**QUARTERLY REPORT UNDER SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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**xQuarterly Report Pursuant to Section 13 or 15(d) of**the Securities Exchange Act of 1934

**Forthe period ended September 30, 2005**

**or**

**oTransition Report Pursuant to Section 13 or 15(d) of**the Securities Exchange Act of 1934

**forthe transition period from**

**To**

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**Commissionfile number 0-7903**

**I.R.S. Employer IdentificationNumber**36-2675371

**QUIXOTE CORPORATION**

(a Delaware Corporation)

**35East Wacker DriveChicago, Illinois 60601**Telephone: (312) 467-6755

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

YES   x      NO   o

Indicate by check mark whether the registrant is anaccelerated filer as defined by Rule 12b-2 of the SecuritiesExchange Act of 1934.

YES   x      NO   o

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).

YES   o      NO   x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:8,816,176 shares of the Company’s Common Stock ($.01-2/3 par value) wereoutstanding as of October 31, 2005.

 

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**PART I—FINANCIALINFORMATIONITEM 1.**   FINANCIAL STATEMENTSQUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)

| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                                 | ** ** | **2004** | ** ** |
| Net sales                                   |       | $                                                        | 39,391,000 |   | $ | 37,987,000 |   |
| Cost of sales                               |       | 28,445,000                                               |       | 26,715,000 |   |
| Gross profit                                |       | 10,946,000                                               |       | 11,272,000 |   |
| Operating  expenses:                        |       |                                                     |       |   |   |
| Selling & administrative           |       | 7,889,000                                                |       | 9,875,000 |   |
| Research & development             |       | 1,430,000                                                |       | 1,260,000 |   |
|                                        |       | 9,319,000                                                |       | 11,135,000 |   |
| Operating profit                            |       | 1,627,000                                                |       | 137,000 |   |
| Other income  (expense):                    |       |                                                     |       |   |   |
| Interest income                             |       | 1,000                                                    |       | 34,000 |   |
| Interest expense                            |       | (1,183,000                                               | )          | (592,000 | ) |
|                                        |       | (1,182,000                                               | )          | (558,000 | ) |
| Earnings (loss) before income taxes         |       | 445,000                                                  |       | (421,000 | ) |
| Income tax  provision (benefit)             |       | 169,000                                                  |       | (160,000 | ) |
| Net earnings  (loss)                        |       | $                                                        | 276,000    |   | $ | (261,000 | ) |
| Per share  data—basic:                 |       |                                                     |       |   |   |
| Net earnings (loss)                         |       | $                                                        | .03        |   | $ | (.03 | ) |
| Weighted average common shares outstanding  |       | 8,909,581                                                |       | 8,761,368 |   |
| Per share  data—diluted:               |       |                                                     |       |   |   |
| Net earnings (loss)                         |       | $                                                        | .03        |   | $ | (.03 | ) |
| Weighted average  common shares outstanding |       | 9,061,500                                                |       | 8,761,368 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATION AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**(Unaudited)**

| ** **                                                                                                                      | ** ** | **September 30,** | ** **  | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-------------------|------------|
| ** **                                                                                                                      | ** ** | **2005**               | ** **  | **2005**          | ** ** |
| **ASSETS**                                                                                                                      |       |                   |        |              |       |
| Current assets:                                                                                                                 |       |                   |        |              |       |
| Cash and cash equivalents                                                                                                       |       | $                      | 399,000     |              | $          | 156,000 |   |
| Accounts receivable, net of allowances for doubtful  accounts of $1,410,000 at September 30 and $1,581,000 at June 30 |       | 34,011,000             |        | 32,745,000        |       |
| Inventories, net:                                                                                                               |       |                   |        |              |       |
| Raw materials                                                                                                                   |       | 14,959,000             |        | 13,988,000        |       |
| Work in process                                                                                                                 |       | 5,032,000              |        | 4,666,000         |       |
| Finished goods                                                                                                                  |       | 8,025,000              |        | 8,757,000         |       |
|                                                                                                                            |       | 28,016,000             |        | 27,411,000        |       |
| Deferred income tax assets                                                                                                      |       | 5,540,000              |        | 5,765,000         |       |
| Other current assets                                                                                                            |       | 2,054,000              |        | 1,160,000         |       |
| Total current  assets                                                                                                           |       | 70,020,000             |        | 67,237,000        |       |
| Property, plant and equipment, at cost                                                                                          |       | 49,020,000             |        | 48,986,000        |       |
| Less accumulated  depreciation                                                                                                  |       | (24,926,000            | )           | (23,978,000       | )          |
|                                                                                                                            |       | 24,094,000             |        | 25,008,000        |       |
| Goodwill                                                                                                                        |       | 29,313,000             |        | 29,313,000        |       |
| Intangible  assets, net                                                                                                         |       | 7,116,000              |        | 7,340,000         |       |
| Deferred income  tax assets                                                                                                     |       | 5,083,000              |        | 5,083,000         |       |
| Other assets                                                                                                                    |       | 2,646,000              |        | 2,809,000         |       |
|                                                                                                                            |       | $                      | 138,272,000 |              | $          | 136,790,000 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTECORPORATION AND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**

| ** **                                                                                                                                            | ** ** | **September 30,  2005** | ** **  | **June 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-------------------------|------------|
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                          | ** ** | ** **                   | ** **  | ** **              | ** ** |
| Current liabilities:                                                                                                                                  | ** ** |                         | ** **  | ** **              | ** ** |
| Current portion of long-term debt                                                                                                                     |       | $                            | 427,000     |                    | $          | 427,000 |   |
| Accounts payable                                                                                                                                      |       | 10,931,000                   |        | 11,061,000              |       |
| Dividends payable                                                                                                                                     |       |                         |        | 1,595,000               |       |
| Accrued expenses                                                                                                                                      | ** ** | 10,180,000                   |        | 11,221,000              |       |
| Total current  liabilities                                                                                                                            | ** ** | 21,538,000                   |        | 24,304,000              |       |
| Long-term debt, net of current portion                                                                                                                | ** ** | 55,384,000                   |        | 49,587,000              |       |
| Other long-term  liabilities                                                                                                                          | ** ** | 1,049,000                    |        | 1,053,000               |       |
| ** **                                                                                                                                            |       | 77,971,000                   |        | 74,944,000              |       |
| Commitments and contingent liabilities (Note 9)                                                                                                       |       |                         |        |                    |       |
| 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 10,864,556 shares at September 30 and  10,799,784 shares at June 30 | ** ** | 181,000                      |        | 180,000                 |       |
| Capital in excess of par value of common stock.                                                                                                       |       | 60,542,000                   |        | 59,382,000              |       |
| Retained earnings                                                                                                                                     |       | 23,881,000                   |        | 23,605,000              |       |
| Accumulated other comprehensive income                                                                                                                |       | 316,000                      |        | 345,000                 |       |
| Treasury stock, at cost, 2,052,468 shares at  September 30 and 1,915,353 shares at June 30                                             |       | (24,619,000                  | )           | (21,666,000             | )          |
| Total  shareholders’ equity                                                                                                                      | ** ** | 60,301,000                   |        | 61,846,000              |       |
|                                                                                                                                                  |       | $                            | 138,272,000 |                    | $          | 136,790,000 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                                                 | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                                                 | ** ** | **2004** | ** ** |
| Operating activities:                                                                                      |       |                                                     |       |   |   |
| Net earnings (loss)                                                                                        |       | $                                                        | 276,000    |   | $ | (261,000 | ) |
| Adjustments to  reconcile net earnings to net cash used by operating activities of continuing  operations: |       |                                                     |       |   |   |
| Depreciation                                                                                               |       | 1,167,000                                                |       | 1,133,000 |   |
| Amortization                                                                                               |       | 428,000                                                  |       | 283,000 |   |
| Provisions for losses on accounts receivable                                                               |       | (171,000                                                 | )          | 166,000 |   |
| Issuance of 401K shares                                                                                    |       | 211,000                                                  |       |   |   |
| Stock-based compensation expense                                                                           |       | 249,000                                                  |       |   |   |
| Tax benefit from stock options                                                                             |       | (36,000                                                  | )          |   |   |
| Changes in  operating assets and liabilities:                                                              |       |                                                     |       |   |   |
| Accounts receivable                                                                                        |       | (1,096,000                                               | )          | (728,000 | ) |
| Inventories                                                                                                |       | (605,000                                                 | )          | (470,000 | ) |
| Other assets                                                                                               |       | (890,000                                                 | )          | (1,933,000 | ) |
| Income taxes                                                                                               |       | 261,000                                                  |       | 1,973,000 |   |
| Accounts payable and accrued expenses                                                                      |       | (1,170,000                                               | )          | (274,000 | ) |
| Other long-term liabilities                                                                                |       | (4,000                                                   | )          | (109,000 | ) |
| Net cash used in  operating activities                                                                     |       | (1,380,000                                               | )          | (220,000 | ) |
| Investing  activities:                                                                                     |       |                                                     |       |   |   |
| Capital expenditures                                                                                       |       | (253,000                                                 | )          | (840,000 | ) |
| Patent expenditures                                                                                        |       | (73,000                                                  | )          |   |   |
| Payments received on note receivable                                                                       |       |                                                     |       | 217,000 |   |
| Net cash used in  investing activities                                                                     |       | (326,000                                                 | )          | (623,000 | ) |
| Financing  activities:                                                                                     |       |                                                     |       |   |   |
| Proceeds from revolving credit agreement                                                                   |       | 13,500,000                                               |       | 11,500,000 |   |
| Payments on revolving credit agreement                                                                     |       | (7,600,000                                               | )          | (11,500,000 | ) |
| Payments on term loan                                                                                      |       |                                                     |       | (750,000 | ) |
| Payments on notes payable                                                                                  |       | (103,000                                                 | )          | (95,000 | ) |
| Proceeds from short term notes payable                                                                     |       |                                                     |       | 1,206,000 |   |
| Payment of semi-annual cash dividend                                                                       |       | (1,595,000                                               | )          | (1,486,000 | ) |
| Purchase of treasury stock                                                                                 |       | (3,105,000                                               | )          |   |   |
| Proceeds from exercise of common stock options                                                             |       | 852,000                                                  |       | 188,000 |   |
| Net cash provided  by (used in) financing activities                                                       |       | 1,949,000                                                |       | (937,000 | ) |
| Effect of exchange rate changes on cash                                                                    |       |                                                     |       | (6,000 | ) |
| Increase  (decrease) in cash and cash equivalents                                                          |       | 243,000                                                  |       | (1,786,000 | ) |
| Cash and cash equivalents at beginning of period                                                           |       | 156,000                                                  |       | 2,389,000 |   |
| Cash and cash  equivalents at end of period                                                                |       | $                                                        | 399,000    |   | $ | 603,000 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(Unaudited)**

1.     Theaccompanying unaudited consolidated financial statements present information inaccordance with generally accepted accounting principles for interim financialinformation and applicable rules of Regulation S-X. Accordingly, they donot include all information or footnotes required by generally acceptedaccounting principles for complete financial statements. The June 30, 2005consolidated balance sheet as presented was derived from the audited financialstatements. The interim financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-K for the year ended June 30,2005. Management believes the financial statements include all normal recurringadjustments necessary for a fair presentation of the results for the interimperiods presented.

2.     In December 2004, the FASB issued SFAS No. 123(revised 2004) (SFAS No. 123(R)), “Share-Based Payment”. We adopted theprovisions of SFAS No 123(R) as of July 1, 2005 using the modifiedprospective method. Under this transition method, share-based compensation costrecognized in the quarter ended September 30, 2005 includes compensationcost for all share-based awards which were unvested as of July 1, 2005 aswell as compensation cost for all share-based awards granted subsequent toJuly 1, 2005, based on the grant date fair value estimated in accordancewith the provisions of SFAS 123(R). The fair value of the options granted is being amortized on astraight-line basis over the requisite service period, which is generally thevesting period. We have two share-based compensation plans, which are describedbelow.

*Plan Descriptions*

Our 2001 Employee Stock Incentive Plan (the Plan),which is shareholder-approved, permits the grant of share options andrestricted shares to its employees for up to 1,125,000 shares, of which 150,000shares were reserved for the grant of restricted stock awards. We believe thatgrants of stock options to employees generate an increased incentive for theemployee to contribute to the Company’s future success and prosperity, thusenhancing the value of the Company for the benefit of its stockholders. ThePlan provides for grants of stock options and restricted stock for employees asmay be determined by the Compensation Committee of the Board of Directors. Nograntee may receive option grants in excess of 100,000 shares per year. Thestock options are granted with an exercise price equal to the fair market valueof our stock on the date of grant. Employee options granted under the currentplan expire not more than ten years from the grant date with vesting to bedetermined by the Committee. For grants currently outstanding, vesting is overa three year period, with one-third of the grant becoming exercisable at theend of each of the three years. Option awards provide for accelerated vestingif there is a change in control, as defined in the Plan.

Our 2001 Non-Employee Directors Stock Option Plan (theDirector Plan), which is also shareholder-approved, permits the grant of shareoptions to our non-employee directors for up to 135,000 shares. We  believe that grants of stock options tonon-employee directors encourages the directors to acquire a long termproprietary interest in the growth and performance of the Company, andgenerates an increased incentive for the directors to contribute to theCompany’s future success and prosperity, thus enhancing the value of theCompany for the benefit of its stockholders. The Director Plan provides for anannual grant of stock options for directors based on a fixed amount. The stockoptions are granted with an exercise price equal to the fair market value ofour stock on the date of grant. Options granted under the Director Plan expirenot more than seven years from the grant date. Vesting is over not less than a 

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six-month period.Option awards provide for accelerated vesting if there is a change in control,as defined in the Director Plan. Vesting is also accelerated upon the death ofa director optionee.

A summary of the principalfeatures of our current plans, as well as copies of those plans are provided inour 2004 Proxy Statement. Shares issued as a result of stock option exercisesor restricted stock grants may be issued as new shares, funded from Treasurystock or may be shares purchased on the open market. We believe that wecurrently have adequate Treasury and authorized unissued shares to meet anyrequirements to issue shares during fiscal 2006. The authorization for issuancewill terminate on November 1, 2011 for both the employee plan and thedirector plan.

*Share-basedCompensation Expense*

The share-based compensation cost that has beencharged against income for those plans was $249,000 for the three months endedSeptember 30, 2005. The total income tax benefit recognized in the incomestatement for share-based compensation arrangements was $36,000 for thatperiod, and the net expense recorded was $213,000, which was $0.02 per basicand diluted share outstanding. Share-based compensation expense, which is anon-cash item, added $249,000 to the first quarter’s cash flow fromoperations.  The exercise of stockoptions provided $852,000 in cash flow from financing activities.

As of September 30,2005, the total compensation cost related to unvested share-based awardsgranted under our stock option plans not yet recognized was approximately$1,585,000. This cost will be amortized on a straight-line basis over a weightedaverage period of approximately 1.5 years and will be adjusted forsubsequent changes in estimated forfeitures. The 241,755 unvested optionsoutstanding at September 30, 2005 had a weighted-average grant date fairvalue of $7.02.

*Determining FairValue*

Thefair value of stock options granted is estimated using the Black-Scholesoption-pricing model that uses the assumptions noted below for the firstquarters of fiscal years 2006 and 2005. Expected volatilities are based onhistorical volatility of the Company’s stock. We use historical data toestimate option exercise patterns, employee termination and forfeiture rateswithin the valuation model; separate groups of optionees that have similarhistorical exercise behavior are considered separately for valuation purposes.The expected term of options granted is derived from the output of the optionvaluation model and represents the period of time that options granted areexpected to be outstanding; the range given below results from certain groupsof employees exhibiting different behavior. The risk-free rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of the grant. The expected dividend yield isdetermined by dividing the current level of per share dividend by the grantdate stock price. We do not incorporate changes in dividends anticipated bymanagement unless those changes have been communicated to marketplaceparticipants.

| * *                              | * * | ***2006***      | ** ** | **2005**  | ** ** |
|---------------------------------------|----------|-----------------|------------|-----------|------------|
| Risk free  interest rate              |     | 4.0             | %          | 4.2       | %          |
| Expected dividend  yield              |     | 1.72            | %          | 1.71      | %          |
| Weighted average  expected volatility |     | 43              | %          | 41        | %          |
| Expected term                         |     | 3.7 - 4.4 years |       | 4.0 years |       |
| Weighted average  expected term       |     | 4.1 years       |       | 4.0 years |       |

 

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*Stock OptionActivity*

Information withrespect to stock option activity under our plans is as follows:

| ** **                                      | ** ** | **Common  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at July 1, 2005 |       | 1,009,971          |       |                                    | $          | 18.19                                              | ** ** |                            |       | ** ** | ** ** |   | ** ** | ** ** |
| Granted                                         |       | 89,200             |       |                                    | $          | 21.15                                              | ** ** |                            |       | ** ** | ** ** |   | ** ** | ** ** |
| Exercised                                       |       | (98,550            | )          |                                    | $          | 15.86                                              | ** ** |                            |       | ** ** | ** ** |   | ** ** | ** ** |
| Cancelled or  expired                           | ** ** | ** **         |       |                                    |       | ** **                                         |       |                            | ** ** | ** ** |   | ** ** | ** ** |
| Outstanding at  September 30, 2005         |       | 1,000,621          |       |                                    | $          | 18.68                                              | ** ** |                            |       | 4.0 Years | ** ** |   | $ | 2,711,000 |   |
| Vested at  September 30, 2005              |       | 758,866            |       |                                    | $          | 17.99                                              | ** ** |                            |       | 3.6 Years | ** ** |   | $ | 2,581,000 |   |

 

Options outstanding atSeptember 30, 2005 are exercisable as follows: 758,866 currently, 121,490within one year, 89,864 in two years and 30,401 thereafter. As ofSeptember 30, 2005, we have 628,498 common shares reserved for our optionand award plans available for future grants.

*Pro formaDisclosures*

Priorto adoption of SFAS 123R, we accounted for stock options granted under therecognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related interpretations. The cost ofrestricted stock granted was expensed in the period the stock is issued. Nocharges were made to earnings in connection with stock options granted, as allstock options granted had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustratesthe effect on net earnings and earnings per share if we had applied the fairvalue recognition provisions of FASB Statement No. 123, “Accounting forStock-Based Compensation”, to the stock options granted during those periods.

| ** **                                                                                                                                    | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **September 30,**           | ** ** |
| ** **                                                                                                                                    | ** ** | **2004**                         | ** ** |
| Net earnings (loss), as  reported                                                                                                             |       |                             | $          | (261,000 | ) |   |
| Add: Stock-based employee compensation expense  included in reported net earnings, net of related tax effects                                 |       |                             |       |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |                             | (234,000   | ) |   |
| Pro-forma net loss                                                                                                                            |       |                             | $          | (495,000 | ) |   |
| Loss per share:                                                                                                                               |       |                             |       |   |   |
| Basic—as reported                                                                                                                        |       |                             | $          | (.03 | ) |   |
| Basic—pro forma                                                                                                                          |       |                             | $          | (.06 | ) |   |
| Diluted—as reported                                                                                                                      |       |                             | $          | (.03 | ) |   |
| Diluted—pro forma                                                                                                                        |       |                             | $          | (.06 | ) |   |

 

Disclosures for thethree months ended September 30, 2005 are not presented becausestock-based payments were recorded using the fair-value method required underSFAS 123(R).

3.     The incometax benefit for the current quarter is based upon the estimated effectiveincome tax rate for the full fiscal year.

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4.     Operatingresults for the first three months of fiscal 2006 are not necessarilyindicative of the performance for the entire year. Our business is seasonalwith a higher level of sales in the fourth fiscal quarter.

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

| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **September 30,**           | ** ** |
| ** **                                               | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| *Numerator:*                                             |       |                             |       |   |   |
| Net earnings  (loss) available to common shareholders    |       | $                                | 276,000    |   | $ | (261,000 | ) |
| *Denominator:*                                           |       |                             |       |   |   |
| Weighted average  shares outstanding—basic          |       | 8,909,581                        |       | 8,761,368 |   |
| Effect of  dilutive securities—common stock options |       | 151,919                          |       |   |   |
| Weighted average  shares outstanding—diluted        |       | 9,061,500                        |       | 8,761,368 |   |
| *Net  earnings (loss) per share of common stock:*        |       |                             |       |   |   |
| Basic                                                    |       | $                                | .03        |   | $ | (.03 | ) |
| Diluted                                                  |       | $                                | .03        |   | $ | (.03 | ) |

 

Therewere outstanding options to purchase common stock at prices that exceeded theaverage market price for the income statement periods. These options have beenexcluded from the computation of diluted earnings per share for the three-monthperiods ended September 30, 2005 and 2004 and are as follows:

| ** **                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** |
| ** **                        | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Average exercise  price per share |       | $                                | 25.20      |   | $ | 24.94 |   |
| Number of shares                  |       | 268,300                          |       | 297,600 |   |
|                                   |            |                                  |            |  |  |  |  |

 

Inaddition, employee stock options totaling 121,070 shares for the three monthsended September 30, 2004 were not included in the diluted weighted averageshares calculation because the effects of these securities were anti-dilutive.

6.     Accumulated other comprehensive incomeconsists of the following:

| ** **                                 | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2005**               | ** ** | **2005**          | ** ** |
| Unrealized loss on  derivative instrument: |       |                   |       |              |       |   |   |
| Beginning balance—July 1         |       |                   | $          | 345,000           |       |   | $ | 660,000 |   |
| Change in derivative instrument            |       |                   |       |              |       | (265,000 | ) |
| Amortization to earnings                   |       |                   | (29,000    | )                 |       | (50,000 | ) |
| Ending balance                             |       |                   | $          | 316,000           |       |   | $ | 345,000 |   |
| Currency translation  adjustment:          |       |                   |       |              |       |   |   |
| Beginning balance                          |       |                   |       |              |       | $ | (46,000 | ) |
| Currency translation adjustment            |       |                   |       |              |       | (27,000 | ) |
| Liquidation of foreign entity              |       |                   |       |              |       | 73,000 |   |
| Ending balance                             |       |                   |       |              |       | $ | — |   |
| Total accumulated  comprehensive income    |       |                   | $          | 316,000           |       |   | $ | 345,000 |   |

 

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Comprehensiveincome (loss) consists of the following:

| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** |
| ** **                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net earnings  (loss)            |       | $                                | 276,000    |   | $ | (261,000 | **)** |
| Other  comprehensive income:    |       |                             |       |   |   |
| Currency translation adjustment |       |                             |       | 4,000 | ** ** |
| Change in derivative instrument |       |                             |       | (371,000 | **)** |
| Comprehensive income  (loss)    |       | $                                | 276,000    |   | $ | (628,000 | **)** |

 

7.     Ouroperations are classified as two reportable segments within the highway andtransportation safety industry. Our two reportable segments are the manufactureand sale of the Company’s products which Protect and Direct, and themanufacture and sale of products which Inform and are often referred to asIntelligent Transportation Systems (ITS) products.  Our segments are discussed in further detailin our Annual Report on Form 10-K for the year ended June 30,2005.

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Thefollowing table presents financial information about reported segments for thethree-month periods ended September 30, 2005 and 2004 along with the itemsnecessary to reconcile the segment information to the totals reported in theconsolidated financial statements.

| ** **                         | ** ** | **Protect and** | ** ** | ** ** | ** ** | **Unallocated** | ** ** | ** **  | ** ** |
|------------------------------------|------------|----------------------|------------|------------|------------|-----------------|------------|-------------|------------|
| ** **                         | ** ** | **Direct**           | ** ** | **Inform** | ** ** | **Corporate**   | ** ** | **Total**   | ** ** |
| *2006*                             |       |                 |       |       |       |            |       |        |       |
| THREE MONTHS                       |       |                 |       |       |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 17,820,000 |       | $          | 21,571,000      |       |        |       | $ | 39,391,000 |   |
| Operating profit  (loss)           |       | 2,894,000            |       | 399,000    |       | $               | (1,666,000 | )           | 1,627,000  |   |
| Identifiable  assets               |       | 52,538,000           |       | 72,732,000 |       | 13,002,000      |       | 138,272,000 |       |
| *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 |       |

 

Identifiable assetsof the Protect and Direct segment as of September 30, 2005 decreased to$52,538,000 from $55,251,000 as of September 30, 2004 due primarily todispositions of assets during fiscal 2005.

8.     Intangibleassets consist of the following:

| ** **                    | ** ** | **September 30, 2005** | ** ** | **June 30, 2005**   | ** ** |
|-------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** |
| Amortized intangible  assets: |       |                             |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Patents and licenses          |       | $                                | 3,064,000  |                          |       | $ | 1,799,000 |   |   | $ | 1,265,000 |   | $ | 2,990,000 |   |   | $ | 1,755,000 |   |   | $ | 1,235,000 |   |
| Technology and installed base |       | 2,491,000                        |       |                          | 949,000    |   |   | 1,542,000 |   | 2,491,000 |   |   | 899,000 |   |   | 1,592,000 |   |
| Customer relationships        |       | 3,807,000                        |       |                          | 1,310,000  |   |   | 2,497,000 |   | 3,807,000 |   |   | 1,181,000 |   |   | 2,626,000 |   |
| Trade names                   |       | 2,250,000                        |       |                          | 438,000    |   |   | 1,812,000 |   | 2,250,000 |   |   | 363,000 |   |   | 1,887,000 |   |
| Other                         |       | 640,000                          |       |                          | 640,000    |   |   | — |   | 640,000 |   |   | 640,000 |   |   | — |   |
| Total                         |       | $12,252,000                      |       |                          | $5,136,000 |   |   | $7,116,000 |   | $12,178,000 |   |   | $4,838,000 |   |   | $ | 7,340,000 |   |
|                               |            |                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangible amortization expense was $298,000 and$283,000 for the three months ended September 30, 2005 and 2004,respectively. The estimated amortization expenses for this fiscal year ended June 30,2006 and for the four fiscal years subsequent to 2006 are as follows:  $1,185,000, $1,120,000, $1,055,000, $844,000and $731,000. The carrying amount of goodwill consists of $21,174,000 for theInform segment and $8,139,000 for the Protect and Direct segment both as of September 30,2005 and June 30, 2005.

9.     Disclosures regarding each group of similar guarantees,commitments and contingencies are provided below.

*Lease Commitments*

We use various leasedfacilities and equipment in our operations. The terms for these leased assetsvary depending on the lease agreements. These operating leases may includeoptions for renewal and we may guarantee the performance of our obligationsunder the leases. Annual minimum future rental payments for lease commitmentswill be approximately $3,994,000 in fiscal year 2006, $6,492,000 in the 

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nextyear to three fiscal years, $1,814,000 in the next three to five fiscal yearsand $3,854,000 thereafter, for an aggregate of $16,154,000.

*Product WarrantyLiability*

Wewarrant to the original purchaser of our products that we will, at our option,repair or replace, without charge, such products if they fail due to amanufacturing defect. The term of these warranties varies (30 days to 5 years)by product. We accrue for product warranties, when, based on availableinformation, it is probable that customers will make claims under warrantiesrelating to products that have been sold, and a reasonable estimate of thecosts can be made. Our estimated product warranty liability is as follows:

| Balance,  July 1, 2005           |   | $        | 2,510,000 |   |
|---------------------------------------|--------|----------|-----------|--------|
| Current  provisions, net              |   | (14,000  | )         |
| Expenditures                          |   | (180,000 | )         |
| Balance—September 30,  2005 |   | $        | 2,316,000 |   |

 

*Legal*

We are subject to legalactions of a routine manner and common to our businesses. We record losscontingencies where appropriate within the guidelines established by Statementof FAS No. 5 “Accounting for Contingencies”. In the opinion of management,based on the advice of legal counsel, the amount of liability, if any, arisingfrom legal actions should not have a material effect on the Company’s resultsof operations or financial condition.

*ExecutiveAgreements*

We have agreements withcertain executives which are designed to retain the services of key employeesand to provide for continuity of management in the event of a termination or anactual or threatened change in control of the Company. Upon occurrence of atermination or a triggering event after a change in control, as defined, theCompany would be liable for payment of benefits under these agreements, to amaximum amount of $4,487,000.  We haveby-laws and agreements under which we indemnify our directors and officers fromliability for certain events or occurrences while the directors or officersare, or were, serving at the Company’s request in such capacities.  The term of the indemnification period is forthe director’s or officer’s lifetime. We believe that any obligations relatingto this indemnification are predominantly covered by insurance subject to certainexclusions and deductibles. Historically, we have not made payments under theseexecutive agreements, and no amount has been accrued in the accompanyingconsolidated financial statements.

*Business PurchaseAgreements*

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, 2003and December 31, 2009, up to a maximum of $5,250,000. No amounts have beenpaid through September 30, 2005 representing additional purchase price. Alsoas part of the purchase price of UST, the Company guaranteed the principal andinterest payments on the $5,000,000 five-year, 5.25% subordinated promissorynote payable to the sellers.

*Indemnification ofLenders and Agents Under Credit Facilities*

Under its creditfacilities, we have agreed to indemnify our lenders under such facilitiesagainst costs or losses resulting from changes in laws and regulations whichwould increase the lenders’ costs, and from 

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anylegal action brought against the lenders related to the use of loan proceeds. Theseindemnifications generally extend for the term of the credit facilities and donot provide for any limit on the maximum potential liability.  Historically, we have not made any significantindemnification payments under such agreements and no amount has been accruedin the accompanying consolidated financial statements with respect to theseindemnification guarantees.

*Bid and PerformanceBonds*

We have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn was $4,989,000 at September 30, 2005 and$8,094,000 at June 30, 2005. Historically, we have not made significantpayments on bid and performance bonds, and no amount has been accrued in theaccompanying consolidated financial statements.

*Other Commitments*

We have standby letters ofcredit covering potential workers’ compensation liabilities. The total amountof standby letters of credit that were outstanding at September 30, 2005and at June 30, 2005 was $1,144,000. We have included $1,048,000 inaccrued liabilities for this exposure as of September 30, 2005.

We have certainnon-cancelable royalty agreements, which contain certain minimum payments inthe aggregate of $2,685,000 through fiscal year 2012. We have included $628,000in accrued liabilities for this exposure as of September 30, 2005.

10.   DuringSeptember, we settled all claims arising from the 2003 acquisition of the PeekTraffic business with the Peek Traffic Group Limited and its affiliates (theSellers) for $633,000 in cash, net of legal expenses. Also, as part of thesettlement, the Sellers sold to us 150,603 shares of our common stock acquiredby the Sellers as part of the purchase price for $3,105,000, or $20.62 pershare.

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**PART I—FINANCIAL INFORMATION**

**ITEM 2.    MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

***OVERVIEW***

Quixote Corporation (the Company) and its subsidiariesdevelop, manufacture and market highway and transportation safety products toprotect, direct and inform motorists, pedestrians and road workers in bothdomestic and international markets.  Ouroperations are comprised of two reportable segments within the highway andtransportation safety industry, concentrating on safety problems and designingproducts to provide transportation safety solutions. Our two reportablesegments are—the manufacture and sale of highway and transportation safetyproducts which “Protect and Direct”, and the manufacture and sale of productsand services which “Inform” that are often referred to as IntelligentTransportation Systems (ITS) products.  The Protect and Direct segment providessolutions for improving safety on the roads either by minimizing the severityof crashes that occur or by preventing crashes from occurring by directing orguiding traffic. The primary product lines within the Protect and Directsegment include energy-absorbing products such as crash cushions, truck-mountedattenuators, sand-filled barrels and water-filled barriers, and directing andguiding products such as flexible post delineators and glare screen systems.  The Inform segment provides solutions forimproving traffic flow and safety on roads and runways by providing information.The primary product lines within the Inform segment include intelligentintersection control systems; mobile and permanent variable message signs;advanced sensing products which measure distance, count and classify vehicles,and sense weather conditions; computerized highway advisory radio transmittingsystems; automated red light enforcement systems; and other transportationequipment.

Our products are sold byboth a direct sales force and a distribution network to customers in thehighway construction and safety business, state departments of transportation,county and local governments and other governmental transportation agencies. Thedomestic market for highway and transportation safety products is directlyaffected by federal, state and local governmental policies and budgets. A portionof our sales is ultimately financed by funds provided to the states by thefederal government. Historically, these funds have covered 75% to 90% of thecost of highway safety projects on roads constructed or maintained with federalassistance. Seasonality affects our business with generally a higher level ofsales in our fourth fiscal quarter.

*RESULTS OF OPERATIONS*

Our results for the first quarter of fiscal 2006 wereconsistent with our expectations. Although the new federal highway spendingbill (SAFETEA-LU) was signed in August, 2005, we do not expect to realizesignificant benefits until the second half of fiscal 2006. During the firstquarter of fiscal 2006, sales increased over the first quarter of last year andwe began to see increased order activity in some areas of our business. Webelieve the increase in sales and order activity reflects improved confidencein our industry now that a highway bill is in place. We were encouraged to seesales growth of 10% in our Inform Group and increased profitability during thefirst quarter which included a 5% increase in sales of traffic and intersectioncontrol products. However, sales volume of traffic and intersection controlsproducts at U.S. Traffic Corporation (UST) continues to be substandard.  We believe this is due in part to the absenceof new large contracts related to ongoing state and municipal budgetary issueswhich we expect will improve during fiscal 2006. See FUTURE OUTLOOK for furtherinformation.

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Thefollowing table sets forth selected key operating statistics relating to theCompany’s financial results:

| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **September 30**            | ** ** |
| ** **                                                    | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues by  Segment:                                         |       |                             |       |   |   |
| Protect and Direct                                            |       | $                                | 17,820,000 |   | $ | 18,396,000 |   |
| Inform                                                        |       | 21,571,000                       |       | 19,591,000 |   |
|                                                          |       | $                                | 39,391,000 |   | $ | 37,987,000 |   |
| Geographic  Revenues:                                         |       |                             |       |   |   |
| Domestic                                                      |       | $                                | 35,048,000 |   | $ | 33,797,000 |   |
| International                                                 |       | 4,343,000                        |       | 4,190,000 |   |
|                                                          |       | $                                | 39,391,000 |   | $ | 37,987,000 |   |
| Operating Income  by Segment:                                 |       |                             |       |   |   |
| Protect and Direct                                            |       | $                                | 2,894,000  |   | $ | 3,216,000 |   |
| Inform                                                        |       | 399,000                          |       | (1,020,000 | ) |
| Unallocated Corporate                                         |       | (1,666,000                       | )          | (2,059,000 | ) |
|                                                          |       | $                                | 1,627,000  |   | $ | 137,000 |   |
| Gross profit  percentage                                      |       | 27.8                             | %          | 29.7 | % |
| Selling and  administrative expenses as a percentage of sales |       | 20.0                             | %          | 26.0 | % |
| Diluted earnings (loss)  per share                            |       | $                                | .03        |   | $ | (.03 | ) |

 

*Revenues*

Our net sales for the firstquarter offiscal 2006 increased $1,404,000, or 4%, to $39,391,000 from $37,987,000 forthe first quarter last year. This was primarily due to increases in salesacross nearly all major product lines in the Inform segment. These salesincreases were partially offset by decreased sales in the Protect and Directsegment.

*Protectand Direct—**Net* sales for the Protect andDirect segment for the first quarter of fiscal 2006 decreased 3% to $17,820,000from $18,396,000 for the first quarter last year.  The decrease in sales was primarily due todecreased international sales, as well as a 12% decrease in sales of permanentcrash cushions which had particularly strong sales in the first quarter offiscal 2005. Sales of truck mounted attenuators, parts and Triton barriers wereconsistent with the first quarter of last year. Partially offsetting the salesdecrease, sales of delineators and barrels increased from last year’s firstquarter.

*Inform—**Net***sales for the Inform segment for the first quarter offiscal 2006 increased 10%, or $1,980,000, to $21,571,000 from $19,591,000 forthe first quarter last year. Sales increased across nearly all major productlines. Sales of traffic and intersection control systems increased 5% duringthe first quarter of fiscal 2006 and sales of traffic and weather sensingsystems and highway advisory radio products increased 23%.

*Geographic*—Internationalsales for the first quarter of fiscal 2006 increased $153,000, or 4%, to$4,343,000, compared to $4,190,000 for the first quarter last year, primarilydue to increased sales of intersection control systems. Domestic sales for thefirst quarter of fiscal 2006 increased 4% to $35,048,000 from $33,797,000.

*Gross Profit Margin*

Our gross profit marginfor the first quarter of fiscal 2006 was 27.8% compared to 29.7% for the firstquarter last year, primarily due to lower gross margins in the Protect andDirect segment due to higher raw 

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materialcosts and, to a lesser extent, volume inefficiencies associated with the lowerlevel of sales. The gross profit margin for the Inform segment also decreasedslightly due to lower gross profit margins for traffic and intersection controlsystems due to unfavorable sales mix, which was partially offset by highergross margins on highway advisory radio products and weather and trafficsensing systems.

*Sellingand Administrative Expenses*

Selling and administrativeexpenses for the first quarter of fiscal 2006 decreased $1,986,000, or 20%, to$7,889,000 from $9,875,000 for the first quarter last year. Selling andadministrative expenses in the Inform segment decreased primarily due to therealization of benefits from cost reduction efforts in the traffic controlbusinesses which occurred over the past year. Also included in the Informsegment selling and administrative expenses for the first quarter of 2006 was a$633,000 gain resulting from a settlement of claims with the seller of PeekTraffic as discussed in Note 10. Selling and administrative expenses inthe Protect and Direct segment decreased primarily due to the lower level ofsales. Selling and administrative expenses for the first quarter of fiscal 2006include $249,000 of expense related to the adoption of SFAS 123(R) requiringthe expensing of stock options as discussed in Note 2. We expect theexpense related to SFAS 123(R) for fiscal year to be approximately$1,000,000. Selling and administrative expenses decreased as a percentage ofsales to 20.0% for the first quarter of 2006 from 26.0% last year, due to thesales increases and the fixed cost nature of many of the expenses, the costreduction efforts, and the settlement of claims.

*Research and Development*

Research and developmentexpenditures were $1,430,000 for the first quarter of fiscal 2006 compared to$1,260,000 for the first quarter last year. The increase of $170,000 was due toincreased expenditures in both the Inform and the Protect and Direct segments. Expendituresincreased in the Protect and Direct segment for the development of innovativenew products to address safety needs both domestically and abroad. Expendituresalso increased in the Inform segment for product upgrades and enhancements toexisting product lines and on new products.

*Operating Profit*

Operating profit for thefirst quarter of fiscal 2006 was $1,627,000, compared to operating profit of$137,000 for the first quarter of fiscal 2005. For the first quarter of fiscal2006, operating profit for the Protect and Direct Group decreased $322,000 to$2,894,000 from $3,216,000 for the first quarter last year due primarily to thedecreased level of sales and factors mentioned above. The Inform Groupoperating profit improved to $399,000 from an operating loss of $1,020,000 forthe first quarter of last year due to the increased level of sales, thesettlement of claims and factors mentioned above.

*Interest Expense*

Interest expense for thefirst quarter of fiscal 2006 increased to $1,183,000 from $592,000 for thefirst quarter last year.  The increasewas due to the higher level of debt and to higher interest rates. The interestrate on our $40 million in Convertible Senior Subordinated Notes is 7%. Theinterest rate on our collateralized bank credit facility is based on prime orLIBOR and a fixed rate, plus a margin, and the weighted average rate was 6.2%as of September 30, 2005.

*Provision for Income Taxes*

Income tax expense for thefirst quarter of fiscal 2006 was $169,000 representing a 38% effective incometax rate. We currently expect to provide for income taxes at a rate of 38% forthe remainder of fiscal 2006.

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*Net Earnings*

Netearnings for the first quarter of fiscal 2006 was $276,000, or $0.03 cents perdiluted share, compared to a net loss of $261,000, or $0.03 cents per dilutedshare, for the first quarter last year.

*FINANCIALCONDITION*

*Liquidity and Capital Resources*

Our principal sources of funds historically have beencash flows from operations and borrowings from banks and other sources. We hadcash and cash equivalents of $399,000 as of September 30, 2005 and accessto additional funds under a bank credit agreement. We believe that thiscollateralized bank credit facility is an important source of liquidity. Thecredit agreement provides for a $30 million secured revolving credit facilitywith a $10 million sub-facility for letters of credit issued by the bank or itsaffiliates. The revolving credit availability is based on a formula of eligibleaccounts receivable, eligible inventory, machinery and equipment and realestate, subject to a minimum excess collateral availability factor. Effective June 30,2006, we will also be required to maintain a maximum senior leverage ratio. Thecovenants also limit the incurrence of additional indebtedness, acquisitions,liens and encumbrances and other matters customarily restricted in suchagreements. The agreement currently expires in April 2008, but may berenewed one additional year on each anniversary date upon mutual consent of theCompany and the Bank.

Our outstanding borrowingswere $55,811,000, or 48.1% of total capitalization, as of September 30,2005, of which $9,900,000 was outstanding related to the bank credit facility. Thiscompares to $50,014,000, or 44.7% of total capitalization, as of June 30,2005. Included in the amount outstanding as of September 30, 2005 and June 30,2005 was $40,000,000 in 7% Convertible Senior Subordinated Notes due February 2025,which were sold through a private placement in February 2005. The amountof standby letters of credit outstanding was $1,144,000 as of both September 30,2005 and June 30, 2005.

*Cash Flows*

Cash flows used in operations were $1,380,000 duringthe first quarter of fiscal 2006. This compares with $220,000 used in the firstquarter of fiscal 2005. In both of the quarters, cash flow generated byoperations was primarily derived from earnings before non-cash expenses such asdepreciation and amortization. The increase in cash used by operatingactivities in the first quarter of fiscal 2006 reflects increased workingcapital, in particular, increases in accounts receivable and inventory anddecreases in accrued expenses.

Investing activities used cash of $326,000 during thefirst quarter of fiscal 2006, compared to $623,000 in the first quarter of theprior year. Expenditures during the first quarter of fiscal 2006 included$253,000 for capital expenditures.

Financing activities provided cash of $1,949,000during the first quarter of fiscal 2006, compared to using cash of $937,000during the first quarter of fiscal 2005. During the first quarter of 2006, weborrowed a net $5,900,000 against our outstanding revolving credit facility. Wepaid $3,105,000 to purchase 150,603 shares of our common stock from thesellers of Peek Traffic for the Treasury. In addition, we paid $103,000 onnotes payable. We received cash of $852,000 from the exercise of common stockoptions. The payment of our semi-annual cash dividend used cash of $1,595,000.

For 2006, we anticipateneeding approximately $4,000,000 in cash for capital expenditures. We may alsoneed additional cash if we consider acquiring businesses that complement ourexisting operations. We may require additional investments in working capitalto maintain growth. We may also need additional funds to repurchase our owncommon stock from time to time. These expenditures will be financed eitherthrough cash on-hand, cash generated from operations or from borrowingsavailable under our bank credit 

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facility.We believe that our existing cash, cash generated from operations and fundsavailable under our existing credit facility are sufficient for all plannedoperating and capital requirements in the near term. If needed and available onfavorable terms, we may also enter into other debt or equity financingarrangements.

*OFF-BALANCE SHEETARRANGEMENTS AND CONTRACTUAL OBLIGATIONS*

We aresubject to certain debt obligations, guarantees, commitments and contingentliabilities further described in our Annual Report on Form 10-K forthe year ended June 30, 2005. The following table presents our contractualobligations to make future payments under contracts, such as debt and leaseagreements, as of September 30, 2005:

| ** **                 | ** ** | ** **                        | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** |
|----------------------------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                 | ** ** | **Total**                         | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| ** **                 | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt             |       | $                                 | 55,811     |               |       | $                  | 427        |               |       | $                  | 5,484      |   |   |   |   |   |   | $ | 49,900 |   |   |
| Operating leases           |       | 16,154                            |       |               | 3,994      |               |       | 6,492              |       |               | $          | 1,814 |   |   |   | 3,854 |   |   |
| Minimum royalty  payments. |       | 2,685                             |       |               | 635        |               |       | 850                |       |               | 600        |   |   |   | 600 |   |   |
| Total                      |       | $                                 | 74,650     |               |       | $                  | 5,056      |               |       | $                  | 12,826     |   |   | $ | 2,414 |   |   |   | $ | 54,354 |   |   |

 

As disclosed in thefootnotes to the consolidated financial statements, we have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn as of September 30, 2005 was $4,989,000. Wealso have standby letters of credit covering potential workers’ compensationliabilities. The total standby exposure relating to letters of credit as of September 30,2005 was $1,144,000.

*FUTURE OUTLOOK*

We believe that the enactment of the federaltransportation funding legislation, SAFETEA-LU, in August 2005 willimprove prospects for increased spending for our products in fiscal 2006. Dueto the long sales cycle typical of our business, we do not expect to begin torealize significant benefits of this legislation until the second half offiscal 2006. In addition, state and local governments may be able to increasespending on transportation safety in 2006 as both national and local economiesimprove. We are beginning to see increased order activity in some areas of ourbusiness. We also expect international sales to continue to be an importantdriver of our sales growth. However, it is difficult to predict when and towhat extent we will see increased spending for our products and there can be noassurance that either domestic or international sales will increase. Therefore,we remain cautious about our performance in fiscal 2006.

We expect the substandard sales volumes and operatinglosses at UST to continue at least through the first half of fiscal 2006. We donot expect to realize significant benefits of projected cost savings from ourrationalizing of portions of the traffic and intersection control business (USTand Peek Traffic) operations and other Inform businesses until the second halfof fiscal 2006, assuming sales volume improves in the second half of fiscal2006. If sales for the Inform segment increase by at least $15 million abovethe fiscal 2005 level, we expect to record a slight profit for the Informsegment in fiscal 2006. However, there can be no assurance either that we willachieve that level of sales or that the gross margin on those sales will besufficient to produce a profit.

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We historically experiencefluctuation in our gross profit margin from quarter to quarter primarily due tosales volume related to seasonality, variability in product mix and changes inour competitive environment. In addition, we have acquired complementarybusinesses over the past several years and, as part of our strategy, maycontinue to acquire complementary businesses. The gross profit margins ofcertain acquired product lines, primarily the traffic control product lines,are lower than our historical gross profit margin, which is currently adverselyaffecting our gross profit margin. We also experience rigorous pricecompetition in our intersection control system, variable message sign andweather sensing system product lines. We do not believe these trends willimprove in the near future.

*SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements. Management’sestimates also affect the reported amounts of revenues and expenses during thereporting period. In addition, certain normal and recurring estimates are madeincluding estimates in determining the allowance for doubtful accountsreceivable, inventory valuation reserves, valuation allowance on deferred taxassets and health care liabilities. These estimates are made using management’sbest judgment given relevant factors and available data. Actual results coulddiffer materially from those estimates. Note 2 to our June 30, 2005consolidated financial statements includes a summary of the significantaccounting policies, methods and estimates used in the preparation of ourconsolidated financial statements.  Therehave been no material changes in accounting policies, methods and estimatesused by management.  In the opinion ofmanagement, the Company does not have any individual accounting policy or useany individual estimate that is critical to the preparation of its consolidatedfinancial statements. In most instances, we must use an accounting policy ormethod because it is the only policy or method permitted under U.S. GAAP. Webelieve the following significant accounting policies and methods used by usare the most important to the presentation of our financial statements:

Revenue Recognition: Revenues, net of sales incentives, are recognized when either serviceshave been rendered or both title and risk of loss of products have beentransferred to unaffiliated customers. Additionally, we ensure that collectionof the resulting receivable is probable, persuasive evidence that anarrangement exists, and the revenue is fixed or determinable. Provision forestimated uncollectible amounts and credit memos is made based upon management’sanalysis of bad debts and credit memos.

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. Standardcosts, which approximate actual costs, are used to value finished goods andwork-in-process. Standard costs include raw materials, direct labor andmanufacturing overhead. Provision for potentially obsolete or slow-movinginventory is made based on management’s analysis of inventory levels, ages andsalability.

Long-Lived Assets: Long-lived assets include suchitems as goodwill, patents, product rights, other intangible assets andproperty, plant and equipment. For purposes of evaluating the recoverability oflong-lived assets, we assess the possibility of obsolescence, demand, newtechnology, competition, and other pertinent economic factors and trends thatmay have an impact on the value or remaining lives of these assets.

Amortized long-lived assets (including amortizedintangible assets and property, plant and equipment) held and used by us arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable in relation tofuture undiscounted cash flows of underlying asset groups. The net carryingvalue of assets not recoverable is reduced to fair value. Fair values ofamortized long-lived assets are determined based upon the performance of athird 

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party fair value appraisal.Patents and other finite-lived intangible assets are amortized on astraight-line or systematic method over the life of the patent or intangibleasset.

Goodwill and other indefinite-lived intangible assetsare tested for impairment at least annually. The indefinite-lived intangibleasset impairment test is performed by comparing the fair value of theintangible asset to its carrying value in a one-step analysis. If the fairvalue of the intangible asset is less than its carrying value, the intangibleasset is written-down to its fair value. The goodwill impairment test isperformed at the reporting unit level and is a two-step analysis. First, thefair value of the reporting unit is compared to its book value. If the fairvalue of the reporting unit is less than its book value, we perform ahypothetical purchase price allocation based on the reporting unit’s fair valueto determine the implied fair value of the reporting unit’s goodwill. If theimplied fair value of the goodwill is less than its carrying value, thegoodwill is written-down to its implied fair value. Fair values are determinedwith the help of a third party appraisal firm using present value techniques.

The impairment review is highly judgmental andinvolves the use of significant estimates and assumptions. These estimates andassumptions have a significant impact on the amount of any impairment chargerecorded. Estimates of fair value are primarily determined using discountedcash flow methods and are dependent upon assumptions of future sales trends,market conditions and cash flows of each reporting unit over several years. Actualcash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows. The impact of these estimates andassumptions on impairment testing of goodwill is particularly critical for theInform segment with $21,174,000 of our $29,313,000 of goodwill recorded in our September 30,2005 balance sheet.

Income Taxes: We recognizedeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the financial statements or tax returns. Underthis method, deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences 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,such future tax benefits are reduced by a valuation allowance. Realization ofdeferred tax assets assumes that we will be able to generate sufficient taxableincome so that the assets will be realized. The factors that we consider inassessing the likelihood of realization include the forecast of future taxableincome and available tax planning strategies that could be implemented torealize the deferred tax assets. We expect the net 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.

*RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS*

As discussed in Note 2, in December 2004, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment”(SFAS 123R). SFAS 123R requires us to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. The cost of the employee services is recognized ascompensation cost over the period that an employee provides service in exchangefor the award. SFAS 123R was effective July 1, 2005, at which time weadopted it using a modified prospective method. We expect the net impact ofadopting SFAS 123R to be approximately $900,000, or $0.10 per diluted share infiscal 2006.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts and spoilage. This 

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statement requires thatthese costs be expensed as current period charges. In addition, this statementrequires that the allocation of fixed production overhead to the costs ofconversion be based on the normal capacity of the production facilities. Weadopted this statement effective July 1, 2005 and do not expect it willhave a material impact on our financial position and results of operations.

The FASB issued Statement No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”, which required financial instruments within its scope to be classifiedas liabilities (or assets in some circumstances). The Statement is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003, except for certain mandatorily redeemable financialinstruments. It is to be implemented by reporting the cumulative effect of achange in an accounting principle for financial instruments created before theissuance date of the Statement and still existing at the beginning of theinterim period of adoption. Restatement is not permitted. The effective date ofcertain provisions of Statement No. 150 for certain mandatorily redeemablefinancial instruments has been deferred by FSP FAS 150-5. Under the FSP,certain mandatorily redeemable shares are subject to the provisions ofStatement No. 150 for the first fiscal period beginning after June 30,2005. Other mandatorily redeemable shares are deferred indefinitely but may besubject to classification or disclosure provisions of the Statement. We adoptedthis statement effective July 1, 2005 and do not expect it will have amaterial impact on our financial statement.

In December 2004, the FASB issued Statement No. 153,“Exchanges of Nonmonetary Assets,” (“SFAS 153”). SFAS 153 amends AccountingPrinciples Board (“APB”) Opinion No. 29, “Accounting for NonmonetaryTransactions” (Opinion 29), to require exchanges of nonmonetary assets beaccounted for at fair value, rather than carryover basis. Nonmonetary exchangesthat lack commercial substance are exempt from this requirement. SFAS 153 iseffective for nonmonetary exchanges entered into in fiscal years beginningafter June 15, 2005. We adopted this statement effective July 1,2005, but we do not routinely enter into exchanges that could be considerednonmonetary, so we do not expect the adoption of SFAS 153 to have a materialimpact on our financial statements.

In March 2005, the FASB issued FASB InterpretationNo. (FIN) 47 “Accounting for Conditional Asset Retirement Obligations.”  The interpretation requires a conditionalasset retirement obligation to be recognized when the fair value of theliability can be reasonably estimated. We adopted this interpretation effectiveJuly 1, 2005 and do not believe the adoption will have a material impacton our financial statements.

In June 2005, theFASB issued Statement No. 154, “Accounting Changes and Error Corrections”(“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes”,and FASB Statement No. 3, “Reporting Accounting Changes in InterimFinancial Statements”. SFAS 154 applies to all voluntary changes in accountingprinciple, and changes the requirements for accounting for and the reporting ofa change in accounting principle. SFAS 154 requires retrospective applicationto prior periods’ financial statements of a voluntary change in accountingprinciple, unless it is impracticable. We early adopted SFAS 154 effective July 1,2005. The adoption of SFAS 154 did not have a material impact on the Company’sresults of operations or financial position.

*FORWARD LOOKINGSTATEMENTS*

Various statements made within the Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this report constitute “forward-looking statements” for purposesof the SEC’s “safe harbor” provisions under the Private Securities LitigationReform Act of 1995 and Rule 3b-6 under the Securities Exchange Actof 1934, as amended. Any statement that addresses expectations or projectionsabout the future, including statements about our strategy for growth, product 

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development, marketposition, expenditures, financial results or changes in governmentallegislation, policies and conditions, is a forward-looking statement.

Investors are cautionedthat all forward-looking statements involve risks and uncertainties, includingthose detailed in our public filings with the SEC, news releases and othercommunications, which speak only as of the dates of those filings orcommunications. We do not undertake any obligation to release publicly anyrevisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. There can be no assurance that actual results will notdiffer materially from our expectations. Factors which could cause materiallydifferent results include, among others, uncertainties related to continuedfederal, state and municipal funding for highways and risks related toreductions in government expenditures; the successful completion, integrationand rationalization of our acquisitions; the ability to generate sufficientfuture cash flows to be in compliance with financing agreements; the introductionand acceptance of our products and services; an unfavorable change in productsales mix; seasonality along with the extent and timing of the award of largecontracts; the cyclical nature of our governmental markets; competitive andpricing pressures; increasing raw material and freight costs; excessmanufacturing capacity; weather conditions and natural disasters; acts of warand terrorist activities; the possible impairment of goodwill and otherintangible assets; compliance with Section 404 of the Sarbanes-Oxley Actof 2002; and general economic conditions.

*ITEM3.   Quantitative and Qualitative Disclosures about Market Risk*

Item 7.A. of our Annual Report on Form 10-Kfor the year ended June 30, 2005 presents information regardingQuantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk from fluctuations ininterest rates. Our exposure to interest rate fluctuations was significantlyreduced when we issued $40 million of fixed rated convertible debt and used theproceeds to pay down bank debt issued pursuant to our revolving creditagreement in the third quarter of fiscal 2005. We had managed our exposure tointerest rate fluctuations beginning in fiscal 2004 through the use ofderivative instruments in the form of non-trading interest rate swaps, but ourinterest rate swap agreement was liquidated in the third quarter of fiscal2005.

The majority of ourbusiness is transacted in U. S. dollars. We continue to evaluate the use ofderivative financial instruments to manage the effects of foreign currencyexchange rates changes, but we do not currently hold any such derivatives. Wedo not believe we are currently exposed to any material risk of loss fromcurrency exchange fluctuations.

*ITEM 4.   Controlsand Procedures*

(a)  Evaluation of Disclosure Controls andProcedures

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the Company’sreports under the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures. Thedesign of any system of disclosure controls and procedures is based in partupon certain assumptions about the likelihood of future events, and there canbe no assurance that any disclosure controls and procedures will succeed inachieving their stated goals under all potential future conditions.

Our management, under the supervision of and with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the periodcovered by this report. Based on the evaluation, the Company’s Chief 

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Executive Officer andChief Financial Officer concluded that solely as a result of the materialweakness in the Company’s internal controls over certain information technologygeneral controls as described below at paragraph (b), the Company’s disclosurecontrols and procedures were not effective as of the end of the period coveredby this Quarterly Report on Form 10-Q, September 30, 2005. However,we performed analysis and other procedures to ensure that our consolidatedfinancial statements were prepared in accordance with accounting principlesgenerally accepted in the United States. Accordingly, management believes that (i) thefinancial statements filed fairly present in all material respects the Company’sfinancial condition, results of operations and cash flow for the periodspresented, and (ii) this report does not contain any untrue statement of amaterial fact or omit or a material fact necessary to make the statements, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report.

(b) Management’s Report on Internal Controls OverFinancial Reporting

There have been no changes in our internal controlover financial reporting identified in connection with the evaluation thatoccurred during our last fiscal quarter that has materially affected, or isreasonably likely to affect, our internal control over financial reporting.

Based on its assessment of our internal control overfinancial reporting for our last fiscal year, management determined that amaterial weakness existed in the Company’s internal controls over certaininformation technology general controls as of June 30, 2005. Specifically,the Company did not have (i) monitoring of information technology managerswho have access to the application and underlying data, (ii) mechanisms totrack changes made to the application itself, and (iii) adequate securityadministration of users’ access to the application. These control deficienciesdid not result in any known financial statement misstatements. However, theaggregation of these control deficiencies represent a material weakness ininternal control over financial reporting on the basis that there is more thana remote likelihood that a material misstatement of our annual or interim financialstatements will not be prevented or detected by its internal control overfinancial reporting. Accordingly, management concluded that, as of June 30,2005, the Company’s internal control over financial reporting was not effectivebased on the criteria set forth by Committee of Sponsoring Organizations of theTreadway Commission. Management is in the process of completing acomprehensive, detailed remediation plan to address these known deficiencies. Duringthe quarter ended September 30, 2005, we decided to upgrade our primaryinformation technology software system to a more current version whichincludes, among other things, better tools to assist with the monitoring ofinformation technology general controls. We expect to complete the upgrade inthe third quarter of fiscal 2006. During this first quarter, we also engaged anexternal consulting firm to assist with the remediation of security and accesscontrols.

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**PART II—OTHER INFORMATION**

There is no informationrequired to be reported under any items except as indicated below:

*ITEM 1.*   LegalProceedings

U.S. TRAFFIC CORPORATION V. MYERS AMERICA, INC.,MYERS/NUART ELECTRICAL PRODUCTS, INC., RAYMOND INT’L W.L.L., RAYMOND OVERSEASHOLDING LIMITED, AND BASIL K. VASILIOU, Circuit Court of Cook County, Illinois,Law Division, No. 2005L010719. On September 29, 2005, our subsidiary,U.S. Traffic Corporation (UST), filed a complaint against both the sellers ofthe assets of the U.S. Traffic business to us in May 2003 and sellers’guarantors. (Pursuant to a Tolling Agreement with the sellers, UST had to fileits fraud claims by September 30, 2005). The complaint arises from thesale of the business to UST and alleges a number of claims against sellers andthe guarantors, including fraud, breach of the Asset Purchase Agreement, breachof sellers’ representations and warranties and other breaches of sellers’indemnity obligations. UST seeks damages for the sellers’ breach and fraud. Seeour interim report on Form 8-K dated January 13, 2005 and filedJanuary 18, 2005, File No. 001-08123, for more informationregarding our claims against the sellers.

In a related action, on September 28,2005 Myers America, Inc. and Myers/Nuart Electrical Products filed alawsuit against UST, claiming a breach of the Asset Purchase Agreement forfailure to provide certain sales and collection reports to sellers anddemanding an accounting. See MYERS AMERICA, INC. V. U.S. TRAFFIC CORPORATION,Circuit Court of Cook County, Illinois, Chancery Division, No. 05CH16573. OnNovember 1, 2005, UST filed a third-party complaint and motion for atemporary restraining order in this action against Myers Power Products, Inc.,an affiliate of sellers, asserting breach of an OEM Supply Agreement betweenthe parties and including a claim of tortious interference with UST’s businessrelations and prospective economic advantage.

*ITEM 2.*   UnregisteredSales of Equity Securities and Uses of Proceeds

(c)   In connection with the settlement of our claims against thesellers of the Peek Traffic business, we repurchased 150,603 shares of ourcommon stock on September 23, 2005 for an aggregate of $3,105,133, or$20.618  per share. The per sharepurchase price was determined by the terms of the Asset Purchase Agreementdated December 10, 2003 between the parties. This settlement including therepurchase of shares was described in our interim report on Form 8-Kfor September 23, 2005.

*ITEM 6.*   Exhibits

| (a)    | Exhibits |
|--------|----------|
|   | 3(b)     | Amended and Restated  By-Laws of the Company as amended through August 17, 2005. |
|   | 10(f)    | Lease dated  September 22, 2005 by and between Gulfcoast Property No. 1, LLC and  Peek Traffic Corporation |
|   | 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**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2005 to be signed on its behalf by the undersigned thereuntoduly authorized.

|                                    |     | QUIXOTE CORPORATION                          |
|------------------------------------|----------|----------------------------------------------|
| DATED:  November 8, 2005 |     | /s/ DANIEL P. GOREY                          |
|                               |     | DANIEL P. GOREY                              |
|                               | * * | *Chief Financial Officer,*                   |
|                               | * * | *Vice President and Treasurer*               |
|                               | * * | *(Chief Financial & Accounting Officer)* |

 

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**EXHIBIT INDEX**

Exhibits:

| 3(b)  |   | Amended and Restated By-Laws of the Company as  amended through August 17, 2005.                            |
|-------|--------|-------------------------------------------------------------------------------------------------------------|
| 10(f) |   | Lease dated September  22, 2005 by and between Gulfcoast Property No. 1, LLC and Peed Traffic  Corporation. |
| 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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