Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

OR

Commission File Number 0-2762

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

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   ü      No        

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 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. [ ü ]

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of May 31, 2002: $11,528,100.

At May 31, 2002, there were 3,101,195 outstanding shares of Registrant’s common stock.

Documents Incorporated By Reference

Portions of the annual proxy statement for the year ended March 31, 2002 are incorporated by reference into Part III.

1

Table of Contents

MAXCO, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

2

Table of Contents

PART I

ITEM 1 — BUSINESS
Maxco, Inc. (“the Company”) is a Michigan corporation incorporated in 1946. Maxco currently operates in three business segments: construction supplies, heat-treating, and packaging products. Maxco’s businesses include Ersco Corporation, a distributor of construction supplies; Atmosphere Annealing Inc., a production metal heat-treating service company; and Pak-Sak Industries Inc., which makes polyethylene packaging. Maxco also has investments in real estate and investments representing less than majority interests in the following: a registered investor advisory firm; a registered broker-dealer of securities that is primarily focused on the trading of fixed income investments over the internet; a company offering a business-to-business vertical web portal designed to bring solution-seekers together with solution-providers; a limited partnership that has equity investments in companies focused on the information technology, telecommunications, and medical technology markets; two technology-related businesses; and one energy-related business. Subsequent to March 31, 2002, L/M II, of which Maxco owns 31%, entered into an agreement to sell its investments in real estate.

During the year ended March 31, 2002, the Company sold its equity interest in Mid-State Industrial Services, Inc. to Maxco President Max A. Coon. Ersco entered into a sale-leaseback agreement involving some of its concrete forming products with a limited liability company in which Mr. Coon is a member. Maxco also recorded additional consideration to be received as one of the former shareholders of Strategic Interactive (Maxco’s former 45% owned affiliate sold to Provant, Inc. in October 1998). Additionally, Maxco recorded a charge to income to recognize a decline in the value of its investment in Provant common stock that has been deemed other than temporary.

During the year ended March 31, 2001, Maxco invested in its operating companies through the purchase of additional property and equipment. In April 2000, the Company invested in Vertical VC, a limited partnership that has equity investments in companies focused on the information technology, and medical technology markets. As discussed below, the Company completed the sale of its investment in Axson in August 2000. The Company also recorded its share of the minimum additional consideration to be received as one of the former shareholders of Strategic Interactive.

During the year ended March 31, 2000, the Company invested in its construction supplies segment through the purchase of property and equipment at its existing branches and the purchase of two businesses. Maxco also added capacity at its heat-treating company through the purchase of property and equipment. Additionally, Maxco invested in Phoenix Financial Group, LTD and its subsidiary Cambridge Group Investments, LTD (dba Bondpage.com), a registered broker-dealer of securities that is primarily focused on the trading of fixed income investments over the Internet. The Company also made an investment in MYOEM.COM, a company offering a business-to-business vertical web portal designed to bring solution-seekers together with solution-providers. Maxco also made additional investments in Foresight Solutions, Inc. In relation to the Company’s 7% interest in Axson, S.A. of France, the majority shareholders of Axson began negotiations with Axson management in the fourth quarter of fiscal 2000, for a management buyout of the existing shareholders interests. Consequently, Maxco classified its investment in Axson as available for sale at March 31, 2000 and adjusted its carrying amount to its estimated fair value, which resulted in a $860,000 charge. This transaction was completed in August 2000.

CONSTRUCTION SUPPLIES
Ersco Corporation

Ersco Corporation 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. Ersco also rents concrete forming and shoring systems used in the construction of concrete structures. The geographic market is the Midwest, primarily in Michigan, Illinois, Indiana, Kansas, Missouri, Ohio, and Wisconsin. Warehouses are located in Detroit, Grand Rapids, Saginaw and Traverse City, Michigan; South Bend, Indiana; Columbus, Ohio; Milwaukee, Wisconsin; and St. Louis, Missouri. A sales office is located in metropolitan Chicago, which specializes in product sales to highway contractors on a direct shipment basis from the manufacturers. Competition is intense and larger project orders are secured on a competitive bid basis. During the years ended March 31, 2002, 2001, and 2000, net sales of the construction supplies group were approximately 65%, 65% and 64%, respectively, of consolidated net sales.

3

Table of Contents

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 46 days sales on hand and represented 71% of Maxco’s total inventories at March 31, 2002. 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 results in accounts receivable levels that generally change with volume levels. However, the collection periods may be extended by prior agreement to accommodate customer cash flows. Where applicable, accounts receivable are secured by perfected lien rights and 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 segment’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 construction supplies 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.

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’s facilities are located 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 8% of Maxco’s total inventories at March 31, 2002. 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 commercial 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.

This unit’s response time to its customer just-in-time requirements does not result in significant backlog for this segment. 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 25%, 25%, and 26% of consolidated net sales for the years ended March 31, 2002, 2001, and 2000, 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

Table of Contents

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 61 days sales on hand and represented 21% of Maxco’s total inventories at March 31, 2002. Credit policies are enforced to help insure that increases in accounts receivable are primarily related to volume increases.

This unit’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 for the years ended March 31, 2002, 2001, and 2000. The segment is not dependent on any patents, trademarks, licenses, franchises, or concessions. This segment accounted for approximately 10% of consolidated net sales for the years ended March 31, 2002, 2001, and 2000.

For additional information regarding the Company’s industry segments, see Note 10 to “Notes to Consolidated Financial Statements.”

INVESTMENT IN REAL ESTATE
Maxco has an ownership interest ranging from 25-50% in primarily two LLC’s which have been involved in the development and ownership of real estate in central Michigan. Effective January 1, 2000, a Master LLC (L/M Associates II) was formed consisting of the majority of the stabilized buildings in which Maxco had an ownership interest. At March 31, 2002 Maxco’s ownership interest in the Master LLC was approximately 31%. The other LLC (L/M Associates) includes properties under development that are not fully leased or individual properties not included in the Master LLC.

In early 2002, Maxco, as managing member of L/M Associates, which is the managing member of L/M Associates II, began negotiations to sell its real estate portfolio. Subsequent to March 31, 2002, L/M Associates II entered into an agreement to sell the properties within the Master LLC to an outside investor. The transaction is subject to approval of 75% of the member interests. If approved, the transaction is expected to be completed by September 30, 2002.

Additionally, the Company is currently negotiating to liquidate the remaining portion of Maxco’s real estate investments.

Maxco also has an investment in Nilson Builders, a residential home builder, as well as LandEquities, which was previously engaged in the construction, leasing, and space planning for its clients including the L/M company portfolios. These entities have been discontinued and their assets are currently being liquidated.

OTHER INVESTMENTS
In addition to its investments in real estate, the Company has other investments in 50% or less owned affiliates.

Maxco’s equity interest is 20% or greater in the following companies and consequently is accounted for using the equity method: approximately a 24% interest in Integral Vision, Inc. (formerly Medar, Inc.), a company that develops, manufactures, and markets microprocessor-based process monitoring and control systems related to optical inspection for use in industrial manufacturing environments; a one-third interest in Blasen Brogan Asset Management Company, a registered investor advisory firm; approximately a 12% direct (36% indirect) interest in Phoenix Financial Group, LTD and its subsidiary Cambridge Group Investments, LTD (dba Bondpage.com), a registered broker-dealer of securities that is primarily focused on the trading of fixed income investments over the Internet; a 50% equity interest in Foresight Solutions, Inc., a developer of accounting software and e-business solutions for small to medium size businesses; and a 50% interest in Robinson Oil Company, LLC, which is in the business of acquiring and developing oil and gas interests.

Maxco’s equity interest is less than 20% in the following companies and consequently is accounted for using the cost method: approximately 6% of the common stock of MYOEM.COM, a company offering a business-to-business vertical web portal designed to bring solution-seekers together with solution-providers; and a 16% interest in Vertical VC, a limited partnership that has equity investments in companies focused on the information technology, telecommunications, and medical technology markets.

5

Table of Contents

In November 1999, Maxco began accounting for its investment in Provant, Inc. common stock as securities available for sale as defined by FASB 115. Consequently, the securities are carried at market value with the unrealized gains and losses net of tax, reported as a separate component of stockholders’ equity. In 2002, the Company recognized a previously unrealized loss on its investment in Provant as an other than temporary impairment in its statement of operations of $3.1 million. At March 31, 2002, the unrealized gain on this stock was approximately $5,000 net of tax.

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 2002, 2001, or 2000.

ENVIRONMENTAL FACTORS
Compliance by Maxco and its operating subsidiaries with environmental protection laws had no material effect on capital expenditures, earnings, or competitive position.

EMPLOYEES
At March 31, 2002, Maxco and its wholly owned subsidiaries employed approximately 600 full time employees.

EXPORT SALES AND FOREIGN OPERATIONS
The Company and its operating subsidiaries had no foreign operations or material export sales during the years ended March 31, 2002, 2001, or 2000.

6

Table of Contents

ITEM 2 — PROPERTIES
The following table provides information relative to the principal properties owned or leased by the Company and its operating subsidiaries as of March 31, 2002. The Company considers its facilities to be in good operating condition.

Expiration dates of leases relative to the Company’s principal properties range from 2002 to 2016. Leases expiring within 12 months are expected to be renewed at substantially the same terms as the present leases.

ITEM 3 — LEGAL PROCEEDINGS
None

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None

7

Table of Contents

PART II

ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Maxco’s common stock trades on the Nasdaq SmallCap Market under the symbol MAXC. The approximate number of record and beneficial holders of Maxco’s common stock at May 31, 2002 was 1,000.

The range of high and low sales prices for the last two years as reported by NASDAQ were:

No cash dividends on common stock have been paid during any period.

8

Table of Contents

ITEM 6 — SELECTED FINANCIAL DATA

NOTES

(1)		Represents a $3.1 million charge for the year ended March 31, 2002 for an impairment of the Company’s investment in Provant, Inc. to estimated fair value and an $860,000 charge for the year ended March 31, 2000 for an adjustment of the Company’s Axson investment to estimated fair value.
(2)		Net income (loss) per share amounts assume dilution for all years presented.

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

Table of Contents

ITEM 7-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting method or its application is generally accepted, management selects the principle or method that is appropriate in the specific circumstances. Application of these accounting principles requires the Company’s management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions pertaining to the accounting policies described below.

Principles of Consolidation and Transactions With Affiliates
The consolidated financial statements include the accounts of Maxco, Inc. and its majority owned subsidiaries. Upon consolidation, all intercompany accounts and transactions are eliminated. Investments in greater than 20% owned investments are accounted for under the equity method. Investments in less than 20% owned affiliates are accounted for under the cost method. Transactions with equity affiliates are in the ordinary course of business and are conducted on an arm’s-length basis. Certain investments in equity affiliates and other activities may be between related parties and are conducted on an arm’s-length basis.

On December 20, 2001 the Company sold its 50% equity interest in Mid-State Industrial Services, Inc. to Maxco President, Max A. Coon, for $1.75 million, of which $750,000 was paid in cash with the remainder being applied to amounts due Mr. Coon for advances he had made to the Company and its affiliates. Additionally, Mid-State retired the $0.5 million obligation it had with Maxco. A portion of the proceeds from the sale was used to retire certain obligations not related to Mid-State which were guaranteed by the Company.

On August 17, 2001 Ersco entered into a sale-leaseback agreement involving some of its concrete forming products with a limited liability company in which Mr. Coon is a member. Ersco sold approximately $3.0 million in assets to the LLC that are now being leased back to the Ersco for a period of 60 months.

The Company’s policy has been to advance funds to its equity holdings as operating cash is required. As of March 31, 2002, the Company has advances to its affiliates totaling $5.3 million, net of a reserve of $1.0 million.

In addition, the Company’s policy has allowed the guarantee of various debt obligations of certain real estate and other investments in an aggregate amount of approximately $40.0 million as of May 31, 2002. Certain of the debt agreements related to its real estate investments, which Maxco and other guarantors have guaranteed, are in default at March 31, 2002. Forbearance agreements have been issued by two of the respective banks and the applicable entities are currently working with the lenders to rectify the default issues. However, efforts to negotiate a forbearance agreement with one of the lenders, representing $12.5 million in loans guaranteed by Maxco and other guarantors, have currently stalled and the lender has delivered a Demand for Payment and Notice of Intent to Commence Foreclosure. The Company remains hopeful that negotiations with the lender will be successful. The Company believes that the agreement to sell its investment in L/M Associates II will significantly reduce the debt obligations it has guaranteed (see note 8). Except as specifically accrued, the Company 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.

At March 31 2001, the Company accrued contingent liabilities totaling approximately $950,000 related to its investments and advances to Foresight Solutions and AMI Energy. These liabilities were paid by the Company in fiscal 2002.

Investments and Marketable Securities
The Company accounts for certain of its investments under 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.

10

Table of Contents

The Company reviews its investments to determine if the value shows a decline that has been deemed other than temporary. Accordingly, Maxco’s investment in Provant was reduced by $3.1 million in fiscal 2002. Additionally, in accordance with APB 18, the Company recorded a charge of $899,000, net of tax, in 2001 to recognize a decline in the value of its investment in Integral Vision that had been deemed other than temporary. The charge is included in equity in net income (loss) of affiliates for the year ended March 31, 2001. Maxco had a 7% interest in Axson, S.A. of France. The majority shareholders of Axson began negotiations with Axson management in the fourth quarter of fiscal 2000 for a management buyout of the existing shareholders interests. Consequently, Maxco classified its investment in Axson as available for sale at March 31, 2000 and adjusted its carrying amount to its estimated fair value, which resulted in a $860,000 charge. This transaction was completed in August 2000.

Revenue Recognition
The Company recognizes revenue from product sales upon transfer of title, which is generally upon shipment. An estimate of reserves is recorded for anticipated returns and credit memos which will be issued on sales recognized to date. Accounts and notes receivable are collateralized or secured by perfected lien rights and payment bonds where applicable. The SEC’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition,” provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

Allowance for Uncollectible Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of the financial condition of the customer and historical experience.

Inventories
Inventories are stated at the lower of first-in, first-out cost or market.

Goodwill, Intangible and Other Long-Lived Assets
Property, plant and equipment, goodwill, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the asset will be useful to the Company.

Goodwill, intangible and other long-lived assets are reviewed by management for impairment whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. If management believes impairment may exist, an assessment is performed. This assessment consists of comparing the estimated undiscounted future cash flows with the carrying amount of the long-lived assets. If the undiscounted future cash flows are less than the carrying amounts of the long-lived assets, the Company adjusts the carrying amount of the long-lived assets to their estimated fair value. Fair value is determined by anticipated future cash flows discounted at a rate commensurate with the risk involved. Goodwill totaled approximately $3.3 million at March 31, 2002 and represented 4% of total assets.

Effective April 1, 2002, the Company will adopt SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS No. 142”) which will result in the discontinuance of amortization of goodwill and indefinite-lived intangible assets that were recorded in connection with previous business combinations. Amortization expense for the years ended March 31, 2002, 2001, and 2000 was $586,000, $705,000, and $675,000, respectively. SFAS No. 142 will also require the Company to perform impairment tests of goodwill and indefinite lived intangible assets on an annual basis (or more frequently if impairment indicators exist). During fiscal 2003, the Company will complete the first of the required impairment tests of goodwill and indefinite lived intangible assets under this statement. The Company has not determined the effect on the financial statements for potential impairment of adopting SFAS No. 142.

RESULTS OF OPERATIONS
The following is a discussion of the major elements relating to Maxco’s financial and operating results for 2002 compared with 2001, and 2001 compared with 2000. 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.

Except for the historical information contained herein, the matters discussed in this report are forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the securities Act of 1933 and Section 21 E of the Securities Act of 1934. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. These forward-looking statements represent the company’s best estimates as of

11

Table of Contents

the date of this report. The company assumes no obligation to update such estimates except as required by the rules and regulations of the Securities and Exchange Commission.

2002 versus 2001
Net sales decreased to $136.6 million in 2002 compared to $157.3 million in 2001. Operating loss was $2.4 million in 2002 compared to earnings of $679,000 for the comparable period in 2001. Net loss was $4.5 million, a loss of $4.9 million after preferred dividends, or a loss of $1.58 per share assuming dilution compared to last year’s net loss of $4.8 million, a loss of $5.2 million after preferred dividends, or a loss of $1.68 per share assuming dilution.

Sales and operating earnings for the years ending March 31, 2002 and 2001 by each of the Company’s segments were as follows:

The $13.7 million decrease in net sales at the construction supplies segment was primarily the result of a slower economy, greater competitive market conditions, and a lower level of commercial construction compared to the prior year. The decrease in net sales at the heat treating segment was due to a slowdown in production experienced by its automotive customers. Lower sales at the packaging products segment were a result of the general economic slowdown and additional competitive pressures.

Consolidated gross profit (net sales less cost of sales and operating expenses) decreased $6.5 million to $29.2 million from $35.7 million. Consolidated gross margin (gross profit as a percentage of net sales) decreased to 21.4% from 22.7%. Gross profit at the Company’s construction supplies segment was affected by lower sales compared to last year, particularly forming sales and sales from inventory. This segment also experienced a lower gross profit due to its sales mix. The increased proportion of sales on a direct shipment basis, which typically have a lower margin than forming sales and sales from inventory, contributed to the reduction in gross profit at this segment. Although gross margin improved for the Company’s heat treating and packaging products segments, gross profit decreased primarily due to the lower sales volume. The operating expense portion as used in arriving at gross profit was reduced by $5.5 million as a result of reduced facility and sales expenses.

Selling, general, and administrative (“SG&A”) expenses decreased $3.8 million or 13.2% to $25.1 million from $28.9 million. This decrease primarily resulted at the Company’s construction supplies segment due to a reduction in selling and administrative expenses and other reduced costs as a result of an expense reduction program. SG&A expenses for the Company’s heat-treating and packaging products segments decreased as a result of their efforts to reduce costs.

Depreciation and amortization expense increased $423,000 to $6.5 million from $6.1 million primarily due to additions of property and equipment at the Company’s construction supplies and heat treating segments.

As a result of the facts discussed above, operating profit decreased $3.1 million to a loss of $2.4 million from profit of $679,000.

Investment and interest income increased in fiscal 2002 primarily due to income of $2.0 million representing Maxco’s remaining share of the additional consideration to be received as one of the former shareholders of Strategic Interactive, Inc. (Maxco’s former 45% owned affiliate sold to Provant, Inc. in October 1998). The payment will be made to the Company in cash, common stock, or a combination of both, at Provant’s option, in July 2002. The Company also recognized a gain of approximately $422,000 on the sale of its investment in Mid-State Industrial Services, Inc. Interest expense decreased in 2002 from the prior year primarily due to reduced borrowings and a reduction in the average interest rate associated with these borrowings. In accordance with FAS 115, the Company recorded a charge of $3.1 million to recognize a previously unrealized decline in the value of its investment in Provant, Inc. common stock that has been deemed other than temporary.

Equity in net income (loss) of affiliates consists of Maxco’s share of the operating results of 50% or less owned entities accounted for under the equity method. On a consolidated basis, equity in net loss of affiliates, net of tax,

12

Table of Contents

was $528,000 for the year ended March 31, 2002, compared to a loss of $3.0 million for the prior year comparable period. This was primarily the result of the Company’s investment in Integral Vision, Inc. At March 31, 2001, the Company adjusted the carrying value of its investment in Integral Vision, Inc. to its estimated fair value, a charge of $899,000 net of tax, as the Company determined that the investment was impaired. Additionally, for Maxco’s fiscal year ended March 31, 2001, its proportionate share of Integral Vision’s net loss, net of tax, totaled $1.3 million. In 2002, Maxco recorded its share of equity losses from Integral Vision, Inc. ($182,000 net of tax) which reduced the recorded amount below its fair value established at March 31, 2001.

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

2001 versus 2000
Net sales increased to $157.3 million in 2001 compared to $156.5 million in 2000. Operating earnings were $679,000 in 2001 compared to $4.0 million for the comparable period in 2000. Net loss was $4.8 million, a loss of $5.2 million after preferred dividends, or a loss of $1.68 per share assuming dilution in 2001 compared to net income of $316,000, a loss of $92,000 after preferred dividends, or a loss of $.03 per share assuming dilution in 2000.

Sales and operating earnings for the years ending March 31, 2001 and 2000 by each of the Company’s segments were as follows:

The $2.6 million increase in net sales at the construction supplies segment was the result of an increase in direct shipment sales and form rental revenues. The benefit of this sales increase was lessened by a change in the mix of sales to lower margin direct shipments. Additionally, labor strikes in two of Ersco’s markets affecting the redi-mix industry adversely impacted the level of activity of its customers in the early part of fiscal 2001. Extreme weather conditions in the Midwest also adversely impacted Ersco’s customers’ activity levels in the third and fourth quarters of fiscal 2001. Although the Company’s heat treating segment added capacity through additional purchases of equipment, sales slowed dramatically beginning late in the third quarter as the automotive industry corrected its inventory levels.

Consolidated gross profit (net sales less cost of sales and operating expenses) decreased $1.0 million to $35.7 million or 22.7% of sales from $36.7 million or 23.5% of net sales. Gross profit decreased for the Company’s heat treating segment primarily due to the lower sales volume. Although its net sales increased, gross profit for the Company’s construction supplies segment decreased primarily due to the fact that a greater proportion of those sales were on a direct shipment basis, which typically have a lower margin than sales from inventory. An improvement in gross margin percentage for the Company’s packaging products segment resulted in a modest increase in gross profit in spite of the decrease in net sales.

Selling, general, and administrative (“SG&A”) expenses increased $1.1 million or 4.0% to $28.9 million from $27.8 million. This increase was primarily attributable to an increase in SG&A expenses for the construction supplies segment resulting from the increase in sales, wage and other expenses incurred to support the planned growth of this unit. Since the growth has not materialized to the levels anticipated, management has begun a program to reduce SG&A expenses. SG&A expenses for the Company’s packaging products segment decreased as a result of its continuing efforts to reduce costs.

Maxco classified its investment in Axson as available for sale at March 31, 2000 and adjusted its carrying amount to its estimated fair value, which resulted in a $860,000 charge.

Depreciation and amortization expense increased $1.2 million to $6.1 million from $4.9 million primarily due to additions of property and equipment at the Company’s construction supplies and heat treating segments.

13

Table of Contents

As a result of the facts discussed above, operating profit decreased $3.3 million or 83.0% to $679,000 from $4.0 million.

Interest expense increased in 2001 from the prior year primarily due to additional borrowings, the proceeds of which were used for additional purchases of property and equipment. Additionally, an increase in the interest rate the Company is charged on its variable rate borrowings also contributed to the increase in net interest expense. Investment and interest income increased in fiscal 2001 primarily due to the fact that the Company recorded income of $675,000 representing its share of the minimum additional consideration to be received as one of the former shareholders of Strategic Interactive, Inc. (Maxco’s former 45% owned affiliate sold to Provant, Inc. in October 1998).

Equity in net income (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 $3.0 million for the year ended March 31, 2001, compared to income of $278,000 for the prior year comparable period. This decrease was primarily attributable to Maxco’s proportionate share of Integral Vision, Inc.’s (formerly Medar, Inc.) losses and a charge to recognize an impairment of the Company’s investment in Integral Vision. For Maxco’s fiscal year ended March 31, 2001, its proportionate share of Integral Vision’s net loss, net of tax, totaled $1.3 million. Additionally, in accordance with APB 18, the Company recorded a charge of $899,000, net of tax, in 2001 to recognize a decline in the value of its investment in Integral Vision that has been deemed other than temporary. For Maxco’s fiscal year ended March 31, 2000, its proportionate share of Integral Vision’s net income, net of tax, totaled $591,000. Integral Vision’s net income for that period was primarily the result of a gain on the sale of its welding controls division in 2000.

Equity in net income of affiliates was also negatively impacted by an increase in losses at Foresight Solutions, Inc. Maxco’s proportionate share of Foresight’s net loss, net of tax, totaled $452,000 in 2001 compared to $207,000 in 2000. In the first quarter of fiscal 2001, the carrying value of the Company’s investment in Foresight was reduced to zero after recognizing the first $72,000 of its proportionate share of Foresight’s losses. However, in accordance with APB 18, the Company continued to recognize its p