**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------|

 

**Forthe qu**arterlyperiod ended December 31, 2005

**or**

| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------|

 

**Forthe transition period from                   To                   **

**CommissionFile Number 0-7903**

**QUIXOTE CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **36-2675371**          |
|-------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer        |
| incorporation or  organization)           |   | Identification  Number) |
| **35 East Wacker Drive**                  |   | ** **              |
| **Chicago,  Illinois**                    |   | **60601**               |
| (Address of principal  executive offices) |   | (Zip Code)              |

 

**(312) 467-6755**

(Registrant’s telephonenumber, including area code)

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

| Large accelerated filer   o | Accelerated filer   x | Non-accelerated filer   o |
|---------------------------------------|---------------------------------|-------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   o YES   x NO

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:8,834,859 shares of the Company’s Common Stock ($.01-2/3 par value)were outstanding as of January 31, 2006.

 

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**PART I—FINANCIAL INFORMATION**

**ITEM 1.**   FINANCIALSTATEMENTS

**QUIXOTECORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**

| ** **                                 | ** ** | **Six Months Ended  December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| Net sales                                  |       | $                                                 | 78,577,000 |   | $ | 71,434,000 |   |
| Cost of sales                              |       | 56,417,000                                        |       | 51,455,000 |   |
| Gross profit                               |       | 22,160,000                                        |       | 19,979,000 |   |
| Operating  expenses:                       |       |                                              |       |   |   |
| Selling & administrative          |       | 17,241,000                                        |       | 18,209,000 |   |
| Research & development            |       | 2,804,000                                         |       | 2,506,000 |   |
|                                       |       | 20,045,000                                        |       | 20,715,000 |   |
| Operating profit (loss)                    |       | 2,115,000                                         |       | (736,000 | ) |
| Other income  (expense):                   |       |                                              |       |   |   |
| Interest income                            |       | 1,000                                             |       | 34,000 |   |
| Interest expense                           |       | (2,289,000                                        | )          | (1,395,000 | ) |
|                                       |       | (2,288,000                                        | )          | (1,361,000 | ) |
| Loss before  income taxes                  |       | (173,000                                          | )          | (2,097,000 | ) |
| Income tax  benefit                        |       | (66,000                                           | )          | (797,000 | ) |
| Net loss                                   |       | $                                                 | (107,000   | ) | $ | (1,300,000 | ) |
| Per share data—basic:                 |       |                                              |       |   |   |
| Net loss                                   |       | $                                                 | (.01       | ) | $ | (.15 | ) |
| Weighted average common shares outstanding |       | 8,864,263                                         |       | 8,770,941 |   |
| Per share data—diluted:               |       |                                              |       |   |   |
| Net loss                                   |       | $                                                 | (.01       | ) | $ | (.15 | ) |
| Weighted average common shares outstanding |       | 8,864,263                                         |       | 8,770,941 |   |
| Cash dividends  declared per common share  |       | $                                                 | .18        |   | $ | .18 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**

| ** **                                 | ** ** | **Three Months Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Net sales                                  |       | $                                                   | 39,186,000 |   | $ | 33,447,000 |   |
| Cost of sales                              |       | 27,972,000                                          |       | 24,740,000 |   |
| Gross profit                               |       | 11,214,000                                          |       | 8,707,000 |   |
| Operating  expenses:                       |       |                                                |       |   |   |
| Selling & administrative          |       | 9,352,000                                           |       | 8,334,000 |   |
| Research & development            |       | 1,374,000                                           |       | 1,246,000 |   |
|                                       |       | 10,726,000                                          |       | 9,580,000 |   |
| Operating profit (loss)                    |       | 488,000                                             |       | (873,000 | ) |
| Other income  (expense):                   |       |                                                |       |   |   |
| Interest income                            |       |                                                |       |   |   |
| Interest expense                           |       | (1,106,000                                          | )          | (803,000 | ) |
|                                       |       | (1,106,000                                          | )          | (803,000 | ) |
| Loss before  income taxes                  |       | (618,000                                            | )          | (1,676,000 | ) |
| Income tax  benefit                        |       | (235,000                                            | )          | (637,000 | ) |
| Net loss                                   |       | $                                                   | (383,000   | ) | $ | (1,039,000 | ) |
| Per share data—basic:                 |       |                                                |       |   |   |
| Net loss                                   |       | $                                                   | (.04       | ) | $ | (.12 | ) |
| Weighted average common shares outstanding |       | 8,820,890                                           |       | 8,780,513 |   |
| Per share data—diluted:               |       |                                                |       |   |   |
| Net loss                                   |       | $                                                   | (.04       | ) | $ | (.12 | ) |
| Weighted average common shares outstanding |       | 8,820,890                                           |       | 8,780,513 |   |
| Cash dividends  declared per common share  |       | $                                                   | .18        |   | $ | .18 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**

| ** **                                                                                                                    | ** ** | **December 31,** | ** ** | **June 30,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|-------------|
| ** **                                                                                                                    | ** ** | **2005**              | ** ** | **2005**          | ** **  |
| **ASSETS**                                                                                                                    |       |                  |       |              |        |
| Current assets:                                                                                                               |       |                  |       |              |        |
| Cash and cash equivalents                                                                                                     |       | $                     | 606,000    |              | $           | 156,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $1,518,000 at December 31 and $1,581,000 at June 30 |       | 36,255,000            |       | 32,745,000        |        |
| Inventories, net:                                                                                                             |       |                  |       |              |        |
| Raw materials                                                                                                                 |       | 15,970,000            |       | 13,988,000        |        |
| Work in process                                                                                                               |       | 4,431,000             |       | 4,666,000         |        |
| Finished goods                                                                                                                |       | 8,422,000             |       | 8,757,000         |        |
|                                                                                                                          |       | 28,823,000            |       | 27,411,000        |        |
| Deferred income tax assets                                                                                                    |       | 5,844,000             |       | 5,765,000         |        |
| Other current assets                                                                                                          |       | 2,741,000             |       | 1,160,000         |        |
| Total current  assets                                                                                                         |       | 74,269,000            |       | 67,237,000        |        |
| Property, plant and equipment, at cost                                                                                        |       | 49,476,000            |       | 48,986,000        |        |
| Less accumulated  depreciation                                                                                                |       | (26,087,000           | )          | (23,978,000       | )           |
|                                                                                                                          |       | 23,389,000            |       | 25,008,000        |        |
| Goodwill                                                                                                                      |       | 29,313,000            |       | 29,313,000        |        |
| Intangible  assets, net                                                                                                       |       | 6,893,000             |       | 7,340,000         |        |
| Deferred income  tax assets                                                                                                   |       | 5,083,000             |       | 5,083,000         |        |
| Other assets                                                                                                                  |       | 2,481,000             |       | 2,809,000         |        |
|                                                                                                                          |       | $141,428,000          |       | $                 | 136,790,000 |   |
|                                                                                                                               |            |                       |            |                   |             |  |  |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**

| ** **                                                                                                                                                                                                     | ** ** | **December 31,  2005** | ** **  | **June 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-------------------------|------------|
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                   | ** ** | ** **                  | ** **  | ** **              | ** ** |
| Current  liabilities:                                                                                                                                                                                          |       |                        |        |                    |       |
| Current portion of long-term debt                                                                                                                                                                              |       | $                           | 427,000     |                    | $          | 427,000 |   |
| Accounts payable                                                                                                                                                                                               |       | 11,898,000                  |        | 11,061,000              |       |
| Dividends payable                                                                                                                                                                                              |       | 1,588,000                   |        | 1,595,000               |       |
| Accrued expenses                                                                                                                                                                                               |       | 10,639,000                  |        | 11,221,000              |       |
| Total current  liabilities                                                                                                                                                                                     |       | 24,552,000                  |        | 24,304,000              |       |
| Long-term debt, net of current portion                                                                                                                                                                         |       | 56,984,000                  |        | 49,587,000              |       |
| Other long-term  liabilities                                                                                                                                                                                   |       | 1,060,000                   |        | 1,053,000               |       |
|                                                                                                                                                                                                           |       | 82,596,000                  |        | 74,944,000              |       |
| Commitments and  contingent liabilities (Note 9)                                                                                                                                                               |       |                        |        |                    |       |
| Shareholders’  equity:                                                                                                                                                                                    |       |                        |        |                    |       |
| Preferred stock, no par value; authorized 100,000  shares; none issued                                                                                                                                         |       |                        |        |                    |       |
| Common stock, par value $.01-2/3; authorized 30,000,000  shares at December 31 and 15,000,000 shares at June 30; issued  10,868,654 shares at December 31 and 10,799,784 shares at June 30 |       | 181,000                     |        | 180,000                 |       |
| Capital in excess of par value of common stock                                                                                                                                                                 |       | 60,939,000                  |        | 59,382,000              |       |
| Retained earnings                                                                                                                                                                                              |       | 21,910,000                  |        | 23,605,000              |       |
| Accumulated other comprehensive income                                                                                                                                                                         |       | 286,000                     |        | 345,000                 |       |
| Treasury stock, at cost, 2,040,506 shares at December 31  and 1,915,353 shares at June 30                                                                                                            |       | (24,484,000                 | )           | (21,666,000             | )          |
| Total  shareholders’ equity                                                                                                                                                                               |       | 58,832,000                  |        | 61,846,000              |       |
|                                                                                                                                                                                                           |       | $                           | 141,428,000 |                    | $          | 136,790,000 |   |

 

See Notes to Consolidated Financial Statements.

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

| ** **                                                                                                          | ** ** | **Six Months Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
| Operating activities:                                                                                               |       |                                                  |       |   |   |
| Net loss                                                                                                            |       | $                                                     | (107,000   | ) | $ | (1,300,000 | ) |
| Adjustments to reconcile net loss to net cash provided  by (used) in operating activities of continuing operations: |       |                                                  |       |   |   |
| Depreciation                                                                                                        |       | 2,578,000                                             |       | 2,371,000 |   |
| Amortization                                                                                                        |       | 865,000                                               |       | 564,000 |   |
| Gain on sale of land                                                                                                |       |                                                  |       | (560,000 | ) |
| Provisions for losses on  accounts receivable                                                                       |       | (63,000                                               | )          | (235,000 | ) |
| Common stock issued for  401K plan                                                                                  |       | 538,000                                               |       | 81,000 |   |
| Stock-based compensation  expense                                                                                   |       | 470,000                                               |       |   |   |
| Tax benefit from stock  options                                                                                     |       | (85,000                                               | )          |   |   |
| Changes in operating assets and liabilities:                                                                        |       |                                                  |       |   |   |
| Accounts receivable                                                                                                 |       | (3,448,000                                            | )          | 3,830,000 |   |
| Inventories                                                                                                         |       | (1,412,000                                            | )          | 462,000 |   |
| Other assets                                                                                                        |       | (1,346,000                                            | )          | (1,978,000 | ) |
| Income taxes                                                                                                        |       | 6,000                                                 |       | 1,372,000 |   |
| Accounts payable and  accrued expenses                                                                              |       | 256,000                                               |       | (2,346,000 | ) |
| Other long-term  liabilities                                                                                        |       | 7,000                                                 |       | (166,000 | ) |
| Net cash provided by  (used in) operating activities                                                           |       | (1,741,000                                            | )          | 2,095,000 |   |
| Investing activities:                                                                                               |       |                                                  |       |   |   |
| Capital expenditures                                                                                                |       | (959,000                                              | )          | (1,708,000 | ) |
| Patent expenditures                                                                                                 |       | (150,000                                              | )          | (87,000 | ) |
| Software expenditures                                                                                               |       | (234,000                                              | )          |   |   |
| Proceeds from sale of  land                                                                                         |       |                                                  |       | 992,000 |   |
| Payments received on  note receivable                                                                               |       |                                                  |       | 217,000 |   |
| Net cash used in  investing activities                                                                              |       | (1,343,000                                            | )          | (586,000 | ) |
| Financing activities:                                                                                               |       |                                                  |       |   |   |
| Proceeds from revolving  credit agreement                                                                           |       | 20,100,000                                            |       | 14,500,000 |   |
| Payments on revolving  credit agreement                                                                             |       | (12,600,000                                           | )          | (14,500,000 | ) |
| Payments on term loan                                                                                               |       |                                                  |       | (2,294,000 | ) |
| Payments on notes  payable                                                                                          |       | (103,000                                              | )          | (192,000 | ) |
| Proceeds from short term  notes payable                                                                             |       |                                                  |       | 1,206,000 |   |
| Payment of semi-annual  cash dividend                                                                               |       | (1,595,000                                            | )          | (1,486,000 | ) |
| Purchase of treasury  stock                                                                                         |       | (3,105,000                                            | )          |   |   |
| Proceeds from exercise  of common stock options                                                                     |       | 837,000                                               |       | 531,000 |   |
| Net cash provided by  (used in) financing activities                                                                |       | 3,534,000                                             |       | (2,235,000 | ) |
| Effect of exchange rate  changes on cash                                                                            |       |                                                  |       | (10,000 | ) |
| Increase (decrease) in  cash and cash equivalents.                                                                  |       | 450,000                                               |       | (736,000 | ) |
| Cash and cash  equivalents at beginning of period                                                                   |       | 156,000                                               |       | 2,389,000 |   |
| Cash and cash equivalents at end of period                                                                          |       | $                                                     | 606,000    |   | $ | 1,653,000 |   |

 

See Notes to Consolidated Financial Statements.

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

**1.****  **The accompanying unaudited consolidated financialstatements present information in accordance with generally accepted accountingprinciples for interim financial information and applicable rules ofRegulation S-X. Accordingly, they do not include all information or footnotesrequired by generally accepted accounting principles for complete financialstatements. The June 30, 2005 consolidated balance sheet as presented wasderived from the audited financial statements. The interim financial statementsand notes should be read in conjunction with the consolidated financialstatements and notes thereto included in our Annual Report on Form 10-Kfor the year ended June 30, 2005. Management believes the financialstatements include all normal recurring adjustments necessary for a fairpresentation of the results for the interim periods presented.

**2.****  **In December 2004, the FASB issued SFAS No. 123(revised 2004) (SFAS No. 123(R)), “Share-Based Payment”. We adopted theprovisions of SFAS No. 123(R) as of July 1, 2005 using the modifiedprospective method. Under this transition method, share-based compensation costrecognized in the quarter ended December 31, 2005 includes compensationcost for all share-based awards which were unvested as of July 1, 2005 aswell as compensation cost for all share-based awards granted subsequent to July 1,2005, based on the grant date fair value estimated in accordance with theprovisions of SFAS No. 123(R).  Thefair value of the options granted is being amortized on a straight-line basisover the requisite service period, which is generally the vesting period. Wehave two share-based compensation plans, which are described below.

*Plan Descriptions*

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

Our 2001 Non-Employee Directors Stock Option Plan (theDirector Plan), which is also shareholder-approved, permits the grant of shareoptions to our non-employee directors for up to 135,000 shares. We believe thatgrants of stock options to non-employee directors encourage the directors toacquire a long term proprietary interest in the growth and performance of theCompany, and generate an increased incentive for the directors to contribute tothe Company’s future success and prosperity, thus enhancing the value of theCompany for the benefit of its stockholders. The Director Plan provides for anannual grant of stock options for directors based on a fixed amount, which iscurrently 5,000 stock options per each non-employee director annually. Thestock options are granted with an exercise price equal to the fair market valueof our stock on the date of grant. Options granted under the Director Planexpire not more 

7

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than seven years from thegrant date. Vesting is over not less than a six-month period. Option awardsprovide for accelerated vesting if there is a change in control, as defined inthe Director Plan. Vesting is also accelerated upon the death of a directoroptionee.

A summary of the principalfeatures of our current plans, as well as copies of those plans are provided inour 2004 Proxy Statement. Shares issued as a result of stock option exercisesor restricted stock grants may be issued as new shares, funded from Treasurystock or may be shares purchased on the open market.  We believe that we currently have adequateTreasury and authorized unissued shares to meet any requirements to issueshares during fiscal 2006. The authorization for issuance will terminate on November 1,2011 for both the employee plan and the director plan.

*Share-based CompensationExpense*

The share-based compensation cost that has beencharged against income for those plans was $470,000 for the six months ended December 31,2005. The total income tax benefit recognized in the income statement forshare-based compensation arrangements was $85,000 for that period, and the netexpense recorded was $385,000, which was $0.04 per basic and diluted shareoutstanding. Share-based compensation expense, which is a non-cash item, added$470,000 to cash flow from operations in the six-month period.  The exercise of stock options provided$837,000 in cash flow from financing activities.

As of December 31,2005, the total compensation cost related to unvested stock options grantedunder our stock option plans not yet recognized was approximately $1,475,000. Thiscost will be amortized on a straight-line basis over a weighted average periodof approximately 1.2 years and will be adjusted for subsequent changes inestimated forfeitures. The 263,689 unvested options outstanding at December 31,2005 had a weighted-average grant date fair value of $7.13.

*Determining FairValue*

Thefair value of stock options granted is estimated using the Black-Scholesoption-pricing model that uses the assumptions noted below for the first sixmonths of fiscal years 2006 and 2005. Expected volatilities are based onhistorical volatility of the Company’s stock. We use historical data toestimate option exercise patterns, employee termination and forfeiture rateswithin the valuation model; separate groups of optionees that have similarhistorical exercise behavior are considered separately for valuation purposes. Theexpected term of options granted is derived from the output of the optionvaluation model and represents the period of time that options granted are expectedto be outstanding; the range given below results from certain groups ofemployees exhibiting different behavior. The risk-free rate for periods withinthe contractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of the grant. The expected dividend yield is determined bydividing the current level of per share dividend by the grant date stock price.We do not incorporate changes in dividends anticipated by management unlessthose changes have been communicated to marketplace participants.

| ** **                            | ** ** | **2006 YTD**    | ** ** | **2005 YTD**    | ** ** |
|---------------------------------------|------------|----------------------|------------|----------------------|------------|
| Risk free  interest rate              |       | 4.0 – 4.5       | %          | 3.9 – 4.2       | %          |
| Expected dividend  yield              |       | 1.73                 | %          | 1.71                 | %          |
| Weighted average  expected volatility |       | 42                   | %          | 41                   | %          |
| Expected term                         |       | 3.7 – 6.0 years |       | 4.0 – 7.0 years |       |
| Weighted average  expected term       |       | 4.5 years            |       | 4.3 years            |       |

 

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*Stock OptionActivity*

Informationwith respect to stock option activity under our plans is as follows:

| ** **                             | ** ** | **Common Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  July 1, 2005      |       |                   | 1,009,971  |                                    |       |                                                 | $          | 18.19                           |       |   |   |   |   |   |   |   |
| Granted                                |       |                   | 114,200    |                                    |       |                                                 | $          | 21.02                           |       |   |   |   |   |   |   |   |
| Exercised                              |       |                   | (102,648   | )                                       |       |                                                 | $          | 15.87                           |       |   |   |   |   |   |   |   |
| Cancelled or  expired                  |       |                   | (6,566     | )                                       |       |                                                 | $          | 21.73                           |       |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2005 |       |                   | 1,014,957  |                                    |       |                                                 | $18.72     |                            |       |   | 3.8 Years |   |   | $ | 1,099,000 |   |
| Vested at  December 31, 2005      |       |                   | 751,268    |                                    |       |                                                 | $17.97     |                            |       |   | 3.3 Years |   |   | $ | 1,373,000 |   |

 

Options outstanding at December 31,2005 are exercisable as follows: 751,268 currently, 144,957 within one year,88,331 in two years and 30,401 thereafter. As of December 31, 2005, wehave 610,064 common shares reserved for our option and award plans availablefor future grants.

*Pro formaDisclosures*

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

| ** **                                                                                                                                    | ** ** | **Six months ended  December 31,  2004** | ** ** | **Three months ended  December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net loss, as  reported                                                                                                                        |       |                                                    | $          | (1,300,000                                                | )          |   |   | $ | (1,039,000 | ) |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                |       |                                                    |       |                                                      |       |   |   |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |                                                    | (499,000   | )                                                         |       |   | (265,000 | ) |   |
| Pro-forma net loss                                                                                                                            |       |                                                    | $          | (1,799,000                                                | )          |   |   | $ | (1,304,000 | ) |   |
| Loss per share:                                                                                                                               |       |                                                    |       |                                                      |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       |                                                    | $          | (0.15                                                     | )          |   |   | $ | (0.12 | ) |   |
| Basic—pro forma                                                                                                                          |       |                                                    | $          | (0.21                                                     | )          |   |   | $ | (0.15 | ) |   |
| Diluted—as reported                                                                                                                      |       |                                                    | $          | (0.15                                                     | )          |   |   | $ | (0.12 | ) |   |
| Diluted—pro forma                                                                                                                        |       |                                                    | $          | (0.21                                                     | )          |   |   | $ | (0.15 | ) |   |

 

Disclosures for the three and six month periods ended December 31,2005 are not presented because stock-based payments were recorded using thefair-value method required under SFAS 123(R).

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**3.**   Theincome tax benefit for the current quarter is based upon the estimatedeffective income tax rate for the full fiscal year.

**4.**   Operatingresults for the first six months of fiscal 2006 are not necessarily indicativeof the performance for the entire year. Our business is seasonal with a higherlevel of sales in the fourth fiscal quarter.

**5.****  **The computation of basic and diluted earnings pershare is as follows:

| ** **                                              | ** ** | **Six Months Ended  December 31,** | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                          | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerator:                                              |       |                                              |       |                                                |       |   |   |   |   |
| Net loss  available to common shareholders              |       | $                                                 | (107,000   | )                                                   | $          | (1,300,000 | ) | $ | (383,000 | ) | $ | (1,039,000 | ) |
| Denominator:                                            |       |                                              |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding—basic         |       | 8,864,263                                         |       | 8,770,941                                           |       | 8,820,890 |   | 8,780,513 |   |
| Effect of dilutive securities—common stock options |       |                                              |       |                                                |       |   |   |   |   |
| Weighted average shares outstanding—diluted        |       | 8,864,263                                         |       | 8,770,941                                           |       | 8,820,890 |   | 8,780,513 |   |
| Net loss per  share of common stock:                    |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                   |       | $                                                 | (0.01      | )                                                   | $          | (0.15 | ) | $ | (0.04 | ) | $ | (0.12 | ) |
| Diluted                                                 |       | $                                                 | (0.01      | )                                                   | $          | (0.15 | ) | $ | (0.04 | ) | $ | (0.12 | ) |

 

Therewere outstanding options to purchase common stock at prices that exceeded theaverage market price for the income statement periods. These options have beenexcluded from the computation of diluted earnings per share for the three andsix-month periods ended December 31, 2005 and 2004 and are as follows:

| ** **                        | ** ** | **Six Months Ended  December 31,** | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                          | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Average exercise  price per share |       | $                                                 | 24.00      |                                                | $          | 24.67 |   | $ | 24.00 |   | $ | 24.67 |   |
| Number of shares                  |       | 374,000                                           |       | 312,000                                             |       | 374,000 |   | 312,000 |   |
|                                   |            |                                                   |            |                                                     |            |  |  |  |  |  |  |  |  |

 

In addition, employee stock options totaling 138,127and 125,123 shares, respectively, for the six and three month periods ended December 31,2005 and 121,616 and 122,796 shares, respectively, for the six and three monthperiods ending December 31, 2004 were not included in the diluted weightedaverage shares calculation because the effects of these securities wereanti-dilutive due to the net loss for these periods.

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**6.****  **Accumulated other comprehensive income consists ofthe following:

| ** **                                 | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2005**          | ** ** |
| Unrealized gain  on derivative instrument: |       |                  |       |              |       |   |   |
| Beginning balance—July 1         |       |                  | $          | 345,000           |       |   | $ | 660,000 |   |
| Change in derivative instrument            |       |                  |       |              |       | (265,000 | ) |
| Amortization to earnings                   |       |                  | (59,000    | )                 |       | (50,000 | ) |
| Ending balance                             |       |                  | $          | 286,000           |       |   | $ | 345,000 |   |
| Currency translation adjustment:           |       |                  |       |              |       |   |   |
| Beginning balance                          |       |                  |       |              |       | $ | (46,000 | ) |
| Currency translation adjustment            |       |                  |       |              |       | (27,000 | ) |
| Liquidation of foreign entity              |       |                  |       |              |       | 73,000 |   |
| Ending balance                             |       |                  | $          | —            |       |   | $ | — |   |
| Total accumulated  comprehensive income    |       |                  | $          | 286,000           |       |   | $ | 345,000 |   |

 

Comprehensiveincome (loss) consists of the following:

| ** **                       | ** ** | **Six Months Ended  December 31,** | ** ** | **Three Months Ended  December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                          | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss                         |       | $                                                 | (107,000   | )                                                   | $          | (1,300,000 | ) | $ | (383,000 | ) | (1,039,000 | ) |
| Other  comprehensive income:     |       |                                              |       |                                                |       |   |   |   |   |
| Currency  translation adjustment |       |                                              |       | (8,000                                              | )          |   |   | (12,000 | ) |
| Change in  derivative instrument |       |                                              |       | (220,000                                            | )          |   |   | 151,000 |   |
| Comprehensive loss               |       | $                                                 | (107,000   | )                                                   | $          | (1,528,000 | ) | $ | (383,000 | ) | $ | (900,000 | ) |
|                                  |            |                                                   |            |                                                     |            |  |  |  |  |  |  |  |  |

** **

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

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Thefollowing table presents financial information about reported segments for thesix-month and three-month periods ended December 31, 2005 and 2004 alongwith the items necessary to reconcile the segment information to the totalsreported in the consolidated financial statements.

| ** **                         | ** ** | **Protect and  Direct** | ** ** | **Inform** | ** ** | **Unallocated  Corporate** | ** ** | **Total**   | ** ** |
|------------------------------------|------------|------------------------------|------------|------------|------------|----------------------------|------------|-------------|------------|
| Fiscal 2006                        |       |                         |       |       |       |                       |       |        |       |
| SIX MONTHS                         |       |                         |       |       |       |                       |       |        |       |
| Net sales from  external customers |       | $                            | 36,199,000 |       | $          | 42,378,000                 |       |        |       | $ | 78,577,000 |   |
| Operating profit  (loss)           |       | 6,005,000                    |       | (199,000   | )          | $                          | (3,691,000 | )           | 2,115,000  |   |
| Identifiable  assets               |       | 51,713,000                   |       | 76,160,000 |       | 13,555,000                 |       | 141,428,000 |       |
| THREE MONTHS                       |       |                         |       |       |       |                       |       |        |       |
| Net sales from  external customers |       | $                            | 18,379,000 |       | $          | 20,807,000                 |       |        |       | $ | 39,186,000 |   |
| Operating profit  (loss)           |       | 3,111,000                    |       | (598,000   | )          | $                          | (2,025,000 | )           | 488,000    |   |
| Fiscal 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 | ) |

 

**8.****  **Intangible assets consistof the following:

| ** **                    | ** ** | **December 31, 2005** | ** ** | **June 30, 2005** | ** ** |
|-------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Gross**                       | ** ** | ** **                  | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                    | ** ** | **Carrying**                    | ** ** | **Accumulated**             | ** ** | **Intangible** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                    | ** ** | **Amount**                      | ** ** | **Amortization**            | ** ** | **Assets** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets** | ** ** |
| Amortized intangible  assets: |       |                            |       |                        |       | * * |   | * * |   |   | * * |   | * * | * * |   |   | * * | * * |   |
| Patents and licenses          |       | $                               | 3,140,000  |                        |       | $ | 1,844,000 | * * |   | $ | 1,296,000 |   | $ | 2,990,000 |   |   | $ | 1,755,000 | * * |   |   | $ | 1,235,000 | * * |   |
| Technology and installed base |       | 2,491,000                       |       |                        | 998,000    | * * |   | 1,493,000 |   | 2,491,000 |   |   | 899,000 | * * |   |   | 1,592,000 | * * |   |
| Customer relationships        |       | 3,807,000                       |       |                        | 1,440,000  | * * |   | 2,367,000 |   | 3,807,000 |   |   | 1,181,000 | * * |   |   | 2,626,000 | * * |   |
| Trade names                   |       | 2,250,000                       |       |                        | 513,000    | * * |   | 1,737,000 |   | 2,250,000 |   |   | 363,000 | * * |   |   | 1,887,000 | * * |   |
| Other                         |       | 640,000                         |       |                        | 640,000    | * * |   | — |   | 640,000 |   |   | 640,000 | * * |   |   | — | * * |   |
| Total                         |       | $12,328,000                     |       |                        | $5,435,000 | * * |   | $6,893,000 |   | $12,178,000 |   |   | $4,838,000 | * * |   |   | $ | 7,340,000 | * * |   |
|                               |            |                                 |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangible amortization expense was $597,000 and$564,000 for the six months ended December 31, 2005 and 2004, respectively.The estimated amortization expenses for this fiscal year ended June 30,2006 and for the four fiscal years subsequent to 2006 are as follows:  $1,189,000, $1,135,000, $1,070,000, $859,000and $746,000. The carrying amount of goodwill consists of $21,174,000 for theInform segment and $8,139,000 for the Protect and Direct segment both as of December 31,2005 and June 30, 2005.

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

*Lease Commitments*

We use various leasedfacilities and equipment in our operations. The terms for these leased assetsvary depending on the lease agreements. These operating leases may includeoptions for renewal and we may guarantee the performance of our obligationsunder the leases. Annual minimum future rental payments for lease commitmentswill be approximately $3,857,000 in fiscal year 2006, $6,805,000 in the 

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nextyear to three fiscal years, $2,081,000 in the next three to five fiscal yearsand $3,854,000 thereafter, for an aggregate of $16,597,000.

*Product WarrantyLiability*

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

| Balance—July 1,  2005      |   | $        | 2,510,000 |   |
|--------------------------------------|--------|----------|-----------|--------|
| Current provisions,  net             |   | (102,000 | )         |
| Expenditures                         |   | (313,000 | )         |
| Balance—December 31,  2005 |   | $        | 2,095,000 |   |

 

*Legal*

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

*Executive Agreements*

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

*Business Purchase Agreements*

As part of the purchaseprice of U.S. Traffic Corporation (UST), the Company has agreed to paycontingent consideration based on a percentage of revenues for sales of certainproducts between May 1, 2003 and December 31, 2009, up to a maximumof $5,250,000. No amounts have been paid through December 31, 2005representing additional purchase price. Also as part of the purchase price ofUST, the Company guaranteed the principal and interest payments on a $5,000,000five-year, 5.25% subordinated promissory note payable to the sellers.

*Indemnificationof Lenders and Agents Under Credit Facilities*

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

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

*Bid and PerformanceBonds*

We have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn was $5,729,000 at December 31, 2005 and$8,094,000 at June 30, 2005. Historically, we have not made significantpayments on bid and performance bonds, and no amount has been accrued in theaccompanying consolidated financial statements.

*Other Commitments*

We have standby letters of credit covering potentialworkers’ compensation liabilities. The total amount of standby letters ofcredit that were outstanding at December 31, 2005 and at June 30,2005 was $1,144,000. We have included $984,000 in accrued liabilities for thisexposure as of December 31, 2005.

We have certain non-cancelable royalty agreements,which contain certain minimum payments in the aggregate of $2,385,000 throughfiscal year 2012. We have included $485,000 in accrued liabilities for thisexposure as of December 31, 2005.

**10.****  **During September 2005,we settled all claims arising from the 2003 acquisition of the Peek TrafficCorporation business with the Peek Traffic Group Limited and its affiliates(the Sellers) for $633,000 in cash, net of legal expenses. Also, as part of thesettlement, the Sellers sold to us 150,603 shares of our common stock acquiredby the Sellers as part of the purchase price for $3,105,000, or $20.62 pershare.

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**PART I—FINANCIAL INFORMATION**

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

*OVERVIEW*

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

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

*RESULTS OF OPERATIONS*

Our results for the first six months of fiscal 2006were consistent with our expectations. Although the new federal highwayspending bill (SAFETEA-LU) was signed in August, 2005, we do not expect torealize significant benefits until at least the second half of fiscal 2006. Duringthe first six months of fiscal 2006, sales increased over the same period lastyear and we began to see increased order activity in some areas of our business.We believe the increase in sales and order activity reflects improvedconfidence in our industry now that a highway bill is in place. We wereencouraged to see sales growth of 12% in our Inform Group and increased profitabilityduring the first half which included a 9% increase in sales of traffic andintersection control products. However, sales volume of traffic andintersection controls products at U.S. Traffic Corporation (UST) continues tobe substandard.  We believe this is duein part to the absence of new large contracts related to ongoing state andmunicipal budgetary issues which we expect will improve during fiscal 2006. SeeFUTURE OUTLOOK for further information.

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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,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                            | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues by Segment:                                          |       |                                                |       |                                              |       |   |   |   |   |
| Protect and Direct                                            | ** ** | $                                                   | 18,379,000 |                                              | $          | 15,280,000 |   | $ | 36,199,000 |   | $ | 33,676,000 |   |
| Inform                                                        | ** ** | 20,807,000                                          |       | 18,167,000                                        |       | 42,378,000 |   | 37,758,000 |   |
|                                                          |       | $                                                   | 39,186,000 |                                              | $          | 33,447,000 |   | $ | 78,577,000 |   | $ | 71,434,000 |   |
| Geographic  Revenues:                                         |       |                                                |       |                                              |       |   |   |   |   |
| Domestic                                                      |       | $                                                   | 32,361,000 |                                              | $          | 29,131,000 |   | $ | 67,409,000 |   | $ | 62,927,000 |   |
| International                                                 |       | 6,825,000                                           |       | 4,316,000                                         |       | 11,168,000 |   | 8,507,000 |   |
|                                                          |       | $                                                   | 39,186,000 |                                              | $          | 33,447,000 |   | $ | 78,577,000 |   | $ | 71,434,000 |   |
| Operating Income (Loss)  by Segment:                          |       |                                                |       |                                              |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                   | 3,111,000  |                                              | $          | 1,313,000 |   | $ | 6,005,000 |   | $ | 4,530,000 |   |
| Inform                                                        |       | (598,000                                            | )          | (893,000                                          | )          | (199,000 | ) | (1,913,000 | ) |
| Unallocated Corporate                                         |       | (2,025,000                                          | )          | (1,853,000                                        | )          | (3,691,000 | ) | (3,913,000 | ) |
|                                                          |       | $                                                   | 488,000    |                                              | $          | (1,433,000 | ) | $ | 2,115,000 |   | $ | (1,296,000 | ) |
| Gross profit percentage                                       |       | 28.6                                                | %          | 26.0                                              | %          | 28.2 | % | 28.0 | % |
| Selling and administrative expenses as a percentage of  sales |       | 23.9                                                | %          | 24.9                                              | %          | 21.9 | % | 25.5 | % |
| Diluted loss per share                                        |       | $                                                   | (0.04      | )                                                 | $          | (0.12 | ) | $ | (0.01 | ) | $ | (0.15 | ) |

 

*Revenues*

Ournet sales for the secondquarterof fiscal 2006 increased $5,739,000, or 17%, to $39,186,000 from $33,447,000for the second quarter last year. This was due to increases in sales acrossnearly all major product lines.

Ournet sales for the first  six months of fiscal 2006increased $7,143,000, or 10%, to $78,577,000 from $71,434,000 for the sameperiod last year due to increases in sales across nearly all major productlines.

*Protectand Direct—**Net*sales for the Protect andDirect segment for the second quarter of fiscal 2006 increased 20% to$18,379,000 from $15,280,000 for the second quarter last year due to increaseddomestic and international sales.  Theincrease in sales was primarily due to increased sales of permanent crashcushions, delineators and Triton® barriers. Sales of truck mounted attenuators,sand-filled barrels and parts also increased, however to a lesser extent. Internationalsales increased $1,534,000, or 46%, over the prior year period.

Netsales for the Protect and Direct segment for the first six months of fiscal2006 increased 7% to $36,199,000 from $33,676,000 for the same period last year. The increase in sales was primarily dueto increased sales of delineators, Triton®  barriers and sand-filled barrels. Sales ofpermanent crash cushions and parts also increased, however to a lesser extent. Salesof truck mounted attenuators decreased slightly from the same period last year.

*Inform—**Net* sales for theInform segment for the second quarter of fiscal 2006 increased 15%, or$2,640,000, to $20,807,000 from $18,167,000 for the second quarter last year. Salesincreased across nearly all major product lines. Sales of traffic andintersection control systems increased 13% during the second 

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quarterof fiscal 2006, however the salesvolumes were less than expected and below break-even levels.  Sales of legacy inform products, consisting ofweather and traffic sensing systems and highway advisory radio products,increased 20% driven by a few large system orders. International sales for theInform segment nearly doubled over the second quarter last year.

Netsales for the Inform segment for the first six months of fiscal 2006 increased12%, or $4,620,000, to $42,378,000 from $37,758,000 for the same period lastyear. Sales increased across nearly all major product lines including trafficand intersection control systems, traffic and weather sensing systems andhighway advisory radio products.

*Geographic*—Internationalsales for the second quarter of fiscal 2006 increased $2,509,000, or 58%, to$6,825,000, compared to $4,316,000 for the second quarter last year, due toincreased sales across all major regions with particularly strong sales in theAsia Pacific and Latin America regions. Sales of our Triton® water-filled barrier continued to be strong inAustralia as they nearly doubled over the second quarter last year. Domesticsales for the second quarter of fiscal 2006 increased 11% to $32,361,000 from$29,131,000.

International sales for the first six months of fiscal2006 increased $2,661,000, or 31%, to $11,168,000, compared to $8,507,000 forthe same period last year, due to strong sales increases in Europe and Latin America.Domestic sales for the first six months of fiscal 2006 increased 7% to$67,409,000 from $62,927,000.

*GrossProfit Margin*

Ourgross profit margin for the second quarter of fiscal 2006 was 28.6% compared to26.0% for the second quarter last year, primarily due to higher gross marginsin the Protect and Direct segment attributable to volume efficienciesassociated with the higher level of sales, offset partially by higher rawmaterial costs. The gross profit margin for the Inform segment also improvedsomewhat due to volume efficiencies.

Our gross profit margin for the first six months offiscal 2006 was 28.2%, consistent with the 28.0% gross margin for the sameperiod last year. Gross margins in the Protect and Direct segment were slightlyhigher due to volume efficiencies associated with the higher level of sales,offset somewhat by higher raw material costs. The gross profit margin for theInform segment was consistent with the prior period, as somewhat lower grossprofit margins for traffic and intersection control systems were offset bysomewhat higher gross margins on highway advisory radio products and weatherand traffic sensing systems.

*Selling and Administrative Expenses*

Sellingand administrative expenses for the second quarter of fiscal 2006 increased$1,018,000, or 12%, to $9,352,000 from $8,334,000 for the second quarter lastyear. The second quarter last year included a gain on the sale of some land of$560,000 for the Protect and Direct segment. Without last year’s $560,000 gain,selling and administrative expenses increased 5% or $458,000. This wasprincipally due to unallocated expense recorded related to the adoption of SFAS123(R), “Share-Based Payment” requiring the expensing of stock options. Weexpect the expense related to SFAS 123(R) for the fiscal year to beapproximately $1,000,000. Selling and administrative expenses in the Protectand Direct segment remained consistent with the second quarter last year afterexcluding the $560,000 gain on the land sale. Selling and administrativeexpenses in the Inform segment increased primarily due to variable costsassociated with the higher level of sales, although somewhat offset due to therealization of benefits from cost reduction efforts in traffic and intersectioncontrol businesses which occurred over the past year. Selling andadministrative expenses decreased as a percentage of sales to 23.9% for thesecond quarter of 2006 from 24.9% last year 

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due to the increased level of sales and the fixed costnature of many of the expenses and the cost reduction efforts.

Selling and administrative expenses for the first sixmonths of fiscal 2006 decreased $968,000, or 5%, to $17,241,000 from$18,209,000 for the same period last year. After excluding last year’s $560,000gain on sale of land, selling and administrative expenses in the Protect andDirect segment decreased due to a decrease in marketing expenses. Selling andadministrative expenses in the Inform segment decreased primarily due to a gainof $633,000 resulting from the settlement of claims with the seller of PeekTraffic Corporation (Peek Traffic) recorded in the first quarter. Informsegment expenses also decreased due to the realization of benefits from costreduction efforts in the traffic and intersection control businesses which occurredover the past year. Unallocatedcorporate expenses decreased as well do to a decline in health care and workerscompensation costs after excluding $470,000 of expense related to theadoption of SFAS 123(R) discussed in Note 2.  Selling and administrative expenses decreasedas a percentage of sales to 21.9% for the first six months of 2006 from 25.5%last year, due to the increased level of sales and the fixed cost nature ofmany of the expenses, the cost reduction efforts, and the Peek Traffic settlementgain.

*Researchand Development*

Researchand development expenditures were $1,374,000 for the second quarter of fiscal2006 compared to $1,246,000 for the second quarter last year. The increase of$128,000 was due to increased expenditures in both the Inform and the Protectand Direct segments. Expenditures increased in the Protect and Direct segmentfor the development of innovative new products to address safety needs bothdomestically and abroad. Expenditures also increased in the Inform segment forproduct upgrades and enhancements to existing product lines and on newproducts.

Research and development expenditures were $2,804,000for the first six months of fiscal 2006 compared to $2,506,000 for the sameperiod last year. The increase of $298,000 was due to increased expenditures inboth the Inform and the Protect and Direct segments.

*OperatingProfit*

Operatingprofit for the second quarter of fiscal 2006 was $488,000, compared to anoperating loss of $873,000 for the second quarter of fiscal 2005. For thesecond quarter of fiscal 2006, operating profit for the Protect and DirectGroup increased 66% to $3,111,000 from $1,874,000 for the second quarter lastyear due primarily to the increased level of sales. The Inform Group operatingloss decreased to $599,000 from an operating loss of $893,000 for the secondquarter of last year also due primarily to the increased level of sales.

Operating profit for the first six months of fiscal2006 was $2,115,000, compared to an operating loss of $736,000 for the sameperiod of fiscal 2005. For the first six months of fiscal 2006, operatingprofit for the Protect and Direct Group increased $915,000 to $6,005,000 from$5,090,000 for the first six months last year due primarily to the increasedlevel of sales. The Inform Group operating loss decreased to $199,000 from anoperating loss of $1,913,000 for the first six months of last year primarilydue to the increased level of sales and the $633,000 Peek Traffic settlementgain.

*Interest Expense*

Interest expense for the second quarter of fiscal 2006increased to $1,106,000 from $803,000 for the second quarter last year.  The increase was due to the higher level ofdebt and to higher interest rates. The interest rate on our $40 million inConvertible Senior Subordinated Notes is 7%. The interest rate on ourcollateralized bank credit facility is based on prime or LIBOR, plus a margin,and the weighted average rate was 6.8% as of December 31, 2005.

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Interest expense for thefirst six months of fiscal 2006 increased to $2,289,000 from $1,395,000 for thesame period last year.  The increase wasdue to the higher level of debt and to higher interest rates. Interest expenseis expected to be approximately $4.5 million for fiscal 2006.

*Provision for Income Taxes*

The income tax benefit for the second quarter offiscal 2006 was $235,000 representing a 38% effective income tax rate.

The income tax benefit forthe first six months of fiscal 2006 was $66,000 also representing a 38%effective income tax rate.

***Net Earnings***

The net loss for the second quarter of fiscal 2006 was$383,000, or $0.04 cents per diluted share, compared to a net loss of$1,039,000, or $0.12 cents per diluted share, for the second quarter last year.

The net loss for the firstsix months of fiscal 2006 was $107,000, or $0.01 cent per diluted share,compared to a net loss of $1,300,000, or $0.15 cents per diluted share, for thesame period last year.

**FINANCIAL CONDITION**

***Liquidity and Capital Resources***

Our principal sources of funds historically have beencash flows from operations and borrowings from banks and other sources. We hadcash and cash equivalents of $606,000 as of December 31, 2005 and accessto additional funds of approximately $8 million under a bank collateralizedcredit agreement. We believe that this bank credit facility is an importantsource of liquidity. The credit agreement provides for a $30 million securedrevolving credit facility with a $10 million sub-facility for letters of credit.Availability under the revolving credit facility is based on a formula ofeligible accounts receivable, eligible inventory, machinery and equipment andreal estate, subject to a minimum excess collateral availability factor.   Effective June 30, 2006, we will also berequired to maintain a maximum senior leverage ratio. The covenants also limitthe incurrence of additional indebtedness, acquisitions, liens and encumbrancesand other matters customarily restricted in such agreements. The agreementcurrently expires in April 2008, but may be renewed one additional year oneach anniversary date upon mutual consent of the Company and the bank.

Our outstanding borrowingswere $57,411,000, or 49.4% of total capitalization, as of December 31,2005, of which $11,500,000 was outstanding related to the bank credit facility.This compares to $50,014,000, or 44.7% of total capitalization, as of June 30,2005. Included in the amount outstanding as of December 31, 2005 and June 30,2005 was $40 million in 7% Convertible Senior Subordinated Notes due February 2025,which were sold through a private placement in February 2005 and a $5million five-year subordinated promissory note. The amount of standby lettersof credit outstanding was $1,144,000 as of both December 31, 2005 and June 30,2005.

***Cash Flows***

Cash flows used in operations were $1,741,000 duringthe first six months of fiscal 2006. This compares with $2,095,000 provided inthe first six months of fiscal 2005. In both of the periods, cash flowgenerated by operations was primarily derived from earnings before non-cashexpenses such as depreciation and amortization. The increase in cash used byoperating activities in the six months of fiscal 2006 reflects increasedworking capital, in particular, increases in accounts receivable and inventory.

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Investing activities used cash of $1,343,000 duringthe first six months of fiscal 2006, compared to $586,000 in the first sixmonths of the prior year. Expenditures during the first six months of fiscal2006 included $959,000 for capital expenditures.

Financing activities provided cash of $3,534,000during the first six months of fiscal 2006, compared to using cash of$2,235,000 during the first six months of fiscal 2005. During the first sixmonths of 2006, we borrowed a net $7,500,000 against our outstanding revolvingcredit facility. We paid $3,105,000 to purchase 150,603 shares of our commonstock from the sellers of Peek Traffic, recorded as treasury stock. Inaddition, we paid $103,000 on notes payable. We received cash of $837,000 fromthe exercise of common stock options. The payment of our semi-annual cashdividend used cash of $1,595,000.

For fiscal 2006, weanticipate needing approximately $3,000,000 in cash for capital expenditures. Wemay require additional investments in working capital to maintain growth. Wemay also need additional funds to repurchase our own common stock from time totime or if we consider acquiring businesses that complement our existingoperations. These expenditures will be financed either through cash on-hand,cash generated from operations or from borrowings available under our bankcredit facility. We believe that our existing cash, cash generated fromoperations and funds available under our existing credit facility are sufficientfor all planned operating and capital requirements in the near term. If neededand available on favorable terms, we may also enter into other debt or equityfinancing arrangements.

**OFF-BALANCESHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**

We aresubject to certain debt obligations, guarantees, commitments and contingentliabilities further described in our Annual Report on Form 10-K forthe year ended June 30, 2005. The following table presents our contractualobligations to make future payments under contracts, such as debt and leaseagreements, as of December 31, 2005:

| ** **                | ** ** | ** **                         | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** |
|---------------------------|------------|------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                | ** ** | **Total**                          | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| ** **                | ** ** | **(Dollar  amounts in thousands)** | ** ** |
| Long-term debt            |       | $                                  | 57,411     |               |       | $                  | 427        |               |       | $                  | 5,446      |   |   |   |   |   |   | $ | 51,538 |   |   |
| Operating leases          |       | 16,597                             |       |               | 3,857      |               |       | 6,805              |       |               | $          | 2,081 |   |   |   | 3,854 |   |   |
| Minimum royalty  payments |       | 2,385                              |       |               | 635        |               |       | 850                |       |               | 600        |   |   |   | 300 |   |   |
| Total                     |       | $                                  | 76,393     |               |       | $                  | 4,919      |               |       | $                  | 13,101     |   |   | $ | 2,681 |   |   |   | $ | 55,692 |   |   |

 

As disclosed in thefootnotes to the consolidated financial statements, we have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn as of December 31, 2005 was $5,729,000. We alsohave standby letters of credit covering potential workers’ compensationliabilities. The total standby exposure relating to letters of credit as of December 31,2005 was $1,144,000.

**FUTURE OUTLOOK**

We believe that the enactment of the federaltransportation funding legislation, SAFETEA-LU, in August 2005 isimproving prospects for increased spending for our products in fiscal 2006. Howeverwe do not expect to begin to realize significant benefits of this legislationuntil at least the second half of fiscal 2006 due to seasonality and the longersales cycle typical of our business.  Inaddition, state and local governments may be able to increase spending ontransportation safety in 2006 as both national and local economies improve. Weare beginning to see increased order activity in many areas of our business. Wealso expect international sales to continue to be an important driver of oursales growth. However, it is 

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difficult to predict towhat extent we will see increased spending for our products and there can be noassurance that either domestic or international sales will continue toincrease.

Performance of our Inform segment has been below whatwe expect primarily due to operating losses at UST. We expect operating lossesat UST to continue into the third quarter due to substandard sales volumes. Salesfor the first six months of fiscal 2006 were below break-even levels. We expect sales volume may improve in thesecond half of fiscal 2006 with the seasonal construction season. However,sales for the Inform segment would need to increase by at least $15 millionabove the fiscal 2005 level in order to record a slight profit for the Informsegment in fiscal 2006. We are currently monitoring the sales volume of trafficand intersection control products and if sales do not improve, we plan to takefurther action to rationalize the traffic and intersection control business. Therecan be no assurance that we will achieve either the level of sales or the grossmargin on those sales to be sufficient to produce a profit. Therefore, weremain cautious about our performance in fiscal 2006.

We historically experiencefluctuation in our gross profit margin from quarter to quarter primarily due tosales volume related to seasonality, variability in product mix and changes inour competitive environment. In addition, we have acquired complementarybusinesses over the past several years and, as part of our strategy, maycontinue to acquire complementary businesses. The gross profit margins ofcertain acquired product lines, primarily the traffic and intersection controlproduct lines, are lower than our historical gross profit margin, which iscurrently adversely affecting our consolidated gross profit margin. We alsoexperience rigorous price competition in selling our intersection controlsystems, variable message signs and weather sensing systems. We do not believethese trends will improve in the near future.

**SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements. Management’sestimates also affect the reported amounts of revenues and expenses during thereporting period. In addition, certain normal and recurring estimates are madeincluding estimates in determining the allowance for doubtful accountsreceivable, inventory valuation reserves, valuation allowance on deferred taxassets and health care liabilities. These estimates are made using management’sbest judgment given relevant factors and available data. Actual results coulddiffer materially from those estimates. Note 2 to our June 30, 2005consolidated financial statements includes a summary of the significantaccounting policies, methods and estimates used in the preparation of ourconsolidated financial statements.  Therehave been no material changes in accounting policies, methods and estimatesused by management, except for the adoption of FAS 123(R), as discussed in note2.  In the opinion of management, theCompany does not have any individual accounting policy or use any individualestimate that is critical to the preparation of its consolidated financialstatements. In most instances, we must use an accounting policy or methodbecause it is the only policy or method permitted under U.S. GAAP. We believethe following significant accounting policies and methods used by us are themost important to the presentation of our financial statements:

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

Inventories: Inventories are valued at the lower of cost (first-in, first-out method)or market. Actual costs are used to value raw materials and supplies. Standardcosts, which approximate actual costs, are used to value finished goods andwork-in-process. Standard costs include raw materials, direct labor and 

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

Amortized long-lived assets (including amortizedintangible assets and property, plant and equipment) held and used by us arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable in relation tofuture undiscounted cash flows of underlying asset groups. The net carryingvalue of assets not recoverable is reduced to fair value. Fair values ofamortized long-lived assets are determined based upon the performance of athird 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, we perform ahypothetical purchase price allocation based on the reporting unit’s fair valueto determine the implied fair value of the reporting unit’s goodwill. If theimplied fair value of the goodwill is less than its carrying value, thegoodwill is written-down to its implied fair value. Fair values are determinedwith the help of a third party appraisal firm using present value techniques.

The impairment review is highly judgmental andinvolves the use of significant estimates and assumptions. These estimates andassumptions have a significant impact on the amount of any impairment chargerecorded. Estimates of fair value are primarily determined using discountedcash flow methods and are dependent upon assumptions of future sales trends,market conditions and cash flows of each reporting unit over several years. Actualcash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows. The impact of these estimates andassumptions on impairment testing of goodwill is particularly critical for theInform segment with $21,174,000 of our $29,313,000 of goodwill recorded in our December 31,2005 balance sheet.

Share-based Compensation Expense:  We account for share-based compensation inaccordance with the provisions of SFAS No. 123(R). Under the fair valuerecognition provisions of SFAS No. 123(R), share-based compensation costis estimated at the grant date based on the fair value of the award and isrecognized as expense ratably over the requisite service period of the award. Determiningthe appropriate fair value model and calculating the fair value of share-basedawards requires judgment, including estimating stock price volatility,forfeiture rates and expected life.

Income Taxes: We recognizedeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the financial statements or tax returns. Underthis method, deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. In assessing the realizability of thedeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Tothe extent that any future tax benefits are not expected to be fully realized,such future tax benefits are reduced by a valuation allowance. Realization ofdeferred tax assets assumes that we will be 

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able togenerate sufficient taxable income so that the assets will be realized. Thefactors that we consider 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. We expect the netdeferred tax assets currently recorded to be fully realizable; however therecan be no assurance that an increased valuation allowance would not need to berecorded in the future.

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

In October, 2005, theFinancial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS13-1, “Accounting for Rental Costs Incurred during a Construction Period.”  This FSP clarifies the accounting for rentalcosts associated with operating leases that are incurred during a constructionperiod. In addition, FSP FAS 13-1 requires that a lessee shall ceasecapitalizing such rental costs upon application of the FSP. FSP FAS 13-1is effective for periods beginning after December 15, 2005. We do not expectthe adoption of FSP FAS 13-1 to have a material impact on our operatingresults or financial condition.

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

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

**ITEM 3. Quantitative and Qualitative Disclosures aboutMarket Risk**

Item 7.A. of our AnnualReport on Form 10-K for the year ended June 30, 2005 presentsinformation regarding Quantitative and Qualitative Disclosures about MarketRisk.

We are exposed to market risk from fluctuations ininterest rates. Our exposure to interest rate fluctuations was significantlyreduced when we issued $40 million of fixed rated convertible debt and used theproceeds to pay down bank debt issued pursuant to our revolving creditagreement in the third quarter of fiscal 2005. We had managed our exposure tointerest rate fluctuations beginning in fiscal 2004 through 

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the use of derivativeinstruments in the form of non-trading interest rate swaps, but our interestrate swap agreement was liquidated in the third quarter of fiscal 2005.

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

**ITEM 4. Controls and Procedures**

**(a)**           Evaluation ofDisclosure Controls and Procedures

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the Company’sreports under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures. The design of any system of disclosure controls and procedures isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any disclosure controls and procedures willsucceed in achieving their stated goals under all potential future conditions.

Our management, under thesupervision of and with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the periodcovered by this report. Based on the evaluation, the Company’s Chief ExecutiveOfficer and Chief Financial Officer concluded that solely as a result of thematerial weakness in the Company’s internal controls over certain informationtechnology general controls as described below at paragraph (b), the Company’sdisclosure controls and procedures were not effective as of the end of theperiod covered by this Quarterly Report on Form 10-Q, December 31,2005. However, we performed analysis and other procedures to ensure that ourconsolidated financial statements were prepared in accordance with accountingprinciples generally accepted in the United States. Accordingly, managementbelieves that (i) the financial statements filed fairly present in allmaterial respects the Company’s financial condition, results of operations andcash flow for the periods presented, and (ii) this report does not containany untrue statement of a material fact or omit or a material fact necessary tomake the statements, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this report.

**(b)**          Management’sReport on Internal Controls Over Financial Reporting

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

Based on its assessment of our internal control overfinancial reporting for our last fiscal year, management determined that amaterial weakness existed in the Company’s internal controls over certaininformation technology general controls as of June 30, 2005. Specifically,the Company did not have (i) monitoring of information technology managerswho have access to the application and underlying data, (ii) mechanisms totrack changes made to the application itself, and (iii) adequate securityadministration of users’ access to the application. These control deficienciesdid not result in any known financial statement misstatements. However, theaggregation of these control deficiencies represent a material weakness ininternal control over financial reporting on the basis that there is more thana remote likelihood that a material misstatement of our annual or interimfinancial statements will not be prevented or detected by its internal controlover financial reporting. Accordingly, management concluded that, as of 

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June 30, 2005, theCompany’s internal control over financial reporting was not effective based onthe criteria set forth by Committee of Sponsoring Organizations of the TreadwayCommission. During the first half of fiscal 2006, we developed a comprehensive,detailed remediation plan to address these known deficiencies. This planincluded the decision to upgrade our primary information technology softwaresystem to a more current version which includes, among other things, bettertools to assist with the monitoring of information technology general controls.We are currently in the process of the upgrade, which we expect to complete inthe third quarter of fiscal 2006. We are also utilizing an external consultingfirm to assist with the remediation of security and access controls.

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**PART II—OTHER INFORMATION**

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

**ITEM 1. Legal Proceedings**

The Company is involved in several pending judicialproceedings for product liability and other damages arising out of the conductof its business. While the outcome of litigation is subject to uncertainties,the Company believes, after consultation with counsel, that the outcome ofthese proceedings, based on current available information and after taking intoaccount the availability and limits of our insurance coverage, will not have amaterial effect on the Company’s consolidated financial condition and resultsof operations.

The Company is involved in litigation with the sellersof the assets of the U.S. Traffic business. On November 1, 2005, oursubsidiary, U.S. Traffic Corporation (UST) filed a third-party complaint andmotion for a temporary restraining order against Myers Power Products, Inc.,an affiliate of sellers, asserting breach of an OEM Supply Agreement betweenthe parties in the action entitled MYERS AMERICA, INC. V. U.S.TRAFFICCORPORATION, Circuit Court of Cook County, Illinois, Chancery Division, No. 05CH16573. On November 9, 2005, an injunctionorder was entered, ordering Myers Power Products, Inc. to supply productsto UST pursuant to the terms of the parties’ OEM Supply Agreement. See our Form 10-QReport for the quarter ended September 30, 2005 and filed November 9,2005 for more information regarding our claims against the sellers.

In another lawsuitentitled Bedinger v. The Mills Corporation and Safe-Hit Corporation et al(State of Tennessee Circuit Court of Davidson County, No. 02C2832), theCompany’s Safe-Hit division was sued in October 2002.  The plaintiff, who tripped over one ofSafe-Hit’s surface mount bases in a parking lot, sought $1,000,000 in damages. Thecase had been tendered to the Company’s insurance carrier. On January 3,2006, the court granted our Motion for Summary Judgment and dismissed us fromthe lawsuit which was subsequently settled with the remaining party. See our Form 10KReport for the fiscal year ended June 30, 2005 and filed September 13,2005 for more information about this matter which is now concluded.

**Item 4. Submission of Matters to Vote of SecurityHolders**

Our Annual Meeting of stockholders was held on November 17,2005. The matters voted on at the Annual Meeting were the following:

(1)   Theelection of Leslie J. Jezuit, Daniel P. Gorey and Duane M. Tyler to serve asDirectors for a three year term until the annual meeting of stockholders in2008.

(2)   Theapproval of an amendment to our Restated Certificate of Incorporation.

(3)   Theratification of the appointment of Grant Thornton LLP as our independentregistered public accounting firm.

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Messrs. Jezuit,Gorey and Tyler were elected and all other matters were approved as a result ofthe following stockholder votes:

| ** ** | ** ** | ** **                                                   | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain Or   Withheld** | ** ** | **Broker No  Vote** | ** ** |
|------------|------------|--------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------------------------------|------------|--------------------------|------------|
| (i)        |       | Election of Directors                                        |       |      |       |        |       |                                |       |                     |       |   |   |
|       |       | Leslie J. Jezuit                                             |       | 8,048,157 |       |        |       |                                | 245,012    |                     |       |   |   |
|       |       | Daniel P. Gorey                                              |       | 8,080,084 |       |        |       |                                | 213,085    |                     |       |   |   |
|       |       | Duane M. Tyler                                               |       | 8,251,267 |       |        |       |                                | 41,902     |                     |       |   |   |
| (ii)       |       | Approval of Amendment Restated Certificate of  Incorporation |       | 7,687,230 |       | 585,226     |       |                                | 20,713     |                     |       |   |   |
| (iii)      |       | Ratification of  Grant Thornton LLP                          |       | 8,274,662 |       | 4,739       |       |                                | 13,768     |                     |       |   |   |

 

**ITEM 6. Exhibits**

(a)    Exhibits

| 3  | (a)    |   | Restated  Certificate of Incorporation as amended November 22, 2005.                                                    |
|----|--------|--------|------------------------------------------------------------------------------------------------------------------------------|
| 10 | (f)    |   | Lease Addendum  dated January 17, 2006 by and between Gulfcoast Property No. 1, LLC  and Peek Traffic Corporation. |
| 31 |   |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                |
| 32 |   |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                |

 

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter endedDecember 31, 2005 to be signed on its behalf by the undersigned thereuntoduly authorized.

|                               | QUIXOTE CORPORATION                             |
|-------------------------------|-------------------------------------------------|
| DATED: February 8,  2006 | /s/ DANIEL P. GOREY                             |
|                          | DANIEL P. GOREY                                 |
|                          | Chief Financial Officer,                        |
|                          | Vice President and Treasurer                    |
|                          | (Chief Financial & Accounting Officer) |

 

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**EXHIBIT INDEX**

| **Exhibits:** | ** ** | ** ** | ** **                                                                                                                   |
|---------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------|
| 3             | (a)        |       | Restated  Certificate of Incorporation as amended November 22, 2005.                                                    |
| 10            | (f)        |       | Lease Addendum  dated January 17, 2006 by and between Gulfcoast Property No. 1, LLC  and Peek Traffic Corporation. |
| 31            |       |       | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                |
| 32            |       |       | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                |

 

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