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

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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x QuarterlyReport Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934

**Forthe period ended March 31, 2005**

**or**

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

**forthe transition period from**

**To**

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Commission file number 0-7903

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

**QUIXOTE CORPORATION**

(a Delaware Corporation)

**35 East Wacker DriveChicago, Illinois 60601**

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES  x    NO  o

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

YES  x    NO  o

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 8,831,657 shares of the Company’sCommon Stock ($.01-2/3 par value) were outstanding as of March 31,2005.

 

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**PART I—FINANCIALINFORMATIONITEM 1.   FINANCIAL STATEMENTSQUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**
| ** **                                 | ** ** | **Nine Months Ended March 31,** | ** **  |
|--------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                 | ** ** | **2005**                                            | ** **  | **2004** | ** ** |
| Net sales                                  |       | $                                                   | 106,386,000 |   | $ | 110,847,000 |   |
| Cost of sales                              |       | 74,394,000                                          |        | 77,017,000 |   |
| Gross profit                               |       | 31,992,000                                          |        | 33,830,000 |   |
| Operating  expenses:                       |       |                                                |        |   |   |
| Selling & administrative          |       | 29,515,000                                          |        | 26,404,000 |   |
| Research & development            |       | 4,004,000                                           |        | 2,549,000 |   |
|                                       |       | 33,519,000                                          |        | 28,953,000 |   |
| Operating profit (loss)                    |       | (1,527,000                                          | )           | 4,877,000 |   |
| Other income  (expense):                   |       |                                                |        |   |   |
| Interest income                            |       | 34,000                                              |        | 25,000 |   |
| Interest expense                           |       | (2,359,000                                          | )           | (1,590,000 | ) |
| Other                                      |       | 560,000                                             |        | (212,000 | ) |
|                                       |       | (1,765,000                                          | )           | (1,777,000 | ) |
| Earnings (loss) before income taxes        |       | (3,292,000                                          | )           | 3,100,000 |   |
| Income tax benefit                         |       | (1,251,000                                          | )           | (133,000 | ) |
| Net earnings  (loss)                       |       | $                                                   | (2,041,000  | ) | $ | 3,233,000 |   |
| Per share data—basic:                 |       |                                                |        |   |   |
| Net earnings (loss)                        |       | $                                                   | (.23        | ) | $ | .38 |   |
| Weighted average common shares outstanding |       | 8,782,566                                           |        | 8,495,076 |   |
| Per share data—diluted:               |       |                                                |        |   |   |
| Net earnings (loss)                        |       | $                                                   | (.23        | ) | $ | .37 |   |
| Weighted average common shares outstanding |       | 8,782,566                                           |        | 8,767,932 |   |
| Cash dividends  declared per common share  |       | $                                                   | .18         |   | $ | .17 |   |

 

See Notes to Consolidated Financial Statements.

2

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                             | ** ** | **2004** | ** ** |
| Net sales                                   |       | $                                                    | 34,952,000 |   | $ | 36,169,000 |   |
| Cost of sales                               |       | 22,939,000                                           |       | 26,185,000 |   |
| Gross profit                                |       | 12,013,000                                           |       | 9,984,000 |   |
| Operating  expenses:                        |       |                                                 |       |   |   |
| Selling & administrative           |       | 10,746,000                                           |       | 9,440,000 |   |
| Research & development             |       | 1,498,000                                            |       | 1,003,000 |   |
|                                        |       | 12,244,000                                           |       | 10,443,000 |   |
| Operating loss                              |       | (231,000                                             | )          | (459,000 | ) |
| Other income  (expense):                    |       |                                                 |       |   |   |
| Interest income                             |       |                                                 |       | 5,000 |   |
| Interest expense                            |       | (964,000                                             | )          | (588,000 | ) |
| Other                                       |       |                                                 |       | (212,000 | ) |
|                                        |       | (964,000                                             | )          | (795,000 | ) |
| Loss before income taxes                    |       | (1,195,000                                           | )          | (1,254,000 | ) |
| Income tax  benefit                         |       | (454,000                                             | )          | (1,700,000 | ) |
| Net earnings  (loss)                        |       | $                                                    | (741,000   | ) | $ | 446,000 |   |
| Per share data—basic:                  |       |                                                 |       |   |   |
| Net earnings (loss)                         |       | $                                                    | (.08       | ) | $ | .05 |   |
| Weighted average common shares outstanding  |       | 8,806,333                                            |       | 8,660,921 |   |
| Per share data—diluted:                |       |                                                 |       |   |   |
| Net earnings (loss)                         |       | $                                                    | (.08       | ) | $ | .05 |   |
| Weighted average  common shares outstanding |       | 8,806,333                                            |       | 8,881,492 |   |

 

See Notes to Consolidated Financial Statements.

3

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**
| ** **                                                                                                                  | ** ** | **March 31,** | ** **  | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| ** **                                                                                                                  | ** ** | **2005**           | ** **  | **2004**          | ** ** |
| **ASSETS**                                                                                                                  |       |               |        |              |       |
| Current assets:                                                                                                             |       |               |        |              |       |
| Cash and cash equivalents                                                                                                   |       | $                  | 669,000     |              | $          | 2,389,000 |   |
| Accounts receivable, net of allowances for doubtful accounts  of $1,538,000 at March 31 and $1,872,000 at June 30 |       | 31,820,000         |        | 33,606,000        |       |
| Refundable income taxes                                                                                                     |       | 2,659,000          |        | 3,371,000         |       |
| Inventories, net:                                                                                                           |       |               |        |              |       |
| Raw materials                                                                                                               |       | 12,044,000         |        | 10,162,000        |       |
| Work in process                                                                                                             |       | 4,486,000          |        | 4,732,000         |       |
| Finished goods                                                                                                              |       | 8,221,000          |        | 10,414,000        |       |
|                                                                                                                        |       | 24,751,000         |        | 25,308,000        |       |
| Notes receivable                                                                                                            |       |               |        | 217,000           |       |
| Deferred income tax assets                                                                                                  |       | 2,682,000          |        | 2,682,000         |       |
| Other current assets                                                                                                        |       | 1,547,000          |        | 668,000           |       |
| Total current  assets                                                                                                       |       | 64,128,000         |        | 68,241,000        |       |
| Property, plant and equipment, at cost                                                                                      |       | 51,921,000         |        | 48,436,000        |       |
| Less accumulated  depreciation                                                                                              |       | (26,564,000        | )           | (20,924,000       | )          |
|                                                                                                                        |       | 25,357,000         |        | 27,512,000        |       |
| Goodwill                                                                                                                    |       | 29,312,000         |        | 29,503,000        |       |
| Intangible  assets, net                                                                                                     |       | 7,542,000          |        | 8,249,000         |       |
| Deferred income  tax assets                                                                                                 |       | 6,099,000          |        | 6,099,000         |       |
| Other assets                                                                                                                |       | 2,745,000          |        | 278,000           |       |
|                                                                                                                        |       | $                  | 135,183,000 |              | $          | 139,882,000 |   |

 

See Notes to Consolidated Financial Statements.

4

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**
| ** **                                                                                                                                        | ** ** | **March 31,  2005** | ** **  | **June 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|-------------------------|------------|
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                    |       |                     |        |                    |       |
| Current  liabilities:                                                                                                                             |       |                     |        |                    |       |
| Current portion of long-term debt                                                                                                                 |       | $                        | 393,000     |                    | $          | 3,393,000 |   |
| Accounts payable                                                                                                                                  |       | 6,772,000                |        | 10,723,000              |       |
| Dividends payable                                                                                                                                 |       |                     |        | 1,486,000               |       |
| Accrued expenses                                                                                                                                  |       | 12,128,000               |        | 12,666,000              |       |
| Total current  liabilities                                                                                                                        |       | 19,293,000               |        | 28,268,000              |       |
| Long-term debt, net of current portion                                                                                                            |       | 53,723,000               |        | 47,014,000              |       |
| Other long-term  liabilities                                                                                                                      |       | 1,125,000                |        | 693,000                 |       |
|                                                                                                                                              |       | 74,141,000               |        | 75,975,000              |       |
| Commitments and  contingent liabilities (Note 10)                                                                                                 |       |                     |        |                    |       |
| Shareholders’  equity:                                                                                                                       |       |                     |        |                    |       |
| Preferred stock,  no par value; authorized 100,000 shares; none issued                                                                            |       |                     |        |                    |       |
| Common stock, par value $.01-2/3; authorized  15,000,000 shares; issued 10,761,271 shares at March 31 and 10,707,440  shares at June 30 |       | 179,000                  |        | 178,000                 |       |
| Capital in excess of par value of common stock                                                                                                    |       | 58,579,000               |        | 57,757,000              |       |
| Retained earnings                                                                                                                                 |       | 23,809,000               |        | 27,430,000              |       |
| Accumulated other comprehensive income                                                                                                            |       | 302,000                  |        | 614,000                 |       |
| Treasury stock, at cost, 1,929,614 shares at  March 31 and 1,951,240 shares at June 30                                                  |       | (21,827,000              | )           | (22,072,000             | )          |
| Total  shareholders’ equity                                                                                                                  |       | 61,042,000               |        | 63,907,000              |       |
|                                                                                                                                              |       | $                        | 135,183,000 |                    | $          | 139,882,000 |   |

 

See Notes to Consolidated Financial Statements.

5

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                           | ** ** | **Nine Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Operating activities:                                                                |       |                                                |       |   |   |
| Net earnings (loss)                                                                  |       | $                                                   | (2,041,000 | ) | $ | 3,233,000 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation                                                                         |       | 3,337,000                                           |       | 3,474,000 |   |
| Amortization                                                                         |       | 996,000                                             |       | 1,316,000 |   |
| (Gain) Loss on disposal of assets                                                    |       | (560,000                                            | )          | 212,000 |   |
| Provisions for losses on accounts receivable                                         |       | (166,000                                            | )          | 252,000 |   |
| Common stock issued for 401k plan                                                    |       | 391,000                                             |       |   |   |
| Changes in  operating assets and liabilities:                                        |       |                                                |       |   |   |
| Accounts receivable                                                                  |       | 1,955,000                                           |       | 5,758,000 |   |
| Inventories                                                                          |       | 551,000                                             |       | 2,267,000 |   |
| Other assets                                                                         |       | (935,000                                            | )          | (575,000 | ) |
| Accounts payable and accrued expenses                                                |       | (4,310,000                                          | )          | (8,263,000 | ) |
| Income taxes                                                                         |       | 712,000                                             |       | (2,668,000 | ) |
| Other long-term liabilities                                                          |       | (228,000                                            | )          | (436,000 | ) |
| Net cash provided  by (used in) operating activities.                                |       | (298,000                                            | )          | 4,570,000 |   |
| Investing  activities:                                                               |       |                                                |       |   |   |
| Cash paid for acquired business, net of cash  acquired                               |       |                                                |       | (11,263,000 | ) |
| Capital expenditures                                                                 |       | (2,820,000                                          | )          | (3,285,000 | ) |
| Patent expenditures                                                                  |       | (114,000                                            | )          |   |   |
| Proceeds from sale of asset                                                          |       | 992,000                                             |       |   |   |
| Payments received on note receivable                                                 |       | 217,000                                             |       |   |   |
| Proceeds from sale/leaseback                                                         |       | 1,206,000                                           |       |   |   |
| Net cash used in  investing activities                                               |       | (519,000                                            | )          | (14,548,000 | ) |
| Financing  activities:                                                               |       |                                                |       |   |   |
| Net proceeds from convertible debt offering                                          |       | 37,395,000                                          |       |   |   |
| Proceeds from revolving credit agreement                                             |       | 10,650,000                                          |       | 28,750,000 |   |
| Payments on revolving credit agreement                                               |       | (29,650,000                                         | )          | (13,250,000 | ) |
| Payments on term loan                                                                |       | (17,000,000                                         | )          | (1,500,000 | ) |
| Payments on notes payable                                                            |       | (291,000                                            | )          | (801,000 | ) |
| Proceeds from interest rate swap                                                     |       | 394,000                                             |       |   |   |
| Payment of semi-annual cash dividend                                                 |       | (3,066,000                                          | )          | (2,828,000 | ) |
| Proceeds from exercise of common stock options                                       |       | 677,000                                             |       | 1,884,000 |   |
| Net cash provided  by (used in) financing activities                                 |       | (891,000                                            | )          | 12,255,000 |   |
| Effect of exchange rate changes on cash                                              |       | (12,000                                             | )          | (7,000 | ) |
| Increase  (decrease) in cash and cash equivalents.                                   |       | (1,720,000                                          | )          | 2,270,000 |   |
| Cash and cash equivalents at beginning of period                                     |       | 2,389,000                                           |       | 3,753,000 |   |
| Cash and cash  equivalents at end of period                                          |       | $                                                   | 669,000    |   | $ | 6,023,000 |   |

 

See Notes to Consolidated Financial Statements.

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

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

2.     At March 31, 2005, the Company hadstock option plans providing for grants of options for directors based upon afixed calculation and grants of stock options and restricted stock foremployees as may be determined by the Compensation Committee of the Board ofDirectors. The cost of restricted stock granted is expensed in the period thestock is issued. The Company accounts for the stock options granted under therecognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related interpretations. No charges are madeto earnings in connection with the stock options granted, as all stock optionsgranted had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effecton net earnings and earnings per share if the Company had applied the fairvalue recognition provisions of FASB Statement No. 123, Accounting forStock-Based Compensation, to the stock options granted.
| ** **                                                                                                                                    | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                                    | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net earnings  (loss), as reported                                                                                                             |       | $                               | (2,041,000 | )                                | $          | 3,233,000 |   | $ | (741,000 | ) | $ | 446,000 |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                |       |                            |       | 252,000                          |       |   |   |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (779,000                        | )          | (1,075,000                       | )          | (280,000 | ) | (249,000 | ) |
| Pro-forma net  earnings (loss)                                                                                                                |       | $                               | (2,820,000 | )                                | $          | 2,410,000 |   | $ | (1,021,000 | ) | $ | 197,000 |   |
| Earnings (loss)  per share:                                                                                                                   |       |                            |       |                             |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                               | (.23       | )                                | $          | .38 |   | $ | (.08 | ) | $ | .05 |   |
| Basic—pro forma                                                                                                                          |       | $                               | (.32       | )                                | $          | .28 |   | $ | (.12 | ) | $ | .02 |   |
| Diluted—as reported                                                                                                                      |       | $                               | (.23       | )                                | $          | .37 |   | $ | (.08 | ) | $ | .05 |   |
| Diluted—pro forma                                                                                                                        |       | $                               | (.32       | )                                | $          | .27 |   | $ | (.12 | ) | $ | .02 |   |

 

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

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

7

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5.     The computation of basic and dilutedearnings per share is as follows:
| ** **                                               | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                                               | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Numerator:*                                             |       |                            |       |                             |       |   |   |   |   |
| Net earnings  (loss) available to common shareholders    |       | $                               | (2,041,000 | )                                | $          | 3,233,000 |   | $ | (741,000 | ) | $ | 446,000 |   |
| *Denominator:*                                           |       |                            |       |                             |       |   |   |   |   |
| Weighted average  shares  outstanding—basic         |       | 8,782,566                       |       | 8,495,076                        |       | 8,806,333 |   | 8,660,921 |   |
| Effect of  dilutive securities—common stock options |       |                            |       | 272,856                          |       |   |   | 220,571 |   |
| Weighted average  shares  outstanding—diluted       |       | 8,782,566                       |       | 8,767,932                        |       | 8,806,333 |   | 8,881,492 |   |
| *Net  earnings (loss) per share of common stock:*        |       |                            |       |                             |       |   |   |   |   |
| Basic                                                    |       | $                               | (.23       | )                                | $          | .38 |   | $ | (.08 | ) | $ | .05 |   |
| Diluted                                                  |       | $                               | (.23       | )                                | $          | .37 |   | $ | (.08 | ) | $ | .05 |   |

 

Employee stock options totaling 113,947 and 100,052shares, respectively, for the nine and three months periods ended March 31,2005 were not included in the diluted weighted average shares calculationbecause the effects of these securities were anti-dilutive.

There were outstanding options to purchase commonstock at prices that exceeded the average market price for the income statementperiods. These options have been excluded from the computation of dilutedearnings per share for both the nine-month and three-month periods ended March 31,2005 and 2004 and are as follows:
| ** **                        | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                        | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Average exercise  price per share |       | $                               | 24.67      |                             | $          | 25.25 |   | $ | 22.73 |   | $ | 25.19 |   |
| Number of shares                  |       | 311,100                         |       | 281,500                          |       | 492,400 |   | 295,200 |   |
|                                   |            |                                 |            |                                  |            |  |  |  |  |  |  |  |  |

 

6.     Accumulated other comprehensive incomeconsists of the following:
| ** **                                 | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2005**           | ** ** | **2004**          | ** ** |
| Currency translation  adjustment:          |       |               |       |              |       |
| Beginning Balance                          |       | $                  | (46,000    | )                 | $          | (44,000 | ) |
| Currency translation adjustment            |       | (27,000            | )          | (2,000            | )          |
| Ending Balance                             |       | $                  | (73,000    | )                 | $          | (46,000 | ) |
| Unrealized loss  on derivative instrument: |       |               |       |              |       |
| Beginning Balance                          |       | $                  | 660,000    |              | $          | — |   |
| Change in derivative instrument            |       | (285,000           | )          | 660,000           |       |
| Ending Balance                             |       | $                  | 375,000    |              | $          | 660,000 |   |
| Total accumulated  comprehensive income    |       | $                  | 302,000    |              | $          | 614,000 |   |

 

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Comprehensiveincome (loss) consists of the following:
| ** **                      | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                      | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net earnings  (loss)            |       | $                               | (2,041,000 | )                                | $          | 3,233,000 |   | $ | (741,000 | ) | $ | 446,000 |   |
| Other comprehensive  income:    |       |                            |       |                             |       |   |   |   |   |
| Currency translation adjustment |       | (27,000                         | )          | (22,000                          | )          | (19,000 | ) | (37,000 | ) |
| Change in derivative instrument |       | (285,000                        | )          | (138,000                         | )          | (65,000 | ) | (425,000 | ) |
| Comprehensive income  (loss)    |       | $                               | (2,353,000 | )                                | $          | 3,073,000 |   | $ | (825,000 | ) | $ | (16,000 | ) |

 

The Company’sderivative instrument, an interest rate swap arrangement, was liquidated duringFebruary 2005 and the Company received $394,000 in cash. The currentmarket value of the interest rate swap arrangement as of the date ofliquidation included in accumulated other comprehensive income is beingamortized over the remaining life of the originally forecasted transaction.

7.     Effective December1, 2003, the Company acquired substantially all of the assets and assumedcertain liabilities of the North American operations of Peek TrafficCorporation (Peek Traffic). The Company paid a purchase price of $15,693,000. Thepurchase price consisted of $11,263,000 in cash and 180,723 of the Company’scommon stock, issued from Treasury Stock, valued at $4,430,000. The cashportion of the purchase price was obtained from the Company’s revolving creditfacility. Peek Traffic is a designer, manufacturer and supplier of intelligentintersection control systems, red light enforcement systems and othertransportation equipment. The results of Peek Traffic have been included in theCompany’s Inform segment since the date of acquisition. The Company anticipatesthat the Peek Traffic business will provide future operating synergies in thetraffic control market, expand the Company’s customer base in the municipal andcounty markets and leverage the Company’s existing technologies within theInform segment.

Thefollowing summary presents the Company’s consolidated results of operations forthe nine-month period ended March 31 as if the acquisition had occurred atthe beginning of fiscal year 2004.
| ** **                             | ** ** | **Nine Months Ended** | ** **  |
|----------------------------------------|------------|---------------------------------|-------------|
| ** **                             | ** ** | **March 31,**              | ** **  |
| ** **                             | ** ** | **2005**                        | ** **  | **2004** | ** ** |
| Net sales                              |       | $                               | 106,386,000 |   | $ | 120,444,000 |   |
| Net earnings (loss)                    |       | (2,041,000                      | )           | 2,998,000 |   |
| Net earnings (loss) per  diluted share |       | $                               | (0.23       | ) | $ | 0.34 |   |

 

The consolidatedpro forma information is not necessarily indicative of the combined resultsthat would have occurred had the acquisitions occurred on that date, nor is itindicative of the results that may occur in the future.

8.     TheCompany’s operations are classified as two reportable segments within thehighway and transportation safety industry. The Company’s two reportablesegments are the manufacture and sale of the Company’s products which Protectand Direct, and the manufacture and sale of products which Inform and are oftenreferred to as Intelligent Transportation Systems (ITS) products. The Company’ssegments are discussed in further detail in the Company’s Annual Report on Form 10-Kfor the year ended June 30, 2004.

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Thefollowing table presents financial information about reported segments for thenine-month and three-month periods ended March 31, 2005 and 2004 alongwith the items necessary to reconcile the segment information to the totalsreported in the consolidated financial statements.
| ** **                         | ** ** | **Protect and** | ** ** | ** **  | ** ** | **Unallocated** | ** ** | ** **  | ** ** |
|------------------------------------|------------|----------------------|------------|-------------|------------|-----------------|------------|-------------|------------|
| ** **                         | ** ** | **Direct**           | ** ** | **Inform**  | ** ** | **Corporate**   | ** ** | **Total**   | ** ** |
| *2005*                             |       |                 |       |        |       |            |       |        |       |
| NINE MONTHS                        |       |                 |       |        |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 52,093,000 |        | $          | 54,293,000      |       |        |       | $ | 106,386,000 |   |
| Operating profit  (loss)           |       | 8,551,000            |       | (3,848,000  | )          | $               | (6,230,000 | )           | (1,527,000 | ) |
| Identifiable  assets               |       | 53,110,000           |       | 67,455,000  |       | 14,618,000      |       | 135,183,000 |       |
| THREE MONTHS                       |       |                 |       |        |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 18,417,000 |        | $          | 16,535,000      |       |        |       | $ | 34,952,000 |   |
| Operating profit  (loss)           |       | 4,021,000            |       | (1,935,000  | )          | $               | (2,317,000 | )           | (231,000   | ) |
| *2004*                             |       |                 |       |        |       |            |       |        |       |
| NINE MONTHS                        |       |                 |       |        |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 52,752,000 |        | $          | 58,095,000      |       |        |       | $ | 110,847,000 |   |
| Operating profit  (loss)           |       | 11,293,000           |       | (349,000    | )          | $               | (6,067,000 | )           | 4,877,000  |   |
| Identifiable  assets               |       | 53,570,000           |       | 104,422,000 |       | 10,518,000      |       | 168,510,000 |       |
| THREE MONTHS                       |       |                 |       |        |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 16,943,000 |        | $          | 19,226,000      |       |        |       | $ | 36,169,000 |   |
| Operating profit (loss)            |       | 3,443,000            |       | (1,600,000  | )          | $               | (2,302,000 | )           | (459,000   | ) |

 

Identifiable assetsof the Inform segment as of March 31, 2005 decreased to $67,455,000 from$104,422,000 as of March 31, 2004 primarily due to $32,600,000 in assetimpairment charges made in the fourth quarter of the fiscal year ended June 30,2004.

9.     Intangibleassets consist of the following:
| ** **                    | ** ** | **March 31, 2005** | ** ** | **June 30, 2004** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Gross**                    | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Carrying**                 | ** ** | **Accumulated**             | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                    | ** ** | **Amount**                   | ** ** | **Amortization**            | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Amortized  intangible assets: |       |                         |       |                        |       |   |   |   |   |
| Patents and licenses          |       | $                            | 2,934,000  |                        | $          | 1,714,000 |   | $ | 2,820,000 |   | $ | 1,597,000 |   |
| Technology and installed base |       | 2,491,000                    |       | 849,000                     |       | 2,491,000 |   | 700,000 |   |
| Customer relationships        |       | 3,807,000                    |       | 1,092,000                   |       | 3,807,000 |   | 827,000 |   |
| Trade names                   |       | 2,250,000                    |       | 285,000                     |       | 2,250,000 |   | 49,000 |   |
| Other                         |       | 640,000                      |       | 640,000                     |       | 640,000 |   | 586,000 |   |
| Total                         |       | $                            | 12,122,000 |                        | $          | 4,580,000 |   | $ | 12,008,000 |   | $ | 3,759,000 |   |

 

Amortization expense was $821,000 and $1,316,000 forthe nine months ended March 31, 2005 and 2004, respectively. The estimatedamortization expenses for this fiscal year ended June 30, 2005 and for thefour fiscal years subsequent to 2005 are as follows: $1,081,000, $1,161,000,$1,121,000, $1,057,000 and $845,000. The carrying amount of goodwill consists of$8,139,000 for the Protect and Direct segment as of March 31, 2005 and June 30,2004. Goodwill for the Inform segment decreased to $21,173,000 as of March 31,2005 from $21,364,000 as of June 30, 2004 due to a purchase accountingadjustment for Peek Traffic Corporation.

10

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

*Lease Commitments*

The Company uses variousleased facilities and equipment in its operations. The terms for these leasedassets vary depending on the lease agreements. These operating leases includeoptions for renewal. Annual minimum future rental payments for leasecommitments will be approximately $3,880,000 in fiscal year 2005, $6,382,000 infiscal years 2006 through 2007, $3,695,000 in fiscal years 2008 through 2009and $5,451,000 thereafter, for an aggregate of $19,408,000.

*Product WarrantyLiability*

TheCompany warrants to the original purchaser of its products that it will, at itsoption, repair or replace, without charge, such products if they fail due to amanufacturing defect. The term of these warranties varies (30 days to 5 years)by product. The Company accrues for product warranties, when, based onavailable information, it is probable that customers will make claims underwarranties relating to products that have been sold, and a reasonable estimateof the costs can be made. The Company’s estimated product warranty liability isas follows:
| Balance,  July 1, 2004       |   | $        | 3,672,000 |   |
|-----------------------------------|--------|----------|-----------|--------|
| Current  provisions               |   | 333,000  |      |
| Adjustments                       |   | (894,000 | )         |
| Expenditures                      |   | (464,000 | )         |
| Balance—March 31,  2005 |   | $        | 2,647,000 |   |

 

Certain amounts have beenreclassified as of July 1, 2004 to conform to the presentation as of March 31,2005.

*Legal*

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

*ExecutiveAgreements*

The Company has agreementswith certain executives which are designed to retain the services of keyemployees and to provide for continuity of management in the event of atermination or an actual or threatened change in control of the Company. Uponoccurrence of a termination or a triggering event after a change in control, asdefined, the Company would be liable for payment of benefits under theseagreements, to a maximum amount of $5,114,000. The Company has by-laws andagreements under which it indemnifies its directors and officers from liabilityfor certain events or occurrences while the directors or officers are, or were,serving at the Company’s request in such capacities. The term of theindemnification period is for the director’s or officer’s lifetime. The Companybelieves that any obligations relating to this indemnification arepredominantly covered by insurance subject to certain exclusions anddeductibles. Historically, the Company has not made payments under theseexecutive agreements, and no amount has been accrued in the accompanyingconsolidated financial statements.

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*Business PurchaseAgreements*

As part of the purchaseprice of UST, the Company has agreed to pay contingent consideration based on apercentage of revenues for sales of certain products between May 1, 2003and December 31, 2009, up to a maximum of $5,250,000. No amounts have beenpaid through March 31, 2005. Also as part of the purchase price of UST,the Company guaranteed the principal and interest payments on the $5,000,000five-year, 5.25% subordinated promissory note payable to the sellers. TheCompany is leasing UST’s Santa Fe Springs, California facility and its Tecate,Mexico facility from affiliates of the sellers, for five year terms which canbe renewed for five years. The Company has guaranteed its performance of itsobligations under the leases. The lease commitments under the leases areincluded in the amounts mentioned above.

*Indemnification ofLenders and Agents Under Credit Facilities*

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

*Bid and PerformanceBonds*

The Company has enteredinto bid and performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to the Company’s performance underthe applicable contract. The total amount of bid and performance related bondsthat were available and undrawn was $1,833,000 at March 31, 2005 and$3,356,000 at June 30, 2004. Historically, the Company has not madesignificant payments on bid and performance bonds, and no amount has beenaccrued in the accompanying consolidated financial statements.

*Other Commitments*

The Company has standby letters of credit coveringpotential workers’ compensation liabilities. The total amount of standby lettersof credit that were outstanding at March 31, 2005 was $1,166,000 and at June 30,2004 was $762,000. The Company has included $1,012,000 in accrued liabilitiesfor this exposure as of March 31, 2005.

The Company hascertain non-cancellable royalty agreements, which contain certain minimumpayments in the aggregate of $2,313,000 through fiscal year 2012. The Companyhas included $247,000 in accrued liabilities for these commitments as of March 31,2005.

11.   During February2005, the Company sold $40,000,000 of 7% Convertible Senior Subordinated Notesdue February 15, 2025 in a private placement and received net proceeds of$37,395,000. Debt issue costs representing direct costs incurred related to theissuance of the Notes in the amount of $2,605,000 were recorded in other assetsand are being amortized into interest expense over five years, the effectiveterm of the Notes. The net proceeds were used to pay off the Company’s bankterm loan and reduce the amount of its revolving credit agreement. The conversionprice is $25.90 per share, which represented a 40% premium over the closingprice of the Company’s stock on the close of the transaction. If fully converted, the notes would convertinto approximately 1,544,000 shares of the Company’s common stock. The sharesare not included in earnings per share as they are currently anti-dilutiveuntil earnings per share reaches approximately $1.20 per share. The notes arefully redeemable by the Company at any time after February 20, 2008 at100% of the principal amount plus accrued and unpaid interest. The investorsmay require the Company to repurchase the notes in cash at a price equal to100% of the principal amount 

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ofthe notes plus accrued and unpaid interest, if any, on February 15, 2010,2015 or 2020. Interest is payable semi-annually on February 15 and August 15of each year, beginning August 15, 2005.

During April 2005, the Company entered into a newbank credit agreement with a secured revolving credit facility of $30 million. Therevolving credit availability is based on a formula of eligible accountsreceivable, eligible inventory, machinery & equipment and real estate,subject to a minimum excess collateral availability factor. Effective June 30,2006, the Company will also be required to maintain a maximum senior leverageratio. Under certain conditions, the Company may request a release of allsecurity interests after June 30, 2006, at which time the Company would nolonger be subject to a borrowing base formula, but would be subject to severalfinancial covenants.

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**PART I—FINANCIAL INFORMATION**

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

*OVERVIEW*

Quixote Corporation (the Company) and its subsidiariesdevelop, manufacture and market highway and transportation safety products toprotect, direct and inform motorists, pedestrians and road workers in bothdomestic and international markets. The Company’s operations are comprised oftwo reportable segments within the highway and transportation safety industry,concentrating on safety problems and designing products to providetransportation safety solutions. The Company’s two reportable segments are—themanufacture and sale of highway and transportation safety products which “Protectand Direct”, and the manufacture and sale of products and services which “Inform”that are often referred to as Intelligent Transportation Systems (ITS) products.The Company’s Protect and Direct segment provides solutions for improvingsafety on the roads either by minimizing the severity of crashes that occur orby preventing crashes from occurring by directing or guiding traffic. Theprimary product lines within the Protect and Direct segment includeenergy-absorbing products such as crash cushions, truck-mounted attenuators,sand-filled barrels and water-filled barriers, and directing and guidingproducts such as flexible post delineators and glare screen systems. TheCompany’s Inform segment provides solutions for improving traffic flow andsafety on roads and runways by providing information. The primary product lineswithin the Inform segment include intelligent intersection control systems;mobile and permanent variable message signs; advanced sensing products whichmeasure distance, count and classify vehicles, and sense weather conditions; computerizedhighway advisory radio transmitting systems; automated red light enforcementsystems; and other transportation equipment.

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

*RESULTS OFOPERATIONS*

The prolonged delay in the passage of new federalhighway funding legislation, coupled with state budgetary constraints, continueto have a material, negative impact on the Company’s business. The previousbill, TEA-21, expired in September 2003, but has currently beenextended until May 31, 2005. Until the new bill is approved, however, multi-yearfunding for transportation safety by the federal government will continue to beuncertain, and the Company believes this uncertainty will continue tonegatively impact state spending for the products and services offered by ourCompany. In addition, sales volume at U.S. Traffic Corporation (UST) continuesto be substandard and lower than originally planned. The Company believes thisis due in part to the absence of new large contracts related to ongoing stateand municipal budgetary issues.

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The following table setsforth selected key operating statistics relating to the Company’s financialresults:
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **March 31**                | ** ** | **March 31**               | ** ** |
| ** **                                                    | ** ** | **2005**                         | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues by  Segment:                                         |       |                             |       |                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                | 18,417,000 |                            | $          | 16,943,000 |   | $ | 52,093,000 |   | $ | 52,752,000 |   |
| Inform                                                        |       | 16,535,000                       |       | 19,226,000                      |       | 54,293,000 |   | 58,095,000 |   |
|                                                          |       | $                                | 34,952,000 |                            | $          | 36,169,000 |   | $ | 106,386,000 |   | $ | 110,847,000 |   |
| Geographic Revenues:                                          |       |                             |       |                            |       |   |   |   |   |
| Domestic                                                      |       | $                                | 30,852,000 |                            | $          | 32,634,000 |   | $ | 93,779,000 |   | $ | 99,621,000 |   |
| International                                                 |       | 4,100,000                        |       | 3,535,000                       |       | 12,607,000 |   | 11,226,000 |   |
|                                                          |       | $                                | 34,952,000 |                            | $          | 36,169,000  |   | $ | 106,386,000 |   | $ | 110,847,000 |   |
| Operating Income by Segment:                                  |       |                             |       |                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                | 4,021,000  |                            | $          | 3,443,000  |   | $ | 8,551,000 |   | $ | 11,293,000 |   |
| Inform                                                        |       | (1,935,000                       | )          | (1,600,000                      | )          | (3,848,000 | ) | (349,000 | ) |
| Unallocated Corporate                                         |       | (2,317,000                       | )          | (2,302,000                      | )          | (6,230,000 | ) | (6,067,000 | ) |
|                                                          |       | $                                | (231,000   | )                               | $          | (459,000 | ) | $ | (1,527,000 | ) | $ | 4,877,000 |   |
| Gross profit percentage                                       |       | 34.4                             | %          | 27.6                            | %          | 30.1 | % | 30.5 | % |
| Selling and administrative expenses as a percentage  of sales |       | 30.7                             | %          | 26.1                            | %          | 27.7 | % | 23.8 | % |
| Diluted earnings per share                                    |       | $                                | (.08       | )                               | $          | .05 |   | $ | (.23 | ) | $ | .37 |   |

 

*Revenues*

The Company’s net sales for the thirdquarterof fiscal 2005 decreased $1,217,000, or 3%, to $34,952,000 from $36,169,000 forthe third quarter last year, as increased sales in the Protect and Directsegment were more than offset by decreased sales in the Inform segment.

The Company’s net sales for the first nine months offiscal 2005 decreased $4,461,000 or 4%, to $106,386,000 from $110,847,000 inthe same period last year, due to decreased sales in both segments. PeekTraffic contributed $22,128,000 net sales in fiscal 2005, compared to the$8,220,000 in sales contributed for the four months since the acquisition in December 2003included in fiscal 2004. Excluding the Peek Traffic acquisition, net salesdecreased by 18% over the prior period.

*Protect and Direct*—Net sales forthe Company’s Protect and Direct segment for the third quarter of fiscal 2005increased 9% to $18,417,000 from $16,943,000 for the third quarter last year. Increased sales of truck-mounted attenuatorsand parts were partially offset by lower sales of delineators.

For the first nine months of fiscal 2005, net salesfor the Protect and Direct segment decreased 1% to $52,093,000 from $52,752,000for the same period last year. Decreased sales of sand-filled barrels and delineatorproducts were partially offset by increased sales of parts.

*Inform*—Net sales for the Company’sInform segment for the third quarter of fiscal 2005 decreased 14% to$16,535,000 from $19,226,000 for the third quarter last year, primarily due tolower sales of intersection control systems and of highway advisory radiosystems. This segment continues to be affected by the absence of largecontracts related to ongoing state and municipal budgetary issues.

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For the first nine months of fiscal 2005, net salesfor the Company’s Inform segment decreased 7% to $54,293,000 from $58,095,000for the same period last year. Excluding the acquisition of Peek Traffic, salesfor the segment decreased $17,710,000, or 36% primarily due to lower sales ofintersection control systems and of highway advisory radios.

*Geographic*—International salesfor the third quarter of fiscal 2005 increased 16% to $4,100,000 from$3,535,000 in the third quarter last year. Domestic sales for the third quarterof fiscal 2005 decreased 5% to $30,852,000 from $32,634,000.

International sales forthe first nine months of fiscal 2005 increased 12% to $12,607,000 from$11,226,000 for the same period last year due to strong sales in Europe and theAsia-Pacific region. Sales of the Triton Barrier® product line also continue tobe strong in Australia. Domestic sales for the first nine months of fiscal 2005decreased 6% to $93,779,000 from $99,621,000.

*Gross Profit Margin*

The Company’s gross profit margin for the third quarterof fiscal 2005 was 34.4% compared to 27.6% for the third quarter last year dueto higher gross profit margins in both the Protect and Direct and the Informsegments. The gross profit margin for the Protect and Direct segment increasedprimarily due to volume efficiencies associated with the higher level of sales,offset somewhat by increased raw material costs. The gross profit margin for theInform segment increased as improved gross margins for highway advisory radiosand sensing systems were partially offset by lower gross margins forintersection control systems.

The gross profit marginfor the first nine-month period of fiscal 2005 was 30.1% compared to 30.5% forthe same period last year due principally to lower gross profit marginsgenerated at UST and in the Protect and Direct segment. The gross profit marginfor the Protect and Direct segment for the first nine months of fiscal 2005 decreasedprimarily due to volume inefficiencies associated with the lower level of salesand increased raw material costs. The gross profit margin for the Informsegment improved slightly due to favorable product sales mix.

*Selling andAdministrative Expenses*

Selling and administrative expenses for the thirdquarter of fiscal 2005 increased $1,306,000, or 14%, to $10,746,000 from$9,440,000 for the third quarter last year. This was primarily due to variablecosts associated with the higher level of sales for the Protect and Directsegment. Selling and administrative expenses increased as a percentage of salesto 30.7% for the third quarter of 2005 from 26.1% last year, due to theincrease in sales.

Selling and administrativeexpenses for the first nine months of fiscal 2005 increased $3,111,000, or 12%,to $29,515,000 from $26,404,000 for the same period last year due to theinclusion of expenses from Peek Traffic which added $1,990,000 for the currentnine-month period, not comparable to the prior period. Excluding Peek Trafficresults, selling and administrative expenses increased $1,121,000, or 5%, forthe first nine months of fiscal 2005primarily related to higher costs in the Protect and Direct segment. Sellingand administrative expenses increased as a percentage of sales to 27.7% for thefirst nine months of fiscal 2005 compared to 23.8% last year, due to thedecrease in sales and the fixed nature of most of the Company’s selling andadministrative expenses.

*Research andDevelopment*

Research and development expenditures were $1,498,000for the third quarter of fiscal 2005 compared to $1,003,000 for the thirdquarter last year. The increase of $495,000 was primarily due to increasedexpenditures in the Protect and Direct segment related to the development ofnew crash 

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cushions and to increasedexpenditures at UST as they work on upgrades and enhancements to their existingproduct lines.

Research and developmentexpenditures were $4,004,000 for the current nine-month period compared with$2,549,000 for the same period last year. The increase of $1,455,000, waspartially due to the inclusion of research and development expenditures at PeekTraffic, which added $224,000 in expenses not comparable to the prior period. Theremaining increased expenditures were due to work on new crash cushions, toincreased expenses at UST as it works on upgrades and enhancements to itsexisting product lines, and to increased inside and outside development costsfor other projects. The Company continues to invest in development projects fornew applications as well as upgrades and modifications to existing products.

*Operating Profit(Loss)*

For the third quarter of fiscal 2005, the operatingloss was $231,000 compared to an operating loss of $459,000 for the thirdquarter of fiscal 2004. Operating profit for the Protect and Direct Groupincreased to $4,021,000 for the third quarter of fiscal 2005 from $3,443,000for the third quarter last year. The Inform Group operating loss of $1,935,000compared to an operating loss of $1,600,000 for the third quarter of last year.

For the first nine monthsof fiscal 2005, the operating loss was $1,527,000 compared to operating profitof $4,887,000 for the first nine months last year. For the nine months ended March 31,2005, operating profit for the Protect and Direct Group decreased to $8,551,000from $11,293,000 for the same period last year. The Inform Group operating lossof $3,848,000 compared to an operating loss of $349,000 for the same periodlast year. Peek Traffic contributed an operating profit of $1,757,000 in thecurrent period not comparable to the prior period.

*Interest Expense*

Interest expense for thethird quarter of fiscal 2005 increased to $964,000 from $588,000 for the thirdquarter last year, due to higher interest rates and to the amortization of debtissuance costs. Interest expense for the first nine months of fiscal 2005increased to $2,359,000 from $1,590,000 for the same nine-month period lastyear. The increase was due to the higher level of average long-term debt sincethe acquisition of Peek Traffic in December 2003, to higher interest ratesand to the amortization of debt issuance costs. The interest rate on theCompany’s credit agreement is based on prime or LIBOR and a fixed rate, plus amargin, and the weighted average rate was 6.3% as of March 31, 2005. Theinterest rate on the Company’s $40 million in Convertible Senior SubordinatedNotes is 7%.

*Other Income*

The Company receivedproceeds of $992,000 from the sale of land and recorded a gain on sale of$560,000 as other income during the second quarter of fiscal 2005. The Companyrecorded a loss on disposal of fixed assets of $212,000 in the third quarter offiscal 2004 in connection with the relocation of the Company’s Chicagoheadquarters.

*Provision forIncome Taxes*

The income tax benefit forthe third quarter of fiscal 2005 was $454,000 and was $1,251,000 for the firstnine months of fiscal 2005. The income tax benefit for the third quarter andnine-month period of fiscal 2004 included an income tax benefit of $1,249,000,or $0.14 per diluted share, which was primarily related to the favorablesettlement of a tax audit.

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*Net Earnings (Loss)*

The net loss for the thirdquarter of fiscal 2005 was $741,000, or $0.08 cents per diluted share, comparedto net earnings of $446,000, or $0.05 cents per diluted share, for the thirdquarter last year. The net loss for the first nine-month period was $2,041,000,or $0.23 cents per diluted share, compared to net earnings of $3,233,000, or$0.37 cents per diluted share, for the same period last year.

*FINANCIAL CONDITION*

*Liquidity andCapital Resources*

The Company’s principal sources of funds historicallyhave been cash flows from operations and borrowings from banks. The Company hadcash and cash equivalents of $669,000 as of March 31, 2005 and access toadditional funds under a bank credit agreement. During February 2005, theCompany sold $40 million of 7% Convertible Senior Subordinated Notes due February 15,2025. The proceeds from the sale of the Notes were used to pay off the Company’sexisting term loan and pay down the revolving credit facility. During April 2005,the Company entered into an amended and restated bank credit agreement with theLaSalle Bank. The Company believes that this credit agreement is an importantsource of liquidity. The credit agreement provides for a $30 million securedrevolving credit facility. The agreement contains both fixed and floatinginterest rate options, at the prime rate or LIBOR rate, plus a margin. Thecredit agreement also contains affirmative and negative covenants includingrequirements that the Company meet certain consolidated financial criteria,including a maximum senior leverage ratio (as defined in the agreement) effective June 30,2006. The covenants also limit the incurrence of additionalindebtedness, acquisitions, liens and encumbrances and other matterscustomarily restricted in such agreements. The agreement currently expires in April 2008,but may be renewed one additional year on each anniversary date upon mutualconsent of the Company and the Bank. The Company is currently in compliancewith its debt covenants as of March 31, 2005.

The Company’s outstandingborrowings were $54,116,000, or 47% of total capitalization, as of March 31,2005, of which $8,000,000 was related to the bank credit facility. Thiscompares to $50,407,000, or 44% of total capitalization, as of June 30,2004. Included in the amount outstanding as of March 31, 2005 was$40,000,000 in Convertible Senior Subordinated Notes, which were issued on February 9,2005. Included in the amounts outstanding related to the bank credit facilitywere borrowings against the revolving credit facility and term loan of$44,000,000 as of June 30, 2004. The amount of standby letters of creditoutstanding was $1,166,000 as of March 31, 2005 and was $762,000 as of June 30,2004.

*Cash Flows*

Cash flows used by operations was $298,000 during thefirst nine months fiscal 2005 compared to $4,570,000 cash provided byoperations in the first nine months of fiscal 2004. In the first nine months offiscal 2004, cash flow generated by operations was primarily derived fromearnings before non-cash expenses such as depreciation and amortization. Thedecrease in cash generated by operating activities in the first nine months offiscal 2005 primarily reflects decreased earnings before non-cash expenses. Thereceipt of income tax refunds of approximately $2 million in the first quarterof fiscal 2005 added to cash inflows, offset by tax payments during the firstnine-month period of fiscal 2005. In the first nine-months of fiscal 2004, aninvestment in working capital, primarily at UST, through the payment ofaccounts payable and accrued expenses in the first quarter of fiscal 2004 wereoffset by decreases in the level of accounts receivable and inventory.

Investing activities used cash of $519,000 during thefirst nine months of fiscal 2005, compared to $14,548,000 in the first ninemonths of the prior year. Expenditures during fiscal 2005 included $2,934,000for capital and patent expenditures, which were offset by $992,000 in proceedsreceived from the sale of land and $217,000 proceeds received from the finalpayment of a note receivable. Also during the first nine 

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months of fiscal 2005, theCompany received cash of $1,206,000 in connection with a sale-leasebackarrangement of equipment relating to a paint line. The lease is recorded as anoperating lease and the future lease payments are included in the leasecommitments in Note 10 to the Consolidated Financial Statements contained inthis Form 10-Q.

Financing activities used cash of $891,000 during thefirst nine months of fiscal 2005, compared to $12,255,000 in cash provided byfinancing activities during the first nine months of fiscal 2004. The Companysold $40,000,000 of Convertible Senior Subordinated Notes in February 2005and received net proceeds of $37,395,000. The proceeds from the sale of theNotes were used to pay off the term loan under the Company’s credit agreementand pay down the revolving credit facility. During the first nine months of2005, the Company paid a net $19,000,000 on the Company’s outstanding revolvingcredit facility, paid $17,000,000 against the remaining balance of the termloan and paid $291,000 on other notes payable. The Company’s interest rate swaparrangement was liquidated in the third quarter of fiscal 2005 and the Companyreceived cash of $394,000. The Company also received cash of $677,000 from theexercise of common stock options. The payment of the Company’s semi-annual cashdividend used cash of $3,066,000.

For the remainder offiscal 2005, the Company anticipates needing approximately $1,000,000 in cashfor capital and patent expenditures. The Company may require additionalinvestments in working capital to maintain growth. The Company may also needadditional funds as it considers acquiring businesses that complement itsexisting operations or to repurchase its own common stock from time to time. Theseexpenditures will be financed either through the Company’s cash on-hand, cashgenerated from its operations or from borrowings available under the Company’sbank credit facility. The Company believes its existing cash, cash generatedfrom operations and funds available under its existing credit facility aresufficient for planned operating and capital requirements in the near term.

*OFF-BALANCE SHEETARRANGEMENTS AND CONTRACTUAL OBLIGATIONS*

The Company is subject tocertain debt obligations, guarantees, commitments and contingent liabilitiesfurther described in the Company’s Annual Report on Form 10-K forthe year ended June 30, 2004. The following table presents the Company’scontractual obligations to make future payments under contracts, such as debtand lease agreements, as of March 31, 2005:
| ** **                | ** ** | ** **                                       | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than**                                   | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **Total**                                        | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **   5 Years   ** | ** ** |
| ** **                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt            |       | $                                                | 54,116     |               |       | $                  | 393        |               |       |                                                 | $          | 723 |   |   |   | $ | 5,000 |   |   |   | $ | 48,000 |   |   |
| Operating leases          |       | 19,408                                           |       |               | 3,880      |               |       |               | 6,382      |                                                 |       |   | 3,695 |   |   |   | 5,451 |   |   |
| Minimum royalty  payments |       | 2,313                                            |       |               | 513        |               |       |               | 600        |                                                 |       |   | 600 |   |   |   | 600 |   |   |
| Total                     |       | $                                                | 75,837     |               |       | $                  | 4,786      |               |       |                                                 | $          | 7,705 |   |   |   | $ | 9,295 |   |   |   | $ | 54,051 |   |   |

 

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*FUTURE OUTLOOK*

The Company has been affected by the general slowdownin U.S. highway safety construction spending for the Company’s products. TheCompany believes this is due principally to the prolonged delay in the passageof new federal highway legislation as well as revenue shortfalls and budgetconstraints at the state level. The previous highway funding bill, TEA-21,expired in September 2003, but has been extended through May 31, 2005. Thetiming of the passage of the new highway legislation is uncertain and furtherextensions may be necessary. Until new legislation is passed, multi-yearfunding for transportation safety by the federal government will continue to beuncertain, and the Company believes this uncertainty will continue tonegatively impact spending on the products and services offered by the Company.Even if a new bill is passed in calendar 2005, the Company will not realize thefull benefit of the bill’s passage until fiscal 2006.

The substandard sales volumes and operating losses atUST are expected to continue during fiscal 2005 and into the first half offiscal 2006. The Company is continuing to implement its plan to rationalizeportions of the UST and Peek Traffic operations which includes integratingproduct offerings, outsourcing non-critical component parts and focusingmanufacturing facilities to obtain greater synergies.

The Company experiencesfluctuation in its gross profit margin from quarter to quarter primarily due tosales volume related to seasonality, variability in product mix and changes inthe competitive environment. In addition, the Company has acquiredcomplementary businesses over the past several years and, as part of itsstrategy, may continue to acquire complementary businesses. The gross profitmargins of certain acquired product lines are lower than the Company’shistorical gross profit margin, which is adversely affecting the Company’sgross profit margin. The Company is also experiencing rigorous competition in severalof its product lines, including its variable message sign, intersection control,and weather sensing system product lines. In addition, the Company has beenaffected by increased prices for certain commodities, particularly steel andresin, which can be a significant component of the cost of certain of theCompany’s products and negatively impact the Company’s gross margin for certainproducts as the Company has generally been unable to increase product prices tooffset those commodity price increases. There can be no assurance that thesetrends will improve significantly in the near future.

*SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements. Management’s estimatesalso affect the reported amounts of revenues and expenses during the reportingperiod. In addition, certain normal and recurring estimates are made includingestimates in determining the allowance for doubtful accounts receivable,inventory valuation reserves, valuation allowance on deferred tax assets andhealth care liabilities. These estimates are made using management’s bestjudgment given relevant factors and available data. Actual results could differmaterially from those estimates. Note 2 to the Company’s June 30, 2004consolidated financial statements includes a summary of the significantaccounting policies, methods and estimates used in the preparation of theCompany’s consolidated financial statements. There have been no material changesin accounting policies, methods and estimates used by management. In theopinion of management, the Company does not have any individual accountingpolicy or use any individual estimate that is critical to the preparation ofits consolidated financial statements. In most instances, the Company must usean accounting policy or method because it is the only policy or methodpermitted under U.S. GAAP. The Company believes the following significantaccounting policies and methods used by the Company are the most important tothe presentation of the Company’s financial statements:

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

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

Long-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, the Company assesses the possibility of obsolescence,demand, new technology, competition, and other pertinent economic factors andtrends that may 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 the Companyare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable inrelation to future undiscounted cash flows of underlying asset groups. The netcarrying value of assets not recoverable is reduced to fair value. Fair valuesof amortized long-lived assets are determined based upon the performance of athird party fair value appraisal. Patents and other finite-lived intangibleassets are amortized on a straight-line or systematic method over the life ofthe patent or intangible asset.

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

The impairment review is highly judgmental andinvolves the use of significant estimates and assumptions. These estimates andassumptions have a significant impact on the amount of any impairment chargerecorded. Estimates of fair value are primarily determined using discountedcash flow methods and are dependent upon assumptions of future sales trends,market conditions and cash flows of each reporting unit over several years. Actualcash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows. The impact of these estimates andassumptions on impairment testing of goodwill is particularly critical for theCompany’s Inform segment with $21,173,000 of the Company’s $29,312,000 ofgoodwill recorded in the Company’s March 31, 2005 balance sheet.

Income Taxes:   TheCompany recognizes deferred tax assets and liabilities for the expected futuretax consequences of events that have been included in the financial statementsor tax returns. Under this method, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. In assessing therealizability of the deferred tax assets, management considers whether it ismore likely than not that some portion or all of the deferred tax assets willnot be 

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realized.To the extent that any future tax benefits are not expected to be fullyrealized, such future tax benefits are reduced by a valuation allowance. Realizationof deferred tax assets assumes that the Company will be able to generatesufficient taxable income so that the assets will be realized. The factors thatthe Company considers in assessing the likelihood of realization include theforecast of future taxable income and available tax planning strategies thatcould be implemented to realize the deferred tax assets. The Company expectsthe deferred tax assets currently recorded to be fully realizable, howeverthere can be no assurance that an increased valuation allowance would not needto be recorded in the future.

*RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS*

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

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

*FORWARD LOOKING STATEMENTS*

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

Investors are cautionedthat all forward-looking statements involve risks and uncertainties, includingthose detailed in the Company’s public filings with the SEC, news releases andother communications, which speak only as of the dates of those filings orcommunications. The Company does not undertake any obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. Risks and uncertainties and other factors could causeactual results to differ materially from the Company’s expectations. Factorswhich could cause materially different results include, among others,uncertainties related to continued federal, state and municipal funding forhighways and risks related to reductions in government expenditures; thesuccessful completion, integration and rationalization of acquisitions; theintroduction and acceptance of the Company’s products and services; anunfavorable change in product sales mix; seasonality along with the extent andtiming of the award of large contracts; the cyclical nature of the Company’sgovernmental markets; competitive and pricing pressures; increasing rawmaterial costs; excess manufacturing capacity; weather conditions; acts of warand terrorist activities; the possible 

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impairmentof goodwill and other intangible assets; the ability to generate sufficientfuture cash flows to be in compliance with financing agreements; and generaleconomic conditions.

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

Item 7.A. of the Company’s Annual Report on Form 10-Kfor the year ended June 30, 2004 presents information regardingQuantitative and Qualitative Disclosures about Market Risk.

The Company is exposed tomarket risk from fluctuations in interest rates. The Company managed itsexposure to interest rate fluctuations beginning in fiscal 2004 through the useof derivative instruments in the form of non-trading interest rate swaps. TheCompany’s interest rate swap arrangement was liquidated in the third quarter offiscal 2005.

***ITEM 4.****                **Controls and Procedures*

(a)          Evaluation of DisclosureControls and Procedures

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

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**PART II—OTHER INFORMATION**

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

*ITEM 6.   Exhibits*
|   | (a)    | Exhibits |
|--------|--------|----------|
|   |   | 10(a)    | Amended and Restated  Credit Agreement dated as of April 20, 2005 among Quixote Corporation as  the borrower (the “Borrower”) and LaSalle Bank National Association as lender  (the “Lender”); Revolving Loan Note dated April 20, 2005 from Borrower  to the Lender; and the following additional auxiliary documents all dated as  of April 20, 2005: Reaffirmation and Amendment of California Deed of  Trust between Energy Absorption Systems, Inc. and Lender; Reaffirmation  and Amendment of Pennsylvania Mortgage between Nu-Metrics, Inc. and  Lender; Reaffirmation and Amendment of Alabama Mortgage between Energy  Absorption Systems (AL) LLC and Lender; Mortgage and Security Agreement  between Spin-Cast Plastics, Inc. and Lender; Reaffirmation and Amendment  of Security Agreement in favor of the Lender by certain identified  subsidiaries of the Borrower; Reaffirmation and Amendment of Trademark  Security Agreement in favor of Lender by Energy Absorption  Systems, Inc.; Reaffirmation and Amendment of Patent Security Agreement  in favor of Lender by Energy Absorption Systems, Inc.; and Reaffirmation  and Amendment of Subsidiary Stock Pledge Agreements in favor of Lender by the  Company, Quixote Transportation Safety, Inc., TranSafe Corporation and Energy  Absorption Systems, Inc. |
|   |   | 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 ended March 31,2005 to be signed on its behalf by the undersigned thereunto duly authorized.
|                          | QUIXOTE CORPORATION                                                                                  |
|--------------------------|------------------------------------------------------------------------------------------------------|
| DATED:  May 5, 2005 | /s/ DANIEL P. GOREY                                                                                  |
|                     | DANIEL P. GOREY                                                                                      |
|                     | *Chief Financial Officer,  Vice President and Treasurer  (Chief Financial & Accounting Officer)* |

 

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**EXHIBITINDEX**

Exhibits:
|        |   | 10(a) | Amended and Restated  Credit Agreement dated as of April 20, 2005 among Quixote Corporation as  the borrower (the “Borrower”) and LaSalle Bank National Association as lender  (the “Lender”); Revolving Loan Note dated April 20, 2005 from Borrower  to the Lender; and the following additional auxiliary documents all dated as  of April 20, 2005: Reaffirmation and Amendment of California Deed of  Trust between Energy Absorption Systems, Inc. and Lender; Reaffirmation  and Amendment of Pennsylvania Mortgage between Nu-Metrics, Inc. and  Lender; Reaffirmation and Amendment of Alabama Mortgage between Energy  Absorption Systems (AL) LLC and Lender; Mortgage and Security Agreement  between Spin-Cast Plastics, Inc. and Lender; Reaffirmation and Amendment  of Security Agreement in favor of the Lender by certain identified  subsidiaries of the Borrower; Reaffirmation and Amendment of Trademark  Security Agreement in favor of Lender by Energy Absorption Systems, Inc.;  Reaffirmation and Amendment of Patent Security Agreement in favor of Lender  by Energy Absorption Systems, Inc.; and Reaffirmation and Amendment of  Subsidiary Stock Pledge Agreements in favor of Lender by the Company, Quixote  Transportation Safety, Inc., TranSafe Corporation and Energy Absorption  Systems, Inc. |
|--------|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 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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