Maxco 10-Q 2007 Q1 Quarterly report

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 June 30, 2006

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)

1005 Charlevoix Drive, Suite 100
Grand Ledge, Michigan	48837
(Address of principal executive offices)	(Zip Code)

Registrant's Telephone Number, including area code:(517) 627-1734

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.

Yesþ No¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes¨ Noþ

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 July 31, 2006
Common Stock	3,454,039 shares

MAXCO, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2006

	PAGE
Part I — Financial Information	3
Item 1. Consolidated Financial Statements	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements Of Operations	5
Consolidated Statements Of Stockholders’ Equity	6
Condensed Consolidated Statements Of Cash Flows	7
Notes To Consolidated Financial Statements	8
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations	13
Item 3. Quantitative And Qualitative Disclosures About Market Risk	17
Item 4. Controls And Procedures	17
Part II — Other Information	18
Item 1. Legal Proceedings	18
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds	18
Item 3. Defaults Upon Senior Securities	18
Item 4. Submission Of Matters To A Vote Of Security Holders	18
Item 5. Other Information	18
Item 6. Exhibits	18
Signatures	20
Certification

2

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

Maxco, Inc. and Subsidiaries

	June 30, 2006			March 31, 2006
	(Unaudited)
	(in thousands)
ASSETS
Current Assets
Cash and cash equivalents	$	626		$	817
Restricted cash		750			750
Accounts and notes receivable, less allowance of
$172,000 ($169,000 at March 31, 2006)		6,804			6,212
Inventories		722			1,048
Prepaid expenses and other		642			673
Total Current Assets		9,544			9,500
Property and Equipment
Land		389			389
Buildings		7,522			7,522
Machinery, equipment, and fixtures		32,238			31,550
		40,149			39,461
Allowances for depreciation		(22,452	)		(21,675	)
		17,697			17,786
Other Assets
Investments		688			688
Notes and contracts receivable and other		781			793
Real estate investments held for sale		627			627
Real estate held for sale		2,900			2,900
Accounts receivable, related parties		407			407
Intangibles		1,424			1,424
		6,827			6,839
	$	34,068		$	34,125

3

CONDENSED CONSOLIDATED BALANCE SHEETS — CONTINUED

Maxco, Inc. and Subsidiaries

	June 30, 2006		March 31, 2006
	(Unaudited)
	(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable	$	1,414	$	1,414
Accounts payable		2,639		2,141
Employee compensation		2,210		2,258
Incentive compensation		2,026		2,026
Taxes, interest, and other liabilities		4,924		4,922
Current maturities of long-term obligations		3,574		4,436
Total Current Liabilities		16,787		17,197
Long-Term Obligations, Less Current Maturities		6,097		7,131
Total Liabilities		22,884		24,328
Stockholders' Equity
Preferred stock:
Series Three: 10% cumulative redeemable, $60 face
value; 14,784 shares issued		678		678
Series Four: 10% cumulative redeemable, $51.50 face
value; 46,414 shares issued		2,390		2,390
Series Five: 10% cumulative redeemable, $120 face
value; 6,648 shares issued		798		798
Series Six: 10% cumulative callable, $160 face
value; 7,812.5 shares issued		1,250		1,250
		5,116		5,116
Common stock, $1 par value; 10,000,000 shares
authorized, 3,454,039 shares issued and outstanding		3,454		3,454
Retained earnings		2,614		1,227
Total Stockholders' Equity		11,184		9,797
	$	34,068	$	34,125

See notes to condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Maxco, Inc. and Subsidiaries

(Unaudited)

	Three Months Ended June 30,
	2006			2005
	(in thousands, except per share data)
Net Sales	$	12,576		$	11,448
Costs and Expenses:
Cost of sales and operating expenses		7,288			7,114
Selling, general and administrative		2,706			2,900
Depreciation and amortization		777			752
		10,771			10,766
Operating Income		1,805			682
Other Income (Expense)
Investment, interest, and other income, net		25			(2	)
Gain on sale of assets		—			2
Interest expense		(310	)		(353	)
Net Income		1,520			329
Less preferred stock dividends		(133	)		(102	)
Net Income Applicable to Common Stock	$	1,387		$	227
Net Income Per Common Share—Basic and Diluted	$	0.40		$	0.07
See notes to consolidated financial statements

5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Maxco, Inc. and Subsidiaries

(Unaudited)

	Number of Common Shares Outstanding		Preferred Stock		Common Stock		Accumulated Comprehensive Loss		Retained Earnings			Totals
	(in thousands, except number of common shares outstanding)
Balances at April 1, 2006		3,454,039	$	5,116	$	3,454	$	—	$	1,227		$	9,797
Net income for the period										1,520			1,520
Comprehensive income													1,520
Preferred stock dividends										(133	)		(133	)
Balances at June 30, 2006		3,454,039	$	5,116	$	3,454	$	—	$	2,614		$	11,184

See notes to consolidated financial statements.

6

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Maxco, Inc. and Subsidiaries

(Unaudited)

	Three Months Ended June 30,
	2006			2005
	(in thousands)
Operating Activites
Net income	$	1,520		$	329
Adjustments to reconcile net income to net cash
provided by operating activites:
Loss on investment		—			30
Gain on sale of assets		—			(2	)
Depreciation and other non-cash charges		777			752
Changes in operating assets and liabilities		84			734
Net Cash Provided By Operating Activities		2,381			1,843
Investing Activities
Purchases of property and equipment		(688	)		(582	)
Collections on notes receivable		—			116
Purchase of subsidiaries		—			(342	)
Other		13			42
Net Cash Used In Investing Activities		(675	)		(766	)
Financing Activities
Net (repayments on) proceeds from line of credit		(674	)		379
Net repayments on other debt obligations		(1,223	)		(1,086	)
Net Cash Used In Financing Activities		(1,897	)		(707	)
(Decrease) Increase in Cash and Cash Equivalents		(191	)		370
Cash and Cash Equivalents at Beginning of Period		1,567			1,781
Cash and Cash Equivalents at End of Period	$	1,376		$	2,151
Supplemental cash flow disclosure:
Interest paid	$	307		$	310

See notes to consolidated financial statements

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maxco, Inc. and Subsidiaries

June 30, 2006

(Unaudited)

NOTE 1 - BUSINESS AND SUMMARY OF 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 the consolidated financial statements and notes thereto included in Maxco's annual report on Form 10-K for the year ended March 31, 2006 filed July 14, 2006.

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 heat treating 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 heat treating 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.

During the prior two fiscal years, debt previously in default has been refinanced and management believes that 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 existing 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 and real estate held for sale that could be liquidated to meet its debt service requirements.

NOTE 2 - EARNINGS PER SHARE

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

	Three Months Ended June 30,
	2006			2005
NUMERATOR:	(in thousands, except per share data)
Net income	$	1,520		$	329
Preferred stock dividends		(133	)		(102	)
Numerator for basic and diluted earnings per share—
income available to common stockholders	$	1,387		$	227
DENOMINATOR:
Denominator for basic and diluted earnings per
share—weighted average shares		3,454			3,454
BASIC AND DILUTED EARNINGS PER SHARE	$	0.40		$	0.07

NOTE 3 - RESTRICTED CASH

At March 31, 2006 the Company had restricted cash of $750,000 held as collateral under its $2.0 million debt facility. Subsequent to June 30, 2006, the Company has renegotiated this debt facility to a $1.75 million line of credit with no restricted cash.

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NOTE 4 - COMPREHENSIVE INCOME

The components of comprehensive income for the three months ended June 30, 2006 and 2005 are as follows:

	Three Months Ended
	June 30,
	2006		2005
	(in thousands)
Net income	$	1,520	$	329
Unrealized gain on swap agreement		—		15
Comprehensive income	$	1,520	$	344

NOTE 5 - INDUSTRY SEGMENT INFORMATION

The following summarizes Maxco’s industry segment information:

	June 30,		March 31,
	2006		2006
	(in thousands)
Identifiable Assets:
Heat treating	$	27,424	$	27,292
Corporate and other		2,429		2,618
Investments and advances		4,215		4,215
Total Identifiable Assets	$	34,068	$	34,125

	Three Months Ended
	June 30,
	2006			2005
	(in thousands)
Net Sales:
Heat treating	$	12,576		$	11,448
Corporate and other		—			—
Total Net Sales	$	12,576		$	11,448
Operating Earnings (Loss):
Heat treating	$	2,207		$	1,306
Corporate and other		(402	)		(624	)
Total Operating Earnings	$	1,805		$	682
Depreciation and Amortization Expense:
Heat treating	$	776		$	745
Corporate and other		1			7
Total Depreciation and Amortization Expense	$	777		$	752
Capital Expenditures:
Heat treating	$	688		$	575
Corporate and other		—			7
Total Capital Expenditures	$	688		$	582

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 to carry out Maxco’s operations in its heat treating segment. Corporate assets are principally cash, notes receivable, and investments.

Maxco has no significant foreign operations or export 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 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.

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NOTE 6 - DEBT

At June 30, 2006 the Company’s wholly owned subsidiary, Atmosphere Annealing, Inc. (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 June 30, 2006, based on these specific collateral levels, Atmosphere could borrow up to $4.5 million under its line of credit, approximately $849,000 of which was borrowed. The agreement, which was amended December 26, 2005, matures in August 2007 and, as such, outstanding borrowings are recorded as long term in the accompanying consolidated balance sheets.

In addition, the Company has a debt facility of $1.75 million that requires interest only payments and matures in August 2006.

A summary of the Company’s debt obligations as of June 30, 2006 and March 31, 2006 is as follows:

	June 30,		March 31,
	2006		2006
Short term obligations:	(in thousands)
Notes payable (various interest rates)	$	1,414	$	1,414
	$	1,414	$	1,414
Long term obligations:
Term notes (various variable interest rates)	$	2,517	$	2,741
Revolving line of credit (LIBOR + 1.25%)		849		1,523
Mortgage notes payable (various variable interest rates)		4,834		4,914
Equipment purchase contracts and capitalized lease obligations (various interest rates)		1,125		2,043
Subordinated debt (fixed rate of 10.00%)		346		346
		9,671		11,567
Less current maturities		3,574		4,436
	$	6,097	$	7,131

Settlement Agreement and Indemnification Matters

Effective October 27, 2005, the Company entered into a Settlement Agreement with American Realty Equities, Inc. (American), Capital Center Associates, LLC, (Capital Center), L/M Associates, LLC (L/M) and Max A. Coon relating to property and the related mortgage on such property owned by Capital Center. Capital Center is majority owned by L/M which is 50% owned by Maxco, Inc.

The Settlement Agreement relates to a promissory note dated February 21, 2001, which was in default and guaranteed by Max A. Coon, the Company’s President and Chief Executive Officer, and others. American purchased the interest of Charter One Bank as lender of the promissory note which was in the original principal amount of approximately $10 million. On August 11, 2005, the Company agreed to indemnify Max A. Coon for any amounts he would be required to pay as result of personal guarantees he had on the Company’s real estate entities that were made for the sole benefit of the Company. American commenced an action in March 2005 to foreclose the construction mortgage and an action to enforce the guarantee against Max Coon and the other guarantors.

Without admitting any liabilities or fault, and to avoid the expense and uncertainties of litigation, the parties settled the litigation as detailed in the Settlement Agreement.

In summary, the Settlement Agreement states that the total amount to be paid to American is $8.5 million if paid on or before September 1, 2006.

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If not paid by September 1, 2006 the parties agreed that the amount to be paid to American is the sum of the real estate proceeds upon sale of the property net of certain costs detailed in the Settlement Agreement plus an amount equal to sixty percent of the amount obtained by subtracting the real property proceeds from the amount due under the loan documents. If an insolvency event by Capital Center is instituted before payment on or before September 1, 2006 the total amount to be paid to American is $5.0 million plus American shall receive the proceeds derived from the sale or disposition of the property in the insolvency proceeding.

The Company has committed to pay the $8.5 million due under the settlement agreement by the required September 1, 2006 date. The Company has received a commitment from a lender to finance the $8.5 million and is in the process of finalizing the required documentation. Management estimates that the fair value of the building is $7.7 million. The Company recorded the $800,000 difference between the fair value and the amount due under the settlement agreement as an impairment charge in the fourth quarter of fiscal 2006.

Management estimates the maximum exposure under the guarantee to American is approximately $5.0 million if the Company fails to pay the amount due under the settlement agreement. In addition, the Company agreed to indemnify Max A. Coon, chairman and president of the Company, for any amount he would be required to pay for a $1.7 million guarantee resulting from the sale of its major real estate portfolio. In total, management estimates the amounts of these guarantees to be up to $6.7 million.

The Company does not believe that there is any unusual degree of risk related to the indemnification of these guarantees made by Max Coon because of sufficient underlying asset values supporting the respective debt obligation and other conditions of such indemnification; as such, no amounts have been accrued for such guarantees as of June 30, 2006.

NOTE 7 - FEDERAL INCOME TAXES

The Company assumed the utilization of net operating loss carryforwards to offset taxable income in the first three months of fiscal 2007. The Company amended its March 31, 2002 Federal income tax return to reflect the write offs of its investment in its discontinued affiliate, Foresight, Inc.’s stock, amounts the Company was required to pay as guarantor of Foresight’s banking agreement, and certain other advances to Foresight. As a result of this amendment, the Company received a federal income tax refund of approximately $790,000 which is recorded in accrued taxes payable at June 30, 2006. The Company is currently under audit by the Internal Revenue Service (IRS) and while the auditing agent has initially denied the claim, the Company is appealing the agent’s position to the Appeals Office of the IRS. While management believes that the facts and tax law support the claim, this matter is not yet settled. Accordingly, the Company has recorded the refund in accrued taxes payable.

NOTE 8 - PREFERRED STOCK 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 $2.0 million at June 30, 2006.

NOTE 9 - INVENTORIES

Inventories are stated at the lower of first-in, first-out cost or market and consisted of the following:

	June 30,		March 31,
	2006		2006
	(in thousands)
Raw materials	$	242	$	314
Work in progress		470		700
Finished goods		10		34
	$	722	$	1,048

The Company ordinarily does not take title to the customer parts received for processing; accordingly, such parts are not included in these consolidated financial statements.

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NOTE 10 - REAL ESTATE INVESTMENT (DISCONTINUED AND HELD FOR SALE)

Maxco has effective ownership interests ranging from 31-50% in primarily two LLC’s that have been involved in the development and ownership of real estate in central Michigan. In 2003, the Company’s affiliated entity, L/M Associates II, sold substantially all of the properties in its real estate portfolio. Pursuant to the terms of the sale agreement, in July 2004, L/M Associates (L/M) exercised its option to require the managing member of the acquiring entity to repurchase L/M’s 16% interest in the acquiring entity. To date this requirement has not been satisfied and L/M Associates is working with the managing member of the acquiring entity to resolve this issue. In addition, the managing member of the acquiring entity, during the fourth quarter of fiscal 2006, listed the applicable properties for sale with a major real estate firm.

NOTE 11 - ACCOUNTS RECEIVABLE AND PAYABLE—RELATED PARTIES

Accounts receivable, related parties consist 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.

The Company’s former Vice President, Chief Financial Officer and Treasurer is indebted to the Company in the amount of approximately $190,000, including accrued interest, as of June 30, 2006. The indebtedness was incurred at various times prior to April 2002 for the purchase of affiliate company stock and personal use. The Company is discussing a payment plan for the repayment of the indebtedness by the individual.

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. 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. recognized incentive compensation expense on a pro-rata basis under the terms of the agreement. The Company charged approximately $600,000 related to this compensation during the year ended March 31, 2005. As of March 31, 2006, the amount accrued was $2.0 million, including $1.4 million charged to operations during the year then ended. No further compensation was charged to operations subsequent to March 31, 2006.

In June 2003, the Company assumed a lease with CJC Leasing, a limited liability company in which Mr. Coon is a member, from Contractor Supply Incorporated, the purchaser of the Company’s formerly wholly owned subsidiary, Ersco Corporation. Contractor Supply Incorporated was required under the lease to pay CJC Leasing an aggregate of approximately $2.3 million in monthly installment payments over a period of approximately 4 years. In exchange for the Company assuming Contractors Supply Incorporated’s lease payments to CJC Leasing, Contractors Supply Incorporated and the Company agreed to reduce the amount then owed by the Company to Contractor Supply Incorporated by $2.3 million. The assumption of the lease obligations to CJC Leasing by the Company allowed the Company to retire a $2.3 million debt that was otherwise due and payable to Contractors Supply Incorporated, by making monthly payments of the approximate $2.3 million over four years. In June 2006, the Company paid off the obligation due CJC Leasing under this lease.

Included in accrued wages is $579,000 and $517,000 at June 30, 2006 and March 31, 2006, respectively, that is due Mr. Coon. Included in accounts payable is $81,000 and $86,000 at June 30, 2006 and March 31, 2006, respectively, that is due to entities in which Mr. Coon has an interest.

NOTE 12 - ABANDONMENT OF DEREGISTRATION

On April 3, 2006 the Board of Directors abandoned its decision to propose to the Company’s common and voting preferred shareholders a transaction that would call for a 1-for-1,000 reverse stock split followed immediately by a 1,000-for-1 forward stock split of Maxco’s common stock. The previously proposed transaction, if implemented, was expected to enable the Company to terminate the registration of its common stock.  

The Board of Directors also decided to engage GBQ Consulting, LLC to locate an investor or purchaser of the Company including its subsidiary Atmosphere Annealing, Inc. Such sale is not expected to occur by March 31, 2007. 

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ITEM 2. 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 because of its representation on Integral Vision’s Board of Directors.

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 that will be issued on sales recognized to date. SEC 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.

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.

During fiscal 2006, the Company performed the impairment tests of its goodwill, indefinite-long-lived intangibles, and other long-lived assets required by relevant accounting standards. 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).

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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.

Material Trends and Uncertainties

Caution Concerning Forward Looking Statements and Certain Risks Related to Our Business and Our Company — Safe Harbor Statements

This report contains statements reflecting the Company's views about its future performance, its financial condition, its markets and many other matters that constitute "forward-looking statements." These views involve risks and uncertainties that are difficult to predict and may cause the Company's actual results and/or expectations about various matters to differ significantly from those discussed in such forward-looking statements. All statements, other than statements of historical fact included in this annual report, regarding our strategy, future operations, financial condition, expected results and costs, new business, estimated revenues and losses, prospects and plans are forward-looking statements. When used in this annual report, the words "will," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. You should not place undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this annual report and we undertake no obligation to update such information. Readers should consider that various factors may affect whether actual results and experience correspond with our forward-looking statements and that many of these factors also represent risks attendant to owning securities in the Company, including the following:

·   Dependence on Automotive Industry and Industry Cyclicality— The industries in which we operate depend upon general economic conditions and are highly cyclical. Our performance is affected particularly by new vehicle sales, which can be highly sensitive to changes in interest rates, consumer confidence and fuel costs. We experience sales declines during the third and fourth calendar quarter as a result of scheduled OEM shutdowns.

·   Customer Concentration— Our base of customers is concentrated among original equipment manufacturers as well as Tier I and Tier II suppliers in North America. The loss of business from a major customer, the discontinuance of particular vehicle models or a change in regulations or auto consumer preferences could materially adversely affect us. In addition, certain of our customers have suffered financial distress, which may materially adversely impact us as well in terms of the potential for lost revenue and/or uncollectible accounts receivable.

·   Ability to Finance Capital Requirements— Our business is capital intensive. We have made substantial capital investments to improve capacity and productivity and to meet customer requirements. More investment is required to maintain and expand our future business awards. If we are unable to meet future capital requirements, our business may be materially adversely affected.

·   Increases in Energy Costs— Increases in energy costs could negatively affect our financial health and results. To the extent feasible, in light of competitive factors, we have offset these fluctuations through selective price adjustments.

·   Increases in Healthcare Costs— Increases in our healthcare costs could negatively affect our financial health and results.

·   Our Industries are Highly Competitive— Continuing trends among our customers will increase competitive pressures in our businesses. The continuing trend towards limiting outside suppliers involves significant risks, as well as opportunities, and has increased competition. We have experienced and may continue to experience adverse pricing pressures as a result.

·   Changing Technology— Our processes are subject to changing technology, which could place us at a competitive disadvantage relative to alternative processes introduced by competitors. We may require significant ongoing and recurring additional capital expenditures to remain competitive.

·   Changing Processes— A change in a foundry’s mold line may eliminate the need for heat treating by controlled cooling in mold which would have a materially adverse affect on our business.

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·   Dependence on Key Personnel and Relationships— We depend on the services of key individuals, particularly our executive officers and senior managers. The loss of any key individual could materially and adversely harm us.

·   Labor Stoppages — Our customers or suppliers may be subject to work stoppages at their facilities, which could materially and adversely harm us.

·   Outsourcing Trend— Our strategies may not succeed if anticipated outsourcing fails to materialize to the extent we have assumed. Principal risks to continued outsourcing are union/labor considerations and objections.

·   Offshoring Trend— Our customers could relocate their manufacturing facilities out of the United States which could materially and adversely harm us.

·   Environmental Matters— Our business may be materially and adversely affected by compliance obligations and liabilities under environmental laws and regulations.

We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Market Opportunities and Growth Strategies

We believe that the following favorable market factors will present opportunities for future growth:

·   Companies are focusing on core competencies and outsourcing non-core processes such as heat treating and coating.

·   In some cases, our customers are consolidating their supply base.

·   Foreign automakers are locating manufacturing facilities in the United States.

Our strategy is to leverage our technical capabilities along with our solid reputation in the industry to (i) expand our relationship with our current customers through superior quality and customer service, and (ii) become a preferred supplier to the foreign automakers locating in the United States. Key elements of our strategy include the following:

·   Expand Capabilities.    By adding new capabilities in our existing plants we believe that we could secure new business from our existing customer base. By offering a “one-stop" shop we could significantly reduce logistical costs for our customers.

·   Provide Technical Expertise To Support Our Customers.    We believe that our technical expertise is one of our competitive advantages. We partner with our customers to find ways to improve quality and reduce cost.

·   Cost Savings Opportunities and Efficiency Improvements.    We have pursued, and will continue to pursue, cost savings that enhance our competitive position in serving our customers. We have made significant investments in material handling equipment in order to improve efficiency and to provide a safer environment for our employees.

·   Pursue Strategic Acquisitions.    We plan to pursue acquisitions that strategically expand our process capabilities and contribute to our geographic diversity and market share. Our ability to execute this element of our strategy may be limited by our capital resources.

MATERIAL CHANGES IN FINANCIAL CONDITION

Cash provided by operating activities amounted to $2.4 million for the three months ended June 30, 2006. Earnings, after non-cash adjustments, generated $2.3 million while changes in working capital components generated $84,000.

Investing activities during the period used cash of $675,000, primarily due to Atmosphere’s purchase of approximately $688,000 of equipment during the quarter.

Cash used in financing activities amounted to $1.9 million during the three months ended June 30, 2006. Atmosphere repaid approximately $674,000 on its line of credit. The Company had repayments of $1.2 million on other debt obligations.

Overall, the Company’s working capital deficit (defined as current assets less current liabilities) decreased from $7.7 million at March 31, 2006 to $7.2 million at June 30, 2006.

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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 June 30, 2006, the 2,410,183 shares of Integral Vision common stock that Maxco owns had an aggregate fair value of approximately $2.3 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.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2006 Compared to 2005

Net sales increased to $12.6 million compared to $11.4 million in last year’s first quarter. First quarter results reflect operating income of $1.8 million compared to $682,000 for the comparable period in 2005. Net income was $1.5 million or $0.40 per share after preferred dividends assuming dilution compared to last year’s income of $329,000 or $0.07 per share after preferred dividends assuming dilution.

Sales and operating earnings for the three months ending June 30, 2006 and 2005 by the Company’s heat treating and corporate and other segments were as follows:

	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
	Net Sales		Operating Earnings (Loss)			Net Sales		Operating Earnings (Loss)
	(in thousands)
Heat treating	$	12,576	$	2,207		$	11,448	$	1,306
Corporate and other		—		(402	)		—		(624	)
	$	12,576	$	1,805		$	11,448	$	682

Atmosphere experienced an increase in net sales of approximately $1.1 million. New customers generated approximately $857,000 of sales while increased volume from existing customers generated an additional $270,000.

Consolidated gross profit (net sales less cost of sales and operating expenses) increased to $5.3 million from $4.3 million. Gross margin (gross profit as a percentage of sales) increased to 42% from 38%. The net increase in Atmosphere Annealing’s sales accounted for $427,000 of the increase in gross profit while the improvement in margin accounted for $527,000 of the increase. Atmosphere experienced decreases in employee related expenses of $115,000, maintenance of $147,000, utilities of $467,000, and general factory expenses of $200,000. Per an agreement with a certain customer, Atmosphere is required to purchase and bill the customer for the steel used in the heat treating process. The amount of steel purchased was $1.1 million higher than the prior year.

Selling, general, and administrative decreased to $2.7 million from $2.9 million in the prior year period as a result of the following factors: Employee related costs at Atmosphere increased $50,000 while building rental decreased $19,000, and legal and other professional services decreased $21,000. In the prior year, Maxco recognized $253,000 of compensation expense under the terms of an incentive agreement with the President of Atmosphere and a retention agreement with the former Vice President of the Company. No such compensation was recognized in the current year.

As a result of the above, operating earnings increased to $1.8 million from $682,000 in last year’s comparable period.

Despite a higher average interest rate on the Company’s borrowings, interest expense decreased $43,000 from the prior year due to lower borrowing levels.

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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. Approximately $2.8 million of Maxco’s debt carries a fixed rate of interest. The Company had total outstanding variable rate short and long term borrowings of $7.2 million at June 30, 2006. A 1% increase from the prevailing interest rates at June 30, 2006 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 $71,000 based on principal balances at June 30, 2006.

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. CONTROLS AND PROCEDURES

a)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-15(e) and 15d-15(e)) as of the end of the period covered by 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 control over financial reporting

There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s first quarter of the fiscal year that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. 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).
3.2	First Amendment to the By-laws is hereby incorporated by reference from Form 8-K dated November 14, 2005.
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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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.
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.
10.38	Settlement Agreement between and among American Realty Equities, Inc., Capital Center Associates, L.L.C., L/M Associates, LLC, Max A. Coon, and Maxco, Inc. dated October 27, 2005 is hereby incorporated by reference from Form 8-K dated November 2, 2005.
31.1	Certification of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e) or Rule 15d-15(e).
31.2	Certification of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e) or Rule 15d-15(e).
32.1	Certification of Chief Executive Officer of periodic report pursuant to 18 U.S.C. §1350.
32.2	Certification of Chief Financial Officer of periodic report pursuant to 18 U.S.C. §1350.

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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: August 14, 2006	By:	/s/ LAWRENCE O. FIELDS
		Lawrence O. Fields, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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