subsidiaries
(Unaudited) Three Months Ended December 31,2004
    
    
    2003(in thousands, except per share data)Net sales
    
    $
    11,414
    
    
    $
    10,562Costs and expenses:Cost of sales and operating expenses
    
    
    7,437
    
    
    
    7,186Selling, general and administrative
    
    
    2,654
    
    
    
    2,941Depreciation and amortization
    
    
    742
    
    
    
    74910,833
    
    
    
    10,876Operating Earnings (Loss)
    
    
    581
    
    
    
    (314
    )Other income (expense)Investment, interest, and other income (loss), net
    
    
    
    
    
    
    (51
    )Gain (loss) on sale of assets
    
    
    2
    
    
    
    (74
    )Interest expense
    
    
    (371
    )
    
    
    (468
    )Income (Loss) Before Equity in Earnings of Affiliates
    
    
    212
    
    
    
    (907
    )Equity in earnings of affiliates
    
    
    
    
    
    
    50Net Income (Loss)
    
    
    212
    
    
    
    (857
    )Less preferred stock dividends
    
    
    (102
    )
    
    
    (102
    )Net Income (Loss) Applicable to Common Stock
    
    $
    110
    
    
    $
    (959
    )Net Income (Loss) Per Common ShareBasic and Diluted
    
    $
    0.04
    
    
    $
    (0.31
    )
 See notes to consolidated
financial statements 5




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Maxco, Inc. and Subsidiaries
(Unaudited) Nine Months Ended December 31,2004
    
    
    2003(in thousands, except per share data)Net sales
    
    $
    33,937
    
    
    $
    29,324Costs and expenses:Cost of sales and operating expenses
    
    
    22,152
    
    
    
    19,408Selling, general and administrative
    
    
    8,164
    
    
    
    8,376Depreciation and amortization
    
    
    2,229
    
    
    
    2,20232,545
    
    
    
    29,986Operating Earnings (Loss)
    
    
    1,392
    
    
    
    (662
    )Other income (expense)Investment, interest, and other income (loss), net
    
    
    151
    
    
    
    (317
    )Gain on sale of assets
    
    
    59
    
    
    
    838Interest expense
    
    
    (1,136
    )
    
    
    (1,341
    )Income (Loss) Before Equity in Loss of Affiliates
    
    
    466
    
    
    
    (1,482
    )Equity in loss of affiliates, net of tax
    
    
    
    
    
    
    (40
    )Net Income (Loss)
    
    
    466
    
    
    
    (1,522
    )Less preferred stock dividends
    
    
    (306
    )
    
    
    (306
    )Net Income (Loss) Applicable to Common Stock
    
    $
    160
    
    
    $
    (1,828
    )Net Income (Loss) Per Common ShareBasic and Diluted
    
    $
    0.05
    
    
    $
    (0.59
    )
 See notes to consolidated
financial statements 6




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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Maxco, Inc. and Subsidiaries
(Unaudited) Number ofCommon
    
    
    
    
    
    
    
    
    
    
    AccumulatedShares
    
    
    Preferred
    
    
    Common
    
    
    Comprehensive
    
    
    RetainedOutstanding
    
    
    Stock
    
    
    Stock
    
    
    Loss
    
    
    Earnings
    
    
    Totals(in thousands, except number of common shares outstanding)Balances at April 1, 2004
    
    
    3,101,195
    
    
    $
    3,866
    
    
    $
    3,101
    
    
    $
    (172
    )
    
    $
    926
    
    
    $
    7,721Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    466Unrealized gain on swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    109Total Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (306
    )
    
    
    (306
    )Balances at December 31, 2004
    
    
    3,101,195
    
    
    $
    3,866
    
    
    $
    3,101
    
    
    $
    (63
    )
    
    $
    1,086
    
    
    $
    7,990
 See notes to consolidated financial statements 7




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Maxco, Inc. and Subsidiaries
(Unaudited) Nine Months Ended December 31,2004
    
    
    2003(in thousands)Operating ActivitesNet income (loss)
    
    $
    466
    
    
    $
    (1,522
    )Adjustments to reconcile net loss to net cash
provided by operating activites:Net gains on sale of assets
    
    
    (59
    )
    
    
    (838
    )Non-cash investment losses
    
    
    
    
    
    
    431Depreciation and other non-cash items
    
    
    2,230
    
    
    
    2,242Changes in operating assets and liabilities
    
    
    592
    
    
    
    1,723Net Cash Provided By Operating Activities
    
    
    3,229
    
    
    
    2,036Investing ActivitiesPayments received on notes receivable
    
    
    1,013
    
    
    
    Purchases of property and equipment
    
    
    (685
    )
    
    
    (328
    )Proceeds from sale of assets
    
    
    57
    
    
    
    1,339Other
    
    
    7
    
    
    
    86Net Cash Provided By Investing Activities
    
    
    392
    
    
    
    1,097Financing ActivitiesNet repayments on line of credit
    
    
    (696
    )
    
    
    (1,368
    )Net repayments on other debt obligations
    
    
    (2,874
    )
    
    
    (1,823
    )Net Cash Used In Financing Activities
    
    
    (3,570
    )
    
    
    (3,191
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    51
    
    
    
    (58
    )Cash and Cash Equivalents at Beginning of Period
    
    
    78
    
    
    
    391Cash and Cash Equivalents at End of Period
    
    $
    129
    
    
    $
    333Supplemental cash flow disclosure:Interest paid
    
    $
    1,030
    
    
    $
    1,261
 See notes to consolidated
financial statements 8




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maxco, Inc. and Subsidiaries
December 31, 2004
(Unaudited) NOTE 1  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited, condensed, consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by accounting
principles generally accepted in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation of the results of the interim periods covered have been
included. For further information, refer to Note 6 and the consolidated financial statements
and notes thereto included in Maxcos annual report on Form 10-K for the year ended March 31,
2004. The results of operations for the interim periods presented are not necessarily indicative of
the results for the full year. Maxcos sales and operating results have varied substantially
from quarter to quarter. Net sales are typically lower in the second and third quarters. The
most significant factors affecting these fluctuations are the seasonal buying patterns of the
Companys customers due to a customer changeover and the reduced number of business days during
the holiday season. In addition, the timing of acquisitions or the occasional sale of corporate
investments may cause substantial fluctuations of operating results from quarter to quarter.
Maxco expects its net sales and operating results to continue to fluctuate from quarter to
quarter. NOTE 2  MARKETABLE SECURITIES The Company classifies its investments in equity securities with readily determinable fair
values as securities available for sale under FASB 115, Accounting for Certain Investments in
Debt and Equity Securities. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of stockholders
equity. NOTE 3  EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands, except per share data)NUMERATOR:Net income (loss)
    
    $
    212
    
    
    $
    (857
    )
    
    $
    466
    
    
    $
    (1,522
    )Preferred stock dividends
    
    
    (102
    )
    
    
    (102
    )
    
    
    (306
    )
    
    
    (306
    )Numerator for basic and diluted earnings per share
income (loss) available to common stockholders
    
    $
    110
    
    
    $
    (959
    )
    
    $
    160
    
    
    $
    (1,828
    )DENOMINATOR:Denominator for basic and diluted earnings per
shareweighted average shares
    
    
    3,101
    
    
    
    3,101
    
    
    
    3,101
    
    
    
    3,101BASIC AND DILUTED INCOME (LOSS) PER SHARE
    
    $
    0.04
    
    
    $
    (0.31
    )
    
    $
    0.05
    
    
    $
    (0.59
    )
 9




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NOTE 4  COMPREHENSIVE INCOME The components of comprehensive income for the three and nine months ended December 31, 2004 and
2003 are as follows: Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)Net income (loss)
    
    $
    212
    
    
    $
    (857
    )
    
    $
    466
    
    
    $
    (1,522
    )Unrealized gain on swap agreement
    
    
    31
    
    
    
    28
    
    
    
    109
    
    
    
    67Comprehensive income (loss)
    
    $
    243
    
    
    $
    (829
    )
    
    $
    575
    
    
    $
    (1,455
    )
 Accumulated comprehensive loss, net of related tax was $63,000 at December 31, 2004 and
$172,000 at March 31, 2004 and consists of an unrealized loss on an interest rate swap
agreement. NOTE 5  INDUSTRY SEGMENT INFORMATION The following summarizes Maxcos industry segment information: December 31,
    
    
    March 31,2004
    
    
    2004(in thousands)Identifiable Assets:Heat treating
    
    $
    26,881
    
    
    $
    29,472Corporate and other
    
    
    1,771
    
    
    
    2,671Investments and advances
    
    
    3,338
    
    
    
    3,338Total Identifiable Assets
    
    $
    31,990
    
    
    $
    35,481
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)Net Sales:Heat treating
    
    $
    11,414
    
    
    $
    10,562
    
    
    $
    33,937
    
    
    $
    29,280Corporate and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Total Net Sales
    
    $
    11,414
    
    
    $
    10,562
    
    
    $
    33,937
    
    
    $
    29,324Operating Earnings (Loss):Heat treating
    
    $
    997
    
    
    $
    331
    
    
    $
    2,665
    
    
    $
    971Corporate and other
    
    
    (416
    )
    
    
    (645
    )
    
    
    (1,273
    )
    
    
    (1,633
    )Total Operating Earnings (Loss)
    
    $
    581
    
    
    $
    (314
    )
    
    $
    1,392
    
    
    $
    (662
    )Depreciation and Amortization Expense:Heat treating
    
    $
    735
    
    
    $
    741
    
    
    $
    2,206
    
    
    $
    2,177Corporate and other
    
    
    6
    
    
    
    8
    
    
    
    23
    
    
    
    25Total Depreciation and Amortization Expense
    
    $
    741
    
    
    $
    749
    
    
    $
    2,229
    
    
    $
    2,202Capital Expenditures:Heat treating
    
    $
    148
    
    
    $
    74
    
    
    $
    685
    
    
    $
    328Corporate and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Capital Expenditures
    
    $
    148
    
    
    $
    74
    
    
    $
    685
    
    
    $
    328
 Accounting policies of the business segments are consistent with those described in the
summary of significant accounting policies (see Note 1). Identifiable assets are those assets that are used in Maxcos operations in each industry
segment. Corporate assets are principally cash, notes receivable, investments, and corporate
office properties. Maxco has no significant foreign operations or export sales. 10




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The nature of the Companys services may produce sales to one or a small number of customers in
excess of 10% of total sales in any one period. It is possible that the specific customers
reaching this threshold may change from year to year. Loss of any one of these customers could
have a material impact on the Companys results of operations. NOTE 6  DEBT At December 31, 2004 the Companys heat treating segment, Atmosphere Annealing (Atmosphere), had
a $6 million line of credit facility. This facility is secured by Atmospheres assets. The
amount that can be borrowed under this facility is dependent on certain accounts receivable
levels at Atmosphere. At December 31, 2004, based on these specific collateral levels,
Atmosphere could borrow up to $3.0 million under its line of credit, approximately $1.9 million
of which was borrowed. The facility matures in August 2005 and, as such, outstanding borrowings
are recorded as current in the accompanying balance sheets. A summary of the Companys debt obligations as of December 31, 2004 and March 31, 2004 is as
follows: December 31,
    
    
    March 31,2004
    
    
    2004(in thousands)Short term obligations:Notes payable (various interest rates)
    
    $
    2,310
    
    
    $
    2,333Revolving line of credit (LIBOR1 + 2.25%)
    
    
    1,857
    
    
    
    2,552$
    4,167
    
    
    $
    4,885Long term obligations:Term notes (various variable interest rates)
    
    $
    3,108
    
    
    $
    4,268Mortgage note payable (LIBOR1 + 2.5%)
    
    
    2,311
    
    
    
    2,670Equipment purchase contracts and capitalized

lease obligations (various interest rates)
    
    
    4,913
    
    
    
    4,581Subordinated debt (fixed rate of 10.00%)
    
    
    359
    
    
    
    2,02510,691
    
    
    
    13,544Less current maturities
    
    
    4,546
    
    
    
    2,064$
    6,145
    
    
    $
    11,480
   1At December 31, 2004 the London Interbank Offered Rate (LIBOR) was 2.40% In May 2004, the Company reached an agreement with a new financial institution to repay
lenders with which the Company was in default. The principal amount repaid was approximately
$2.3 million. The new debt facility of $2.7 million requires interest only payments for one
year and matures in May 2005. The remaining proceeds of approximately $400,000 were used for
working capital requirements. Maxco has provided the guarantee of various debt obligations of certain real estate and other
investments in an aggregate amount of approximately $2.7 million as of December 31, 2004.
Certain of the debt agreements related to its real estate investments, which Maxco and other
guarantors have guaranteed, are in default at December 31, 2004. An extension has been issued
by one of the banks and the applicable entities are currently working to liquidate the
properties to satisfy the requirements of the lenders. The Company does not believe that there
is any unusual degree of risk related to the guarantees because of sufficient underlying asset
values supporting the respective debt obligations. In addition to the $2.7 million mentioned above, the Company has recorded in the accompanying
financial statements amounts that had been previously identified as guarantees. The amounts so
recorded aggregated approximately $281,000 as of December 31, 2004. The accompanying financial statements have been prepared on the basis that the Company will
continue as a going concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Although there is concern about the Companys
ability to operate as a going concern due to current debt service requirements, Management
believes it has substantially reduced the risk as debt previously in default has been refinanced
and the Companys exposures relative to outstanding guarantees have been significantly reduced.
The Companys ability to meet its short term and long term debt service and other obligations
(including compliance with 11




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financial covenants) will continue to be dependent upon its future operating performance. This dependency will be subject to financial, business and other factors,
certain of which, such as prevailing economic conditions, are beyond the Companys control. The
Company believes that funds generated by its operations, funds available under its credit
facilities, and funds that could be available under other credit facilities will be sufficient
to finance near term capital needs, as well as to fund existing operations for the reasonably
foreseeable future. Additionally the Company has long term equity investments that could be
liquidated to meet its debt service requirements. NOTE 7  FEDERAL INCOME TAXES The Company assumed the utilization of net operating loss carryforwards to offset taxable income
in the first nine months of fiscal 2005. NOTE 8  DIVIDENDS Effective January 1, 2002, the Maxco Board of Directors suspended the payment of dividends on
all preferred stock. These dividend payments have been accrued in the accompanying financial
statements and totaled approximately $1.3 million at December 31, 2004. NOTE 9  INVENTORIES Inventories are stated at the lower of first-in, first-out cost or market and consisted of the
following: December 31,
    
    
    March 31,2004
    
    
    2004(in thousands)Raw materials
    
    $
    237
    
    
    $
    174Work in progress
    
    
    110
    
    
    
    190Finished goods
    
    
    40
    
    
    
    44$
    387
    
    
    $
    408
 NOTE 10  SALE OF REAL ESTATE PORTFOLIO Maxco has ownership interests of not more than 50% in primarily two LLCs which have been
involved in the development and ownership of real estate in central Michigan. Effective January
1, 2000, a Master LLC (L/M Associates II) was formed consisting of the majority of the
stabilized buildings in which Maxco and others had an ownership interest. At December 31, 2004
Maxcos effective ownership interest in the Master LLC was approximately 31%. The other LLC
(L/M Associates) includes properties that are not fully leased or individual properties not
included in the Master LLC. In early 2002, Maxco, as managing member of L/M Associates, which is the managing member of L/M
Associates II, began negotiations to sell substantially all of the properties in the real estate
portfolio of L/M Associates II. In June 2002, L/M Associates II entered into an agreement to
sell the properties within the Master LLC to an outside investor. The transaction was approved
by more than 75% of the member interests in July 2002. This transaction was completed in
January 2003. As part of this transaction, L/M Associates agreed to reinvest a portion of its
distributable share of the proceeds to acquire approximately a 16% interest in the acquiring
entity. By agreement, this investment may be repurchased by a member of the acquiring entity.
However, pursuant to the agreement, in July 2004, L/M Associates exercised its option to require
the same member to repurchase the investment. To date this requirement has not been satisfied
and L/M Associates intends to aggressively pursue other collection remedies. This real estate investment is discontinued and Maxco is actively pursuing its liquidation. NOTE 11  ACCOUNTS RECEIVABLE AND PAYABLERELATED PARTIES Accounts receivable, related parties consists primarily of unsecured cash advances to officers,
stockholders, and affiliates. Certain of the amounts are non-interest bearing. The ultimate
settlement of the balances is generally expected to be made in cash, although not necessarily
within the next year. Vincent Shunsky, Vice President, is indebted to The Company in the principal amount of
approximately $127,000. The indebtedness was incurred at various times prior to April 2002 for
the purchase of affiliate company stock and personal use. This debt carries interest rates up to
8%. As of January 31, 2005 the amount outstanding was approximately $171,000 including accrued
interest. In October 2004 the Company entered into a Retention 12




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Agreement with Mr. Shunsky to provide him with a bonus of $200,000 to retain his services until at least March 31, 2006.
Should he leave the employ of the Company prior to that date the bonus must be repaid. In June 2003, the Company assumed a lease with CJC Leasing, a limited liability company in which
Company President Max A. Coon is a member, from Contractor Supply Incorporated, the purchaser of
the Companys formerly wholly owned subsidiary, Ersco Corporation. At December 31, 2004 the
amount owed to CJC Leasing was approximately $1.7 million. Included in accounts payable is $128,000 at both December 31, 2004 and March 31, 2004, which is
due to entities in which Mr. Coon has an interest. 
 NOTE 12NEW
ACCOUNTING PRONOUNCEMENTS In December, 2004 the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123R which will require the Company to
measure the cost of employee services received in exchange for an
award of common stock options as compensation expense in the
statement of income using a fair value method. The Company will begin
reporting these costs in the second quarter of fiscal 2006. The
effect of implementing this new accounting standard has not been
determined at this time, but is not expected to impact reported
earnings per share in amounts significantly different from the pro
forma results historically reported. ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN FINANCIAL CONDITION Cash provided by operating activities amounted to $3.2 million for the nine months. Earnings,
after non-cash adjustments, generated $2.6 million while changes in working capital components
generated $592,000. Cash was generated by investing activities during the nine month period from the receipt of
payments on certain notes receivable, primarily $950,000 from the purchaser of the Companys
formerly wholly owned subsidiary, Wright Plastic Products. These proceeds were used primarily for
working capital requirements. The Companys heat treating segment purchased approximately $685,000
of equipment during the nine month period. In May 2004, the Company reached an agreement with a new financial institution to repay lenders
with which the Company was in default. The new debt facility of $2.7 million requires interest
only payments for one year and matures in May 2005. Atmosphere Annealing repaid $696,000 on its
line of credit during the period. Net repayments on other debt obligations amounted to $2.9
million for the nine month period. Overall, the Companys working capital deficit (defined as current assets less current liabilities)
increased from $7.7 million at March 31, 2004 to $10.9 million at December 31, 2004. This is
primarily due to the fact that $2.7 million of debt became due within one year during the period.
While this debt is due in May 2005, the Company anticipates it will be able to extend the maturity
date. The Companys ability to meet its short term and long term debt service and other obligations
(including compliance with financial covenants) will continue to be dependent upon its future
operating performance. This dependency will be subject to financial, business and other factors,
certain of which, such as prevailing economic conditions, are beyond the Companys control. The
Company believes that funds generated by its operations, funds available under its credit
facilities, and funds that could be available under other credit facilities will be sufficient to
finance near term capital needs, as well as to fund existing operations for the reasonably
foreseeable future. Additionally the Company has long term equity investments that could be
liquidated to meet its debt service requirements. At December 31, 2004, the 2,240,605 shares of Integral Vision common stock that Maxco owns had an
aggregate fair value of approximately $5.4 million. Maxcos investment in Integral Vision is
reflected in Maxcos financial statements under the equity method for all periods presented as the
Company maintains representation on Integral Visions Board of Directors. At December 31, 2004, the 2,837,089 shares of Provant common stock that Maxco owns had an aggregate
fair value of approximately $85,000. Maxcos investment in Provant is reflected in Maxcos
financial statements under the cost method as an available-for-sale security as the Company owns
less than 20% of Provants outstanding stock. MATERIAL CHANGES IN RESULTS OF OPERATIONS Three Months Ended December 31, 2004 Compared to 2003 Net sales increased to $11.4 million compared to $10.6 million in last years third quarter. Third
quarter results reflect operating earnings of $581,000 compared to a loss of $314,000 for the
comparable period in 2003. Net income was $212,000 or $.04 per share after preferred dividends
assuming dilution compared to last years net loss of $857,000 or $.31 per share after preferred
dividends assuming dilution. 13




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Sales and operating earnings for the three months ended December 31, 2004 and 2003 by the Companys
heat treating and corporate and other segments were as follows: Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Operating
    
    
    
    
    
    
    OperatingNet Sales
    
    
    Earnings (Loss)
    
    
    Net Sales
    
    
    Earnings (Loss)(in thousands)Heat treating
    
    $
    11,414
    
    
    $
    997
    
    
    $
    10,562
    
    
    $
    331Corporate and other
    
    
    
    
    
    
    (416
    )
    
    
    
    
    
    
    (645
    )$
    11,414
    
    
    $
    581
    
    
    $
    10,562
    
    
    $
    (314
    )
 The increase in net sales at the Companys heat treating segment, Atmosphere Annealing
(Atmosphere), was due in part to increased business with Honda of America Manufacturing, Inc. An
expanded customer base also contributed to the increase in sales. Consolidated gross profit (net sales less cost of sales and operating expenses) was approximately
$4.0 million (35% of net sales) in the current quarter compared to $3.4 million (32% of net sales)
in the prior year. The increase in heat treating sales was the primary reason that gross profit
increased from the prior year. Selling, general, and administrative decreased to $2.6 million from $2.9 million in the prior year
period. Atmosphere experienced reductions in the cost of health insurance of approximately
$180,000. Conversely, employee related costs ($27,000), state income taxes ($24,000), and
professional services ($26,000) increased over the prior year. Maxcos corporate segment saw
employee costs lowered by $53,000 and legal costs lowered by $48,000. Additionally, in the prior
year quarter, the corporate segment recorded a charge of $123,000 for an anticipated workers
compensation claim. As a result of the above, operating earnings increased to $581,000 from a loss of $314,000 in last
years comparable period. Investment, interest, and other income (loss), net increased from a loss of $51,000 in the prior
year to a net $0 in the current year. In the prior year quarter, the Company recorded a charge of
$57,000 as an other than temporary impairment to the value of its investment in Provant. Interest
expense decreased from $468,000 to $371,000 primarily due to reduced borrowing levels. In the prior year quarter, the Company recorded $50,000 in equity in earnings of affiliates to
record its share of earnings from an unconsolidated investment. Nine Months Ended December 31, 2004 Compared to 2003 Net sales increased to $33.9 million compared to $29.3 million in last years comparable period.
Results from this period reflect operating earnings of $1.4 million compared to a loss of $662,000
for the comparable period in 2003. Net income was $466,000 or $.05 per share after preferred
dividends assuming dilution compared to last years net loss of $1.5 million or $.59 per share
after preferred dividends assuming dilution. Sales and operating earnings for the nine months ended December 31, 2004 and 2003 by the Companys
heat treating and corporate and other segments were as follows: Nine Months Ended
    
    
    Nine Months EndedDecember 31, 2004
    
    
    December 31, 2003Operating
    
    
    
    
    
    
    OperatingNet Sales
    
    
    Earnings (Loss)
    
    
    Net Sales
    
    
    Earnings (Loss)(in thousands)Heat treating
    
    $
    33,937
    
    
    $
    2,665
    
    
    $
    29,280
    
    
    $
    971Corporate and other
    
    
    
    
    
    
    (1,273
    )
    
    
    44
    
    
    
    (1,633
    )$
    33,937
    
    
    $
    1,392
    
    
    $
    29,324
    
    
    $
    (662
    )
 The increase in net sales at the Companys heat treating segment, Atmosphere Annealing
(Atmosphere), was due in part to increased business with Honda of America Manufacturing, Inc. An
expanded customer base also contributed to the increase in sales. 14




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Consolidated gross profit (net sales less cost of sales and operating expenses) increased to $11.8
million from $9.9 million. Gross margin (gross profit as a percentage of net sales) was
approximately 34% for both periods. The increase in heat treating sales was the primary reason
that gross profit increased from the prior year. Selling, general, and administrative decreased to $8.2 million from $8.4 million in the prior year
period. Atmosphere experienced reductions in the cost of health and general insurances of
approximately $228,000. Conversely, employee related costs ($136,000), state income taxes
($76,000), and professional services ($106,000) increased over the prior year period.
Additionally, bad debt expense at Atmosphere increased $150,000 over the prior year period to
provide for receivables that are no longer expected to be collected. Maxcos corporate segment saw
lower employee costs ($89,000), health and general insurances ($70,000), and legal costs
($114,000). Additionally, in the prior year quarter, the corporate segment recorded a charge of
$123,000 for an anticipated workers compensation claim. As a result of the above, operating earnings increased to $1.4 million from a loss of $662,000 in
last years comparable period. Investment, interest, and other income (loss), net increased from a loss of $317,000 to income of
$151,000. Atmosphere received a discount of $94,000 as a result of paying off a note in the
current period. In the prior year period, the Company recorded a charge of $340,000 as an other
than temporary impairment to the value of its investment in Provant. Interest expense decreased
from $1.3 million to $1.1 million primarily due to reduced borrowing levels. Gain on sale of assets includes $57,000 for a gain on the sale of a building in the current year
and $910,000 for a gain on sale of land in the prior year. In the prior year, the Company recorded $90,000 in equity in losses of affiliates to adjust its
investment in Integral Vision to an estimated realizable amount and $50,000 in equity in earnings
of affiliates to record its share of earnings from an unconsolidated investment. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys variable interest expense is sensitive to changes in the general level of United
States interest rates. While approximately $4.6 million of Maxcos debt carries a fixed rate of
interest, the Company entered into an interest rate swap agreement based on a notional amount of
$2.7 million to manage its exposure to interest rate changes. The swap involves the exchange of
fixed and variable interest payments without changing the notional principal amount. The Company
had total outstanding variable rate short and long term borrowings of $10.3 million at December 31,
2004. A 1% increase from the prevailing interest rates at December 31, 2004 on the unhedged
variable rate portion of the Companys short and long-term borrowings would increase interest
expense on an annualized basis by approximately $101,000 based on principal balances at December
31, 2004. The Companys heat treating segment experiences fluctuations in the price of natural gas used in
the heat treating process. To the extent feasible in light of competitive factors, the Company has
offset these fluctuations through selective price adjustments. 
 ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES The Companys Chief Executive Officer and Chief Financial Officer believe Maxcos disclosure
controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), are
effective. This conclusion was reached after an evaluation of these controls and procedures as of
December 31, 2004. 15




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##### Table of Contents



PART II
OTHER INFORMATION 
 Item 1. Legal Proceedings None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information The annual meeting of shareholders has been delayed more than 30 days later than it is
traditionally held. The meeting will be held on March 15, 2005. 
 Item 6(a)
    
    Exhibits3
    
    Restated Articles of Incorporation are hereby incorporated from Form 10-Q dated February 13, 1998.3.1
    
    By-laws are hereby incorporated by reference from Form S-4 dated November 4, 1991 (File No.
33-43855).4.2
    
    Resolution establishing Series Three Preferred Shares is hereby incorporated by reference
from Form S-4 dated November 4, 1991 (File No. 33-43855).4.3
    
    Resolution authorizing the redemption of Series Two Preferred Stock and establishing Series
Four Preferred Stock and the terms of the subordinated notes is hereby incorporated by
reference from Form 10-Q dated February 14, 1997.4.4
    
    Resolution establishing Series Five Preferred Shares is hereby incorporated by reference from
Form 10-K dated June 5, 1997.4.5
    
    Resolution establishing Series Six Preferred Shares is hereby incorporated by reference from
Form 10-K dated June 23, 1999.10.1
    
    Incentive stock option plan adopted August 15, 1983, including the amendment (approved by
shareholders August 25, 1987) to increase the authorized shares on which options may be
granted by two hundred fifty thousand (250,000), up to five hundred thousand (500,000) shares
of the common stock of the company is hereby incorporated by reference from the registrants
annual report on Form 10-K for the fiscal year ended March 31, 1988.10.11
    
    Asset purchase agreement for the purchase of Atmosphere Annealing, Inc. is hereby
incorporated by reference from Form 8-K dated January 17, 1997.
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##### Table of Contents



10.18
    
    Maxco, Inc. 1998 Employee Stock Option Plan is hereby incorporated by reference from Form
10-Q dated November 12, 1998.10.29
    
    Obligor assignment agreement among Contractor Supply Incorporated, Maxco, Inc., and Ersco
Corporation dated November 14, 2002 is hereby incorporated by reference from Form 10-Q dated
November 25, 2002.10.30
    
    Stock purchase agreement between Ersco Corporation, Maxco, Inc., and Contractor Supply
Incorporated dated November 14, 2002 is hereby incorporated by reference from Form 10-Q dated
November 25, 2002.10.31
    
    Asset Purchase Agreement between Pak Sak Industries, Inc., Maxco, Inc., P-S Business
Acquisition, Inc., and P&D Real Estate, LLC and Packaging Personified, Inc. dated September
27, 2002 is hereby incorporated by reference from Form 10-Q dated February 14, 2003.10.32
    
    First Amendment to Asset Purchase Agreement between Pak Sak Industries, Inc., Maxco, Inc.,
P-S Business Acquisition, Inc., and P&D Real Estate, LLC and Packaging Personified, Inc. dated
October 30, 2002 is hereby incorporated by reference from Form 10-Q dated February 14, 2003.10.33
    
    Second Amendment to Asset Purchase Agreement between Pak Sak Industries, Inc., Maxco, Inc.,
P-S Business Acquisition, Inc., and P&D Real Estate, LLC and Packaging Personified, Inc. dated
November 25, 2002 is hereby incorporated by reference from Form 10-Q dated February 14, 2003.10.34
    
    Credit Agreement between Atmosphere Annealing, Inc. and Huntington National Bank dated
November 18, 2003 is hereby incorporated by reference from Form 10-Q dated November 19, 2003.10.35
    
    Subordination Agreement between Maxco, Inc., Atmosphere Annealing, Inc. and Comerica Bank
and Huntington National Bank dated November 18, 2003 is hereby incorporated by reference from
Form 10-Q dated November 19, 2003.10.36
    
    Incentive agreement between Sanjeev Deshpande and Maxco, Inc. dated April 20, 2004 is hereby
incorporated by reference from Form 10-K dated July 13, 2004.10.37
    
    Business Loan Agreement between Capitol National Bank and Maxco, Inc. dated May 28, 2004 is
hereby incorporated by reference from Form 10-K dated July 13, 2004.31.1
    
    Certification of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e) or
Rule 15d-15(e).31.2
    
    Certification of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e) or
Rule 15d-15(e).32.1
    
    Certification of Chief Executive Officer of periodic report pursuant to 18 U.S.C. §1350.32.2
    
    Certification of Chief Financial Officer of periodic report pursuant to 18 U.S.C. §1350.
 17




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. MAXCO, INC.Date:  February 14,  2005
    
    /s/ VINCENT SHUNSKYVincent Shunsky, Vice President-Financeand Treasurer (Principal Financial andAccounting Officer)
 18




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EXHIBIT INDEX EX NO.
    
    DESCRIPTION31.1
    
    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.
 19