<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, 1999
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)
Michigan 38-1792842
-------- ----------
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) 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)
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 (ss. 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, 1999: $12,063,400.
At May 31, 1999, there were outstanding 3,193,195 shares of Registrant's common
stock.
Documents Incorporated By Reference
-----------------------------------
Portions of the annual proxy statement for the year ended March 31, 1999 are
incorporated by reference into Part III.
================================================================================
1
<PAGE> 2
MAXCO, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ------------------------------------------------------------- -----
<S> <C> <C>
1 Business 3
2 Properties 7
3 Legal Proceedings 8
4 Submission of Matters to a Vote of Security Holders 8
5 Market for Registrant's Common Equity and Related
Shareholder Matters 8
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
7A Quantitative and Qualitative Disclosures About
Market Risk 14
8 Financial Statements and Supplemental Data 14
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
10 Directors and Executive Officers of the Registrant 14
11 Executive Compensation 14
12 Security Ownership of Certain Beneficial Owners
and Management 14
13 Certain Relationships and Related Transactions 15
14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 15
Signatures 17
List of Financial Statements and Financial
Statement Schedules 18
</TABLE>
2
<PAGE> 3
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 construction supplies company; Atmosphere Annealing Inc., a
production metal heat treating service company; and Pak-Sak Industries Inc.,
which makes polyethylene packaging. Maxco also has investments in three real
estate development companies: L/M Associates, LLC, LandEquities Corporation, and
Nilson Builders. In addition to real estate, Maxco also has investments in a
registered investor advisory firm, three technology-related businesses, two
energy-related businesses, and a company in the business of selling, leasing,
and servicing lift trucks.
The Company had several notable events occur during the year ended March 31,
1999. Maxco's construction supplies segment purchased a business in the
Columbus, Ohio market. In addition, Maxco acquired a one-third interest in
Blasen Brogan Asset Management Company, a Lansing, Michigan based registered
investor advisory firm; acquired a 50% equity interest in and agreed to finance
certain debt of Mid-State Industrial Services, Inc., which is in the business of
selling, leasing, and servicing lift trucks; and acquired a 40% equity interest
in Foresight Solutions, Inc., a software developer whose customers primarily are
in the light manufacturing and distribution industries. The Company also made
additional investments in its real estate activity as it acquired a 50% interest
in LandEquities and Nilson Builders, companies that manage, develop, and build
commercial and residential property.
The Company sold its 45% equity interest in Strategic Interactive, Inc. to
Provant, Inc. for cash and approximately 249,000 shares of Provant's stock in
October 1998 when Provant acquired 100% of the stock of Strategic Interactive.
Maxco's investment activities during the year ended March 31, 1998 included the
following: 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 retail energy marketing and
consulting firm.
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 400 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. 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
Ersco Corporation
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, Illinois, Indiana,
Kentucky, Missouri, Ohio and Wisconsin. Warehouses are located in Detroit, Grand
Rapids, Saginaw and Traverse City, Michigan; South Bend, Indiana; Louisville,
Kentucky; Columbus, Ohio; and Milwaukee, Wisconsin. A sales office is located in
metropolitan Chicago, which specializes in product sales to highway contractors
on a direct shipment basis from the manufacturers. On April 1, 1999, Ersco
acquired a branch location in the St. Louis, Missouri metropolitan area.
Competition is intense and larger project orders are secured on a competitive
bid basis. During the years ended March 31, 1999, 1998, and 1997, net sales of
the construction supplies group were approximately 58%, 49% and 61%,
respectively, of consolidated net sales.
3
<PAGE> 4
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 50 days sales on hand and represented 60% of Maxco's total inventories at
March 31, 1999. 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 receivables are
secured by perfected lien rights and payment bonds.
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, the activities of this segment 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
400 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
traditionally small and consist mainly of steel inventory, various lubricants
and other materials used in the heat treating, phosphate coating or bar shearing
and sawing process. Inventories of this segment represent 9% of Maxco's total
inventories at March 31, 1999. 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 29%, 33%,
and 11% of consolidated net sales for the years ended March 31, 1999, 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.
4
<PAGE> 5
The customers served by this unit are primarily industrial customers, food
packagers, and specialty distributors. 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 44 days sales on
hand and represented 31% of Maxco's total inventories at March 31, 1999. Credit
policies are enforced to help insure that increases in accounts receivable are
primarily related to volume increases.
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, 1999, 1998, and 1997. The segment is not
dependent on any patents, trademarks, licenses, franchises or concessions. This
segment accounted for approximately 13%, 18% and 28% of consolidated net sales
for the years ended March 31, 1999, 1998, and 1997, respectively.
For additional information regarding the Company's industry segments, see Note
12 to "Notes to Consolidated Financial Statements."
INVESTMENT IN REAL ESTATE
Effective January 1, 1997, Maxco acquired a 50% interest in L/M Associates, LLC
(L/M), a company formed to develop and lease real estate. L/M has an interest,
along with other third party investors, in a real estate portfolio having an
aggregate market value of approximately $130 million at March 31, 1999. This
portfolio consists of properties located in central Michigan, and includes
approximately 70 offices and retail buildings, and more than 235 acres of
property zoned for commercial retail development and residential building sites.
In addition, in 1999, the Company made additional investments in related real
estate businesses as it acquired a 50% interest in LandEquities Corporation
(LandEquities) and Nilson Builders and Associates, Inc. (Nilson).
LandEquities is primarily engaged in construction, management, leasing, and
space planning for its clients including the L/M Companies' portfolio. Nilson is
a residential homebuilder that constructs custom single family homes as well as
pre-designed homes.
The following table details key statistics related to properties in the real
estate portfolio of Maxco's joint venture.
<TABLE>
<CAPTION>
Year Ended
March 31, 1999
------------------------------------
(in thousands)
Under
Leased Development
---------------- ----------------
<S> <C> <C>
Square footage 665 250
Net rental income $7,600 (1)
Estimated fair market value $68,000 (2) $62,000
Outstanding debt $47,000 $29,000
Funds from operations $ 773
</TABLE>
(1)Includes rents on facilities for less than a full year of occupancy.
(2)Based on appraised value at the time of closing of end financing.
5
<PAGE> 6
OTHER INVESTMENTS
In addition to its investment in various real estate entities, the Company has
other investments in 50% or less owned affiliates.
Medar, Inc. develops, manufactures, and markets microprocessor-based process
monitoring and control systems related to resistance welding and optical
inspection for use in industrial manufacturing environments. Subsequent to March
31, 1999, Medar agreed to sell its welding division for cash. After the
completion of this transaction, which is subject to shareholder approval, Medar
will change its name to Integral Vision. The principal application for Integral
Vision products will be optical inspection systems. As of March 31, 1999,
Maxco's ownership of Medar's Common Stock was approximately 24%.
Investments which were acquired in the current fiscal year include the
following: a one-third interest in Blasen Brogan Asset Management Company, a
Lansing, Michigan based registered investor advisory firm; a 50% equity interest
in Mid-State Industrial Services, Inc., which is in the business of selling,
leasing, and servicing lift trucks; and a 40% equity interest in Foresight
Solutions, Inc., a software developer, whose customers primarily are in the
light manufacturing and distribution industries.
Prior to 1999, Maxco made investments in the following: approximately 7% of the
common stock of Axson, S.A., of France, a manufacturer of resins and composite
materials for advanced applications; a 33% interest in AMI Energy, Inc., which
is a retail energy marketing and consulting firm; and a 50% interest in Robinson
Oil Company, LLC, which is in the business of acquiring and developing oil and
gas interests.
DISCONTINUED OPERATIONS
Maxco's discontinued operations for the year ended March 31, 1997, included
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 1999,
1998, or 1997.
ENVIRONMENTAL FACTORS
Compliance by Maxco and its subsidiaries with environmental protection laws had
no material effect upon capital expenditures, earnings or competitive position.
EMPLOYEES
At March 31, 1999, Maxco and its wholly owned subsidiaries employed
approximately 700 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, 1999, 1998, or 1997.
6
<PAGE> 7
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, 1999. The
Company considers its facilities to be in good operating condition.
<TABLE>
<CAPTION>
OWNED/
LOCATION APPROXIMATE SIZE LEASED USE
- -------- ---------------- ------ ---
DISTRIBUTION
------------
Ersco Corporation
- -----------------
<S> <C> <C> <C>
Okemos, MI 7,300 sq ft Leased Administrative offices
Southfield, MI 24,000 sq ft Leased Warehouse and distribution
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
Louisville, KY 11,400 sq ft Leased Warehouse and distribution
Columbus, OH 9,000 sq ft Leased Warehouse and distribution
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.
- --------------------------
Lansing, MI 145,000 sq ft Leased Plant and administrative offices
Lansing, MI 58,000 sq ft Leased Heat treating plant
Canton, OH 160,000 sq ft on 8 acres Owned(A) Heat treating plant
N. Vernon, IN 88,000 sq ft on 6 acres 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 1999 to 2005. Leases expiring within 12 months are expected to be renewed
at substantially the same terms as the present leases.
7
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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, 1999 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>
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
June 30 10-1/4 7
September 30 9-3/8 7-1/4
December 31 9 6
1999 March 31 8-3/4 5-1/2
</TABLE>
No cash dividends on common stock have been paid during any period.
8
<PAGE> 9
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997 1996 1995
(in thousands, except share data)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $124,732 $102,544 $74,277 $59,330 $55,850
Income (loss) from continuing
operations before equity in
earnings of affiliates(1) 1,183 2,784 1,482 (1,098) 1,646
Equity in earnings (loss) of
affiliates, net of deferred tax (395) (1,373) (250) (1,501) 438
Income (loss) from continuing
operations 788 1,411 1,232 (2,599) 2,084
Income (loss) from discontinued
operations(2)(4) 21,322 (94) 2,034
Net income (loss)(1)(2) 788 1,411 22,554 (2,693) 4,118
Net income (loss) per share:(3)
Continuing operations .12 .30 .26 (.66) .43
Discontinued operations 5.20 (.02) .43
Net income (loss) per share $ .12 $ .30 $ 5.46 $ (.68) $ .86
AT MARCH 31:
Total assets $ 85,430 $ 76,055 $68,161 $57,531 $ 48,148
Long-term obligations
(net of current maturities) 32,856 27,698 16,027 26,815 15,369
Working capital 9,858 9,232 7,402 31,551 24,138
</TABLE>
NOTES
(1) Includes a $3.1 million pre-tax gain from subsidiary stock transactions for
the years ended March 31, 1995.
(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.
9
<PAGE> 10
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 1999 compared with 1998, and 1998 compared
with 1997. 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
1999 VERSUS 1998
Net sales increased to $124.7 million in 1999 compared to $102.5 million in
1998. Operating earnings were $3.0 million in 1999 compared to $5.3 million for
the comparable period in 1998. Net income was $788,000 or $.12 per share
assuming dilution compared to last year's $1.4 million or $.30 per share
assuming dilution.
Sales and operating earnings for the years ending March 31, 1999 and 1998 by
each of the Company's segments were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1999 March 31, 1998
-------------------- ---------------------
Operating Operating
Earnings Earnings
Sales (loss) Sales (loss)
----- ------ ----- ------
(in thousands)
<S> <C> <C> <C> <C>
Construction supplies $72,440 $2,538 $50,677 $2,819
Heat treating 35,700 3,434 33,328 4,452
Packaging products 16,251 (1,006) 18,200 (431)
</TABLE>
The growth in sales in 1999 was primarily a result of the $21.8 million increase
for the construction supplies segment. An increase in sales for the
heat-treating segment was offset by a decline in sales for the packaging
products segment.
The growth in net sales at the construction supplies segment was the result of
an increase in same branch sales of approximately 13%, and sales of
approximately $15.5 million generated by new Ersco branches in Illinois, Ohio,
and Kentucky. The same branch sales increase was primarily attributable to
additional activity due to an overall strong general construction market fueled
in part by increased availability of federal highway repair dollars.
Consolidated gross margin (net sales less cost of sales and operating expenses)
increased as a result of the overall sales increase, to $27.3 million or 21.9%
of sales from $24.8 million or 24.2% of sales. The decline in gross margin
percentage was primarily attributable to the construction supplies segment.
Gross margin percentage for this segment was lower as a higher portion of their
increased sales level was product sales on a direct shipment basis, which
generally have a lower gross margin than sales from inventory.
Selling, general, and administrative expenses increased $3.9 million or 22.7% to
$20.9 million from $17.0 million. Selling, general, and administrative expenses
increased at both the construction supplies and heat treating segments. The
increase in selling, general, and administrative expenses for the construction
supplies segment was primarily the result of the increase in sales, additional
operating costs associated with the newly acquired locations, and wage and other
expenses incurred to support the planned growth of this unit. Operating earnings
for this segment were affected by the timing of the acquisition of the Company's
branch in Columbus, Ohio and the startup of its Louisville, Kentucky branch.
Since these locations began operations at the end of the traditional
construction season, they were unable to adequately cover their expense levels
due to limited sales volume during the winter months. In addition, the severity
of the winter, especially in January 1999, affected this units sales levels in
the fourth quarter of the fiscal year. The increase in selling, general, and
administrative expenses by the heat-treating segment was caused primarily by
increased employee benefit expenses plus higher costs incurred in anticipation
of increased sales. The planned sales increase did not occur in part due to a
labor strike at one of its major customers as well as delays which occurred in
making a new process line operationally efficient.
Depreciation and amortization expense increased primarily due to the
amortization of intangibles and additional depreciation related to the
acquisitions at the Company's construction supplies segment. Additions of
property and equipment by the Company's heat-treating and packaging products
segments also contributed to the increase in depreciation expense for the year.
Operating profit decreased from $5.3 million to $3.0 million primarily as a
result of the reduced operating profit for the heat treating segment that
resulted from the additional selling, general, and administrative costs; an
operating loss of approximately $1.0 million which occurred at Maxco's packaging
products segment, due to this segment's lower sales and gross margin percentage;
and additional state tax expense in the current year because tax benefits used
in the prior year were not available at the same level in 1999.
10
<PAGE> 11
1999 VERSUS 1998 - CONTINUED
Net interest expense increased in 1999 from the prior year due to additional
long-term borrowings and a reduction in marketable securities, the proceeds of
which were used for investments in new affiliates, repurchase of the Company's
stock, and additional purchases of property and equipment.
Equity in net loss of affiliates consists of Maxco's share of the operating
results of 50% or less owned entities. On a consolidated basis, equity in net
loss of affiliates, net of tax, was $395,000 for the year ended March 31, 1999,
compared to $1.4 million for the prior year comparable period.
Federal income tax expense in 1999 differs from the amount computed by applying
statutory rates due primarily to a prior year tax adjustment.
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
in 1998 compared to $22.6 million or $5.46 per diluted share in 1997. Income
from discontinued operations for 1997 included a $22.0 million gain from the
sale of FinishMaster.
Sales and operating earnings for the years ended March 31, 1998 and 1997 by each
of the Company's segments were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1998 March 31, 1997
----------------------- ---------------------
Operating Operating
Earnings Earnings
Sales (loss) Sales (loss)
-------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Construction supplies $50,677 $2,819 $45,577 $1,954
Heat treating 33,328 4,452 8,254 1,201
Packaging products 18,200 (431) 19,991 645
</TABLE>
The sales growth in 1998 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 same branch sales.
Consolidated gross margin (net sales less cost of sales and operating expenses)
increased to $24.8 million or 24.2% of sales from $14.8 million or 20.0% of
sales. The inclusion of gross margin generated at Atmosphere Annealing for an
entire year was the primary reason for the increase in gross margin and gross
margin percentage. An increase in gross margin at the construction supplies
segment was offset by a decrease in gross margin at the packaging products
segment.
Selling, general, and administrative expenses increased $6.0 million or 55.0% to
$17.0 million from $11.0 million. The increase was primarily attributable to the
inclusion of selling, general, and administrative expenses at Atmosphere
Annealing for an entire year. An increase in selling, general, and
administrative expenses at the construction supplies segment was partially
offset by a decrease in selling, general, and administrative expenses at the
packaging products segment.
Depreciation and amortization expense increased $1.1 million or 76.7% to $2.5
million from $1.4 million. The increase was primarily attributable to the
inclusion of an entire year of depreciation and amortization for Atmosphere
Annealing. Additions of property and equipment by the Company's heat-treating
and packaging products segments also contributed to the increase in depreciation
expense for the year.
The improved operating earnings in 1998 over the comparable period of 1997 were
due to increased earnings at Ersco, 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 1998. 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.
11
<PAGE> 12
1998 VERSUS 1997 - CONTINUED
Net 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 net 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 charges. As
a result, Maxco reported a charge of $1.6 million, net of deferred tax, as its
share of these losses.
LIQUIDITY AND SOURCES OF CAPITAL
Maxco continued to strengthen its financial condition through operations as net
cash provided by operating activities generated $4.2 million in 1999. The cash
generated from operating activities, proceeds from the redemption of marketable
securities, and the sale of investments were invested in long-term value
opportunities.
Operating activities for 1999 generated cash primarily due to the Company's
income from continuing operations of $788,000 and non-cash charges of
approximately $4.0 million in the current year. The changes in working capital
items resulted primarily from the continuous growth of the construction supplies
segment.
The Company used cash for investing activities with the purchase of a business
by its construction supplies segment, investments in various 50% or less owned
affiliates, and the acquisition of property and equipment. Specifically, during
the period, Maxco acquired a one-third interest in Blasen Brogan Asset
Management Company, a Lansing, Michigan based registered investor advisory firm;
a 50% equity interest in and agreed to finance certain debt of Mid-State
Industrial Services, Inc., which is in the business of selling, leasing, and
servicing lift trucks; a 40% equity interest in Foresight Solutions, a software
developer, whose customers primarily are in the light manufacturing and
distribution industries; and a 50% interest in LandEquities and Nilson Builders,
which are in the business of managing, developing, and building commercial and
residential property.
Cash used in investing activities was partially offset by cash generated from
the sale of marketable securities and the sale of the Company's interest in
Strategic Interactive to Provant, Inc. (see Note 10) for cash and stock. The
transaction contains an earn out provision based on the future performance of
Strategic Interactive over the next three years that could result in additional
compensation to Maxco. The current market price of the Provant stock received in
the sale of Strategic Interactive indicates an unrealized gain of approximately
$802,000, net of deferred tax, at March 31, 1999. As the Company is restricted
from selling the Provant stock for more than one year, in accordance with FASB
115 regarding restrictive securities, this unrealized gain is not included in
the accompanying financial statements.
Net cash provided by financing activities during the year consisted primarily of
proceeds from long-term obligations, offset by repayments on long-term
obligations and the acquisition and retirement of common stock. The Company has
lines of credit totaling $27 million of which approximately $10.0 million was
available at March 31,1999. The lines of credit consisted of a $12 million
unsecured facility (increased to $15.0 million in June 1999), a $5.0 million
facility secured by the assets at Atmosphere, and a $10 million acquisition line
for Ersco acquisitions.
In fiscal 1999, the Company repurchased 140,415 shares of its common stock for
approximately $1.1 million.
At March 31, 1999, the 2,130,605 shares of Medar common stock that Maxco owns
had an aggregate market value of approximately $3.5 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.
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.
12
<PAGE> 13
SEASONAL AND QUARTERLY FLUCTUATIONS
The following table sets forth consolidated operating data for each of the eight
quarters ended March 31, 1999. 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 1999 Fiscal 1998
--------------------------------------------- ------------------------------------------
6/30/98 9/30/98 12/31/98 3/31/99 6/30/97 9/30/97 12/31/97 3/31/98
------- ------- -------- ------- ------- ------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 35,696 $ 35,553 $ 29,697 $ 23,786 $ 27,839 $ 29,342 $ 24,091 $ 21,272
Gross margin 7,488 7,407 6,934 5,500 6,913 6,998 5,686 5,240
Equity in earnings (loss) of
affiliates, net of deferred tax(1) 130 (88) (80) (357) 101 102 (10) (1,566)
Net income (loss) 1,128 609 129 (1,078) 1,325 1,432 347 (1,693)
Net income (loss) per common
share: $ .31 $ .15 $ .01 $ (.37) $ .35 $ .38 $ .07 (.54)
======== ======== ======== ======== ======== ======== ======== ========
</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.
(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.
Maxco's sales and operating results have varied substantially from quarter to
quarter. Net sales are typically lower in the third and fourth quarters. The
most significant factors affecting these fluctuations are the seasonal buying
patterns of the Company's customers due to inclement weather and the reduced
number of business days during the holiday season. In addition, the timing of
acquisitions or the occasional sale of corporate investments may cause
substantial fluctuations of operating results from quarter to quarter. Maxco
expects its net sales and earnings to continue to fluctuate from quarter to
quarter.
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 is substantially completed with its assessment,
remediation and testing. Management estimates total pretax costs relating to
the Year 2000 Issue to be approximately $200,000. Approximately 95% of these
costs were incurred through May 31, 1999 and the remaining costs are expected to
be incurred through September 1999.
13
<PAGE> 14
IMPACT OF THE YEAR 2000 ISSUE - CONTINUED
The Company believes its planning efforts are adequate to address the Year 2000
Issue and that its greatest risks in this area are primarily those that it
cannot directly control, including the readiness of its major suppliers,
customers and service providers. Failure on the part of any of these entities to
timely remediate their Year 2000 Issues could result in disruptions in the
Company's supply of materials, disruptions in its customers' ability to conduct
business and interruptions to the Company's daily operations. Management
believes that its exposure to third party risk may be minimized to some extent
because it does not rely significantly on any one supplier or customer. There
can be no guarantee, however, that the systems of other third parties on which
the Company's systems and operations rely will be corrected on a timely basis
and will not have a material adverse effect on the Company.
The Company has been contacting its major suppliers, customers and service
providers regarding their Year 2000 Issues. However, the Company does not
currently have adequate information to assess the risk of these entities not
being able to provide goods and services to the Company. However, because the
Company believes this area is among its greatest risks, as information is
received and evaluated, the Company intends to develop contingency plans, as
deemed necessary, to safeguard its ongoing operations. Such contingency plans
may include identifying alternative suppliers or service providers, stockpiling
certain inventories if alternative sources of supply are not available,
evaluating the impact and credit worthiness of non-compliant customers and the
addition of lending capacity if deemed necessary to finance higher levels of
inventory or working capital on an interim basis.
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
The Financial Accounting Standards Board issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. Statement 133 is effective
for fiscal years beginning after December 31, 1999. The Company expects to adopt
the new statement effective April 1, 2000. The statement requires the Company to
recognize all derivatives on the balance sheet at fair value. The Company has
not evaluated the potential effect the adoption of this statement will have on
its results of operations or financial condition.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The
Company's variable interest expense is sensitive to changes in the general level
of United States interest rates. Some of the Company's interest expense is fixed
through long-term borrowings to mitigate the impact of such potential exposure.
Additionally, the Company entered into an interest rate swap agreement based on
a notional amount of $5.0 million to manage its exposure to interest rate
changes. The swap involves the exchange of fixed and variable interest payments
without changing the notional principal amount. The Company had total
outstanding variable rate long-term borrowings of $29.5 million at March 31,
1999. A 1% increase from the prevailing interest rates at March 31, 1999 on the
unhedged variable rate portion of the Company's long-term borrowings would
increase interest expense by $246,000 based on principal balances at March 31,
1999.
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
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, 1999.
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, 1999.
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, 1999.
14
<PAGE> 15
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, 1999.
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
<TABLE>
<CAPTION>
Exhibit Number
--------------
<S> <C>
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.
4.5 Resolution establishing Series Six Preferred Shares.
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.
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,
is hereby incorporated by reference from Form 10-K dated
June 24, 1998.
10.16 Second amendment to amended and restated loan agreement
between Comerica Bank and Maxco, Inc. dated June 24, 1998,
is hereby incorporated by reference from Form 10-K dated
June 24, 1998.
10.17 Third amendment to amended and restated loan agreement
between Comerica Bank and Maxco, Inc. dated September 24,
1998, is hereby incorporated by reference from Form 10-Q
dated November 12, 1998.
10.18 Maxco, Inc. 1998 Employee Stock Option Plan is hereby
incorporated by reference from Form 10-Q dated November 12,
1998.
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
10.19 Fourth amendment to amended and restated loan agreement between
Comerica Bank and Maxco, Inc. dated June 22, 1999.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors (Form S-8 filed June 2, 1992
- File No. 33-48351 and Form S-8 filed November 19, 1998 -
File No. 333-67539).
27 Financial Data Schedules
</TABLE>
(b) Reports on Form 8-K:
None
(c) Exhibits
- Resolution establishing Series Six Preferred Shares.
- Fourth amendment to amended and restated loan agreement between
Comerica Bank and Maxco, Inc. dated June 22, 1999.
- 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.
16
<PAGE> 17
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 23, 1999 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 06/23/99 President (Principal Executive Officer) and
- ------------------------------ Director
Max A. Coon Date
/S/ VINCENT SHUNSKY 06/23/99 Vice President of Finance and Treasurer
- ------------------------------ (Principal Financial and Accounting Officer)
Vincent Shunsky Date and Director
/S/ ERIC L. CROSS 06/23/99 Director
- ------------------------------
Eric L. Cross Date
/S/CHARLES J. DRAKE 06/23/99 Director
- ------------------------------
Charles J. Drake Date
/S/JOEL I. FERGUSON 06/23/99 Director
- ------------------------------
Joel I. Ferguson Date
/S/ RICHARD G. JOHNS 06/23/99 Director
- ------------------------------
Richard G. Johns Date
/S/J. MICHAEL WARREN 06/23/99 Director
- ------------------------------
J. Michael Warren Date
/S/ MICHAEL W. WISTI 06/23/99 Director
- ------------------------------
Michael W. Wisti Date
/S/ANDREW S. ZYNDA 06/23/99 Director
- ------------------------------
Andrew S. Zynda Date
17
<PAGE> 18
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, 1999
MAXCO, INC.
LANSING, MICHIGAN
18
<PAGE> 19
FORM 10-K--ITEM 14(a)(1) AND (2)
MAXCO, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Maxco, Inc. and subsidiaries
are included in Item 8:
Consolidated balance sheets--March 31, 1999 and 1998 ..................... 21
Consolidated statements of operations--Years ended March 31, 1999,
1998, and 1997 ........................................................... 22
Consolidated statements of stockholders' equity--Years ended March 31,
1999, 1998, and 1997 ..................................................... 23
Consolidated statements of cash flows--Years ended March 31,
1999, 1998, and 1997 .................................................... 24
Notes to consolidated financial
statements--March 31, 1999 .............................................. 25
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
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 from 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 from the
Medar, Inc. Form 10-K for the year ended December 31, 1998, as filed with
the Securities and Exchange Commission (SEC File Number 0-12728).
19
<PAGE> 20
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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1999. 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 referred to above present
fairly, in all material respects, the consolidated financial position of Maxco,
Inc. and subsidiaries at March 31, 1999 and 1998, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999, 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.
/S/ ERNST & YOUNG LLP
Detroit, Michigan
May 28, 1999
20
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
MAXCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31,
1999 1998
------------- --- -------------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,122 $ 1,040
Marketable securities 400
Accounts receivable, less allowance of
$558,000 in 1999 and $565,000 in 1998 19,814 16,280
Inventories--Note 1 5,010 3,579
Prepaid expenses and other 608 303
------------- -------------
TOTAL CURRENT ASSETS 26,554 21,602
MARKETABLE SECURITIES - LONG TERM--Notes 1 & 2 2,501 7,657
PROPERTY AND EQUIPMENT
Land 732 732
Buildings 11,152 10,553
Machinery, equipment, and fixtures 30,814 20,854
------------- -------------
42,698 32,139
Allowances for depreciation (10,799) (8,321)
------------- -------------
31,899 23,818
OTHER ASSETS
Investments--Notes 4 and 10 16,144 15,842
Notes and contracts receivable and other 3,996 3,056
Intangibles--Note 1 4,336 2,992
Restricted cash for acquisition of equipment - Note 1 1,088
------------- -------------
24,476 22,978
------------- -------------
$85,430 $76,055
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 226 $ 226
Accounts payable 10,489 6,568
Employee compensation 2,192 2,058
Taxes, interest, and other liabilities 1,726 2,028
Current maturities of long-term obligations 2,063 1,490
------------- -------------
TOTAL CURRENT LIABILITIES 16,696 12,370
LONG-TERM OBLIGATIONS, less current maturities--Note 5 32,856 27,698
DEFERRED INCOME TAXES--Note 9 1,734 1,180
STOCKHOLDERS' EQUITY--Notes 6 and 7
Preferred stock:
Series Three: 10% cumulative callable, $60 face value;
14,876 shares issued and outstanding 683 690
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;
6,648 shares issued and outstanding 798 802
Series Six: 10% cumulative callable, $160 face value;
20,000 shares authorized, issued - none
Common stock, $1 par value; 10,000,000 shares authorized,
3,219,995 shares (1998--3,307,910 shares) issued and outstanding 3,220 3,308
Accumulated other comprehensive income 9 47
Retained earnings 27,044 27,570
------------- -------------
34,144 34,807
------------- -------------
$85,430 $76,055
============= =============
</TABLE>
See notes to consolidated financial statements
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF OPERATIONS
MAXCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
------------ -------------- ---------------
(in thousands except per share data)
<S> <C> <C> <C>
Net sales $124,732 $102,544 $74,277
Costs and expenses:
Cost of sales and operating expenses 97,403 77,707 59,430
Selling, general and administrative 20,919 17,044 10,997
Depreciation and amortization 3,395 2,481 1,404
------------ -------------- ---------------
121,717 97,232 71,831
------------ -------------- ---------------
OPERATING EARNINGS 3,015 5,312 2,446
Other income (expense):
Investment income 837 1,048 1,209
Interest expense (2,403) (2,114) (1,381)
------------ -------------- ---------------
(1,566) (1,066) (172)
------------ -------------- ---------------
INCOME FROM CONTINUING OPERATIONS BEFORE
FEDERAL INCOME TAXES AND EQUITY
IN NET LOSS OF AFFILIATES 1,449 4,246 2,274
Federal income tax expense--Note 9 266 1,462 792
------------ -------------- ---------------
INCOME FROM CONTINUING OPERATIONS BEFORE
EQUITY IN NET LOSS OF AFFILIATES 1,183 2,784 1,482
Equity in net loss of affiliates, net of
deferred tax--Notes 4, 9 and 10 (395) (1,373) (250)
------------ -------------- ---------------
INCOME FROM CONTINUING OPERATIONS 788 1,411 1,232
Loss from discontinued operations--Note 3 (670)
Gain from disposal of discontinued operations,
net of tax--Note 3 21,992
------------ -------------- ---------------
NET INCOME 788 1,411 22,554
Less preferred stock dividends (409) (390) (236)
------------ -------------- ---------------
NET INCOME APPLICABLE
TO COMMON STOCK $ 379 $ 1,021 $ 22,318
============ ============== ===============
NET INCOME PER COMMON SHARE - Basic-
Note 13
Continuing operations $ .12 $ .30 $ .26
Discontinued operations 5.54
------------ -------------- ---------------
$ .12 $ .30 $ 5.80
============ ============== ===============
NET INCOME PER COMMON SHARE - Assuming dilution -
Note 13
Continuing operations $ .12 $ .30 $ .26
Discontinued operations 5.20
------------ -------------- ---------------
$ .12 $ .30 $ 5.46
============ ============== ===============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MAXCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Retained
Stock Stock Capital Income Earnings Totals
-------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at April 1, 1996 $ 1,654 $ 4,227 $ 686 $ 12,759 $ 19,326
Net income for the year 22,554 22,554
Net unrealized loss on marketable
securities (68) (68)
--------
Total Comprehensive Income 22,486
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
--------
Total Comprehensive Income 1,526
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
Net income for the year 788 788
Net unrealized loss on marketable
securities (38) (38)
--------
Total Comprehensive Income 750
Preferred stock dividends (409) (409)
Exercise of stock options for
52,500 shares 52 20 72
Acquisition and retirement of
140,415 shares (140) (925) (1,065)
Redemption of preferred stock (11) (11)
-------- -------- ------- -------- -------- --------
BALANCES AT MARCH 31, 1999 $ 3,871 $ 3,220 $ 9 $ 27,044 $ 34,144
======== ======== ======= ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
MAXCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
---------------------------------------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 788 $ 1,411 $22,554
Income from discontinued operations (21,322)
------------ ------------ ------------
Income from continuing operations 788 1,411 1,232
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,930 2,240 1,291
Amortization 465 241 113
Equity in net loss of affiliates 395 1,373 250
Deferred federal income taxes 461 (688) 608
Changes in operating assets and liabilities
of continuing operations:
Accounts receivable (2,224) (3,496) (2,842)
Inventories (1,096) 88 62
Prepaid and other (305) (34) 315
Accounts payable and other current liabilities 2,828 612 1,604
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,242 1,747 2,633
INVESTING ACTIVITIES
Payment received on note receivable 3,443
Sale of subsidiaries 41,671
Sale of investment 2,160
Purchase of businesses (2,700) (468) (3,184)
Purchases of property and equipment (9,198) (7,474) (1,516)
Investment in affiliates (3,961) (6,452) (6,890)
Net proceeds from (investment in) marketable securities 5,491 2,881 (10,847)
Other 74 190 427
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (8,134) (7,880) 19,661
FINANCING ACTIVITIES
Restricted cash for acquisition of equipment 1,088 (1,088)
Proceeds from long-term obligations 6,517 13,724 4,876
Repayments on long-term obligations (2,218) (5,375) (20,045)
Proceeds from exercise of stock options 72 35 79
Dividends paid on preferred stock (409) (390) (236)
Acquisition and retirement of preferred and common stock (1,076) (1,342) (6,094)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,974 5,564 (21,420)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 82 (569) 874
CASH AT BEGINNING OF YEAR 1,040 1,609 735
------------ ------------ ------------
CASH AT END OF YEAR $ 1,122 $ 1,040 $ 1,609
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAXCO, INC. AND SUBSIDIARIES
March 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of 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, a construction supplies company; Atmosphere Annealing Inc., a production
metal heat treating service company; and Pak-Sak Industries Inc., which makes
polyethylene packaging. Maxco also has investments in three real estate
development companies, L/M Associates, LLC, LandEquities Corporation, and Nilson
Builders. In addition to real estate, Maxco also has investments in a registered
investor advisory firm, three technology-related businesses, two energy-related
businesses, and a company in the business of selling, leasing, and servicing
lift trucks.
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. (Medar) 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 1999.
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. The carrying
amount of cash and cash equivalents approximates fair value because of the short
maturity of those instruments.
Receivables: Trade accounts receivable represent amounts due from customers in
the 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 payment 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>
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Raw materials $ 732 $ 723
Finished goods and work in process 1,283 1,077
Purchased products for resale 2,995 1,779
------- -------
$ 5,010 $ 3,579
======= =======
</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.
At March 31, 1999, the Company's marketable securities consist of debt
securities and United States government securities.
25
<PAGE> 26
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 discounted cash flows. Accumulated amortization was
approximately $1,023,000 and $659,000 at March 31, 1999 and 1998, 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. At March 31, 1999, all of the proceeds had
been expended.
Revenue Recognition: The Company recognizes revenue from product sales upon
shipment.
Gain Recognition on Sale of Subsidiary Stock: The Company's policy is to record
gains from the sale or other issuance of previously unissued stock by its
subsidiaries.
Advertising: Advertising costs are expensed as incurred. The amounts were not
material for all years presented.
Interest Rate Swap: The Company entered into an interest rate swap agreement to
modify the interest characteristics of certain of its outstanding debt. The
interest rate swap agreement is designated with the principal balance and term
of a specific debt obligation. This agreement involves the exchange of amounts
based on a fixed interest rate for amounts based on variable interest rates over
the life of the agreement without an exchange of the notional amount upon which
the payments are based. The fair value of the swap agreement and changes in the
fair value, as a result of changes in market interest rates, are not recognized
in the financial statements.
Fair Value Disclosure: The carrying amounts of certain financial instruments
such as cash and cash 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.
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. For the
year ended March 31, 1999, the Company has provided 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 March 31, 1999, the
Company has provided financial and descriptive information about its reportable
operating segments to conform to the Statement 131 requirements.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - Continued
New Financial Accounting Pronouncement: The Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. Statement 133 is effective for fiscal years beginning after December
31, 1999. The Company expects to adopt the new statement effective April 1,
2000. The statement requires the Company to recognize all derivatives on the
balance sheet at fair value. The Company has not evaluated the potential effect
the adoption of this statement will have on its results of operations or
financial condition.
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.
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 approximated
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.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 3 - DISCONTINUED OPERATIONS - Continued
<TABLE>
<CAPTION>
March 31,
1997
-------------
<S> <C>
Net Sales $46,297
Cost and expenses 46,976
-------------
Loss before income taxes (679)
Income tax benefit (238)
-------------
Net loss (441)
Minority interest in net earnings
of discontinued operations (229)
-------------
Total loss from
discontinued operations $ (670)
=============
</TABLE>
NOTE 4 - INVESTMENT IN MEDAR, INC.
At March 31, 1999, Maxco owned 2,130,605 shares of Medar's common stock
(aggregate market value of $3.5 million), representing approximately 24% of
Medar's total common stock outstanding.
During the quarter ended September 30, 1997, the Company participated in a
private placement by Medar of $7.0 million of subordinated debentures. Maxco
purchased $750,000 of these debentures representing 10.7% of the total placed.
These debentures were outstanding at March 31, 1999. Maxco also received
warrants to purchase 150,000 shares of Medar stock at $6.86, which were
outstanding and exercisable at March 31, 1999. 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, 1999, 1998 and 1997 were
approximately $2.6 million, $10.1 million, and $2.3 million, respectively.
Accordingly, Maxco's equity share of Medar's net loss for these years was
$627,000, $2,380,000 and $519,000 and is recorded net of deferred tax for these
periods in equity earnings from affiliates, along with the equity results of
other 50% or less owned affiliates. For the years ended March 31, 1999, 1998 and
1997, Medar's sales were $37.0 million, $36.9 million and $41.4 million,
respectively.
NOTE 5 - LONG-TERM OBLIGATIONS
Long-term obligations at March 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
(in thousands)
<S> <C> <C>
Revolving lines of credit (variable interest rates
ranging from 6.7% to 7.3% at March 31, 1999) $ 16,999 $ 11,150
Tax exempt revenue bonds (variable interest rates) 4,472 4,740
Taxable revenue bonds 4,915 5,293
Mortgage notes payable (various interest rates
ranging up to 8.75%) 2,149 2,270
Equipment purchase contracts and capitalized lease
obligations (various interest rates) 1,460 1,886
Subordinated debt (fixed interest rate of 10%) 3,765 3,765
Other 1,159 84
------------ -----------
34,919 29,188
Less current maturities 2,063 1,490
------------ -----------
$ 32,856 $ 27,698
============ ===========
</TABLE>
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 5 - LONG-TERM OBLIGATIONS - Continued
The Company has three revolving lines of credit at March 31, 1999. In aggregate,
Maxco can borrow up to $27 million under these agreements of which $10 million
is available at March 31, 1999. At March 31, 1999, the lines of credit mature as
follows: $22 million in August 2000 and $5 million in July 2000.
Certain of the agreements require 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.
In December, 1998, Maxco entered into a swap agreement with a notional amount of
approximately $5.0 million converting its variable rate taxable revenue bonds to
a fixed rate of 5.34% which matures in December 2005. The fair value of the swap
is not material as of March 31, 1999.
In June 1999, the Company increased the availability under one its lines of
credit to allow for additional borrowings of $3.0 million.
Notes and contracts payable are generally collateralized by assets purchased
with proceeds of the borrowings. The aggregate principal maturities of long-term
debt from 2001 - 2004 are as follows:
2001 2002 2003 2004
- ------------------- ----------------- ----------------- --------------
$2,035,000 $3,135,000 $2,095,000 $2,549,000
Interest paid approximates interest expensed for the years presented.
As of March 31, 1999, the Company has guaranteed various debt obligations of
certain affiliates in an aggregate amount of $25.8 million. Maxco does not
believe that there is any unusual degree of risk related to these guarantees
because of sufficient underlying asset values supporting the respective debt
obligations.
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 quarterly
cumulative dividend at the rate of 10% of face value annually. 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% of face value 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.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 6 - PREFERRED STOCK - Continued
Series Three Preferred Stock is voting stock on a par with the common stock, and
has twenty votes per share. Quarterly cumulative dividends are provided at the
annual rate of 10% of face value annually, subject to the restrictions of
Michigan corporate law and the discretion of the Maxco Board of Directors. The
stock is callable at the option of the Company, with the call price declining at
the rate of one percent per year to a minimum price after February 1999, equal
to face value ($60 per share).
Series Six Preferred Stock, established February 4, 1999, is voting stock on a
par with the common stock, and has twenty votes per share. Quarterly cumulative
dividends are provided at the annual rate of 10% of face value annually, subject
to the restrictions of Michigan corporate law and the discretion of the Maxco
Board of Directors. The stock is callable, at the option of the Company, at any
time after the second anniversary of their issuance in whole or in part. The
call price will be face value ($160 per share) plus a declining premium amount
which shall be equal to 5% until the third anniversary of issuance and shall
decline 1% annually thereafter to zero following the seventh anniversary.
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>
1999 1998 1997
----------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
(number of shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding and exercisable at
beginning of year 188 $ 6.09 203 $ 5.47 341 $ 5.24
Granted and exercisable 10 7.50 10 7.00
Exercised (53) 1.38 (25) 1.38 (78) 2.55
Cancelled (60) 8.00
Outstanding and exercisable at --- --- ---
end of year 145 $ 7.90 188 $ 6.09 203 $ 5.47
=== === ===
</TABLE>
The exercise price for options outstanding as of March 31, 1999 ranged from
$7.00 to $8.00. The weighted average fair value of options granted during the
years ended March 31, 1999 and 1998 was $2.94 and $2.68, respectively. The
weighted average remaining contractual life of those options is approximately
eight years.
The Company has elected to follow APB No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options 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 is
estimated to be approximately $759,000 ($.11 per share) for 1999 and $1.4
million ($.29 per share) for 1998. 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, .323 market price volatility in 1999
(.31 for the 1998 grant), and a five year weighted average life of these
options. These proforma results reflect only stock options granted in 1999 and
1998 (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.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
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 $351,000, $251,000 and
$171,000 for the years ended March 31, 1999, 1998 and 1997, respectively.
NOTE 9 - FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current $ (195) $ 2,150 $ 184
Deferred (benefit) 461 (688) 608
------- ------- -------
266 1,462 792
Amount allocated to equity in
earnings of affiliates (203) (707) (129)
------- ------- -------
$ 63 $ 755 $ 663
======= ======= =======
</TABLE>
The reconciliation of income taxes computed at the United States federal
statutory tax rate to income tax expense is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Income taxes computed at
United States statutory rate(34%) 493 1,444 773
Prior year tax adjustment (294)
Other 67 18 19
------- ------- -------
$ 266 $ 1,462 $ 792
======= ======= =======
</TABLE>
Federal income taxes paid by Maxco were $600,000 in 1999, $2.1 million in 1998,
and $15.8 million in 1997, which included taxes paid on the gain from disposal
of discontinued operations.
Federal income tax benefit related to Maxco's loss from discontinued operations
amounted to $238,000 for the year ended March 31, 1997.
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>
1999 1998
------ ------
(in thousands)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Depreciation $1,259 $ 662
Undistributed earnings 457 732
Other 23 30
------ ------
Total Deferred Tax Liabilities 1,739 1,424
DEFERRED TAX ASSETS:
Allowance for doubtful accounts 190 192
Inventory 111 52
------ ------
Total Deferred Assets 301 244
------ ------
Net Deferred Liabilities $1,438 $1,180
====== ======
</TABLE>
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 9 - FEDERAL INCOME TAXES - Continued
Deferred tax assets and liabilities are recorded in the consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
LIABILITIES:
Taxes, interest, and other liabilities $ (296) $ -
Deferred income taxes 1,734 1,180
------- -------
$ 1,438 $ 1,180
======= =======
</TABLE>
Components of accumulated comprehensive income are shown net of tax.
NOTE 10 - OTHER INVESTMENTS
Real Estate:
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. In addition, effective October 1, 1998, the Company made
additional investments in its real estate activity as it acquired a 50%
interest in LandEquities and Nilson Builders. These companies manage,
develop, and build commercial and residential properties.
Technology Related:
In addition to a 24% equity interest in Medar, the Company has an equity
interest in two other technology related businesses. Effective August 1,
1998, the Company acquired a 40% equity interest in Foresight Solutions,
Inc., a software developer whose customers primarily are in the light
manufacturing and distribution industries.
The Company sold its 45% equity interest in Strategic Interactive, Inc. to
Provant, Inc. for cash and approximately 249,000 shares of Provant's stock
in October 1998 when Provant acquired 100% of the stock of Strategic
Interactive.
Maxco also has an investment in approximately 7% of the common stock of
Axson, S.A., of France, a manufacturer of resins and composite materials
for advanced applications.
Energy Related:
Effective January 1, 1998, Maxco acquired a 33% interest in AMI Energy,
Inc., which is a retail energy marketing and consulting firm. In addition,
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.
Other:
Effective June 1, 1998, Maxco acquired a one-third interest in Blasen
Brogan Asset Management Company; a Lansing, Michigan based registered
investor advisory firm.
Effective August 1, 1998, the Company acquired a 50% equity interest in and
agreed to finance certain debt of Mid-State Industrial Services, Inc.,
which is in the business of selling, leasing, and servicing lift trucks.
32
<PAGE> 33
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>
Energy Related
Real Estate Technology Related and Other
March 31, March 31, March 31,
1999 1998 1999 1998 1999 1998
---------- ----------- ----------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Condensed income statement information:
Net Sales $ 7,956 $ 1,937 $40,741 $40,932 $ 7,627 $ 190
Gross Margin 4,142 1,327 12,171 3,749 2,744 171
Net Income(Loss) 82 5 (2,974) (9,216) 95 7
Condensed balanced sheet information:
Current Assets $21,780 $ 2,479 $24,197 $25,075 $ 7,128 $ 5,203
Non-Current Assets 34,413 31,947 16,650 18,132 3,823 64
---------- ----------- ----------- ---------- ---------- ----------
$56,193 $34,426 $40,847 $43,207 $10,951 $ 5,267
========== =========== =========== ========== ========== ==========
Current Liabilities $23,812 $16,581 $28,926 $24,236 $ 7,188 $ 5,164
Non-Current Liabilities 23,116 9,706 2,692 4,775 2,923
Stockholders' Equity 9,265 8,139 9,229 14,196 840 103
---------- ----------- ----------- ---------- ---------- ----------
$56,193 $34,426 $40,847 $43,207 $10,951 $ 5,267
========== =========== =========== ========== ========== ==========
</TABLE>
The difference between the carrying amount and the underlying equity in the net
assets of the Company's 50% or less owned investments, approximately $1,388,000,
is being amortized over a 15 year life.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Maxco and certain subsidiaries occupy facilities and use equipment under
operating lease agreements requiring annual rental payments approximating
$1,537,000 in 2000, $1,342,000 in 2001, $1,138,000 in 2002, $917,000 in 2003,
$676,000 in 2004, and $188,000 thereafter for a total commitment aggregating
$5,798,000. Rent expense charged to operations, including short-term leases,
aggregated $1,580,000 in 1999, $1,231,000 in 1998 and $810,000 in 1997.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MAXCO, INC. AND SUBSIDIARIES
NOTE 12 - INDUSTRY SEGMENT INFORMATION
The following summarizes Maxco's industry segment information:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- --------------
(in thousands)
<S> <C> <C> <C>
Net sales:
Distribution - construction supplies unit $ 72,440 $ 50,667 $ 45,577
Heat treating 35,700 33,328 8,254
Packaging products 16,251 18,200 19,991
Corporate and other 341 349 455
----------------- ----------------- --------------
Total Net Sales $ 124,732 $ 102,544 $ 74,277
================= ================= ==============
Operating earnings (loss):
Distribution - construction supplies unit $ 2,538 $ 2,819 $ 1,954
Heat treating 3,434 4,452 1,201
Packaging products (1,006) (431) 645
Corporate and other (1,951) (1,528) (1,354)
----------------- ----------------- --------------
Total Operating Earnings $ 3,015 $ 5,312 $ 2,446
================= ================= ==============
Identifiable assets:
Distribution - construction supplies unit $ 21,275 $ 11,863 $ 9,707
Heat treating 26,211 23,058 17,522
Packaging products 7,402 7,543 7,126
Corporate and other 17,639 17,778 21,616
Investments and advances 12,903 15,813 12,190
----------------- ----------------- --------------
Total Identifiable Assets $ 85,430 $ 76,055 $ 68,161
================= ================= ==============
Depreciation and amortization expense:
Distribution - construction supplies unit $ 1,017 $ 487 $ 434
Heat treating 1,400 1,186 260
Packaging products 674 585 541
Corporate and other 304 223 169
----------------- ----------------- --------------
Total Depreciation And Amortization Expense $ 3,395 $ 2,481 $ 1,404
================= ================= ==============
Capital expenditures:
Distribution - construction supplies unit $ 2,208 $ 640 $ 641
Heat treating 5,920 5,378 591
Packaging products 960 1,371 246
Corporate and other 110 85 38
----------------- ----------------- --------------
Total Capital Expenditures $ 9,198 $ 7,474 $ 1,516
================= ================= ==============
</TABLE>
Accounting policies of the business segments are consistent with those described
in the summary of significant accounting policies (see Note 1).
Identifiable assets are those assets that are used in Maxco's operations in each
industry segment. Corporate assets are principally cash, notes receivable,
investments, and corporate office properties.
Maxco has no significant foreign operations, export sales, or inter-segment
sales.
No sales to any single customer exceeded 10% of consolidated sales for 1999,
1998 or 1997.
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
MAXCO, INC. AND SUBSIDAIRIES
NOTE 13 - EARNINGS PER SHARE
The Following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands except per share date)
<S> <C> <C> <C>
NUMERATOR:
Incoming form Continuing operations $ 788 $ 1,411 $ 1,232
Income from discontinued operations 21,322
-------- -------- --------
Net income 788 1,411 22,554
Perferred Stock dividends (409) (390) (236)
-------- -------- --------
NUMERATOR FOR BASIC EARNING PER SHARE--INCOME
AVAILABLE TO COMMON STOCKHOLDERS
Continuing operations 379 1,021 996
Discontinued operations 21,322
-------- -------- --------
Net income 379 1,021 22,318
Effect of dilutive securities:
Preferred stock dividends 81
-------- -------- --------
NUMERATOR FOR DILUTED EARNINGS PER SHARE--INCOME
TO COMMON STOCKHOLDERS AFTER ASSUMED CONVERSIONS
Continuing operations 379 1,021 1,077
Discontinued operations 21,322
-------- -------- --------
Net income $ 379 $ 1,021 $ 22,399
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE--
WEIGHTED-AVERAGE SHARES 3,256 3,379 3,845
Effect of dilutive securities:
Employee stock options 34 81 86
Convertible Preferred Stock 174
-------- -------- --------
Dilutive potential common shares 34 81 260
-------- -------- --------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE--ADJUSTEd
WEIGHTED-AVERAGE SHARES AND ASSUMED CONVERSIONS 3,290 3,460 4,105
======== ======== ========
BASIC EARNINGS PER SHARE
Continuing operations $ .12 $ .30 $ .26
Discontinued operations 5.54
-------- -------- --------
Net income $ .12 $ .30 $ 5.80
======== ======== ========
DILUTED EARNINGS PER SHARE
Continuing operations $ .12 $ .30 $ .26
Discontinued operations 5.20
-------- -------- --------
Net income $ .12 $ .30 $ 5.46
======== ======== ========
</TABLE>
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
- -----------------------------------------------------------------------------------------------------------------------------------
c
ADDITIONS
----------------------------------
Charged to Other
Balance at Charged to Costs Accounts- Balance
DESCRIPTION Beginning and Expenses -Describe Deductions- at End
of Period -Describe of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999:
Allowance for doubtful accounts $565 $191 $198(A) $558
Year ended March 31, 1998:
Allowance for doubtful accounts $470 $113 $ 18(A) $565
Year ended March 31, 1997:
Allowance for doubtful accounts $276 $303 $132(B) $241(A) $470
</TABLE>
(A) Represents uncollectible accounts written off, less recoveries.
(B) Represents allowance for doubtful accounts for acquired business.
36
<PAGE> 37
MAXCO, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- -----------
4.5 Resolution establishing Series Six Preferred Shares
10.19 Fourth amendment to amended and restated loan agreement
between Comerica Bank and Maxco, Inc. dated June 22, 1999.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors (Form S-8 filed June 2, 1992 -
File No. 33-48351 and Form S-8 filed November 19, 1998 - File
No. 333-67539)
27 Financial Data Schedules
<PAGE> 1
EXHIBIT 4.5
CERTIFICATE OF RESOLUTION
Pursuant to MCLA Section 450.1302, the undersigned, Eric L. Cross,
does, by signing this document, hereby certify that the below is a Resolution
duly adopted by the Board of Directors of Maxco, Inc., establishing and
designating Series Six Preferred Stock of the Corporation and prescribing the
relative right thereof.
Further, be advised that 27,000 shares of previously authorized but
unissued shares of Series Five Preferred Stock are hereby reclassified as
Preferred Stock which may be designated as Series Six Preferred Stock or any
other designation later established by the Board of Directors.
NOW THEREFORE, be it resolved that the Board of Directors shall and
hereby does establish Series Six Preferred Stock of Maxco, Inc., having the
following rights, privileges and restrictions:
A. Series Six Preferred Stock. Series Six Preferred Stock of
Maxco, Inc. shall be 20,000 shares with a face value of $160
per share.
B. Dividends. The Corporation shall pay a Dividend upon such
Series Six Preferred Stock as follows:
1. Such Dividend shall be equal to 10% per annum of the
face value of each share.
2. The Corporation shall be obligated to declare a
Dividend each and every quarter if it shall then be
legally entitled to do so.
3. If the Dividend set forth herein is not paid and if
such Dividend did not, under the circumstances, have
to be paid, then such Dividend shall be payable in
the next period when such Dividend legally can be
made.
4. Should the surplus of said Corporation prior to any
Dividend Day be insufficient to pay the Dividend on
the Series Six Preferred Shares, such Dividend shall
be payable from future surplus, but without interest,
and no Dividend shall at any time be paid on the
Common Shares until the full amount of 10% per annum
up to such time and for the then current fiscal year
upon all of the Preferred Shares issued shall have
been paid or set apart.
C. Redemption. The Series Six preferred Shares are redeemable at
any time after the second anniversary of their issuance in
whole or in part, at the Company's option, at 100% of
principal amount plus a declining premium amount which shall
be equal to 5% until the third anniversary of issuance and
shall decline 1% annually thereafter to zero following the
seventh anniversary, and plus any accumulated and unpaid
Dividends to the date of redemption.
<PAGE> 2
Notice of the election of the Corporation to redeem all or a
portion of the Series Six Preferred Stock shall be given by
the Corporation by mailing a copy of such notice, not less
than 30 nor more than 90 days prior to the date designated
therein as the date for such redemption, to the holders of
record of the Series Six Preferred Stock to be redeemed,
addressed to them at their respective address appearing on the
books of the Corporation.
D. Voting. Holders of the Series Six Preferred Shares shall be
entitled to 20 votes for each share of Series Six Preferred
Stock held.
E. Liquidation. In any event of dissolution of the Corporation,
the holders of Series Six Preferred Stock shall be entitled to
receive the face value of their shares, together with
accumulated dividends thereon to the date of payment, before
holders of the Common Shares shall be entitled to receive
anything thereon. Thereafter, the Series Six Preferred Stock
shall not be entitled to share in the assets of the
Corporation.
F. The Corporation has no obligation to register the Series Six
Preferred Shares under any federal or state security law or to
provide a prospectus for offer or transfer thereof by the
holders. The Series Six Preferred Shares will be restricted
securities within the meaning of the Securities Act of 1933,
and Rule 144 promulgated thereunder.
Adopted this 11th day of January, 1999.
Effective upon filing with the Michigan Department of Consumer and
Industry Services, - Corporation, Securities & Land Development Bureau.
/s/ Eric L. Cross
-------------------------------
Eric L. Cross, Secretary
<PAGE> 1
EXHIBIT 10.19
FOURTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
DATED AS OF SEPTEMBER 30, 1996
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (the
"Fourth Amendment") effective as of the 22nd day of June, 1999, 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, as further amended by Second Amendment thereto dated
as of June 24, 1998 and as further amended by Third Amendment thereto dated as
of September 24, 1998 (the "Agreement"); and
WHEREAS, Borrower and Bank now desire to amend the Agreement to provide
(i) for the securitization of Revolving Loans, (ii) for the modification of
certain of the covenants and restrictions set forth in the Agreement, and (iii)
for the waiver of those covenants for periods ending March 31, 1999 and earlier.
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:
"Commitment Amount" shall mean $15,000,000 (or such lesser amount to
which the Commitment Amount may be reduced by the Borrower from time
to time under Section 2.8.1 of this Agreement).
-1-
<PAGE> 2
"Collateral" shall mean the properties and rights described
in the Collateral Documents and each and every mortgage, security
agreement, pledge, assignment and other security or collateral
agreement which has been, or will hereafter be, executed by Borrower or
any of the Guarantors to or for the benefit of the Bank; all items now
or hereafter deposited in any account of Borrower or any of the
Guarantors with the Bank and all proceeds of such items (cash or
otherwise); and all account balances of Borrower or any of the
Guarantors now or hereafter with the Bank.
"Collateral Documents" shall mean the Security Agreements, the
Pledge Agreements, the Mortgages, and the Financing Statements.
"Investment Entity" shall mean any corporation, partnership,
limited liability company or other entity in which an ownership
interest is owned directly, or indirectly through one or more
intermediaries, by the Borrower, other than a Subsidiary.
"Pledge Agreements" shall mean pledge agreement in such form
as shall be required by the Bank pursuant to this Agreement, which the
Borrower and the Guarantors have previously or in the future will
pledge, to the Bank, the Securities.
"Securities" shall mean (i) all of the issued and outstanding
capital stock of the Subsidiaries and (ii) all of the shares of capital
stock or other ownership interest owned by the Borrower or any
Subsidiary in an Investment Entity.
"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 Revolving Loans, Term
Loans and/or the Revolving Ersco Acquisition Loans.
"Security Interests" shall mean first priority liens in the
Collateral as contemplated by the Collateral Documents, except as to
the Collateral in the possession of Guarantor, Atmosphere Annealing,
Inc., in which the Bank shall take a second priority lien.
2. There is hereby added a new Sub-Section 3.3 to Section 3 of
the Agreement which shall read as follows:
3.3 Revolving Loans. To secure full and timely performance of
the Borrower's covenants set out in this Agreement relating to the
Revolving Loans and to secure the repayment of the Revolving Credit
Note the Borrower agrees to grant
-2-
<PAGE> 3
and assign, and to cause the Guarantors to grant and assign security
and/or pledged interests in the Collateral pursuant to the Collateral
Documents and other instruments and agreements satisfactory to the
Bank and, in addition, the Borrower recognizes and agrees that the
Revolving Credit Note and the Revolving Loan are secured by all
security interests, mortgages, pledges, and encumbrances previously or
hereafter granted to the Bank by the Borrower.
3. Section 5.1 of Section 5 is hereby deleted in its entirety and
is replaced by the following:
5.1 Corporate Existence and Power. (a) The Borrower is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Michigan, (b) each of the Subsidiaries is a
corporation duly organized, validly existing and in good standing under
the law of its state of incorporation, (c) the Borrower and each of the
Subsidiaries have the corporate power and authority to own their
respective properties and assets and to carry out their respective
businesses as now being conducted and are qualified to do business and
in good standing in every jurisdiction wherein such qualification is
necessary, (d) the Borrower has the corporate power and authority to
execute, deliver and perform this Agreement, to borrow money in
accordance with its terms, to execute and deliver the Notes and other
documents contemplated hereby, to grant to the Bank the Security
Interests and the Purchase Money Security Interests in the Collateral
as contemplated by the Collateral Documents and to do any and all other
things required of it hereunder, (e) each of the Guarantors has the
corporate power and authority to execute, deliver and perform the
Guaranty, the Acknowledgement and Consent and the other documents
contemplated hereby, to grant to the Bank liens, mortgages and security
interests in the Collateral, and to do any and all other things
required of it hereunder, and (f) except as disclosed in Schedule 5.1,
neither the Borrower nor any Subsidiary conducts business under any
assumed or trade name.
4. Schedule 5.12 annexed to the Agreement and referenced in
Section 5.12 of Section 5 of the Agreement is replaced in its entirety
by the new Schedule 5.12 which is attached hereto and is by this
reference made a part hereof.
5. Sub-Section 6.6 of Section 6 is hereby deleted in its
entirety and is replaced by the 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 5.50 to 1.0.
6. Sub-Section 6.12 of Section 6 is hereby deleted in its
entirety and is replaced by the following:
-3-
<PAGE> 4
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 2.00 to 1.0.
7. There is hereby added a new Sub-Section 6.13 to Section 63 of
the Agreement which shall read as follows
6.13 Waivers. In accordance with the provisions of Section 9.3
of the Agreement, the Bank hereby specifically waives (i) the
affirmative covenant set forth in Section 6.6 of the Agreement only to
the extent of Borrower's failure to comply with the Consolidated Funded
Debt to EBITDA ratio as of March 31, 1999 and all prior times, and (ii)
the affirmative covenant set forth in Section 6.12 of the Agreement
only to the extent of Borrower's failure to comply with the Debt to
Tangible Net Worth ratio as of March 31, 1999 and all prior times.
Notwithstanding the waivers set forth herein, Borrower must, as of all
other applicable times of determination under the Agreement, comply
with each of terms and conditions of the Agreement, including but not
limited to the affirmative covenants of Section 6 of the Agreement. As
set forth in Section 9.3 of the Agreement these waivers are expressly
limited to the extent specified and shall not operate as a waiver of
any other provision of the Agreement or any Default or Event of Default
hereunder.
8. Sub-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, 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;
provided that the aggregate dollar amount of all guarantees expressly
permitted by (ii) and (iii) of this Sub-Section 7.7 shall not, at any
time, exceed $45 Million.
9. Sub-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
-4-
<PAGE> 5
Guarantors, Medar Subordinated Debt Securities, Provant, Inc.,
Robinson Oil Co., L.L.C., AMI Energy, Inc., L/M Associates II, L.L.C.,
Blasen Brogan Asset Management Company, Axson, Ltd. (France),
Foresight Solutions, Inc., LandEquities Corporation, Nilson Builders,
Inc., Midstate Industrials, Inc. and the Phoenix Financial Group,
Ltd., in each case limited to the interest owned by the Borrower on
the date of this Fourth 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).
10. 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.
11. Neither the extension of this Fourth 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.
IN WITNESS WHEREOF, the Borrower and the Bank have caused this Fourth
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
-5-
<PAGE> 6
The Undersigned Guarantors hereby acknowledge and consent to the above
Fourth Amendment.
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
-6-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF MAXCO, INC.
<TABLE>
<CAPTION>
State of
Incorporation
-------------
<S> <C>
Atmosphere Annealing, Inc. Michigan
Ersco Corporation Michigan
Ersco of Michigan, Inc. Michigan
Pak-Sak Industries, Inc. Michigan
Parcco, Inc. Michigan
</TABLE>
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statements (Forms
S-8 No. 33-48351 and S-8 No. 333-67539) pertaining to the Maxco, Inc. Incentive
Stock Option Plan and the Maxco, Inc. 1998 Stock Option Plan and in the related
prospectus of our report dated May 28, 1999, 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, 1999.
/S/ ERNST & YOUNG LLP
Detroit, Michigan
June 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM
10-K FOR THE YEAR ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,122
<SECURITIES> 0
<RECEIVABLES> 20,372
<ALLOWANCES> 558
<INVENTORY> 5,010
<CURRENT-ASSETS> 26,554
<PP&E> 42,698
<DEPRECIATION> 10,799
<TOTAL-ASSETS> 85,430
<CURRENT-LIABILITIES> 16,696
<BONDS> 32,856
0
3,871
<COMMON> 3,220
<OTHER-SE> 27,053
<TOTAL-LIABILITY-AND-EQUITY> 85,430
<SALES> 124,732
<TOTAL-REVENUES> 124,732
<CGS> 97,403
<TOTAL-COSTS> 121,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,403
<INCOME-PRETAX> 1,449
<INCOME-TAX> 266
<INCOME-CONTINUING> 788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 788
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
