**QUARTERLY REPORT 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**

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

**Forthe period ended December 31, 2004**

**or**

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

**forthe transition period from**

**To**

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Commission file number 0-7903

I.R.S. EmployerIdentification Number **36-2675371**

**QUIXOTE CORPORATION**

(a Delaware Corporation)

**35 East Wacker Drive**

**Chicago, Illinois 60601**

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

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

YES   x       NO o

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

YES   x       NO o

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 8,800,063 shares of the Company’sCommon Stock ($.01-2/3 par value) were outstanding as of December 31,2004.

 

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**PART I—FINANCIALINFORMATIONITEM 1.   FINANCIAL STATEMENTSQUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**
| ** **                                 | ** ** | **Six Months Ended December 31,** | ** ** |       |
|--------------------------------------------|------------|-------------------------------------------------------|------------|------------|
| ** **                                 | ** ** | **2004**                                              | ** ** | **2003**   | ** ** |
| Net sales                                  |       | $                                                     | 71,434,000 |       | $ | 74,678,000 |   |
| Cost of sales                              |       | 51,455,000                                            |       | 50,832,000 |   |
| Gross profit                               |       | 19,979,000                                            |       | 23,846,000 |   |
| Operating  expenses:                       |       |                                                  |       |       |   |
| Selling & administrative          |       | 18,769,000                                            |       | 16,964,000 |   |
| Research & development            |       | 2,506,000                                             |       | 1,546,000  |   |
|                                       |       | 21,275,000                                            |       | 18,510,000 |   |
| Operating profit (loss)                    |       | (1,296,000                                            | )          | 5,336,000  |   |
| Other income  (expense):                   |       |                                                  |       |       |   |
| Interest income                            |       | 34,000                                                |       | 20,000     |   |
| Interest expense                           |       | (1,395,000                                            | )          | (1,002,000 | ) |
| Other                                      |       | 560,000                                               |       |       |   |
|                                       |       | (801,000                                              | )          | (982,000   | ) |
| Earnings (loss) before income taxes        |       | (2,097,000                                            | )          | 4,354,000  |   |
| Income tax  provision (benefit)            |       | (797,000                                              | )          | 1,567,000  |   |
| Net earnings  (loss)                       |       | $                                                     | (1,300,000 | )          | $ | 2,787,000 |   |
| Per share data—basic:                 |       |                                                  |       |       |   |
| Net earnings (loss)                        |       | $                                                     | (.15       | )          | $ | .33 |   |
| Weighted average common shares outstanding |       | 8,770,941                                             |       | 8,404,162  |   |
| Per share data—diluted:               |       |                                                  |       |       |   |
| Net earnings (loss)                        |       | $                                                     | (.15       | )          | $ | .32 |   |
| Weighted average common shares outstanding |       | 8,770,941                                             |       | 8,710,026  |   |
| Cash dividends  declared per common share  |       | $                                                     | .18        |       | $ | .17 |   |
|                                            |            |                                                       |            |            |  |  |  |  |  |  |  |

 

See Notes to Consolidated Financial Statements.

2

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**
| ** **                                 | ** ** | **Three Months Ended December 31,**                                                                          | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **          2004          ** | ** ** | **          2003          ** | ** ** |
| Net sales                                  |       |                                                                                                                             | $          | 33,447,000 |   |   |   | $ | 35,494,000 |   |   |
| Cost of sales                              |       |                                                                                                                             | 24,740,000 |   |   |   | 24,424,000 |   |   |
| Gross profit                               |       |                                                                                                                             | 8,707,000  |   |   |   | 11,070,000 |   |   |
| Operating  expenses:                       |       |                                                                                                                             |       |   |   |   |   |   |   |
| Selling & administrative          |       |                                                                                                                             | 8,894,000  |   |   |   | 9,013,000 |   |   |
| Research & development            |       |                                                                                                                             | 1,246,000  |   |   |   | 830,000 |   |   |
|                                       |       |                                                                                                                             | 10,140,000 |   |   |   | 9,843,000 |   |   |
| Operating profit (loss)                    |       |                                                                                                                             | (1,433,000 | ) |   |   | 1,227,000 |   |   |
| Other income  (expense):                   |       |                                                                                                                             |       |   |   |   |   |   |   |
| Interest income                            |       |                                                                                                                             |       |   |   |   | 5,000 |   |   |
| Interest expense                           |       |                                                                                                                             | (803,000   | ) |   |   | (504,000 | ) |   |
| Other                                      |       |                                                                                                                             | 560,000    |   |   |   |   |   |   |
|                                       |       |                                                                                                                             | (243,000   | ) |   |   | (499,000 | ) |   |
| Earnings (loss) before income taxes        |       |                                                                                                                             | (1,676,000 | ) |   |   | 728,000 |   |   |
| Income tax  provision (benefit)            |       |                                                                                                                             | (637,000   | ) |   |   | 262,000 |   |   |
| Net earnings  (loss)                       |       |                                                                                                                             | $          | (1,039,000 | ) |   |   | $ | 466,000 |   |   |
| Per share data—basic:                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| Net earnings (loss)                        |       |                                                                                                                             | $          | (.12 | ) |   |   | $ | .06 |   |   |
| Weighted average common shares outstanding |       |                                                                                                                             | 8,780,513  |   |   |   | 8,432,133 |   |   |
| Per share data—diluted:               |       |                                                                                                                             |       |   |   |   |   |   |   |
| Net earnings (loss)                        |       |                                                                                                                             | $          | (.12 | ) |   |   | $ | .05 |   |   |
| Weighted average common shares outstanding |       |                                                                                                                             | 8,780,513  |   |   |   | 8,733,412 |   |   |
| Cash dividends  declared per common share  |       |                                                                                                                             | $          | .18 |   |   |   | $ | .17 |   |   |

 

See Notes to Consolidated Financial Statements.

3

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**
| ** **                                                                                                                     | ** ** | **December 31,** | ** **  | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------------|------------|
| ** **                                                                                                                     | ** ** | **2004**              | ** **  | **2004**          | ** ** |
| **ASSETS**                                                                                                                     |       |                  |        |              |       |
| Current assets:                                                                                                                |       |                  |        |              |       |
| Cash and cash equivalents                                                                                                      |       | $                     | 1,653,000   |              | $          | 2,389,000 |   |
| Accounts receivable, net of allowances for doubtful  accounts of $1,469,000 at December 31 and $1,872,000 at June 30 |       | 30,021,000            |        | 33,606,000        |       |
| Refundable income taxes                                                                                                        |       | 1,999,000             |        | 3,371,000         |       |
| Inventories, net:                                                                                                              |       |                  |        |              |       |
| Raw materials                                                                                                                  |       | 12,027,000            |        | 10,162,000        |       |
| Work in process                                                                                                                |       | 4,271,000             |        | 4,732,000         |       |
| Finished goods                                                                                                                 |       | 8,548,000             |        | 10,414,000        |       |
|                                                                                                                           |       | 24,846,000            |        | 25,308,000        |       |
| Notes receivable                                                                                                               |       |                  |        | 217,000           |       |
| Deferred income tax assets                                                                                                     |       | 2,682,000             |        | 2,682,000         |       |
| Other current assets                                                                                                           |       | 2,497,000             |        | 668,000           |       |
| Total current  assets                                                                                                          |       | 63,698,000            |        | 68,241,000        |       |
| Property, plant and equipment, at cost                                                                                         |       | 49,606,000            |        | 48,436,000        |       |
| Less accumulated  depreciation                                                                                                 |       | (23,188,000           | )           | (20,924,000       | )          |
|                                                                                                                           |       | 26,418,000            |        | 27,512,000        |       |
| Goodwill                                                                                                                       |       | 29,312,000            |        | 29,503,000        |       |
| Intangible  assets, net                                                                                                        |       | 7,772,000             |        | 8,249,000         |       |
| Deferred income  tax assets                                                                                                    |       | 6,099,000             |        | 6,099,000         |       |
| Other assets                                                                                                                   |       | 427,000               |        | 278,000           |       |
|                                                                                                                           |       | $                     | 133,726,000 |              | $          | 139,882,000 |   |

 

See Notes to Consolidated Financial Statements.

4

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**
| ** **                                                                                                                                           | ** ** | **December 31,** | ** **  | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------------|------------|
| ** **                                                                                                                                           | ** ** | **2004**              | ** **  | **2004**          | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                         |       |                  |        |              |       |
| Current liabilities:                                                                                                                                 |       |                  |        |              |       |
| Current portion of long-term debt                                                                                                                    |       | $                     | 4,599,000   |              | $          | 3,393,000 |   |
| Accounts payable                                                                                                                                     |       | 9,074,000             |        | 10,723,000        |       |
| Dividends payable                                                                                                                                    |       | 1,579,000             |        | 1,486,000         |       |
| Accrued expenses                                                                                                                                     |       | 11,787,000            |        | 12,666,000        |       |
| Total current  liabilities                                                                                                                           |       | 27,039,000            |        | 28,268,000        |       |
| Long-term debt, net of current portion                                                                                                               |       | 44,528,000            |        | 47,014,000        |       |
| Other long-term  liabilities                                                                                                                         |       | 747,000               |        | 693,000           |       |
|                                                                                                                                                 |       | 72,314,000            |        | 75,975,000        |       |
| Commitments and  contingent liabilities (Note 10)                                                                                                    |       |                  |        |              |       |
| Shareholders’  equity:                                                                                                                          |       |                  |        |              |       |
| Preferred stock, no par value;  authorized 100,000 shares; none issued                                                                               |       |                  |        |              |       |
| Common stock, par value $.01-2/3; authorized 15,000,000  shares; issued 10,747,476 shares at December 31 and 10,707,440 shares at  June 30 |       | 179,000               |        | 178,000           |       |
| Capital in excess of par value of common stock                                                                                                       |       | 58,326,000            |        | 57,757,000        |       |
| Retained earnings                                                                                                                                    |       | 24,550,000            |        | 27,430,000        |       |
| Accumulated other comprehensive income                                                                                                               |       | 386,000               |        | 614,000           |       |
| Treasury stock, at cost, 1,947,413 shares at December 31  and   1,951,240 shares at June 30                                                |       | (22,029,000           | )           | (22,072,000       | )          |
| Total  shareholders’ equity                                                                                                                     |       | 61,412,000            |        | 63,907,000        |       |
|                                                                                                                                                 |       | $                     | 133,726,000 |              | $          | 139,882,000 |   |

 

See Notes to Consolidated Financial Statements.

5

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                                                     | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2004**                                              | ** ** | **2003** | ** ** |
| Operating activities:                                                                                          |       |                                                  |       |   |   |
| Net earnings (loss)                                                                                            |       | $                                                     | (1,300,000 | ) | $ | 2,787,000 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities of  continuing operations: |       |                                                  |       |   |   |
| Depreciation                                                                                                   |       | 2,371,000                                             |       | 2,201,000 |   |
| Amortization                                                                                                   |       | 564,000                                               |       | 784,000 |   |
| Gain on disposal of land                                                                                       |       | (560,000                                              | )          |   |   |
| Provisions for losses on accounts receivable                                                                   |       | (235,000                                              | )          | 350,000 |   |
| Common stock issued for 401K plan                                                                              |       | 81,000                                                |       |   |   |
| Changes in  operating assets and liabilities:                                                                  |       |                                                  |       |   |   |
| Accounts receivable                                                                                            |       | 3,830,000                                             |       | 4,840,000 |   |
| Inventories                                                                                                    |       | 462,000                                               |       | 2,189,000 |   |
| Other assets                                                                                                   |       | (1,978,000                                            | )          | (1,785,000 | ) |
| Accounts payable and accrued expenses                                                                          |       | (2,346,000                                            | )          | (9,128,000 | ) |
| Income taxes                                                                                                   |       | 1,372,000                                             |       | (1,090,000 | ) |
| Other long-term liabilities                                                                                    |       | (166,000                                              | )          | (195,000 | ) |
| Net cash provided  by operating activities                                                                     |       | 2,095,000                                             |       | 953,000 |   |
| Investing  activities:                                                                                         |       |                                                  |       |   |   |
| Cash paid for acquired business, net of cash acquired                                                          |       |                                                  |       | (11,263,000 | ) |
| Capital expenditures                                                                                           |       | (1,708,000                                            | )          | (1,998,000 | ) |
| Patent expenditures                                                                                            |       | (87,000                                               | )          |   |   |
| Proceeds from sale of land                                                                                     |       | 992,000                                               |       |   |   |
| Payments received on note receivable                                                                           |       | 217,000                                               |       |   |   |
| Net cash used in  investing activities                                                                         |       | (586,000                                              | )          | (13,261,000 | ) |
| Financing  activities:                                                                                         |       |                                                  |       |   |   |
| Proceeds from revolving credit agreement                                                                       |       | 14,500,000                                            |       | 22,000,000 |   |
| Payments on revolving credit agreement                                                                         |       | (14,500,000                                           | )          | (9,500,000 | ) |
| Payments on term loan                                                                                          |       | (2,294,000                                            | )          | (1,500,000 | ) |
| Payments on notes payable                                                                                      |       | (192,000                                              | )          | (193,000 | ) |
| Payment of semi-annual cash dividend                                                                           |       | (1,486,000                                            | )          | (1,403,000 | ) |
| Proceeds from short term note                                                                                  |       | 1,206,000                                             |       |   |   |
| Proceeds from exercise of common stock options                                                                 |       | 531,000                                               |       | 475,000 |   |
| Net cash provided  by (used in) financing activities                                                           |       | (2,235,000                                            | )          | 9,879,000 |   |
| Effect of exchange rate changes on cash                                                                        |       | (10,000                                               | )          | 30,000 |   |
| Decrease in cash  and cash equivalents                                                                         |       | (736,000                                              | )          | (2,399,000 | ) |
| Cash and cash equivalents at beginning of period                                                               |       | 2,389,000                                             |       | 3,753,000 |   |
| Cash and cash  equivalents at end of period                                                                    |       | $                                                     | 1,653,000  |   | $ | 1,354,000 |   |

 

See Notes to Consolidated Financial Statements.

6

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

1.     Theaccompanying unaudited consolidated financial statements present information inaccordance with generally accepted accounting principles for interim financialinformation and applicable rules of Regulation S-X. Accordingly, they donot include all information or footnotes required by generally acceptedaccounting principles for complete financial statements. The June 30, 2004consolidated balance sheet as presented was derived from the audited financialstatements. The interim financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the yearended June 30, 2004. Management believes the financial statements includeall normal recurring adjustments necessary for a fair presentation of theresults for the interim periods presented.

2.     At December 31, 2004, the Company hadstock option plans providing for grants of options for directors based upon afixed calculation and grants of stock options and restricted stock foremployees as may be determined by the Compensation Committee of the Board ofDirectors. The cost of restricted stock granted is expensed in the period thestock is issued. The Company accounts for the stock options granted under therecognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related interpretations. No charges are madeto earnings in connection with the stock options granted, as all stock optionsgranted had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effecton net earnings and earnings per share if the Company had applied the fairvalue recognition provisions of FASB Statement No. 123, Accounting forStock-Based Compensation, to the stock options granted.
| ** **                                                                                                                                    | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **December 31,**          | ** ** | **December 31,**            | ** ** |
| ** **                                                                                                                                    | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings  (loss), as reported                                                                                                             |       | $                              | (1,300,000 | )                                | $          | 2,787,000 |   | $ | (1,039,000 | ) | $ | 466,000 |   |
| 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 |       | (499,000                       | )          | (826,000                         | )          | (265,000 | ) | (273,000 | ) |
| Pro-forma net  earnings (loss)                                                                                                                |       | $                              | (1,799,000 | )                                | $          | 2,213,000 |   | $ | (1,304,000 | ) | $ | 193,000 |   |
| Earnings (loss)  per share:                                                                                                                   |       |                           |       |                             |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                              | (.15       | )                                | $          | .33 |   | $ | (.12 | ) | $ | .06 |   |
| Basic—pro forma                                                                                                                          |       | $                              | (.21       | )                                | $          | .26 |   | $ | (.15 | ) | $ | .02 |   |
| Diluted—as reported                                                                                                                      |       | $                              | (.15       | )                                | $          | .32 |   | $ | (.12 | ) | $ | .05 |   |
| Diluted—pro forma                                                                                                                        |       | $                              | (.21       | )                                | $          | .25 |   | $ | (.15 | ) | $ | .02 |   |

 

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

4.     Operatingresults for the first six months of fiscal 2005 are not necessarily indicativeof the performance for the entire year. The Company’s business is seasonal witha higher level of sales in the Company’s fourth fiscal quarter.

7

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5.     The computation of basic and dilutedearnings per share is as follows:
| ** **                                                | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **December 31,**          | ** ** | **December 31,**            | ** ** |
| ** **                                                | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Numerator:*                                              |       |                           |       |                             |       |   |   |   |   |
| Net earnings  (loss) available to common shareholders     |       | $                              | (1,300,000 | )                                | $          | 2,787,000 |   | $ | (1,039,000 | ) | $ | 466,000 |   |
| *Denominator:*                                            |       |                           |       |                             |       |   |   |   |   |
| Weighted average  shares  outstanding—basic          |       | 8,770,941                      |       | 8,404,162                        |       | 8,780,513 |   | 8,432,133 |   |
| Effect of  dilutive securities—common  stock options |       |                           |       | 305,864                          |       |   |   | 301,279 |   |
| Weighted average  shares  outstanding—diluted        |       | 8,770,941                      |       | 8,710,026                        |       | 8,780,513 |   | 8,733,412 |   |
| *Net  earnings (loss) per share of  common stock:*        |       |                           |       |                             |       |   |   |   |   |
| Basic                                                     |       | $                              | (.15       | )                                | $          | .33 |   | $ | (.12 | ) | $ | .06 |   |
| Diluted                                                   |       | $                              | (.15       | )                                | $          | .32 |   | $ | (.12 | ) | $ | .05 |   |

 

Employee stock options totaling 121,616 and 122,796shares, respectively, for the six and three months periods ended December 31,2004 were not included in the diluted weighted average shares calculationbecause the effects of these securities were anti-dilutive.

Therewere outstanding options to purchase common stock at prices that exceeded theaverage market price for the income statement periods. These options have beenexcluded from the computation of diluted earnings per share for the six-month and three-monthperiods ended December 31, 2004 and 2003 and are as follows:
| ** **                        | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **December 31,**          | ** ** | **December 31,**            | ** ** |
| ** **                        | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Average exercise  price per share |       | $                              | 24.67      |                             | $          | 25.26 |   | $ | 24.67 |   | $ | 25.26 |   |
| Number of shares                  |       | 312,000                        |       | 283,200                          |       | 312,000 |   | 283,200 |   |
|                                   |            |                                |            |                                  |            |  |  |  |  |  |  |  |  |

 

6.    Accumulated othercomprehensive income consists of the following:
| ** **                                 | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2004**              | ** ** | **2004**          | ** ** |
| Currency translation  adjustment:          |       |                  |       |              |       |   |   |
| Beginning Balance                          |       |                  | $          | (46,000           | )          |   | $ | (44,000 | ) |
| Currency translation adjustment            |       |                  | (8,000     | )                 |       | (2,000 | ) |
| Ending Balance                             |       |                  | $          | (54,000           | )          |   | $ | (46,000 | ) |
| Unrealized loss  on derivative instrument: |       |                  |       |              |       |   |   |
| Beginning Balance                          |       |                  | $          | 660,000           |       |   | $ | — |   |
| Change in derivative instrument            |       |                  | (220,000   | )                 |       | 660,000 |   |
| Ending Balance                             |       |                  | $          | 440,000           |       |   | $ | 660,000 |   |
| Total accumulated  comprehensive income    |       |                  | $          | 386,000           |       |   | $ | 614,000 |   |

 

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Comprehensiveincome (loss) consists of the following:
| ** **                      | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **December 31,**          | ** ** | **December 31,**            | ** ** |
| ** **                      | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings  (loss)            |       | $                              | (1,300,000 | )                                | $          | 2,787,000 |   | $ | (1,039,000 | ) | $ | 466,000 |   |
| Other  comprehensive income:    |       |                           |       |                             |       |   |   |   |   |
| Currency translation adjustment |       | (8,000                         | )          | 15,000                           |       | (12,000 | ) | 9,000 |   |
| Change in derivative instrument |       | (220,000                       | )          | 287,000                          |       | 151,000 |   | 241,000 |   |
| Comprehensive income  (loss)    |       | $                              | (1,528,000 | )                                | $          | 3,089,000 |   | $ | (900,000 | ) | $ | 716,000 |   |

 

7.     Effective December 1,2003, the Company acquired substantially all of the assets and assumed certainliabilities of the North American operations of Peek Traffic Corporation (PeekTraffic). The Company paid a purchase price of $15,693,000. The purchase priceconsisted of $11,263,000 in cash and 180,723 of the Company’s common stock,issued from Treasury Stock, valued at $4,430,000. The cash portion of thepurchase price was obtained from the Company’s revolving credit facility. PeekTraffic is a designer, manufacturer and supplier of intelligent intersectioncontrol systems, red light enforcement systems and other transportationequipment. The results of Peek Traffic have been included in the Company’sInform segment since the date of acquisition. The Company anticipates that thePeek Traffic business will provide future operating synergies in the trafficcontrol market, expand the Company’s customer base in the municipal and countymarkets and leverage the Company’s existing technologies within the Informsegment.

Thefollowing summary presents the Company’s consolidated results of operations foreach of the six-month and three-month periods ended December 31 as if theacquisition had occurred at the beginning of fiscal year 2004.
| ** **                             | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **December 31,**          | ** ** | **December 31,**            | ** ** |
| ** **                             | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                              |       | $                              | 71,434,000 |                             | $          | 84,275,000 |   | $ | 33,447,000 |   | $ | 39,421,000 |   |
| Net earnings (loss)                    |       | (1,300,000                     | )          | 2,566,000                        |       | (1,039,000 | ) | 396,000 |   |
| Net earnings (loss) per  diluted share |       | $                              | (0.15      | )                                | $          | 0.29 |   | $ | (0.12 | ) | $ | 0.05 |   |

 

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’soperations are classified as two reportable segments within the highway andtransportation safety industry. The Company’s two reportable segments are themanufacture and sale of the Company’s products which Protect and Direct, andthe manufacture and sale of products which Inform and are often referred to asIntelligent Transportation Systems (ITS) products. The Company’s segments arediscussed in further detail in the Company’s Annual Report on Form 10-Kfor the year ended June 30, 2004.

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Thefollowing table presents financial information about reported segments for thesix-month and three-month periods ended December 31, 2004 and 2003 alongwith the items necessary to reconcile the segment information to the totalsreported in the consolidated financial statements.
| ** **                         | ** ** | **Protect and  Direct** | ** ** | **Inform**  | ** ** | ** Unallocated   Corporate** | ** ** | **Total**   | ** ** |
|------------------------------------|------------|------------------------------|------------|-------------|------------|----------------------------------------|------------|-------------|------------|
| *2005*                             |       |                         |       |        |       |                                   |       |        |       |
| SIX MONTHS                         |       |                         |       |        |       |                                   |       |        |       |
| Net sales from  external customers |       | $                            | 33,676,000 |        | $          | 37,758,000                             |       |        |       | $ | 71,434,000 |   |
| Operating profit  (loss)           |       | 4,530,000                    |       | (1,913,000  | )          | $                                      | (3,913,000 | )           | (1,296,000 | ) |
| Identifiable  assets               |       | 50,457,000                   |       | 70,800,000  |       | 12,469,000                             |       | 133,726,000 |       |
| THREE MONTHS                       |       |                         |       |        |       |                                   |       |        |       |
| Net sales from  external customers |       | $                            | 15,280,000 |        | $          | 18,167,000                             |       |        |       | $ | 33,447,000 |   |
| Operating profit  (loss)           |       | 1,313,000                    |       | (893,000    | )          | $                                      | (1,853,000 | )           | (1,433,000 | ) |
| *2004*                             |       |                         |       |        |       |                                   |       |        |       |
| SIX MONTHS                         |       |                         |       |        |       |                                   |       |        |       |
| Net sales from  external customers |       | $                            | 35,809,000 |        | $          | 38,869,000                             |       |        |       | $ | 74,678,000 |   |
| Operating profit  (loss)           |       | 7,851,000                    |       | 1,250,000   |       | $                                      | (3,765,000 | )           | 5,336,000  |   |
| Identifiable  assets               |       | 51,431,000                   |       | 108,129,000 |       | 4,535,000                              |       | 164,095,000 |       |
| THREE MONTHS                       |       |                         |       |        |       |                                   |       |        |       |
| Net sales from  external customers |       | $                            | 16,413,000 |        | $          | 19,081,000                             |       |        |       | $ | 35,494,000 |   |
| Operating profit (loss)            |       | 3,368,000                    |       | (121,000    | )          | $                                      | (2,020,000 | )           | 1,227,000  |   |

 

Identifiable assetsof the Inform segment as of December 31, 2004 decreased to $70,800,000from $108,129,000 as of December 31, 2003 primarily due to $32,600,000 inasset impairment charges made in the fourth quarter of the fiscal year ended June 30,2004.

9.     Intangibleassets consist of the following:
| ** **                    | ** ** | **December 31, 2004** | ** ** | **June 30, 2004**   | ** ** |
|-------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortized intangible  assets: |       |                            |       |                          |       |   |   |   |   |
| Patents and licenses          |       | $                               | 2,907,000  |                          | $          | 1,675,000 |   | $ | 2,820,000 |   | $ | 1,597,000 |   |
| Technology and installed base |       | 2,491,000                       |       | 800,000                       |       | 2,491,000 |   | 700,000 |   |
| Customer relationships        |       | 3,807,000                       |       | 1,002,000                     |       | 3,807,000 |   | 827,000 |   |
| Trade names                   |       | 2,250,000                       |       | 206,000                       |       | 2,250,000 |   | 49,000 |   |
| Other                         |       | 640,000                         |       | 640,000                       |       | 640,000 |   | 586,000 |   |
| Total                         |       | $                               | 12,095,000 |                          | $          | 4,323,000 |   | $ | 12,008,000 |   | $ | 3,759,000 |   |

 

Amortization expense was $564,000 and $784,000 for thesix months ended December 31, 2004 and 2003, respectively. The estimatedamortization expenses for this fiscal year ended June 30, 2005 and for thefour fiscal years subsequent to 2005 are as follows: $1,080,000, $1,160,000,$1,120,000, $1,055,000 and $844,000. The carrying amount of goodwill consistsof $8,139,000 for the Protect and Direct segment as of December 31, 2004and June 30, 2004. Goodwill for the Inform segment decreased to$21,173,000 as of December 31, 2004 from $21,364,000 as of June 30,2004 due to a purchase accounting adjustment for Peek Traffic Corporation.

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

*Lease Commitments*

The Company uses variousleased facilities and equipment in its operations. The terms for these leasedassets vary depending on the lease agreements. These operating leases includeoptions for renewal. Annual minimum future rental payments for leasecommitments will be approximately $3,762,000 in fiscal year 2005, $5,744,000 infiscal years 2006 through 2007, $3,057,000 in fiscal years 2008 through 2009and $5,265,000 thereafter, for an aggregate of $17,828,000.

*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, 2004          |   | $        | 3,672,000 |   |
|--------------------------------------|--------|----------|-----------|--------|
| Current  provisions                  |   | 270,000  |      |
| Adjustments                          |   | (391,000 | )         |
| Expenditures                         |   | (491,000 | )         |
| Balance—December 31,  2004 |   | $        | 3,060,000 |   |

 

Certain amounts have beenreclassified as of July 1, 2004 to conform to the presentation as of December 31,2004.

*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 $5,114,000. 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.

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*Business Purchase Agreements*

As part of the purchaseprice of UST, the Company has agreed to pay contingent consideration based on apercentage of revenues for sales of certain products between May 1, 2003and December 31, 2009, up to a maximum of $5,250,000. No amounts have beenpaid through December 31, 2004. Also as part of the purchase price of UST,the Company guaranteed the principal and interest payments on the $5,000,000five-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 of Lenders and Agents Under CreditFacilities*

Under its creditfacilities, the Company has agreed to indemnify its lenders under suchfacilities against costs or losses resulting from changes in laws andregulations which would increase the lenders’ costs, and from any legal actionbrought against the lenders related to the use of loan proceeds. Theseindemnifications generally extend for the term of the credit facilities and donot provide for any limit on the maximum potential liability. Historically, theCompany has not made any significant indemnification payments under suchagreements and no amount has been accrued in the accompanying consolidatedfinancial statements with respect to these indemnification guarantees.

*Bid and Performance Bonds*

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 $1,021,000 at December 31, 2004 and$3,356,000 at June 30, 2004. Historically, the Company has not madesignificant payments on bid and performance bonds, and no amount has beenaccrued in the accompanying consolidated financial statements.

*Other Commitments*

The Company has standbyletters of credit covering potential workers’ compensation liabilities. Thetotal amount of standby letters of credit that were outstanding at December 31,2004 was $1,166,000 and at June 30, 2004 was $762,000. The Company hasincluded $844,000 in accrued liabilities for this exposure as of December 31,2004.

TheCompany has certain non-cancellable royalty agreements, which contain certainminimum payments in the aggregate of $2,313,000 through fiscal year 2012. TheCompany has included $183,000 in accrued liabilities for these commitments asof December 31, 2004.

11.         Effective February 9, 2005, the Company completed a$40 million private placement of 7% convertible senior subordinated notes dueFebruary 15, 2025 (the Notes).  The Company will use the net proceeds from the saleof the Notes to repay in full the term loan portion and to pay down therevolving loan portion of the Company’s bank credit facility which will createavailability for working capital purposes.  Uponcompletion of this transaction, the outstanding amount of the Company’srevolving credit facility will be approximately $7 million.  TheCompany intends to renegotiate its bank credit arrangement on more favorableterms to provide additional financial flexibility. The Notes are convertibleand redeemable under certain circumstances and provisions as defined in therelated definitive agreements including the indenture under which the Notes areissued.  In addition, the Company entered into a FourthAmendment to its bank credit facility effective February 9, 2005 to permit thesale of the Notes.  The Company will file a Form 8-K dated February 9,2005 with further information related to this transaction.

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**PART I—FINANCIAL INFORMATION**

**ITEM 2.**   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIALCONDITION 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 providetransportation safety solutions. The Company’s two reportable segments are—themanufacture and sale of highway and transportation safety products which “Protectand Direct”, and the manufacture and sale of products and services which “Inform”that are often referred to as Intelligent Transportation Systems (ITS) products.The Company’s Protect and Direct segment provides solutions for improvingsafety on the roads either by minimizing the severity of crashes that occur orby preventing crashes from occurring by directing or guiding traffic. Theprimary product lines within the Protect and Direct segment includeenergy-absorbing products such as crash cushions, truck-mounted attenuators,sand-filled barrels and water-filled barriers, and directing and guidingproducts such as flexible post delineators and glare screen systems. TheCompany’s Inform segment provides solutions for improving traffic flow andsafety on roads and runways by providing information. The primary product lineswithin the Inform segment include intelligent intersection control systems,mobile and permanent variable message signs, advanced sensing products whichmeasure distance, count and classify vehicles, and sense weather conditions, computerizedhighway advisory radio transmitting systems, automated red light enforcementsystems, and other transportation 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 and budgets. A portion of the Company’s sales is ultimately financedby funds provided to the states by the federal government. Historically, thesefunds have 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 prolonged delay in the passage of new federalhighway funding legislation, coupled with state budgetary constraints, continueto have a material, negative impact on the Company’s business. The previousbill, TEA-21, expired in September 2003, but has been extended untilMay 2005. Until the new bill is approved, however, the transportationsafety allotment in federal and state budgets will continue to be uncertain,and the Company believes this uncertainty will continue to negatively impactspending on the products and services offered by our Company. In addition,sales volume at U.S. Traffic Corporation (UST), continues to be substandard and lower thanoriginally planned. The Company believes this is due in part to the absence ofnew large contracts related to ongoing state and municipal budgetary issues.

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Thefollowing table sets forth selected key operating statistics relating to theCompany’s financial results:
| ** **                                                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                            | ** ** | **2003**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues by Segment:                                          | * *   | * *                                            | * *   | * *                                          | * *   | * * | * * | * * | * * |
| Protect and Direct                                            |       | $                                                   | 15,280,000 |                                              | $          | 16,413,000 |   | $ | 33,676,000 |   | $ | 35,809,000 |   |
| Inform                                                        |       | 18,167,000                                          |       | 19,081,000                                        |       | 37,758,000 |   | 38,869,000 |   |
|                                                          |       | $                                                   | 33,447,000 |                                              | $          | 35,494,000 |   | $ | 71,434,000 |   | $ | 74,678,000 |   |
| Geographic  Revenues:                                         |       |                                                |       |                                              |       |   |   |   |   |
| Domestic                                                      |       | $                                                   | 29,131,000 |                                              | $          | 31,832,000 |   | $ | 62,927,000 |   | $ | 66,987,000 |   |
| International                                                 |       | 4,316,000                                           |       | 3,662,000                                         |       | 8,507,000 |   | 7,691,000 |   |
|                                                          |       | $                                                   | 33,447,000 |                                              | $          | 35,494,000 |   | $ | 71,434,000 |   | $ | 74,678,000 |   |
| Operating Income  (Loss) by Segment:                          |       |                                                |       |                                              |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                   | 1,313,000  |                                              | $          | 3,368,000 |   | $ | 4,530,000 |   | $ | 7,851,000 |   |
| Inform                                                        |       | (893,000                                            | )          | (121,000                                          | )          | (1,913,000 | ) | 1,250,000 |   |
| Unallocated Corporate                                         |       | (1,853,000                                          | )          | (2,020,000                                        | )          | (3,913,000 | ) | (3,765,000 | ) |
|                                                          |       | $                                                   | (1,433,000 | )                                                 | $          | 1,227,000 |   | $ | (1,296,000 | ) | $ | 5,336,000 |   |
| Gross profit percentage                                       |       | 26.0                                                | %          | 31.2                                              | %          | 28.0 | % | 31.9 | % |
| Selling and administrative expenses as a percentage  of sales |       | 26.6                                                | %          | 25.4                                              | %          | 26.3 | % | 22.7 | % |
| Diluted earnings  (loss) per share                            |       | $                                                   | (0.12      | )                                                 | $          | 0.05 |   | $ | (0.15 | ) | $ | 0.32 |   |

 

*Revenues*

The Company’s net sales for the secondquarterof fiscal 2005 decreased $2,047,000, or 6%, to $33,447,000 from $35,494,000 forthe second quarter last year. The acquisition of Peek Traffic Corporation (PeekTraffic) in December 2003 contributed $5,821,000 of net sales during thecurrent second quarter. Excluding the Peek Traffic acquisition, net salesdecreased by $5,555,000, or 17% in the current second quarter due to lowersales in both the Protect and Direct and the Inform segments.

The Company’s net sales for the first six months offiscal 2005 decreased $3,244,000 or 4%, to $71,434,000 from $74,678,000 in thesame period last year. The acquisition of Peek Traffic contributed $12,101,000in net sales during the current six-month period. Excluding the acquisition,net sales decreased by $13,031,000, or 18%, due to decreased sales in bothsegments.

*Protectand Direct*—Net sales for the Company’s Protect andDirect segment for the second quarter of fiscal 2005 decreased 7% to$15,280,000 from $16,413,000 for the second quarter last year. The Companybelieves 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 permanent crash cushions, truck-mounted attenuators, flexiblepost delineators, and sand filled barrels were partially offset by increasedsales of parts and the Triton Barrier® product line.

For the first six months of fiscal 2005, net sales forthe Protect and Direct segment decreased 6% to $33,676,000 from $35,809,000 forthe same period last year. Decreased sales of permanent crash cushions,flexible post delineators, truck-mounted attenuators, barrels and the TritonBarrier® product line were partially offset by increased sales of parts.

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*Inform*—Netsales for the Company’s Inform segment for the second quarter of fiscal 2005decreased 5% to $18,167,000 from $19,081,000 for the second quarter last year. Excludingthe acquisition of Peek Traffic, sales decreased $4,422,000, or 26%, primarilydue to lower sales of intersection control systems and of highway advisoryradio systems. This segment continues to be affected by the absence of largecontracts related to ongoing state and municipal budgetary issues.

For the first six months of fiscal 2005, net sales forthe Company’s Inform segment decreased 3% to $37,758,000 from $38,869,000 forthe same period last year. Excluding the acquisition of Peek Traffic, whichadded $12,101,000 in sales in the current period, sales for the segmentdecreased $10,899,000, or 30% primarily due to lower sales of intersectioncontrol systems and of highway advisory radios.

*Geographic**—*International sales for the second quarter of fiscal 2005increased 18% to $4,316,000 from $3,662,000 in the second quarter last year. Theacquisition of Peek Traffic contributed $600,000 in international net sales forthe second quarter of fiscal 2005. Domestic sales for the second quarter offiscal 2005 decreased 8% to $29,131,000 from $31,832,000. The acquisition ofPeek Traffic contributed $5,221,000 in domestic net sales in the second quarterof fiscal 2005, offset by decreased domestic sales, excluding acquisitions, forboth segments.

International sales forthe first six months of fiscal 2005 increased 11% to $8,507,000 from $7,691,000for the same period last year. Sales of the Triton Barrier® product linecontinue to be strong in Australia. The acquisition of Peek Traffic contributed$896,000 in international net sales for the first six months of fiscal 2005. Domesticsales for the first six months of fiscal 2005 decreased 6% to $62,927,000 from$66,987,000. The acquisition of Peek Traffic contributed $11,205,000 indomestic net sales in the first six months of fiscal 2005, offset by decreaseddomestic sales, excluding acquisitions, for both segments.

*Gross Profit Margin*

The Company’s gross profit margin for the secondquarter of fiscal 2005 was 26.0% compared to 31.2% for the second quarter lastyear due principally to lower gross profit margins in the Protect and Directsegment. The gross profit margin for the Protect and Direct segment decreasedprimarily due to volume inefficiencies associated with the lower level of salesand the largefixed component of the Company’s expenses, and to increased raw material costs.The gross profit margin for the Inform segment was consistent as decreasedgross margins for the intersection control systems were offset by increasedgross margins for weather sensing systems.

The gross profit marginfor the first six-month period of fiscal 2005 was 28.0% compared to 31.9% forthe same period last year due principally to lower gross profit marginsgenerated at UST and in the Protect and Direct segment. The gross profit marginfor the Protect and Direct segment for the first six months of fiscal 2005decreased primarily due to volume inefficiencies associated with the lowerlevel of sales and to increased raw material costs. The gross profit margin forthe Inform segment was consistent as decreased gross margins for theintersection control systems were offset by increased gross margins for weathersensing systems and highway advisory radio systems.

*Selling andAdministrative Expenses*

Selling and administrative expenses for the secondquarter of fiscal 2005 decreased $119,000, or 1%, to $8,894,000 from $9,013,000for the second quarter last year. The inclusion of expenses from Peek Traffic inthe current second quarter added $583,000 not comparable to the second quarter last year. Excluding Peek Traffic results, selling andadministrative expenses for the second quarter of fiscal 2005 decreased $702,000, or 8%, compared to the second quarter last year. This was partially due to lower costs at USTwhich were caused by planned cost reductions, including lower personnel costs. Selling and administrative expensesincreased as a percentage of sales to 26.6% for the second quarter of 2005 from25.4% last year, 

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due tothe decrease in sales and the fixed nature of most of the Company’s selling and administrative expenses.

Selling and administrative expenses for the firstsix months of fiscal 2005 increased $1,805,000, or 11%, to $18,769,000 from$16,964,000 for the same period last year due to the inclusion of expenses fromPeek Traffic which added $2,366,000 for the current six-month period. Excluding Peek Traffic results, selling andadministrative expenses decreased $140,000, or 1%, for the first six months offiscal 2005 primarily related to lowercosts at UST due to cost reduction programs. Selling and administrativeexpenses increased as a percentage of sales to 26.3% for the first six monthsof fiscal 2005 compared to 22.7% last year, due tothe decrease in sales and the fixed nature of most of the Company’s selling and administrativeexpenses.

*Research andDevelopment*

Research and developmentexpenditures were $1,246,000 for the second quarter of fiscal 2005 compared to$830,000 for the second quarter last year. Research and developmentexpenditures were $2,506,000 for the current six-month period compared with$1,546,000 for the same period last year. The increases of $416,000 and$960,000, respectively, were primarily due to the inclusion of research anddevelopment expenditures at Peek Traffic, increased expenditures at UST as theywork on upgrades and enhancements to their existing product lines, and toincreased inside and outside development costs for other projects. The Companycontinues to invest in development projects for new applications as well asupgrades and modifications to existing products.

*Operating Profit(Loss)*

For the second quarter of fiscal 2005, the operatingloss was $1,433,000 compared to operating profit of $1,227,000 for the secondquarter of fiscal 2004. Operating profit for the Protect and Direct Groupdecreased to $1,313,000 for the second quarter of fiscal 2005 from $3,368,000for the second quarter last year. The Inform Group operating loss of $893,000compared to an operating loss of $121,000 for the second quarter of last year. Excludingthe results of the acquisition of Peek Traffic, the operating loss for theInform Group was $1,710,000 compared to $252,000 for the second quarter lastyear.

For the first six monthsof fiscal 2005, the operating loss was $1,296,000 compared to operating profitof $5,336,000 for the first six months last year. For the six months ended December 31,2004, operating profit for the Protect and Direct Group decreased to $4,530,000from$7,851,000 for the same period last year. The Inform Group operating loss of$1,913,000 compared to operatingprofit of $1,250,000 for the same period last year. Excluding the results ofthe acquisition of Peek Traffic, the operating loss for the Inform Group was$3,575,000 compared to operating profit of $1,120,000 for the same period lastyear.

*Interest Expense*

Interest expense for thesecond quarter of fiscal 2005 increased to $803,000 from $504,000 for thesecond quarter last year. Interest expense for the first six months of fiscal2005 increased to $1,395,000 from $1,002,000 for the same six-month period lastyear. The increases were due to the higher level of average long-term debtsince the acquisition of Peek Traffic in December 2003, and to higherinterest rates. The interest rate on the Company’s credit agreement is based onprime or LIBOR and a fixed rate, plus a margin, and the weighted average ratewas 5.5% as of December 31, 2004.

*Other Income*

The Company receivedproceeds of $992,000 from the sale of land and recorded a gain on sale of$560,000 as other income duringthe second quarter of fiscal 2005.

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*Provision forIncome Taxes*

The income tax benefit forthe second quarter of fiscal 2005 was $637,000 and was $797,000 for the firstsix months of fiscal 2005.

*Net Earnings (Loss)*

The net loss for thesecond quarter of fiscal 2005 was $1,039,000, or $0.12 cents per diluted share,compared to net earnings of $466,000, or $0.05 cents per diluted share, for thesecond quarter last year. The net loss for the first six-month period was$1,300,000, or $0.15 cents per diluted share, compared to net earnings of$2,787,000, or $0.32 cents per diluted share, for the same period last year.

*FINANCIAL CONDITION*

Please refer to Note 11 included in thisForm 10-Q when reviewing this section.

*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 $1,653,000 as of December 31, 2004 and accessto additional funds of $11 million under a bank credit agreement whichcurrently expires as of May 16, 2006. The Company believes that thiscredit agreement is an important source of liquidity. The credit agreementprovides for a $38 million secured revolving credit facility and a term loanagreement with $14,706,000 outstanding at December 31, 2004. Principal onthe term loan is payable quarterly in installments of $750,000, plus interest. Theagreement contains both fixed and floating interest rate options, at the primerate or LIBOR rate, plus a margin. The credit agreement also contains affirmativeand negative covenants including requirements that the Company meet certainconsolidated financial criteria, including minimum levels of consolidated networth, EBITDA (as defined in the agreement), and capital expenditures. Dividendpayments are limited by a maximum amount outstanding against the revolvingcredit facility of $33 million, minus the amount of such dividend payment. Thecovenants also limit the incurrence of additional indebtedness, acquisitions,liens and encumbrances and other matters customarily restricted in suchagreements. The agreement may be renewed one additional year on eachanniversary date upon mutual consent of the Company and the banks.

Effective June 30, 2004 and during September 2004,the Company entered into two amendments to the credit agreement, modifyingcertain covenants, pledging the Company’s assets as collateral and reducing themaximum amount of availability under the revolving credit facility to $38million to avoid the occurrence of events of default relating to certaincovenants and financial ratios. The Company is currently in compliance with itsdebt covenants as of December 31, 2004. However, the Company’s ability toremain in compliance in the future is dependent upon the Company’s futureperformance and may be affected in part by events beyond its control, includingthe prolonged delay in the passage of new federal highway legislation. Whilethe Company currently expects to be in compliance with the current agreement,there can be no assurance that the Company will generate sufficient earningsand cash flow to remain in compliance or that it will be able to obtain futureamendments to the agreement, if necessary, to avoid a default. In the event ofa default, the lenders could elect to declare all amounts borrowed under theagreement, $41,706,000 as of December 31, 2004, to be due and currentlypayable and the Company would negotiate a new credit agreement. However, therecan be no assurance that the Company would be able to obtain a new creditagreement with satisfactory terms and conditions within an acceptable timeperiod.

The Company’s outstandingborrowings were $49,127,000, or 44% of total capitalization, as of December 31,2004, of which $41,706,000 was outstanding related to the bank credit facility.This compares to $50,407,000, or 44% of total capitalization, as of June 30,2004. Included in the amounts outstanding related to the bank credit facilitywere borrowings against the revolving credit facility of $27,000,000 as of 

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December 31,2004 and June 30, 2004. The amount of standby letters of creditoutstanding was $1,166,000 as of December 31, 2004 and was $762,000 as of June 30,2004.

*Cash Flows*

Cash flows provided by operations increased to$2,095,000 during the first half of fiscal 2005 compared to $953,000 in thefirst half of fiscal 2004. In the first six months of both fiscal 2005 and2004, cash flow generated by operations was primarily derived from earningsbefore non-cash expenses such as depreciation and amortization. The increase incash generated by operating activities in the first half of fiscal 2005reflects decreased working capital, in particular, decreases in accountsreceivable and inventories. The receipt of income tax refunds of approximately$2 million in the first quarter of fiscal 2005 added to these inflows. In thefirst half of fiscal 2004, an investment in working capital, primarily at UST,through the payment of accounts payable and accrued expenses in the firstquarter of fiscal 2004 was offset by decreases in thelevel of accounts receivable and inventory.

Investing activities used cash of $586,000 during thefirst six months of fiscal 2005, compared to $13,261,000 in the first sixmonths of the prior year. Expenditures during fiscal 2005 included $1,795,000for capital and patent expenditures, which were offset by $992,000 in proceedsreceived from the sale of land and $217,000 proceeds received from the finalpayment of a note receivable.

Financing activities used cash of $2,235,000 duringthe first six months of fiscal 2005, compared to $9,879,000 in cash provided byfinancing activities during the first six months of fiscal 2004. During thefirst half of 2005, there was no net change in borrowings against the Company’soutstanding revolving credit facility and the Company paid $2,294,000 againstthe term loan and paid $192,000 on other notes payable. Also during the firsthalf of fiscal 2005, the Company received cash of $1,206,000 in connection withshort-term interim notes payable in connection with a leasing arrangement ofequipment relating to a paint line in the process of construction. Uponcompletion of the project in the third quarter, the notes payable will becancelled and the Company will begin to make lease payments on the equipment. TheCompany also received cash of $531,000 from the exercise of common stockoptions. The payment of the Company’s semi-annual cash dividend used cash of$1,486,000. The Company has paid a semi-annual dividend since 1993 and plans tocontinue to do so. However, per the Company’s current credit agreement,dividend payments are limited by a maximum amount outstanding against therevolving credit facility of $33 million, minus the amount of such dividendpayment.

For the remainder of fiscal 2005, the Companyanticipates needing less than an additional $2,000,000 in cash for capital and patentexpenditures. The Company may require additional investments in working capitalto maintain growth. The Company may also need additional funds as it considersacquiring businesses that complement its existing operations or to repurchaseits own common stock from time to time. These expenditures will be financedeither through the Company’s cashon-hand, 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 planned operating and capital requirementsin the near term. The Company may also enter into other debt or equityfinancing arrangements, if available on favorable terms.

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*OFF-BALANCESHEET ARRANGEMENTS 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, 2004. The following table presents the Company’scontractual obligations to make future payments under contracts, such as debtand lease agreements, as of December 31, 2004:
| ** **                | ** ** | ** **                                       | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | ** More than ** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **Total**                                        | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**               | ** ** |
| ** **                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt            |       | $                                                | 49,127     |               |       | $                  | 4,599      |               |       | $                              | 6,822      |   | $ | 10,706 |   |   | $ | 27,000 |   |   |
| Operating leases          |       | 17,828                                           |       |               | 3,762      |               |       | 5,744              |       | 3,057                          |       |   | 5,265 |   |   |
| Minimum royalty  payments |       | 2,313                                            |       |               | 513        |               |       | 600                |       | 600                            |       |   | 600 |   |   |
| Total                     |       | $                                                | 69,268     |               |       | $                  | 8,874      |               |       | $                              | 13,166     |   | $ | 14,363 |   |   | $ | 32,865 |   |   |

 

*FUTURE OUTLOOK*

The Company has been affected by the general slowdownin U.S. highway safety construction spending for the Company’s products. TheCompany believes this is due principally to the prolonged delay in the passageof new federal highway legislation as well as revenue shortfalls and budgetconstraints at the state level. The previous highway funding bill, TEA-21,expired in September 2003, but has been extended through May 31, 2005. The timing of the passage of the new highwaylegislation is uncertain. Until new legislation is passed, the transportationsafety allotment in federal and state budgets will continue to be uncertain,and the Company believes this uncertainty will continue to negatively impactspending on the products and services offered by the Company.  Even if a new bill is passed in the first halfof calendar 2005, the Company may not realize the benefit of the bill’s passageuntil fiscal 2006.

The substandard sales volumes and operating losses atUST are expected to continue during fiscal 2005 and into the first half offiscal 2006.  The Company is continuingto implement its plan to rationalize portions of the UST and Peek Trafficoperations which includes integrating product offerings, outsourcing non-criticalcomponent parts and focusing manufacturing facilities to obtain greatersynergies.  Under the current plan, the Company expectsthe combined results of the UST and Peek Traffic operations to be profitable byearly fiscal 2006, although there can be noassurance that the Company will achieve this objective.

The Company experiencesfluctuation in its gross profit margin from quarter to quarter primarily due tosales volume related to seasonality, variability in product mix and changes inthe competitive environment. In addition, the Company has acquiredcomplementary businesses over the past several years and, as part of itsstrategy, may continue to acquire complementary businesses. The gross profitmargins of certain acquired product lines are lower than the Company’shistorical gross profit margin, which is adversely affecting the Company’sgross profit margin. The Company is also experiencing rigorous competition inits variable message sign and weather sensing system product lines. In addition,the Company has been affected by increased prices for certain commodities,particularly steel and resin, which can be a significant component of the costof certain of the Company’s products and negatively impact the Company’s grossmargin for certain products as the Company has generally been unable toincrease product prices to offset those commodity price increases. There can beno assurance that these trends will improve significantly in the near future.

*SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at 

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the date of the financialstatements. Management’s estimates also affect the reported amounts of revenuesand expenses during the reporting period. In addition, certain normal andrecurring estimates are made including estimates in determining the allowancefor doubtful accounts receivable, inventory valuation reserves, valuationallowance on deferred tax assets and health care liabilities. These estimatesare made using management’s best judgment given relevant factors and availabledata. Actual results could differ materially from those estimates. Note 2 tothe Company’s June 30, 2004 consolidated financial statements includes asummary of the significant accounting policies, methods and estimates used inthe preparation of the Company’s consolidated financial statements.  There have been no material changes inaccounting policies, methods and estimates used by management.  In the opinion of management, the Company doesnot have any individual accounting policy or use any individual estimate thatis critical to the preparation of its consolidated financial statements. Inmost instances, the Company must use an accounting policy or method because itis the only policy or method permitted under U.S. GAAP. The Company believesthe following significant accounting policies and methods used by the Companyare the most important to the presentation of the Company’s financialstatements:

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

Inventories:   Inventoriesare valued at the lower of cost (first-in, first-out method) or market. Actualcosts are used to value raw materials and supplies. Standard costs, whichapproximate actual costs, are used to value finished goods and work-in-process.Standard costs include raw materials, direct labor and manufacturing overhead. Provisionfor potentially obsolete or slow-moving inventory is made based on management’sanalysis of inventory levels, ages and salability.

Long-Lived Assets:   Long-lived assets include such items asgoodwill, patents, product rights, other intangible assets and property, plantand equipment. For purposes of evaluating the recoverability of long-livedassets, the Company assesses the possibility of obsolescence, demand, newtechnology, competition, and other pertinent economic factors and trends thatmay have an impact on the value or remaining lives of these assets.

Amortized long-lived assets (including amortizedintangible assets and property, plant and equipment) held and used by theCompany are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable inrelation to future undiscounted cash flows of underlying asset groups. The netcarrying value of assets not recoverable is reduced to fair value. Fair valuesof amortized long-lived assets are determined based upon the performance of athird party fair value appraisal. Patents and other finite-lived intangibleassets are amortized on a straight-line or systematic method over the life ofthe patent or intangible asset.

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

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The impairment review is highly judgmental andinvolves the use of significant estimates and assumptions. These estimates andassumptions have a significant impact on the amount of any impairment chargerecorded. Estimates of fair value are primarily determined using discountedcash flow methods and are dependent upon assumptions of future sales trends,market conditions and cash flows of each reporting unit over several years. Actualcash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows. The impact of these estimates andassumptions on impairment testing of goodwill is particularly critical for theCompany’s Inform segment with $21,173,000 of the Company’s $29,312,000 ofgoodwill recorded in the Company’s December 30, 2004 balance sheet.

Income Taxes:   The Company recognizes deferred taxassets and liabilities for the expected future tax consequences of events thathave been included in the financial statements or tax returns. Under thismethod, deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. In assessing the realizability of thedeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Tothe extent that any future tax benefits are not expected to be fully realized,such future tax benefits are reduced by a valuation allowance. Realization ofdeferred tax assets assumes that the Company will be able to generatesufficient taxable income so that the assets will be realized. The factors thatthe Company considers in assessing the likelihood of realization include theforecast of future taxable income and available tax planning strategies thatcould be implemented to realize the deferred tax assets.   The Company expects the deferred tax assetscurrently recorded to be fully realizable, however there can be no assurancethat an increased valuation allowance would not need to be recorded in thefuture.

*RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS*

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS123R requires the Company to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award. The cost of the employee services is recognized as compensationcost over the period that an employee provides service in exchange for theaward. SFAS 123R is effective July 1, 2005 for the Company and may beadopted using a modified prospective method or a modified retrospective method.The Company is currently evaluating the adoption alternatives and the impact tothe Company and expects to complete its evaluation during the fourth quarter of2005.

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43,Chapter 4,” which amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and spoilage. This statement requires thatthese costs be expensed as current period charges. In addition, this statementrequires that the allocation of fixed production overhead to the costs ofconversion be based on the normal capacity of the production facilities. Theprovisions of this statement are effective July 1, 2005 for the Company. TheCompany is currently evaluating the impact that this statement will have on theCompany’s financial position and results of operations.

*FORWARD LOOKING STATEMENTS*

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 

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growth, productdevelopment, market position, expenditures, financial results or changes ingovernmental legislation, policies and conditions, is a forward-lookingstatement.

Investors are cautionedthat all forward-looking statements involve risks and uncertainties, includingthose detailed in the Company’s public filings with the SEC, news releases andother communications, which speak only as of the dates of those filings orcommunications. The Company does not undertake any obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. Risks and uncertainties and other factors couldcause actual results to differ materially from the Company’s expectations. Factorswhich could cause materially different results include, among others,uncertainties related to continued federal, state and municipal funding forhighways and risks related to reductions in government expenditures; thesuccessful completion, integration and rationalization of acquisitions; theability to generate sufficient future cash flows to be in compliance withfinancing agreements; the introduction and acceptance of the Company’s productsand services; an unfavorable change in product sales mix; seasonality alongwith the extent and timing of the award of large contracts; the cyclical natureof the Company’s governmental markets; competitive and pricing pressures;increasing raw material costs; excess manufacturing capacity; weatherconditions; acts of war and terrorist activities; the possible impairment ofgoodwill and other intangible assets; and general economic conditions.

*ITEM3.   Quantitative and Qualitative Disclosures about Market Risk*

Item 7.A. of the Company’sAnnual Report on Form 10-K for the year ended June 30, 2004presents information regarding Quantitative and Qualitative Disclosures aboutMarket Risk.

*ITEM 4.   Controls and Procedures*

(a)   Evaluationof Disclosure Controls and Procedures

Disclosure controlsand procedures are controls and other procedures that are designed to ensurethat information required to be disclosed in the reports that are filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed in the reports that are filed under the Exchange Actis accumulated and communicated to management, including the principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure. Under the supervision of andwith the participation of management, including the principal executive officerand principal financial officer, the Company has evaluated the effectiveness ofthe design and operation of its disclosure controls and procedures as of theend of the period covered by this report, and, based on its evaluation, ourprincipal executive officer and principal financial officer have concluded thatthese controls and procedures are effective.

(b)   Changes inInternal Controls

There have been no significant changes in internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the evaluation described above. In addition, therehave been no corrective actions with regard to significant deficiencies andmaterial weaknesses.

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**PART II—OTHER INFORMATION**

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

ITEM 4.   Submission of Matters to Vote of Security Holders

The Company’s Annual Meeting of Stockholders washeld on November 18, 2004.  The mattersvoted on at the Annual Meeting were as follows:

(i) The election of William G. Fowler and Robert D.van Roijen, Jr. to serve as directors.

(ii) The approval of an amendment to the Company’s2001 Employee Stock Incentive Plan.

(iii) The approval of an amendment to the Company’s2001 Non-Employee Directors Stock Option Plan.

(iv) The ratification of Grant Thornton LLP as theCompany’s independent registered public accounting  firm.

Messrs. Fowler and van Roijen were elected and allother matters were approved as a result of the following stockholder votes:
| ** **                                                                     | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain or  Withheld** | ** ** | **Broker  No Vote** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------------------------|------------|--------------------------|------------|
| (i) Election of Directors                                                      |       |      |       |        |       |                          |       |                     |       |   |   |
| William G. Fowler                                                              |       | 7,644,905 |       |        |       |                          | 393,918    |                     |       |   |   |
| Robert D. van Roijen, Jr                                                       |       | 7,631,904 |       |        |       |                          | 406,919    |                     |       |   |   |
| (ii) Approval of amendment to                                                  |       |      |       |        |       |                          |       |                     |       |   |   |
| 2001 Employee Incentive  Plan                                                  |       | 6,041,629 |       | 1,486,221   |       |                          | 21,900     |                     |       | 489,073 |   |
| (iii) Approval of amendment to 2001  Non-Employee Directors  Stock Option Plan |       | 6,174,783 |       | 1,352,997   |       |                          | 21,970     |                     |       | 489,073 |   |
| (iv) Ratification of Grant Thornton LLP                                        |       | 7,984,308 |       | 40,728      |       |                          | 13,787     |                     |       |   |   |

 

*ITEM6.   Exhibits*

(a)          Exhibits

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

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

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter endedDecember 31, 2004 to be signed on its behalf by the undersigned thereuntoduly authorized.
|                                           | QUIXOTE  CORPORATION                         |
|-------------------------------------------|---------------------------------------------------|
| DATED:   February 9,  2005 | /s/ DANIEL P. GOREY                               |
|                                      | DANIEL P. GOREY                                   |
|                                      | *Chief Financial Officer,*                        |
|                                      | *Vice President and Treasurer*                    |
|                                      | *(Chief Financial & Accounting Officer)* |

 

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