**QUARTERLYREPORT UNDER SECTION 13 OR 15(d)********OF THESECURITIES EXCHANGE ACT OF 1934**

 

**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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**ý****Quarterly Report Pursuant toSection 13 or 15(d) of********theSecurities Exchange Act of 1934**

**For the period ended September 30, 2004**

 

**or**

 

**o****Transition Report Pursuant toSection 13 or 15(d) of**

**theSecurities Exchange Act of 1934****for the transition period from**

 

**To**

 

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**Commission file number 0-7903**

 

I.R.S. Employer Identification Number **36-2675371**

 

**QUIXOTE CORPORATION**

(a Delaware Corporation)

** **

**35 East Wacker Drive**

**Chicago, Illinois 60601**

Telephone: **(312) 467-6755**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

YES  ý      NO  o

 

Indicateby check mark whether the registrant is an accelerated filer as defined by Rule12b-2 of the Securities Exchange Act of 1934.

YES  ý      NO  o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 8,768,700 shares of the Company’sCommon Stock ($.01-2/3 par value) were outstanding as of September 30, 2004.

 

 

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PART I - FINANCIALINFORMATION

 

ITEM 1. FINANCIALSTATEMENTS

 

QUIXOTE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
|                                        |       | **2004**                             | ** ** | **2003** | ** ** |
|                                        |       |                                 |       |   |   |
| Net sales                                   |       | $                                    | 37,987,000 |   | $ | 39,184,000 |   |
| Cost of sales                               |       | 26,715,000                           |       | 26,408,000 |   |
| Gross profit                                |       | 11,272,000                           |       | 12,776,000 |   |
|                                        |       |                                 |       |   |   |
| Operating  expenses:                        |       |                                 |       |   |   |
| Selling &  administrative               |       | 9,875,000                            |       | 7,951,000 |   |
| Research &  development                 |       | 1,260,000                            |       | 716,000 |   |
|                                        |       | 11,135,000                           |       | 8,667,000 |   |
|                                        |       |                                 |       |   |   |
| Operating profit                            |       | 137,000                              |       | 4,109,000 |   |
|                                        |       |                                 |       |   |   |
| Other income  (expense):                    |       |                                 |       |   |   |
| Interest income                             |       | 34,000                               |       | 15,000 |   |
| Interest expense                            |       | (592,000                             | )          | (498,000 | ) |
|                                        |       | (558,000                             | )          | (483,000 | ) |
|                                        |       |                                 |       |   |   |
| Earnings (loss)  before income taxes        |       | (421,000                             | )          | 3,626,000 |   |
| Income tax  provision (benefit)             |       | (160,000                             | )          | 1,305,000 |   |
| Net earnings  (loss)                        |       | $                                    | (261,000   | ) | $ | 2,321,000 |   |
|                                        |       |                                 |       |   |   |
| Per share data -  basic:                    |       |                                 |       |   |   |
| Net earnings  (loss)                        |       | $                                    | (.03       | ) | $ | .28 |   |
|                                        |       |                                 |       |   |   |
| Weighted average  common shares outstanding |       | 8,761,368                            |       | 8,366,336 |   |
|                                        |       |                                 |       |   |   |
| Per share data -  diluted:                  |       |                                 |       |   |   |
| Net earnings  (loss)                        |       | $                                    | (.03       | ) | $ | .27 |   |
|                                        |       |                                 |       |   |   |
| Weighted average  common shares outstanding |       | 8,761,368                            |       | 8,679,678 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

2

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QUIXOTECORPORATION AND SUBSIDIARIES

ConsolidatedBalance Sheets

(Unaudited)

 
| ** **                                                                                                                    | ** ** | **September 30,  2004** | ** **  | **June 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|--------------------|------------|
| **ASSETS**                                                                                                                    |       |                    |        |               |       |
| ** **                                                                                                                    |       |                    |        |               |       |
| Current assets:                                                                                                               |       |                    |        |               |       |
|                                                                                                                          |       |                    |        |               |       |
| Cash and cash  equivalents                                                                                                    |       | $                       | 603,000     |               | $          | 2,389,000 |   |
| Accounts  receivable, net of allowances for doubtful accounts of $2,038,000 at  September 30 and $1,872,000 at June 30   |       | 34,180,000              |        | 33,606,000         |       |
| Refundable income  taxes                                                                                                      |       | 1,398,000               |        | 3,371,000          |       |
|                                                                                                                          |       |                    |        |               |       |
| Inventories,  net:                                                                                                            |       |                    |        |               |       |
| Raw materials                                                                                                                 |       | 11,808,000              |        | 10,162,000         |       |
| Work in process                                                                                                               |       | 4,876,000               |        | 4,732,000          |       |
| Finished goods                                                                                                                |       | 9,094,000               |        | 10,414,000         |       |
|                                                                                                                          |       | 25,778,000              |        | 25,308,000         |       |
|                                                                                                                          |       |                    |        |               |       |
| Notes receivable                                                                                                              |       |                    |        | 217,000            |       |
| Deferred income  taxes                                                                                                        |       | 2,682,000               |        | 2,682,000          |       |
| Other current  assets                                                                                                         |       | 2,425,000               |        | 668,000            |       |
| Total current  assets                                                                                                         |       | 67,066,000              |        | 68,241,000         |       |
|                                                                                                                          |       |                    |        |               |       |
| Property, plant  and equipment, at cost                                                                                       |       | 49,276,000              |        | 48,436,000         |       |
| Less accumulated  depreciation                                                                                                |       | (22,057,000             | )           | (20,924,000        | )          |
|                                                                                                                          |       | 27,219,000              |        | 27,512,000         |       |
|                                                                                                                          |       |                    |        |               |       |
| Goodwill                                                                                                                      |       | 29,503,000              |        | 29,503,000         |       |
| Intangible  assets, net                                                                                                       |       | 7,966,000               |        | 8,249,000          |       |
| Deferred income  taxes                                                                                                        |       | 6,099,000               |        | 6,099,000          |       |
| Other assets                                                                                                                  |       | 454,000                 |        | 278,000            |       |
|                                                                                                                          |       | $                       | 138,307,000 |               | $          | 139,882,000 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

3

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QUIXOTECORPORATION AND SUBSIDIARIES

ConsolidatedBalance Sheets

(Unaudited)

 
| ** **                                                                                                                                  | ** ** | **September 30,  2004** | ** **  | **June 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|--------------------|------------|
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                              |       |                    |        |               |       |
|                                                                                                                                        |       |                    |        |               |       |
| Current  liabilities:                                                                                                                       |       |                    |        |               |       |
| Current portion  of long-term debt                                                                                                          |       | $                       | 4,599,000   |               | $          | 3,393,000 |   |
| Accounts payable                                                                                                                            |       | 10,196,000              |        | 10,723,000         |       |
| Dividends  payable                                                                                                                          |       |                    |        | 1,486,000          |       |
| Accrued expenses                                                                                                                            |       | 12,921,000              |        | 12,666,000         |       |
| Total current  liabilities                                                                                                                  |       | 27,716,000              |        | 28,268,000         |       |
|                                                                                                                                        |       |                    |        |               |       |
| Long-term debt,  net of current portion                                                                                                     |       | 46,169,000              |        | 47,014,000         |       |
| Other long-term  liabilities                                                                                                                |       | 955,000                 |        | 693,000            |       |
|                                                                                                                                        |       | 74,840,000              |        | 75,975,000         |       |
|                                                                                                                                        |       |                    |        |               |       |
| Commitments and  contingent liabilities (Note 10)                                                                                           |       |                    |        |               |       |
|                                                                                                                                        |       |                    |        |               |       |
| Shareholders’  equity:                                                                                                                 |       |                    |        |               |       |
| Preferred stock,  no par value; authorized 100,000 shares; none issued                                                                      |       |                    |        |               |       |
| Common stock,  par value $.01-2/3; authorized 15,000,000 shares; issued 10,719,940 shares at  September 30 and 10,707,440 shares at June 30 |       | 178,000                 |        | 178,000            |       |
| Capital in  excess of par value of common stock                                                                                             |       | 57,945,000              |        | 57,757,000         |       |
| Retained  earnings                                                                                                                          |       | 27,169,000              |        | 27,430,000         |       |
| Accumulated  other comprehensive income (loss)                                                                                              |       | 247,000                 |        | 614,000            |       |
| Treasury stock,  at cost, 1,951,240 shares at September 30 and June 30                                                                      |       | (22,072,000             | )           | (22,072,000        | )          |
| Total  shareholders’ equity                                                                                                            |       | 63,467,000              |        | 63,907,000         |       |
|                                                                                                                                        |       | $                       | 138,307,000 |               | $          | 139,882,000 |   |
|                                                                                                                                             |            |                         |             |                    |            |  |  |  |

 

See Notes to ConsolidatedFinancial Statements.

 

4

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QUIXOTECORPORATION AND SUBSIDIARIES

ConsolidatedStatements of Cash Flows

(Unaudited)

 
| ** **                                                                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Operating  activities:                                                                      |       |                                 |       |   |   |
| Net earnings  (loss)                                                                        |       | $                                    | (261,000   | ) | $ | 2,321,000 |   |
|                                                                                        |       |                                 |       |   |   |
| Adjustments to  reconcile net earnings (loss) to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation                                                                                |       | 1,133,000                            |       | 1,038,000 |   |
| Amortization                                                                                |       | 283,000                              |       | 379,000 |   |
| Provisions for  losses on accounts receivable                                               |       | 166,000                              |       | 168,000 |   |
| Changes in  operating assets and liabilities:                                               |       |                                 |       |   |   |
| Accounts  receivable                                                                        |       | (728,000                             | )          | 1,868,000 |   |
| Inventories                                                                                 |       | (470,000                             | )          | 824,000 |   |
| Other assets                                                                                |       | (1,933,000                           | )          | (1,181,000 | ) |
| Accounts payable  and accrued expenses                                                      |       | (274,000                             | )          | (8,614,000 | ) |
| Income taxes  payable (refundable)                                                          |       | 1,973,000                            |       | 404,000 |   |
| Other long-term  liabilities                                                                |       | (109,000                             | )          |   |   |
| Net cash used in  operating activities                                                      |       | (220,000                             | )          | (2,793,000 | ) |
|                                                                                        |       |                                 |       |   |   |
| Investing  activities:                                                                      |       |                                 |       |   |   |
| Capital  expenditures                                                                       |       | (840,000                             | )          | (463,000 | ) |
| Payments  received from note receivable                                                     |       | 217,000                              |       |   |   |
| Net cash used in  investing activities                                                      |       | (623,000                             | )          | (463,000 | ) |
|                                                                                        |       |                                 |       |   |   |
| Financing  activities:                                                                      |       |                                 |       |   |   |
| Proceeds from  revolving credit agreement                                                   |       | 11,500,000                           |       | 7,000,000 |   |
| Payments on  revolving credit agreement                                                     |       | (11,500,000                          | )          | (4,500,000 | ) |
| Payments on term  loan                                                                      |       | (750,000                             | )          | (750,000 | ) |
| Payments on  notes payable                                                                  |       | (95,000                              | )          |   |   |
| Proceeds from  short term notes payable                                                     |       | 1,206,000                            |       |   |   |
| Payment of  semi-annual cash dividend                                                       |       | (1,486,000                           | )          | (1,402,000 | ) |
| Proceeds from  exercise of common stock options                                             |       | 188,000                              |       | 327,000 |   |
| Net cash (used  in) provided by financing activities                                        |       | (937,000                             | )          | 675,000 |   |
|                                                                                        |       |                                 |       |   |   |
| Effect of  exchange rate changes on cash                                                    |       | (6,000                               | )          | (3,000 | ) |
| Decrease in cash  and cash equivalents                                                      |       | (1,786,000                           | )          | (2,584,000 | ) |
|                                                                                        |       |                                 |       |   |   |
| Cash and cash  equivalents at beginning of period                                           |       | 2,389,000                            |       | 3,753,000 |   |
| Cash and cash  equivalents at end of period                                                 |       | $                                    | 603,000    |   | $ | 1,169,000 |   |
|                                                                                             |            |                                      |            |  |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements.

 

5

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QUIXOTECORPORATION AND SUBSIDIARIES

Notesto Consolidated Financial Statements

(Unaudited)

 

1.  The accompanying unaudited consolidatedfinancial statements present information in accordance with generally acceptedaccounting principles for interim financial information and applicable rules ofRegulation S-X.  Accordingly, they do notinclude all information or footnotes required by generally accepted accountingprinciples for complete financial statements. The June 30, 2004 consolidated balance sheet as presented was derivedfrom the audited financial statements. The interim financial statements and notes should be read in conjunctionwith the consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended June 30, 2004.  Management believes the financial statementsinclude all normal recurring adjustments necessary for a fair presentation ofthe results for the interim periods presented.

 

2.  At September 30, 2004, the Company had stockoption plans providing for grants of stock options for directors based upon afixed calculation and grants of stock options and restricted stock foremployees as may be determined by the Compensation Committee of the Board ofDirectors. The cost of restricted stock granted is expensed in the period thestock is issued.  The Company accountsfor the stock options granted under the recognition and measurement principlesof APB Opinion No. 25, Accounting for Stock Issued to Employees, and relatedinterpretations.  No charges are made toearnings in connection with the stock options granted, as all stock optionsgranted had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net earnings and earnings per shareif the Company had applied the fair value recognition provisions of FASBStatement No. 123, Accounting for Stock-Based Compensation, to the stockoptions granted.

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                                                                                                          |       |                                  |       |   |   |
| Net earnings  (loss), as reported                                                                                                             |       | $                                     | (261,000   | ) | $ | 2,321,000 |   |
| Add: Stock-based  employee compensation  expense included  in reported net earnings, net of related tax effects                          |       |                                  |       | 252,000 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (234,000                              | )          | (553,000 | ) |
| Pro forma net  earnings (loss)                                                                                                                |       | $                                     | (495,000   | ) | $ | 2,020,000 |   |
|                                                                                                                                          |       |                                  |       |   |   |
| Earnings (loss)  per share:                                                                                                                   |       |                                  |       |   |   |
| Basic – as  reported                                                                                                                     |       | $                                     | (.03       | ) | $ | .28 |   |
| Basic – pro  forma                                                                                                                       |       | $                                     | (.06       | ) | $ | .24 |   |
| Diluted – as  reported                                                                                                                   |       | $                                     | (.03       | ) | $ | .27 |   |
| Diluted – pro  forma                                                                                                                     |       | $                                     | (.06       | ) | $ | .23 |   |

 

3.  The income tax benefit for the currentquarter is based upon the estimated effective income tax rate for the fullfiscal year.

 

4.  Operating results for the first three monthsof fiscal 2005 are not necessarily indicative of the performance for the entireyear.  The Company’s business is seasonalwith a higher level of sales in the Company’s fourth fiscal quarter.

 

6

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5.  The computation of basic and diluted earningsper share is as follows:

 
| ** **                                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                  |       |                                  |       |   |   |
| Numerator:                                            |       |                                  |       |   |   |
| Net earnings  (loss) available to common shareholders |       | $                                     | (261,000   | ) | $ | 2,321,000 |   |
|                                                  |       |                                  |       |   |   |
| Denominator:                                          |       |                                  |       |   |   |
| Weighted average  shares outstanding-basic            |       | 8,761,368                             |       | 8,366,336 |   |
|                                                  |       |                                  |       |   |   |
| Effect of  dilutive securities- common stock options  |       |                                  |       | 313,342 |   |
|                                                  |       |                                  |       |   |   |
| Weighted average  shares outstanding-diluted          |       | 8,761,368                             |       | 8,679,678 |   |
|                                                  |       |                                  |       |   |   |
| Net earnings  (loss) per share of common stock:       |       |                                  |       |   |   |
| Basic                                                 |       | $                                     | (.03       | ) | $ | .28 |   |
| Diluted                                               |       | $                                     | (.03       | ) | $ | .27 |   |

 

There were outstandingoptions to purchase common stock at prices that exceeded the average marketprice for the income statement periods. These options have been excluded fromthe computation of diluted earnings per share for the three-month periods endedSeptember 30, 2004 and 2003 and are as follows:

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Average exercise  price per share |       | $                                     | 24.94      |   | $ | 25.21 |   |
| Number of shares                  |       | 297,600                               |       | 268,700 |   |
|                                   |            |                                       |            |  |  |  |  |

 

In addition, employeestock options totaling 121,070 shares for the three months ended September 30,2004 were not included in the diluted weighted average shares calculationbecause the effects of these securities were anti-dilutive.

 

7

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6.  Accumulated other comprehensive incomeconsists of the following:

 
| ** **                                 | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|--------------------|------------|
| Currency  translation adjustment:          |       |                    |       |               |       |
| Beginning  Balance                         |       | $                       | (46,000    | )                  | $          | (44,000 | ) |
| Currency  translation adjustment           |       | 4,000                   |       | (2,000             | )          |
| Ending Balance                             |       | $                       | (42,000    | )                  | $          | (46,000 | ) |
|                                       |       |                    |       |               |       |
| Unrealized loss  on derivative instrument: |       |                    |       |               |       |
| Beginning  Balance                         |       | $                       | 660,000    |               | $          | — |   |
| Change in  derivative instrument           |       | (371,000                | )          | 660,000            |       |
| Ending Balance                             |       | $                       | 289,000    |               | $          | 660,000 |   |
|                                       |       |                    |       |               |       |
| Total  accumulated comprehensive income    |       | $                       | 247,000    |               | $          | 614,000 |   |

 

Comprehensive income (loss) consists of the following:

 
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2004**                              | ** ** | **2003** |   |
|                             |       |                                  |       |   |   |
| Net earnings  (loss)             |       | $                                     | (261,000   | ) | $ | 2,321,000 |   |
| Other comprehensive  income:     |       |                                  |       |   |   |
| Currency  translation adjustment |       | 4,000                                 |       | 6,000 |   |
| Change in  derivative instrument |       | (371,000                              | )          | 46,000 |   |
| Comprehensive  income (loss)     |       | $                                     | (628,000   | ) | $ | 2,373,000 |   |

 

7.  Effective December 1, 2003, the Company acquired substantially all ofthe assets and assumed certainliabilities of the North American operations of Peek Traffic Corporation (PeekTraffic).  The Company paid a purchaseprice of $15,693,000.  The purchase priceconsisted of $11,263,000 in cash and 180,723 shares of the Company’s commonstock, issued from Treasury Stock, valued at $4,430,000.  The cash portion of the purchase price wasobtained from the Company’s revolving credit facility.  Peek Traffic is a designer, manufacturer andsupplier of intelligent intersection control systems, red light enforcementsystems and other transportation equipment. The results of Peek Traffic have been included in the Company’s Informsegment since the date of acquisition. The Company anticipates that the Peek Traffic business will provide operatingsynergies in the traffic control market, expand the Company’s customer base inthe municipal and county markets and leverage the Company’s existingtechnologies within the Inform segment.

 

8

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Thefollowing summary presents the Company’s consolidated results of operations forthe three-month periods ended September 30 as if the acquisition had occurredat the beginning of fiscal year 2004.

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2004**                              | ** ** | **2003** |   |
|                                   |       |                                  |       | **(pro  forma)** |   |
| Net sales                              |       | $                                     | 37,987,000 |   | $ | 44,854,000 |   |
| Net earnings  (loss)                   |       | (261,000                              | )          | 2,170,000 |   |
| Net earnings  (loss) per diluted share |       | $                                     | (0.03      | ) | $ | 0.26 |   |

 

The consolidated proforma information is not necessarily indicative of the combined results thatwould have occurred had the acquisitions occurred on that date, nor is itindicative of the results that may occur in the future.

 

*8.  The Company’s operations are classified astwo reportable segments within the highway and transportation safety industry.  The Company’s two reportable segments are themanufacture and sale of the Company’s products which Protect and Direct, andthe manufacture and sale of products which Inform and are often referred to asIntelligent Transportation Systems (ITS) products.   The Company’s segments are discussed infurther detail in the Company’s Annual Report on Form 10-K for the year endedJune 30, 2004.*

* *

The following tablepresents financial information about reported segments for the three-monthperiods ended September 30, 2004 and 2003 along with the items necessary toreconcile the segment information to the totals reported in the consolidatedfinancial statements.

 
| ** **                         | ** ** | **Protect and  Direct** | ** ** | **Inform** | ** ** | **Unallocated  Corporate** | ** ** | **Total**   | ** ** |
|------------------------------------|------------|-------------------------|------------|------------|------------|----------------------------|------------|-------------|------------|
| 2005                               |       |                    |       |       |       |                       |       |        |       |
| THREE MONTHS                       |       |                    |       |       |       |                       |       |        |       |
| Net sales from  external customers |       | $                       | 18,396,000 |       | $          | 19,591,000                 |       |        |       | $ | 37,987,000 |   |
| Operating profit  (loss)           |       | 3,216,000               |       | (1,020,000 | )          | $                          | (2,059,000 | )           | 137,000    |   |
| Identifiable  assets               |       | 55,251,000              |       | 72,440,000 |       | 10,616,000                 |       | 138,307,000 |       |
|                               |       |                    |       |       |       |                       |       |        |       |
| 2004                               |       |                    |       |       |       |                       |       |        |       |
| THREE MONTHS                       |       |                    |       |       |       |                       |       |        |       |
| Net sales from  external customers |       | $                       | 19,396,000 |       | $          | 19,788,000                 |       |        |       | $ | 39,184,000 |   |
| Operating profit  (loss)           |       | 4,483,000               |       | 1,372,000  |       | $                          | (1,746,000 | )           | 4,109,000  |   |
| Identifiable  assets               |       | 52,320,000              |       | 89,010,000 |       | 4,278,000                  |       | 145,608,000 |       |
|                                    |            |                         |            |            |            |                            |            |             |            |  |  |  |  |  |  |

* *

Identifiable assets ofthe Inform segment as of September 30, 2004 decreased to $72,440,000 from$89,010,000 as of September 30, 2003 due to $32,600,000 in asset impairmentcharges made in the fourth quarter of the fiscal year ended June 30, 2004,which were partially offset by the assets acquired in the purchase of PeekTraffic in December, 2003.

 

9

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9.  Intangible assets consist of thefollowing:

 
| ** **                     | ** ** | **September 30, 2004**      | ** ** | **June 30, 2004**             | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortized  intangible assets:  |       |                        |       |                          |       |   |   |   |   |
| Patents and  licenses          |       | $                           | 2,820,000  |                          | $          | 1,636,000 |   | $ | 2,820,000 |   | $ | 1,597,000 |   |
| Technology and  installed base |       | 2,491,000                   |       | 750,000                       |       | 2,491,000 |   | 700,000 |   |
| Customer  relationships        |       | 3,807,000                   |       | 915,000                       |       | 3,807,000 |   | 827,000 |   |
| Trade names                    |       | 2,250,000                   |       | 128,000                       |       | 2,250,000 |   | 49,000 |   |
| Other                          |       | 640,000                     |       | 613,000                       |       | 640,000 |   | 586,000 |   |
| Total                          |       | $                           | 12,008,000 |                          | $          | 4,042,000 |   | $ | 12,008,000 |   | $ | 3,759,000 |   |

 

Amortizationexpense was $283,000 and $379,000 for the three months ended September 30, 2004and 2003, respectively.  The estimatedamortization expenses for this fiscal year ended June 30, 2005 and for the fourfiscal years subsequent to 2005 are as follows: $1,077,000, $1,154,000, $1,114,000, $1,049,000 and $838,000.  The carrying amount of goodwill consists of$21,364,000 for the Inform segment and $8,139,000 for the Protect and Directsegment both as of September 30, 2004 and June 30, 2004.

 

10.  Disclosures regarding each group of similarguarantees, commitments and contingencies are provided below.

 

Lease Commitments

 

The Company uses variousleased facilities and equipment in its operations.  The terms for these leased assets varydepending on the lease agreements.  Theseoperating leases include options for renewal. Annual minimum future rental payments for lease commitments will be approximately$3,762,000 in fiscal year 2005, $5,744,000 in fiscal years 2006 through 2007,$3,057,000 in fiscal years 2008 through 2009 and $5,265,000 thereafter, for anaggregate of $17,828,000.

 

Product WarrantyLiability

 

The Company warrants tothe original purchaser of its products that it will, at its option, repair orreplace, without charge, such products if they fail due to a manufacturingdefect. The term of these warranties varies (30 days to 5 years) byproduct.  The Company accrues for productwarranties, when, based on available information, it is probable that customerswill make claims under warranties relating to products that have been sold, anda reasonable estimate of the costs can be made. The Company’s estimated product warranty liability is as follows:

 
| Balance, July 1, 2004         |   | $        | 3,672,000 |   |
|-------------------------------|--------|----------|-----------|--------|
| Current  Provisions           |   | 170,000  |      |
| Expenditures                  |   | (203,000 | )         |
| Balance -  September 30, 2004 |   | $        | 3,639,000 |   |
|                               |        |          |           |        |  |

 

Certain amounts have beenreclassified as of June 30, 2004 to conform to the presentation as of September30, 2004.

 

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Legal

 

The Company is subject tolegal actions of a routine manner and common to its businesses.  The Company records loss contingencies whereappropriate within the guidelines established by Statement of FAS No. 5 “Accountingfor Contingencies”.  In the opinion ofmanagement, based on the advice of legal counsel, the amount of liability, ifany, arising from legal actions should not have a material effect on theCompany’s results of operations or financial condition.

 

Executive Agreements

 

The Company has agreements with certain executiveswhich are designed to retain the services of key employees and to provide forcontinuity of management in the event of a termination or an actual orthreatened change in control of the Company. Upon occurrence of a termination or a triggering event after a change incontrol, as defined, the Company would be liable for payment of benefits underthese agreements, to a maximum amount of $5,114,000.   The Company has by-laws and agreements underwhich it indemnifies its directors and officers from liability for certainevents or occurrences while the directors or officers are, or were, serving atthe Company’s request in such capacities.  The term of the indemnification period is for the director’s or officer’slifetime.  The Company believes that anyobligations relating to this indemnification are predominantly covered byinsurance subject to certain exclusions and deductibles.  Historically, the Company has not madepayments under these executive agreements, and no amount has been accrued inthe accompanying consolidated financial statements.

 

Business Purchase Agreements

 

As part of the purchaseprice of UST, the Company has agreed to pay contingent consideration based on apercentage of revenues for sales of certain products between May 1, 2003 andDecember 31, 2009, up to a maximum of $5,250,000.  No amounts have been paid through September30, 2004.  Also as part of the purchaseprice of UST, the Company guaranteed the principal and interest payments on the$5,000,000 five-year,5.25% subordinated promissory note payable to the sellers.  The Company is leasing UST’s Santa FeSprings, California facility and its Tecate, Mexico facility from affiliates ofthe sellers, for five year terms which can be renewed for five years.  The Company has guaranteed its performance ofits obligations under the leases.  Thelease commitments under the leases are included in the amounts mentioned above.

 

Indemnification of Lenders and Agents Under Credit Facilities

 

Under its creditfacilities, the Company has agreed to indemnify its lenders under suchfacilities against costs or losses resulting from changes in laws andregulations which would increase the lenders’ costs, and from any legal actionbrought against the lenders related to the use of loan proceeds.  These indemnifications generally extend forthe term of the credit facilities and do not provide for any limit on themaximum potential liability.   Historically,the Company has not made indemnification payments under such agreements and noamount has been accrued in the accompanying consolidated financial statementswith respect to these indemnification guarantees.

 

Bid and Performance Bonds

 

The Company has enteredinto bid and performance related bonds associated with various contracts.  Potential payments due under these bonds arerelated to the Company’s performance under the applicable contract.  The total amount of bid and performancerelated bonds that were available and undrawn was $1,272,000 at September 30,2004 and $3,356,000 at June 30, 2004. Historically, the Company has not made significant payments on bid andperformance bonds, and no amount has been accrued in the accompanyingconsolidated financial statements.

 

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Other Commitments

 

The Company has standbyletters of credit covering potential workers’ compensation liabilities. Thetotal amount of standby letters of credit that were outstanding at September30, 2004 was $1,166,000 and at June 30, 2004 was $762,000.  The Company has included $834,000 in accruedliabilities for this exposure as of September 30, 2004.

 

The Company has certainnon-cancellable royalty agreements, which contain certain minimum payments inthe aggregate of $2,613,000 through fiscal year 2012.  The Company has included $120,000 in accruedliabilities for these committments as of September 30, 2004.

 

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PART I – FINANCIAL INFORMATION

 

ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL

CONDITIONAND RESULTS OF OPERATIONS

 

OVERVIEW

 

Quixote Corporation (theCompany) and its subsidiaries develop, manufacture and market highway andtransportation safety products to protect, direct and inform motorists,pedestrians and road workers in both domestic and international markets.   The Company’s operations are comprised oftwo reportable segments within the highway and transportation safety industry,concentrating on safety problems and designing products to providetransportation safety solutions.  The Company’stwo reportable segments are – the manufacture and sale of highway andtransportation safety products which “Protect and Direct”, and the manufactureand sale of products and services which “Inform” that are often referred to asIntelligent Transportation Systems (ITS) products.   The Company’s Protect and Direct segmentprovides solutions for improving safety on the roads either by minimizing theseverity of crashes that occur or by preventing crashes from occurring bydirecting or guiding traffic.  Theprimary product lines within the Protect and Direct segment includeenergy-absorbing products such as crash cushions, truck-mounted attenuators,sand-filled barrels and water-filled barriers, and directing and guidingproducts such as flexible post delineators and glare screen systems.   The Company’s Inform segment providessolutions for improving traffic flow and safety on roads and runways byproviding information.  The primaryproduct lines within the Inform segment include intelligent intersection controlsystems, mobile and permanent variable message signs, advanced sensing productswhich measure distance, count and classify vehicles, and sense weatherconditions, computerized highway advisory radio transmitting systems, automatedenforcement systems, video detection systems and other transportationequipment.

 

The Company’s productsare sold by both a direct sales force and a distribution network to customersin the highway construction and safety business, state departments oftransportation, county and local governments and other governmentaltransportation agencies.  The domesticmarket for highway and transportation safety products is directly affected byfederal, state and local governmental policies and budgets.  A portion of the Company’s sales isultimately financed by funds provided to the states by the federal government.Historically, these funds have covered 75% to 90% of the cost of highway safetyprojects on roads constructed or maintained with federal assistance.  Seasonality affects the Company’s businesswith generally a higher level of sales in the Company’s fourth fiscal quarter.

 

RESULTS OF OPERATIONS

 

The prolonged delay inthe passage of new federal highway funding legislation, coupled with statebudgetary constraints, continue to have a material, negative impact on theCompany’s business.  The previous bill,TEA-21, expired in September 2003, but has been extended until May 2005.  Until the new bill is approved, however, thetransportation safety allotment in federal and state budgets will continue tobe uncertain, and the Company believes this uncertainty will continue tonegatively impact spending on the products and services offered by ourCompany.  In addition, sales volume atU.S. Traffic Corporation (UST), acquired in May 2003, continues to besignificantly lower than originally planned.  The Company believes this is due in part to the absence of new largecontracts related to ongoing state and municipal budgetary issues.

 

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The following table sets forth selected keyoperating statistics relating to the Company’s financial results:

 
| ** **                                                    | ** ** | **Three Months Ended  September 30** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                             | ** ** | **2003** | ** ** |   |
| Revenues by  Segment:                                         |       |                                 |       |   |   |   |
| Protect and  Direct                                           |       | $                                    | 18,396,000 |   | $ | 19,396,000 |   |   |
| Inform                                                        |       | 19,591,000                           |       | 19,788,000 |   |   |
|                                                          |       | $                                    | 37,987,000 |   | $ | 39,184,000 |   |   |
| Geographic  Revenues:                                         |       |                                 |       |   |   |   |
| Domestic                                                      |       | $                                    | 33,797,000 |   | $ | 35,154,000 |   |   |
| International                                                 |       | 4,190,000                            |       | 4,030,000 |   |   |
|                                                          |       | $                                    | 37,987,000 |   | $ | 39,184,000 |   |   |
|                                                          |       |                                 |       |   |   |   |
| Operating Income  (Loss) by Segment:                          |       |                                 |       |   |   |   |
| Protect and  Direct                                           |       | $                                    | 3,216,000  |   | $ | 4,483,000 |   |   |
| Inform                                                        |       | (1,020,000                           | )          | 1,372,000 |   |   |
| Unallocated  Corporate                                        |       | (2,059,000                           | )          | (1,746,000 | ) |   |
|                                                          |       | $                                    | 137,000    |   | $ | 4,109,000 |   |   |
| Gross profit  percentage                                      |       | 29.7                                 | %          | 32.6 | % |   |
| Selling and  administrative expenses as a percentage of sales |       | 26.0                                 | %          | 20.2 | % |   |
| Diluted earnings  (loss) per share                            |       | $                                    | (.03       | ) | $ | .27 |   |   |
|                                                               |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

Revenues

 

The Company’s net salesfor the firstquarter of fiscal 2005 decreased $1,197,000, or 3%, to$37,987,000 from $39,184,000 for the first quarter last year.  This was primarily due to decreases in salesacross both the Protect and Direct and the Inform segments, which werepartially offset by $6,279,000 in sales from the acquisition of Peek Traffic inDecember 2003.  Excluding theacquisition, net sales decreased $7,476,000, or 19%.

 

Protect and Direct– Net sales for the Company’s Protect and Direct segment for the first quarterof fiscal 2005 decreased 5% to $18,396,000 from $19,396,000 for the firstquarter last year.   The Company believesthe decrease in sales is due to state budgetaryconstraints and transportation funding uncertainties caused by the delay in thepassage of the new federal highway funding bill.  Decreased sales of truck-mounted attenuators,flexible post delineators, sand filled barrels, the Triton Barrier® productline and parts were partially offset by increased sales of permanent crashcushions.

 

Inform– Net sales for the Company’s Inform segment for the first quarter of fiscal2005 decreased $197,000 to $19,591,000 from $19,788,000 for the first quarterlast year.  Incremental sales of$6,279,000 due to the acquisition of Peek Traffic Corporation (Peek Traffic) inDecember 2003 were more than offset by decreased sales of intelligentintersection control systems by UST and decreased sales of highway advisory radios.  Excluding the recent acquisition, net salesfor the Inform segment decreased $6,476,000, or 33%.  Sales of UST products significantly decreasedto $8,091,000 from $14,165,000 for the first quarter of 2004 in part related tothe absence of large contracts related to ongoing state and municipal budgetaryissues.

 

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Geographic- International sales for the first quarter of fiscal 2005 increased $160,000,or 4%, to $4,190,000, compared to $4,030,000 for the first quarter lastyear.  The acquisition of Peek Trafficcontributed $296,000 in international net sales for the first quarter of fiscal2005.  Domestic sales for the firstquarter of fiscal 2005 decreased 4% to $33,797,000 from $35,154,000.  The acquisition of Peek Traffic contributed$5,984,000 in domestic net sales in the first quarter of fiscal 2005.

 

Gross Profit Margin

 

TheCompany’s gross profit margin for the first quarter of fiscal 2005 was 29.7%compared to 32.6% for the first quarter last year due to lower gross margins inboth the Protect and Direct and the Inform segments.  The gross profit margin for the Protect andDirect segment decreased primarily due to volume inefficiencies associated withthe lower level of sales and the fixed component of the Company’sexpenses.  Increased raw material pricesalso contributed to the decline in gross profit margin.  The gross profit margin for the Informsegment decreased primarily due to low gross profit margins at UST, which waspartially offset by higher gross margins at Peek Traffic, acquired in December,2003.

 

Sellingand Administrative Expenses

 

Sellingand administrative expenses for the first quarter of fiscal 2005 increased$1,924,000, or 24%, to $9,875,000 from $7,951,000 for the first quarter lastyear due to the inclusion of expenses from Peek Traffic which added $1,362,000for the quarter.  Excluding Peek Traffic,selling and administrative expenses for the first quarter of fiscal 2005 increased$562,000, or 7%, primarily due to increases in employee related expenses,including health insurance costs. Selling and administrative expenses increased as a percentage of salesto 26.0% for the first quarter of 2005 from 20.2% last year, primarily due tothe sales decline and the fixed cost nature of some of the expenses.

 

Research and Development

 

Research and developmentexpenditures were $1,260,000 for the first quarter of fiscal 2005 compared to$716,000 for the first quarter last year. The increase of $544,000 was primarily due to the inclusion of researchand development expenditures at Peek Traffic, as well as increased expendituresat UST as they work to upgrade and enhance their existing product lines.

 

Operating Profit

 

The operating profit forthe first quarter of fiscal 2005 was $137,000, compared to operating profit of$4,109,000 for the first quarter of fiscal 2004.  For the first quarter of fiscal 2005,operating profit for the Protect and Direct Group decreased $1,267,000 to$3,216,000 from $4,483,000 for the first quarter last year.  The Inform Group operating loss of $1,020,000compares to an operating profit of $1,372,000 for the first quarter of lastyear.  Excluding the results of theacquisition of Peek Traffic, the operating loss for the Inform Group was$1,865,000 compared to operating profit of $1,372,000 for the first quarterlast year.

 

Interest Expense

 

Interest expense for thefirst quarter of fiscal 2005 increased to $592,000 from $498,000 for the firstquarter last year.   The increase was dueto the higher level of debt since the acquisition of Peek Traffic in December2003, and to higher interest rates.  Theinterest rate on the Company’s collateralized credit agreement is based onprime or LIBOR and a fixed rate, plus a margin, and the weighted average ratewas 4.3% as of September 30, 2004.  TheCompany believes interest rates may continue to increase during fiscal 2005 toan average rate of 6%.

 

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Provision for IncomeTaxes

 

The income tax benefitfor the first quarter of fiscal 2005 was $160,000. The Company expects toprovide for income taxes at a rate of 38% for the remainder of fiscal 2005.

 

Net Earnings

 

Net loss for the firstquarter of fiscal 2005 was $261,000, or $0.03 cents per diluted share, comparedto net earnings of $2,321,000, or $0.27 cents per diluted share, for the firstquarter last year.

 

FINANCIAL CONDITION

 

Liquidity and CapitalResources

 

The Company’s principalsources of funds historically have been cash flows from operations andborrowings from banks.  The Company hadcash and cash equivalents of $603,000 as of September 30, 2004 and access toadditional funds of approximately $9.8 million under a bank credit agreementwhich currently expires as of May 16, 2006. The Company believes that this credit agreement is an important sourceof liquidity.  The credit agreementprovides for a $38 million revolving credit facility and a term loan agreementwith $16,250,000 outstanding at September 30, 2004.  Principal on the term loan is payablequarterly in installments of $750,000, plus interest.  The agreement contains both fixed andfloating interest rate options, at the prime rate or LIBOR rate, plus amargin.  The credit agreement alsocontains affirmative and negative covenants including requirements that theCompany meet certain consolidated financial criteria, including minimum levelsof consolidated net worth, EBITDA (as defined in the agreement), and capitalexpenditures.  The Company has paid asemi-annual dividend since 1993 and plans to continue to do so.  However, dividend payments are allowed onlyto the extent that borrowings and letters of credit outstanding against therevolving credit facility do not exceed $33 million less the amount of suchdividend payment.  The covenants alsolimit the incurrence of additional indebtedness, acquisitions, liens andencumbrances and other matters customarily restricted in such agreements.  The agreement may be renewed one additionalyear on each anniversary date upon mutual consent of the Company and the banks.

 

Effective June 30, 2004and during September 2004, the Company entered into two amendments to thecredit agreement, modifying certain covenants, pledging the Company’s assets ascollateral and reducing the maximum amount of availability under the revolvingcredit facility to $38 million to avoid the occurrence of events of defaultrelating to certain covenants and financial ratios.  The Company is currently in compliance withits debt covenants as of September 30, 2004. However, the Company’s ability to remain in compliance in the future isdependent upon the Company’s future performance and may be affected in part byevents beyond its control, including the prolonged delay in the passage of newfederal highway legislation.  While theCompany currently expects to be in compliance with the current agreement, therecan be no assurance that the Company will generate sufficient earnings and cashflow to remain in compliance or that it will be able to obtain futureamendments to the agreement, if necessary, to avoid a default.  In the event of a default, the lenders couldelect to declare all amounts borrowed under the agreement, $43,250,000 as ofSeptember 30, 2004, to be due and currently payable and the Company wouldnegotiate a new credit agreement.  However,there can be no assurance that the Company would be able to obtain a new creditagreement with satisfactory terms and conditions within an acceptable timeperiod.

 

The Company’s outstandingborrowings were $50,768,000, or 44% of total capitalization, as of September30, 2004, of which $43,250,000 was outstanding related to the bank creditfacility.  This compares to $50,407,000,or 44% of total capitalization, as of June 30, 2004, of which $44,000,000 wasoutstanding related to the bank credit facility.   Included in the amounts outstanding relatedto the bank credit facility were borrowings against the revolving creditfacility of $27,000,000 as of September 30, 2004 and June 30, 2004.  The amount of standby letters of creditoutstanding was $1,166,000 as of September 30, 2004 and was $762,000 as of June30, 2004.

 

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Cash Flows

 

Cash flows used inoperations were $220,000 during the first quarter of fiscal 2005.  This compares with $2,793,000 in the firstquarter of fiscal 2004.  Cash used byoperating activities in the first quarter of fiscal 2005 reflects increasedworking capital, in particular, pre-payments for the Company’s insuranceprogram and increases in accounts receivable and inventory.  These outflows were offset somewhat by thereceipt of income tax refunds of approximately $2 million.

 

Investing activities usedcash of $623,000 during the first quarter of fiscal 2005, compared to $463,000in the first quarter of the prior year. Expenditures during fiscal 2005 included $840,000 for capitalexpenditures, and were offset by the $217,000 in proceeds received from thefinal payment of a note receivable.

 

Financing activities usedcash of $937,000 during the first quarter of fiscal 2005, compared to $675,000in cash generation during the first quarter of fiscal 2004.  During the first quarter of 2005, there wasno net change in borrowings against the Company’s outstanding revolving creditfacility.  The Company paid $750,000 in aquarterly payment on the term loan and $95,000 on other notes payable.  During the first quarter of fiscal 2005, theCompany received cash of $1,206,000 in connection with short-term interim notespayable in connection with a leasing arrangement for a paint line in the processof construction.  Once the last paymentrelating to the paint line is made, expected in the second quarter, the notespayable will be cancelled and the Company will begin to make lease payments onthe equipment.  The Company also receivedcash of $188,000 from the exercise of common stock options.  The payment of the Company’s semi-annual cashdividend used cash of $1,486,000.

 

For 2005, the Companyanticipates needing $3,500,000 in cash for capital expenditures.  The Company may require additional investmentsin working capital to maintain growth. The Company may also need additionalfunds in the future as it considers acquiring businesses that complement itsexisting operations or to repurchase its own common stock from time totime.  These expenditures will befinanced either through the Company’s cash on-hand, cash generated from itsoperations or from borrowings available under the Company’s bank creditfacility.  Although there can be noassurance, the Company believes its existing cash, cash generated fromoperations and funds available under its existing credit facility aresufficient for all planned operating and capital requirements in the nearterm.  If needed and available onfavorable terms, the Company may also enter into other debt or equity financingarrangements.

 

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUALOBLIGATIONS

 

The Company is subject tocertain debt obligations, guarantees, commitments and contingent liabilitiesfurther described in the Company’s Annual Report on Form 10-K for the yearended June 30, 2004.

 

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The following tablepresents the Company’s contractual obligations to make future payments undercontracts, such as debt and lease agreements, as of September 30, 2004:

 

(Dollar amounts in thousands)

 
| ** **                | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|---------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
|                      |       |      |       |                  |       |          |       |          |       |                   |       |
| Long-term debt            |       | $         | 50,768     |                  | $          | 4,599         |       | $             | 6,919      |                   | $          | 11,000 |   | $ | 28,250 |   |
| Operating leases          |       | 17,828    |       | 3,762                 |       | 5,744         |       | 3,057         |       | 5,265                  |       |
| Minimum royalty  payments |       | 2,613     |       | 513                   |       | 600           |       | 600           |       | 900                    |       |
| Total                     |       | $         | 71,209     |                  | $          | 8,874         |       | $             | 13,263     |                   | $          | 14,657 |   | $ | 34,415 |   |

 

FUTURE OUTLOOK

 

The Company has beenaffected by the general slowdown in U.S. highway safety construction spendingfor the Company’s products.  The Companybelieves this is due principally to the prolonged delay in the passage of newfederal highway legislation as well as revenue shortfalls and budgetconstraints at the state and municipal levels. The previous highway funding bill, TEA-21, expired in September 2003,but has been extended through May 31, 2005.  The timing of the passage of the new highway legislation isuncertain.  Until new legislation ispassed, the transportation safety allotment in federal and state budgets willcontinue to be uncertain, and the Company believes this uncertainty willcontinue to negatively impact spending on the products and services offered bythe Company.

 

The substandard salesvolumes and operating losses at UST are expected to continue during fiscal2005.   The Company has developed and isimplementing a plan to rationalize portions of the UST and Peek Trafficoperations which includes integrating product offerings, outsourcingnon-critical component parts and focusing manufacturing facilities to obtaingreater synergies.  Although the Companyis currently refining estimates related to the plan, the total projected annualsavings could be several million dollars with costs estimated at approximatelyone million dollars.   The full benefitof projected annual cost savings is not expected to be realized until fiscal2006.  There can be no assurance,however, that the Company's rationalization plan will result in cost savings orto what extent.

 

The Company experiencesfluctuation in its gross profit margin from quarter to quarter primarily due tosales volume related to seasonality, variability in product mix and changes inthe competitive environment.  Inaddition, the Company has acquired complementary businesses over the pastseveral years and, as part of its strategy, may continue to acquirecomplementary businesses.  The grossprofit margins of certain acquired product lines are lower than the Company’shistorical gross profit margin, which is adversely affecting the Company’sgross profit margin.  The Company is alsoexperiencing rigorous competition in its variable message sign and weathersensing system product lines.  Inaddition, the Company has been affected by increased prices for certaincommodities, particularly steel and resin, which can be a significant componentof the cost of certain of the Company’s products and negatively impact theCompany’s gross margin for certain products. The Company does not believe these trends will improve in the nearfuture.

 

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SIGNIFICANT ACCOUNTINGPOLICIES AND CRITICAL ESTIMATES

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America (U.S. GAAP) requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements.  Management’sestimates also affect the reported amounts of revenues and expenses during thereporting period.  In addition, certainnormal and recurring estimates are made including estimates in determining theallowance for doubtful accounts receivable, inventory valuation reserves,valuation allowance on deferred tax assets and health care liabilities.  These estimates are made using management’sbest judgment given relevant factors and available data.  Actual results could differ materially fromthose estimates.  Note 2 to the Company’sJune 30, 2004 consolidated financial statements includes a summary of thesignificant accounting policies, methods and estimates used in the preparationof the Company’s consolidated financial statements.   There have been no material changes inaccounting policies, methods and estimates used by management.   In the opinion of management, the Companydoes not have any individual accounting policy or use any individual estimatethat is critical to the preparation of its consolidated financialstatements.  In most instances, theCompany must use an accounting policy or method because it is the only policyor method permitted under U.S. GAAP.  TheCompany believes the following significant accounting policies and methods usedby the Company are the most important to the presentation of the Company’sfinancial statements:

 

Revenue Recognition:  Revenues, net of sales incentives, arerecognized when either services have been rendered or both title and risk ofloss of products have been transferred to unaffiliated customers.  Additionally, the Company ensures thatcollection of the resulting receivable is probable, persuasive evidence that anarrangement exists, and the revenue is fixed or determinable.  Provision for estimated uncollectible amountsis made based upon management’s analysis of sales returns and bad debts.

 

Inventories:  Inventories are valued at the lower of cost(first-in, first-out method) or market. Actual costs are used to value raw materials and supplies.  Standard costs, which approximate actualcosts, are used to value finished goods and work-in-process. Standard costsinclude raw materials, direct labor and manufacturing overhead.  Provision for potentially obsolete orslow-moving inventory is made based on management’s analysis of inventorylevels, ages and salability.

 

Long-Lived Assets:Long-lived assets include such items as goodwill, patents, product rights,other intangible assets and property, plant and equipment.  For purposes of evaluating the recoverabilityof long-lived assets, the Company assesses the possibility of obsolescence,demand, new technology, competition, and other pertinent economic factors andtrends that may have an impact on the value or remaining lives of these assets.

 

Amortized long-livedassets (including amortized intangible assets and property, plant andequipment) held and used by the Company are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable in relation to future undiscounted cash flows ofunderlying asset groups.  The netcarrying value of assets not recoverable is reduced to fair value.  Fair values of amortized long-lived assetsare determined based upon the performance of a third party fair valueappraisal.  Patents and otherfinite-lived intangible assets are amortized on a straight-line or systematicmethod over the life of the patent or intangible asset.

 

Goodwill and otherindefinite-lived intangible assets are tested for impairment at leastannually.  The indefinite-livedintangible asset impairment test is performed by comparing the fair value ofthe intangible asset to its carrying value in a one-step analysis.  If the fair value of the intangible asset isless than its carrying value, the intangible asset is written-down to its fairvalue.  The goodwill impairment test is performedat the reporting unit level and is a two-step analysis.  First, the fair value of the reporting unitis compared to its book value.  If thefair value of the reporting unit is less than its book value, the Companyperforms a hypothetical purchase price allocation based on the reporting unit’sfair value to determine the implied fair value of the

 

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reporting unit’sgoodwill.  If the implied fair value ofthe goodwill is less than its carrying value, the goodwill is written-down toits implied fair value.  Fair values aredetermined with the help of a third party appraisal firm using present valuetechniques.

 

The impairment review ishighly judgmental and involves the use of significant estimates andassumptions.  These estimates andassumptions have a significant impact on the amount of any impairment chargerecorded.  Estimates of fair value areprimarily determined using discounted cash flow methods and are dependent uponassumptions of future sales trends, market conditions and cash flows of eachreporting unit over several years. Actual cash flows in the future may differ significantly from thosepreviously forecasted.  Other significantassumptions include growth rates and the discount rate applicable to futurecash flows.  The impact of theseestimates and assumptions on impairment testing of goodwill is particularlycritical for the Company’s Inform segment with $21,364,000 of the Company’s$29,503,000 of goodwill as recorded in the Company’s September 30, 2004 balancesheet.

 

Income Taxes: The Companyrecognizes deferred tax assets and liabilities for the expected future taxconsequences of events that have been included in the financial statements ortax returns.  Under this method, deferredtax assets and liabilities are determined based on the difference between thefinancial statement and tax basis of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected to reverse.  In assessing the realizability of thedeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Tothe extent that any future tax benefits are not expected to be fully realized, suchfuture tax benefits are reduced by a valuation allowance.  Realization of deferred tax assets assumesthat the Company will be able to generate sufficient taxable income so that theassets will be realized.  The factorsthat the Company considers in assessing the likelihood of realization includethe forecast of future taxable income and available tax planning strategiesthat could be implemented to realize the deferred tax assets.    The Company expects the deferred tax assetscurrently recorded to be fully realizable, however there can be no assurancethat an increased valuation allowance would not need to be recorded in thefuture.

 

FORWARD LOOKINGSTATEMENTS

 

Various statements madewithin the Management’s Discussion and Analysis of Financial Condition andResults of Operations and elsewhere in this report constitute “forward-lookingstatements” for purposes of the SEC’s “safe harbor” provisions under thePrivate Securities Litigation Reform Act of 1995 and Rule 3b-6 under theSecurities Exchange Act of 1934, as amended. Any statement that addresses expectations or projections about thefuture, including statements about the Company’s strategy for growth, productdevelopment, market position, expenditures, financial results or changes ingovernmental legislation, policies and conditions, is a forward-lookingstatement.

 

Investors are cautionedthat all forward-looking statements involve risks and uncertainties, includingthose detailed in the Company’s public filings with the SEC, news releases andother communications, which speak only as of the dates of those filings orcommunications.  The Company does notundertake any obligation to release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the date hereofor to reflect the occurrence of unanticipated events.  There can be no assurance that actual resultswill not differ materially from the Company’s expectations.  Factors which could cause materiallydifferent results include, among others, uncertainties related to continuedfederal, state and municipal funding for highways and transportation safety andrisks related to reductions in government expenditures; the successfulcompletion, integration and rationalization of acquisitions; the ability to generatesufficient future cash flows to be in compliance with financing agreements; theintroduction and acceptance of the Company’s products and services; anunfavorable change in product sales mix; seasonality along with the extent andtiming of the award of large contracts; the cyclical nature of the Company’sgovernmental markets; competitive and pricing pressures; increasing rawmaterial costs; excess manufacturing capacity; weather conditions; acts of warand terrorist activities; the possible impairment of goodwill and otherintangible assets; and general economic conditions.

 

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ITEM 3.  Quantitative and Qualitative Disclosuresabout Market Risk

 

Item 7.A. of the Company’sAnnual Report on Form 10-K for the year ended June 30, 2004 presentsinformation regarding Quantitative and Qualitative Disclosures about MarketRisk.

 

ITEM 4.  Controls and Procedures

 

(a) Evaluation ofDisclosure Controls and Procedures

 

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in the reports that are filed or submittedunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in the reports that are filedunder the Exchange Act is accumulated and communicated to management, includingthe principal executive officer and principal financial officer, as appropriateto allow timely decisions regarding required disclosure.  Under the supervision of and with theparticipation of management, including the principal executive officer andprincipal financial officer, the Company has evaluated the effectiveness of thedesign and operation of its disclosure controls and procedures as of the end ofthe period covered by this report, and, based on its evaluation, our principalexecutive officer and principal financial officer have concluded that thesecontrols and procedures are effective.

 

(b) Changes in InternalControls

 

There have been nosignificant changes in internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluationdescribed above.  In addition, there havebeen no corrective actions with regard to significant deficiencies and materialweaknesses.

 

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PART II - OTHER INFORMATION

 

Thereis not information required to be reported under any items except as indicatedbelow:

 

ITEM6.  Exhibits and Reports on Form 8-K

 
| (a)       |   | Exhibits                                                                  |
|-----------|--------|---------------------------------------------------------------------------|
|      |   |                                                                      |
|   31 |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|      |   |                                                                      |
|   32 |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  |

 

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SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Quarterly Report on Form 10-Q for the quarter ended September 30,2004 to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |             | QUIXOTE CORPORATION                          |
|--------|------------------|----------------------------------------------|
|   |             |                                         |
| DATED: | November 8, 2004 |                                         |   | /s/ Daniel P.  Gorey |   |
|   |             | DANIEL P. GOREY                              |
|   |             | Chief Financial Officer,                     |
|   |             | Vice President  and Treasurer                |
|   |             | (Chief Financial  & Accounting  Officer) |
|        |                  |                                              |  |  |  |

 

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