SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTER ENDED DECEMBER 31, 1999

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.

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 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
DECEMBER 31, 1999
(Unaudited)

NOTE 1 — Basis of Presentation and Significant Accounting Policies

The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods covered have been included. For further information, refer to the consolidated financial statements and notes thereto included in Maxco’s annual report on Form 10-K for the year ended March 31, 1999.

The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. 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 marketable securities as securities available for sale under FASB 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Beginning in November 1999, Maxco accounted for its investment in Provant Inc. common stock as securities available for sale, as these shares are no longer restricted stock as defined by FASB 115. At December 31,1999 the unrealized gain on this stock and other securities available for sale was approximately $1,962,000 net of deferred tax.

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

NOTE 4 — Investment in Integral Vision, Inc.

On June 30, 1999, Integral Vision, Inc. (formerly Medar, Inc.), Maxco’s 25% owned affiliated company sold its welding division for cash and debt. Maxco recognized its proportionate share of the gain on this transaction as part of equity in earnings of affiliates. Also, as a result of this transaction, Maxco received payment on June 30, 1999 of the full balance due on subordinated debentures of $750,000.

NOTE 5 — Long Term Debt

At December 31, 1999 Maxco had available $6.3 million on its lines of credit which provide for up to $33.0 million for acquisitions and general corporate purposes.

NOTE 6 — 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 7 — Comprehensive Income

The components of comprehensive income for the three and nine months ended December 31, 1999 and 1998 are as follows:

The components of accumulated comprehensive income, net of related tax at December 31, 1999 and March 31, 1999 are as follows:

NOTE 8 — 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 8 — 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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MAXCO, INC. AND SUBSIDIARIES
DECEMBER 31, 1999

MATERIAL CHANGES IN FINANCIAL CONDITION

Operating activities generated $2.2 million in cash for the nine months. Individual working capital component levels increased over the March 31, 1999 level, primarily due to the higher sales levels by the Company’s construction supplies unit (Ersco) as well as the addition of working capital components of acquired businesses added to this unit.

Investing activities included the purchases by Ersco of businesses in the St. Louis market area. Cash was also used in investing activities during the nine months at Ersco to purchase forms used for rental to its customers and additional equipment for Maxco’s heat-treating unit (Atmosphere Annealing).

During the quarter ended June 30, 1999, Integral Vision, Inc. (formerly Medar, Inc.), Maxco’s 25% owned affiliated company, sold its welding division for cash and debt. Consequently, payment was received of the full balance due of $750,000 on subordinated debentures held by Maxco.

Net proceeds from additional long-term debt were used primarily to fund the acquisition of Ersco’s St. Louis branch and the purchase of equipment at Ersco and Atmosphere Annealing.

At December 31, 1999 Maxco had available $6.3 million on its lines of credit which provide for up to $33.0 million for acquisitions and general corporate purposes.

Beginning in November 1999 Maxco accounted for its investment in Provant Inc. common stock as securities available for sale as these shares are no longer restricted stock as defined by FASB 115. Consequently, the securities are carried at fair value with the unrealized gains and losses net of tax, reported as a separate component of stockholders’ equity. At December 31,1999 the unrealized gain on this stock was approximately $2.0 million net of tax.

The Company 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 twelve months.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Three Months Ended December 31, 1999 Compared to 1998

Net sales increased to $34.0 million compared to $29.7 million in last year’s third quarter. Third quarter results reflect operating earnings of $263,000 compared to $840,000 for the comparable period in 1998. Net loss was $493,000 or $.19 per share assuming dilution compared to last year’s net income of $129,000 or $.01 per share assuming dilution.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MAXCO, INC. AND SUBSIDIARIES

Higher sales in the current period occurred at Maxco’s construction supplies unit (Ersco) over the comparable 1998 period primarily as a result of sales generated by branches added since the third quarter of last year in the St. Louis and Columbus metropolitan areas. Sales at Atmosphere Annealing and Pak-Sak were relatively comparable with the prior year comparable period.

Consolidated gross profit (net sales less cost of sales and operating expenses) increased to $8.2 million or approximately 24% of sales from $6.9 million or 23% of sales. The construction supplies unit generated additional gross profit in the current period over last year due to its increased sales level. Gross margin at this unit was higher in the current quarter due primarily to the increase in sales of higher margin products such as rentals and associated accessories. A higher proportion of these sales were from inventory which generally have a higher margin as compared to sales made on a direct shipment basis. The higher proportion of sales from inventory were attributable in part to the recently acquired St. Louis branches of Ersco. Improvements in gross margin also occurred at Maxco’s heat-treating unit as efficiency improvements resulting from the completion of certain major capital projects were realized.

Selling, general, and administrative expenses increased to $6.7 million from $5.2 million. The increase is primarily attributable to the construction supplies segment due to additional operating costs associated with new locations, increases in staffing levels, and other expenses incurred to support the planned growth of this unit.

The increase in depreciation expense in 1999 was attributable to depreciation by Ersco on purchases of rental forms and shoring equipment and depreciation of assets from its acquired businesses, as well as depreciation by Atmosphere Annealing on new equipment, including a new coating line, additional furnaces, and facility improvements made late in the prior year. The increase in amortization expense was attributable to the goodwill recorded as a result of acquisitions by Ersco since the third quarter of last year.

As a result of the above, operating earnings decreased to approximately $263,000 from $840,000 in last year’s comparable period.

Net interest expense increased in 1999 from the prior year quarter due to additional long-term borrowings and reduction in marketable securities, the proceeds of which were used primarily for additional purchases of property and equipment and the purchase of businesses.

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

Nine Months Ended December 31, 1999 Compared to 1998

Net sales increased to $125.2 million compared to $100.9 million in last year’s comparable nine-month period. Results for this period include operating earnings of $5.6 million compared to $4.2 million for the comparable period in 1998. Net income was $2.7 million or $.75 per share assuming dilution compared to last year’s $1.9 million or $.47 per share assuming dilution.

Higher sales in the current nine-month period occurred at Maxco’s construction supplies unit (Ersco) over the comparable 1998 period primarily as a result of a 8.1% increase in same branch sales, and sales of approximately $15.6 million generated by branches added since the third quarter of last year in the St. Louis, Columbus, and Louisville metropolitan areas. A strong general construction market resulting from an overall stable and growing general economy, increased availability of federal highway repair dollars, as well as an increase in form rental revenues were primary reasons for the increase in same branch sales for the nine months. Sales at Atmosphere Annealing increased in the current nine-month period over the comparable nine-month period last year in part because last year’s sales levels were depressed due to a labor strike at one of its automotive customers. Additionally, sales of coating and other services increased due to greater processing capabilities of equipment and facilities recently placed in service.

Consolidated gross profit (net sales less cost of sales and operating expenses) increased to $29.4 million or approximately 23% of sales from $21.8 million or 22% of sales. The construction supplies unit generated additional gross profit in the current period over last year due to its increased sales level. Gross margin at this unit was higher for the current nine-month period due to increased levels of rental revenues, sales of higher margin products, as well as a higher proportion of sales from inventory. Inventory sales generally have higher margins as compared to sales on a direct shipment basis. The higher proportion of products sold from inventory was primarily attributable to Ersco’s acquisition of its St. Louis branch where sales are primarily made on this basis. Improvements in gross margin also occurred at Maxco’s heat-treating unit as efficiency improvements resulting from the completion of certain major capital projects were realized.

Selling, general, and administrative expenses increased to $20.2 million from $15.3 million. The increase was in large part attributable to the construction supplies segment where selling expenses were higher due to increased sales. Also, additional operating costs associated with its new locations and their related selling activities were incurred since the third quarter of last year. Additionally, staffing levels were increased at Atmosphere Annealing and Ersco to support their planned growth. At December 31,1999 Maxco’s total number of employees was 795 compared to 670 at December 31, 1998.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MAXCO, INC. AND SUBSIDIARIES

The increase in depreciation expense in 1999 was attributable to depreciation by Ersco on purchases of rental forms and shoring equipment as well as assets of its acquired businesses. Additionally, depreciation by Atmosphere Annealing also increased as a result of new equipment including a new coating line, additional furnaces, and facility improvements placed in service late in the prior year. The increase in amortization expense was attributable to the goodwill recorded as a result of acquisitions by Ersco since the third quarter of last year.

As a result of the above, operating earnings increased to approximately $5.6 million from $4.2 million in last year’s comparable period.

Net interest expense increased from the prior year due to additional long-term borrowings and reduction in marketable securities, the proceeds of which were used primarily for additional purchases of property and equipment and the purchase of businesses.

NEW FINANCIAL ACCOUNTING PRONOUNCEMENT

The Financial Accounting Standards Board issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities. Statement 137 is effective for fiscal years beginning after June 15, 2000. The Company expects to adopt the new statement effective April 1, 2001. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. The Company has not evaluated the potential effect the adoption of this statement will have on its results of operations or financial condition.

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 $43.2 million at December 31, 1999. A 1% increase from the prevailing interest rates at December 31, 1999 on the unhedged variable rate portion of the Company’s long-term borrowings would increase interest expense by $386,000 based on principal balances at December 31, 1999.

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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)

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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.

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EXHIBIT INDEX