**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                      | ** ** | **QUARTERLY****REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                                                       |       |                                                                                                      |
|                                                       |
| **For the  quarterly period ended December 31, 2009** |
|                                                       |       | ** **                                                                                                |
| **or**                                                     |
|                                                       |       | ** **                                                                                                |
| **o**                                                      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |

 

**For the transition period from****                              ****to****                              **

 

**Commission File Number 001-08123**

 

**QUIXOTE CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **36-2675371**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. EmployerIdentification Number) |

 

| **35 East Wacker Drive****Chicago, Illinois** |   | **60601**  |
|-----------------------------------------------|--------|------------|
| (Address of  principal executive offices)     |   | (Zip Code) |

 

**(312) 467-6755**

(Registrant’stelephone number, including area code)

 

**No Change**

Former name, former address and formerfiscal year, if changed since last report

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. x  YES o NO

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files). o  YES o NO

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.  (Check one):

 

| Large accelerated filer o                                              |   | Accelerated filer x         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). o  YES x NO

 

As of February 3, 2010, there were9,333,867 shares of the registrant’s common stock ($.01-2/3 par value)outstanding.

 

 

 

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**RecentDevelopments**

 

OnDecember 30, 2009, we entered into an Agreement and Plan of Merger(“Agreement”) with Trinity Industries, Inc. and its wholly-ownedsubsidiary, THP Merger Co. (together “Trinity”) whereby, subject to certainconditions, Trinity will acquire all of our common stock (including theassociated preferred stock purchase rights) through a tender offer and asubsequent merger for $6.38 per share of common stock in cash (“Trinity Acquisition”),and we will become a wholly-owned subsidiary of Trinity Industries, Inc.  Unless stated otherwise, all forward-lookinginformation contained in this report does not take into account or give anyeffect to the impact of the proposed Trinity Acquisition.

 

OnJanuary 7, 2010, Trinity announced the commencement of a tender offer forall of our outstanding shares of common stock for $6.38 per share, includingthe associated preferred stock purchase rights, net to seller in cash andwithout interest thereon.  The Trinitytender offer and subsequent merger, with a transactional value of approximately$61.1 million, are subject to certain closing conditions contained in theAgreement, including the acquisition by THP Merger Co. of that number of sharesof our common stock pursuant to the tender offer, together with the number ofour shares of common stock then owned by Trinity, that represents at least 60%of our outstanding shares of common stock on a fully-diluted basis.  The Trinity tender offer, unless extended inaccordance with its terms, will expire at midnight New York City time at theend of the day on February 4, 2010. If Trinity purchases shares of our common stock in the tender offer,Trinity will subsequently merge THP Merger Co. into the Company, with theCompany surviving.  The terms andconditions of the Trinity Acquisition are described in Trinity’s Schedule TOfiled with the Securities and Exchange Commission on January 7, 2010 andamendments thereto, and in our Schedule 14D-9 filed with the Securities andExchange Commission on January 7, 2010 and amendments thereto.

 

OnDecember 18, 2009, we sold our Inform segment to Vaisala, Inc. for$20 million in cash, of which $1 million is being held in escrow until December 18,2011 as a reserve to secure and fund any potential indemnity claims of thepurchaser pursuant to the Stock Purchase Agreement.

 

OnDecember 29, 2009, we gave notice to the holders of our $40,000,000 7%Convertible Senior Subordinated Notes due February 15, 2025 (“Notes”) that,at the option of the holder and in accordance with the terms of the Notes, wewould repurchase all Notes for a purchase price, payable in cash, equal to 100%of the principal amount of the Notes plus any accrued and unpaid interest on February 15,2010.  We expect that holders will tenderall the Notes for repurchase.

 

OnJanuary 29, 2010, we entered into an amended bank credit agreement whichextended the expiration date of our credit agreement from January 31, 2010to February 15, 2010.  Our bank hasissued us a commitment letter dated January 29, 2010 to amend our creditagreement, if necessary, before February 15, 2010 to permit us to borrowup to $22.5 million to repurchase the Notes under certain conditions.  With that bank borrowing, plus the $19 millionof cash proceeds we received from the sale of our Inform Segment and borrowingsof up to $7 million from Trinity pursuant to the Agreement, we expect to fundthe repurchase of the Notes on February 15, 2010, if the Trinity tenderoffer is not consummated prior to this date.

 

2

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PART 1.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

QUIXOTE CORPORATION ANDSUBSIDIARIES

Consolidated Statementsof Operations

(Unaudited)

 
| ** **                                                        | ** ** | **Three Months Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Net sales                                                         |       | $                                        | 17,626,000 |   | $ | 15,021,000 |   |
| Cost of sales                                                     |       | 11,650,000                               |       | 11,207,000 |   |
| Gross profit                                                      |       | 5,976,000                                |       | 3,814,000 |   |
|                                                              |       |                                     |       |   |   |
| Operating expenses:                                               |       |                                     |       |   |   |
| Selling & administrative                                 |       | 4,519,000                                |       | 5,428,000 |   |
| Research & development                                   |       | 433,000                                  |       | 616,000 |   |
| Merger transaction costs (Note 2)                                 |       | 775,000                                  |       |   |   |
| Severance costs                                                   |       |                                     |       | 843,000 |   |
|                                                              |       | 5,727,000                                |       | 6,887,000 |   |
| Operating profit (loss)                                           |       | 249,000                                  |       | (3,073,000 | ) |
|                                                              |       |                                     |       |   |   |
| Other income (expense):                                           |       |                                     |       |   |   |
| Interest income                                                   |       | 2,000                                    |       |   |   |
| Interest expense                                                  |       | (866,000                                 | )          | (865,000 | ) |
|                                                              |       | (864,000                                 | )          | (865,000 | ) |
| Loss from continuing operations before income taxes               |       | (615,000                                 | )          | (3,938,000 | ) |
| Income tax benefit                                                |       | (233,000                                 | )          | (1,497,000 | ) |
| Loss from continuing operations                                   |       | (382,000                                 | )          | (2,441,000 | ) |
|                                                              |       |                                     |       |   |   |
| Discontinued operations:                                          |       |                                     |       |   |   |
| Gain (loss) from operations, net of income taxes                  |       | 53,000                                   |       | (215,000 | ) |
| Gain on sale, net of income  taxes                                |       | 3,535,000                                |       |   |   |
|                                                              |       |                                     |       |   |   |
| Gain (loss) from discontinued operations, net of  income taxes    |       | 3,588,000                                |       | (215,000 | ) |
| Net earnings (loss)                                               |       | $                                        | 3,206,000  |   | $ | (2,656,000 | ) |
|                                                              |       |                                     |       |   |   |
| Per share data - basic:                                           |       |                                     |       |   |   |
| Loss from continuing operations                                   |       | $                                        | (0.04      | ) | $ | (0.27 | ) |
| Gain (loss) from discontinued operations                          |       | 0.38                                     |       | (0.02 | ) |
| Net earnings (loss)                                               |       | $                                        | 0.34       |   | $ | (0.29 | ) |
| Weighted average common shares outstanding                        |       | 9,328,800                                |       | 9,231,149 |   |
|                                                              |       |                                     |       |   |   |
| Per share data - diluted:                                         |       |                                     |       |   |   |
| Loss from continuing operations                                   |       | $                                        | (0.04      | ) | $ | (0.27 | ) |
| Gain (loss) from discontinued operations                          |       | 0.38                                     |       | (0.02 | ) |
| Net earnings (loss)                                               |       | $                                        | 0.34       |   | $ | (0.29 | ) |
| Weighted average common and common equivalent shares  outstanding |       | 9,330,296                                |       | 9,231,149 |   |
| Cash dividends declared per share of common stock                 |       | $                                        | —     |   | $ | — |   |

 

SeeNotes to Unaudited Consolidated Financial Statements.

 

3

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QUIXOTE CORPORATION ANDSUBSIDIARIES

Consolidated Statementsof Operations

(Unaudited)

 
| ** **                                                        | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Net sales                                                         |       | $                                      | 38,098,000 |   | $ | 35,003,000 |   |
| Cost of sales                                                     |       | 25,236,000                             |       | 24,858,000 |   |
| Gross profit                                                      |       | 12,862,000                             |       | 10,145,000 |   |
|                                                              |       |                                   |       |   |   |
| Operating expenses:                                               |       |                                   |       |   |   |
| Selling & administrative                                 |       | 9,270,000                              |       | 10,237,000 |   |
| Research & development                                   |       | 909,000                                |       | 1,216,000 |   |
| Merger transaction costs (Note 2)                                 |       | 775,000                                |       |   |   |
| Severance costs                                                   |       | 296,000                                |       | 843,000 |   |
|                                                              |       | 11,250,000                             |       | 12,296,000 |   |
| Operating profit (loss)                                           |       | 1,612,000                              |       | (2,151,000 | ) |
|                                                              |       |                                   |       |   |   |
| Other income (expense):                                           |       |                                   |       |   |   |
| Interest income                                                   |       | 2,000                                  |       |   |   |
| Interest expense                                                  |       | (1,739,000                             | )          | (1,782,000 | ) |
|                                                              |       | (1,737,000                             | )          | (1,782,000 | ) |
| Loss from continuing operations before income taxes               |       | (125,000                               | )          | (3,933,000 | ) |
| Income tax benefit                                                |       | (47,000                                | )          | (1,495,000 | ) |
| Loss from continuing operations                                   |       | (78,000                                | )          | (2,438,000 | ) |
|                                                              |       |                                   |       |   |   |
| Discontinued operations:                                          |       |                                   |       |   |   |
| Gain (loss) from operations, net of income taxes                  |       | 376,000                                |       | (1,000 | ) |
| Gain (loss) on sale, net of  income taxes                         |       | 3,535,000                              |       | (712,000 | ) |
| Gain (loss) from discontinued operations, netof income taxes      |       | 3,911,000                              |       | (713,000 | ) |
| Net earnings (loss)                                               |       | $                                      | 3,833,000  |   | $ | (3,151,000 | ) |
|                                                              |       |                                   |       |   |   |
| Per share data - basic:                                           |       |                                   |       |   |   |
| Loss from continuing operations                                   |       | $                                      | (0.01      | ) | $ | (0.26 | ) |
| Gain (loss) from discontinued operations                          |       | 0.42                                   |       | (0.08 | ) |
| Net earnings (loss)                                               |       | $                                      | 0.41       |   | $ | (0.34 | ) |
| Weighted average common shares outstanding                        |       | 9,325,441                              |       | 9,209,672 |   |
|                                                              |       |                                   |       |   |   |
| Per share data - diluted:                                         |       |                                   |       |   |   |
| Loss from continuing operations                                   |       | $                                      | (0.01      | ) | $ | (0.26 | ) |
| Gain (loss) from discontinued operations                          |       | 0.42                                   |       | (0.08 | ) |
| Net earnings (loss)                                               |       | $                                      | 0.41       |   | $ | (0.34 | ) |
| Weighted average common and common equivalent shares  outstanding |       | 9,327,197                              |       | 9,209,672 |   |
| Cash dividends declared per share of common stock                 |       | $                                      | —     |   | $ | — |   |

 

SeeNotes to Unaudited Consolidated Financial Statements.

 

4

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QUIXOTE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 
| ** **                                                                                                               | ** ** | **December 31,  2009** | ** ** | **June 30,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ASSETS                                                                                                                   |       |                        |       |                    |       |
|                                                                                                                     |       |                        |       |                    |       |
| Current assets:                                                                                                          |       |                        |       |                    |       |
|                                                                                                                     |       |                        |       |                    |       |
| Cash and cash equivalents                                                                                                |       | $                           | 27,292,000 |                    | $          | 183,000 |   |
| Accounts receivable, net of allowancefor doubtful accounts of  $970,000 at December 31 and $879,000 at June 30 |       | 11,753,000                  |       | 15,427,000              |       |
|                                                                                                                     |       |                        |       |                    |       |
| Inventories, net:                                                                                                        |       |                        |       |                    |       |
| Raw materials                                                                                                            |       | 2,823,000                   |       | 3,632,000               |       |
| Work in process                                                                                                          |       | 3,779,000                   |       | 3,402,000               |       |
| Finished goods                                                                                                           |       | 4,403,000                   |       | 5,360,000               |       |
|                                                                                                                     |       | 11,005,000                  |       | 12,394,000              |       |
|                                                                                                                     |       |                        |       |                    |       |
| Deferred income taxes                                                                                                    |       | 2,354,000                   |       | 2,354,000               |       |
| Other current assets                                                                                                     |       | 1,446,000                   |       | 862,000                 |       |
| Assets of discontinued operations                                                                                        |       |                        |       | 9,098,000               |       |
| Total current assets                                                                                                     |       | 53,850,000                  |       | 40,318,000              |       |
|                                                                                                                     |       |                        |       |                    |       |
| Property, plant and equipment, at cost                                                                                   |       | 38,101,000                  |       | 37,597,000              |       |
| Less accumulated depreciation                                                                                            |       | (26,166,000                 | )          | (25,320,000             | )          |
|                                                                                                                     |       | 11,935,000                  |       | 12,277,000              |       |
|                                                                                                                     |       |                        |       |                    |       |
| Goodwill                                                                                                                 |       | 8,139,000                   |       | 8,139,000               |       |
| Intangible assets, net                                                                                                   |       | 819,000                     |       | 901,000                 |       |
| Deferred income taxes                                                                                                    |       | 15,511,000                  |       | 18,901,000              |       |
| Other assets                                                                                                             |       | 1,113,000                   |       | 339,000                 |       |
| Assets of discontinued operations                                                                                        |       |                        |       | 4,717,000               |       |
| Total assets                                                                                                             |       | $                           | 91,367,000 |                    | $          | 85,592,000 |   |

 

See Notes to Unaudited ConsolidatedFinancial Statements.

 

5

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QUIXOTE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 
| ** **                                                                                                                       | ** ** | **December 31,  2009** | ** ** | **June 30,********2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                        |       |                        |       |                          |       |
|                                                                                                                             |       |                        |       |                          |       |
| Current liabilities:                                                                                                             |       |                        |       |                          |       |
| Current portion of long-term debt                                                                                                |       | $                           | 43,250,000 |                          | $          | 41,000,000 |   |
| Accounts payable                                                                                                                 |       | 3,137,000                   |       | 2,721,000                     |       |
| Accrued expenses                                                                                                                 |       | 5,906,000                   |       | 4,671,000                     |       |
| Liabilities of discontinued operations                                                                                           |       |                        |       | 2,007,000                     |       |
| Total current liabilities                                                                                                        |       | 52,293,000                  |       | 50,399,000                    |       |
|                                                                                                                             |       |                        |       |                          |       |
| Other long-term liabilities                                                                                                      |       | 971,000                     |       | 1,028,000                     |       |
|                                                                                                                             |       | 53,264,000                  |       | 51,427,000                    |       |
|                                                                                                                             |       |                        |       |                          |       |
| Commitments and contingent liabilities (Note 9)                                                                                  |       |                        |       |                          |       |
|                                                                                                                             |       |                        |       |                          |       |
| Shareholders’ equity:                                                                                                       |       |                        |       |                          |       |
| Preferred stock, no par value; authorized100,000 shares; none issued                                                             |       |                        |       |                          |       |
| Common stock, par value $.01-2/3; authorized30,000,000 shares; issued  11,077,711 shares at December 31 and at June 30 |       | 185,000                     |       | 185,000                       |       |
| Capital in excess of par value of common stock                                                                                   |       | 66,238,000                  |       | 66,133,000                    |       |
| Accumulated deficit                                                                                                              |       | (7,326,000                  | )          | (11,159,000                   | )          |
| Treasury stock, at cost, 1,743,844 shares atDecember 31 and at  June 30                                                |       | (20,994,000                 | )          | (20,994,000                   | )          |
| Total shareholders’ equity                                                                                                  |       | 38,103,000                  |       | 34,165,000                    |       |
| Total liabilities and shareholders’ equity                                                                                  |       | $                           | 91,367,000 |                          | $          | 85,592,000 |   |

 

See Notes to Unaudited ConsolidatedFinancial Statements.

 

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QUIXOTE CORPORATION ANDSUBSIDIARIES

Consolidated Statementsof Cash Flows

(Unaudited)

 
| ** **                                                                                | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Operating activities:                                                                     |       |                                   |       |   |   |
| Net earnings (loss)                                                                       |       | $                                      | 3,833,000  |   | $ | (3,151,000 | ) |
| (Gain) loss on sale of discontinued operations,net of tax                                 |       | (3,535,000                             | )          | 712,000 |   |
| Gain from discontinued operations, net of tax                                             |       | (376,000                               | )          | (1,000 | ) |
| Loss from continuing operations, net of tax                                               |       | (78,000                                | )          | (2,440,000 | ) |
|                                                                                      |       |                                   |       |   |   |
| Adjustments to reconcile net loss to netcash provided by (used in)  operating activities: |       |                                   |       |   |   |
| Depreciation                                                                              |       | 884,000                                |       | 1,150,000 |   |
| Amortization                                                                              |       | 362,000                                |       | 406,000 |   |
| Deferred income taxes                                                                     |       | 3,390,000                              |       | (1,931,000 | ) |
| Provisions for losses on accounts receivable                                              |       | 209,000                                |       | 270,000 |   |
| Issuance of stock retirement plan shares                                                  |       |                                   |       | 268,000 |   |
| Issuance of stock to 401K plan                                                            |       |                                   |       | 381,000 |   |
| Share-based compensation expense                                                          |       | 105,000                                |       | 185,000 |   |
| Changes in operating assets and liabilities:                                              |       |                                   |       |   |   |
| Accounts receivable                                                                       |       | 3,465,000                              |       | 4,996,000 |   |
| Inventories                                                                               |       | 1,389,000                              |       | (1,132,000 | ) |
| Other assets and liabilities                                                              |       | (1,638,000                             | )          | (670,000 | ) |
| Income taxes payable/refundable                                                           |       |                                   |       | (132,000 | ) |
| Accounts payable and accrued expenses                                                     |       | 1,651,000                              |       | (1,288,000 | ) |
| Other                                                                                     |       | (57,000                                | )          | (26,000 | ) |
| Net cash provided by operating activities —continuing operations                     |       | 9,682,000                              |       | 37,000 |   |
| Net cash used in operating activities —  discontinuedoperations                      |       | (2,936,000                             | )          | (984,000 | ) |
| Net cash provided by (used in) operating activities                                       |       | 6,746,000                              |       | (947,000 | ) |
|                                                                                      |       |                                   |       |   |   |
| Investing activities:                                                                     |       |                                   |       |   |   |
| Capital expenditures                                                                      |       | (666,000                               | )          | (417,000 | ) |
| Proceeds from sale of discontinued operations                                             |       | 19,000,000                             |       | 20,000,000 |   |
| Net cash provided by investingactivities — continuing  operations                    |       | 18,334,000                             |       | 19,583,000 |   |
| Net cash used in investing activities —  discontinuedoperations                      |       | (221,000                               | )          | (535,000 | ) |
| Net cash provided by investing activities                                                 |       | 18,113,000                             |       | 19,048,000 |   |
| Financing activities:                                                                     |       |                                   |       |   |   |
| Proceeds from revolving credit agreement                                                  |       | 4,000,000                              |       | 14,800,000 |   |
| Payments on revolving credit agreement                                                    |       | (1,750,000                             | )          | (30,650,000 | ) |
| Payment of semi-annual cash dividend                                                      |       |                                   |       | (1,829,000 | ) |
| Net cash provided by (used in) financing activities                                       |       | 2,250,000                              |       | (17,679,000 | ) |
| Increase in cash and cash equivalents                                                     |       | 27,109,000                             |       | 422,000 |   |
|                                                                                      |       |                                   |       |   |   |
| Cash and cash equivalents at beginning of period                                          |       | 183,000                                |       | 554,000 |   |
| Cash and cash equivalents at end of period                                                |       | $                                      | 27,292,000 |   | $ | 976,000 |   |

 

See Notes to Unaudited Consolidated FinancialStatements.

 

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QUIXOTE CORPORATION ANDSUBSIDIARIES

Notes to ConsolidatedFinancial 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 do not include allinformation or footnotes required by generally accepted accounting principlesfor complete financial statements.  The June 30,2009 consolidated balance sheet, as presented, was derived from the auditedfinancial statements.  The interimfinancial statements and notes should be read in conjunction with theconsolidated financial statements and notes thereto included in our AnnualReport on Form 10-K for the year ended June 30, 2009.  Management believes the financial statementsinclude all normal recurring adjustments necessary for a fair presentation ofthe results for the interim periods presented.

 

Certain balances in the financial statements have been reclassified toconform to the current presentation. Included with the reclassifications are restatements to reclassify theInform segment as discontinued operations. We sold the Inform segment on December 18, 2009.

 

Recently Adopted and Recently Issued AccountingPronouncements

On July 1, 2009, we adopted an update to financial standardsrelated to convertible debt instruments that may be settled in cash uponconversion (including partial cash settlement). The update requires the issuer of certain convertible debt instrumentsthat may be settled in cash (or other assets) on conversion to separatelyaccount for the liability (debt) and equity (conversion option) components ofthe instrument in a manner that reflects the issuer’s non-convertible debtborrowing rate.  The adoption of this newguidance issued by the FASB did not have an impact on our financial statements.

 

On July 1, 2009, we adopted the authoritative guidance issued bythe FASB on fair value measurement for nonfinancial assets and liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually).  The adoption of the new guidance did not havea material impact on our financial statements.

 

On July 1, 2009, we adopted an update to accounting standards fordisclosures about the fair value of financial instruments which requirespublicly-traded companies to provide disclosures on fair value of financialinstruments in interim financial statements. The adoption of the new guidance issued by the FASB did not have amaterial impact on our financial statements.

 

On October 1, 2009, we adopted an update to accounting standardsissued by the FASB which provides clarification for the fair value measurementof liabilities in circumstances in which a quoted price in an active market foran identical liability is not available. The adoption of the new guidance issued by the FASB did not have amaterial impact on our financial statements.

 

In June, 2009, the FASB Accounting Standards Codification(Codification) was issued.  TheCodification is the source of authoritative accounting principles recognized bythe FASB to be applied in the preparation of financial statements in conformitywith generally accepted accounting principles. The Codification is effective for interim and annual statements issuedafter September 15, 2009.  Weadopted the provisions of the Codification on September 30, 2009, whichdid not have a material impact on our financial statements.

 

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InOctober 2009, the FASB issued authoritative guidance on revenuerecognition that will become effective for us beginning July 1, 2010, withearlier adoption permitted.  Under thenew guidance on arrangements that include software elements, tangible productsthat have software components that are essential to the functionality of thetangible product will no longer be within the scope of the software revenuerecognition guidance, and software-enabled products will now be subject toother relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenuearrangements with multiple deliverables that are outside the scope of thesoftware revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or thirdparty evidence for deliverables in an arrangement cannot be determined, a bestestimate of the selling price is required to separate deliverables and allocatearrangement consideration using the relative selling price method. The newguidance includes new disclosure requirements on how the application of therelative selling price method affects the timing and amount of revenuerecognition.  We believe adoption of thisnew guidance will not have a material impact on our financial statements.

 

**2.**  On December 30, 2009, we entered into anAgreement and Plan of Merger (“Agreement”) with Trinity Industries, Inc.and its wholly-owned subsidiary, THP Merger Co. (together “Trinity”) whereby,subject to certain conditions, Trinity will acquire all of our common stock(including the associated preferred stock purchase rights) through a tenderoffer and a subsequent merger for $6.38 per share of common stock in cash(“Trinity Acquisition”), and we will become a wholly-owned subsidiary ofTrinity Industries, Inc.

 

OnJanuary 7, 2010, Trinity announced the commencement of a tender offer forall of our outstanding shares of common stock for $6.38 per share, includingthe associated preferred stock purchase rights, net to seller in cash andwithout interest thereon.  The Trinitytender offer and subsequent merger, with a transactional value of approximately$61.1 million, are subject to certain closing conditions contained in theAgreement, including the acquisition by THP Merger Co. of that number of sharesof our common stock pursuant to the tender offer, together with the number ofour shares of common stock then owned by Trinity, that represents at least 60%of our outstanding shares of common stock on a fully-diluted basis.  The Trinity tender offer, unless extended inaccordance with its terms, will expire at midnight New York City time at theend of the day on February 4, 2010. If Trinity purchases shares of our common stock in the tender offer,Trinity will subsequently merge THP Merger Co. into the Company, with theCompany surviving. The terms and conditions of the Trinity Acquisition aredescribed in Trinity’s Schedule TO filed with the Securities and ExchangeCommission on January 7, 2010 and amendments thereto, and in our Schedule14D-9 filed with the Securities and Exchange Commission on January 7, 2010and amendments thereto.

 

Werecorded $775,000 in merger transaction costs in the second quarter of fiscal2010 related to the Trinity Acquisition, including $575,000 for a fairnessopinion and other services performed by our financial advisor and $200,000 inlegal costs.  We are obligated to paythese costs even if the Trinity Acquisition is not consummated.  In addition, we have recognized a tax benefitfor theses costs due to uncertainty surrounding the consummation of theAcquisition.  Of the $775,000 in mergertransaction costs, $645,000 was recorded in accrued expenses as of December 31,2009.

 

**3**.  On December 18, 2009, we sold our Informsegment to Vaisala, Inc. for $20 million in cash, of which $1 million isbeing held in escrow until December 18, 2011 as a reserve to secure andfund any potential indemnity claims of the purchaser pursuant to the StockPurchase Agreement.  The $1 millionescrow is recorded in non-current other assets. Vaisala, Inc. is the United States operating subsidiary of theVaisala Group, a global leader in environmental and industrialmeasurement.  The transaction involvedthe sale of all the outstanding stock of the four subsidiaries making up theInform segment, pursuant to a Stock Purchase Agreement dated December 18,2009.  The Inform segment sold productsincluding highway advisory radio systems; advanced sensing products whichmeasure distance, count and classify vehicles; weather sensing systems andother transportation equipment.  We havereflected the results of those operations as discontinued operations.  We recognized a gain on the sale of the Informsegment of $3,535,000, net of income taxes of $3,354,000, in the second quarterof fiscal 2010.  The sale of the

 

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Informsegment allowed us to strengthen our balance sheet and improve our financialflexibility in order to meet our debt obligations.

 

OnJuly 25, 2008, we sold our Intersection Control segment to Signal Group, Inc.for $20 million in cash.  TheIntersection Control segment sold products including traffic controllers,traffic and pedestrian signals, traffic uninterruptible power supply (UPS)systems, video detection equipment, toll road monitoring systems and parkingdetection devices.  We have reflected theresults of those operations as discontinued operations.  We recognized a loss on sale of the IntersectionControl segment of $712,000, net of income taxes of $436,000, in the firstquarter of fiscal 2009.

 

Theresults of discontinued operations are as follows for the three and six monthsended December 31, 2009 and 2008:

 
| ** **                                                                  | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                  | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                                      |       |                                    |       |   |   |   |   |
| Net  sales                                                                  |       | $                                         | 4,230,000  |                                    | $          | 5,036,000 |   | $ | 10,620,000 |   | $ | 11,925,000 |   |
|                                                                        |       |                                      |       |                                    |       |   |   |   |   |
| Gain  (loss) from operations of discontinued operations before income taxes |       | $                                         | 85,000     |                                    | $          | (345,000 | ) | $ | 606,000 |   | $ | (1,000 | ) |
| Gain  (loss) from sale of business                                          |       | 6,889,000                                 |       | —                                  |       | 6,889,000 |   | (1,148,000 | ) |
| Gain  (loss) before taxes                                                   |       | 6,974,000                                 |       | (345,000                                | )          | 7,495,000 |   | (1,149,000 | ) |
| Income  tax provision (benefit)                                             |       | 3,386,000                                 |       | (130,000                                | )          | 3,584,000 |   | (436,000 | ) |
| Gain  (loss) from discontinued operations, net of income tax benefit        |       | $                                         | 3,588,000  |                                    | $          | (215,000 | ) | $ | 3,911,000 |   | $ | (713,000 | ) |

 

**4.**  We recognizeshare-based compensation expense for all unvested share-based payments based onthe fair value on the original grant date. The fair value of the options and restricted stock granted is amortizedon a straight-line basis over the requisite service period, which is thevesting period.  As of December 31,2009, we have 434,500 common shares reserved for future grants from our stockoption and award plans.  Our stock optionand award plans are discussed in further detail in our Annual Report on Form 10-Kfor the year ended June 30, 2009.

 

Share-basedCompensation Expense

Theshare-based compensation cost that has been charged to Selling andAdministrative Expense for stock options and restricted stock awards under ourstock option and award plans was $105,000 and $185,000 for the six-monthperiods ending December 31, 2009 and 2008, respectively.  As of December 31, 2009, the totalcompensation cost related to unvested stock options and restricted stockgranted under our stock option plans not yet recognized was approximately$292,000.  This cost will be amortized ona straight-line basis over a weighted average period of approximately 1.8 yearsand will be adjusted for subsequent changes in estimated forfeitures.  The 269,666 unvested stock optionsoutstanding at December 31, 2009 had a weighted-average fair value of$1.03.  The 5,067 shares of restrictedstock unvested at December 31, 2009 had a fair value of $19.52.

 

Asfurther discussed in Note 2, if the Trinity Acquisition is consummated asexpected, a change of control, as defined by the stock option and award plans,will occur and all stock options will immediately vest and all restrictions onrestricted stock outstanding will lapse. All compensation cost not yet recognized for those options and unvestedrestricted stock will be immediately recognized.  The Agreement requires that payments be madeto all in-the-money option holders for the difference between the option grantprice and the purchase price of $6.38 per share. The Agreement also requiresthat payments be made to all out-of-the-money option holders, except for ourcurrent directors and named executive officers, at $0.40 per share of commonstock subject to the out-of-the-money options.

 

10

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Approximately$789,000 in compensation cost is expected to be recognized upon consummation ofthe merger for these items.

 

DeterminingFair Value

Thefair value of stock options granted is estimated using the Black-Scholesoption-pricing model that uses the assumptions noted below.  Expected volatilities are based on historicalvolatility of the Company’s stock.  Weuse historical data to estimate option exercise patterns, employee terminationand forfeiture rates within the valuation model; separate groups of optioneesthat have similar historical exercise behavior are considered separately forvaluation purposes.  The expected term ofoptions granted is derived from the output of the option valuation model andrepresents the period of time that options granted are expected to beoutstanding; the range given below results from certain groups of employeesexhibiting different behavior.  Therisk-free rate for periods within the contractual life of the option is basedon the U.S. Treasury yield curve in effect at the time of the grant.  The expected dividend yield is determined bydividing the current level of per share dividend by the grant date stock price.  We do not incorporate changes in dividendsanticipated by management until those changes have been communicated tomarketplace participants.

 
| ** **                             | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Risk free interest rate                |       | 2.4%                                   |       | 2.9% |   |
| Expected dividend yield                |       | 0%                                     |       | 5.2% |   |
| Weighted average expected volatility   |       | 57%                                    |       | 38% |   |
| Expected term                          |       | 4.0 – 6.0 yrs                     |       | 3.9 – 6.0 yrs |   |
| Weighted average expected term         |       | 4.5 yrs                                |       | 4.4 yrs |   |
| Weighted average grant date fair value |       | $0.85                                  |       | $1.69 |   |

 

We apply a forfeiture rate, estimated based on historical data, of upto 14% to the option fair value calculated by the Black-Scholes option pricingmodel.  This estimated forfeiture ratemay be revised in subsequent periods if actual forfeitures differ from thisestimate.

 

The fair value of the restricted stock granted in the first quarter offiscal 2008 was determined and fixed based on the price of our stock at thetime of the grant.

 

Stock Option and Restricted Stock Activity

Information with respect to stock option activity under our plans is asfollows:

 
| ** **                             | ** ** | ** **        | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|----------------------------------------|------------|-------------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                             | ** ** | ** **        | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                             | ** ** | ** **        | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                             | ** ** | ** **        | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                             | ** ** | **Common Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
|                                   |       |              |       |          |       |            |       |          |       |
| Outstanding  at July 1, 2008      |       | 830,670           |       | $             | 18.72      |            |       |          |       |   |
| Granted                                |       | 152,100           |       | $             | 7.79       |            |       |          |       |   |
| Exercised                              |       |              |       |          |       |            |       |          |       |
| Cancelled  or expired                  |       | (102,434          | )          | $             | 17.39      |            |       |          |       |   |
| Outstanding  at December 31, 2008 |       | 880,336           |       | $             | 16.98      |            | 2.6 Years  |          | $          | 1,250 |   |
|                                   |       |              |       |          |       |            |       |          |       |
| Outstanding  at July 1, 2009      |       | 873,669           |       | $             | 16.80      |            |       |          |       |   |
| Granted                                |       | 243,000           |       | $             | 2.06       |            |       |          |       |   |
| Exercised                              |       |              |       |          |       |            |       |          |       |
| Cancelled  or expired                  |       | (221,170          | )          | $             | 13.83      |            |       |          |       |   |
| Outstanding  at December 31, 2009 |       | 895,499           |       | $             | 13.54      |            | 2.5 Years  |          | $          | 963,970 |   |
|                                   |       |              |       |          |       |            |       |          |       |
| Vested  at December 31, 2009      |       | 625,833           |       | $             | 18.07      |            | 1.6 Years  |          | $          | 0 |   |

 

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Options outstanding as of December 31, 2009 are exercisable as follows:625,833 currently, 112,671 within one year, 87,660 in two years and 69,335 inthree years.  As of December 31,2008, 685,903 options were exercisable. During the six-month periods ended December 31, 2009 and 2008, thefollowing stock option activity occurred under our plans:

 
| ** **                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Total  intrinsic value of stock options exercised |       | —   |       | —   |       |
| Total  fair value of stock options vested         |       | $        | 123,000    |     | $          | 356,000 |   |
|                                                   |            |          |            |          |            |  |  |

 

Information with respect to restricted stock activity under our plansis as follows:

 
| ** **                                      | ** ** | ** **           | ** ** | **Weighted-**  | ** ** |
|-------------------------------------------------|------------|----------------------|------------|----------------|------------|
| ** **                                      | ** ** | ** **           | ** ** | **Average**    | ** ** |
| ** **                                      | ** ** | ** **           | ** ** | **Grant Date** | ** ** |
| ** **                                      | ** ** | **Number of Shares** | ** ** | **Fair Value** | ** ** |
|                                            |       |                 |       |           |       |
| Outstanding  at July 1, 2008               |       | 29,100               |       | $              | 19.52      |   |
| Restricted  stock granted                       |       |                 |       |           |       |
| Restricted  stock vested                        |       | (9,102               | )          | $              | 19.52      |   |
| Cancelled  or expired                           |       | (1,800               | )          | $              | 19.52      |   |
| Unvested  outstanding at December 31, 2008 |       | 18,198               |       | $              | 19.52      |   |
|                                            |       |                 |       |           |       |
| Outstanding  at July 1, 2009               |       | 10,133               |       | $              | 19.52      |   |
| Restricted  stock granted                       |       |                 |       |           |       |
| Restricted  stock vested                        |       | (5,066               | )          | $              | 19.52      |   |
| Cancelled  or expired                           |       |                 |       | $              | 19.52      |   |
| Unvested  outstanding at December 31, 2009 |       | 5,067                |       | $              | 19.52      |   |

 

We also had a retirement stock award program for certain of our keyexecutives which ended with the final issuance of vested shares in July 2008.  The retirement stock award program resultedin a charge to earnings for compensation expense of $268,000 for the six monthsended December 31, 2008.

 

**5.**     The incometax provision for the first six months of fiscal 2010 is based upon theestimated effective income tax rate for the full fiscal year.

 

Wehad unrecognized tax benefits of $182,000 as of December 31, 2009 and June 30,2009, of which $156,000, if recognized, would favorably affect our income taxrate.  The tax liability is recorded inaccrued expenses.

 

Werecord the interest related to uncertain tax positions as interest expenseduring the period incurred.  Penaltiesrelated to uncertain tax positions, which have historically been immaterial,are recorded as part of the income tax expense during the period incurred.  In accrued expenses, we had accrued $21,000for interest and $1,000 for penalties as of December 31, 2009 and as of June 30,2009.

 

Wefile income tax returns in jurisdictions of operation, including federal, stateand international jurisdictions.  Attimes, we are subject to audits in these jurisdictions.  The final resolution of any such tax auditcould result in either a reduction in our accruals or an increase in our incometax provision, both of which could have an impact on consolidated results ofoperations in any given period.  U.S.federal income tax returns have been audited through fiscal 2004.  The tax years 2007 and 2008 are currentlyunder examination by the Internal Revenue Service.  We do not anticipate significant changes in the

 

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unrecognizedtax benefits within the next twelve months as the result of examinations orlapse of statues of limitations to be material to our results of operations orfinancial position.

 

**6**.    Operating results for the first six monthsof fiscal 2010 are not necessarily indicative of the performance for the entireyear.  Our business is generally seasonalwith a higher level of sales in the fourth fiscal quarter.

 

**7.**     The computation of basic and dilutedearnings (loss) per share is as follows:

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Numerator:                                           |       |                   |       |                  |       |   |   |   |   |
| Loss from continuing operations                      |       | $                      | (382,000   | )                     | $          | (2,441,000 | ) | $ | (78,000 | ) | $ | (2,438,000 | ) |
| Earnings (loss) from discontinued operations         |       | 53,000                 |       | (215,000              | )          | 376,000 |   | (1,000 | ) |
| Gain (loss) on sale of discontinued operations       |       | 3,535,000              |       |                  |       | 3,535,000 |   | (712,000 | ) |
| Net earnings (loss)                                  |       | $                      | 3,206,000  |                  | $          | (2,656,000 | ) | $ | 3,833,000 |   | $ | (3,151,000 | ) |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Denominator:                                         |       |                   |       |                  |       |   |   |   |   |
| Weighted average shares outstanding-basic            |       | 9,328,800              |       | 9,231,149             |       | 9,325,441 |   | 9,209,672 |   |
| Effect  of dilutive securities-common stock options  |       | 1,496                  |       |                  |       | 1,756 |   |   |   |
| Weighted average shares outstanding-diluted          |       | 9,330,296              |       | 9,231,149             |       | 9,327,197 |   | 9,209,672 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per share of common stock - basic:   |       |                   |       |                  |       |   |   |   |   |
| Loss from continuing operations                      |       | $                      | (0.04      | )                     | $          | (0.27 | ) | $ | (0.01 | ) | $ | (0.26 | ) |
| Earnings (loss) from discontinued operations         |       |                   |       | (0.02                 | )          | 0.04 |   |   |   |
| Gain (loss) on sale of discontinued operations       |       | 0.38                   |       |                  |       | 0.38 |   | (0.08 | ) |
| Net earnings (loss)                             |       | $                      | 0.34       |                  | $          | (0.29 | ) | $ | 0.41 |   | $ | (0.34 | ) |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per share of common stock - diluted: |       |                   |       |                  |       |   |   |   |   |
| Loss from continuing operations                      |       | $                      | (0.04      | )                     | $          | (0.27 | ) | $ | (0.01 | ) | $ | (0.26 | ) |
| Earnings (loss) from discontinued operations         |       |                   |       | (0.02                 | )          | 0.04 |   |   |   |
| Gain (loss) on sale of discontinued operations       |       | 0.38                   |       |                  |       | 0.38 |   | (0.08 | ) |
| Net earnings (loss)                             |       | $                      | 0.34       |                  | $          | (0.29 | ) | $ | 0.41 |   | $ | (0.34 | ) |

 

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-monthand six-month periods ended December 31, 2009 and 2008 and are as follows:

 
| ** **                        | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **2009**                                  | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                              |       |                                      |       |                                    |       |   |   |   |   |
| Average  exercise price per share |       | $                                         | 17.12      |                                    | $          | 17.29 |   | $ | 17.12 |   | $ | 17.29 |   |
| Number of shares                  |       | 682,499                                   |       | 855,000                                 |       | 682,499 |   | 855,000 |   |
|                                   |            |                                           |            |                                         |            |  |  |  |  |  |  |  |  |

 

Inaddition, employee stock options totaling 235 shares for the six-month periodending December 31, 2008 were not included in the diluted weighted averageshares calculation because the effects of these securities were anti-dilutive.

 

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**8.**       Intangible assets consist ofthe following:

 
| ** **            | ** ** | **December 31, 2009** | ** ** | **June 30, 2009** | ** ** |
|-----------------------|------------|----------------------------|------------|------------------------|------------|
| ** **            | ** ** | **Gross**                  | ** ** | ** **             | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **            | ** ** | **Carrying**               | ** ** | **Accumulated**        | ** ** | **Intangible** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **            | ** ** | **Amount**                 | ** ** | **Amortization**       | ** ** | **Assets** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets** | ** ** |
|                  |       |                       |       |                   |       |   |   |   |   |   |   |   |   |
| Patents  and licenses |       | $                          | 3,128,000  |                   | $          | 2,309,000 |   | $ | 819,000 |   | $ | 3,141,000 |   | $ | 2,240,000 |   | $ | 901,000 |   |
|                       |            |                            |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangible amortization expensewas $81,000 in the six-month periods ended December 31, 2009 and2008.  The estimated amortization expensefor this fiscal year ended June 30, 2010 and for the five fiscal yearssubsequent to 2010 is as follows: $160,000, $158,000, $157,000, $113,000, $110,000 and $102,000.  The carrying amount of goodwill consists of$8,139,000 as of December 31, 2009 and as of June 30, 2009.

 

**9.**      Disclosures regarding guarantees, commitments and contingencies areprovided below.

 

Lease Commitments

We use variousleased facilities and equipment in our operations.  The terms for these leased assets varydepending on the lease agreements.  Theseoperating leases may include options for renewal and we may guarantee theperformance of our obligations under the leases.  Aggregate rent expense was $628,000 and$606,000 for the six months ended December 31, 2009 and 2008,respectively.  Annual minimum futurerental payments for lease commitments will be approximately $348,000 for theremainder of fiscal year 2010, a total of $1,225,000 in fiscal years 2011 to2012 and a total of $1,724,000 in fiscal years 2013 to 2014, for an aggregateof $3,297,000.

 

ProductWarranty Liability

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 vary by product, themajority of which range from 90 days to, in limited circumstances, 1 year.  We accrue for product warranties, when, basedon available information, it is probable that customers will make claims underwarranties relating to products that have been sold, and a reasonable estimateof the costs can be made.  We estimatedno product warranty liability for the six-month periods ended December 31,2009.

 

Legal

We are involved inseveral pending judicial proceedings for product liability and other damagesarising out of the conduct of our business. We record losscontingencies where appropriate according to authoritative guidance issued bythe FASB.  While the outcome oflitigation is subject to uncertainties, we believe, after consultation withcounsel, that the outcome of these proceedings, based on current availableinformation and after taking into account the availability and limits of ourinsurance coverage, will not have a material effect on our consolidatedfinancial condition and results of operations.  See Note 12for additional information.

 

ExecutiveAgreements

We have agreements with certain named executives which are designed toretain the services of key employees and to provide for continuity ofmanagement in the event of an actual or threatened change in control of theCompany.  Upon occurrence of a triggeringevent after a change in control, as defined, we would be liable for payment ofbenefits under these agreements of approximately $3.5 million.  The triggering event would occur upon thetermination of certain named executive officers anytime prior to

 

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March 6, 2012, as defined. A portion of these benefits will fluctuate based upon the share price atthe time of the triggering event. Historically, we have not made payments under the change of controlagreements, and no amount has been accrued in the accompanying consolidatedfinancial statements.  If the merger withTrinity is consummated, the three named executives will be terminated and willbe owed $3.5 million for change of control payments. We also have employmentagreements with certain key executives which are designed to retain theservices of those key employees.  Uponoccurrence of a triggering event under these agreements, we would be liable forpayment of certain benefits under these agreements of approximately $1.6million.  We record the expense for theseagreements when the agreement is triggered. If the merger with Trinity is consummated, the three named executiveswill be terminated and will be owed approximately $1.0 million in severancepayments. We have by-laws and agreements under which we indemnify our directorsand officers from liability for certain events or occurrences while thedirectors or officers are, or were, serving at our request in such capacities.  The term of the indemnification period is forthe director’s or officer’s lifetime.  Webelieve that any obligations relating to this indemnification are predominantlycovered by insurance subject to certain exclusions and deductibles, and thereforeno amount has been accrued in the accompanying consolidated financialstatements.  See Note 2 for additionalinformation on the Trinity Acquisition.

 

Indemnification ofLenders and Agents Under Credit Facilities

Under our creditfacility, we have agreed to indemnify our lender against costs or lossesresulting from changes in laws and regulations which would increase the lender’scosts, and from any legal action brought against the lender related to the useof loan proceeds.  These indemnificationprovisions generally extend for the term of the credit facility and do notprovide for any limit on the maximum potential liability.  Historically, we have not made anysignificant indemnification payments under such agreements and no amount hasbeen accrued in the accompanying consolidated financial statements with respectto these indemnification guarantees.

 

Bidand Performance Bonds

Wehave entered into bid and performance related bonds associated with variouscontracts.  Potential payments due underthese bonds are related to our performance under the applicable contract.  The total amount of bid and performancerelated bonds that were available and undrawn was $637,000 as of December 31,2009 and $2,115,000 as of June 30, 2009. Historically, customers have not drawn upon these instruments due tonon-performance, and no amount has been accrued in the accompanyingconsolidated financial statements.

 

OtherCommitments

Wehave standby letters of credit covering primarily potential workers’compensation liabilities. The total amount of standby letters of credit thatwere outstanding was $840,000 as of December 31, 2009 and $1,120,000 as ofJune 30, 2009.  We have included$606,000 and $757,000 in accrued liabilities for potential workers’compensation liabilities as of December 31, 2009 and June 30, 2009,respectively.

 

Wehave certain non-cancelable royalty agreements, which contain certain minimumpayments in the aggregate of $810,000 through fiscal year 2012. We haveincluded $211,000 and $208,000 in accrued liabilities for current obligationsrelating to royalty agreements as of December 31, 2009 and June 30,2009, respectively.

 

**10.**      When certain assets or liabilities are recorded or disclosed at fairvalue, they are measured using a fair value hierarchy that prioritizes theinputs to valuation techniques used to measure fair value into three broadlevels.  The following is a briefdescription of those three levels:

 

Level 1:  Unadjusted quoted prices in active marketsthat are accessible at the measurement date for identical, unrestricted assetsor liabilities.

 

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Level 2:  Quoted prices in markets that are not activeor inputs which are observable, either directly or indirectly, forsubstantially the full term of the asset or liability.

 

Level 3:  Prices or valuation techniques that requireinputs that are both significant to the fair value measurement and unobservable(i.e. supported by little or no market activity).

 

Ourfinancial instruments, which consist principally of cash, accounts receivable,accounts payable, short-term debt and convertible debt, are carried atcost.  The carrying values of our cash,accounts receivable and accounts payable approximate fair value due to theirshort maturities.  The carrying value ofour short-term debt from our revolving credit facility of $3,250,000 as of December 31,2009 approximates fair value due to the variable-rate nature of the respectiveborrowings and is valued using Level 1 techniques.  On December 29, 2009, we gave notice tothe holders of our $40,000,000 7% Convertible Senior Subordinated Notes due February 15,2025 (“Notes”) that, at the option of the holder and in accordance with theterms of the Notes, we would repurchase all Notes for a purchase price, payablein cash, equal to 100% of the principal amount of the Notes plus any accruedand unpaid interest on February 15, 2010. We expect that holders will tender all the Notes for repurchase.  Therefore we have estimated the fair value ofthe Notes as of December 31, 2009 at face value using Level 1 valuationtechniques.

 

On July 1, 2009, weadopted the new accounting guidance on fair value measurements of nonfinancialassets and nonfinancial liabilities.  Wemeasure our nonfinancial assets and liabilities, including primarily property,plant and equipment, tax assets, intangible assets and goodwill, at fair valueon a non-recurring basis when they are deemed to be other-than-temporarilyimpaired, using Level 3 techniques. During the six months ended December 31, 2009 and 2008, we did notrecord any impairment on those assets or liabilities required to be measured atfair value on a non-recurring basis and had no required additional disclosures.

 

**11.**     We implemented a series of cost savings initiatives primarily in thesecond half of fiscal 2009 and into the first quarter of fiscal 2010.  One of the initiatives included the reductionof our workforce across our business. The total workforce reduction during fiscal 2009 and through the firstquarter of fiscal 2010 was approximately 57 employees.  We recorded $296,000 in severance costs inthe first quarter of fiscal 2010 related to workforce reductions of 16employees.

 

Severance activity was as follows:

 
| ** **                             | ** ** | **Employee**  | ** ** |
|----------------------------------------|------------|---------------|------------|
| ** **                             | ** ** | **Severance** | ** ** |
| ** **                             | ** ** | **Costs**     | ** ** |
|                                   |       |          |       |
| Accrual balance July 1, 2008      |       | $             | —     |   |
| Costs incurred                         |       | 1,342,000     |       |
| Cash payments                          |       | (1,275,000    | )          |
| Accrual balance June 30, 2009     |       | 67,000        |       |
| Costs incurred                         |       | 296,000       |       |
| Cash payments                          |       | (363,000      | )          |
| Accrual balance December 31, 2009 |       | $             | —     |   |
|                                   |       |          |       |
| Remaining expected severance costs     |       | $             | —     |   |
|                                   |       |          |       |
| Total expected severance costs         |       | $             | 1,638,000  |   |

 

16

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Employee severance costs includeseverance pay and any related retention bonuses.

 

**12.      **As discussed atPart II, Item 1. Legal Proceedings below, two purported stockholder classactions were filed on January 13, 2010 and January 20, 2010,respectively, naming the Company and its directors as well as Trinity asdefendants in connection with the Trinity Acquisition (see Note 2).  On January 28, 2010, we entered intomemorandums of understanding to settle both lawsuits.  The total amount of the settlement, subjectto approval by the court, is not to exceed $600,000. The lawsuits were tenderedto our insurance carrier and we are subject to a $250,000 deductible.

 

OnJanuary 29, 2010, we entered into an amended bank credit agreement whichextended the expiration date of our credit agreement from January 31, 2010to February 15, 2010.  Our bank hasissued us a commitment letter dated January 29, 2010 to amend our creditagreement, if necessary, before February 15, 2010 to permit us to borrowup to $22.5 million under certain conditions.

 

We evaluated subsequent eventsthrough February 4, 2010, which is the date we filed our Quarterly Reporton Form 10-Q for the second quarter of fiscal 2010 with the Securities andExchange Commission, and included all accounting and disclosure requirementsrelated to subsequent events in our financial statements.

 

17

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PART I — FINANCIAL INFORMATION

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

RECENTDEVELOPMENTS

 

OnDecember 30, 2009, we entered into an Agreement and Plan of Merger(“Agreement”) with Trinity Industries, Inc. and its wholly-ownedsubsidiary, THP Merger Co. (together “Trinity”) whereby, subject to certainconditions, Trinity will acquire all of our common stock (including theassociated preferred stock purchase rights) through a tender offer and a subsequentmerger for $6.38 per share of common stock in cash (“Trinity Acquisition”), andwe will become a wholly-owned subsidiary of Trinity Industries, Inc.

 

OnJanuary 7, 2010, Trinity announced the commencement of a tender offer forall of our outstanding shares of common stock for $6.38 per share, includingthe associated preferred stock purchase rights, net to seller in cash andwithout interest thereon.  The Trinitytender offer and subsequent merger, with a transactional value of approximately$61.1 million, are subject to certain closing conditions contained in theAgreement, including the acquisition by THP Merger Co. of that number of sharesof our common stock pursuant to the tender offer, together with the number ofour shares of common stock then owned by Trinity, that represents at least 60%of our outstanding shares of common stock on a fully-diluted basis.  The Trinity tender offer, unless extended inaccordance with its terms, will expire at midnight New York City time at theend of the day on February 4, 2010. If Trinity purchases shares of our common stock in the tender offer,Trinity will subsequently merge THP Merger Co. into the Company, with theCompany surviving. The terms and conditions of the Trinity Acquisition aredescribed in Trinity’s Schedule TO filed with the Securities and ExchangeCommission on January 7, 2010 and amendments thereto, and in our Schedule14D-9 filed with the Securities and Exchange Commission on January 7, 2010and amendments thereto.

 

OnDecember 18, 2009, we sold our Inform segment to Vaisala, Inc. for$20 million in cash, of which $1 million is being held in escrow as a reserveuntil December 18, 2011 to secure and fund any potential indemnity claimsof the purchaser pursuant to the Stock Purchase Agreement.

 

OnDecember 29, 2009, we gave notice to the holders of our $40,000,000 7%Convertible Senior Subordinated Notes due February 15, 2025 (“Notes”)that, at the option of the holder and in accordance with the terms of theNotes, we would repurchase all Notes for a purchase price, payable in cash,equal to 100% of the principal amount of the Notes plus any accrued and unpaidinterest on February 15, 2010.  Weexpect that holders will tender all the Notes for repurchase.

 

OnJanuary 29, 2010, we entered into an amended bank credit agreement whichextended the expiration date of our credit agreement from January 31, 2010to February 15, 2010.  Our bank hasissued us a commitment letter dated January 29, 2010 to amend our creditagreement, if necessary, before February 15, 2010 to permit us to borrowup to $22.5 million to repurchase the Notes under certain conditions.  With that bank borrowing, plus the $19million of cash proceeds we received from the sale of our Inform Segment andborrowings of up to $7 million from Trinity pursuant to the Agreement, weexpect to fund the repurchase of the Notes on February 15, 2010, if theTrinity tender offer is not consummated prior to this date.

 

OVERVIEW

 

Wedevelop, manufacture and market highway and transportation safety products toprotect and direct motorists, pedestrians and road workers in both domestic andinternational markets. Our continuing operations are comprised of onereportable segment within the highway and transportation safety industry, 

 

18

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whichis the manufacture and sale of highway and transportation safety products whichprotect and direct motorists and highway personnel. We provide solutions forimproving safety on the roads either by minimizing the severity of crashes thatoccur or by preventing crashes from occurring by directing or guiding traffic.Our primary product lines include energy-absorbing products such as crashcushions, truck-mounted attenuators, sand-filled barrels and water-filledbarriers, and directing and guiding products such as flexible post delineatorsand glare screen systems

 

Ourproducts are sold worldwide primarily through a distribution network andsupplemented by a direct sales force to customers in the highway constructionand safety business, state and municipal departments of transportation, andother governmental transportation agencies. The domestic market for highway andtransportation safety products is directly affected by federal, state and localgovernmental policies and budgets. A portion of our domestic sales isultimately financed by funds provided to the states by the federal government.Historically, these funds have covered 75% to 90% of the cost of highway safetyprojects on roads constructed or maintained with federal assistance.Seasonality affects our business with generally a higher level of sales in ourfourth fiscal quarter.

 

DISCONTINUEDOPERATIONS

 

OnDecember 18, 2009, we sold our Inform segment to Vaisala, Inc. for$20 million in cash, of which $1 million is being held in escrow as a reserveuntil December 18, 2011 to secure and fund any potential indemnity claimsof the purchaser pursuant to the Stock Purchase Agreement.  The Inform segment provided solutions forimproving traffic flow and safety on roads and runways by providinginformation.  Accordingly, we reflect theresults of those operations as discontinued operations for all periodspresented.  In the second quarter of fiscal2010 we recorded a gain of $3,535,000, net of income taxes of $3,354,000 on thesale of the segment.  The sale of theInform segment allowed us to strengthen our balance sheet and improve ourfinancial flexibility in order to meet our debt obligations.

 

OnJuly 25, 2008, we sold our Intersection Control segment to Signal Group, Inc.for $20 million in cash. The Intersection Control segment sold productsincluding traffic controllers, traffic and pedestrian signals, trafficuninterruptible power supply (UPS) systems, video detection equipment and tollroad monitoring systems. Accordingly, we reflect the results of thoseoperations as discontinued operations for all periods presented. The assets andliabilities of the divested segment were classified as assets and liabilitiesheld for sale within our consolidated balance sheets until the sale. In thefirst quarter of fiscal 2009, we recorded a loss on the sale of this businessof $712,000, net of income taxes.

 

# RESULTSOF CONTINUING OPERATIONS

#  

Our second fiscal quarterresults were driven by sales growth in both the domestic and internationalmarkets.  Domestic sales increased 17%,which we believe was driven in part by Federal stimulus funding.  International sales increased 18% over thesales levels achieved a year ago, primarily due to increased sales in the AsiaPacific region.  Our results alsobenefitted from the cost reductions we made in the second half of fiscal 2009and into the first quarter of fiscal 2010, allowing for enhanced gross marginand profitability in the quarter and the first half of fiscal 2010 compared tothe prior year periods.  See FUTURE OUTLOOK forfurther information.

 

19

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

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| ** **                                                    | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Protect  and Direct Revenues                                  |       | $                      | 17,626,000 |                  | $          | 15,021,000 |   | $ | 38,098,000 |   | $ | 35,003,000 |   |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Geographic  Revenues:                                         |       |                   |       |                  |       |   |   |   |   |
| Domestic                                                      |       | $                      | 11,928,000 |                  | $          | 10,202,000 |   | $ | 25,491,000 |   | $ | 22,954,000 |   |
| International                                                 |       | 5,698,000              |       | 4,819,000             |       | 12,607,000 |   | 12,049,000 |   |
|                                                          |       | $                      | 17,626,000 |                  | $          | 15,021,000 |   | $ | 38,098,000 |   | $ | 35,003,000 |   |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Operating  Income (Loss):                                     |       |                   |       |                  |       |   |   |   |   |
| Protect  and Direct                                           |       | $                      | 2,646,000  |                  | $          | (414,000 | ) | $ | 5,482,000 |   | $ | 1,958,000 |   |
| Corporate                                                     |       | (2,397,000             | )          | (2,659,000            | )          | (3,870,000 | ) | (4,109,000 | ) |
|                                                          |       | $                      | 249,000    |                  | $          | (3,073,000 | ) | $ | 1,612,000 |   | $ | (2,151,000 | ) |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Gross  profit percentage                                      |       | 33.9                   | %          | 25.4                  | %          | 33.8 | % | 29.0 | % |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Selling  and administrative expenses as a percentage of sales |       | 25.6                   | %          | 36.1                  | %          | 24.3 | % | 29.2 | % |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Diluted  earnings (loss) per share                            |       | $                      | (0.04      | )                     | $          | (0.27 | ) | $ | (0.01 | ) | $ | (0.26 | ) |

 

Revenues

 

Our net sales forthe second quarter of fiscal 2010 increased $2,605,000, or 17%, to $17,626,000from $15,021,000 for the second quarter last year, with increases in bothdomestic and international markets. Sales increases in the permanent crash cushion, truck-mountedattenuator, parts and Triton barrier product lines were somewhat offset bydecreased sales of delineators, barrels and ABC terminal product lines.

 

Our net sales forthe first six months of fiscal 2010 increased $3,095,000, or 9%, to $38,098,000from $35,003,000 for the same period last year, with increases in both domesticand international markets.  For the firstsix months of fiscal 2010, sales increased in the permanent crash cushion,truck-mounted attenuator, parts, and barrel product lines and sales decreasedin the Triton barrier product, delineator and ABC terminal product lines.

 

Geographic - Domestic sales for the second quarterof fiscal 2010 increased $1,726,000, or 17%, to $11,928,000 from $10,202,000driven in part by activity related to the Federal stimulus funding.  International sales for the second quarter offiscal 2010 increased $879,000, or 18%, to $5,698,000, compared to $4,819,000for the second quarter last year, with increased sales in the Asia Pacificregion, Canada and Europe offsetting decreased sales in the other regions.  International sales in the Asia Pacificregion increased 132% partially due to increased sales of Triton barrier andother product sales in Australia.

 

20

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Domestic sales forthe first six months of fiscal 2010 increased $2,537,000, or 11%, to$25,491,000 from $22,954,000 driven in part by activity related to the Federalstimulus funding.  International salesfor the first six months of fiscal 2010 increased $558,000, or 5%, to$12,607,000, compared to $12,049,000 for the same period last year, with increasedsales in the Asia Pacific region and Canada offsetting decreased sales in theother regions.

 

Gross ProfitMargin

 

Our gross profitmargin for the second quarter of fiscal 2010 was 33.9% compared to 25.4% forthe second quarter last year.  The grossmargin increased primarily due to favorable product sales mix with increasedsales of permanent crash cushions, which have higher gross margins, anddecreased sales of ABC terminals, which have lower gross margins than someother product lines.  In addition, thegross profit margin increased due to higher volume and lower material costs forsome product lines.

 

Our gross profitmargin for the first six months of fiscal 2010 was 33.8% compared to 29.0% forthe same period last year.  The grossmargin increased primarily due to favorable product sales mix with increasedsales of permanent crash cushions, which have higher gross margins, anddecreased sales of ABC terminals, which have lower gross margins than someother product lines and to the higher sales volume.

 

Selling and AdministrativeExpenses

 

Selling and administrativeexpenses for the second quarter of fiscal 2010 decreased $909,000, or 17%, to$4,519,000 from $5,428,000 for the second quarter last year due to decreasedexpenses related to headcount reductions and other cost-savingsinitiatives.  Selling and administrativeexpenses decreased as a percentage of sales to 25.6% for the second quarter of2010 from 36.1% in the prior year period.

 

Selling and administrativeexpenses for the first six months of fiscal 2010 decreased $967,000, or 9%, to$9,270,000 from $10,237,000 for the same period last year due to decreasedexpenses related to headcount reductions and other cost-savings initiativesoffset partially by $300,000 in expenses related to the shut-down of our Chinafacility.  Selling and administrativeexpenses decreased as a percentage of sales to 24.3% for the first six monthsof 2010 from 29.2% in the prior year period.

 

Research and Development

 

Research and developmentexpenditures for the second quarter of fiscal 2010 decreased $183,000, or 30%,to $433,000 from $616,000 for the same period last year, primarily due toreduced testing costs.

 

Research and developmentexpenditures for the first six months of fiscal 2010 decreased $307,000, or 25%,to $909,000 from $1,216,000 for the same period last year.  We continue to focus our investment inresearch and development primarily in critical projects to support long termgrowth.

 

Merger Transaction Costs

 

We recorded $775,000 inmerger transaction costs in the second quarter of fiscal 2010 related to theTrinity Acquisition, including $575,000 for a fairness opinion and otherservices performed by our financial advisor and $200,000 in legal costs.

 

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Severance Costs

 

We recorded $296,000 inseverance costs in the first quarter of fiscal 2010 related to headcountreductions primarily in sales and administrative functions.

 

We recorded $843,000 inseverance costs in the second quarter of fiscal 2009 related to the retirementof our former chief executive officer and another senior executive.

 

Operating Profit (Loss)

 

Operating profitfor the second quarter of fiscal 2010 was $249,000, compared to an operatingloss of $3,073,000 for the second quarter of fiscal 2009, primarily due to thehigher sales volume, favorable product sales mix, reduced expenses due to thecost savings initiatives implemented last year and lower severance costs offsetsomewhat by the incurrence of transaction costs related to the TrinityAcquisition.

 

Operating profitfor the first six months of fiscal 2010 was $1,612,000, compared to anoperating loss of $2,151,000 for the same period last year, primarily due tothe higher sales volume favorable product sales mix, reduced expenses due tothe cost savings initiatives implemented last year and lower severance costsoffset somewhat by the incurrence of transaction costs related to the TrinityAcquisition and by increased costs related to the shut-down of our Chinafacility.

 

Interest Expense

 

Interest expense for thesecond quarter of fiscal 2010 was consistent with the same period lastyear.   The interest rate on our bankfacility is based on LIBOR or the British Bankers Association LIBOR, plus amargin.  Our overall weighted averageinterest rate was 6.7% as of December 31, 2009, primarily due to the 7%interest rate on our $40,000,000 in convertible debt.

 

Interest expense for thefirst six months of fiscal 2010 decreased $43,000, or 2% to $1,739,000 from$1,782,000 for the same period last year.

 

Income Tax Benefit

 

The income tax benefitfor the second quarter of fiscal 2010 was $233,000 representing a 38% effectiveincome tax rate.  The income tax benefitfor the second quarter of fiscal 2009 was $1,497,000, also representing a 38%effective income tax rate.

 

The income tax benefitfor the first six months of fiscal 2010 was $47,000 representing a 38%effective income tax rate.  The incometax benefit for the first six months of fiscal 2009 was $1,495,000, alsorepresenting a 38% effective income tax rate.

 

Loss from ContinuingOperations

 

The loss from continuingoperations for the second quarter of fiscal 2010 was $382,000, or $0.04 perdiluted share, compared to a loss from continuing operations of $2,441,000, or$0.27 per diluted share, for the second quarter last year.

 

The loss from continuingoperations for the first six months of fiscal 2010 was $78,000, or $0.01 perdiluted share, compared to a loss from continuing operations of $2,438,000, or$0.26 per diluted share, for the same period last year.

 

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Earnings (Loss) fromDiscontinued Operations, Net of Income Taxes

 

Earnings from discontinued operations, net of incometaxes, for the second quarter of fiscal 2010 were $3,588,000, or $0.38 perdiluted share compared to a loss of $215,000, or $0.02 per diluted share in thesecond quarter of fiscal 2009.  Includedin the current period earnings was a $3,535,000 gain on the sale of the Informsegment.

 

Earnings from discontinued operations, net of incometaxes, for the first six months of fiscal 2010 were $3,911,000, or $0.42 perdiluted share compared to a loss of $713,000, or $0.08 per diluted share in thesame period of fiscal 2009.  Included inthe current period earnings was a $3,535,000 gain on the sale of the Informsegment.  Included in the prior period losswas a loss of $712,000 on the sale of the Intersection Control segment.

 

Net Earnings (Loss)

 

Net earnings for thesecond quarter of fiscal 2010 were $3,206,000, or $0.34 per diluted share,compared to a net loss of $2,656,000, or $0.29 per diluted share, for thesecond quarter last year.

 

Net earnings for thefirst six months of fiscal 2010 were $3,833,000, or $0.41 per diluted share,compared to a net loss of $3,151,000, or $0.34 per diluted share, for the sameperiod last year.

 

FINANCIALCONDITION

 

Liquidityand Capital Resources

 

Ourprincipal sources of cash historically have been cash flows from operations andborrowings from banks and other sources. We had cash and cash equivalents of$27,292,000 as of December 31, 2009, primarily as the result of the $19million in cash received for the sale of the Inform segment on December 18,2009.  As of December 31, 2009, wehad $3,250,000 outstanding against our bank credit facility (the “CreditAgreement”) and $40,000,000 outstanding in 7% Convertible Senior SubordinatedNotes due February 2025 (the “Notes”).

 

OnJanuary 29, 2010, we entered into an amended bank credit agreement whichextended the expiration date of our Credit Agreement from January 31, 2010to February 15, 2010.  Our bank hasissued us a commitment letter dated January 29, 2010 to amend our CreditAgreement, if necessary, before February 15, 2010 to permit us to borrowup to $22.5 million to repurchase the Notes under certain conditions.

 

Weexpect to be in compliance with the covenants of our Credit Agreement, asamended, through the term of the Credit Agreement. However, our ability toremain in compliance with the covenants and to modify our capital structure isdependent upon the consummation of the Trinity Acquisition and our futureperformance and may be affected in part by events beyond our control, includingthe current economic downturn. Reduced cash flows from operations, regardlessof cause, may make it more difficult to comply with our bank covenants.Continuing uncertainty in the credit markets may affect our ability to accessthose markets and may increase costs associated with borrowing and issuing debtinstruments.

 

OnDecember 29, 2009, we gave notice to the holders of our Notes that, at theoption of the holder and in accordance with the terms of the Notes, we wouldrepurchase all Notes for a purchase price, payable in cash, equal to 100% ofthe principal amount of the Notes plus any accrued and unpaid interest on February 15,2010.  We expect that holders will tenderall the Notes for repurchase.  If theTrinity tender offer is not consummated prior to such date, we expect to payfor 

 

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theNotes at 100% of the principal plus any accrued and unpaid interest on February 15,2010, in cash by using the $19 million cash proceeds from the sale of theInform segment, $22.5 million from bank borrowings pursuant to the CreditAgreement and up to $7 million of borrowings from Trinity pursuant to theAgreement.  See Note 2 for additionalinformation.

 

Althoughthe variable interest rates under our Credit Agreement have been volatile dueto the current credit environment, the financial effect on us has not beensignificant as the amount outstanding against the facility was only $3,250,000as of December 31, 2009.  Currently,we do not believe that our operating cash flow needs will require us tosignificantly increase our bank borrowings in the near term.  We have reduced the amount of discretionaryexpenditures and are restricting capital expenditures to those more critical tothe effectiveness of our operations, which we do not believe will have amaterial impact on the effectiveness of our operations.   Our $40 million of Notes accounted for themajority of our $43.3 million in outstanding debt as of December 31, 2009.

 

Thereare currently no default interest provisions in connection with a default onour Credit Agreement. The provisions of our Credit Agreement and the Notes eachinclude cross-default provisions such that a default on any individual paymentobligation greater than $5 million is a default under both agreements.

 

Ouroutstanding borrowings were $43,250,000, or 52.7% of total capitalization, as ofDecember 31, 2009, of which $3,250,000 was outstanding against our bankcredit facility. This compares to outstanding borrowings of $41,000,000, or54.5% of total capitalization, as of June 30, 2009.  Included in current debt as of December 31,2009 and June 30, 2009 was the $40 million of Notes. The amount of standbyletters of credit outstanding was $840,000 as of December 31, 2009 and$1,120,000 as of June 30, 2009.

 

CashFlows

 

Cashflows provided by continuing operations were $9,682,000 during the first sixmonths of fiscal 2010 compared with $37,000 provided by continuing operationsin the first six months of fiscal 2009. For the first six months of fiscal2010, the loss from continuing operations was $78,000, net of income taxescompared to a loss of $2,440,000, net of income taxes for the first six monthsof fiscal 2009. Non-cash depreciation and amortization were $1,246,000 for thecurrent period compared to $1,556,000 for the year ago period. The increase incash provided by operations was primarily due to increased cash provided bydeferred income taxes and decreased working capital in the first six months offiscal 2010. Decreased working capital provided $4,810,000 in cash, primarilyrepresenting decreased accounts receivable and inventories and increasedaccounts payables due to our focus on increasing cash flow. This compares to anincrease in cash due to decreased working capital of $1,746,000 for the firstsix months of fiscal 2009. Cash used in discontinued operations was $2,936,000during the first six months of fiscal 2010 primarily representing increasedworking capital.

 

Investingactivities of continuing operations provided cash of $18,334,000 during thefirst six months of fiscal 2010, compared to $19,583,000 provided in the firstsix months of the prior year.  Proceedsfrom the sale of the Inform segment provided cash of $19 million in the secondquarter of fiscal 2010.  Proceeds fromthe sale of the Intersection Control segment provided cash of $20 million inthe first quarter of fiscal 2009. Expenditures during the first six months offiscal 2010 included $666,000 for capital expenditures compared with $417,000for the first six months last year.

 

Financingactivities provided cash of $2,250,000 during the first six months of fiscal 2010,compared with $17,679,000 of cash used during the first six months of fiscal2009. The $20 million in proceeds from the sale of the Intersection Controlsegment was used to pay down substantially all of our bank debt in the firstquarter of fiscal 2009. During the first six months of fiscal 2010, we borroweda net $2,250,000 against our outstanding revolving credit facility. The paymentof our semi-annual cash dividend used cash 

 

24

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of$1,829,000 in the first quarter of fiscal 2009. Our decision made in fiscal2009 to suspend payment of the semi-annual dividend will save nearly $4 millionin annual cash expenditures.

 

Ifthe Trinity Acquisition is not consummated, we anticipate spending not morethan $2,000,000 in cash in fiscal 2010 for capital expenditures as we manageour capital spending in this difficult environment. We currently believe thatfuture operating and capital cash needs will be financed either through cashon-hand, cash generated from operations, cash obtained under our CreditAgreement or cash from other financing alternatives. We currently believe thatthese sources of cash should be sufficient for all planned operating andcapital requirements in the near term. We sold the Inform segment, implemented a series of cost controlmeasures to improve our financial performance and also suspended oursemi-annual dividend and reduced capital expenditures to conserve cash.  See Liquidity and Capital Resources above,Note 2 and Note 3 for additional information.

 

OFF-BALANCESHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

 

Weare subject to certain debt obligations, guarantees, commitments and contingentliabilities further described in our Annual Report on Form 10-K for theyear ended June 30, 2009.  Thefollowing table presents our contractual obligations to make future paymentsunder contracts, such as debt and lease agreements, as of December 31,2009:

 
| ** **                       | ** ** | ** ** | ** ** | **Less than** | ** ** | ** **    | ** ** | ** **    | ** ** | **More than** | ** ** |
|----------------------------------|------------|------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                       | ** ** | **Total**  | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| Long-term  debt (1)              |       | $          | 43,250,000 |          | $          | 43,250,000    |       |          |       |          |       |   |   |
| Estimated  interest payments (2) |       | 1,793,000  |       | 1,793,000     |       |          |       |          |       |          |       |
| Operating  leases                |       | 3,297,000  |       | 348,000       |       | $             | 1,225,000  |          | $          | 1,724,000     |       |   |   |
| Minimum  royalty payments        |       | 810,000    |       | 510,000       |       | 300,000       |       |          |       |          |       |
| Uncertain  tax benefits          |       | 183,000    |       | 72,000        |       | 111,000       |       |          |       |          |       |
| Purchase  obligations (3)   |       | 1,472,000  |       | 1,472,000     |       |          |       |          |       |          |       |
| Total                            |       | $          | 50,805,000 |          | $          | 47,445,000    |       | $             | 1,636,000  |          | $          | 1,724,000 |   |   |   |

 

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(1)     Amountincludes expected cash payments on long-term debt based upon current andeffective maturities.  Amount does notinclude renewals relating to refinancing of long-term debt currentlyoutstanding as future terms are unknown at this time and difficult to estimate.

(2)     Amountincludes estimated interest payments based on interest rates as of the currentperiod.  Interest rates on variable-ratedebt are subject to change in the future. Interest is estimated based upon current and effective maturities oflong-term debt currently outstanding and does not include an estimate of futureinterest payments relating to refinancing of long-term debt per (1) above.  Cash paid for interest was $3,519,000 infiscal 2009 and we currently expect cash for interest to be approximately thatamount or higher in fiscal 2010.

(3)     Purchaseobligations include non-cancellable orders with suppliers in the normal courseof business on a short-term basis.

 

Asdisclosed in the footnotes to the consolidated financial statements, we haveentered into bid and performance related bonds associated with variouscontracts.  Potential payments due underthese bonds are related to our performance under certain contracts.  The total amount of bid and performancerelated bonds that were available and undrawn as of December 31, 2009 was$637,000.  We also have standby lettersof credit covering potential workers’ compensation liabilities and otherliabilities.  The total standby exposurerelating to letters of credit as of December 31, 2009 was $840,000.

 

FUTUREOUTLOOK

 

Ifthe Trinity Acquisition is consummated, we will cease to be an independentcompany filing reports with the Securities and Exchange Commission pursuant tothe Exchange Act of 1934, as amended; our 

 

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commonstock will cease to trade on the NASDAQ Global Market; and we will become awholly-owned subsidiary of Trinity.  SeeNote 2 for additional information.

 

Lookingforward, we remain cautious about our business, given the continued weak globaleconomic conditions and the difficult financial markets. This unfavorablemarket environment may negatively affect demand for our products indefinitely.

 

TheUnited States domestic market for highway and transportation safety products isdirectly affected by federal, state, and local governmental policies.Historically, federal funds have been allocated and highway policy has beendeveloped through six-year federal highway authorization bills. The federalhighway authorization law, the Safe, Accountable, Flexible and EfficientTransportation Equity Act-A Legacy for Users, or SAFETEA-LU, expired September 30,2009, but has been extended through the end of February 2010.  We anticipate further delays in the enactmentof a new highway authorization bill with additional extensions for limitedtimes (perhaps 1, 3, 6 or 12 months) at current funding levels.

 

Whileuncertainty in funding for our markets continues, we are encouraged by aturnaround to profitability in our fourth quarter of fiscal 2009 as well as ourcontinued performance in the first six months of fiscal 2010. We continue tobelieve that our business will gain strength if the federal funding issue isresolved. We anticipate that our fiscal 2010 results will continue to benefitfrom the federal funding for transportation projects, enacted as part of theAmerican Recovery and Reinvestment Act, which includes approximately $27billion in Federal stimulus funding for highways and bridges. However, webelieve that this one-time spending package cannot substitute for enactment ofthe multi-year highway authorization legislation and the long term funding ofthe highway trust fund. Until a new multi-year highway authorization billbecomes law, the transportation safety allotment in federal and state budgetsmay be uncertain and we believe that prolonged uncertainty may adversely impactsales of our products and our financial performance in fiscal 2010. Inaddition, state and local government budgetary constraints and deficit issuesare expected to continue in fiscal 2010, which will negatively impact ourperformance in fiscal 2010.

 

Webelieve that domestic demand for our products is uncertain due to the domesticfunding issues and economic environment. We believe we will continue to seegrowth in international sales. We believe that we have strong market sharepositions, brand name recognition and a talented employee base and that we arewell positioned with our leaner cost structure. However it is difficult topredict to what extent we will see increased spending for our products andthere can be no assurance that either domestic or international sales willincrease.

 

SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America (U.S. GAAP) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements.  Management’s estimates also affect thereported amounts of revenues and expenses during the reporting period.  In addition, certain normal and recurringestimates are made, including estimates in determining the allowance fordoubtful accounts receivable, inventory valuation reserves, valuation allowanceon deferred tax assets and health care liabilities.  These estimates are made using management’sbest judgment given relevant factors and available data.  Actual results could differ materially fromthose estimates.  Note 2 to our June 30,2009 consolidated 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 during 

 

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thisfiscal year except for the adoption of accounting guidance as described in Note1 in the Notes to Consolidated Financial Statements.  In most instances, we must use an accountingpolicy or method because it is the only policy or method permitted under U.S.GAAP.  We are providing updatedinformation for the following significant accounting policies:

 

LONG-LIVED ASSETS:  Long-livedassets include such items as goodwill, patents, product rights, other intangibleassets and property, plant and equipment. For purposes of evaluating the recoverability of long-lived assets, weassess the possibility of obsolescence, demand, new technology, competition,and other pertinent economic factors and trends that may have an impact on thevalue or remaining lives of these assets. In performing our impairment assessments, we first assess ourindefinite-lived intangibles; second, assess our amortized long-lived assets(including amortized intangible assets and property, plant and equipment); andthird, assess our goodwill. Additionally, we reassess the remaining useful lives of our amortizedlong-lived assets.

 

Amortizedlong-lived assets (including amortized intangible assets and property, plantand equipment) held and used by us are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable in relation to future undiscounted cash flows of underlyingasset groups.  The net carrying value ofassets not recoverable is reduced to fair value.  Fair values of amortized long-lived assetsare determined based upon the performance of a fair value appraisal.  Patents and other finite-lived intangibleassets are amortized on a straight-line or systematic method over the life ofthe patent or intangible asset.

 

Goodwilland other indefinite-lived intangible assets are tested for impairment annuallyor when a triggering event occurs.  Theindefinite-lived intangible asset impairment test is performed by comparing thefair value of the intangible asset to its carrying value in a one-stepanalysis.  If the fair value of theintangible asset is less than its carrying value, the intangible asset iswritten down to its fair value.  Thegoodwill impairment test is performed at the reporting unit level and is atwo-step analysis.  First, the fair valueof the reporting unit is compared to its book value.  If the fair value of the reporting unit isless than its book value, we perform a hypothetical purchase price allocationbased on the reporting unit’s fair value to determine the implied fair value ofthe 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 determined using discountedcash flow methodologies.

 

Weperformed the first step of the goodwill impairment test for our one reportingunit, which represents our one financial reporting segment, in the thirdquarter of fiscal 2009 and again in our annual impairment review in the fourthquarter of fiscal 2009.  In performingthe first step of the goodwill impairment test for the reporting segment, wedetermined that the fair value of the segment was substantially in excess ofits carrying value as of March 31, 2009 and June 30, 2009.  We also evaluated intangible assets and otherlong-lived assets for impairment and determined that their fair value wassubstantially in excess of their carrying value as of March 31, 2009 and June 30,2009.  There was no impairment chargerecorded in the reportable segment during fiscal 2009 due to the relatively lowlevel of long-lived assets within the segment.

 

Theimpairment review is highly judgmental and involves the use of significantestimates and assumptions.  Theseestimates and assumptions have a significant impact on the amount of anyimpairment charge recorded.  Estimates offair value are primarily determined using discounted cash flow methods and aredependent upon assumptions of future sales trends, market conditions and cashflows of each reporting unit over several years.  Actual cash flows in the future may differsignificantly from those previously forecasted. Other significant assumptions include growth rates and the discount rateapplicable to future cash flows. Our stock price is also a factor impacting theassessment of the fair value of our underlying reporting segment for purposesof performing a goodwill impairment assessment. Our stock 

 

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pricecan be affected by, among other things, the relatively small public float ofour stock, quarterly fluctuations in our operating results, and changes inestimates of our future earnings.

 

Ifour operating profit in interim periods during fiscal 2010 is lower thanexpected, or if we experience changes in expectations related to the extent andduration of the economic downturn and its impact on our operating results, orif our market capitalization falls below our carrying value for a sustainedperiod, we may need to perform an interim impairment test. The amount of animpairment loss could be up to the total amounts of goodwill and intangibleassets recorded as of December 31, 2009 of $8,139,000 and $819,000,respectively.

 

INCOME TAXES:  We recognize deferredtax assets and liabilities for the expected future tax consequences of eventsthat have been included in the financial statements or tax returns.  Under this method, deferred tax assets andliabilities are determined based on the difference between the financialstatement and tax basis of assets and liabilities using enacted tax rates ineffect for the year in which the differences are expected to reverse.  In assessing the realizability of thedeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized.  To the extent that any future tax benefitsare not expected to be fully realized, such future tax benefits are reduced by avaluation allowance.  Realization of deferredtax assets assumes that we will be able to generate sufficient future taxableincome so that the assets will be realized. The factors that we consider in assessing the likelihood of realizationinclude the forecast of future taxable income, available tax planningstrategies that could be implemented to realize the deferred tax assets as wellas certain federal and state laws that impose restrictions on the utilizationof net operating loss and tax credit carryforwards.  During the second quarter of fiscal 2010, weperformed an Internal Revenue Code Section 382 analysis with respect toour net operating loss and credit carryforwards and determined that there wascurrently no such limitation.  We aresubject to the examination of our income tax returns by the Internal RevenueService and other tax authorities, and currently our income tax returns for taxyears 2007 and 2008 are under investigation by the Internal RevenueService.  Although we assess thelikelihood of adverse outcomes resulting from these examinations to determinethe adequacy of our provision for income taxes, there is no assurance that suchdeterminations by us are in fact adequate. Changes in our effective tax rates or amounts assessed upon examinationof our tax returns may have a material adverse impact on our results and ourfinancial condition.  We currently expectthe net deferred tax assets of $17,865,000 recorded as of December 31,2009 to be fully realizable in part based upon expected future projected incomeand the significant length of time to utilize net operating losses.

 

CONCENTRATION OF RISK:  No singlecustomer or single country outside of the Unites Sates accounted for more than10% of net sales in either of the six month periods ended December 31.  Our assets outside of the United States arenot material, at less than 1% of our total assets as of December 31, 2009.

 

RECENTLYADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

SeeNote 1 in the Notes to Consolidated Financial Statements.

 

FORWARDLOOKING STATEMENTS

 

Variousstatements made within the Management’s Discussion and Analysis of FinancialCondition and Results of Operations and elsewhere in this report constitute “forward-lookingstatements” for purposes of the SEC’s “safe harbor” provisions under the PrivateSecurities Litigation Reform Act of 1995 and Rule 3b-6 under theSecurities Exchange Act of 1934, as amended. Except for historical information, any statement that addressesexpectations or projections about the future, including statements about our strategyfor growth, product development, market position, expenditures, financialresults or changes in governmental legislation, policies and conditions, is aforward-looking statement.

 

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Readers are cautioned not to place unduereliance on these forward-looking statements and that all forward-lookingstatements involve risks and uncertainties, including those detailed in ourpublic filings with the SEC, news releases and other communications, whichspeak only as of the dates of those filings or communications.  We do not undertake any obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.  There can be noassurance that actual results will not differ materially from ourexpectations.  Factors which could causematerially different results include the failure to consummate the TrinityAcquisition in a timely manner, uncertainties related to continued weakening ofthe global economic conditions and the constricted financial markets; continuedfederal, state and municipal funding for highways and risks related toreductions in government expenditures; market demand for our products; pricingand competitive factors, among others which are set forth in the “Risk Factors”of Part II, Item 1A, to this Report.

 

ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

Part I, Item 7.A. ofour Annual Report on Form 10-K for the year ended June 30, 2009presents information regarding Quantitative and Qualitative Disclosures aboutMarket Risk.

 

We are exposed to market risk from fluctuationsin interest rates on our revolving credit facility, and, to a limited extent,currency exchange rates.  The majority ofour debt is at a fixed interest rate. Given that our exposure to interest rate fluctuations is low, wecurrently believe that the use of derivative instruments in the form ofnon-trading interest rate swaps to manage the risk is not necessary.

 

Assets, liabilities and commitmentsthat are to be settled in cash and are denominated in foreign currencies fortransaction purposes are sensitive to changes in currency exchange rates.  The U.S. dollar is the functional currencyfor substantially all of our operations. Accounts of foreign operations withfunctional currencies other than the U.S. dollar are translated into U.S.dollars using the year-end exchange rate for assets and liabilities and averagemonthly rates for revenue and expense accounts. Net foreign exchange gains and losses resulting from foreign currencytransactions included in net income were immaterial for the first six months offiscal 2010 and in fiscal year 2009.  Wewill continue to evaluate the need for the use of derivative financialinstruments to manage foreign currency exchange rate changes.  In the next few years we may confront greaterrisks from currency exchange fluctuations as our business expandsinternationally.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a)          Evaluation of Disclosure Controls and Procedures

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s reports under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand 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.

 

Ourmanagement, under the supervision of and with the participation of the Company’sChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of the Company’s disclosure controls 

 

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andprocedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, as of the end of the period covered by this report.  Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer concluded that our disclosure controlsand procedures were effective as of December 31, 2009.

 

(b)         Changes in Internal Controls over Financial Reporting

 

Therehave been no changes in our internal controls over financial reporting that mayhave materially affected, or are likely to materially affect, our internalcontrol over financial reporting. Our process for evaluating controls andprocedures is continuous and encompasses review of the design and effectivenessof established controls and procedures and the remediation of any deficiencieswhich may be identified during this process.

 

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PART II — OTHER INFORMATION

 

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

 

Item 1.  Legal Proceedings

 

*Olga Mata, Individually as Representative of the Estate ofElpido Mata et al. vs. Energy Absorption Systems, Inc., QuixoteTransportation Safety, Inc., William Brothers Construction, Keller CrashCushions d/b/a Contractors Barricade Service, J.I.T. Distributing Inc. andGustavo Reyes d/b/a Cerrito Trucking,* State of Texas, DistrictCourt of Brazoria County, No. 44361. In November 2009 the Courtdenied Plaintiffs’ Motion for Reconsideration and for New Trial. Plaintiffssubsequently appealed and the appeal is pending.  See our Quarterly Report on Form 10-Qfor the quarter ended September 30, 2009 filed on November 9, 2009and our Annual Report on Form 10-K for the fiscal year ended June 30,2009 and filed on September 14, 2009 for more information about this case.

 

Twolawsuits were filed against us, our directors and Trinity following theannouncement of the pending Trinity Acquisition (see Note 2):  *Superior Partners, onBehalf of Itself and All Others Similarly Situated vs. Leslie J. Jezuit, BruceReimer, Daniel P. Gorey, Robert D. van Roijen, Lawrence C. McQuade, Duane M.Tyler, Clifford D. Nastas, Quixote Corporation and Trinity Industries, Inc.*(Case No. 10 CH 0613) filed on January 13, 2010 in theCircuit Court of Cook County, Illinois, Chancery Division (the “Court”); and *Ralph A. Ardito, Individually and on Behalf of All Others Similarly Situatedvs. Bruce Reimer, Leslie J. Jezuit, Daniel P. Gorey, Robert D. van Roijen,Lawrence C. McQuade, Duane M. Tyler, Clifford D. Nastas, Quixote Corporation,Trinity Industries, Inc. and THP Merger Co.*(Case No. 10CH 2544) filed on January 20, 2010 in the Court (the “Lawsuits”).  The Trinity Acquisition and the Lawsuits aredescribed in greater detail in the Solicitation/Recommendation Statement onSchedule 14D-9 initially filed by the Company on January 7, 2010, asamended on January 15, 2010, January 19, 2010  and January 22, 2010 (as so amended, andas further amended hereby, the “Schedule 14D-9”).

 

Trinity has beendismissed without prejudice as a defendant in the Lawsuits.  On January 28, 2010, we entered intomemorandums of understanding with plaintiffs’ counsel and the other remainingnamed defendants to settle the Lawsuits. Under the terms of the memorandums of understanding, the Company, theother remaining named defendants and the plaintiffs have agreed to settle the *Superior Partners* lawsuit and dismiss ofthe *Ardito*lawsuit as moot,subject to court approval. As part of the settlement, the remaining defendantsdeny all allegations of wrongdoing and deny that the previous disclosures wereinadequate but the Company agreed to make available certain additionalinformation to its stockholders.  Thememorandums of understanding further contemplate that the parties will enterinto a stipulation of settlement. The stipulation of settlement will be subjectto customary conditions, including court approval following notice to membersof the proposed settlement class. If finally approved by the court, thesettlement will resolve all of the claims that were or could have been broughton behalf of the proposed settlement class in the action being settled, includingall claims relating to the pending tender offer, the merger, the Agreement, theadequacy of the merger consideration, the negotiations preceding the Agreement,the adequacy and completeness of the disclosures made in connection with thetender offer and the merger and any actions of the remaining individualdefendants in connection with the tender offer, the merger or the Agreement,including any alleged breaches of the fiduciary duties of any of the remainingdefendants, or the aiding and abetting thereof. If the court does approve ofthe settlement after a notice period, then all public stockholders who did notelect to opt out of such settlement will be bound thereby.

 

In addition, in connection with the settlement andas provided in the memorandums of understanding, and subject to approval by thecourt, the remaining named defendants or their insurers will pay to plaintiffs’counsel in the *Superior Partner*action for theirfees and expenses an amount not to exceed $431,000, and the remaining named defendantsor their insurers will pay to plaintiff’s counsel in the *Ardito*actionan 

 

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amountnot to exceed $169,000 and, per the settlement with the plaintiff in the *Ardito*action, the settlement of the *SuperiorPartners*action moots the *Ardito*action.  Neither payment will affect the amount ofconsideration to be paid to stockholders of the Company in connection with the tenderoffer and the subsequent merger. Furthermore, any payment is also conditionedon the tender offer being consummated so the Company’s stockholders will notindirectly bear such payment. The Lawsuits were tendered to our insurancecarrier and we are subject to a $250,000 deductible.

 

Under the terms of the Agreement, the settlement issubject to the approval of Trinity, which may not be unreasonably withheld ordelayed. Trinity has given its approval to the settlement described by thememorandums of understanding.

 

The Company and the other remaining defendantsmaintain that the Lawsuits are completely without merit. Nevertheless, in orderto avoid costly litigation and eliminate the risk of any delay to the closingof the tender offer and subsequent merger, and because the only effect of thesettlement on the stockholders is to provide additional disclosure, the remainingdefendants have agreed to the settlement contemplated in the memorandum ofunderstanding.

 

We are involved in severalother pending judicial proceedings for product liability and other damagesarising out of the conduct of our business. While the outcome of litigation is subject to uncertainties, we believe,after consultation with counsel, that the outcome of these proceedings, basedon current available information and after taking into account the availabilityand limits of our insurance coverage, will not have a material effect on ourconsolidated financial condition and results of operations.

 

Item 1A.  Risk Factors

 

There are many factors which are frequently beyond our control thatpose material risks to our business, operating results and financial condition.The factors we believe are material to our business are listed below.

 

**Our business will be adversely affected if the Trinity Acquisition isnot consummated, or is delayed.**

 

Ifthe Trinity Acquisition is not consummated or its consummation is delayed, ourbusiness will be adversely affected.  Asof January 15, 2010, we have incurred costs in connection with the TrinityAcquisition of approximately $775,000 and we will be obligated to pay all ofthose costs even if the Trinity Acquisition is not consummated.  Our position in the market place with ourcustomers, suppliers and other third parties may be adversely affected by apublic announcement that the Trinity Acquisition will not be consummated.  The loss of valuable employees couldadversely affect our ability to do business as an independent company, if theTrinity Acquisition is not consummated or if its consummation is delayed.  If the Trinity Acquisition is not consummated,we may be involved in litigation with Trinity, our shareholders or otherpersons. See Note 2 to the Consolidated Financial Statements for additionalinformation.

 

**Our business could be adversely affected by reduced levels of cash,whether from operations or extraordinary expenses or pursuant to the terms ofour credit agreement.**

 

Reducedlevels of cash generated from operations as well as our ability to refinanceour existing debt could adversely impact our current business.

 

Historically,our principal sources of cash have been cash flows from operations andborrowings from banks and other sources. Given continued weak global economicconditions, operations may 

 

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continueto generate less cash than we need.  On January 29,2010, we and our bank extended the expiration date of our credit agreement fromJanuary 31, 2010 to February 15, 2010.  Our bank has issued us a commitment letterdated January 29, 2010, to amend our credit agreement, if necessary,before February 15, 2010 to permit us to borrow up to $22.5 million torepurchase the Notes under certain conditions. With that bank borrowing, plusthe $19 million of cash proceeds we received from the sale of our InformSegment and borrowings of up to $7 million from Trinity pursuant to theAgreement, we expect to fund the repurchase of the Notes on February 15,2010 if the Trinity tender offer is not consummated prior to this date.  We expect to be in compliance with thecovenants of our Credit Agreement, as amended, through the term of the CreditAgreement. However, our ability to remain in compliance with the covenants andto modify our capital structure is dependent upon the consummation of theTrinity Acquisition and our future performance and may be affected in part byevents beyond our control, including the current economic downturn. Reducedcash flows from operations, regardless of cause, may make it more difficult tocomply with our bank covenants. Continuing uncertainty in the credit marketsmay affect our ability to access those markets and may increase costsassociated with borrowing and issuing debt instruments.

 

**A decrease or delay in federal government funding of transportationsafety and highway construction and maintenance may cause our revenues, profitsand cash flow to decrease.**

 

Salesof our products are sensitive to foreign, domestic and regional economies ingeneral, and in particular, changes in government infrastructure spending whichcan be adversely impacted by reduced tax revenues. We depend substantially onfederal, state and local funding for transportation safety, highwayconstruction and maintenance and other related infrastructure projects. Federalgovernment funding for infrastructure projects is usually accomplished throughhighway authorization bills, which establish funding over a multi-year period.The most recent highway authorization legislation, the SAFETEA-LU, expired September 30,2009, but was extended through the end of February, 2010.  We anticipate further delays in the enactmentof a new highway authorization bill with additional extensions for limitedtimes (perhaps 1, 3, 6 or 12 months) at current funding levels. Even afterfederal legislation is enacted, funding appropriations may be revised in futurecongressional sessions, and federal funding for infrastructure projects may bereduced in the future.

 

Federaltransportation spending is funded through a highway trust fund which derivesmost of its money from gasoline tax revenue. When the price of gasolineincreased in 2008, the number of miles driven decreased significantly whichdepleted the surplus in the federal highway trust fund. Reduced tax revenuesand altered driving patterns may impact the solvency of the highway trust fund.Failure to replenish the highway trust fund expeditiously may have an adverseimpact on our sales and financial performance in fiscal 2010.

 

Congressenacted the American Recovery and Reinvestment Act in February 2009 whichincludes approximately $27 billion in Federal stimulus funding for highway andbridge improvements, aimed at increasing jobs through infrastructure projects.We believe that the Federal stimulus funding has had a positive impact on ourdomestic sales, although we are not able to quantify the amount of theimpact.There is no assurance that this Federal stimulus spending program willpositively affect the demand for our products in fiscal 2010, or thereafter.

 

**Constraints on state and local government budgets and decreases instate highway funding adversely affect our financial performance.**

 

Statesand municipalities may continue to reduce spending on highways due to reducedtax revenues and other budget constraints and priorities. Loss of tax revenuesand such budgetary constraints adversely affect the ability of states to fundtransportation, highway and infrastructure projects, and 

 

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thereforereduce the demand for our products. Municipalities also suffer from budgetconstraints that can reduce transportation safety spending.

 

Likethe federal highway trust fund which depends on gasoline tax revenue, statehighway funds also are dependent on revenue from state gasoline taxes. A numberof states also contribute a portion of their sales tax on new car purchasesinto their state highway funds. A decrease in miles driven or new car sales mayadversely affect the ability of states to fund transportation projects, andcorrespondingly, reduce the demand for our products. The majority of stateshave been experiencing budgetary constraints and deficits which we expect willcontinue in fiscal 2010.

 

**Global economic conditions,as well as difficulties in managing and expanding in international markets,could affect future growth in these markets.**

 

In fiscal year 2009, international sales were $23,166,000 or 33%, of ourtotal sales and we believe international markets are an important source of ourgrowth. We plan to continue to increase our presence in these markets. However,the current deterioration of the global economy has had an adverse impact onour international sales, and we anticipate, will continue to adversely affectour international sales, as foreign governments reduce spending fortransportation and infrastructure projects.

 

In connection with an increase in international sales efforts, we needto hire, train and retain qualified personnel in countries where language,cultural or regulatory barriers may exist. Moreover, funding and governmentrequirements vary by country with respect to transportation safety. In a numberof countries there are no governmental requirements or funding fortransportation safety and we must educate officials and demonstrate the needfor and the benefits of our products. In addition, our international revenuesare subject to the following risks:

 

·                  fluctuating currencyexchange rates could reduce the demand for or profitability of foreign sales byaffecting the pricing of our products;

 

·                  the burden of complying witha wide variety of foreign laws and regulations, including the requirements foradditional testing of our products;

 

·                  dependence on foreign salesagents;

 

·                  difficulty collectingforeign receivables,

 

·                  political and economicinstability of foreign governments; and

 

·                  imposition of protectivelegislation such as import or export barriers.

 

**We are in a competitive marketplace.**

 

To the extent one or more of our current or future competitorsintroduce products that better address customer requirements, or are lessexpensive than our products, our business can be adversely affected and we maybe unable to maintain our leadership position in certain product lines.Competition may adversely affect the selling prices and the profit margins onour products. If we are unable to timely develop and introduce new products, orenhance existing products, or reduce costs in response to changing marketconditions or customer requirements or demands, our business and results ofoperations could be materially and adversely affected.

 

We hold numerous patents covering technology and applications relatedto many of our products and systems, and numerous trademarks and trade namesregistered with the U.S. Patent and Trademark 

 

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Officeand in foreign countries. Our existing and future patents and trademarks maynot adequately protect us against infringements, especially in certain foreigncountries, and pending patent or trademark applications may not result inissued patents or trademarks. Our patents, registered trademarks and patentapplications may not be upheld if challenged, and competitors may developsimilar or superior methods or products outside the protection of our patents.This could increase competition for our products and materially decrease ourrevenues. If our products are deemed to infringe the patents or proprietaryrights of others, we could be required to modify the design of our products,change the name of our products or obtain a license for the use of some of thetechnologies used in our products. We may be unable to do any of the foregoingin a timely manner, upon acceptable terms and conditions, or at all, and thefailure to do so could cause us to incur additional costs or lose expectedrevenue.

 

We have been affected by increased prices for certain commodities,particularly steel, aluminum and resin, which are a significant component ofthe cost of certain of our products. Such price increases negatively impact ourgross margin for certain products, when we are unable to pass along to ourcustomers cost increases. Increasing fuel and freight costs may also adversely affectour performance.

 

**Management’s estimates andassumptions affect reported amounts of expenses and changes in those estimatescould impact operating results.**

 

Goodwill and other indefinite-lived intangible assets are tested forimpairment at least annually, and the results of such testing may adverselyaffect our financial results. We use a variety of valuation techniques indetermining fair value. The impairment review is highly judgmental and involvesthe 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.Actual cash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows. Our stock price is also a factorimpacting the assessment of the fair value of our underlying reporting segmentfor purposes of performing a goodwill impairment assessment. Our stock pricecan be affected by, among other things, the relatively small public float ofour stock, quarterly fluctuations in our operating results, and changes inestimates of our future earnings.  Actualresults may differ significantly from the estimates and assumptions used.

 

We recognize deferred tax assets and liabilities for the expectedfuture tax consequences of events which are included in the financialstatements or tax returns. In assessing the realizability of the deferred taxassets, management makes certain assumptions about whether the deferred taxassets will be realized. Realization of deferred tax assets assumes that wewill be able to generate sufficient future taxable income so that the assetswill be realized. The factors that we consider in assessing the likelihood ofrealization include the forecast of future taxable income, available taxplanning strategies that could be implemented to realize the deferred taxassets as well as certain federal and state laws that impose restrictions onthe utilization of net operating loss and tax credit carryforwards. During thesecond quarter of fiscal 2010, we performed Internal Revenue Code Section 382analyses with respect to our net operating loss and credit carryforwards anddetermined that there was currently no such limitation. In addition, we aresubject to the examination of our income tax returns by the Internal RevenueService and other tax authorities. Although we assess the likelihood of adverseoutcomes resulting from these examinations to determine the adequacy of ourprovision for income taxes, there is no assurance that such determinations byus are in fact adequate. Changes in our effective tax rates or amounts assessedupon examination of our tax returns may have a material adverse impact on ourresults and our financial condition. We currently expect the net deferred taxassets of $17,865,000 recorded as of December 31, 2009 to be fullyrealizable in part based upon expected future projected income and thesignificant length of time to utilize net operating losses. However, changes inexpectations related to the extent and duration of the economic downturn and 

 

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itsimpact on our operating results as well as a subsequent change in ownershipwhich may limit the utilization of net operating losses and tax creditcarryforwards could cause us to further review the realizability of ourdeferred tax assets. It is possible that the review would result in anincreased valuation allowance, increasing income tax expense, which wouldadversely affect our net income.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 4. Submission of Matters to Vote of Security Holders

 

Our Annual Meeting of Stockholders was held on November 19,2009.  The matters voted on at the AnnualMeeting were the following:

 

(1)        The election of Bruce Reimerand Clifford D. Nastas to serve as Directors for a three-year term until theannual meeting of stockholders in 2012 and the election of Lawrence C, McQuadeto serve as a Director for a one-year term until the annual meeting ofstockholders in 2010.

(2)        The approval of theStockholder Rights Plan.

(3)        The ratification of theappointment of Grant Thornton LLP as our independent registered publicaccounting firm.

 

Messrs. Reimer, Nastas and McQuade were elected, the StockholderRights Plan was approved and the ratification of the appointment of GrantThornton LLP was approved as a result of the following stockholder votes:

 
| ** **                                                    | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain or Withheld** | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------------------|------------|
|                                                          |       |      |       |        |       |                    |       |
| (1)   Election  of Directors                   |       |      |       |        |       |                    |       |
|                                                          |       |      |       |        |       |                    |       |
| Bruce Reimer                                                  |       | 7,409,423 |       |        |       | 1,077,557               |       |
| Clifford D. Nastas                                            |       | 7,333,625 |       |        |       | 1,153,355               |       |
| Lawrence C. McQuade                                           |       | 7,254,505 |       |        |       | 1,232,475               |       |
|                                                          |       |      |       |        |       |                    |       |
| (2)   Approval  of the Stockholder Rights Plan |       | 3,982,391 |       | 1,277,455   |       | 3,227,134               |       |
|                                                          |       |      |       |        |       |                    |       |
| (3)   Ratification  of Grant Thornton LLP      |       | 8,305,127 |       | 175,093     |       | 6,760                   |       |

 

The terms of Leslie J. Jezuit, Daniel P. Gorey, Duane M. Tyler andRobert D. van Roijen as directors continued after this meeting.

 

Item 5. OtherInformation.

 

On March 16, 2009, the Board of Directors of Quixote Corporationadopted a Stockholder Rights Plan (“NOL Rights Plan”) designed to protect netoperating loss carry-forwards and certain other tax attributes of Quixote(collectively, the “NOL Assets”) against the threat that changes in shareownership could limit their ability to use the NOL Assets in the future. 

 

A person that acquires 4.9% of Quixote’s outstanding Quixote commonstock becomes an “Acquiring Person” for purposes of the NOL Rights Plan,thereby triggering certain effects of the NOL Rights Plan, subject to theBoard’s discretion to treat any transaction in its shares as an “ExemptTransaction” under the NOL Rights Plan. Pursuant to a Schedule 13G filing on January 29, 2010, Quixote becameaware that Alexander Capital Advisors, LLC had acquired beneficial ownership of7.6% of Quixote’s outstanding common stock.

 

Pursuant to the NOL Rights Plan, the Board of Directors of the Companyon February 2, 2010 made a determination that the acquisition of Shares byAlexander Capital Advisors, LLC should be treated as an Exempt Transactionunder the NOL Rights Plan and, consequently, Alexander Capital Advisors, LLC isnot an Acquiring Person for purposes of the NOL Rights Plan as a result of hisbeneficial ownership of the Shares.

 

 

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Item 6.  Exhibits

 

(a) Exhibits

 

10.1            Eighth Amendment to Amendedand Restated Credit Agreement and Reaffirmation of Guaranties dated as of January 29,2010 among Quixote Corporation as borrower and Bank of America as lender, filedherewith.

 

10.2            Agreement and Plan of Mergerdated as of December 30, 2009 among Trinity Industries, Inc., THPMerger Co. and Quixote Corporation, filed as Exhibit 2.1 to the Company’sReport on Form 8-K dated December 30, 2009 and filed on December 31,2009 (File No. 001-08123) and incorporated herein by reference.

 

10.3            Amendment dated as of December 29,2009 between Quixote Corporation and Bruce Reimer, filed as Exhibit 2.2 tothe Company’s Report on Form 8-K dated December 30, 2009 and filed onDecember 31, 2009 (File No. 001-08123) and incorporated herein byreference.

 

10.4            Amendment dated as of December 29,2009 between Quixote Corporation and Daniel P. Gorey, filed as Exhibit 2.3to the Company’s Report on Form 8-K dated December 30, 2009 and filedon December 31, 2009 (File No. 001-08123) and incorporated herein byreference.

 

10.5            Amendment dated as of December 29,2009 between Quixote Corporation and Joan R. Riley, filed as Exhibit 2.4to the Company’s Report on Form 8-K dated December 30, 2009 and filedon December 31, 2009 (File No. 001-08123) and incorporated herein byreference.

 

10.6            Amendment No. 1 toRights Agreement dated as of December 30, 2009 between Quixote Corporationand Computershare Trust Company, N.A., filed as Exhibit 2.5 to theCompany’s Report on Form 8-K dated December 30, 2009 and filed on December 31,2009 (File No. 001-08123) and incorporated herein by reference.

 

10.7            Stock Purchase Agreement byand among Vaisala, Inc., Quixote Corporation, Quixote TransportationSafety, Inc. and Transafe Corporation relating to the purchase of all ofthe issued and outstanding capital stock of Quixote Transportation Technologies, Inc.,Nu-Metrics, Inc., Highway Information Systems, Inc. and SurfaceSystems, Inc. dated December 18, 2009, filed as Exhibit 2.1 tothe Company’s Report on Form 8-K, dated December 21, 2009, and filedon December 21, 2009 (File No. 001-08123) and incorporated herein byreference.

 

31                      Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32                      Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Quarterly Report on Form 10-Q for the quarter ended December 31,2009 to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |                  | QUIXOTE CORPORATION                     |
|--------|-----------------------|-----------------------------------------|
|   |                  |                                    |
| DATED: | February 4, 2010 |                                    | /s/ Daniel P. Gorey |
|   |                  | Daniel P. Gorey                         |
|   |                  | Chief Financial  Officer,               |
|   |                  | Executive Vice  President and Treasurer |
|   |                  | (Chief  Financial & Accounting |
|   |                  | Officer)                                |
|        |                       |                                         |  |

 

38

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**EXHIBIT INDEX**

 

Exhibits:

 

10.1            Eighth Amendment to Amendedand Restated Credit Agreement and Reaffirmation of Guaranties dated as of January 29,2010 among Quixote Corporation as borrower and Bank of America as lender, filedherewith.

 

10.2            Agreement and Plan of Mergerdated as of December 30, 2009 among Trinity Industries, Inc., THPMerger Co. and Quixote Corporation, filed as Exhibit 2.1 to the Company’sReport on Form 8-K dated December 30, 2009 and filed on December 31,2009 (File No. 001-08123) and incorporated herein by reference.

 

10.3            Amendment dated as of December 29,2009 between Quixote Corporation and Bruce Reimer, filed as Exhibit 2.2 tothe Company’s Report on Form 8-K dated December 30, 2009 and filed onDecember 31, 2009 (File No. 001-08123) and incorporated herein byreference.

 

10.4            Amendment dated as of December 29,2009 between Quixote Corporation and Daniel P. Gorey, filed as Exhibit 2.3to the Company’s Report on Form 8-K dated December 30, 2009 and filedon December 31, 2009 (File No. 001-08123) and incorporated herein byreference.

 

10.5            Amendment dated as of December 29,2009 between Quixote Corporation and Joan R. Riley, filed as Exhibit 2.4to the Company’s Report on Form 8-K dated December 30, 2009 and filedon December 31, 2009 (File No. 001-08123) and incorporated herein byreference.

 

10.6            Amendment No. 1 toRights Agreement dated as of December 30, 2009 between Quixote Corporationand Computershare Trust Company, N.A., filed as Exhibit 2.5 to theCompany’s Report on Form 8-K dated December 30, 2009 and filed on December 31,2009 (File No. 001-08123) and incorporated herein by reference.

 

10.7            Stock Purchase Agreement byand among Vaisala, Inc., Quixote Corporation, Quixote TransportationSafety, Inc. and Transafe Corporation relating to the purchase of all ofthe issued and outstanding capital stock of Quixote Transportation Technologies, Inc.,Nu-Metrics, Inc., Highway Information Systems, Inc. and SurfaceSystems, Inc. dated December 18, 2009, filed as Exhibit 2.1 tothe Company’s Report on Form 8-K, dated December 21, 2009, and filedon December 21, 2009 (File No. 001-08123) and incorporated herein byreference.

 

31                      Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

32                      Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

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