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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2000

Commission File Number 0-2762

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

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

Indicate by check mark whether the registrant (1) has filed all annual, quarterly and other reports required to be filed by Section 12 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to the filing requirements for at least the past 90 days.

Yes  X    No    

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practicable date.

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PART I

FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEETS

Maxco, Inc. and Subsidiaries

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See notes to consolidated financial statements

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

See notes to consolidated financial statements

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

See notes to consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maxco, Inc. and Subsidiaries
June 30, 2000
(Unaudited)

NOTE 1 — Basis of Presentation and Significant Accounting Policies
The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods covered have been included. For further information, refer to the consolidated financial statements and notes thereto included in Maxco’s annual report on Form 10-K for the year ended March 31, 2000.

The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. Maxco’s sales and operating results have varied substantially from quarter to quarter. Net sales are typically lower in the third and fourth quarters. The most significant factors affecting these fluctuations are the seasonal buying patterns of the Company’s customers due to inclement weather and the reduced number of business days during the holiday season. In addition, the timing of acquisitions or the occasional sale of corporate investments may cause substantial fluctuations of operating results from quarter to quarter. Maxco expects its net sales and operating results to continue to fluctuate from quarter to quarter.

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

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

NOTE 3 — Marketable Securities
The Company classifies its investments in equity securities with readily determinable fair values as securities available for sale under FASB 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Application of this method resulted in an unrealized loss, net of deferred tax, of approximately $1.2 million being reported as part of stockholders’ equity at June 30, 2000.

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

NOTE 4 — Investment in Integral Vision, Inc. (Formerly Medar, Inc.)
The following table summarizes the operating results of Integral Vision, Inc., Maxco’s 25% owned affiliated company:

During the quarter ended June 30, 1999, Integral Vision sold its welding division and recognized a gain of approximately $5.5 million on the transaction.

Condensed income statement information for the three months ended June 30, 2000 and June 30, 1999 for the equity investees where Maxco’s share of their net income (loss) exceeded 20% of consolidated pre-tax income for the year ended March 31, 2000 is as follows:

NOTE 5 — Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:

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

NOTE 6 — Comprehensive Income
The components of comprehensive income for the three months ended June 30, 2000 and 1999 are as follows:

The components of accumulated comprehensive income, net of related tax at June 30, 2000 and March 31, 2000 are as follows:

NOTE 7 — INDUSTRY SEGMENT INFORMATION

The following summarizes Maxco’s industry segment information:

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

NOTE 7 — INDUSTRY SEGMENT INFORMATION — Continued

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.

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

NOTE 8 — INVESTMENT IN AXSON, S.A.

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

NOTE 9 — DEBT

The Company is currently in default on certain financial and other covenants as required by its $18 million and $10 million lines of credit with a bank. As such the outstanding balance on the lines ($22.7 million at June 30, 2000) has been classified as current in the accompanying financial statements. These lines of credit were amended in July 2000 to carry an interest rate of 1% over prime, increasing the availability under the $18 million line to $20 million, and as provided under the original agreement with the bank, the $10 million acquisition line was converted to a $7.6 million term loan. However, there are ongoing negotiations with the bank to obtain waivers of default. Management anticipates that the negotiations will be completed in the third quarter of the fiscal year.

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

NOTE 10 — FEDERAL INCOME TAXES

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Maxco, Inc. and Subsidiaries
June 30, 2000

MATERIAL CHANGES IN FINANCIAL CONDITION

Operating activities generated $3.4 million in cash for the quarter. Individual working capital component levels increased over the March 31, 2000 level, primarily from the increased sales activity by the Company’s construction supplies unit (Ersco) over the traditional slower fourth quarter of the prior year.

Cash was used in investing activities during the quarter to purchase additional equipment for Maxco’s heat-treating unit (Atmosphere Annealing), and its Construction Supplies unit (Ersco).

Net proceeds from additional long-term debt were used primarily to fund the purchase of equipment.

At June 30, 2000, the Company continued to classify certain lines of credit as short term due to the Company being in default on certain financial and other covenants under its $18 million and $10 million lines of credit with a bank. In July 2000, these lines of credit were amended to carry an interest rate of 1% over prime, increasing the availability under the $18 million line to $20 million, and as provided under the original agreement with the bank, the $10 million acquisition line was converted to a $7.6 million term loan. However, there are ongoing negotiations with the bank to obtain waivers of default. Management anticipates that these negotiations will be completed in the third quarter of the fiscal year.

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

At June 30, 2000, the 2,240,605 shares of Integral Vision (formerly Medar) common stock that Maxco owns had an aggregate market value of approximately $5.6 million ($3.4 million at August 9, 2000). Maxco’s investment in Integral Vision is reflected in Maxco’s financial statements under the equity method for all periods presented as the Company owns greater than 20% of Integral Vision’s outstanding stock.

At June 30, 2000, the 249,230 shares of Provant common stock that Maxco owns had an aggregate market value of approximately $1.4 million ($2.0 million at March 31, 2000). Maxco’s investment in Provant is reflected in Maxco’s financial statements under the cost method as an available-for-sale security as the Company owns less than 20% of Provant’s outstanding stock.

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

Maxco believes that its current financial resources, together with cash generated from operations 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.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Three Months Ended June 30, 2000 Compared to 1999

Net sales increased to $48.5 million compared to $44.0 million in last year’s first quarter. First quarter results reflect operating earnings of $1.7 million compared to $2.9 million for the comparable period in 1999. Net income was $202,000 or $.03 per share assuming dilution compared to last year’s $1.9 million or $.57 per share assuming dilution.

Sales and operating earnings for the three months ending June 30, 2000 and 1999 by each of the company’s segments were as follows:

The increase in sales at Maxco’s Construction Supplies unit (Ersco) was primarily from an increase in product sales to highway contractors on a direct shipment basis from the manufacturers. The nominal increase in sales at the Company’s heat treating unit (Atmosphere) was offset by lower sales at its packaging products unit (Pak-Sak).

Consolidated gross profit (net sales less cost of sales and operating expenses) for both periods was $10.5 million, however, as a percentage of sales, decreased from 24% in the prior year to 22% in the current period. The decrease in gross margin was primarily the result of the increased sales at Ersco on a direct shipment basis, which generally have a lower margin. Higher operating expenses at certain of Ersco’s locations in anticipation of higher yard sales, which did not occur due in part to inclement weather in the month of June and a strike at certain redi-mix concrete plants in a key market were also factors. Gross profit at Atmosphere was also affected primarily by the increase in the price of natural gas that is used in the heat treating process.

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

Selling, general, and administrative expenses increased $869,000 to $7.3 million from $6.5 million. The increase primarily resulted at the construction supplies unit due to additional wages and other expenses incurred to support the planned growth of this unit.

Depreciation and amortization expense for the three months ended June 30, 2000 increased as a result of the additional depreciation resulting from the purchases of property and equipment by Atmosphere and Ersco in the 2000 fiscal year.

As a result of the above, operating earnings decreased to approximately $1.7 million from $2.9 million in last year’s comparable period.

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

Integral Vision, Inc. (formerly Medar, Inc.) had a net loss for the three months ended June 30, 2000 of $1.9 million compared to a net income of $3.6 million for the three months ended June 30, 1999. During the quarter ended June 30, 1999, Integral Vision sold its welding division and recognized a gain of approximately $5.5 million on the transaction. This was the primary reason Maxco’s equity in earnings of affiliates decreased to a loss of $325,000 for the three months ended June 30, 2000 from income of $325,000 in the comparable prior year period.

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 short and long term borrowings of $44.7 million at June 30, 2000. A 1% increase from the prevailing interest rates at June 30, 2000 on the unhedged variable rate portion of the Company’s short and long-term borrowings would increase interest expense on an annualized basis by approximately $400,000 based on principal balances at June 30, 2000.

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PART II

OTHER INFORMATION

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PART II
OTHER INFORMATION (Continued)

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PART II
OTHER INFORMATION (Continued)

*Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

      MAXCO, INC.

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EXHIBIT INDEX

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EXHIBIT INDEX

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EXHIBIT INDEX

*Filed herewith

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