<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number 0-2762
MAXCO, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S><C>
Michigan 38-1792842
-------- ----------
(State or other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
1118 Centennial Way, Lansing, Michigan 48917
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (517) 321-3130
--------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
---- ----
Securities registered pursuant to Section 12(g) of the Act:
Common stock Series Three Preferred Stock
--------------- ----------------------------
(Title of Class) (Title of Class)
</TABLE>
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 x No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 31, 1998: $15,785,400.
At May 31, 1998, there were outstanding 3,296,710 shares of Registrant's common
stock.
Documents Incorporated By Reference
Portions of the annual proxy statement for the year ended March 31, 1998 are
incorporated by reference into Part III.
1
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MAXCO, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- --------------------------------------------------------------------------- ----
<S> <C> <C>
1 Business 3
2 Properties 6
3 Legal Proceedings 7
4 Submission of Matters to a Vote of Security Holders 7
5 Market for Registrant's Common Equity and Related Shareholder Matters 7
6 Selected Financial Data 8
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
8 Financial Statements and Supplemental Data 12
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12
10 Directors and Executive Officers of the Registrant 13
11 Executive Compensation 13
12 Security Ownership of Certain Beneficial Owners and Management 13
13 Certain Relationships and Related Transactions 13
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 13
Signatures 15
List of Financial Statements and Financial Statement Schedules 17
</TABLE>
2
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PART I
ITEM 1 - BUSINESS
Maxco, Inc. ("the Company") is a Michigan corporation incorporated in
1946. Maxco currently operates in three business segments: distribution,
heat-treating, and packaging products. Maxco's businesses include Ersco
Corporation, a distributor of construction supplies; Atmosphere Annealing, Inc.,
a metal heat-treating service company; and Pak-Sak Industries, Inc., a
manufactuer of polyethylene bags and packaging material. Maxco also holds
investments in a real estate development limited liability company, L/M
Associates, LLC; three technology related businesses: Medar, Inc. (NASDAQ/NMS:
MDXR), Axson, S.A., and Strategic Interactive; as well as investments in two
energy related business: AMI Energy, Inc. and Robinson Oil Company, LLC.
Maxco's investment activities during the year ended March 31, 1998 included the
following: increasing its investment in Strategic Interactive from 15% to 45%
ownership; acquiring a 50% interest in Robinson Oil Company, LLC, which is in
the business of acquiring and developing oil and gas interests; and acquiring a
33% interest in AMI Energy, Inc., which is a client based wholesale distributor
of natural gas in the Midwest.
Several significant events occurred during the year ended March 31, 1997. In
July 1996, Maxco sold its then 67% owned subsidiary, FinishMaster, Inc., a
distributor of automotive paint, for a total consideration of $62.6 million.
Maxco also sold Wright Plastic Products, Inc., its custom plastic injection
molder and tool builder, in October 1996; and sold Akemi, Inc., which formulates
and compounds polyester and epoxy thermoset plastics, in January 1997.
Effective January 1, 1997, Maxco acquired the business and substantially all the
assets of Atmosphere Annealing, Inc., a provider of metal heat treating services
to Midwestern industrial users. This unit employs approximately 370 people at
facilities in Lansing, Michigan; Canton, Ohio; and North Vernon, Indiana.
Maxco also made other investments during the year ended March 31, 1997.
Effective January 1, 1997, the Company acquired a 50% interest in L/M
Associates, a Limited Liability Company (LLC), formed to develop and lease real
estate in central Michigan, and invested in Strategic Interactive, Inc., which
develops and provides web based training, education and other corporate
communications. Effective January 27, 1997, Maxco acquired approximately 7% of
the stock of Axson, S.A., a manufacturer of resins and composite materials for
advanced applications.
DISTRIBUTION
The distribution segment consists of Ersco Corporation and its subsidiary,
Wisconsin Wire and Steel, which operates in the construction supply industry.
This unit distributes concrete construction products and accessories, fabricates
reinforcing steel and rents concrete forms used in road and commercial building
construction. Their products include reinforcing steel rod and mesh, expansion
fiber and concrete curing compounds, as well as custom fabrication of steel (rod
and mesh) and fiber products used in concrete paving and construction. The
geographic market is the Midwest, primarily in Michigan, Indiana, and Wisconsin.
Warehouses are located in Detroit, Grand Rapids, Saginaw and Traverse City,
Michigan; South Bend, Indiana; and Milwaukee, Wisconsin. In January 1998, Ersco
acquired an office in metropolitan Chicago, which specializes in product sales
to highway contractors on a direct shipment basis from the manufacturers.
Competition is intense and larger project orders are secured on a competitive
bid basis. During the years ended March 31, 1998, 1997, and 1996, net sales of
the construction supplies group were approximately 49%, 61% and 68%,
respectively, of consolidated net sales.
This segment is not dependent on any patents, trademarks, licenses, franchises,
or concessions and is not dependent upon a single or a few customers, the loss
of which would have a significant adverse effect on the segment.
Units of this segment may carry significant amounts of inventory to meet
delivery requirements of customers. Inventories of this segment were equivalent
to 34 days sales on hand and represented 50% of Maxco's total inventories at
March 31, 1998. Credit policies have been established that provide for extension
of credit and collection of amounts due. The Company's general policy requires
payment within 30 days of invoice date. Adherence to these policies will mean
that accounts receivable levels will generally change with volume levels.
However, the collection periods may be extended by prior agreement to
accommodate customer cash flows. Where applicable, accounts receivable are
secured by perfected lien rights and performance bonds.
3
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The volume of the construction supplies unit in the third and fourth quarters is
generally lower due to reduced construction activity during the winter months in
the unit's market area. Historically, this segment's activities have generally
followed the economic cycles within the respective business unit's market area.
Generally, the distribution segment of the Company does not enter into specific
long-term contracts with its customers. As such, no backlog exists for this
segment.
HEAT TREATING
Atmosphere Annealing, Inc.
Acquired in January 1997, Atmosphere Annealing, Inc. provides metal heat
treating, phosphate coating and bar shearing and sawing services to the cold
forming, stamping, forging and casting industries. Its services are sold through
Atmosphere's own sales personnel and outside sales representatives, primarily to
automotive companies and automotive suppliers. This unit employs approximately
370 people at its facilities in Lansing, Michigan; Canton, Ohio; and North
Vernon, Indiana.
Since Atmosphere is a service business, inventory levels for this segment are
small and consist only of various lubricants and other materials used in the
heat treating, phosphate coating or bar shearing and sawing process. In addition
to pickup and delivery of consigned inventory by its customers, Atmosphere
maintains its own trucks which are in operation 24 hours a day throughout the
Midwest to insure prompt pickup and delivery.
The heat treating industry is competitive with over 250 heat treaters in
Michigan, Ohio, and Indiana. Atmosphere specializes in high volume, low priced,
ferrous heat treating using large furnaces. In its market niche of this type of
heat treating, Atmosphere competes with only a limited number of competitors.
Much of the heat treating industry is comprised of smaller companies that
specialize in higher priced batch heat-treating such as carburizing, nitriding,
tool and die, brazing, salt bath or induction hardening.
The Company's response time to its customer just-in-time requirements does not
result in significant backlog for this segment. Company growth is possible by
this unit in the future due to its customers' outsourcing of high volume heat
treating services. These services are usually outsourced by Atmosphere's
customers because of extensive storage requirements, costs and other issues.
Sales for this unit are fairly consistent throughout the year with the exception
of lower volume during model changeovers for its automotive customers in July,
and during the winter holiday season. Sales to a single or a few customers are
significant to this segment. This segment accounted for approximately 33% and
11% of consolidated net sales for the years ended March 31, 1998 and 1997,
respectively.
PACKAGING PRODUCTS
Pak-Sak Industries, Inc.
Pak-Sak Industries, Inc. extrudes polyethylene film and converts it into a
variety of polyethylene bags and packaging materials. A smaller portion of the
business is the purchase and resale of film products produced by other
companies. Manufactured products are both printed and plain. Products are sold
primarily throughout the Midwest area by its own sales personnel, manufacturers'
representatives and paper jobbers. Manufacturing facilities are located in
Sparta, Michigan.
The customers served by this unit are primarily general manufacturing
businesses. This segment's business is primarily affected by changing consumer
demands and the general condition of the economy. The business of this segment
is relatively stable within the economic cycle of industry in general.
Inventory levels of this segment tend to be in proportion to the level of sales
activity. Total inventories of this segment were equivalent to 46 days sales on
hand and represented 50% of Maxco's total inventories at March 31, 1998. Credit
policies are enforced to help insure that increases in accounts receivable are
primarily related to volume increases.
4
<PAGE> 5
The Company's response time to its customers' just-in-time inventory
requirements, which may change on a daily basis, does not result in significant
backlog for this segment.
Sales of packaging products to a single customer were not significant to the
Company for the years ended March 31, 1998, 1997 and 1996. The segment is not
dependent on any patents, trademarks, licenses, franchises or concessions. This
segment accounted for approximately 18%, 28% and 32% of consolidated net sales
for the years ended March 31, 1998, 1997 and 1996, respectively.
For additional information regarding the Company's industry segments, see Note
12 to "Notes to Consolidated Financial Statements."
OTHER INVESTMENTS
Medar, Inc. develops, manufactures and markets microprocessor-based process
monitoring and control systems for use in industrial manufacturing environments.
The principal applications for the Company's products include optical inspection
systems and resistance welding controls. As of March 31, 1998, Maxco's ownership
of Medar's Common Stock was approximately 24%.
Effective January 1, 1997, Maxco acquired a 50% interest in a Limited Liability
Company (LLC) formed to develop and lease real estate. The LLC has an interest,
along with other third party investors, in a real estate portfolio having an
aggregate fee simple market value of approximately $100 million at March 31,
1998. This portfolio consists of properties located in central Michigan, and
includes approximately 65 offices and retail buildings, residential building
sites, and more than 125 acres of property zoned for commercial and retail
development.
Effective January 1, 1997, Maxco acquired a 15% interest in Strategic
Interactive, Inc. which provides web based training, education and other
corporate communications solutions. In 1998, Maxco increased its investment in
Strategic Interactive from 15% to 45%.
Maxco also invested in approximately 7% of the common stock of Axson, S.A., of
France, a manufacturer of resins and composite materials for advanced
applications in 1997.
Effective January 1, 1998, Maxco acquired a 33% interest in AMI Energy, Inc.,
which is a client based wholesale distributor of natural gas in the Midwest.
Effective November 1, 1997, Maxco acquired a 50% interest in Robinson Oil
Company, LLC, which is in the business of acquiring and developing oil and gas
interests.
In June 1998, Maxco acquired a one-third interest in Blasen Brogan Asset
Management Company, a Lansing, Michigan based registered investor advisory firm.
DISCONTINUED OPERATIONS
Maxco's discontinued operations include Wright Plastic Products, Inc. a custom
plastic injection molder and tool builder; Akemi, Inc., which formulates and
compounds polyester and epoxy thermoset plastics; and FinishMaster, Inc. a
distributor of automotive paints, coatings and paint-related accessories (see
Note 3 to "Notes to Consolidated Financial Statements").
The results of operations for Maxco's discontinued operations are reported
separately in the accompanying financial statements.
RESEARCH AND DEVELOPMENT
Expenditures on research activities related to development or improvement of
products were not significant.
MAJOR CUSTOMERS
No sales to any single customer exceeded 10% of consolidated sales for 1998,
1997 or 1996.
ENVIRONMENTAL FACTORS
Compliance by Maxco and its subsidiaries with environmental protection laws had
no material effect upon capital expenditures, earnings or competitive position.
5
<PAGE> 6
EMPLOYEES
At March 31, 1998, Maxco and its wholly-owned subsidiaries employed
approximately 630 full time employees in its continuing operations.
EXPORT SALES AND FOREIGN OPERATIONS
The Company and its subsidiaries had no foreign operations or material export
sales during the years ended March 31, 1998, 1997 or 1996.
ITEM 2 - PROPERTIES
The following table provides information relative to the principal properties
owned or leased by the Company and its subsidiaries as of March 31, 1998. The
Company considers its facilities to be in good operating condition.
<TABLE>
<CAPTION>
OWNED/
LOCATION APPROXIMATE SIZE LEASED USE
- -------- ---------------- ------ ---
<S> <C> <C> <C>
DISTRIBUTION
------------
Ersco Corporation
- -----------------
Southfield, MI 24,000 sq ft Leased Warehouse and
administrative offices
Saginaw, MI 15,000 sq ft Leased Warehouse and distribution
Traverse City, MI 7,800 sq ft Leased Warehouse and distribution
Wyoming, MI 7,500 sq ft Leased Warehouse and distribution
Mishawaka, IN 21,200 sq ft on 1.3 acres Owned(A) Warehouse and distribution
Chicago, IL 1,850 sq ft Leased Direct highway sales office
Wisconsin Wire & Steel, Inc.
- ----------------------------
Brookfield, WI 15,000 sq ft on 1.6 acres Owned(A) Warehouse and
administrative offices
Brookfield, WI 5,900 sq ft on .75 acres Owned(A) Held for sale
HEAT TREATING
-------------
Atmosphere Annealing, Inc.
- --------------------------
Canton, OH 160,000 sq ft Owned(A) Heat treating plant
Lansing, MI 145,000 sq ft Leased Plant and administrative offices
Lansing, MI 58,000 sq ft Leased Heat treating plant
N. Vernon, IN 88,000 sq ft Owned(A) Heat treating plant
PACKAGING PRODUCTS
------------------
Pak-Sak Industries, Inc.
- ------------------------
Sparta, MI 78,000 sq ft on 2.5 acres Owned(A) Manufacturing and
administrative offices
Sparta, MI 12,000 sq ft Leased Manufacturing
CORPORATE
---------
Maxco, Inc.
- -----------
Lansing, MI 7,200 sq ft on 1.9 acres Owned(A) Executive offices
Thornapple Township, MI 150 acres Owned Held for investment
Lansing, MI 6,000 sq ft on 1.0 acre Owned(A) Leased to FinishMaster, Inc.
Eaton Rapids, MI 44,200 sq ft on 5 acres Owned(A) Leased to Axson, N.A.
Eaton Rapids, MI 9,300 sq ft on 1.5 acres Owned Leased to Axson, N.A.
</TABLE>
- --------------------------------------------------------------
(A)Subject to a mortgage
Expiration dates of leases relative to the Company's principal properties range
from 1998 to 2004. Leases expiring within 12 months are expected to be renewed
at substantially the same terms as the present leases.
6
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ITEM 3 - LEGAL PROCEEDINGS
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Maxco's common stock trades on the Nasdaq Stock Market under the symbol MAXC.
The approximate number of record and beneficial holders of Maxco's common stock
at May 31, 1998 was 1,500.
The range of high and low sales prices for the last two years as reported by
NASDAQ were:
<TABLE>
<CAPTION>
YEAR QUARTER ENDED HIGH LOW
---- ------------- ---- ----
<S> <C> <C> <C>
1996 March 31 10 6-3/4
June 30 10-1/8 8
September 30 9-3/4 8-1/8
December 31 8-5/8 7-1/8
1997 March 31 7-3/4 6-1/4
June 30 8 6-1/8
September 30 11-1/2 7
December 31 12-1/2 9
1998 March 31 11-1/2 7-1/2
</TABLE>
No cash dividends on common stock have been paid during any period.
7
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ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Net sales $102,544 $ 74,277 $ 59,330 $ 55,850 $ 43,039
Income (loss) from continuing
operations before equity in
earnings of affiliates(1) 2,784 1,482 (1,098) 1,646 6,377
Equity in earnings (loss) of
affiliates, net of deferred tax (1,373) (250) (1,501) 438 701
Income (loss) from continuing
operations 1,411 1,232 (2,599) 2,084 7,078
Income (loss) from discontinued
operations(2)(4) 21,322 (94) 2,034 2,235
Net income (loss) (1) (2) 1,411 22,554 (2,693) 4,118 9,313
Net income (loss) per share: (3)
Continuing operations .30 .26 (.66) .43 1.50
Discontinued operations 5.20 (.02) .43 .48
Net income (loss) per share $ .30 $ 5.46 $ (.68) $ .86 $ 1.98
AT MARCH 31:
Total assets $ 76,055 $ 68,161 $ 57,531 $ 48,148 $ 39,325
Long-term obligations
(net of current maturities) 27,698 16,027 26,815 15,369 10,219
Working capital 9,232 7,402 31,551 24,138 25,228
</TABLE>
NOTES
(1) Includes a $3.1 million and a $12.1 million pre-tax gain from subsidiary
stock transactions for the years ended March 31, 1995 and 1994,
respectively.
(2) Includes a $35.2 million pre-tax gain for the year ended March 31, 1997,
from the sale of FinishMaster stock.
(3) Earnings per share amounts assume dilution for all years presented.
(4) See Note 3 to "Notes to Consolidated Financial Statements".
No cash dividends on common stock have been paid during any period.
The above selected financial data should be read in conjunction with the
consolidated financial statements which appear in Part II, Item 8 of this
report.
8
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ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the major elements relating to Maxco's
financial and operating results for 1998 compared with 1997, and 1997 compared
with 1996. The comments that follow should be read in conjunction with Maxco's
Consolidated Financial Statements and related notes, contained in Part II, Item
8 of this report.
RESULTS OF OPERATIONS
1998 VERSUS 1997
Net sales from continuing operations increased to $102.5 million in 1998,
compared to $74.3 million for 1997. Operating earnings were $5.3 million in
1998, compared to $2.4 million for 1997. Results for 1998 reflect income from
continuing operations of $1.4 million compared to $1.2 million for the
comparable period in 1997. Net income was $1.4 million or $.30 per diluted share
compared to $22.6 million or $5.46 per diluted share in the prior year. Income
from discontinued operations for the prior year included a $22.0 million gain
from the sale of FinishMaster.
The sales growth in the current period was due to an increase in sales of
approximately $5.0 million at the construction supplies unit, and the inclusion
of sales for a full year for Atmosphere Annealing, acquired in January 1997.
Sales at Pak-Sak declined from the 1997 level. Sales growth for the construction
supplies unit reflects higher construction activity in the Company's market
areas, the inclusion of sales in the Illinois market as a result of acquisitions
made by Ersco in January 1998, and increased market share in Michigan and
Indiana.
The improved operating earnings over the comparable period of the prior year
were due to increased earnings at Ersco and Wisconsin Wire & Steel, and the
inclusion of operating earnings generated by Atmosphere Annealing for the entire
year. Operating earnings at the construction supplies unit increased because of
the higher sales level and a higher gross margin percentage in the current year.
Operating earnings were negatively impacted, however, during this period as a
result of Pak-Sak's lower sales and lower gross margin percentage, which caused
Pak-Sak to have an operating loss for the year. Interest expense increased in
1998 from the prior year due to additional long-term borrowings, the proceeds of
which were used for investments in the Company's affiliates, repurchases of the
Company's stock, and additional purchases of property and equipment.
Maxco's equity in the loss of affiliates increased in 1998 due to increased
losses at Medar during the period. For the quarter ended March 31, 1998, Medar
reported a loss of $9.9 million resulting primarily from the write-off of
previously capitalized software and other product line restructuring changes. As
a result, Maxco reported a charge of $1.6 million as its share of these losses.
1997 VERSUS 1996
Net sales from continuing operations increased to $74.3 million compared to
$59.3 million in 1996. Income from continuing operations increased to $1.2
million in 1997 compared to a loss of $2.6 million for the comparable period in
1996. Net income was $22.6 million or $5.46 per diluted share compared to a net
loss of $2.7 million or $.68 per share in 1996.
The primary contributors to the increase in net sales from continuing operations
in 1997 were an increase in sales in the construction supplies unit due to an
expanded market area and product line, and the inclusion of Atmosphere Annealing
since the acquisition of this company in January 1997. Sales also increased at
Pak-Sak due to a change in customer mix.
A significant contributor to the improvement in income from continuing
operations in 1997 was approximately $1.2 million in operating earnings
generated by Atmosphere Annealing since Maxco acquired this operation in January
1997. In addition, earnings increased in 1997 at Pak-Sak due primarily to its
sales volume increase. Operating earnings at the construction supplies unit were
comparable to 1996 despite the sales volume increase for this unit. Gross margin
percentage was lower in 1997 due to a highly competitive market for the resteel
portion of their business.
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<PAGE> 10
Other expense decreased approximately $1.7 million from 1996 as a result of
investment income generated in 1997 from the investment of the cash proceeds
received from the sale of Maxco's interest in FinishMaster. Interest expense was
also reduced as a portion of the proceeds from the offering was used to retire
$21.3 million in debt under Maxco's revolving line of credit.
Income from continuing operations was also favorably affected by a reduction in
the amount of equity losses from affiliates recorded in 1997. Improved operating
results at Medar during this period and equity from Maxco's investment in its
real estate LLC contributed to the year to year improvement.
The primary reason for the after-tax gain from disposal of discontinued
operations in 1997 of $22.0 million was due to the sale of Maxco's interest in
FinishMaster stock which occurred on July 9, 1996.
LIQUIDITY AND SOURCES OF CAPITAL
Maxco continued to strengthen its financial condition through operations as net
cash provided by operating activities generated $1.7 million in 1998. The cash
generated from operating activities, and proceeds from the collection of a note
receivable related to the prior year sale of Maxco's interest in FinishMaster,
were invested in longer term value opportunities for the Company in 1998.
Operating activities for 1998 generated cash of approximately $1.7 million
primarily due to the Company's income from continuing operations of $1.4 million
and non cash expenses of approximately $3.2 million in the current year. The
cash generated from continuing operations was partially offset by a net increase
in certain working capital items. Cash generated from operating activities was
partially offset by an increase in accounts receivable attributable to the
increased sales activity by the Company in 1998. Conversely, funds were
generated by an increase in accounts payable and other current liabilities.
Cash used in investing activities in 1998 included an increased investment in
the common stock of Strategic Interactive, increased investments in Medar, as
well as additional investments in property and equipment primarily at the
Company's heat-treating unit.
In 1998, the Company increased its investment in the common stock of Strategic
Interactive, which provides web based training, education and other corporate
communications, from 15% to 45% of Strategic's outstanding common stock.
Effective January 1, 1998, the Company acquired approximately 33% of the common
stock of AMI Energy, Inc., which is a client based wholesale distributor of
natural gas in the Midwest. Effective November 1, 1997, Maxco acquired a 50%
interest in Robinson Oil Company, LLC, which is in the business of acquiring and
developing oil and gas interests.
Net cash provided by financing activities during the year consisted primarily of
proceeds from long-term obligations, repayments on long-term obligations, and
the acquisition and retirement of common stock. In December 1997, the Company's
Atmosphere Annealing subsidiary issued variable rate bonds totaling $7.9
million. Approximately $3.5 million of the proceeds was used for the refinancing
of other long-term debt with the balance used for the acquisition of machinery
and equipment. At March 31, 1998, approximately $1.1 million of the variable
rate bond proceeds remained as restricted cash for the acquisition of equipment
by Atmosphere Annealing, Inc. The Company has lines of credit totaling $17.0
million of which approximately $5.9 million was available at March 31,1998. The
lines of credit consist of a $12 million unsecured facility with the remaining
$5.0 million secured by the assets at Atmosphere.
In fiscal 1998, the Company repurchased 132,900 shares of its common stock for
approximately $1.3 million. Additionally, in the quarter ended June 30, 1997,
the Company issued 6,767 shares of a new Series Five Preferred Stock in exchange
for 101,870 shares of common stock. Maxco's Series Five Preferred Stock has a
face value of $120 and pays a dividend at the rate of 10% of face value per
annum. The Company exchanged one share of Series Five Preferred Stock for 15
shares of common stock surrendered.
During the year, Maxco invested in 237,200 shares of Medar stock bringing its
ownership percentage of Medar to approximately 24% of Medar's outstanding common
stock. Additionally, Maxco purchased $750,000 of subordinated debt of Medar
which pays interest at 12.95%. The 2,130,605 shares of Medar common stock that
Maxco owns had an aggregate market value at March 31,1998 of approximately $5.0
million. Maxco's investment in Medar is reflected in Maxco's financial
statements under the equity method for all periods presented as the Company owns
greater than 20% of Medar's outstanding stock.
10
<PAGE> 11
Subsequent to March 31, 1998, the Company's Ersco unit secured a commitment for
a $10.0 million credit facility, under certain circumstances, to fund
acquisitions.
Maxco believes that its current financial resources, together with cash
generated from operations and its available resources under its lines of credit,
will be adequate to meet its cash requirements for the next year.
Additionally, the Company believes the value that has been created in its
portfolio of investments could provide additional resources for the Company if
needed.
SEASONAL AND QUARTERLY FLUCTUATIONS
The following table sets forth consolidated operating data for each of the eight
quarters ended March 31, 1998. The unaudited quarterly information has been
prepared on the same basis as the annual information and, in management's
opinion, includes all adjustments, consisting of only normal recurring entries,
necessary for a fair presentation of the information for the quarters presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
Quarter Ended
Fiscal 1998 Fiscal 1997
-------------------------------------------- --------------------------------------------
6/30/97 9/30/97 12/31/97 3/31/98 6/30/96 9/30/96 12/31/96 3/31/97
-------- ------- ---------- ---------- -------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $27,839 $29,342 $24,091 $21,272 $18,340 $19,876 $15,955 $20,106
Gross margin 6,913 6,998 5,686 5,240 3,073 3,384 3,046 5,344
Equity in earnings (loss) of 101 102 (10) (1,566) 115 78 (497) 54
affiliates, net of deferred
tax(1)
Income (loss) from
continuing operations 1,325 1,432 347 (1,693) 139 662 87 344
Income (loss) from
discontinued operations(2) 308 21,782 (693) (75)
Net income (loss) 1,325 1,432 347 (1,693) 447 22,444 (606) 269
Net income (loss) per common share:
Continuing operations $ .35 $ .38 $ .07 (.54) $ .02 $ .15 $ .01 $ .07
Discontinued businesses .07 5.14 (.19) (.02)
------- ------- ------- -------
Net income (loss) per
common share * $ .35 $ .38 $ .07 (.54) $ .09 $ 5.29 $ (.18) $ .05
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
* The sum of the quarterly net income per share amounts may not equal the
annual amounts reported. Net income per share is computed independently for
each quarter and the full year and is based on the respective weighted
average common shares outstanding.
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. The increase in the quarter
ended March 31, 1997, however, resulted from the inclusion of sales from
Atmosphere Annealing acquired at the beginning of the quarter. 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 earnings to continue to fluctuate from quarter to
quarter.
(1) The quarter ended March 31, 1998, includes a loss of $1.6 million from
Maxco's 24% equity in Medar, net of deferred tax.
(2) The quarter ended September 30, 1996, includes a $22.0 million after-tax
gain on the sale of Maxco's interest in FinishMaster.
11
<PAGE> 12
IMPACT OF INFLATION
Inflation impacts Maxco's costs for materials, labor and related costs of
manufacturing and distribution. To the extent permitted by competition, Maxco
has offset these higher costs through selective price increases.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. The Company is addressing this risk to
the availability and integrity of financial systems and the reliability of
operational systems. The Company is evaluating and managing the risks and costs
associated with this problem and an initial assessment has been completed. The
cost of achieving Year 2000 compliance is not estimated to be materially over
the cost of normal software upgrades and replacements and is expected to be
incurred through September 30, 1999.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans, and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENT
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement established standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for fiscal
years beginning after December 15, 1997. Beginning in fiscal 1999, the Company
will provide the information relating to comprehensive income to conform to the
Statement 130 requirements.
Also in 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
statement supersedes Financial Accounting Standards Board Statement No. 14 and
establishes standards for the way public business enterprises report selected
information about operating segments in annual reports and interim financial
reports issued to shareholders. Statement 131 is effective for fiscal years
beginning after December 15, 1997. In fiscal 1999, the Company will provide
financial and descriptive information about its reportable operating segments to
conform to the Statement 131 requirements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted in a separate section of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
12
<PAGE> 13
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is hereby incorporated by reference from the Registrant's definitive
proxy statement to be filed within 120 days of March 31, 1998.
ITEM 11 - EXECUTIVE COMPENSATION
Item 11 is hereby incorporated by reference from the Registrant's definitive
proxy statement to be filed within 120 days of March 31, 1998.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is hereby incorporated by reference from the Registrant's definitive
proxy statement to be filed within 120 days of March 31, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is hereby incorporated by reference from the Registrant's definitive
proxy statement to be filed within 120 days of March 31, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2)--The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) Listing of Exhibits
Exhibit Number
--------------
3 Restated Articles of Incorporation are hereby incorporated
by reference from Form 10-Q dated February 13, 1998.
3.1 By-laws are hereby incorporated by reference from Form S-4
dated November 4, 1991 (File No. 33-43855).
4.2 Resolution establishing Series Three Preferred Shares is
hereby incorporated by reference from Form S-4 dated
November 4, 1991 (File No. 33-43855).
4.3 Resolution authorizing the redemption of Series Two
Preferred Stock, establishing Series Four Preferred Stock
and the terms of the subordinated notes is hereby
incorporated by reference from Form 10-Q dated February 14,
1997.
4.4 Resolution establishing Series Five Preferred Shares is
hereby incorporated by reference from Form 10-K dated June
5, 1997.
10.1 Incentive stock option plan adopted August 15, 1983,
including the amendment (approved by shareholders August
25, 1987) to increase the authorized shares on which
options may be granted by two hundred fifty thousand
(250,000), up to five hundred thousand (500,000) shares of
the common stock of the company is hereby incorporated by
reference from the annual report on Form 10-K for the
fiscal year ended March 31, 1988.
10.8 Stock Purchase Agreement (sale of FinishMaster, Inc.)
effective July 9, 1996, is hereby incorporated by reference
from registrants Form 10-K dated June 18, 1996.
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 registrants 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
registrants Form 8-K dated January 17, 1997.
10.12 Asset Purchase Agreement - Axson North America Inc. is
hereby incorporated by reference from registrants Form 10-Q
dated February 14, 1997.
13
<PAGE> 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
Continued
10.13 Loan agreement between Michigan Strategic Fund and
Atmosphere Annealing, Inc. is hereby incorporated by
reference from registrants 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 registrants 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.
10.16 Second amendment to amended and restated loan agreement
between Comerica Bank and Maxco, Inc. dated June 24, 1998.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors (Form S-8 filed June 2,
1992 - File No. 33-48351)
27 Financial Data Schedules
(b) Reports on Form 8-K:
None
(c) Exhibits
-First Amendment to amended and restated loan agreement between
Comerica Bank and Maxco, Inc. dated August 1, 1997.
-Second Amendment to amended and restated loan agreement between
Comerica Bank and Maxco, Inc. dated June 24, 1998.
-Subsidiaries of the Registrant
-Consent of Independent Auditors
-Financial Data Schedules
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section
of this report.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date June 24, 1998 MAXCO, INC.
-------------------
By /S/ VINCENT SHUNSKY
------------------------------------
Vincent Shunsky, Vice
President of Finance and Treasurer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/S/ MAX A. COON 06/24/98 President (Principal Executive Officer)
- ---------------------------- and Director
Max A. Coon Date
/S/ VINCENT SHUNSKY 06/24/98 Vice President of Finance and Treasurer
- ----------------------------- (Principal Financial and Accounting
Vincent Shunsky Date Officer) and Director
/S/ ERIC L. CROSS 06/24/98 Director
- -----------------------------
Eric L. Cross Date
/S/CHARLES J. DRAKE 06/24/98 Director
- -----------------------------
Charles J. Drake Date
/S/JOEL I. FERGUSON 06/24/98 Director
- -----------------------------
Joel I. Ferguson Date
/S/ RICHARD G. JOHNS 06/24/98 Director
- -----------------------------
Richard G. Johns Date
/S/ J. MICHAEL WARREN 06/24/98 Director
- ------------------------------
J. Michael Warren Date
/S/MICHAEL W. WISTI 06/24/98 Director
- ------------------------------
Michael W. Wisti Date
/S/ANDREW S. ZYNDA 06/24/98 Director
- ------------------------------
Andrew S. Zynda Date
15
<PAGE> 16
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) AND (2), (c), AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED MARCH 31, 1998
MAXCO, INC.
LANSING, MICHIGAN
16
<PAGE> 17
FORM 10-K--ITEM 14(a)(1) AND (2)
MAXCO, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
The following consolidated financial statements of Maxco, Inc. and subsidiaries are included in Item 8:
Consolidated balance sheets--March 31, 1998 and 1997 ............................................................ 19
Consolidated statements of operations--Years ended March 31, 1998, 1997, and 1996 ............................... 21
Consolidated statements of stockholders' equity--Years ended March 31, 1998, 1997, and 1996 ..................... 22
Consolidated statements of cash flows--Years ended March 31, 1998, 1997, and 1996 ............................... 23
Notes to consolidated financial statements--March 31, 1998 ...................................................... 24
The following consolidated financial statement schedule of Maxco, Inc. and subsidiaries is included in Item 14(d):
Schedule II--Valuation and qualifying accounts and reserves ..................................................... 36
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
Financial statements of the Registrant's discontinued operation
(FinishMaster, Inc.), are hereby incorporated by reference to the
FinishMaster, Inc. Form 10-K for the year ended March 31, 1996, as filed
with the Securities and Exchange Commission (SEC File Number 000-23222).
Financial statements of the Registrant's significant unconsolidated
affiliate (Medar, Inc.) are hereby incorporated by reference to the Medar,
Inc. Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission (SEC File Number 0-12728).
17
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Maxco, Inc.
We have audited the consolidated balance sheets of Maxco, Inc. and subsidiaries
as of March 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1998. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and schedule referred to
above present fairly, in all material respects, the consolidated financial
position of Maxco, Inc. and subsidiaries at March 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Detroit, Michigan
May 29, 1998
except for Note 14, as
to which the date is
June 19, 1998
18
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
MAXCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31,
1998 1997
-------------------------------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,040 $ 1,609
Marketable securities 400 2,984
Accounts receivable, less allowance of
$565,000 in 1998 and $470,000 in 1997 16,280 13,526
Inventories--Note 1 3,579 3,667
Prepaid expenses and other 303 269
-------- --------
TOTAL CURRENT ASSETS 21,602 22,055
MARKETABLE SECURITIES - LONG TERM--Notes 1 & 2 7,657 7,780
PROPERTY AND EQUIPMENT
Land 732 732
Buildings 10,553 9,810
Machinery, equipment, and fixtures 20,854 14,358
-------- --------
32,139 24,900
Allowances for depreciation (8,321) (6,325)
-------- --------
23,818 18,575
OTHER ASSETS
Investments--Notes 4 and 10 15,842 12,219
Notes and contracts receivable and other 3,056 4,896
Intangibles--Note 1 2,992 2,636
Restricted cash for acquisition of equipment - Note 1 1,088
-------- --------
22,978 19,751
======== ========
$ 76,055 $68,161
======== ========
</TABLE>
See notes to consolidated financial statements
19
<PAGE> 20
<TABLE>
<CAPTION>
March 31,
1998 1997
-----------------------------------
(in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 226 $ 226
Accounts payable 6,568 6,556
Employee compensation 2,058 1,699
Taxes, interest, and other liabilities 2,028 1,714
Current maturities of long-term obligations 1,490 4,458
--------- ----------
TOTAL CURRENT LIABILITIES 12,370 14,653
LONG-TERM OBLIGATIONS, less current maturities--Note 5 27,698 16,027
DEFERRED INCOME TAXES--Note 9 1,180 2,502
STOCKHOLDERS' EQUITY--Notes 6 and 7
Preferred stock:
Series Three: 10% cumulative callable, $60 face value;
14,988 shares issued and outstanding 690 716
Series Four: 10% cumulative callable, $51.50 face value,
46,414 shares issued and outstanding 2,390 2,390
Series Five: 10% cumulative callable, $120 face value;
6,680 shares issued and outstanding 802
Common stock, $1 par value; 10,000,000 shares authorized,
3,307,910 shares (1997--3,517,680 shares) issued and outstanding 3,308 3,518
Net unrealized gain (loss) on marketable securities 47 (68)
Retained earnings 27,570 28,423
--------- ----------
34,807 34,979
========= ==========
$ 76,055 $ 68,161
========= ==========
</TABLE>
See notes to consolidated financial statements
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF OPERATIONS
MAXCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997 1996
---------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
Net sales $ 102,544 $ 74,277 $ 59,330
Costs and expenses:
Cost of sales and operating expenses 77,707 59,430 49,456
Selling, general and administrative 17,044 10,997 8,650
Depreciation and amortization 2,481 1,404 875
------------- ------------ ----------
97,232 71,831 58,981
------------- ------------ ----------
OPERATING EARNINGS 5,312 2,446 349
Other income (expense):
Investment income 1,048 1,209 17
Interest expense (2,114) (1,381) (1,923)
------------- ------------ ----------
(1,066) (172) (1,906)
------------- ------------ ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES
AND EQUITY IN
EARNINGS (LOSS) OF AFFILIATES 4,246 2,274 (1,557)
Federal income tax expense (benefit)--Note 9 1,462 792 (459)
-------------- ------------ ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS
OF AFFILIATES 2,784 1,482 (1,098)
Equity in earnings (loss) of affiliates, net of
deferred tax--Notes 4 and 9 (1,373) (250) (1,501)
-------------- ------------ ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,411 1,232 (2,599)
Loss from discontinued operations--Note 3 (670) (94)
Gain from disposal of discontinued operations,
net of tax--Note 3 21,992
------------- ------------ ----------
NET INCOME (LOSS) $ 1,411 $ 22,554 $ (2,693)
------------- ------------ ----------
Less preferred stock dividends (390) (236) (204)
------------- ------------ ----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 1,021 $ 22,318 $ (2,897)
============= ============ ==========
NET INCOME (LOSS) PER COMMON SHARE--Basic--
Note 13
Continuing operations $ .30 $ .26 $ (.66)
Discontinued operations 5.54 (.02)
============= ============ ----------
$ .30 $ 5.80 $ (.68)
============= ============ ==========
NET INCOME (LOSS) PER COMMON SHARE--Assuming dilution -
Note 13
Continuing operations $ .30 $ .26 $ (.66)
Discontinued operations 5.20 (.02)
------------- ------------ ----------
$ .30 $ 5.46 $ (.68)
============= ============ ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
AND COMMON STOCK EQUIVALENTS OUTSTANDING 3,460 4,105 4,251
============= ============ ==========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MAXCO, INC. AND SUBSIDIARIES
Additional Net
Preferred Common Paid-in Unrealized Retained
Stock Stock Capital Gain (Loss) Earnings Totals
------------ ---------- ---------- -------------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1995 $ 1,655 $ 4,290 $ 1,190 $ (60) $ 15,656 $ 22,731
Net loss for the year (2,693) (2,693)
Net unrealized gain on
marketable securities 60 60
Preferred stock dividends (204) (204)
Exercise of stock options for
5,500 shares 5 5 10
Redemption of preferred stock (1) (1)
Acquisition and retirement of
67,710 shares (68) (509) (577)
--------- --------- --------- --------- --------- ---------
Balances at March 31, 1996 $ 1,654 $ 4,227 $ 686 $ 12,759 $ 19,326
Net income for the year 22,554 22,554
Net unrealized loss on marketable (68) (68)
securities
Preferred stock dividends (236) (236)
Exercise of stock options for
78,000 shares 78 1 79
Issuance of preferred stock 1,490 (140) (1,932) (582)
Redemption of preferred stock (38) (1) (39)
Acquisition and retirement of
647,762 shares (647) (686) (4,722) (6,055)
--------- --------- --------- --------- --------- ---------
Balances at March 31, 1997 $ 3,106 $ 3,518 $ (68) $ 28,423 $ 34,979
Net income for the year 1,411 1,411
Net unrealized gain on
marketable securities 115 115
Preferred stock dividends (390) (390)
Exercise of stock options for
25,000 shares 25 10 35
Acquisition and retirement of
132,900 shares (133) (1,123) (1,256)
Redemption of preferred stock (36) (1) (37)
Conversion of common stock to
preferred stock 812 (102) (760) (50)
--------- --------- --------- --------- --------- ---------
BALANCES AT MARCH 31, 1998 $ 3,882 $ 3,308 $ 47 $ 27,570 $ 34,807
========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAXCO, INC. AND SUBSIDIARIES
Year Ended March 31,
1998 1997 1996
----------------------------------------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ 1,411 $ 22,554 $ (2,693)
Loss (income) from discontinued operations (21,322) 94
----------- -------- ---------
Income (loss) from continuing operations 1,411 1,232 (2,599)
Advances to discontinued operations (1,943)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 2,240 1,291 831
Amortization 241 113 44
Equity in operations of Medar and other 1,373 250 2,275
Deferred federal income taxes (688) 608 (835)
Changes in operating assets and liabilities
of continuing operations:
Accounts receivable (3,496) (2,842) 132
Inventories 88 62 252
Prepaid and other (34) 315 (149)
Accounts payable and other current liabilities 612 1,604 (848)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,747 2,633 (2,840)
INVESTING ACTIVITIES
Payment received on note receivable 3,443
Sale of subsidiaries 41,671
Purchase of businesses (468) (3,184)
Purchases of property and equipment (7,474) (1,450) (5,042)
Investment in affiliates (6,452) (6,890) (2,777)
Net investment in marketable securities 2,881 (10,847)
Other 190 361 (190)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,880) 19,661 (8,009)
FINANCING ACTIVITIES
Restricted cash for acquisition of equipment (1,088)
Proceeds from long-term obligations 13,724 4,876 12,532
Repayments on long-term obligations (5,375) (20,045) (430)
Proceeds from exercise of stock options 35 79 10
Dividends paid on preferred stock (390) (236) (204)
Acquisition and retirement of preferred and common stock (1,342) (6,094) (578)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,564 (21,420) 11,330
--------- --------- ---------
INCREASE (DECREASE) IN CASH (569) 874 481
CASH AT BEGINNING OF YEAR 1,609 735 254
--------- --------- ---------
CASH AT END OF YEAR $ 1,040 $ 1,609 $ 735
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAXCO, INC. AND SUBSIDIARIES
March 31, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Maxco, Inc. is a Michigan corporation incorporated
in 1946. Maxco currently operates in three business segments: distribution,
heat-treating, and packaging products. Maxco's businesses include Ersco
Corporation, a distributor of construction supplies; Atmosphere Annealing,
Inc., a metal heat-treating service company; and Pak-Sak Industries, Inc., a
manufacturer of polyethylene bags and packaging material. Maxco also holds
investments in a real estate development limited liability company, L/M
Associates, LLC; three technology related businesses: Medar, Inc. (NASDAQ/NMS:
MDXR), Axson, S.A., and Strategic Interactive; as well as investments in two
energy related business: AMI Energy, Inc., and Robinson Oil Company, LLC.
Principles of Consolidation: The consolidated financial statements include the
accounts of Maxco, Inc. and its majority owned subsidiaries. Upon consolidation,
all intercompany accounts and transactions are eliminated. Investments in Medar,
Inc. and other greater than 20% owned investments are accounted for under the
equity method. Investments in less than 20% owned affiliates are accounted for
under the cost method.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications: Certain items in the prior year financial statements have
been reclassified to conform with the presentation used in 1998.
Cash and Cash Equivalents: The Company considers cash and other highly liquid
investments, including investments in interest bearing repurchase agreements
with less than 90 day maturities, as cash and cash equivalents.
Receivables: Trade accounts receivable represent amounts due from highway and
general construction, automotive, and flexible packaging industries primarily in
the mid-western United States. Accounts and notes receivable at the Company's
construction supplies unit are collateralized or secured, by perfected lien
rights and performance bonds, where applicable.
Inventories: Inventories are stated at the lower of first-in, first-out cost or
market and at March 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
(in thousands)
<S> <C> <C>
Raw materials $ 723 $ 783
Finished goods and work in process 1,077 1,212
Purchased products for resale 1,779 1,672
--------------- -------------
$3,579 $3,667
=============== =============
</TABLE>
Marketable Securities:
Marketable securities are classified in accordance with FASB 115 as securities
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The amortized cost of securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are included in investment income or loss. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
investment income. The fair value of marketable securities is based on quoted
market value. The carrying amount of cash and cash equivalents approximates fair
value because of the short maturity of those instruments.
At March 31, 1998, the Company's marketable securities consist of debt
securities and United States government securities.
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - Continued
Properties and Depreciation: Property and equipment are stated on the basis of
cost and include expenditures for new facilities and equipment and those which
materially extend the useful lives of existing facilities and equipment.
Equipment capitalized under lease agreements is not significant.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. Depreciation (and amortization of capitalized leases) for financial
reporting purposes is computed by the straight-line method based on the
estimated useful lives of the assets ranging from 3 to 31 years.
Federal Income Taxes: The Company provides for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Intangibles: Intangibles primarily consist of the excess of cost over fair
market value of net assets of acquired businesses. Intangibles, including
non-compete agreements, are amortized on a straight-line basis over periods
ranging from 5 to 20 years. The carrying value of goodwill will be reviewed if
the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, the Company's carrying value of the goodwill will be reduced by the
estimated shortfall of cash flows. Accumulated amortization was approximately
$659,000 and $436,000 at March 31, 1998 and 1997, respectively.
Restricted Cash: The Company has borrowings under its variable rate tax exempt
revenue bond. The use of the proceeds from these borrowings are restricted for
the acquisition of certain equipment. The unexpended portion of $1.1 million is
included as restricted cash in the consolidated balance sheet at March 31, 1998.
Net Income (Loss) Per Share: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings per Share.
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share exclude any dilutive effects from
options, warrants, and convertible securities. Diluted earnings per share are
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements. The effect of
restating the earnings per share amounts was not material.
The weighted average number of shares of common stock and common stock
equivalents utilized in the computation of net income (loss) per share was
3,460,000 in 1998, 4,105,000 in 1997 and 4,251,000 in 1996. Per share amounts,
give effect to preferred stock dividend requirements and dilutive stock options
of less than 50% owned affiliates, if dilutive for the periods. The effect of
stock options and potential conversion of callable convertible preferred stock
was antidilutive for the year ended March 31, 1996.
Gain Recognition on Sale of Subsidiary Stock: The Company's policy is to record
gains from the sale or other issuance of previously un-issued stock by its
subsidiaries.
Advertising: Advertising costs are expensed as incurred. The amounts were not
material for all years presented.
Fair Value Disclosure: The carrying amounts of certain financial instruments
such as cash and equivalents, accounts receivable, marketable securities,
accounts payable and long-term debt approximate their fair values. The fair
value of the long-term debt is estimated using discounted cash flow analysis and
the Company's current incremental borrowing rates for similar types of
arrangements.
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
Effect Of Accounting Pronouncements: In 1997, the Financial Accounting Standards
Board issued Statement No. 130, Reporting Comprehensive Income. This Statement
established standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. Statement
130 is effective for fiscal years beginning after December 15, 1997. Beginning
in 1998, the Company will provide the information relating to comprehensive
income to conform to the Statement 130 requirements.
Also in 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
statement supersedes Financial Accounting Standards Board Statement No. 14 and
establishes standards for the way public business enterprises report selected
information about operating segments in annual reports and interim financial
reports issued to shareholders. Statement 131 is effective for fiscal years
beginning after December 15, 1997. For the year ended 1999, the Company will
provide financial and descriptive information about its reportable operating
segments to conform to the Statement 131 requirements.
NOTE 2 - ACQUISITION OF ASSETS
Effective January 1, 1997, Maxco acquired the business and substantially all of
the assets (consisting principally of accounts receivable, inventory and fixed
assets) of Atmosphere Annealing, Inc. Atmosphere Annealing, which was privately
owned by four individuals, including a 25% ownership by the spouse of Maxco
Chairman, Max A. Coon, provides metal heat treating to Midwestern industrial
users.
The consideration paid for these assets, acquired for approximately $12.8
million, consisted of the assumption of funded debt of approximately $6.4
million, cash and the issuance of a subordinated note. The sellers received one
half of the net purchase price in cash with the balance in the form of a
subordinated note. The Company in 1998, guaranteed an $800,000 long-term
obligation of the Seller related to the expansion of certain of Atmosphere's
heat-treating facilities, which it leases from the Seller.
The acquisition of Atmosphere has been accounted for as a purchase. The results
of operations for Atmosphere have been included in the consolidated financial
statements since the date of acquisition.
Cash used for this transaction was provided by proceeds from the sale of some of
the Company's marketable securities.
Agreement on the purchase price was reached based on an arms length negotiation.
The following unaudited proforma summary presents the consolidated
results of operations as if the acquisition of Atmosphere had
occurred at April 1, 1996, and does not purport to be indicative of
what would have occurred had the acquisition actually been made as
of such date or of results which may occur in the future.
<TABLE>
<CAPTION>
Twelve-months ended March 31, 1997
Maxco Atmosphere Proforma Proforma
(as reported) Annealing Adjustments Consolidated
------------------- ------------------- ------------------- ----------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $74,277 $20,800 $95,077
Income from
continuing operations 1,232 1,257 (562) (A) 1,927
Per common share: $ .27 $ .32 (.14) $ .45
</TABLE>
(A) The financial statements of Atmosphere did not provide for a
federal tax provision because prior to the acquisition by Maxco,
Atmosphere elected to be taxed as an S-Corporation.
Consequently, proforma adjustments include a 34% federal tax
provision for Atmosphere's income for the period presented. In
addition, proforma adjustments include estimated incremental
amortization, depreciation and interest expense resulting from
the purchase.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 3 - DISCONTINUED OPERATIONS
On July 9, 1996, Maxco completed an agreement to sell its 4,045,000 shares (67
percent interest) of FinishMaster, Inc. and for Maxco to enter into an agreement
not to compete for a total consideration of $62.6 million. As a result of this
transaction, a pre-tax gain of $35.2 million was recognized in 1997.
Effective October 31, 1996, Maxco sold the business and substantially all the
assets (consisting principally of accounts receivable, inventory and fixed
assets) of Maxco's wholly owned subsidiary, Wright Plastic Products, Inc.,
including substantially all the assets of Wright's subsidiary, Pacer Tool and
Mold, Inc. to Plastic Acquisition Co. LLC, a privately held company. The assets
of approximately $10 million were purchased for cash, assumption of certain
liabilities and a note. The assets were sold for an amount which approximates
book value.
Effective January 27, 1997, Maxco sold the business and certain assets
(consisting principally of accounts receivable, inventory, fixed assets and
intangibles) of Maxco's wholly owned subsidiary, Akemi, Inc. to Axson North
America, a Houston based subsidiary of privately held Axson, S.A., based in
Paris, France for approximately $2.0 million in cash. In addition, Maxco
purchased approximately 7 percent of the capital stock of Axson, S.A. for
approximately $1.9 million.
The results of operations for these units have been reported separately as
discontinued operations in the consolidated statements of operations.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
(in thousands)
<S> <C> <C>
Net Sales $46,297 $128,348
Cost and expenses 46,976 127,124
---------- ----------
Income (loss) before income taxes (679) 1,224
Income tax expense (benefit) (238) 459
---------- ----------
Net income (loss) (441) 765
Minority interest in net earnings
of discontinued operations (229) (859)
---------- ----------
Total income (loss) from
discontinued operations $ (670) $ (94)
========== ==========
</TABLE>
NOTE 4 - INVESTMENT IN MEDAR, INC.
At March 31, 1998, Maxco owned 2,130,605 shares of Medar's common stock
(aggregate market value of $5.0 million), representing approximately 24% of
Medar's total common stock outstanding.
During the quarter ended September 30, 1997, the Company participated in the
private placement by Medar, Inc. of $7.0 million of subordinated debentures.
Maxco purchased $750,000 of these debentures representing 10.7% of the total
placed. Maxco also received warrants to purchase 150,000 shares of Medar stock
at $6.86. The debentures have maturities of up to eight years and bear interest
at 12.95%. In connection with this transaction, Maxco also purchased 150,000
shares of previously unissued Medar stock at $5.00 a share.
In 1997, Maxco purchased 156,000 shares of Medar stock bringing its ownership
percentage above 20% of Medar's outstanding shares. Consequently, Maxco's
investment in Medar is accounted for under the equity method for all periods
presented.
Medar's net loss for the years ended March 31, 1998, 1997 and 1996 were
approximately $10.1 million, $2.3 million, and $11.4 million, respectively.
Accordingly, Maxco's equity share of Medar's net loss for these years was
$2,380,000, $519,000 and $2,275,000 and is recorded net of deferred tax for
these periods in equity earnings from affiliates, along with the equity results
of other less than 50% owned affiliates. For the years ended March 31, 1998,
1997 and 1996, Medar's sales were $36.9 million, $41.4 million and $38.6
million, respectively.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 5 - LONG-TERM OBLIGATIONS
Long-term obligations at March 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(in thousands)
<S> <C> <C>
Revolving line of credit (LIBOR + 1.75%,
7.4% at March 31, 1998) $ 8,700 $ 3,800
Line of credit (interest 8.25% at March 31, 1998) 2,450 2,350
Tax exempt revenue bonds (variable rate of
interest, 3.9% at March 31, 1998) 4,740 2,390
Variable rate notes (variable rate of interest,
5.67% at March 31, 1998) 5,293
Mortgage notes payable (various interest rates
ranging up to 9.5%) 2,270 3,874
Equipment purchase contracts and capitalized lease
obligations (various interest rates) 1,886 4,196
Subordinated debt (interest rate of 10%) 3,765 3,765
Other 84 110
------------ -----------
$29,188 $20,485
Less current maturities 1,490 4,458
----------- -----------
$27,698 $16,027
=========== ===========
</TABLE>
Under its revolving credit agreement at March 31, 1998, Maxco can borrow up to
$12.0 million on an unsecured basis. At March 31, 1998, the Company had $3.3
million available under this agreement. The line of credit matures August 1,
1999.
The revolving credit arrangement requires a facility fee of 0.25%, a commitment
fee of 0.25% of the unused line, and compensating balances equal to 5% of
borrowings under this arrangement or the fee equivalent. The fees incurred and
the interest effect of required balances approximated $108,000 for 1998,
$142,000 for 1997 and $128,000 for 1996.
The Company also has a separate credit line of $5.0 million for Atmosphere
Annealing, Inc. The Company had $2.6 million of this line available at March
31, 1998.
Notes and contracts payable are generally collateralized by assets purchased
with proceeds of the borrowings. The aggregate principal maturities of long-term
debt from 2000 - 2003 are as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003
- ------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
$1,986,000 $2,145,000 $2,533,000 $2,020,000
</TABLE>
Interest paid approximates interest expensed for the years presented.
The Company has guaranteed various debt obligations of certain affiliates in an
aggregate amount of $21.5 million. Maxco does not believe that there is any
unusual degree of risk related to these guarantees.
Subsequent to March 31, 1998, the Company's Ersco unit secured a commitment for
a $10.0 million credit facility, under certain circumstances, to fund
acquisitions.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 6 - PREFERRED STOCK
Maxco may issue up to 100,000 shares of preferred stock with terms determined by
Maxco's Board of Directors.
In the quarter ended June 30, 1997, 6,767 shares of Series Five Preferred stock
were issued in exchange for 101,870 shares of common stock. These new shares
were issued in conjunction with an offer to exchange shares of common stock for
shares of the Company's non-voting Series Five Preferred Stock. The Series Five
Preferred shares have a face value of $120, are callable at the Company's
option, are non-voting, have no conversion rights, and pay a dividend at the
rate of 10% of face value per annum. The Company exchanged one share of Series
Five Preferred Stock for every 15 shares of common stock surrendered.
Effective January 1, 1997, the Company converted its entire issue of cumulative
non-voting Series Two Preferred Stock. The conversion of this stock eliminated a
class of stock which had rights to convert into approximately 230,000 shares of
common stock. At the option of the holder, this conversion was accomplished in
some cases by issuing shares of a newly established Series Four Preferred Stock.
The Series Four Preferred Stock is cumulative, callable at the Company's option,
is non-voting, has no conversion rights, and will pay an annual dividend at the
rate of 10% annually. Alternatively, certain holders of the Series Two Preferred
Stock accepted payment in the form of an unsecured subordinated note which bears
interest at the rate of 10% a year. In addition, 140,000 shares of common stock
were exchanged for 21,746 shares of the Series Four Preferred Stock in January
1997.
Series Three Preferred Stock is voting stock on a par with the common stock, and
has twenty votes per share. Quarterly cumulative dividends are provided at the
annual rate of 10%, subject to the restrictions of Michigan corporate law and
the discretion of the Maxco Board of Directors. The stock is callable at the
option of the Company , with the call price declining at the rate of one percent
per year to a minimum price after February 1999, equal to face value ($60 per
share).
NOTE 7 - STOCK OPTIONS
Under the terms of Maxco's incentive common stock option plan, options for the
purchase of up to 500,000 shares of common stock may be granted and options are
exercisable upon grant.
A summary of incentive stock options activity follows for the year ended March
31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
------ ---------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C>
(number of shares in thousands)
Outstanding and exercisable at 203 $ 5.47 341 $5.24 161
beginning of year $1.96
Granted and exercisable 10 7.00 185 8.00
Exercised (25) 1.38 (78) 2.55 (5) 1.87
Cancelled ==== (60) 8.00
Outstanding and exercisable at ==== ====
end of year 188 $ 6.09 203 $5.47 341 $5.24
==== ====== ==== ===== ==== =====
</TABLE>
Exercise prices for options outstanding as of March 31, 1998 ranged from $1.38
to $8.00. The weighted average fair value of options granted during the years
ended March 31, 1998 and 1996 was $2.68 and $2.71, respectively. The weighted
average remaining contractual life of those options is eight years.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 7 - STOCK OPTIONS - Continued
The Company has elected to follow APB No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options because, in management's opinion, the alternative fair value provided
for under FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Schole
option pricing model.
After adjusting for the proforma effect of stock compensation, the net income
(loss) is estimated to be approximately $1.4 million ($.29 per share) for 1998
and a net loss of $3.2 million ($.80 per share) for 1996. There was no effect
for 1997. Assumptions used in determining the above proforma disclosures were
risk free interest rates of approximately 6%, no dividend yields, .31 market
price volatility in 1998 (.24 for the 1996 grant), and a five year weighted
average life of option. These proforma results reflect only stock options
granted in 1998 and 1996 (none were granted in 1997), and may not be comparable
with the results of applying the fair market value methodology to all stock
options granted prior to the initial adoption of this statement.
NOTE 8 - EMPLOYEE SAVINGS PLAN
The Company has two 401(k) Employee Savings Plans covering substantially all
employees of the Company. Employees may contribute a portion of their
compensation to the plans which is then matched based on the percentages
specified in the plan documents. A separate employer contribution may be made at
the discretion of the Board of Directors. Company contributions charged to
continuing operations under both Plans were approximately $143,000, $147,000 and
$136,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
NOTE 9 - FEDERAL INCOME TAXES
The provision for federal income taxes (benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
(in thousands)
<S> <C> <C> <C>
Current (benefit) $2,150 $ 184 $ 376
Deferred (688) 608 (835)
------------- ------------ -------------
1,462 792 (459)
Deferred amount allocated to equity in
earnings of affiliates (707) (129) (774)
============= ============ =============
$ 755 $ 663 $ (1,233)
============= ============ =============
</TABLE>
The federal income tax expense differs from the amount computed by applying
statutory rates due to certain expenses which are not deductible for tax
purposes. Federal income taxes paid by Maxco was $2.1 million in 1998 and $15.8
million in 1997, which included taxes paid on the gain from disposal of
discontinued operations. No taxes were paid in 1996.
Federal income tax expense (benefit) related to Maxco's discontinued operations
amounted to $(238,000) and $459,000 for the years ended March 31, 1997 and 1996.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 9 - FEDERAL INCOME TAXES - Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of March 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
(in thousands)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Depreciation $ 662 $ 235
Undistributed earnings 732 1,439
Gain on sale of subsidiary 1,171
Other 30
------ -------
Total Deferred Tax Liabilities 1,424 2,845
DEFERRED TAX ASSETS:
Allowance for doubtful accounts 192 160
Inventory 52 66
Other 117
------- -------
Total Deferred Assets 244 343
======= =======
Net Deferred Liabilities $1,180 2,502
======= =======
</TABLE>
NOTE 10 - OTHER INVESTMENTS
Effective January 1, 1997, Maxco acquired a 50% interest in a Limited Liability
Company (LLC), L/M Associates, for approximately $4.3 million in cash and
properties. The LLC was formed to develop and lease real estate in central
Michigan.
Effective January 1, 1997, Maxco acquired a 15% interest in Strategic
Interactive, Inc. which provides web based training, education and other
corporate communications solutions for companies. In 1998, the Company increased
its investment in Strategic Interactive to 45%.
Maxco also has an investment of approximately 7% of the common stock of Axson,
S.A., of France, a manufacturer of resins and composite materials for advanced
applications.
Effective January 1, 1998, Maxco acquired a 33% interest in AMI Energy, Inc.,
which is a client based wholesale distributor of natural gas in the Midwest.
Effective November 1, 1997, Maxco acquired a 50% interest in Robinson Oil
Company, LLC, which is in the business of acquiring and developing oil and gas
interests.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 10 - OTHER INVESTMENTS - Continued
The combined results of operations and financial position of the Company's
unconsolidated affiliates are summarized below.
<TABLE>
<CAPTION>
March 31,
1998
--------------
(in thousands)
<S> <C>
Condensed income statement information:
Net sales 43,059
Gross margin 5,247
Income (loss) from continuing operations (9,204)
Net income (loss) (9,204)
Condensed balanced sheet information:
Current assets 33,290
Non-current assets 47,164
Current liabilities 46,220
Non-current liabilities 11,749
Minority interest 209
</TABLE>
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Maxco and certain subsidiaries occupy facilities and use equipment under
operating lease agreements requiring annual rental payments approximating
$1,015,000 in 1999, $864,000 in 2000, $680,000 in 2001, $539,000 in 2002,
$450,000 in 2003, and $455,000 thereafter for a total commitment aggregating
$4,003,000. Rent expense charged to operations, including short-term leases,
aggregated $1,231,000 in 1998, $810,000 in 1997 and $631,000 in 1996.
NOTE 12 - INDUSTRY SEGMENT INFORMATION
The following summarizes Maxco's industry segment information:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Net sales:
Distribution - construction supplies unit $50,667 $45,577 $40,600
Heat treating 33,328 8,254
Packaging products 18,200 19,991 18,789
Corporate and other 349 455 (59)
--------- ---------- ----------
TOTAL NET SALES $102,544 $74,277 $59,330
========= ========== ==========
Operating income (loss):
Distribution - construction supplies unit $ 2,819 $ 1,954 $ 1,975
Heat treating 4,452 1,201
Packaging products (431) 645 243
Corporate and other (1,528) (1,354) (1,869)
--------- ---------- ----------
TOTAL OPERATING EARNINGS 5,312 2,446 349
Interest expense, investment income and
equity in earnings of affiliates (3,146) (551) (4,181)
--------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES $ 2,166 $ 1,895 $(3,832)
========= ========== ==========
</TABLE>
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
NOTE 12 - INDUSTRY SEGMENT INFORMATION - Continued
1998 1997 1996
---------------- --- ---------------- --- ---------------
(in thousands)
<S> <C> <C> <C>
Identifiable assets:
Distribution - construction supplies unit $ 11,863 $ 9,707 $ 8,246
Heat treating 23,058 17,522
Packaging products 7,543 7,126 7,679
Corporate and other 17,778 21,616 9,316
Investments and advances 15,813 12,190 5,121
Net assets of discontinued operations 27,169
---------------- ---------------- ---------------
$ 76,055 $ 68,161 $ 57,531
================ ================ ===============
Depreciation and amortization expense:
Distribution - construction supplies unit $ 487 $ 434 $ 284
Heat treating 1,186 260
Packaging products 585 541 485
Corporate and other 223 169 106
---------------- ---------------- ---------------
$ 2,481 $ 1,404 $ 875
================ ================ ===============
Capital expenditures:
Distribution - construction supplies unit $ 667 $ 641 $ 1,629
Heat treating 5,378 9,788
Packaging products 1,371 246 953
Corporate and other 85 95 2,590
---------------- ---------------- ---------------
$ 7,501 $ 10,770 $ 5,172
================ ================ ===============
</TABLE>
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.
No sales to any single customer exceeded 10% of consolidated sales for 1998,
1997 or 1996.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 13 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
(in thousands except per share data)
<S> <C> <C> <C>
NUMERATOR:
Income (loss) from continuing operations $1,411 $ 1,232 $(2,599)
Income (loss) from discontinued operations 21,322 (94)
-------- --------- -------
Net income (loss) 1,411 22,554 (2,693)
Preferred stock dividends (390) (236) (204)
-------- --------- -------
NUMERATOR FOR BASIC EARNING PER SHARE--INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS
Continuing operations 1,021 996 (2,803)
Discontinued operations 21,322 (94)
-------- --------- -------
Net income (loss) 1,021 22,318 (2,897)
Effect of dilutive securities:
Preferred stock dividends 81
------ --------- -------
NUMERATOR FOR DILUTED EARNINGS PER SHARE--INCOME (LOSS)
TO COMMON STOCKHOLDERS AFTER ASSUMED CONVERSIONS
Continuing operations 1,021 1,077 (2,803)
Discontinued operations 21,322 (94)
------ --------- -------
Net income (loss) $1,021 $ 22,399 $(2,897)
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE--
WEIGHTED-AVERAGE SHARES 3,379 3,845 4,251
Effect of dilutive securities:
Employee stock options 81 86
Convertible Preferred Stock 174
------ --------- -------
Dilutive potential common shares 81 260
------ --------- -------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE--ADJUSTED
WEIGHTED-AVERAGE SHARES AND ASSUMED CONVERSIONS 3,460 4,105 4,251
====== ========= =======
BASIC EARNINGS PER SHARE
Continuing operations $ .30 $ .26 $ (.66)
Discontinued operations 5.54 (.02)
------ --------- -------
Net income (loss) .30 5.80 (.68)
====== ========= =======
DILUTED EARNINGS PER SHARE
Continuing operations .30 .26 (.66)
Discontinued operations 5.20 (.02)
------ --------- -------
Net income (loss) $ .30 $ 5.46 $ (.68)
====== ========= =======
</TABLE>
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 14 - SUBSEQUENT EVENT
In June 1998, Maxco acquired a one-third interest in Blasen Brogan Asset
Management Company, a Lansing, Michigan based registered investor advisory firm.
35
<PAGE> 36
MAXCO, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
- --------------------------- ----------------------- ------------------ -------------------- -------------------- ------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------- ----------------------- ------------------ -------------------- -------------------- ------------------
ADDITIONS
---------------------------------------
Charged to Other
Balance at Charged to Costs Accounts--Describe Balance
DESCRIPTION Beginning and Expenses Deductions-- at End
of Period Describe of Period
- ---------------------------------------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998:
Allowance for doubtful acccounts $ 470 $ 113 $ 18(A) $ 565
Year ended March 31, 1997:
Allowance for doubtful accounts $ 276 $ 303 $ 132(B) $ 241(A) $ 470
Year ended March 31, 1996:
Allowance for doubtful accounts $ 214 $ 174 $ 112(A) $ 276
</TABLE>
(A) Represents uncollectible accounts written off, less recoveries.
(B) Represents allowance for doubtful accounts for acquired business.
36
<PAGE> 37
Exhibit Index
-------------
Exhibit No. Description
- ------------ ------------
10.15 First Amendment to amended and restated loan agreement between
Comerica Bank and Maxco, Inc. dated August 1, 1997.
10.16 Second amendment to amended and restated loan agreement between
Comerica Bank and Maxco, Inc. dated June 24, 1998.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors (Form S-8 filed June 2, 1992 -
File No. 33-48351)
27 Financial Data Schedules
<PAGE> 1
EX-10.15
FIRST AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (the "First
Amendment") dated as of the 1st day of August, 1997, by and among Maxco, Inc., a
Michigan Corporation (hereinafter referred to as the "Borrower"), and Comerica
Bank, a Michigan banking corporation (hereinafter referred to as the "Bank").
W I T N E S S E T H
WHEREAS, Borrower and Bank entered into a certain Amended and Restated
Loan Agreement dated September 30, 1996, (the "Agreement");
WHEREAS, the borrower and the Bank desire to amend certain of the
covenants set forth in the Agreement; NOW, THEREFORE, in consideration
of the premises and the mutual covenants herein contained, the Borrower
and the Bank hereby agree as follows:
1. In Sub-Section 1.1 of Section 1 of the Agreement, the following
definition is hereby deleted in its entirety and replaced by the following or
added entirely:
"Termination Date" shall mean, as to the Revolving Credit Loan, August
1, 1999, (or such earlier date on which the Borrower shall permanently
terminate the Bank's commitment under section 2.8.1 of this Agreement).
2. Except as specifically modified hereby, the terms and conditions of
the Agreement and the Notes remain in full force and effect and the undersigned
hereby ratify and agrees to be bound by the terms of the Agreement as hereby
amended.
3. Neither the extension of this First Amendment by the Bank, nor any
other act or omission by the Bank in connection herewith, shall be deemed a
waiver by the Bank of any default under the Agreement.
-1-
<PAGE> 2
IN WITNESS WHEREOF, the Borrower and the Bank have caused this First
Amendment to be executed by their duly authorized officers as of the day and
year first written above.
MAXCO, INC.
By /s/ Vincent Shunsky
---------------------------
Vincent Shunsky
Its Vice President
COMERICA BANK
By /s/ David G. Grantham
----------------------------
David G. Grantham
Its Vice President
The Undersigned Guarantors hereby acknowledge and consent to the above
First Amendment.
Ersco Corporation, a division of Maxco, Inc. Pak-Sak Industries, Inc.
By /s/ Vincent Shunsky By /s/ Vincent Shunsky
------------------------ -----------------------
Vincent Shunsky Vincent Shunsky
Its Vice President Its Treasurer
Wisconsin Wire & Steel, Inc.
By /s/ Vincent Shunsky
-------------------------
Vincent Shunsky
Its Treasurer
-2-
<PAGE> 1
EX-10.16
SECOND AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
DATED AS OF SEPTEMBER 30, 1996
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN
AGREEMENT (the "Second Amendment") dated as of the 24th day of June, 1998, by
and among MAXCO, INC., a Michigan Corporation ("Borrower") and COMERICA BANK, a
Michigan banking corporation ("Bank").
W I T N E S S E T H
WHEREAS, Borrower and Bank entered into a certain Amended and Restated
Loan Agreement dated September 30, 1996, as amended by First Amendment thereto
dated as of August 1, 1997 (the "Agreement");
WHEREAS, Borrower, in addition to other credit facilities provided for
in the Agreement, desires to borrow up to $5,000,000 (subject to restrictions
provided herein) from the Bank from time to time for the acquisition financing
needs of the Borrower's wholly owned subsidiary Ersco Corporation, a Michigan
corporation ("Ersco") ("Phase I Ersco Acquisition");
WHEREAS, Borrower, in addition to other credit facilities provided for
in the Agreement and the Phase I Ersco Acquisition Facility, desires to borrow
up to additional $5,000,000 (subject to restrictions provided herein) from the
Bank from time to time, after the Phase I Ersco Acquisition Facility is fully
drawn down, for additional acquisition financing needs of Ersco ("Phase II Ersco
Acquisition"); and
WHEREAS, the Borrower and the Bank now desire to amend certain of the
covenants and restrictions set forth in the Agreement;
-1-
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Borrower and the Bank hereby agree as follows:
1. In Sub-Section 1.1 of Section 1 of the Agreement, the following
definitions are hereby deleted in their entirety and replaced by the following
or added entirely:
"Accounts," "Chattel Paper," "Documents," "Equipment,"
"Fixtures," "General Intangibles," "Goods," "Instruments," and
"Inventory" shall have the meanings assigned to them in the UCC on the
date of this Agreement.
"Approved Ersco Acquisition(s)" shall mean business
acquisitions for Ersco prepared by the Borrower, which are approved in
writing by the Bank, which approval shall not be unreasonably withheld.
"Atmosphere Annealing" shall mean Atmosphere Annealing, Inc.,
a Michigan corporation.
"Consolidated Funded Debt" shall mean, as of any applicable
date of determination, that portion of consolidated Debt which consists
of (a) indebtedness for borrowed money, including indebtedness for
borrowed money which is evidenced by notes, bonds, debentures or other
similar instruments or (b) obligations under installment sales
contracts or capital leases, less Liquid Assets of Borrower and/or the
Guarantors as of the applicable date.
"Ersco" shall mean Ersco Corporation, a Michigan corporation.
"Ersco Collateral" shall mean the any property of Ersco,
including but not limited to, any property in the possession of the
Bank, any amount in any deposit account of the Ersco with the Bank, any
real property, any securities owned by Ersco in any acquired
subsidiaries, all of Ersco's Accounts, Chattel Paper, Documents,
Equipment, Fixtures, General Intangibles, Goods, Instruments and
Inventory, wherever located and whether or not owned or hereafter
acquired, together with all replacements thereof, substitutions
therefor and all proceeds hereof.
"Financing Statements" shall mean UCC financing statements
describing the Bank as secured party and the Borrower, Ersco or a
Guarantor as debtor covering the Collateral or the Ersco Collateral, as
provided in this Agreement, and otherwise in such form, for filing in
such jurisdictions and with such filing offices as the Bank shall
reasonably deem necessary or advisable.
"Guarantors" shall mean Akemi, Ersco, Pak-Sak, Wisconsin and
Atmosphere Annealing.
-2-
<PAGE> 3
"Mortgages" shall mean one or more continuing collateral
mortgages in such form as shall be required by the Bank to perfect a
security interest in the Akemi Real Estate.
"Note" shall mean the Revolving Credit Note, the Revolving
Ersco Acquisition Note or the Term Note and "Notes" shall mean each of
the Revolving Credit Note, the Revolving Ersco Acquisition Note and the
Term Note.
"Phase I Ersco Acquisition Commitment Amount" shall mean
$5,000,000 (or such lesser amount to which the Phase I Ersco
Acquisition Commitment Amount may be reduced by the Borrower from time
to time under Section 2.8.1 of this Agreement), which commitment shall
be only for use in Phase I Ersco Acquisitions.
"Phase II Ersco Acquisition Commitment Amount" shall mean
$5,000,000 (or such lesser amount to which the Phase II Ersco
Acquisition Commitment Amount may be reduced by the Borrower from time
to time under Section 2.8.1 of this Agreement), which commitment shall
be only for use in Phase II Ersco Acquisitions.
"Revolving Ersco Acquisition Note" shall mean a promissory
note conforming to Section 2.3(c) of this Agreement and in the form of
Exhibit A-3 to this Agreement.
"Revolving Ersco Acquisition Loan" shall mean an advance made
by the Bank to the Borrower under Section 2.1(d) of this Agreement on a
Disbursement Date for a Phase I Ersco Acquisition or a Phase II Ersco
Acquisition.
"Security Agreements" shall mean security agreements in such
form as shall be required by the Bank pursuant to this Agreement, which
the Borrower, Ersco and the Guarantors have previously or in the future
will grant, to the Bank, security interests in the Collateral and/or
the Ersco Collateral, as applicable, now owned or hereafter acquired,
together with all replacements thereof, substitutions therefor and all
proceeds thereof, for the purpose of securing Term Loans and/or the
Revolving Ersco Acquisition Loans.
"Series Four Preferred Stock" shall mean 46,414 issued shares
of 10% Maxco, Inc. preferred stock.
"Series Five Preferred Stock" shall mean 6,680 issued shares
of 10% Maxco, Inc. preferred stock.
"Termination Date" shall mean, as to the Revolving Credit Loan
and the Revolving Ersco Acquisition Loan, August 1, 1999 (or such
earlier date on which the Borrower shall permanently terminate the
Bank's commitment under Section 2.8.1 of this Agreement).
2. There shall be added a new Sub-Sub-Section 2.1(d) to Sub-Section 2.1
of Section 2 which shall read as follows:
-3-
<PAGE> 4
2.1 Commitment. (d) Subject to the terms and conditions of
this Agreement, the Bank agrees to make loans to the Borrower for
Approved Ersco Acquisitions on a revolving basis of such amount as the
Borrower shall request pursuant to Section 2.2 of this Agreement at any
time from the date of this Agreement until the Termination Date, up to
an aggregate principal amount outstanding at any time not to exceed the
sum of the Phase I Ersco Acquisition Commitment Amount and the Phase II
Ersco Acquisition Commitment Amount, provided that each Disbursement
Date under this Agreement must be a Business Day, and the principal
amount of each Revolving Ersco Acquisition Loan made under this
Agreement shall be in the aggregate amount of $10,000 or an integral
multiple thereof, and provided further, that the principal amount of
each Revolving Ersco Acquisition Loan made under this Agreement, for
which Borrower elects to pay interest at the Eurodollar-based Rate,
shall be in the aggregate amount of $1,000,000 or greater in $500,000
increments thereafter.
3. Sub-Sub-Section 2.2.1 of Sub-Section 2.2 of Section 2 is hereby
deleted in its entirety and replaced by the following:
2.2.1 Notice of Request for Loan and Letters of Credit. The
Borrower may with the consent of the Bank request a Revolving Loan, a
Revolving Ersco Acquisition Loan, a Term Loan or a Letter of Credit and
make payments thereon by written, telephonic or other approved form of
electronic authorization to the Bank in accordance with such terms and
procedures as the Bank shall from time to time establish.
4. A new Sub-Sub-Section 2.2.2(e) of Sub-Section 2.2 of Section 2 are
replaced and added by the following:
2.2.2 Bank Obligation to Make Loans or to Issue Letters of
Credit. The Bank agrees to make the Revolving Loan, the Revolving Ersco
Acquisition Loan or the Term Loan, or to issue the Letter of Credit, on
the Disbursement Date as set forth in a notice to the Bank from the
Borrower conforming to the requirements of Section 2.2.1 by crediting
the Borrower's general deposit account with the Bank in the amount of
such Revolving Loan, Revolving Ersco Acquisition Loan or Term Loan, or
by delivering the Letter of Credit to the Borrower, provided, however,
that the Bank shall not be so obligated if:
. . .
(c) Any such proposed Revolving Ersco Acquisition Loan would
cause the aggregate unpaid principal amount of the Revolving Ersco
Acquisition Loans outstanding under this Agreement to exceed the sum of
the Phase I Ersco Acquisition Commitment Amount and the Phase II Ersco
Acquisition Commitment Amount.
5. There shall be added a new Sub-Sub-Section (c) to Sub-Section
2.3 to Section 2 which shall read as follows:
-4-
<PAGE> 5
(c) Revolving Ersco Acquisition Note. The Revolving Ersco
Acquisition Loans shall be evidenced by the Revolving Ersco Acquisition
Note, executed by the Borrower, dated the date of this Agreement,
payable to the Bank on the Termination Date (unless sooner accelerated
pursuant to the terms of this Agreement), and in the principal amount
of the sum of the Phase I Ersco Acquisition Commitment Amount and the
Phase II Ersco Acquisition Commitment Amount. The date and amount of
each Revolving Ersco Acquisition Loan made by the Bank and of each
repayment of principal thereon received by the Bank shall be recorded
by the Bank in its records. The aggregate unpaid principal amount so
recorded by the Bank shall constitute the best evidence of the
principal amount owing and unpaid on the Note, provided, however, that
the failure by the Bank so to record any such amount or any error in so
recording any such amount (whether on the schedule attached to the
Revolving Ersco Acquisition Note or otherwise) shall not limit or
otherwise affect the obligations of the Borrower under this Agreement
or the Revolving Ersco Acquisition Note to repay the principal amount
of all the Revolving Ersco Acquisition Loans together with all interest
accrued or accruing thereon.
6. There shall be added a new Sub-Section 2.4(c) to Section 2
which shall read as follows:
(c) The Revolving Ersco Acquisition Note shall bear interest
on the outstanding principal balance from time to time outstanding at a
rate equal to the Prime Rate, less one-half of one percent (.5%), or
the Eurodollar-based Rate, as elected by the Borrower under the terms
of the Revolving Ersco Acquisition Note, until maturity, whether by
acceleration or otherwise, and thereafter at a rate equal to three
percent (3%) per annum plus the rate otherwise prevailing hereunder.
Interest shall be payable in accordance with the terms of the Revolving
Ersco Acquisition Note.
7. There shall be added a new Sub-Section 2.6.5 to Section 2
which shall read as follows:
2.6.5 Revolving Ersco Acquisition Commitment Fee. The Borrower
agrees to pay to the Bank a revolving credit commitment fee for the
period from and including the date of this Agreement to the Termination
Date equal to (a) one-quarter of one percent (1/4%) per annum (i) of
the Phase I Ersco Acquisition Commitment Amount until the date of the
first request for a draw against the Phase II Ersco Acquisition
Commitment Amount and then (ii) of the Phase II Ersco Acquisition
Commitment Amount plus (b) one-quarter of one percent (1/4%) per annum
on the average daily difference between (i) the Phase I Ersco
Acquisition Commitment Amount and the aggregate unpaid principal
balance of the Revolving Ersco Acquisition Loans until the Phase I
Ersco Acquisition Commitment Amount is fully drawn, and then upon the
first request for a draw against the Phase II Ersco Acquisition
Commitment Amount, (ii) the Phase II Ersco Acquisition Commitment
Amount and the aggregate unpaid principal balance of the Revolving
Ersco Acquisition Loans drawn against
-5-
<PAGE> 6
the Phase II Ersco Acquisition Commitment Amount. Such commitment fees
shall be payable on the last Business Day of each March, June,
September and December during the term of this Agreement, and on the
Termination Date, for the periods ending on such dates.
8. Sub-Section 2.8 of Section 2 is hereby deleted in its
entirety and replaced by the following:
2.8 Changes in Commitment and Prepayments.
2.8.1 Termination or Reduction in Commitment. The Borrower
may, at any time and from time to time, upon at least five (5) Business
Days' prior written notice received by the Bank, permanently terminate
the Bank's commitments under this Agreement or permanently reduce the
Commitment Amount, the Phase I Ersco Acquisition Commitment Amount or
the Phase II Ersco Acquisition Commitment Amount by an integral
multiple of $500,000, provided, however, that the Borrower, on the
effective date of such termination or reduction, (a) shall pay to the
Bank, in the case of a termination, the aggregate unpaid principal
amount of all Revolving Loans, Revolving Ersco Acquisition Loans and
Term Loans (together with, in the case of Term Loans, any prepayment
penalty or premium provided by the Term Notes or otherwise required by
the Bank) and shall deposit with the Bank in cash an amount (adjusted,
as deemed necessary by the Bank, for any applicable reserve or other
requirements) equal to the Bank's maximum liability under all Letters
of Credit then outstanding, or (b) shall pay to the Bank, in the case
of a reduction, the amount, if any, by which the aggregate unpaid
principal amount of all Revolving Loans exceeds the then reduced
Commitment Amount, together in either case with all interest accrued
and unpaid on the principal amounts so prepaid, and/or (c) shall pay to
the Bank, in the case of a reduction, the amount, if any, by which the
aggregate unpaid principal amount of all Revolving Ersco Acquisition
Loan exceeds the then reduced sum of the Phase I Ersco Acquisition
Commitment Amount and the Phase II Ersco Acquisition Commitment Amount,
together in either case with all interest accrued and unpaid on the
principal amounts so prepaid. After any such reduction, the commitment
fee provided under Section 2.6.1 of this Agreement shall be calculated
on the Commitment Amount and the sum of the Phase I Ersco Acquisition
Commitment Amount and the Phase II Ersco Acquisition Commitment Amount,
as so reduced and the such commitment amounts may not be increased or
otherwise reinstated without the express written agreement of the Bank.
2.8.2 Mandatory Prepayments. In addition to the mandatory
prepayment required under Section 2.8.1 of this Agreement, the Borrower
shall pay to the Bank the amount, if any, by which the aggregate unpaid
principal amount of all Revolving Loans from time to time exceeds the
Commitment Amount, together with all interest accrued and unpaid on the
amount of such excess, but without other premium or penalty. Such
prepayment shall be immediately due and owing upon the occurrence of
any such excess, provided, however, that any mandatory prepayment made
under this Section 2.8.2 shall not reduce the Commitment Amount.
-6-
<PAGE> 7
2.8.3 Optional Prepayments.
(a) The Borrower may, at any time and from time to
time, upon at least one (1) Business Day's prior written
notice received by the Bank, prepay the unpaid principal
amount of the Revolving Loans in whole or in part without
premium or penalty, provided, however, that any such optional
prepayment shall be made in an integral multiple of $10,000
and provided, further, that any optional prepayment made under
this Section 2.8.3 shall not reduce the Commitment Amount.
(b) The Borrower may prepay the unpaid principal
amount of the Term Loans only if permitted by, and on the
terms of, the Term Notes.
2.8.4 Payments Under Revolving Ersco Acquisition Loans.
Principal payments required under a Revolving Ersco Acquisition Loan
will be predicated on the amounts outstanding and will be defined prior
to any Revolving Ersco Acquisition Loan and shall provide for an
amortization period of up to seven (7) years, as determined by the
Bank, with payments commencing within six (6) months following the date
of the Revolving Ersco Acquisition Loan.
9. Section 3 is hereby deleted in its entirety and replaced by the
following:
SECTION 3. SECURITY.
3.1 Term Loans. To secure full and timely performance of the
Borrower's covenants set out in this Agreement relating to the Term
Loans and to secure the repayment of the Term Notes the Borrower agrees
to grant and assign, and to cause the Guarantors to grant and assign,
Purchase Money Security Interests and other security interests in the
Collateral pursuant to the Security Agreements, the Financing
Statements, the Mortgages and other instruments and agreements
satisfactory to the Bank. Any security interest in Collateral securing
a Term Loan shall also be deemed as security for all other Term Loans
made pursuant to this Agreement.
3.2 Revolving Ersco Acquisition Loans. To secure full and
timely performance of the Borrower's covenants set out in this
Agreement relating to the Revolving Ersco Acquisition Loans and to
secure the repayment of the Revolving Ersco Acquisition Note the
Borrower agrees to cause Ersco to grant and assign security interests
in the Ersco Collateral pursuant to the Security Agreements, the
Financing Statements, the Mortgages and other instruments and
agreements satisfactory to the Bank. Any security interest in Ersco
Collateral securing a Revolving Ersco Acquisition Loan shall also be
deemed as security for all other Revolving Ersco Acquisition Loans made
pursuant to this Agreement ("Ersco Security Interests"), including
loans for both Phase I Ersco Acquisitions and Phase Ii Ersco
Acquisitions. Notwithstanding anything contained herein to the
contrary, the Ersco Security
-7-
<PAGE> 8
Interests shall be granted to the Bank contemporaneously with the
first request by Borrower for a Revolving Ersco Acquisition Loan for
a Phase II Ersco Acquisition.
10. Section 5.5 of Section 5 is hereby deleted in its entirety and
is replaced by the following:
5.5 Subsidiaries. The Guarantors are wholly owned Subsidiaries
of the Borrower. The Borrower also owns approximately (i) 24% of the
capital stock of Medar, (ii) 100% of the capital stock of Atmosphere
Annealing, Inc., (iii) 45% of the capital stock of Strategic
Interactive, Inc., (iv) 50% of the membership interests Robinson Oil
Co., L.L.C., (v) 33% of the capital stock of AMI Energy, Inc., (vi) 50%
of the membership interests in L/M Associates, L.L.C. and (vii) 33% of
the capital stock of Blasen Brogan Asset Management Company.
11. Section 5.17 of Section 5 is hereby deleted in its entirety
and is replaced by the following:
5.17 Shares and Shareholders. The Borrower's entire authorized
capital stock consists of 10,000,000 shares of common stock, $1.00 par
value, and 100,000 shares of Preferred Stock, of which 14,988 shares of
Series Three Preferred Stock are issued and outstanding; of which
46,414 shares of Series Four Preferred Stock are issued and
outstanding; and of which 6,680 shares of Series Five Preferred Stock
are issued and outstanding. The Guarantors' entire outstanding capital
stock is owned both beneficially and of record by the Borrower, and the
Guarantors' authorized and outstanding capital stock consists of the
following:
<TABLE>
<CAPTION>
Authorized Outstanding
Guarantor: Capital Stock: Par Value: Capital Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Akemi 50,000 $ 1.00 1,000
Atmosphere Annealing 60,000 N/A 1,000
Ersco Corp. 60,000 N/A 1,000
Pak-Sak 5,000 $10.00 3,768
Wisconsin Common 1,250 no par 290
Preferred 250 $100.00 250
</TABLE>
The Borrower owns 2,130,605 shares of the outstanding capital stock of
Medar, which constitutes approximately 24% of the aggregate outstanding
capital stock of Medar and those interest disclosed in Section 5.5.
Except as disclosed on Schedule 5.17, there are no outstanding options,
warrants or rights to purchase, nor any agreement for the subscription,
purchase or acquisition of, any shares of the capital stock of the
Borrower or any Subsidiary.
12. Section 6.6 of Section 6 is hereby deleted in its entirety
and is replaced by the
-8-
<PAGE> 9
following:
6.6 Maintain Consolidated Funded Debt to EBITDA. On a
consolidated basis, maintain the ratio of Consolidated Funded Debt to
earnings before interest, taxes, depreciation and amortization
(determined on a rolling four quarters basis) ("EBITDA") of not more
than (a) 3.20 to 1.0 from the date of this Agreement and the date upon
which a Revolving Ersco Acquisition Loan is requested by Borrower for a
Phase II Ersco Acquisition, and (b) 3.80 to 1.0 thereafter until the
Termination Date.
13. There shall be added a new Sub-Section 6.12 to Section 6
which shall read as follows:
6.12 Maintain Debt to Tangible Net Worth. On a consolidated
and proforma (including acquisitions) basis, maintain the ratio of Debt
to Tangible Net Worth of not more than 1.75 to 1.0 from the date upon
which a Revolving Ersco Acquisition Loan is requested by Borrower for a
Phase II Ersco Acquisition to the Termination Date.
14. Section 7.1 of Section 7 is hereby deleted in its entirety
and is replaced by the following:
7.1 Dividends. Declare or pay any dividend (other than
dividends payable solely in shares of its capital stock) on, or make
any other distribution with respect to (whether by reduction of capital
or otherwise), any shares of its capital stock, except that (i)
dividends from any Subsidiary to the Borrower are permitted, (ii)
dividends of up to $110,000 annually on Borrower's Series Three
Preferred Stock are permitted, (iii) dividends of up to $300,000
annually on the Borrower's Series Four Preferred Stock are permitted,
and (iv) dividends of up to $81,000 annually on the Borrower's Series
Five Preferred Stock are permitted.
15. Section 7.2 of Section 7 is hereby deleted in its entirety
and is replaced by the following:
7.2 Stock Issuance. Issue any additional shares of its capital
stock, or any warrant, right or option relating thereto or any security
convertible into any of the foregoing, except (i) pursuant to the
Borrower's employee stock option plan, or (ii) Borrower's Series Five
Preferred Stock but only to the extent such stock was issued on or
prior to June 24, 1998.
16. Section 7.7 of Section 7 is hereby deleted in its
entirety and is replaced by the following:
7.7 Guarantee Obligations. Guarantee or otherwise, directly or
indirectly, in any way be or become responsible for obligations of any
other Person, whether by agreement to purchase the indebtedness of any
other Person, agreement for the furnishing of funds to any other Person
through the furnishing of goods, supplies or services, by way of stock
purchase,
-9-
<PAGE> 10
capital contribution, advance or loan, for the purpose of
paying or discharging (or causing the payment or discharge of) the
indebtedness of any other Person, or otherwise, except for (i) the
endorsement of negotiable instruments by the Borrower or the
Subsidiaries in the ordinary course of business for deposit or
collection, (ii) the guaranty by the Borrower of any and all
obligations of any Subsidiary wholly-owned by Borrower, (iii) the
guaranties by the Borrower listed on Schedule 5.12 of this Agreement.
17. Section 7.10 of Section 7 is hereby deleted in its entirety
and is replaced by the following:
7.10 Acquire Securities. Purchase or hold beneficially any
stock or other securities of, or make any investment or acquire any
interest whatsoever in, any other Person except for the common stock of
or ownership interests in the Guarantors, Medar Subordinated Debt
Securities, Atmosphere Annealing, Strategic Interactive, Inc., Robinson
Oil Co., L.L.C., AMI Energy, Inc., L/M Associates, L.L.C., and Blasen
Brogan Asset Management Company, in each case limited to the interest
owned by the Borrower on the date of this Second Amendment to the
Agreement, and except for certificates of deposit with maturities of
one year or less of United States commercial banks with capital,
surplus and undivided profits in excess of $100,000,000, direct
obligations of the United States Government maturing within one year
from the date of acquisition thereof, and high grade commercial paper
and high grade fixed-income securities (e.g., corporate bonds).
18. Except as specifically modified hereby, the terms and
conditions of the Agreement and the Notes remain in full force and
effect and the undersigned hereby ratify and agrees to be bound by the terms of
the Agreement as hereby amended.
19. Neither the extension of this Second Amendment by the Bank,
nor any other act or omission by the Bank in connection herewith, shall
be deemed a waiver by the Bank of any default under the Agreement.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the Borrower and the Bank have caused this Second
Amendment to be executed by their duly authorized officers as of the day and
year first written above.
MAXCO, INC.
By /s/ Vincent Shunsky
-------------------------
Vincent Shunsky
Its Vice President
COMERICA BANK
By /s/ David G. Grantham
-------------------------
David G. Grantham
Its Vice President
-11-
<PAGE> 12
The Undersigned Guarantors hereby acknowledge and consent to the above
Second Amendment.
Akemi Plastics, Inc.
By /s/ Vincent Shunsky
-------------------------
Vincent Shunsky
Its Treasurer
Ersco Corporation Pak-Sak Industries, Inc.
By /s/ Vincent Shunsky By /s/ Vincent Shunsky
------------------------ ----------------------
Vincent Shunsky Vincent Shunsky
Its Treasurer Its Treasurer
Wisconsin Wire & Steel, Inc. Atmosphere Annealing, Inc.
By /s/ Vincent Shunsky By /s/ Vincent Shunsky
------------------------ -----------------------
Vincent Shunsky Vincent Shunsky
Its Treasurer Its Treasurer
-12-
<PAGE> 1
MAXCO, INC. AND SUBSIDIARIES
EXHIBIT 21 - SUBSIDIARIES OF MAXCO, INC.
SUBSIDIARIES OF MAXCO, INC.
<TABLE>
<CAPTION>
State of
Incorporation
-------------
<S> <C>
Atmosphere Annealing, Inc. Michigan
Ersco Corporation Michigan
Wisconsin Wire & Steel, Inc. Wisconsin
(subsidiary of Ersco Corporation)
Ersco of Michigan, Inc. Michigan
Pak-Sak Industries, Inc. Michigan
GUM, Inc. (formerly Ultra-Mag Industries, Inc.) (Inactive) Michigan
Parcco, Inc. (Inactive) Michigan
T.H.&P. Corporation (formerly Planet Corporation) (Inactive) Michigan
</TABLE>
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement (Form S-8
No. 33-48351) pertaining to the Maxco, Inc. Incentive Stock Option Plan and in
the related prospectus of our report dated May 29, 1998 (except Note 14, as to
which the date is June 19, 1998), with respect to the consolidated financial
statements and schedule of Maxco, Inc. included in the Annual Report (Form 10-K)
for the year ended March 31, 1998.
ERNST & YOUNG, LLP
Detroit, Michigan
June 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-K FOR THE YEAR ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,040
<SECURITIES> 400
<RECEIVABLES> 16,845
<ALLOWANCES> 565
<INVENTORY> 3,579
<CURRENT-ASSETS> 21,602
<PP&E> 32,139
<DEPRECIATION> 8,321
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