INTEGRAL VISION INC (MAXC) - Description of business
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Maxco, Inc. (Maxco) is a Michigan corporation incorporated in 1946. Maxco currently operates in the heat-treating business segment through Atmosphere Annealing Inc., a production metal heat-treating service company. Maxco also has investments in real estate and investments representing less than majority interests in the following businesses: a registered broker-dealer of securities that is primarily focused on the trading of fixed income investments; a developer, manufacturer and marketer of microprocessor-based process monitoring and inspection systems for use in industrial manufacturing environments; and an energy-related business. References to “the Company” are defined as Maxco, Inc. and its wholly owned subsidiary, Atmosphere Annealing, Inc. Heat Treating Atmosphere Annealing, Inc. Atmosphere Annealing, Inc. (“Atmosphere”) 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. In May 2005, Atmosphere acquired the common stock of BCGW, Inc. (“BCGW”) for $200,000. BCGW owns the buildings that house Atmosphere’s operating facilities in Lansing, Michigan. The spouse of Maxco’s president, Max A. Coon, was a 25% owner of BCGW. At the acquisition date BCGW had $1.2 million in property and equipment and $1.0 million in debt. 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. The majority of heat treating services are completed on customer owned parts shipped to Atmosphere’s plants for heat treating. Title to these parts does not transfer to Atmosphere and therefore customer owned parts heat treated by Atmosphere are not included in Atmosphere Annealing Inc.’s inventory. Inventories of this segment represent 100% of Maxco’s total inventories at March 31, 2006. Atmosphere is a service provider, not a manufacturer. With one exception, the parts processed are customer owned parts and therefore the right to return is not a material issue. Extended payment terms are not provided to customers. The heat-treating industry is competitive with over 250 heat treaters in Michigan, Ohio, and Indiana. Atmosphere specializes in high volume, 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 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. This operating segment accounted for 100% of consolidated net sales for the years ended March 31, 2006, 2005, and 2004. Subsequent to March 31, 2006, the Company engaged GBQ Consulting, LLC to locate an investor or purchaser of the Company including its subsidiary Atmosphere Annealing, Inc. Such sale is not expected to occur by March 31, 2007. Investment in Real Estate (Discontinued and Held For Sale) Maxco has effective ownership interests ranging from 31-50% in primarily two LLC’s that have been involved in the development and ownership of real estate in central Michigan. In 2003, the Company’s affiliated entity, L/M Associates II, sold substantially all of the properties in its real estate portfolio. Pursuant to the terms of the sale agreement, in July 2004, L/M Associates (L/M) exercised its option to require the managing member of the acquiring entity to repurchase L/M’s 16% interest in the acquiring entity. To date this requirement has not been satisfied and L/M Associates intends to pursue other collection remedies against the managing member of the acquiring entity. In addition, during the fourth quarter of fiscal 2006, the managing member of the acquiring entity listed the applicable properties for sale with a major real estate firm. Maxco accounts for its interest in L/M as real estate investment held for sale. In May 2005, Maxco acquired the common stock of Ledges Commerce Park (“Ledges”) for $200,000 plus the assumption of certain liabilities from L/M. As a result of this transaction, Maxco has recorded the assets acquired at their fair value, (all such assets are held for sale) and recorded the liabilities assumed at the amount at which they are expected to be settled. The financial reporting effect of this transaction essentially grosses up the assets and liabilities on Maxco’s balance sheet. This transaction effectively gives Maxco full control over the disposition of assets and the settlement of the liabilities as it relates to Ledges. The Company included the operations of Ledges since the date of acquisition in the consolidated financial statements. Such amounts are immaterial. Any real risks on guarantees that Maxco has estimated would be required to be paid by Maxco have been recorded in the accompanying consolidated financial statements and Maxco’s investment in real estate has been adjusted to the net realizable value of the remaining assets. Impairment charges totaling $800,000 were recognized during the year ended March 31, 2006 to further reduce the carrying value of the Company’s investment in real estate to its estimated fair value less costs to sell. 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 36% 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; and a 50% interest in Robinson Oil Company, LLC, which is in the business of acquiring and developing oil and gas interests. Impairment charges of $226,000 and $30,000 were recognized during the year ended March 31, 2006 to reduce the carrying value of the Company’s investments in Phoenix Financial Group and Robinson Oil Company, respectively, to their estimated fair values. At March 31, 2006, Maxco owned 2,410,183 shares or 8% of Integral Vision, Inc. common stock. Maxco’s ownership of Integral Vision had been greater than 20% but decreased as Integral Vision common stock warrants were exercised in March 2004. However, Maxco continues to account for its investment in Integral Vision under the equity method because of its representation on Integral Vision’s Board of Directors. Integral Vision develops, manufactures, and markets flat panel display inspection systems to ensure product quality in the display manufacturing process. Research and Development Expenditures on research activities related to development or improvement of products were not significant. Major Customers The nature of the Company’s services may produce sales to one or a small number of customers in excess of 10% of total sales in any one year. It is possible that the specific customers reaching this threshold may change from year to year. Loss of any one of these customers could have a material impact on the Company’s results of operations. For the year ended March 31, 2006 sales to Honda of America Manufacturing, Inc. and GM Powertrain represented 33.2% and 10.4% of consolidated sales, respectively. Amounts due from these customers represented 33% of the respective outstanding trade receivable balance at March 31, 2006. For the year ended March 31, 2005 sales to Honda of America Manufacturing, Inc. and GM Powertrain represented 33.3% and 10.7% of consolidated sales, respectively. Amounts due from these customers represented 31% of the respective outstanding trade receivable balance at March 31, 2005. For the year ended March 31, 2004 sales to Honda of America Manufacturing, Inc. and GM Powertrain represented 38.3% and 14.3% of consolidated sales, respectively. 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, 2006, Maxco and its wholly-owned operating subsidiary employed approximately 260 full time employees. Export Sales and Foreign Operations The Company and its operating subsidiary had no foreign operations or material export sales during the years ended March 31, 2006, 2005, or 2004. For additional information regarding industry segment information see Note 11 to “Notes to Consolidated Financial Statements”.