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

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

----

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

**Forthe period ended March 31, 2004**

**or**

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

**forthe transition period from               To               **

----

Commission file number 0-7903

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

**QUIXOTE CORPORATION**

(a Delaware Corporation)

**35 East Wacker Drive**

**Chicago, Illinois 60601**

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

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.

YES   x       NO  o

Indicate by check markwhether the registrant is an accelerated filer as defined by Rule 12b-2 ofthe Securities Exchange Act of 1934.

YES   x       NO  o

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 8,696,463 shares of the Company’sCommon Stock ($.012¤3par value) were outstanding as of March 31, 2004.

 

----

**PART I—FINANCIALINFORMATION**ITEM 1.   FINANCIAL STATEMENTSQUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)
| ** **                                 | ** ** | **Nine Months Ended March 31,** | ** **  |
|--------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                 | ** ** | **2004**                                            | ** **  | **2003** | ** ** |
| Net sales                                  |       | $                                                   | 110,847,000 |   | $ | 75,472,000 |   |
| Cost of sales                              |       | 77,017,000                                          |        | 44,964,000 |   |
| Gross profit                               |       | 33,830,000                                          |        | 30,508,000 |   |
| Operating  expenses:                       |       |                                                |        |   |   |
| Selling & administrative          |       | 26,404,000                                          |        | 20,986,000 |   |
| Research & development            |       | 2,549,000                                           |        | 1,543,000 |   |
|                                       |       | 28,953,000                                          |        | 22,529,000 |   |
| Operating profit                           |       | 4,877,000                                           |        | 7,979,000 |   |
| Other income  (expense):                   |       |                                                |        |   |   |
| Interest income                            |       | 25,000                                              |        | 66,000 |   |
| Interest expense                           |       | (1,590,000                                          | )           | (637,000 | ) |
| Other                                      |       | (212,000                                            | )           |   |   |
|                                       |       | (1,777,000                                          | )           | (571,000 | ) |
| Earnings before income taxes               |       | 3,100,000                                           |        | 7,408,000 |   |
| Income tax  provision (benefit)            |       | (133,000                                            | )           | 2,519,000 |   |
| Net earnings                               |       | $                                                   | 3,233,000   |   | $ | 4,889,000 |   |
| Per share data—basic:                 |       |                                                |        |   |   |
| Net earnings                               |       | $                                                   | .38         |   | $ | .63 |   |
| Weighted average common shares outstanding |       | 8,495,076                                           |        | 7,793,082 |   |
| Per share data—diluted:               |       |                                                |        |   |   |
| Net earnings                               |       | $                                                   | .37         |   | $ | .61 |   |
| Weighted average common shares outstanding |       | 8,767,932                                           |        | 7,990,722 |   |
| Cash dividends  declared per common share  |       | $                                                   | .17         |   | $ | .16 |   |

 

See Notes to Consolidated Financial Statements.

2

----

**QUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| Net sales                                   |       | $                                                    | 36,169,000 |   | $ | 25,205,000 |   |
| Cost of sales                               |       | 26,185,000                                           |       | 15,156,000 |   |
| Gross profit                                |       | 9,984,000                                            |       | 10,049,000 |   |
| Operating  expenses:                        |       |                                                 |       |   |   |
| Selling & administrative                |       | 9,440,000                                            |       | 6,877,000 |   |
| Research & development                  |       | 1,003,000                                            |       | 635,000 |   |
|                                        |       | 10,443,000                                           |       | 7,512,000 |   |
| Operating profit (loss)                     |       | (459,000                                             | )          | 2,537,000 |   |
| Other income  (expense):                    |       |                                                 |       |   |   |
| Interest income                             |       | 5,000                                                |       | 11,000 |   |
| Interest expense                            |       | (588,000                                             | )          | (187,000 | ) |
| Other                                       |       | (212,000                                             | )          |   |   |
|                                        |       | (795,000                                             | )          | (176,000 | ) |
| Earnings (loss) before income taxes         |       | (1,254,000                                           | )          | 2,361,000 |   |
| Income tax  provision (benefit)             |       | (1,700,000                                           | )          | 803,000 |   |
| Net earnings                                |       | $                                                    | 446,000    |   | $ | 1,558,000 |   |
| Per share data—basic:                  |       |                                                 |       |   |   |
| Net earnings                                |       | $                                                    | .05        |   | $ | .20 |   |
| Weighted average common shares outstanding  |       | 8,660,921                                            |       | 7,738,268 |   |
| Per share data—diluted:                |       |                                                 |       |   |   |
| Net earnings                                |       | $                                                    | .05        |   | $ | .20 |   |
| Weighted average  common shares outstanding |       | 8,881,492                                            |       | 7,927,684 |   |

 

See Notes to Consolidated Financial Statements.

3

----

**QUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**
| ** **                                                                                                                  | ** ** | **March 31,** | ** **  | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| ** **                                                                                                                  | ** ** | **2004**           | ** **  | **2003**          | ** ** |
| *ASSETS*                                                                                                                    |       |               |        |              |       |
| Current assets:                                                                                                             |       |               |        |              |       |
| Cash and cash equivalents                                                                                                   |       | $                  | 6,023,000   |              | $          | 3,753,000 |   |
| Accounts receivable, net of allowances for doubtful  accounts of $1,594,000 at March 31 and $1,267,000 at June 30 |       | 33,491,000         |        | 36,835,000        |       |
| Refundable income taxes                                                                                                     |       | 1,363,000          |        |              |       |
| Inventories, net:                                                                                                           |       |               |        |              |       |
| Raw materials                                                                                                               |       | 11,356,000         |        | 10,475,000        |       |
| Work in process                                                                                                             |       | 4,949,000          |        | 5,508,000         |       |
| Finished goods                                                                                                              |       | 7,462,000          |        | 6,984,000         |       |
|                                                                                                                        |       | 23,767,000         |        | 22,967,000        |       |
| Notes receivable                                                                                                            |       | 217,000            |        | 217,000           |       |
| Deferred income tax assets                                                                                                  |       | 2,793,000          |        | 2,713,000         |       |
| Other current assets                                                                                                        |       | 1,472,000          |        | 603,000           |       |
| Total current  assets                                                                                                       |       | 69,126,000         |        | 67,088,000        |       |
| Property, plant and equipment, at cost                                                                                      |       | 49,869,000         |        | 44,165,000        |       |
| Less accumulated  depreciation                                                                                              |       | (19,910,000        | )           | (17,928,000       | )          |
|                                                                                                                        |       | 29,959,000         |        | 26,237,000        |       |
| Goodwill                                                                                                                    |       | 56,253,000         |        | 48,642,000        |       |
| Intangible  assets, net                                                                                                     |       | 12,831,000         |        | 8,387,000         |       |
| Other assets                                                                                                                |       | 341,000            |        | 471,000           |       |
|                                                                                                                        |       | $                  | 168,510,000 |              | $          | 150,825,000 |   |

 

See Notes to Consolidated Financial Statements.

4

----

**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**
| ** **                                                                                                                                            | ** ** | **March 31,** | ** **  | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| ** **                                                                                                                                            | ** ** | **2004**           | ** **  | **2003**          | ** ** |
| *LIABILITIES  AND SHAREHOLDERS’ EQUITY*                                                                                                          |       |               |        |              |       |
| Current  liabilities:                                                                                                                                 |       |               |        |              |       |
| Current portion of long-term debt                                                                                                                     |       | $                  | 3,495,000   |              | $          | 4,028,000 |   |
| Accounts payable                                                                                                                                      |       | 8,468,000          |        | 10,761,000        |       |
| Dividends payable                                                                                                                                     |       |               |        | 1,402,000         |       |
| Income tax payable                                                                                                                                    |       |               |        | 1,305,000         |       |
| Accrued expenses                                                                                                                                      |       | 13,792,000         |        | 13,503,000        |       |
| Total current  liabilities                                                                                                                            |       | 25,755,000         |        | 30,999,000        |       |
| Long-term debt,  net of current portion                                                                                                               |       | 53,659,000         |        | 39,789,000        |       |
| Deferred income  tax liabilities                                                                                                                      |       | 3,746,000          |        | 3,917,000         |       |
| Other long-term  liabilities                                                                                                                          |       | 1,440,000          |        | 565,000           |       |
|                                                                                                                                                  |       | 58,845,000         |        | 44,271,000        |       |
| Commitments and  contingent liabilities (Note 10)                                                                                                     |       |               |        |              |       |
| Shareholders’  equity:                                                                                                                           |       |               |        |              |       |
| Preferred stock,  no par value; authorized 100,000 shares; none issued                                                                                |       |               |        |              |       |
| Common stock, par value $.012¤3;  authorized 15,000,000 shares; issued 10,647,703 shares at March 31 and  10,437,436 shares at June 30 |       | 177,000            |        | 174,000           |       |
| Capital in excess of par value of common stock                                                                                                        |       | 56,834,000         |        | 52,173,000        |       |
| Retained earnings                                                                                                                                     |       | 49,175,000         |        | 47,368,000        |       |
| Accumulated other comprehensive loss                                                                                                                  |       | (204,000           | )           | (44,000           | )          |
| Treasury stock, at cost, 1,951,240 shares at  March 31 and 2,131,963 shares at June 30                                                      |       | (22,072,000        | )           | (24,116,000       | )          |
| Total  shareholders’ equity                                                                                                                      |       | 83,910,000         |        | 75,555,000        |       |
|                                                                                                                                                  |       | $                  | 168,510,000 |              | $          | 150,825,000 |   |

 

See Notes to Consolidated Financial Statements.

5

----

**QUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                                                     | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2004**                                            | ** ** | **2003** | ** ** |
| Operating activities:                                                                                          |       |                                                |       |   |   |
| Net earnings                                                                                                   |       | $                                                   | 3,233,000  |   | $ | 4,889,000 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities of  continuing operations: |       |                                                |       |   |   |
| Depreciation                                                                                                   |       | 3,474,000                                           |       | 2,304,000 |   |
| Amortization                                                                                                   |       | 1,316,000                                           |       | 347,000 |   |
| Loss on disposal of assets                                                                                     |       | 212,000                                             |       |   |   |
| Provisions for losses on accounts receivable                                                                   |       | 252,000                                             |       | 83,000 |   |
| Changes in operating  assets and liabilities:                                                                  |       |                                                |       |   |   |
| Accounts receivable                                                                                            |       | 5,758,000                                           |       | 768,000 |   |
| Inventories                                                                                                    |       | 2,267,000                                           |       | 61,000 |   |
| Other assets                                                                                                   |       | (575,000                                            | )          | (492,000 | ) |
| Accounts payable and accrued expenses                                                                          |       | (8,263,000                                          | )          | 1,442,000 |   |
| Income taxes                                                                                                   |       | (2,668,000                                          | )          | 504,000 |   |
| Other long-term liabilities                                                                                    |       | (436,000                                            | )          |   |   |
| Net cash provided  by operating activities                                                                     |       | 4,570,000                                           |       | 9,906,000 |   |
| Investing  activities:                                                                                         |       |                                                |       |   |   |
| Cash paid for acquired business, net of cash acquired                                                          |       | (11,263,000                                         | )          |   |   |
| Capital expenditures                                                                                           |       | (3,285,000                                          | )          | (1,512,000 | ) |
| Patent expenditures                                                                                            |       |                                                |       | (445,000 | ) |
| Net cash used in  investing activities                                                                         |       | (14,548,000                                         | )          | (1,957,000 | ) |
| Financing  activities:                                                                                         |       |                                                |       |   |   |
| Proceeds from revolving credit agreement                                                                       |       | 28,750,000                                          |       | 10,800,000 |   |
| Payments on revolving credit agreement                                                                         |       | (13,250,000                                         | )          | (13,800,000 | ) |
| Payments on term loan                                                                                          |       | (1,500,000                                          | )          |   |   |
| Payments on notes payable                                                                                      |       | (801,000                                            | )          | (876,000 | ) |
| Payment of semi-annual cash dividend                                                                           |       | (2,828,000                                          | )          | (2,486,000 | ) |
| Proceeds from exercise of common stock options                                                                 |       | 1,884,000                                           |       | 506,000 |   |
| Repurchase of common stock for treasury                                                                        |       |                                                |       | (3,024,000 | ) |
| Net cash provided  by (used in) financing activities                                                           |       | 12,255,000                                          |       | (8,880,000 | ) |
| Effect of exchange rate changes on cash                                                                        |       | (7,000                                              | )          | 30,000 |   |
| Increase  (decrease) in cash and cash equivalents.                                                             |       | 2,270,000                                           |       | (901,000 | ) |
| Cash and cash equivalents at beginning of period                                                               |       | 3,753,000                                           |       | 1,798,000 |   |
| Cash and cash  equivalents at end of period                                                                    |       | $                                                   | 6,023,000  |   | $ | 897,000 |   |

 

See Notes to Consolidated Financial Statements.

6

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited)**

1.   The accompanying unaudited consolidatedfinancial statements present information in accordance with generally acceptedaccounting principles for interim financial information and applicable rules ofRegulation S-X. Accordingly, they do not include all information or footnotesrequired by generally accepted accounting principles for complete financialstatements. The June 30, 2003 consolidated balance sheet as presented wasderived from the audited financial statements. The interim financial statementsand notes should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended June 30, 2003. Management believes the financialstatements include all normal recurring adjustments necessary for a fairpresentation of the results for the interim periods presented.

2.   AtMarch 31, 2004, the Company had stock option plans providing for grants ofoptions for directors based upon a fixed calculation and grants of stock optionsand restricted stock for employees as may be determined by the CompensationCommittee of the Board of Directors. The cost of restricted stock granted isexpensed in the period the stock is issued. The Company accounts for the stockoptions granted under the recognition and measurement principles of APB OpinionNo. 25, Accounting for Stock Issued to Employees, and relatedinterpretations. No charges are made to earnings in connection with the stockoptions granted, as all stock options granted had an exercise price equal tothe market value of the underlying common stock on the date of grant. Thefollowing table illustrates the effect on net earnings and earnings per shareif the Company had applied the fair value recognition provisions of FASBStatement No. 123, Accounting for Stock-Based Compensation, to the stockoptions granted.
| ** **                                                                                                                                    | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                                    | ** ** | **2004**                        | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings, as  reported                                                                                                                    |       | $                               | 3,233,000  |                             | $          | 4,889,000 |   | $ | 446,000 |   | $ | 1,558,000 |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                |       | 252,000                         |       |                             |       |   |   |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (1,075,000                      | )          | (1,021,000                       | )          | (249,000 | ) | (337,000 | ) |
| Pro forma net  earnings                                                                                                                       |       | $                               | 2,410,000  |                             | $          | 3,868,000 |   | $ | 197,000 |   | $ | 1,221,000 |   |
| Earnings per  share:                                                                                                                          |       |                            |       |                             |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                               | .38        |                             | $          | .63 |   | $ | .05 |   | $ | .20 |   |
| Basic—pro forma                                                                                                                          |       | $                               | .28        |                             | $          | .50 |   | $ | .02 |   | $ | .16 |   |
| Diluted—as reported                                                                                                                      |       | $                               | .37        |                             | $          | .61 |   | $ | .05 |   | $ | .20 |   |
| Diluted—pro forma                                                                                                                        |       | $                               | .27        |                             | $          | .48 |   | $ | .02 |   | $ | .15 |   |

 

3.   The income tax benefit for the currentquarter is based upon the estimated effective income tax rate for the fullfiscal year. In addition, an income tax benefit of $1,249,000, or $0.14 perdiluted share, was recorded in the third quarter of fiscal 2004 primarilyrelated to certain tax refund claims for research and development creditsapproved by the Internal Revenue Service during the quarter.

7

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

4.   Operating results for the first nine monthsof fiscal 2004 are not necessarily indicative of the performance for the entireyear. The Company’s business is seasonal with a higher level of sales in theCompany’s fourth fiscal quarter.

5.   Thecomputation of basic and diluted earnings per share is as follows:
| ** **                                              | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                                              | ** ** | **2004**                        | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Numerator:*                                            |       |                            |       |                             |       |   |   |   |   |
| Net earnings  available to common shareholders          |       | $                               | 3,233,000  |                             | $          | 4,889,000 |   | $ | 446,000 |   | $ | 1,558,000 |   |
| *Denominator:*                                          |       |                            |       |                             |       |   |   |   |   |
| Weighted average  shares outstanding—basic    |       | 8,495,076                       |       | 7,793,082                        |       | 8,660,921 |   | 7,738,268 |   |
| Effect of dilutive securities—common stock options |       | 272,856                         |       | 197,640                          |       | 220,571 |   | 189,416 |   |
| Weighted average  shares outstanding—diluted       |       | 8,767,932                       |       | 7,990,722                        |       | 8,881,492 |   | 7,927,684 |   |
| *Net earnings per share of common stock:*               |       |                            |       |                             |       |   |   |   |   |
| Basic                                                   |       | $                               | .38        |                             | $          | .63 |   | $ | .05 |   | $ | .20 |   |
| Diluted                                                 |       | $                               | .37        |                             | $          | .61 |   | $ | .05 |   | $ | .20 |   |

 

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 both thenine-month and three-month periods ended March 31, 2004 and 2003 and areas follows:
| ** **                        | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                        | ** ** | **2004**                        | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Average exercise  price per share |       | $                               | 25.25      |                             | $          | 23.78 |   | $ | 25.19 |   | $ | 23.78 |   |
| Number of shares                  |       | 281,500                         |       | 246,300                          |       | 295,200 |   | 246,300 |   |
|                                   |            |                                 |            |                                  |            |  |  |  |  |  |  |  |  |

 

6.   The Company is exposed to market risk fromfluctuations in interest rates. The Company manages its exposure to interestrate fluctuations through the use of derivative instruments in the form ofnon-trading interest rate swaps. The objective of the swap is to fix theinterest rate on certain variable rate debt to stabilize interest rates and tomore effectively balance the Company’s long-term borrowing costs and interestrate risk. During July 2003, the Company entered into an interest rateswap agreement (the Agreement) to set a fixed interest rate relating to $20million of its outstanding debt at variable interest rates. The terms of theAgreement match the terms of the underlying debt. In addition, the Agreementhas been designated as, and is effective as, a cash-flow hedge of anoutstanding debt obligation. Changes in fair value of the Agreement arereported as other comprehensive income and are recognized into earnings whenthe hedge transaction affects earnings.

8

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

Accumulatedother comprehensive loss consists of the following:
| Currency translation adjustment:                                |   |     |     |
|-----------------------------------------------------------------|--------|----------|----------|
| Balance—July 1, 2003                                  |   | $        | (44,000  | ) |
| Currency translation adjustment                                 |   | (22,000  | )        |
| Balance—March 31,  2004                               |   | $        | (66,000  | ) |
| Unrealized loss  on derivative instrument:                      |   |     |     |
| Balance—July 1, 2003                                  |   | $        | —   |   |
| Change in derivative instrument                                 |   | (138,000 | )        |
| Balance—March 31,  2004                               |   | $        | (138,000 | ) |
| Total accumulated  comprehensive loss—March 31,  2004 |   | $        | (204,000 | ) |

 

Comprehensiveincome (loss) consists of the following:
| ** **                      | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                      | ** ** | **2004**                        | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings                    |       | $                               | 3,233,000  |                             | $          | 4,889,000 |   | $ | 446,000 |   | $ | 1,558,000 |   |
| Other comprehensive  income:    |       |                            |       |                             |       |   |   |   |   |
| Currency translation adjustment |       | (22,000                         | )          | (4,000                           | )          | (37,000 | ) | (36,000 | ) |
| Change in derivative instrument |       | (138,000                        | )          |                             |       | (425,000 | ) |   |   |
| Comprehensive income  (loss)    |       | $                               | 3,073,000  |                             | $          | 4,885,000 |   | $ | (16,000 | ) | $ | 1,522,000 |   |

 

7.   Effective December 1, 2003, the Companyacquired substantially all of the assets and assumed certain liabilities of theNorth American operations of Peek Traffic Corporation (Peek Traffic). TheCompany paid a purchase price of $15,693,000. The purchase price consisted of$11,263,000 in cash and 180,723 of the Company’s common stock, issued fromTreasury Stock, valued at $4,430,000. The cash portion of the purchase pricewas obtained from the Company’s revolving credit facility. Peek Traffic is adesigner, manufacturer and supplier of intelligent intersection controlsystems, red light enforcement systems and other transportation equipment. Theresults of Peek Traffic have been included in the Company’s Inform segmentsince the date of acquisition.

Thefollowing unaudited summary presents the estimated fair values of the assetsacquired and liabilities of Peek Traffic assumed as of December 1, 2003,the effective date of the acquisition.
| Current assets                 |   | $          | 5,977,000  |   |
|--------------------------------|--------|------------|------------|--------|
| Property, plant  and equipment |   | 2,902,000  |       |
| Intangible assets              |   | 5,760,000  |       |
| Goodwill                       |   | 7,611,000  |       |
| Total assets                   |   | 22,250,000 |       |
| Current  liabilities           |   | 6,557,000  |       |
| Net assets                     |   | $          | 15,693,000 |   |

 

9

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

The allocation of purchase price above is subject tochange based on finalization of valuations of certain assets and liabilities. Theintangible assets acquired in connection with the acquisition of Peek Trafficwere assigned as follows:
| ** **                    | ** ** | **Gross**                | ** ** | **Weighted-average** | ** ** |
|-------------------------------|------------|--------------------------|------------|----------------------|------------|
| ** **                    | ** ** | **Carrying Amount** | ** ** | **Useful Life** | ** ** |
| Amortized intangible  assets: |       |                     |       |                 |       |   |   |   |   |
| Customer relationships        |       |                     | $          | 3,110,000            |       |   |   | 10 years |   |   |
| Trade Names                   |       |                     | 1,700,000  |                 |       |   | 20 years |   |   |
| Technology                    |       |                     | 840,000    |                 |       |   | 15 years |   |   |
| Backlog                       |       |                     | 110,000    |                 |       |   | 1 year |   |   |
| Total                         |       |                     | $          | 5,760,000            |       |   |   | 12 years |   |   |

 

Effective May 16, 2003, the Company acquiredcertain assets and liabilities of the Traffic and Transit Lighting businessesof U.S. Traffic Corporation (UST). The Company paid a purchase price of$35,725,000, net of cash acquired, consisting of $20,158,000 in cash, a$5,000,000 five-year note and 558,534 shares of the Company’s common stock witha fair value of $10,567,000. The Company’s source of cash for this acquisitionwas a $70,000,000 credit facility. UST is a designer, manufacturer and supplierof intelligent intersection control systems and other transportation equipment.The results of UST have been included in the Company’s Inform segment since thedate of acquisition.

The Company anticipates that the UST and Peek Trafficbusinesses will provide future operating synergies in the traffic controlmarket, expand the Company’s customer base in the municipal and county marketsand leverage the Company’s existing technologies within the Inform segment.

Thefollowing pro forma summary presents the Company’s consolidated results ofoperations for each of the nine-month and three-month periods ended March 31as if the acquisitions had occurred at the beginning of fiscal year 2003.
| ** **                      | ** ** | **Nine Months Ended** | ** **  | **Three Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------|-------------|----------------------------------|------------|
| ** **                      | ** ** | **March 31**               | ** **  | **March 31**                | ** ** |
| ** **                      | ** ** | **2004**                        | ** **  | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                       |       | $                               | 120,444,000 |                             | $          | 130,143,000 |   | $ | 36,169,000 |   | $ | 41,667,000 |   |
| Net earnings                    |       | 2,998,000                       |        | 4,840,000                        |       | 446,000 |   | 1,337,000 |   |
| Net earnings per diluted  share |       | $                               | 0.34        |                             | $          | 0.55 |   | $ | 0.05 |   | $ | 0.16 |   |

 

The results above for the three-month and nine-monthperiods ended March 31, 2003 include restructuring and other nonrecurringcosts incurred by Peek Traffic of $62,000 and $2,616,000, respectively.

The consolidated pro forma information is notnecessarily indicative of the combined results that would have occurred had theacquisitions occurred on that date, nor is it indicative of the results thatmay occur in the future.

8.   The Company’s operations are classified astwo reportable segments within the highway and transportation safety industry. TheCompany’s two reportable segments are the manufacture and sale of the Company’sproducts which Protect and Direct, and the manufacture and sale of productswhich Inform and are often referred to as Intelligent Transportation Systems(ITS) products. The Company’s segments 

10

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

are discussed in furtherdetail in the Company’s Annual Report on Form 10-K for the yearended June 30, 2003.

Thefollowing table presents financial information about reported segments for thenine-month and three-month periods ended March 31, 2004 and 2003 alongwith the items necessary to reconcile the segment information to the totalsreported in the consolidated financial statements.
| ** **                         | ** ** | **Protect and** | ** ** | ** **  | ** ** | **Unallocated** | ** **  | ** **  | ** ** |
|------------------------------------|------------|----------------------|------------|-------------|------------|-----------------|-------------|-------------|------------|
| ** **                         | ** ** | **Direct**           | ** ** | **Inform**  | ** ** | **Corporate**   | ** **  | **Total**   | ** ** |
| *2004*                             |       |                 |       |        |       |            |        |        |       |
| NINE MONTHS                        |       |                 |       |        |       |            |        |        |       |
| Net sales from  external customers |       | $                    | 52,752,000 |        | $          | 58,095,000      |        |        |       | $ | 110,847,000 |   |
| Operating profit  (loss)           |       | 11,293,000           |       | (349,000    | )          | $               | (6,067,000  | )           | 4,877,000  |   |
| Identifiable  assets               |       | 53,570,000           |       | 104,422,000 |       | 10,518,000      |        | 168,510,000 |       |
| THREE MONTHS                       |       |                 |       |        |       |            |        |        |       |
| Net sales from  external customers |       | $                    | 16,943,000 |        | $          | 19,226,000      |        |        |       | $ | 36,169,000 |   |
| Operating profit  (loss)           |       | 3,443,000            |       | (1,600,000  | )          | $               | (2,302,000  | )           | (459,000   | ) |
| *2003*                             |       |                 |       |        |       |            |        |        |       |
| NINE MONTHS                        |       |                 |       |        |       |            |        |        |       |
| Net sales from  external customers |       | $                    | 53,822,000 |        | $          | 21,650,000      |        |        |       | $ | 75,472,000 |   |
| Operating profit  (loss)           |       | 11,474,000           |       | 1,657,000   |       | $               | (5,152,000  | )           | 7,979,000  |   |
| Identifiable  assets               |       | 52,019,000           |       | 40,982,000  |       | 4,579,000       |        | 97,580,000  |       |
| THREE MONTHS                       |       |                 |       |        |       |            |        |        |       |
| Net sales from  external customers |       | $                    | 17,836,000 |        | $          | 7,369,000       |        |        |       | $ | 25,205,000 |   |
| Operating profit (loss)            |       | 3,723,000            |       | 317,000     |       | $               | (1,503,000) |        | 2,537,000  |   |

 

Identifiable assets of the Inform segment as of March 31,2004 increased to $104,422,000 from $40,982,000 as of March 31, 2003primarily due to the acquisitions of UST in May 2003 and Peek Traffic in December 2003.

11

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

9.   Intangible assets consist of thefollowing:
| ** **                           | ** ** | **March 31, 2004** | ** ** | **June 30, 2003** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **Gross  Carrying**          | ** ** | **Accumulated**             | ** ** | **Gross  Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                           | ** ** | **Amount**                   | ** ** | **Amortization**            | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Amortized  intangible assets:        |       |                         |       |                        |       |   |   |   |   |
| Patents and licenses                 |       | $                            | 2,779,000  |                        | $          | 1,570,000 |   | $ | 2,779,000 |   | $ | 1,410,000 |   |
| Technology and installed base        |       | 3,940,000                    |       | 616,000                     |       | 3,100,000 |   | 386,000 |   |
| Customer relationships               |       | 5,430,000                    |       | 604,000                     |       | 2,320,000 |   | 126,000 |   |
| Finite-lived trade names             |       | 1,700,000                    |       | 28,000                      |       |   |   |   |   |
| Other                                |       | 640,000                      |       | 500,000                     |       | 530,000 |   | 80,000 |   |
|                                 |       | 14,489,000                   |       | 3,318,000                   |       | 8,729,000 |   | 2,002,000 |   |
| Indefinite-lived  intangible assets: |       |                         |       |                        |       |   |   |   |   |
| Trade names                          |       | 1,660,000                    |       |                        |       | 1,660,000 |   |   |   |
| Total                                |       | $                            | 16,149,000 |                        | $          | 3,318,000 |   | $ | 10,389,000 |   | $ | 2,002,000 |   |

 

Amortization expense was $1,316,000 and $347,000 forthe nine months ended March 31, 2004 and 2003, respectively. The estimatedamortization expenses for this fiscal year ended June 30, 2004 and for thefour fiscal years subsequent to 2004 are as follows: $1,765,000, $1,394,000,$1,490,000, $1,469,000 and $1,371,000. The carrying amount of goodwill consistsof $48,114,000 for the Inform segment and $8,139,000 for the Protect and Directsegment as of March 31, 2004. The acquisition of Peek Traffic in December 2003added $7,611,000 of goodwill to the Inform segment, and the acquisition of USTin May 2003 added $19,048,000 of goodwill to the Inform segment.

10.   Disclosuresregarding each group of similar guarantees, commitments and contingencies areprovided below.

*Lease Commitments*

The Company uses variousleased facilities and equipment in its operations. The terms for these leasedassets vary depending on the lease agreements. These operating leases includeoptions for renewal. Annual minimum future rental payments for leasecommitments will be approximately $3,641,000 in the next year, $4,865,000 inthe next year to three years, $2,722,000 in the next three to five years and$5,496,000 thereafter, for an aggregate of $16,724,000.

12

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

*Product WarrantyLiability*

TheCompany warrants to the original purchaser of its products that it will, at itsoption, repair or replace, without charge, such products if they fail due to amanufacturing defect. The term of these warranties varies (30 days to 5 years)by product. The Company accrues for product warranties, when, based onavailable 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. The Company’s estimated product warranty liability isas follows:
| Balance,  July 1, 2003       |   | $         | 1,986,000 |   |
|-----------------------------------|--------|-----------|-----------|--------|
| Current  Provisions               |   | 300,000   |      |
| Expenditures                      |   | (132,000  | )         |
| Changes in Estimates              |   | (172,000  | )         |
| Acquisitions                      |   | 2,460,000 |      |
| Balance—March 31,  2004 |   | $         | 4,442,000 |   |

 

*Bid and PerformanceBonds*

The Company has enteredinto bid and performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to the Company’s performance underthe applicable contract. The total amount of bid and performance related bondsthat were available and undrawn was $3,508,000 at March 31, 2004 and$5,300,000 at June 30, 2003. Historically, the Company has not madesignificant payments on bid and performance bonds, and no amount has beenaccrued in the accompanying consolidated financial statements.

*Legal*

The Company is subject tolegal actions of a routine manner and common to its businesses. The Companyrecords loss contingencies where appropriate within the guidelines establishedby Statement of FAS No. 5 “Accounting for Contingencies”. In the opinionof management, based on the advice of legal counsel, the amount of liability,if any, arising from legal actions should not have a material effect on theCompany’s results of operations or financial condition.

*ExecutiveAgreements*

The Company has agreementswith certain executives which are designed to retain the services of keyemployees and to provide for continuity of management in the event of atermination or an actual or threatened change in control of the Company. Uponoccurrence of a termination or a triggering event after a change in control, asdefined, the Company would be liable for payment of benefits under theseagreements, to a maximum amount of $4,937,000. The Company has by-laws andagreements under which it indemnifies its directors and officers from liabilityfor certain events or occurrences while the directors or officers are, or were,serving at the Company’s request in such capacities. The term of theindemnification period is for the director’s or officer’s lifetime. The Companybelieves that any obligations relating to this indemnification arepredominantly covered by insurance subject to certain exclusions anddeductibles. Historically, the Company has not made payments under theseexecutive agreements, and no amount has been accrued in the accompanyingconsolidated financial statements.

13

----

**QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

*Business PurchaseAgreements*

As part of the purchase priceof UST, the Company has agreed to pay contingent consideration based on apercentage of revenues for sales of certain products between May 1, 2003and December 31, 2009, up to a maximum of $5,250,000. No amounts have beenpaid through March 31, 2004. Also as part of the purchase price of UST,the Company guaranteed the principal and interest payments on the $5,000,0000five-year, 5.25% subordinated promissory note payable to the sellers. TheCompany is leasing UST’s Santa Fe Springs, California facility and its Tecate,Mexico facility from affiliates of the sellers, for five year terms which canbe renewed for five years. The Company has guaranteed its performance of itsobligations under the leases. The lease commitments under the leases areincluded in the amounts mentioned above.

*Indemnification ofLenders and Agents Under Credit Facilities*

Under its credit facilities, the Company has agreed toindemnify its lenders under such facilities against costs or losses resultingfrom changes in laws and regulations which would increase the lenders’ costs,and from any legal action brought against the lenders related to the use ofloan proceeds. These indemnifications generally extend for the term of thecredit facilities and do not provide for any limit on the maximum potentialliability. Historically, the Company has not made any significantindemnification payments under such agreements and no amount has been accruedin the accompanying consolidated financial statements with respect to theseindemnification guarantees.

The Company is currentlyin compliance with all covenants in its three-year bank credit agreement,however the Company believes that it is probable that the Company may violatetwo of the financial covenants included in the agreement as of June 30,2004. The Company also believes that it is probable that a waiver will beobtained. However, if a waiver is not obtained, the outstanding amount againstthe credit agreement, $50,500,000 as of March 31, 2004, would beclassified as a current liability and the Company would need to renegotiate anew credit agreement.

*Other Commitments*

The Company has standby letters of credit coveringpotential workers’ compensation liabilities. The total amount of standbyletters of credit that were outstanding at March 31, 2004 was $740,000 andat June 30, 2003 was $330,000.

The Company has certain non-cancellable royaltyagreements, which contain certain minimum payments in the aggregate of$2,613,000 through fiscal year 2012. In addition, the Company has a purchasecommitment arrangement related to expansion of one of its facilities in theamount of approximately $250,000 as of March 31, 2004 and $450,000 as of June 30,2003. There are no current liabilities accrued in the accompanying financialstatements for these commitments.

14

----

**PART I—FINANCIAL INFORMATION**

**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*OVERVIEW*

Quixote Corporation (the Company) and its subsidiariesdevelop, manufacture and market highway and transportation safety products toprotect, direct and inform motorists, pedestrians and road workers in bothdomestic and international markets. The Company’s operations are comprised oftwo reportable segments within the highway and transportation safety industry,concentrating on safety problems and designing products to provide solutionsfor the highways. The Company’s two reportable segments are—the manufacture andsale of highway and transportation safety products which “Protect and Direct”,and the manufacture and sale of products and services which “Inform” that areoften referred to as Intelligent Transportation Systems (ITS) products. TheCompany’s Protect and Direct segment provides solutions for improving safety onthe roads either by minimizing the severity of crashes that occur or bypreventing crashes from occurring by directing or guiding traffic. The primaryproduct lines within the Protect and Direct segment include energy-absorbingproducts such as crash cushions, truck-mounted attenuators, sand-filled barrelsand water-filled barriers, and directing and guiding products such as flexiblepost delineators and glare screen systems. The Company’s Inform segmentprovides solutions for improving traffic flow and safety on roads and runwaysby providing information. The primary product lines within the Inform segmentinclude intelligent intersection control systems, mobile and permanent variablemessage signs, advanced sensing products which measure distance, count andclassify vehicles, and sense weather conditions, computerized highway advisoryradio transmitting systems, automated red light enforcement systems, and othertransportation equipment.

The Company’s products aresold by both a direct sales force and a distribution network to customers inthe highway construction and safety business, state departments oftransportation, county and local governments and other governmentaltransportation agencies. The domestic market for highway and transportationsafety products is directly affected by federal, state and local governmentalpolicies. A portion of the Company’s sales is ultimately financed by fundsprovided to the states by the federal government. Historically, these fundshave covered 75% to 90% of the cost of highway safety projects on roadsconstructed or maintained with federal assistance. Seasonality affects theCompany’s business with generally a higher level of sales in the Company’sfourth fiscal quarter.

*RESULTS OFOPERATIONS*

The results for the third quarter were below theCompany’s expectation, largely as a result of significantly lower than expectedsales volume at UST, acquired in May 2003. We believe this is due in partto the absence of new large contracts related to ongoing state and municipalbudgetary issues. In addition, the passage of new federal highway fundinglegislation has been delayed. The previous bill, TEA-21, expired in September 2003,but has been extended until June 30, 2004. The passage of the new six-yearreauthorization bill, called SAFE-TEA, may not occur by June 30, 2004 andanother extension could be required. Until the new bill is approved, however,the transportation safety allotment in federal and state budgets will continueto be uncertain, and the Company believes this uncertainty will continue tonegatively impact spending on the products and services offered by our Company.

The Company is also currently in the process ofintegrating the acquisitions of UST and Peek Traffic, acquired in December 2003,which is requiring a substantial amount of management’s time and energy. The Companyis also identifying and implementing the solutions that may improve theperformance of UST, including the hiring of new management-level professionals.

15

----

Thefollowing table sets forth selected key operating statistics relating to theCompany’s financial results:
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **March 31**                | ** ** | **March 31**               | ** ** |
| ** **                                                    | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues by  Segment:                                         |       |                             |       |                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                | 16,943,000 |                            | $          | 17,836,000 |   | $ | 52,752,000 |   | $ | 53,822,000 |   |
| Inform                                                        |       | 19,226,000                       |       | 7,369,000                       |       | 58,095,000 |   | 21,650,000 |   |
|                                                          |       | $                                | 36,169,000 |                            | $          | 25,205,000 |   | $ | 110,847,000 |   | $ | 75,472,000 |   |
| Geographic Revenues:                                          |       |                             |       |                            |       |   |   |   |   |
| Domestic                                                      |       | $                                | 32,634,000 |                            | $          | 21,626,000 |   | $ | 99,621,000 |   | $ | 65,308,000 |   |
| International                                                 |       | 3,535,000                        |       | 3,579,000                       |       | 11,226,000 |   | 10,164,000 |   |
|                                                          |       | $                                | 36,169,000 |                            | $          | 25,205,000 |   | $ | 110,847,000 |   | $ | 75,472,000 |   |
| Operating Income by Segment:                                  |       |                             |       |                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                | 3,443,000  |                            | $          | 3,723,000 |   | $ | 11,293,000 |   | $ | 11,474,000 |   |
| Inform                                                        |       | (1,600,000                       | )          | 317,000                         |       | (349,000 | ) | 1,657,000 |   |
| Unallocated Corporate                                         |       | (2,302,000                       | )          | (1,503,000                      | )          | (6,067,000 | ) | (5,152,000 | ) |
|                                                          |       | $                                | (459,000   | )                               | $          | 2,537,000 |   | $ | 4,877,000 |   | $ | 7,979,000 |   |
| Gross profit percentage                                       |       | 27.6                             | %          | 39.9                            | %          | 30.5 | % | 40.4 | % |
| Selling and administrative expenses as a percentage  of sales |       | 26.1                             | %          | 27.3                            | %          | 23.8 | % | 27.8 | % |
| Diluted earnings  per share                                   |       | $                                | .05        |                            | $          | .20 |   | $ | .37 |   | $ | .61 |   |

 

*Revenues*

The Company’s net sales for the thirdquarterof fiscal 2004 increased $10,964,000, or 44%, to $36,169,000 from $25,205,000for the third quarter last year. This was primarily due to the acquisitions ofUST in May 2003 and Peek Traffic in December 2003, which contributed$13,644,000 of net sales not comparable to the third quarter of the prior year.Excluding the two recent acquisitions, net sales decreased by $2,680,000, or11%, due to decreases in sales across both its Protect and Direct and Informsegments in the third quarter of fiscal 2004.

The Company’s net sales for the first nine months offiscal 2004 increased $35,375,000, or 47%, to $110,847,000 from $75,472,000 inthe same period last year. The acquisitions of UST and Peek Traffic contributed$39,425,000 in net sales for the current nine-month period not comparable tothe prior year. Excluding the two recent acquisitions, net sales decreased by$4,050,000, or 5%, as increases in sales during the first quarter of 2004 wereoffset by decreased sales in the second and third quarters of fiscal 2004 forboth segments.

*Protect and Direct*—Net sales forthe Company’s Protect and Direct segment for the third quarter of fiscal 2004decreased 5% to $16,943,000 from $17,836,000 for the third quarter last year. TheCompany believes the decrease in sales is due to state budgetary constraints and transportation funding uncertaintiescaused by the delay in the passage of the new federal highway funding bill. Decreasedsales of truck-mounted attenuators, flexible post delineators and sandfilled barrels were partially offset by increased sales of permanent crashcushions, parts and the Triton Barrier® product line.

For the first nine months of fiscal 2004, net salesfor the Protect and Direct segment were $52,752,000, which were slightly lowerthan the $53,822,000 in sales for the same period last year. Decreased sales of

16

----

permanent crash cushions,flexible post delineators and truck-mounted attenuators were partially offset byincreased sales of parts and the Triton Barrier® product line.

*Inform*—Net sales for the Company’sInform segment for the third quarter of fiscal 2004 increased $11,857,000 to$19,226,000 from $7,369,000 for the third quarter last year. This was primarilydue to the acquisitions of UST and Peek Traffic, which added $13,644,000 in netsales for the third quarter of fiscal 2004 not comparable to the third quarterof the prior year. Excluding the two recent acquisitions, net sales for theInform segment decreased $1,787,000, or 24%. Sales across most major productlines decreased with the exception of increased sales of highway advisory radiosystems. In addition, sales for the third quarter of last year includedshipments of $600,000 on a large contract to supply weather and traffic sensingsystems. UST has also been affected by the difficult operating environment,which has resulted in depressed order flows and sales levels lower thanplanned.

For the first nine months of fiscal 2004, net salesfor the Company’s Inform segment increased $36,445,000 to $58,095,000 from$21,650,000 for the same period last year. The increase was primarily due tothe acquisitions of UST and Peek Traffic, which added $39,425,000 in net salesnot comparable to the first nine months of the prior year. Excluding the tworecent acquisitions, net sales decreased $2,980,000, or 14%, due to decreasedorder flows and a difficult comparison related to large contract sales lastyear. Sales for the second and third quarters of last year included shipmentstotaling $3,400,000 on two large contracts that were not replaced in thecurrent fiscal year. Sales across most major product lines decreased for thefirst nine months of fiscal 2004 due to weak sales in the second and thirdquarters, which were partially offset by increased sales of highway advisoryradio systems.

*Geographic*—International salesfor the third quarter of fiscal 2004 were consistent at $3,535,000 as comparedto $3,579,000 for the third quarter last year. The acquisitions of UST and PeekTraffic contributed $689,000 in international net sales for the third quarterof fiscal 2004. Domestic sales for the third quarter of fiscal 2004 increased51% to $32,634,000 from $21,626,000. The acquisitions of UST and Peek Trafficcontributed $12,955,000 in domestic net sales in the third quarter of fiscal2004 offset by decreased domestic sales, excluding acquisitions, for bothsegments.

International sales forthe first nine months of fiscal 2004 increased 10% to $11,226,000 from$10,164,000 for the same period last year. Sales of the Triton Barrier® productline continue to be strong in Australia. The acquisitions of UST and PeekTraffic contributed $854,000 in international net sales for the first ninemonths of fiscal 2004. Domestic sales for the first nine months of fiscal 2004increased 53% to $99,621,000 from $65,308,000. The acquisitions of UST and PeekTraffic contributed $38,571,000 in domestic net sales in the first nine monthsof fiscal 2004 offset by decreased domestic sales, excluding acquisitions, forboth segments.

*Gross Profit Margin*

The Company’s gross profit margin for the thirdquarter of fiscal 2004 was 27.6% compared to 39.9% for the third quarter lastyear due principally to lower gross profit margins at UST. The gross profitmargin for the Protect and Direct segment decreased primarily due to volumeinefficiencies associated with the lower level of sales and the fixed componentof the Company’s expenses. The gross profit margin for the Inform segmentdecreased primarily due to low gross profit margins at UST. Excluding UST andPeek Traffic results, the gross profit margin for the Inform segment wasslightly higher than the prior year period partially due to a favorable changein product mix with lower sales of lower margin large contract sales.

The gross profit marginfor the first nine-month period was 30.5% compared to 40.4% for the same periodlast year due principally to lower gross profit margins generated at UST. Thegross profit margin for the Protect and Direct segment for the first ninemonths of fiscal 2004 decreased primarily due to volume inefficienciesassociated with the lower level of sales and the fixed component of the Company’sexpenses. 

17

----

Thegross profit margin for the Inform segment decreased primarily due to low grossprofit margins at UST. Excluding UST and Peek Traffic results, the gross profitmargin for the Inform segment decreased slightly also due to decreased salesvolume.

*Selling andAdministrative Expenses*

Selling and administrative expenses for the thirdquarter of fiscal 2004 increased $2,563,000, or 37%, to $9,440,000 from$6,877,000 for the third quarter last year due to the inclusion of expensesfrom UST and Peek Traffic which added $2,597,000 for the quarter. Excluding USTand Peek Traffic results, selling and administrative expenses for the thirdquarter of fiscal 2004 were consistent with the prior year. Selling andadministrative expenses declined as a percentage of sales to 26.1% for thethird quarter of 2004 from 27.3% last year as UST and Peek Traffic have lowerselling and administrative expenses as a percentage of sales than the Company’shistorical percentage.

Selling and Administrativeexpenses for the first nine-month period increased $5,418,000, or 26%, to$26,404,000 from $20,986,000 for the same period last year due to inclusion ofUST and Peek Traffic which added $6,630,000 for the first nine months of fiscal2004. Excluding UST and Peek Traffic results, selling and administrativeexpenses decreased for the first nine months of fiscal 2004 primarily related to decreased selling expenses due to lower salesvolume in the Protect and Direct Segment. Selling and administrativeexpenses decreased as a percentage of sales to 23.8% for the first nine monthsof fiscal 2004 compared to 27.8% last year as UST and Peek Traffic generallyhave lower selling and administrative expenses as a percentage of sales thanthe Company’s historical percentage.

*Research andDevelopment*

Research and developmentexpenditures were $1,003,000 for the third quarter of fiscal 2004 compared to$635,000 for the third quarter last year. Research and development expenditureswere $2,549,000 for the current nine-month period compared with $1,543,000 forthe same period last year. The increases of $386,000 and $1,006,000,respectively, were primarily due to the inclusion of research and developmentexpenditures at UST and Peek Traffic, as well as increased inside and outsidedevelopment costs for several projects. The Company continues to invest indevelopment projects for new applications as well as upgrades and modificationsto existing products.

*Operating Profit*

For the third quarter of fiscal 2004, operating profitfor the Protect and Direct Group decreased $280,000 to $3,443,000 from$3,723,000 for the third quarter last year due to the factors mentioned above. Operatingprofit for the Inform Group decreased $1,917,000 to a loss of $1,600,000 from aprofit of $317,000 for the third quarter of last year. Excluding the results ofthe two recent acquisitions of Peek Traffic, with operating profit of $270,000,and UST, with an operating loss of $1,833,000, operating profit for the InformGroup on an organic basis decreased $354,000 to a loss of $37,000 from a profitof $317,000 for the third quarter last year due to the factors mentioned above.The sales levels and operating profit at UST were lower than planned for thethird quarter of fiscal 2004.

For the nine months ended March 31,2004, operating profit for the Protect and Direct Group decreased $181,000 to$11,293,000 from $11,474,000 for the same period last year due to the factorsmentioned above. Operating profit for the Inform Group decreased $2,006,000 toa loss of $349,000 from a profit of $1,657,000 for the third quarter of lastyear. Excluding the results of the two recent acquisitions of Peek Traffic,with operating profit of $401,000, and UST, with an operating loss of$2,051,000, operating profit for the Inform Group on an organic basis decreased$357,000 to $1,301,000 from $1,657,000 for the same period last year due thefactors mentioned above.

18

----

*Interest Expense*

Interest expense for thethird quarter of fiscal 2004 increased to $588,000 from $187,000 for the thirdquarter last year. Interest expense for the first nine months of fiscal 2004increased to $1,590,000 from $637,000 for the same nine-month period last year.The increases were due to the higher level of average long-term debt since theacquisitions of UST in May 2003 and Peek Traffic in December 2003. Theinterest rate on the Company’s $70 million, three-year unsecured creditagreement is based on prime or LIBOR and a fixed rate, plus a margin, and theweighted average rate was 3.5% as of March 31, 2004.

*Other Expense*

The Company recorded aloss on disposal of fixed assets of $212,000 in the third quarter of fiscal2004 in connection with the relocation of the Company’s Chicago headquarters.

*Provision forIncome Taxes*

The income tax benefit forthe third quarter of fiscal 2004 was $1,700,000 and was $133,000 for the firstnine months of fiscal 2004. An income tax benefit of $1,249,000, or $0.14 perdiluted share, was recorded in the third quarter of fiscal 2004 primarilyrelated to certain tax refund claims for research and development creditsapproved by the Internal Revenue Service during the quarter. The Companyexpects to provide for income taxes at a rate of 36% for the remainder offiscal 2004.

*Net Earnings*

Net earnings for the thirdquarter of fiscal 2004 were $446,000, or $0.05 cents per diluted share,compared to $1,558,000, or $0.20 cents per diluted share, for the third quarterlast year. Net earnings for the first nine-month period were $3,233,000, or$0.37 cents per diluted share, compared to $4,889,000, or $0.61 cents perdiluted share, for the same period last year.

*FINANCIAL CONDITION*

*Liquidity andCapital Resources*

The Company’s principal sources of funds historicallyhave been cash flows from operations and borrowings from banks. The Company hadcash and cash equivalents of $6,023,000 as of March 31, 2004 and access toadditional funds of $11,000,000 under a three-year unsecured bank creditagreement which currently expires as of May 16, 2006. The Company believesthat this credit agreement is an important source of liquidity. The creditagreement provides for a $50 million revolving credit facility and a $20million term loan agreement. Principal on the term loan is payable quarterly ininstallments of $750,000, plus interest. The agreement contains both fixed andfloating interest rate options, at the prime rate or LIBOR rate, plus a margin.The agreement contains affirmative and negative covenants includingrequirements that the Company maintain certain financial ratios and beprofitable each year. Access to additional funds is limited based upon acertain leverage ratio. The agreement may be renewed one additional year oneach anniversary date upon mutual consent of the Company and the banks. TheCompany is currently in compliance with all covenants in this agreement,however the Company believes that it is probable that the Company will violatetwo of the financial covenants as of June 30, 2004. The Company alsobelieves that it is probable that a waiver will be obtained. However, if awaiver is not obtained, the outstanding amount against the credit agreement, $50,500,000as of March 31, 2004, would be classified as a current liability and theCompany would need to renegotiate a new credit agreement.

The Company’s outstandingborrowings were $57,154,000, or 41% of total capitalization, as of March 31,2004, of which $50,500,000 was outstanding related to the revolving creditfacility. This compares to $43,817,000, or 37% of total capitalization, as of June 30,2003. The increase primarily relates 

19

----

to theacquisition of Peek Traffic in December 2003 for which the Companyborrowed $11,000,000 against the revolving credit facility.

*Cash Flows*

Cash flows provided by operations were $4,570,000during the first nine months of fiscal 2004. Decreases in the level of accountsreceivable and inventory throughout the first nine months of fiscal 2004 due tothe decreased level of sales were partially offset by an investment in workingcapital at UST through the payment of accounts payable and accrued expenses inthe first quarter of fiscal 2004.

Investing activities used cash of $14,548,000 duringthe first nine months of fiscal 2004, including $11,263,000 for the purchase ofPeek Traffic and $3,285,000 for capital expenditures.

Financing activities provided cash of $12,255,000during the first nine months of fiscal 2004. The Company borrowed a net$15,500,000 against its outstanding revolving credit facility primarily for theacquisition of Peek Traffic. The Company also paid $1,500,000 in quarterlypayments on the term loan due in connection with the acquisition of UST and$801,000 on other notes payable. The payment of the Company’s semi-annual cashdividend used cash of $2,828,000. The Company received cash of $1,884,000 fromthe exercise of common stock options.

For the remainder offiscal 2004, the Company anticipates needing less than an additional $1,000,000in cash for capital expenditures. The Company may also need additional cash asit considers acquiring businesses that complement its existing operations. Also,the Company may require additional investments in working capital to maintaingrowth. The Company may also need additional funds to repurchase its own commonstock from time to time. These expenditures will be financed either through theCompany’s invested cash, cash generated from its operations or from borrowings availableunder the Company’s bank credit facility. The Company believes its existingcash, cash generated from operations and funds available under its existingcredit facility are sufficient for all planned operating and capitalrequirements in the near term. If needed and available on favorable terms, theCompany may also enter other debt or equity financing arrangements.

*SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements. Management’sestimates also affect the reported amounts of revenues and expenses during thereporting period. In addition, certain normal and recurring estimates are madeincluding estimates in determining the allowance for doubtful accountsreceivable, inventory valuation reserves, valuation allowance on deferred taxassets and health care liabilities. These estimates are made using management’sbest judgment given relevant factors and available data. Actual results coulddiffer materially from those estimates. Note 2 to the Company’s June 30,2003 consolidated financial statements includes a summary of the significantaccounting policies, methods and estimates used in the preparation of theCompany’s consolidated financial statements. There have been no subsequentmaterial changes in accounting policies, methods and estimates used bymanagement. In the opinion of management, the Company does not have anyindividual accounting policy or use any individual estimate that is critical tothe preparation of its consolidated financial statements. In most instances,the Company must use an accounting policy or method because it is the onlypolicy or method permitted under U.S. GAAP.

20

----

The Companybelieves the following significant accounting policies and methods used by theCompany are the most important to the presentation of the Company’s financialstatements:

Revenue Recognition:   Revenues, net of salesincentives, are recognized when either services have been rendered or bothtitle and risk of loss of products have been transferred to unaffiliatedcustomers. Additionally, the Company ensures that collection of the resultingreceivable is probable, persuasive evidence that an arrangement exists, and thefee is fixed or determinable. Provision for estimated uncollectible amounts ismade based upon management’s analysis of sales returns and bad debts.

Inventories:   Inventories are valued at the lowerof cost (first-in, first-out method) or market. Actual costs are used to valueraw materials and supplies. Standard costs, which approximate actual costs, areused to value finished goods and work-in-process. Standard costs include rawmaterials, direct labor and manufacturing overhead. Provision for potentiallyobsolete or slow-moving inventory is made based on management’s analysis ofinventory levels, ages and salability.

Long-LivedAssets:   Long-livedassets include such items as goodwill, patents, product rights and otherintangible assets. Long-lived assets held and used by the Company are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. For purposes of evaluatingthe recoverability of long-lived assets, the Company assesses the possibilityof obsolescence, demand, new technology, competition, and other pertinenteconomic factors and trends that may have an impact on the value or remaininglives of these assets. Additionally, goodwill and other indefinite-livedintangible assets are tested for impairment at least annually during the fourthquarter each year using the discounted cash flow method which incorporates thecurrent trend of operating results. The Company believes it is possible thatthe annual impairment test could result in an impairment of goodwill or otherindefinite-lived intangible asset charge to earnings in the fourth quarter offiscal 2004. Patents and other finite-lived intangible assets are amortized ona straight-line basis over the life of the patent or agreement.

Income Taxes:   TheCompany recognizes deferred tax assets and liabilities for the expected futuretax consequences of events that have been included in the financial statementsor tax returns. Under this method, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. In addition, the amount ofany future tax benefits are reduced by a valuation allowance to the extent suchbenefits are not expected to be fully realized.

*RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS*

InMarch 2004, the Financial Accounting Standards Board (FASB) issuedthe exposure draft, “Share-based Payment”, which is a proposed amendment toFASB Statement No. 123, “Accounting for Stock-based Compensation”. In thisdraft, the FASB formally proposed to require companies to recognize the fairvalue of stock options and other stock-based compensation to employees forfuture reporting periods in the income statement based on their fair values. Thefinal standard, expected in late 2004, would be effective for public companiesthat currently use the fair value method, rather than minimum value method, forrecognition or disclosure proposed for fiscal years beginning after December 15,2004. The Company is currently evaluating the impact that expensing stockoptions and other stock-based compensation will have on the results ofoperations, financial position and liquidity.

21

----

*OFF-BALANCE SHEETARRANGEMENTS AND CONTRACTUAL OBLIGATIONS*

TheCompany is subject to certain debt obligations, guarantees, commitments andcontingent liabilities further described in the Company’s annual report on Form 10-Kfor the year ended June 30, 2003. The following table presents the Company’scontractual obligations to make future payments under contracts, such as debtand lease agreements, as of March 31, 2004:
| ** **                | ** ** | ** ** | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** |
|---------------------------|------------|------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                | ** ** | **Total**  | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| Long-term debt            |       | $          | 57,154,000 |               | $          | 3,495,000          |       | $                  | 6,820,000  |               | $          | 11,201,000 |   | $ | 35,638,000 |   |
| Operating leases          |       | 16,724,000 |       | 3,641,000          |       | 4,865,000          |       | 2,722,000          |       | 5,496,000          |       |
| Minimum royalty  payments |       | 2,613,000  |       | 513,000            |       | 600,000            |       | 600,000            |       | 900,000            |       |
| Purchase  obligations     |       | 250,000    |       | 250,000            |       |               |       |               |       |               |       |
| Total                     |       | $          | 76,741,000 |               | $          | 7,899,000          |       | $                  | 12,285,000 |               | $          | 14,523,000 |   | $ | 42,034,000 |   |

 

*FORWARD LOOKINGSTATEMENTS*

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

Investors are cautionedthat all forward-looking statements involve risks and uncertainties, includingthose detailed in the Company’s public filings with the SEC, news releases andother communications, which speak only as of the dates of those filings orcommunications. The Company does not undertake any obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereto or to reflect the occurrence ofunanticipated events. There can be no assurance that actual results will notdiffer materially from the Company’s expectations. Factors which could causematerially different results include, among others, uncertainties related tocontinued federal, state and municipal funding for highways and risks relatedto reductions in government expenditures; the successful completion andintegration of acquisitions; the introduction and acceptance of the Company’sproducts and services; an unfavorable change in product sales mix; seasonalityalong with the extent and timing of the award of large contracts; the cyclicalnature of the Company’s governmental markets; competitive and pricingpressures; increasing raw material costs; excess manufacturing capacity;weather conditions; acts of war and terrorist activities; the possibleimpairment of goodwill and other intangible assets; and general economicconditions.

**ITEM 3.   Quantitative and Qualitative Disclosuresabout Market Risk**

Item 7.A. of the Company’s Annual Report on Form 10-Kfor the year ended June 30, 2003 presents information regardingQuantitative and Qualitative Disclosures about Market Risk.

The Company is exposed tomarket risk from fluctuations in interest rates. The Company manages itsexposure to interest rate fluctuations through the use of derivativeinstruments in the form of non-trading interest rate swaps. The objective ofthe swap is to fix the interest rate on certain variable rate debt to stabilizeinterest rates and to more effectively balance the Company’s long-termborrowing costs and interest rate risk. During July 2003, the Companyentered into an interest rate swap agreement to set a fixed interest raterelating to $20 million of its outstanding debt at variable interest rates.

22

----

**ITEM 4.   Controls and Procedures**

(a) Evaluation of Disclosure Controls andProcedures

Disclosure controls and procedures are controls andother procedures that are designed to ensure that information required to bedisclosed in the reports that are filed or submitted under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed in the reportsthat are filed under the Exchange Act is accumulated and communicated tomanagement, including the principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding required disclosure.Under the supervision of and with the participation of management, includingthe principal executive officer and principal financial officer, the Companyhas evaluated the effectiveness of the design and operation of its disclosurecontrols and procedures as of the end of the period covered by this report,and, based on its evaluation, our principal executive officer and principalfinancial officer have concluded that these controls and procedures areeffective.

(b) Changes in Internal Controls

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

23

----

**PART II—OTHER INFORMATION**

There is not informationrequired to be reported under any items except as indicated below:

**ITEM 1.   Legal Proceedings**

In February 2004Quixote Corporation (the Company) and U.S. Traffic Corporation, one of itssubsidiaries (UST) were served with a Summons and Complaint in an actionentitled “Georgia Electric Company v. U.S. Traffic Corporation n/k/a MyersAmerica, Inc., Display Solutions, Inc., Quixote Corporation, and U.S.Traffic Corporation f/n/a Green Light Acquisition Corporation” (U.S. DistrictCourt, Northern District of Georgia, Case No. 1:03-CV-2816-RWS).The complaint alleges breach of contract and warranty claims arising from thesale of variable message signs to the plaintiff by the former owner of U.S.Traffic Corporation, n/k/a Myers America, Inc. (“Myers”) and allegesdamages of over one million dollars. The complaint further asserts that theCompany and UST assumed certain contractual obligations and liabilities withrespect to this litigation with the acquisition of assets from Myers. TheCompany and UST have answered the complaint denying any liability. The Companydoes not believe the eventual outcome will have a material adverse impact onthe Company.

**ITEM 6.   Exhibits and Reports on Form 8-K**

(a)           Exhibits

31            Certification pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

32            Certification pursuantto Section 906 of the Sarbanes-Oxley Act of 2002

(b)          Reports on Form 8-K

On January 30, 2004 the Company filed a report onForm 8-K dated January 29, 2004 to report the issuance of apress release announcing its second quarter fiscal results.

On April 29, 2004 the Company filed a report on Form 8-Kdated April 28, 2004 to report the issuance of a press release announcingits third quarter fiscal results.

24

----

 

**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2004 to be signed on its behalf by the undersigned thereuntoduly authorized.
|   |              | Quixote Corporation                                                                                                 |
|--------|-------------------|---------------------------------------------------------------------------------------------------------------------|
| DATED: | May 13, 2004 |                                                                                                                |   | /s/ Daniel P. Gorey |   |
|   |              | DANIEL P. GOREY                                                                                                     |
|   |              | *Chief Financial Officer,  Vice President and Treasurer  (Chief Financial & Accounting Officer)* |
|        |                   |                                                                                                                     |  |  |  |

 

25

----