10-Q 1 a2079960z10-q.htm 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended March 31, 2002

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

For the transition period from To

Commission file number 0-7903

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

QUIXOTE CORPORATION
(a Delaware Corporation)

One East Wacker Drive
Chicago, Illinois 60601
Telephone: (312) 467-6755

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 7,719,716 shares of the Company's Common Stock ($.01²/3 par value) were outstanding as of March 31, 2002.

PART I—FINANCIAL INFORMATION

QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

		Nine Months Ended March 31,
		2002			2001
Net sales		$	62,279,000		$	64,288,000
Cost of sales			40,019,000			36,033,000

Gross profit			22,260,000			28,255,000
Operating expenses:
	Selling & administrative		17,087,000			17,647,000
	Research & development		1,561,000			912,000

			18,648,000			18,559,000
Operating profit			3,612,000			9,696,000

Other income (expense):
	Interest income		27,000			60,000
	Interest expense		(949,000	)		(1,042,000	)
	Other		830,000

			(92,000	)		(982,000	)

Earnings before income taxes			3,520,000			8,714,000
Provision for income taxes			1,267,000			3,311,000

Earnings from continuing operations			2,253,000			5,403,000
Earnings from discontinued operations, net of income taxes			192,000

Net earnings		$	2,445,000		$	5,403,000

Per share data—basic:
	Earnings from continuing operations	$	.29		$	.74
	Net earnings	$	.32		$	.74
	Average common shares outstanding		7,651,754			7,343,640
Per share data—diluted:
	Earnings from continuing operations	$	.28		$	.69
	Net earnings	$	.30		$	.69
	Average diluted common shares outstanding		8,132,445			7,889,014

See Notes to Consolidated Financial Statements.

QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

		Three Months Ended March 31,
		2002			2001
Net sales		$	21,507,000		$	22,688,000
Cost of sales			13,899,000			12,863,000

Gross profit			7,608,000			9,825,000
Operating expenses:
	Selling & administrative		5,815,000			6,158,000
	Research & development		667,000			314,000

			6,482,000			6,472,000
Operating profit			1,126,000			3,353,000

Other income (expense):
	Interest income		2,000			9,000
	Interest expense		(240,000	)		(378,000	)

			(238,000	)		(369,000	)

Earnings before income taxes			888,000			2,984,000
Provision for income taxes			319,000			1,134,000

Net earnings		$	569,000		$	1,850,000

Per share data—basic:
Net earnings		$	.07		$	.25
Average common shares outstanding			7,744,173			7,367,245
Per share data—diluted:
	Net earnings	$	.07		$	.23
	Average diluted common shares outstanding		8,035,561			7,979,747

See Notes to Consolidated Financial Statements.

QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets

			March 31, 2002			June 30, 2001
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	1,557,000		$	4,118,000
	Accounts receivable, net of allowances for doubtful accounts of $1,373,000 at March 31 and $777,000 at June 30			19,197,000			21,207,000
	Inventories, net:
		Raw materials		1,781,000			3,279,000
		Work in process		1,637,000			2,230,000
		Finished goods		9,108,000			11,362,000

				12,526,000			16,871,000

	Deferred income tax assets			2,759,000			2,099,000
	Other current assets			1,498,000			283,000

Total current assets				37,537,000			44,578,000

Property, plant and equipment, at cost				38,071,000			32,093,000
Less: accumulated depreciation				(15,585,000	)		(14,750,000	)

				22,486,000			17,343,000

Goodwill				29,388,000			24,889,000
Intangible assets, net				4,924,000			453,000
Other assets				829,000			766,000

			$	95,164,000		$	88,029,000

See Notes to Consolidated Financial Statements.

QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets

		March 31, 2002			June 30, 2002
		(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt	$	1,206,000		$	1,179,000
	Accounts payable		2,748,000			3,622,000
	Dividends payable					1,123,000
	Accrued expenses		5,370,000			4,820,000
	Income taxes payable		1,499,000			1,869,000
	Liabilities of discontinued operations		947,000			929,000

Total current liabilities			11,770,000			13,542,000

Long-term debt, net of current portion			27,853,000			21,526,000
Deferred income tax liabilities			1,223,000			1,874,000
Liabilities of discontinued operations and other			466,000			481,000

Shareholders' equity:
	Preferred stock, no par value; authorized 100,000 shares; none issued
	Common stock, par value $.01²/3; authorized 15,000,000 shares; 9,687,679 issued shares at March 31 and 9,485,585 shares at June 30		161,000			158,000
	Capital in excess of par value of common stock		37,739,000			35,738,000
	Retained earnings		37,409,000			36,192,000
	Currency translation adjustment		(365,000	)		(390,000	)
	Treasury stock, at cost, 1,967,963 shares at March 31 and June 30		(21,092,000	)		(21,092,000	)

Total shareholders' equity			53,852,000			50,606,000

		$	95,164,000		$	88,029,000

See Notes to Consolidated Financial Statements.

QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

				Nine Months Ended March 31,
				2002			2001
Operating activities:
	Earnings from continuing operations			$	2,253,000		$	5,403,000
	Discontinued operations:
		Gain on disposal, net of income taxes			192,000

	Net earnings				2,445,000			5,403,000
	Adjustments to reconcile net earnings to net cash provided by operating activities of continuing operations:
		Discontinued operations			(192,000	)
		Gain on sale of assets			(830,000	)
	Depreciation				1,854,000			1,466,000
		Amortization			253,000			1,341,000
		Provisions for losses on accounts receivable			178,000			(57,000	)
		Equity loss on investment in TMT joint venture						871,000
		Changes in operating assets and liabilities:
			Accounts receivable		3,964,000			3,966,000
			Refundable income taxes					(266,000	)
			Inventories and other assets		5,299,000			(5,702,000	)
			Accounts payable and accrued expenses		(3,838,000	)		(2,681,000	)
			Income taxes payable		(44,000	)		(727,000	)

Net cash provided by operating activities of continuing operations					9,089,000			3,614,000
Net cash provided by (used in) discontinued operations					32,000			(270,000	)

Net cash provided by operating activities					9,121,000			3,344,000

Investing activities:
	Cash paid for acquired businesses, net of cash acquired				(11,300,000	)		(2,950,000	)
	Capital expenditures				(6,245,000	)		(1,969,000	)
	Patent and license expenditures				(684,000	)		(269,000	)
	Proceeds from sale of assets				581,000
	Investment in TMT joint venture							(615,000	)

Net cash used in investing activities					(17,648,000	)		(5,803,000	)

Financing activities:
	Borrowing on revolving line of credit				25,500,000			23,350,000
	Payments on revolving line of credit				(17,800,000	)		(14,650,000	)
	Payments on notes payable				(1,412,000	)		(2,162,000	)
	Payment of semi-annual cash dividend				(2,351,000	)		(2,211,000	)
	Proceeds from exercise of common stock options				2,004,000			1,012,000
	Repurchase of common stock for treasury							(2,660,000	)

Net cash provided by financing activities					5,941,000			2,679,000

Effect of exchange rate changes on cash					25,000

Increase (decrease) in cash and cash equivalents					(2,561,000	)		220,000
Cash and cash equivalents at beginning of period					4,118,000			1,524,000

Cash and cash equivalents at end of period				$	1,557,000		$	1,744,000

See Notes to Consolidated Financial Statements.

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

1. The accompanying unaudited consolidated financial statements present information in accordance with generally accepted accounting principles for interim financial information and applicable rules of Regulation S-X. Accordingly, they do not include all information or footnotes required by generally accepted accounting principles for complete financial statements. The June 30, 2001 consolidated balance sheet as presented was derived from audited financial statements. The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2001. Management believes the financial statements include all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented.

2. The provision for income taxes is based upon the estimated effective income tax rate for the year.

3. Operating results for the first nine months of fiscal 2002 are not necessarily indicative of the performance for the entire year. The Company's business is historically seasonal with the highest level of sales and earnings in the Company's fourth fiscal quarter.

4. The computation of basic and diluted earnings per share, as prescribed by FASB No. 128, is as follows:

		Nine Months Ended March 31,				Three Months Ended March 31,
		2002		2001		2002		2001
Numerator:
Earnings from continuing operations available to common shareholders		$	2,253,000	$	5,403,000	$	569,000	$	1,850,000

Denominator:
Weighted average shares outstanding-basic:			7,651,754		7,343,640		7,744,173		7,367,245
Add: Effect of dilutive stock options			480,691		545,374		291,388		612,502

Weighted average shares outstanding-diluted:			8,132,445		7,889,014		8,035,561		7,979,747

Earnings per share of common stock:
	Basic	$	0.29	$	0.74	$	0.07	$	0.25
	Diluted	$	0.28	$	0.69	$	0.07	$	0.23

There were outstanding options to purchase common stock at prices that exceeded the average market price for the income statement period. These options have been excluded from the computation of diluted earnings per share and are as follows:

	Nine Months Ended March 31,				Three Months Ended March 31,
	2002		2001		2002		2001
Weighted average exercise price per share	$	24.84	$	21.00	$	24.04	$	21.00
Number of shares		189,300		60,000		239,300		60,000

5. The assets and liabilities of substantially all subsidiaries outside the United States are translated to the United States dollar at period-end rates of exchange, and earnings and cash flow statements are translated at weighted-average rates of exchange. Translation adjustments are accumulated with other comprehensive earnings (losses) as a separate component of shareholders'

equity. The Company has no other components of comprehensive earnings and had no comprehensive income items prior to fiscal 2001. The Company's total comprehensive earnings consists of the following:

	Nine Months Ended March 31, 2002		Three Months Ended March 31, 2002
Net earnings	$	2,445,000	$	569,000
Currency translation adjustment		25,000		14,000

Total comprehensive earnings	$	2,470,000	$	583,000

6. The Company's operations are being classified as two principal reportable segments within the highway and transportation safety industry. The Company's two reportable segments are: the manufacture and sale of highway and transportation safety products which Protect and Direct, and the manufacture and sale of products which Inform and are often referred to as Intelligent Transportation Systems (ITS) products.

The following table presents financial information about reported segments for the nine month and three month periods ended March 31, 2002 and 2001 along with the items necessary to reconcile the segment information to the totals reported in the consolidated financial statements.

	Protect and Direct		Inform			Unallocated Corporate			Total
2002
NINE MONTHS
Net sales from external customers	$	46,370,000	$	15,909,000					$	62,279,000
Operating profit (loss)		7,355,000		163,000		$	(3,906,000	)		3,612,000
Identifiable assets		51,252,000		38,732,000			5,180,000			95,164,000
THREE MONTHS
Net sales from external customers	$	16,228,000	$	5,279,000					$	21,507,000
Operating profit (loss)		2,770,000		(435,000	)	$	(1,209,000	)		1,126,000
2001
NINE MONTHS
Net sales from external customers	$	53,951,000	$	10,337,000					$	64,288,000
Operating profit (loss)		12,659,000		2,173,000		$	(5,136,000	)		9,696,000
Identifiable assets		50,949,000		26,419,000			4,966,000			82,334,000
THREE MONTHS
Net sales from external customers	$	18,652,000	$	4,036,000					$	22,688,000
Operating profit (loss)		4,527,000		652,000		$	(1,826,000	)		3,353,000

7. In July 2001, the Company sold certain assets of its non-highway plastic product line for $500,000 in cash and $700,000 in a three-year promissory note with interest imputed at 8%. In addition, the Company is to receive $250,000 during fiscal year 2002 for consulting services related to the sale. The gain on the sale of $749,000 was recorded as other income.

During the second quarter of fiscal 2002, the Company recorded other income of $81,000 representing the gain on the sale of one of the Company's buildings and related property no longer needed for inventory storage.

8. Effective August 31, 2001, the Company acquired all of the outstanding stock of Surface Systems, Inc. (SSI). The acquisition has been accounted for under the purchase method, and the operating results have been included in the consolidated results since the date of acquisition. SSI has been included in the Company's Inform segment.

SSI is a leading manufacturer and seller of patented pavement sensing equipment and specialized weather stations and also provides weather forecasting services. The Company believes that SSI will play an important part in the Inform segment by providing weather information to improve safety on the roads. SSI had revenues in its fiscal year ended June 30, 2001 of approximately $9,000,000. The Company paid a purchase price of approximately $11,300,000 in cash, net of cash acquired. No SSI bank debt was assumed. The Company's source of funds for this acquisition was its existing bank credit facility.

The following unaudited pro forma summary presents the Company's consolidated results of operations for each of the nine-month and three-month periods ended March 31 as if the acquisition had occurred at the beginning of fiscal year 2001.

	Nine Months Ended March 31				Three Months Ended March 31
	2002		2001		2002		2001
Net sales	$	63,066,000	$	70,873,000	$	21,507,000	$	24,920,000
Net earnings		1,386,000		3,933,000		569,000		1,435,000
Net earnings per diluted share		.17		.50		.07		.18

The unaudited consolidated pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisition occurred on that date, nor is it indicative of the results that may occur in the future.

9. Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standard (FAS) No. 141, Business Combinations, and FAS No. 142, Goodwill and Other Intangible Assets. FAS No. 141 requires, among other things, that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS No. 142 addresses the accounting for goodwill and other intangible assets subsequent to their acquisition. FAS No. 142 requires, among other things, that goodwill and other indefinite-lived intangible assets no longer be amortized and that such assets be tested for impairment at least annually.

Intangible assets consist of the following:

	March 31, 2002				June 30, 2001
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Patents and licenses	$	2,147,000	$	1,115,000	$	1,462,000	$	1,009,000
Technology and installed base		2,610,000		113,000
Customer relationships		200,000		23,000
Other		130,000		12,000

		5,087,000		1,263,000		1,462,000		1,009,000
Indefinite-lived intangible assets:
Trade names		1,100,000

Total	$	6,187,000	$	1,263,000	$	1,462,000	$	1,009,000

Amortization expense was $253,000 and $1,341,000 for the nine months ended March 31, 2002 and 2001, respectively. Amortization expense was $89,000 and $481,000 for the three months ended March 31, 2002 and 2001, respectively. The estimated amortization expense for this fiscal year ended June 30, 2002 and for the four fiscal years subsequent to 2002 is as follows: $354,000, $390,000, $354,000, $338,000 and $318,000.

The carrying amount of goodwill consists of the following:

March 31, 2002				June 30, 2001
Protect and Direct Segment		Inform Segment		Protect and Direct Segment		Inform Segment
$	8,139,000	$	21,249,000	$	8,139,000	$	16,750,000

During the nine-month period ended March 31, 2002, goodwill in the amount of $4,549,000 was acquired in connection with the acquisition of SSI, and is included in the Inform segment.

The reconciliation of net income, basic earnings per share and diluted earnings per share as reported, to that adjusted on a pro forma basis to exclude goodwill amortization, including related tax effects, as a result of adopting FAS No. 142 is as follows:

		Nine Months Ended March 31				Three Months Ended March 31
		2002		2001		2002		2001
Reported net income		$	2,445,000	$	5,403,000	$	569,000	$	1,850,000
Add: Goodwill amortization					710,000				258,000

Adjusted net income		$	2,445,000	$	6,113,000	$	569,000	$	2,108,000

Basic earnings per share:
	Net income as reported	$	.32	$	.74	$	.07	$	.25
	Add: Goodwill amortization				.09				.03

		$	.32	$	.83	$	.07	$	.28

Diluted earnings per share:
	Net income as reported	$	.30	$	.69	$	.07	$	.23
	Add: Goodwill amortization				.09				.03

		$	.30	$	.78	$	.07	$	.26

10. The Company made certain reclassifications to the current nine-month period in an effort to conform SSI's income statement classifications with those of the Company's. As a result, the Company reclassified $1,296,000 from selling and administrative expense to cost of sales which affects the quarter ended December 31, 2001. This reclassification has no impact on previously reported net earnings, but adjusts expense categories to conform SSI's expense classifications with the Company's historical classifications.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

CURRENT YEAR-TO-DATE VERSUS PRIOR YEAR-TO-DATE

The Company's sales for the first nine months of fiscal 2002 decreased 3% to $62,279,000 compared to $64,288,000 for the first nine months last year primarily due to soft shipments during the current nine-month period. The Company believes the decline in sales is primarily due to the delay of highway safety construction spending by many states as a result of their revenue collection shortfalls and budget deficits. Sales in the protect and direct segment decreased 14% for the first nine months of fiscal 2002 to $46,370,000 from $53,951,000 last year. Sales declined across the Company's Protect and Direct product lines with the exception of sales of parts, Triton Barrier® and the FreezeFree™ anti-icing system. Sales of the water-filled Triton Barrier continue to outpace last year as interest grows in the product's functionality as a portable security barrier. The Company continues to see interest in one of its newest products, the FreezeFree™ anti-icing system, with $768,000 in sales for the first nine months of fiscal 2002. The Company believes this product should continue to generate interest with greater sales potential in fiscal 2003 aided by the opportunities for add-on FreezeFree systems to the more than 600 bridges currently using the Company's weather systems acquired through Surface Systems, Inc. (SSI). Sales of the Company's Inform segment increased 54% to $15,909,000 for the first nine months of fiscal 2002 from $10,337,000 for the same period last year, primarily due to the acquisitions of SSI in August 2001 and National Signal, Inc. (NSI) in January 2001. These two acquisitions added $8,130,000 in sales for the current nine months of fiscal 2002 not comparable to the prior year. Organic sales for this segment decreased 25% for the first nine months as a result of decreased sales of advanced sensing products and highway advisory radios principally associated with the more discretionary demand for these products.

The gross profit margin for the first nine months of fiscal 2002 was 35.7% compared to 44.0% for the same period last year. This decline in gross margin was principally due to volume inefficiencies associated with the lower level of organic sales for the Protect and Direct and for the Inform segments. The gross profit margin for the Protect and Direct segment declined to a lesser extent as a result of an adverse change in product sales mix with lower sales of the higher margin permanent crash cushions. Contributing to the decline in gross profit margin for the Inform segment was the impact of the acquisitions of SSI and NSI as those gross profit margins are lower than the segment's historical gross profit margin.

Selling and administrative expenses for the first nine months of fiscal 2002 decreased 3% or $560,000 to $17,087,000 from $17,647,000 last year. This decrease is due to both the decline in sales as well as cost containment initiatives. This decrease was offset somewhat by the inclusion of selling and administrative expenses from SSI and NSI which added approximately $2,342,000 in costs for the current nine-month period. Organic selling and administrative expenses for the current nine-month period decreased $2,902,000, or 16%.

Research and development expenditures were $1,561,000 for the current nine-month period compared with $912,000 last year. The increase is due to a greater amount of expenditures for upgrades and modifications to existing products like the recently introduced QuadGuard® HS crash cushion for impacts up to 70 mph. The Company also worked on developing new products including wider models of the REACT 350® crash cushion and on advanced pavement sensors and software to provide an integrated system solution for collecting and providing traffic information.

Operating profit decreased to $3,612,000 in the first nine months of fiscal 2002 from $9,696,000 in the first nine months of the prior year.

Interest expense was $949,000 for the first nine months of fiscal 2002 compared to $1,042,000 for last year's nine-month period. Interest expense remained consistent due to the offsetting effects of a higher level of long-term debt outstanding due to the acquisition of SSI and lower interest rates for the current nine-month period.

Other income was $830,000 for the first nine months of fiscal 2002 principally due to the gain on the sale of the Company's non-highway plastic product line.

The Company's effective income tax rate for the first nine months of fiscal 2002 was 36% compared to an effective income tax rate of 38% for the same period last year. The decrease in the effective rate was due in part to the expected utilization of certain tax planning strategies. The Company believes its effective income tax rate for fiscal year 2002 will be approximately 36%.

Earnings from continuing operations for the current nine-month period were $2,253,000 compared to $5,403,000 for the first nine months of the prior year. Net earnings were $2,445,000, or $0.30 per diluted share, for the current nine-month period compared to $5,403,000, or $0.69 per diluted share, for the nine months of the prior year. Net earnings for the first nine months of fiscal 2002 included a gain from discontinued operations of $192,000, net of income taxes, due to the favorable settlement of a lawsuit related to a long-standing accounts receivable that was ultimately paid by the guarantor.

CURRENT YEAR QUARTER VERSUS PRIOR YEAR QUARTER

The Company's sales for the third quarter of fiscal 2002 decreased 5% to $21,507,000 from $22,688,000 in the third quarter last year reflecting continuing soft shipments during the current quarter. Sales for the Protect and Direct segment decreased 13% for the current third quarter to $16,228,000 from $18,652,000 primarily due to lower sales of permanent crash cushions and truck mounted attenuators, which were partially offset by increased sales of parts, the Triton Barrier® and the FreezeFree™ anti-icing system. Sales of the water-filled Triton Barrier increased 97% to $787,000 for the current third quarter due to demand for its security characteristics. Sales of the Company's Inform segment increased 31% for the current third quarter to $5,279,000 from $4,036,000 as a result of the acquisition of SSI in August 2001. SSI contributed sales of $1,955,000 for the third quarter of fiscal 2002. Organic sales for this segment decreased 18% for the third quarter as a result of decreased sales of advanced sensing products and highway advisory radios principally associated with the more discretionary demand for these products.

The gross profit margin for the third quarter of the current year decreased to 35.4% compared to 43.3% for the same period last year. This decline in gross margin was principally due to volume inefficiencies associated with the lower level of organic sales for the Protect and Direct segment as well as the Inform segment. The gross profit margin for the Protect and Direct segment declined to a lesser extent as a result of an adverse change in product sales mix. Contributing to the decline in gross profit margin for the Inform segment was the impact of the acquisitions of SSI and NSI as those gross profit margins are lower than the segment's historical gross profit margin.

Selling and administrative expenses for the third quarter of fiscal 2002 decreased 6% or $343,000 to $5,815,000 from $6,158,000 for the third quarter of fiscal 2001. This decrease is due to both the decline in sales as well as cost containment initiatives. This decrease was offset somewhat by the inclusion of selling and administrative expenses from SSI which added $669,000 for the current third quarter. Organic selling and administrative expenses for the current third quarter decreased $1,012,000, or 16%.

Research and development expenditures were $667,000 for the current third quarter compared with $314,000 for the third quarter last year. The Company continued with its work on new products including enhancements to its existing line of crash cushions along with advanced pavement sensor and

software development to provide an integrated system solution of collecting and providing weather and traffic information.

Operating profit decreased to $1,126,000 in the third quarter of fiscal 2002 from $3,353,000 in the third quarter of the prior year.

Interest expense in the third quarter of the current year decreased to $240,000 from $378,000 for the third quarter of the prior year primarily due to lower interest rates during the current third quarter.

The Company's effective income tax rate for the third quarter of fiscal 2002 was 36% compared to an effective income tax rate of 38% for the same period last year. The decrease in the effective rate was due in part to the expected utilization of certain tax planning strategies.

Net earnings were $569,000, or $0.07 per diluted share, for the current third quarter compared to $1,850,000, or $0.23 per diluted share, for the third quarter of last year.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash and cash equivalents of $1,557,000 as of March 31, 2002 and had access to additional funds of $14,300,000 under a three-year unsecured revolving credit agreement with three banks. The Company believes that this credit facility is an important source of liquidity. The credit agreement provides for a $40 million credit facility and contains both fixed and floating interest rate options, at the prime rate or lower, and contains affirmative and negative covenants including requirements that the Company maintain certain financial ratios and be profitable each year. The agreement may be renewed one additional year on each anniversary date upon mutual consent of the Company and the banks. At any time during the three years, the Company may elect to convert the loan to a four-year term with equal quarterly principal payments due throughout the term to amortize the loan in full. The Company is currently is compliance with all covenants in this agreement.

Operating activities were a source of cash for the Company for the first nine months of fiscal 2002 providing $9,121,000.

Investing activities used cash of $17,648,000 during the first nine months of fiscal 2002 including $6,245,000 for capital expenditures and $11,300,000 for the purchase of SSI in August 2001. Capital expenditures during the current nine-month period related principally to the expansion of the Company's primary manufacturing facility in Pell City, Alabama, nearly doubling its size to 300,000 square feet. Offsetting these expenditures somewhat, the Company received $581,000 in cash proceeds primarily from the sale of the Company's non-highway plastic product line.

Financing activities provided cash of $5,941,000 during the first nine months of the current year. The Company borrowed a net $7,700,000 against its outstanding revolving credit facility primarily as a result of borrowing for the acquisition of SSI. The payments of the Company's semi-annual cash dividend used cash of $2,351,000. In addition, the Company used cash of $1,412,000 for the payment of notes payable due in connection with the acquisitions of NSI, Roadway Safety Service, Inc. and Nu-Metrics, Inc. The Company also received cash of $2,004,000 from the exercise of common stock options.

For fiscal 2002, the Company anticipates needing approximately $7,000,000 in cash for capital expenditures, which includes approximately $4,500,000 in connection with the completion of the expansion of the Company's primary manufacturing facility in Pell City, Alabama as well as approximately $1,000,000 to upgrade the Company's information technology systems. The Company may also need additional cash as it considers acquiring businesses that complement its existing operations. Also, the Company will require additional investments in working capital to maintain growth. The Company may also need additional funds to repurchase its own common stock from time to time. These expenditures will be financed either through the Company's invested cash, cash

generated from its operations or from borrowings available under the Company's revolving credit facility. The Company believes its existing cash, cash generated from operations and funds available under its existing credit facility are sufficient for all planned operating and capital requirements.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requires all registrants to discuss critical accounting policies or methods used in the preparation of financial statements. Note 2 to the Company's June 30, 2001 consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. In the opinion of management, the Company does not have any individual accounting policy which is critical to the preparation of its consolidated financial statements. In most instances, the Company must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America ("U.S. GAAP"). The following is a summary of the more significant accounting policies and methods used by the Company:

Revenue Recognition: As required by U.S. GAAP, the Company principally recognizes operating revenues when title and risk of loss pass to its customers, with appropriate provision for uncollectible accounts. The amounts recorded for these provisions and related allowances are not significant to the Company's consolidated financial position or results of operations.

Long-Lived Assets: Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the Company assesses the possibility of obsolescence, demand, new technology, competition, and other pertinent economic factors and trends that may have an impact on the value or remaining lives of these assets. Long-lived assets include such items as goodwill, patents, product rights and equity method investments. Patents and product rights are amortized on a straight-line basis over the life of the patent or agreement.

Amortization expense of $1,835,000 was recognized for the year ended June 30, 2001. Effective July 1, 2001, with the adoption of Statement of Financial Accounting Standard (FAS) No. 142, the Company is no longer required to amortize a substantial portion of its goodwill and other indefinite-lived intangible assets. As a result, the Company estimates that amortization expense will approximate $354,000 for this fiscal year ending June 30, 2002. Under the new standard, the Company is also required to continue to review annually its goodwill and other intangible assets for possible impairment or loss of value. The initial goodwill impairment test has been completed, and as a result no impairment losses were recorded. The Company currently does not anticipate having to record any future impairment losses.

RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in August 2001 and is effective for fiscal years beginning after December 15, 2001. The Statement clarifies and revises existing guidance on accounting for the impairment or disposal of long-lived assets such as property, plant and equipment, amortized intangibles and other long-lived assets not specifically addressed in other accounting literature. The Company does not expect the adoption of this standard will have a significant impact on fiscal 2003 financial results.

FUTURE OUTLOOK

The Company's operating results continue to reflect the general slowdown in U.S. highway safety construction spending for the Company's products. The Company believes this is due principally to

revenue shortfalls and budget deficits at the state level where over 40 states are currently operating at a deficit. Currently, the Company is encouraged by recent improvements in order flow and backlog and based upon the seasonal nature of the Company's business, anticipates a traditional sales acceleration in the fiscal fourth quarter although below sales and profit levels of a year ago. Given the current uncertain economic conditions, the Company remains cautious about its near-term outlook.

Looking ahead to fiscal 2003, current estimates project that government spending on highways could be reduced by between $4 to $8 billion, which would have an impact on the Company's prospects for 2003. The Company's earnings for fiscal year 2003 will also be dependent on the budgetary positions of the states. The current six year federal highway bill (TEA-21) expires on September 30, 2003. It is currently uncertain as to what the future governmental spending levels will be in the next highway funding bill.

FORWARD-LOOKING STATEMENTS

Various statements made within the Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q constitute "forward-looking statements" for purposes of the SEC's "safe harbor" provisions under the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities Exchange Act of 1934, as amended. Any statement that addresses expectations or projections about the future, including statements about the Company's strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.

Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company's public filings with the SEC, news releases and other communications, which speak only as of the date the Company files this Quarterly Report on Form 10-Q with the SEC. There can be no assurance that actual results will not differ materially from the Company's expectations. Factors which could cause materially different results include, among others, uncertainties related to the introduction and acceptance of the Company's products and services; the successful completion and integration of acquisitions; continued federal and state funding for highways and risks related to reductions in government expenditures; an unfavorable change in product sales mix; seasonality along with the extent and timing of the award of large contracts; the cyclical nature of the Company's governmental markets; pricing pressures; increasing raw material costs; excess manufacturing capacity; weather conditions; acts of war and terrorist activities; the possible impairment of intangible assets; and competitive and general economic conditions.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

Odin Systems International, Inc. v. Energy Absorption Systems, Inc., No. CV200-082, U.S. District Court for the Southern District of Georgia. This litigation has been settled. Under the terms of the settlement, Odin Systems International, Inc. ("Odin") assigned to Energy Absorption Systems, Inc. ("Energy") all of its anti-icing technology and patents, and Energy granted back to Odin a non-exclusive license to use the technology and patents. In addition, Odin agreed to pay Energy a nominal cash payment and future royalties on sales of anti-icing systems in the highway market. See the Company's Form 10-K for the year ended June 30, 2001, Item 3, for additional information.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K.

On March 26, 2002, the Company filed a report on Form 8-K dated March 18, 2002, reporting under Item 5 "Other Events and Regulation FD Disclosure", that the Company had acquired two patents and certain technology from B&B Electromatic, Inc. for a purchase price of $350,000 in cash. The patents relate to crossing gate technology that the Company intends to sell to the railroad crossing and highway markets.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 to be signed on its behalf by the undersigned thereunto duly authorized.

	QUIXOTE CORPORATION
DATED: May 14, 2002	/s/ DANIEL P. GOREY DANIEL P. GOREY Chief Financial Officer, Vice President and Treasurer (Chief Financial & Accounting Officer)

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PART I—FINANCIAL INFORMATION
Consolidated Statements of Operations
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

ITEM 6. Exhibits and Reports on Form 8-K

SIGNATURE