Maxco 10-Q 2001 Q3 Quarterly report

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, 2000

Commission File Number 0-2762

MAXCO, INC.
(Exact Name of Registrant as Specified in its Charter)

Michigan	38-1792842
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
1118 Centennial Way Lansing, Michigan	48917
(Address of principal executive offices)	(Zip Code)

Registrant’s Telephone Number, including area code:      (517) 321-3130

Indicate by check mark whether the registrant (1) has filed all annual, quarterly and other reports required to be filed by Section 12 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  No 

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 December 31, 2000
Common Stock	3,101,195 shares

1

TABLE OF CONTENTS

7th Amendment to Amended & Restated Loan Agreement

PART I

FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEETS
Maxco, Inc. and Subsidiaries

			December 31,			March 31,
			2000			2000
			(Unaudited)
			(in thousands)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	1,014		$	542
	Marketable securities						185
	Accounts and notes receivable, less allowance of     $710,000 ($513,000 at March 31, 2000)			24,425			22,098
	Advances to affiliate			3,008			3,008
	Inventories — Note 2			7,081			8,000
	Investment held for sale — Note 9						1,121
	Prepaid expenses and other			1,183			760
		TOTAL CURRENT ASSETS		36,711			35,714
MARKETABLE SECURITIES — LONG TERM — Note 3				1,067			4,240
PROPERTY AND EQUIPMENT
	Land			732			732
	Buildings			12,780			12,271
	Machinery, equipment, and fixtures			49,782			41,650
				63,294			54,653
	Allowances for depreciation			(18,633	)		(14,893	)
				44,661			39,760
OTHER ASSETS
	Investments			10,270			12,165
	Notes and contracts receivable and other			5,334			4,325
	Intangibles			3,846			4,216
				19,450			20,706
			$	101,889		$	100,420

2

				December 31,			March 31,
				2000			2000
				(Unaudited)
				(in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
	Notes payable			$	19,314		$	23,667
	Accounts payable				18,903			12,989
	Employee compensation				2,485			3,247
	Taxes, interest, and other liabilities				499			381
	Current maturities of long-term obligations				3,734			3,117
			TOTAL CURRENT LIABILITIES		44,935			43,401
LONG-TERM OBLIGATIONS, less current maturities					24,196			22,390
DEFERRED INCOME TAXES					1,965			2,319
STOCKHOLDERS’ EQUITY
	Preferred stock:
		Series Three: 10% cumulative redeemable, $60 face    value; 14,784 shares issued and outstanding			678			678
		Series Four: 10% cumulative redeemable, $51.50 face    value; 46,414 shares issued and outstanding			2,390			2,390
		Series Five: 10% cumulative redeemable, $120 face    value; 6,648 shares issued and outstanding			798			798
		Series Six: 10% cumulative callable, $160 face    value; 20,000 shares authorized, issued — none
	Common stock, $1 par value; 10,000,000 shares
		authorized, 3,101,195 shares issued and outstanding			3,101			3,101
	Net unrealized loss on marketable securities				(1,434	)		(877	)
	Retained earnings				25,260			26,220
					30,793			32,310
				$	101,889		$	100,420

See notes to consolidated financial statements

3

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

				Three Months Ended December 31,
				2000			1999
				(Unaudited)			(Unaudited)
				(in thousands, except per share data)
Net sales				$	33,515		$	33,963
Costs and expenses:
	Cost of sales and operating expenses				25,831			25,754
	Selling, general and administrative				6,921			6,697
	Depreciation and amortization				1,549			1,249
					34,301			33,700
			Operating Earnings (Loss)		(786	)		263
Other income (expense)
	Investment and interest income				207			144
	Interest expense				(1,268	)		(939	)
			Loss Before Federal
Income Taxes and Equity in Loss of Affiliates					(1,847	)		(532	)
Federal income tax benefit					(591	)		(149	)
	Loss Before Equity in Loss of Affiliates				(1,256	)		(383	)
Equity in loss of affiliates, net of tax					(453	)		(110	)
			Net Loss		(1,709	)		(493	)
Less preferred stock dividends					(102	)		(102	)
		Net Loss Applicable to Common Stock			(1,811	)		(595	)
Net Loss Per Common Share — Basic				$	(.58	)	$	(.19	)
Net Loss Per Common Share — Assuming Dilution				$	(.58	)	$	(.19	)

See notes to consolidated financial statements

4

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

				Nine Months Ended December 31,
				2000			1999
				(Unaudited)			(Unaudited)
				(in thousands, except per share data)
Net sales				$	131,063		$	125,166
Costs and expenses:
	Cost of sales and operating expenses				101,753			95,799
	Selling, general and administrative				21,576			20,156
	Depreciation and amortization				4,612			3,617
					127,941			119,572
			Operating Earnings		3,122			5,594
Other income (expense)
	Investment and interest income				1,209			433
	Interest expense				(3,582	)		(2,522	)
			Income Before Federal
	Income Taxes and Equity in Earnings of Affiliates				749			3,505
Federal income tax expense					328			1,258
		Income Before Equity in Earnings of Affiliates			421			2,247
Equity in earnings (loss) of affiliates, net of tax					(1,075	)		445
			Net Income (Loss)		(654	)		2,692
Less preferred stock dividends					(306	)		(306	)
			Net Income (Loss) Applicable to Common Stock		(960	)		2,386
Net Income (Loss) Per Common Share — Basic				$	(.31	)	$	.75
Net Income (Loss) Per Common Share — Assuming Dilution				$	(.31	)	$	.75

See notes to consolidated financial statements

5

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

				Nine Months Ended December 31,
				2000			1999
				(Unaudited)			(Unaudited)
				(in thousands)
Operating Activities
	Net Income (loss)			$	(654	)	$	2,692
	Adjustments to reconcile net income (loss) to net cash provided    by operating activities:
		Depreciation and other non-cash items			5,360			3,580
		Changes in operating assets and liabilities			4,680			(4,071	)
			Net Cash Provided By Operating Activities		9,386			2,201
Investing Activities
	Purchase of businesses							(4,587	)
	Sale of investment				1,143
	Payment received on note receivable							750
	Redemption of (investment in) marketable securities				2,530			(28	)
	Investment in affiliates				(272	)		(833	)
	Advances to affiliates, net of distributions				(147	)		(704	)
	Purchases of property and equipment				(8,989	)		(9,140	)
	Other				159			26
			Net Cash Used In Investing Activities		(5,576	)		(14,516	)
Financing Activities
	Proceeds from long-term obligations				4,794			15,386
	Repayments on long-term obligations and notes payable				(2,371	)		(2,258	)
	Repayments on short-term obligations				(5,455	)
	Changes in capital stock							(476	)
	Dividends paid on preferred stock				(306	)		(306	)
			Net Cash Provided by (Used in) Financing Activities		(3,338	)		12,346
			Increase in Cash and Cash Equivalents		472			31
			Cash and Cash Equivalents at Beginning of Period		542			1,122
			Cash and Cash Equivalents at End of Period	$	1,014		$	1,153

See notes to consolidated financial statements

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maxco, Inc. and Subsidiaries
December 31, 2000
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting 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 the consolidated financial statements and notes thereto included in Maxco’s annual report on Form 10-K for the year ended March 31, 2000.

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 third and fourth quarters. The most significant factors affecting these fluctuations are the seasonal buying patterns of the Company’s customers due to inclement weather 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.

Certain other amounts in the consolidated financial statements have been reclassified to conform to the current presentation.

NOTE 2 — INVENTORIES
        The major classes of inventories, at the dates indicated were as follows:

	December 31,		March 31,
	2000		2000
	(unaudited)
	(in thousands)
Raw materials	$	554	$	589
Finished goods and work in progress		967		1,136
Purchased products for resale		5,560		6,275
	$	7,081	$	8,000

NOTE 3 — MARKETABLE SECURITIES

The Company classifies its marketable securities 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. Application of this method resulted in an unrealized loss, net of deferred tax, of approximately $1.4 million being reported as part of stockholders’ equity at December 31, 2000.

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maxco, Inc. and Subsidiaries

NOTE 4 — INVESTMENT IN INTEGRAL VISION, INC.

On June 30, 1999, Integral Vision (formerly Medar, Inc.), Maxco’s 25% owned affiliated company sold its welding division for cash and debt. The gain recognized through December 31, 1999 on this transaction was $8.7 million, of which Maxco recognized $522,000 and $2.1 million for the three and nine months ended December 31, 1999, respectively.

NOTE 5 — OTHER INVESTMENTS

Condensed income statement information for the three and nine months ended December 31, 2000 and 1999 for the equity investees where Maxco's share of their net income (loss) exceeded 20% of consolidated pre-tax income for the year ended March 31, 2000 is as follows:

Foresight Solutions, Inc.

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2000			1999			2000			1999
	(in thousands)
Net Sales	$	373		$	557		$	817		$	1,475
Gross Margin		279			367			494			1,246
Net Loss		(388	)		(324	)		(1,666	)		(847	)

Midstate Industrial Services, Inc.

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2000		1999		2000		1999
	(in thousands)
Net Sales	$	3,043	$	3,178	$	9,406	$	9,339
Gross Margin		817		682		3,070		2,649
Net Loss		61		60		585		523

NOTE 6 — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

		Three Months Ended						Nine Months Ended
		December 31,						December 31,
		2000			1999			2000			1999
		(in thousands, except per share data)
NUMERATOR:
	Net income (loss)	$	(1,709	)	$	(493	)	$	(654	)	$	2,692
	Preferred stock dividends		(102	)		(102	)		(306	)		(306	)
Numerator for basic and diluted earnings per share—income (loss) available to common stockholders			(1,811	)		(595	)		(960	)		2,386
DENOMINATOR:
	Denominator for basic and diluted earnings per share—
	Weighted-average shares		3,101			3,151			3,101			3,170
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE		$	(.58	)	$	(.19	)	$	(.31	)	$	.75

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maxco, Inc. and Subsidiaries

NOTE 7 — COMPREHENSIVE INCOME

      The components of comprehensive income for the three and nine months ended December 31, 2000 and 1999 are as follows:

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2000			1999			2000			1999
				(in thousands)
Net income (loss)	$	(1,709	)	$	(493	)	$	(654	)	$	2,692
Unrealized gains (losses) on marketable securities		(447	)		2,001			(557	)		1,953
	$	(2,156	)	$	1,508		$	(1,211	)	$	4,645

      The components of accumulated comprehensive income, net of related tax at December 31, 2000 and March 31, 2000 are as follows:

	December 31,			March 31,
	2000			2000
	(in thousands)
Unrealized losses on marketable securities		(1,434	)		(877	)

NOTE 8 — INDUSTRY SEGMENT INFORMATION

      The following summarizes Maxco’s industry segment information:

			December 31,		March 31,
			2000		2000
			(in thousands)
Identifiable assets:
		Construction supplies	$	36,967	$	32,902
		Heat treating		33,329		30,367
		Packaging products		5,911		6,565
		Corporate and other		15,412		18,421
		Investments and advances		10,270		12,165
	Total Identifiable Assets		$	101,889	$	100,420

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maxco, Inc. and Subsidiaries

      NOTE 8 — INDUSTRY SEGMENT INFORMATION — Continued

					Three Months Ended						Nine Months Ended
					December 31,						December 31,
					2000			1999			2000			1999
Net sales:
	Construction supplies				$	19,900		$	20,524		$	88,564		$	83,177
	Heat treating					9,655			9,793			30,092			29,579
	Packaging products					3,876			3,562			12,158			12,161
	Corporate and other					84			84			249			249
				Total Net Sales	$	33,515		$	33,963		$	131,063		$	125,166
Operating earnings (loss):
	Construction supplies				$	(468	)	$	86		$	3,044		$	4,565
	Heat treating					610			1,321			2,639			3,700
	Packaging products					(109	)		(514	)		(194	)		(562	)
	Corporate and other					(819	)		(630	)		(2,367	)		(2,109	)
		Total Operating Earnings (Loss)			$	(786	)	$	263		$	3,122		$	5,594
Depreciation and amortization expense:
	Construction supplies				$	653		$	489		$	1,902		$	1,360
	Heat treating					605			481			1,814			1,444
	Packaging products					184			192			565			546
	Corporate and other					107			87			331			267
Total Depreciation and Amortization Expense					$	1,549		$	1,249		$	4,612		$	3,617
Capital expenditures:
	Construction supplies				$	373		$	1,413		$	3,563		$	4,163
	Heat treating					621			1,637			5,267			4,332
	Packaging products					53			119			158			617
	Corporate and other					0			19			1			28
			Total Capital Expenditures		$	1,047		$	3,188		$	8,989		$	9,140

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.

NOTE 9 — INVESTMENT IN AXSON, S.A.

Maxco had a 7% investment in Axson, S.A. of France (Axson), a manufacturer of resins and composite materials for advanced applications, which was carried at cost value. In the fourth quarter of fiscal 2000, the majority shareholders of Axson began negotiations with Axson management for a management buyout of the existing shareholders interests. As such, Maxco adjusted its carrying amount to its estimated realizable value at March 31, 2000, which resulted in a $860,000 charge in the fourth quarter of last year, for other than temporary impairment on its investment. This transaction was completed in August 2000.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maxco, Inc. and Subsidiaries

NOTE 10 — DEBT

The Company is currently in default on certain financial and other covenants as required by its $18 million line of credit with a bank. As such the outstanding balances on the line ($10.8 million at December 31, 2000) and a term note ($7.2 million at December 31, 2000) have been classified as current in the accompanying financial statements. The interest rates on the line and the term note are prime plus 1.5% and prime plus 1.0% respectively. On January 11, 2001, the loan agreement with the bank was amended extending the maturity date of the line of credit to August 1, 2002. There are ongoing negotiations with the bank to obtain waivers of default. Management anticipates that the negotiations will be completed by the end of the fiscal year.

The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. The Company’s ability to meet its short term and long term debt service and other obligations (including compliance with financial covenants) will be dependent upon its future operating performance and the successful renegotiation of its credit facilities. These dependencies will be subject to financial, business and other factors, certain of which are beyond the Company’s control, such as prevailing economic conditions. There can be no assurance that, in the event the Company were to require additional financing, such additional financing would be available on satisfactory terms. The Company believes that funds generated by its operations and funds available under other credit facilities, will be sufficient to finance short term capital needs, as well as to fund existing operations for the foreseeable future. However, in the event that the Company is unable to successfully renegotiate its credit facilities, the Company has liquid long term equity investments that could be used to meet its short term and long term debt service requirements and fund operating cash flows.

NOTE 11 — FEDERAL INCOME TAXES

The Company’s effective tax rate varied from the statutory rate of 34% due to certain expenses that are not deductible for tax purposes.

NOTE 12 — SUBSEQUENT EVENT

On November 2, 2000, Maxco signed a letter of intent to sell Ersco Corporation, its construction supplies unit, to privately held Lofland Acquisitions, Inc., a Dallas based affiliate of the Lofland Company which supplies reinforcing steel and concrete construction supplies to contractors, for a combination of cash and Lofland Acquisitions’ stock. Negotiations between Maxco and Lofland were terminated on December 6, 2000, as the companies were unable to reach agreement on the terms of the proposed transaction. Ersco Corporation will continue to operate as a wholly owned subsidiary of Maxco.

11

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Maxco, Inc. and Subsidiaries
December 31, 2000

MATERIAL CHANGES IN FINANCIAL CONDITION

Operating activities for the nine months generated $9.4 million in cash, of which earnings, after non-cash adjustments, generated $4.7 million. Net working capital decreased from the March 31, 2000 level, primarily due to a higher accounts payable level.

Cash was used in investing activities during the nine months to purchase additional equipment for Maxco’s heat-treating unit (Atmosphere Annealing), and its Construction Supplies unit (Ersco). Cash used in investing activities was partially offset by cash generated from the sale of marketable securities and from the sale of the Company’s 7% interest in Axson, S.A. of France.

Net proceeds from additional long-term debt were used primarily to fund the purchase of equipment. Cash was used to reduce the outstanding balance on the Company’s line of credit by $5.0 million to comply with the collateral levels of the formula based borrowing arrangement. Through March 31, 2000, the Company was not on a similar type formula based borrowing arrangement.

At December 31, 2000, the Company continued to classify one of its lines of credit and one of its term notes as short term due to the Company being in default on certain financial and other covenants under its $18 million line of credit with a bank. The interest rates on the line and the term note are prime plus 1.5% and prime plus 1.0% respectively. On January 11, 2001, the loan agreement with the bank was amended extending the maturity date of the line of credit to August 1, 2002. There are ongoing negotiations with the bank to obtain waivers of default. Management anticipates that these negotiations will be completed by the end of the fiscal year.

The Company’s ability to meet its short term and long term debt service and other obligations (including compliance with financial covenants) will be dependent upon its future operating performance and the successful renegotiation of its credit facilities. These dependencies will be subject to financial, business and other factors, certain of which are beyond the Company’s control, such as prevailing economic conditions. There can be no assurance that, in the event the Company were to require additional financing, such additional financing would be available on satisfactory terms. The Company believes that funds generated by its operations and funds available under other credit facilities will be sufficient to finance short term capital needs, as well as to fund existing operations for the foreseeable future. However, in the event that the Company is unable to successfully renegotiate its credit facilities, the Company has liquid long term equity investments that could be used to meet its short term and long term debt service requirements and fund operating cash flows.

At December 31, 2000, the 2,240,605 shares of Integral Vision (formerly Medar) common stock that Maxco owns had an aggregate market value of approximately $1.1 million ($1.4 million at February 9, 2001). Maxco’s investment in Integral Vision is reflected in Maxco’s financial statements under the equity method for all periods presented, as the Company owns greater than 20% of Integral Vision’s outstanding stock.

12

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Maxco, Inc. and Subsidiaries

At December 31, 2000, the 249,230 shares of Provant common stock that Maxco owns had an aggregate market value of approximately $1.1 million ($1.6 million at February 9, 2001). 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.

On November 2, 2000, Maxco signed a letter of intent to sell Ersco Corporation, its construction supplies unit, to privately held Lofland Acquisitions, Inc., a Dallas based affiliate of the Lofland Company which supplies reinforcing steel and concrete construction supplies to contractors, for a combination of cash and Lofland Acquisitions’ stock. Negotiations between Maxco and Lofland were terminated on December 6, 2000, as the companies were unable to reach agreement on the terms of the proposed transaction. Ersco Corporation will continue to operate as a wholly owned subsidiary of Maxco.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Three Months Ended December 31, 2000 Compared to 1999

Net sales decreased to $33.5 million compared to $34.0 million in last year’s third quarter. Third quarter results reflect an operating loss of $786,000 compared to earnings of $263,000 for the comparable period in 1999. Net loss was $1.7 million or $.58 per share assuming dilution compared to last year’s loss of $493,000 or $.19 per share assuming dilution.

Sales and operating earnings for the three months ended December 31, 2000 and 1999 by each of the company’s segments were as follows:

	Three Months Ended					Three Months Ended
	December 31, 2000					December 31, 1999
			Operating					Operating
			Earnings					Earnings
	Sales		(loss)			Sales		(loss)
			(in thousands)
Construction supplies	$	19,900	$	(468	)	$	20,524	$	86
Heat treating		9,655		610			9,793		1,321
Packaging products		3,876		(109	)		3,562		(514	)

Lower sales in the current period occurred at Maxco’s construction supplies unit over the comparable 1999 period primarily as a result of reduced construction activity due to worse than normal weather conditions in the Midwest region, particularly in the month of December 2000. Despite a slowdown in the automotive industry, sales at Atmosphere Annealing, which provides heat treating services to automotive companies and suppliers, were comparable to the prior year quarter.

Consolidated gross profit (net sales less cost of sales and operating expenses) decreased to $7.7 million or approximately 23% of sales from $8.2 million or 24% of sales. The Company’s heat treating unit’s gross profit was lower due to lower sales and the increase in the cost of natural gas that is used in the heat treating process. Gross profit at the Company’s construction supplies unit was lower due to lower sales and that a greater proportion of its sales were on a direct shipment basis, which typically have a lower margin than sales from inventory. Gross profit improved at the Company’s packaging products unit (Pak-Sak) as a result of selling to fewer but higher volume customers, thereby realizing manufacturing efficiencies such as lower scrap and setup costs.

13

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Maxco, Inc. and Subsidiaries

Selling, general, and administrative expenses increased to $6.9 million from $6.7 million. The increase primarily resulted at the construction supplies unit due to additional wages and other expenses incurred to support the planned growth of this unit. Since the growth has not materialized to the levels anticipated, management has begun a program to reduce selling, general, and administrative expenses.

Depreciation and amortization expense for the three months ended December 31, 2000 increased as a result of the additional depreciation resulting from the purchases of property and equipment by Atmosphere Annealing and Ersco since the third quarter of the prior year.

As a result of the above, operating earnings decreased to a loss of approximately $786,000 from earnings of $263,000 in last year’s comparable period.

Net interest expense increased from the prior year quarter due to additional long-term borrowings, the proceeds of which were used for investments in the Company’s affiliates and additional purchases of property and equipment.

On June 30, 1999, Integral Vision sold its welding controls division for cash and debt. The gain recognized through December 31, 1999 on this transaction was $8.7 million, of which Maxco recognized $522,000 for the three months ended December 31, 1999.

Nine Months Ended December 31, 2000 Compared to 1999

Net sales increased to $131.1 million compared to $125.2 million in last year’s comparable nine-month period. Results for this period include operating earnings of $3.1 million compared to $5.6 million for the comparable period in 1999. Net loss was $654,000 or $.31 per share assuming dilution compared to last year’s net income of $2.7 million or $.75 per share assuming dilution.

Sales and operating earnings for the nine months ended December 31, 2000 and 1999 by each of the company’s segments were as follows:

	Nine Months Ended					Nine Months Ended
	December 31, 2000					December 31, 1999
			Operating					Operating
			Earnings					Earnings
	Sales		(loss)			Sales		(loss)
			(in thousands)
Construction supplies	$	88,564	$	3,044		$	83,177	$	4,565
Heat treating		30,092		2,639			29,579		3,700
Packaging products		12,158		(194	)		12,161		(562	)

14

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Maxco, Inc. and Subsidiaries

Higher sales in the current period occurred at Maxco’s construction supplies unit over the comparable 1999 period as a result of a strong general construction market, increased availability of federal highway repair dollars, as well as an increase in form rental revenues. Sales were negatively impacted towards the end of the nine month period due to the extreme weather conditions in the Midwest. Despite a slowdown in the automotive industry toward the end of the nine month period, sales at Atmosphere Annealing, which provides heat treating services to automotive companies and suppliers, were comparable to the nine-month period of the prior year.

Consolidated gross profit (net sales less cost of sales and operating expenses) decreased to $29.3 million or approximately 22% of sales from $29.4 million or 23% of sales. The construction supplies unit generated additional gross profit in the current period over last year due to its increased sales level. Gross margin percentage at this unit was lower, however, since the increased sales were on a direct shipment basis, which typically have a lower margin than sales from inventory. Gross profit at Atmosphere Annealing was lower than the prior year primarily due to the increase in natural gas prices. Natural gas is a major cost component of the heat treating process.

Selling, general, and administrative expenses increased to $21.6 million from $20.2 million. The increase primarily resulted at the construction supplies unit due to additional wages and other expenses incurred to support the planned growth of this unit. Since the planned growth has not materialized to the levels anticipated, management has begun a program to reduce selling, general, and administrative expenses to support its current sales level.

The increase in depreciation expense in 2000 was attributable to depreciation by Ersco on purchases of rental forms and shoring equipment. Additionally, depreciation by Atmosphere Annealing also increased as a result of new equipment including additional furnaces and facility improvements placed in service since December of last year.

As a result of the above, operating earnings decreased to approximately $3.1 million from $5.6 million in last year’s comparable period.

Investment and interest income increased for the nine-month period ended December 31, 2000 primarily due to the recording of Maxco’s share of the minimum contingent consideration, which, during the second quarter, was agreed to be paid in fiscal 2002 to former shareholders of Strategic Interactive (Maxco’s former 45% owned affiliate sold to Provant, Inc. in October, 1998). Interest expense increased from the prior year period due to additional long-term borrowings, the proceeds of which were used for investments in the Company’s affiliates and additional purchases of property and equipment.

On June 30, 1999, Integral Vision, Inc. (formerly Medar Inc.) sold its welding division for cash and debt. The gain recognized through December 31, 1999 on this transaction was $8.7 million of which Maxco recognized $2.1 million for the nine months ended December 31, 1999.

15

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Maxco, Inc. and Subsidiaries

NEW FINANCIAL ACCOUNTING PRONOUNCEMENT
In 1998, the Financial Accounting Standards Board issued Statement No. 133,Accounting for Derivative Instruments and Hedging Activities. Statement 133 is effective for fiscal years beginning after June 15, 2000. The Company expects to adopt the new statement effective April 1, 2001. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. The Company has not evaluated the potential effect the adoption of this statement will have on its results of operations or financial condition.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101),Revenue Recognition in Financial Statements. SAB 101 provides guidance for revenue recognition under certain circumstances. The accounting and disclosures prescribed by SAB 101 will be effective for the fourth quarter of fiscal year 2001. The Company believes there will be no material impact resulting from the application of SAB 101.

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. Some of the Company’s interest expense is fixed through long-term borrowings to mitigate the impact of such potential exposure. Additionally, the Company entered into an interest rate swap agreement based on a notional amount of $5.0 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 long-term borrowings of $23.8 million at December 31, 2000. A 1% increase from the prevailing interest rates at December 31, 2000 on the unhedged variable rate portion of the Company’s long-term borrowings would increase interest expense on an annualized basis by $196,000 based on principal balances at December 31, 2000.

16

PART IIOTHER INFORMATION

Item 1.	Legal Proceedings
	None
Item 2.	Changes in Securities
	None
Item 3.	Defaults Upon Senior Securities
	The Company is currently in default on certain financial and other covenants as required by its $18 million line of credit with a bank.
Item 4.	Submission of Matters to a Vote of Security Holders
	None
Item 5.	Other Information
	None
Item 6(a)	Exhibits
3	Restated Articles of Incorporation are hereby incorporated from Form 10-Q dated February 13, 1998.
3.1	By-laws are hereby incorporated by reference from Form S-4 dated November 4, 1991 (File No. 33-43855).

17

PART II
OTHER INFORMATION (Continued)

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.
10.9	Asset purchase agreement — Wright Plastic Products, Inc. is hereby incorporated by reference from registrants Form 10-Q dated November 14, 1996.
10.10	Amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated September 30, 1996 is hereby incorporated by reference from Form 10-Q dated November 14, 1996.
10.11	Asset purchase agreement for the purchase of Atmosphere Annealing, Inc. is hereby incorporated by reference from Form 8-K dated January 17, 1997.
10.12	Asset purchase agreement — Axson North America, Inc. is hereby incorporated by reference from Form 10-Q dated February 14, 1997.
10.13	Loan agreement between Michigan Strategic Fund and Atmosphere Annealing, Inc. is hereby incorporated by reference from Form 10-Q dated February 13, 1998.
10.14	Loan agreement between LAM Funding, L.L.C. and borrower including Guaranty-Maxco, Inc. is hereby incorporated by reference from Form 10-Q dated February 13, 1998.
10.15	First Amendment to amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated August 1, 1997, is hereby incorporated by reference from Form 10-K dated June 24, 1998.
10.16	Second amendment to amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated June 24, 1998 is hereby incorporated by reference from Form 10-K dated June 24, 1998.

18

PART II
OTHER INFORMATION (Continued)

10.17	Third amendment to amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated September 24, 1998, is hereby incorporated by reference from Form 10-Q dated November 12, 1998.
10.18	Maxco, Inc. 1998 Employee Stock Option Plan is hereby incorporated by reference from Form 10-Q dated November 12, 1998.
10.19	Fourth amendment to amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated June 22, 1999, is hereby incorporated by reference from Form 10-K dated June 23, 1999.
10.20	Fifth amendment to amended and restated loan agreement between Comerica bank and Maxco, Inc. dated September 1, 1999 is hereby incorporated by reference from Form 10-Q dated November 12, 1999.
10.21	Sixth amendment to amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated July 12, 2000 is hereby incorporated by reference from Form 10-K dated July 14, 2000.
10.22*	Seventh amendment to amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated January 11, 2000.
Item 6(b)	Reports on Form 8-K
	None

*Filed herewith

19

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, 2001	\S\ VINCENT SHUNSKY
	Vincent Shunsky, Vice President-Finance and Treasurer (Principal Financial and Accounting Officer)

20

EXHIBIT INDEX

EXHIBIT 10.22 Seventh amendment to amended and restated loan agreement between Comerica Bank and Maxco, Inc. dated January 11, 2001.