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 ______________________________ [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended December 31, 1996 or [ ] 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 XX NO -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 7,974,612 shares of the Company's Common Stock ($.01-2/3 par value) were outstanding as of December 31, 1996. PART I FINANCIAL INFORMATION QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Operations (Unaudited) THREE MONTHS ENDED DECEMBER 31, -------------------------------- 1996 1995 ---- ---- Net sales.............................$ 34,383,000 $ 36,067,000 Cost of sales......................... 23,480,000 26,398,000 ------------ ------------ Gross profit.......................... 10,903,000 9,669,000 Operating Expenses: Selling & administrative............ 7,646,000 6,877,000 Research & development.............. 605,000 277,000 ------------ ------------ 8,251,000 7,154,000 Operating profit...................... 2,652,000 2,515,000 ------------ ------------ Other income (expense): Interest income..................... 90,000 Interest expense.................... (1,113,000) (1,627,000) Other............................... (55,000) (249,000) ------------ ------------ (1,168,000) (1,786,000) ------------ ------------ Earnings from continuing operations before income taxes................... 1,484,000 729,000 Provisions for income taxes........... 445,000 277,000 ------------ ------------ Earnings from continuing operations... 1,039,000 452,000 ------------ ------------ Loss from discontinued operations (net of tax)........................ (135,000) ------------ ------------ Net earnings..........................$ 1,039,000 $ 317,000 ============ ============ Per share data: Earnings from continuing operations.$ .13 $ .06 Loss from discontinued operations... (.02) ------------ ------------ Net earnings..........................$ .13 $ .04 ============ ============ Weighted average common and common equivalent shares outstanding......... 8,013,144 7,989,747 ============ ============ See Notes to Consolidated Condensed Financial Statements. -2- QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Operations (Unaudited) SIX MONTHS ENDED DECEMBER 31, -------------------------------- 1996 1995 ---- ---- Net sales.............................$ 65,976,000 $ 73,710,000 Cost of sales......................... 45,171,000 52,282,000 ------------ ------------ Gross profit.......................... 20,805,000 21,428,000 Operating Expenses: Selling & administrative............ 14,817,000 13,830,000 Research & development.............. 1,049,000 575,000 ------------ ------------ 15,866,000 14,405,000 Operating profit...................... 4,939,000 7,023,000 ------------ ------------ Other income (expense): Interest income..................... 1,000 165,000 Interest expense.................... (2,205,000) (3,184,000) Other............................... (114,000) (422,000) ------------ ------------ (2,318,000) (3,441,000) ------------ ------------ Earnings from continuing operations before income taxes................... 2,621,000 3,582,000 Provisions for income taxes........... 786,000 1,361,000 ------------ ------------ Earnings from continuing operations... 1,835,000 2,221,000 ------------ ------------ Discontinued operations (net of tax): Actual loss from operations......... (1,553,000) Loss on disposition................. (10,913,000) ------------ ------------ Loss from discontinued operations... (12,466,000) ------------ ------------ Net earnings (loss)...................$ 1,835,000 $(10,245,000) ============ ============ Per share data: Earnings from continuing operations.$ .23 $ .28 Loss from discontinued operations... (1.56) ------------ ------------ Net earnings (loss)...................$ .23 $ (1.28) ============ ============ Weighted average common and common equivalent shares outstanding......... 8,009,489 7,989,635 ============ ============ See Notes to Consolidated Condensed Financial Statements. -3- QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Condensed Balance Sheets DECEMBER 31, JUNE 30, ------------------------------------- ASSETS 1996 1996 - ------------------------------------------------------------------------------- (Unaudited) Current assets: Cash and cash equivalents...................$ 4,866,000 $ 2,250,000 Accounts receivable, net of allowances for doubtful accounts of $1,207,000 at December 31 and $740,000 at June 30........ 23,351,000 22,433,000 Refundable income taxes...................... 3,016,000 3,016,000 Inventories: Raw materials............................... 3,617,000 3,957,000 Work in process............................. 1,392,000 1,052,000 Finished goods.............................. 1,283,000 944,000 ------------ ------------ 6,292,000 5,953,000 Deferred income tax assets.................... 2,643,000 2,643,000 Other current assets.......................... 1,845,000 1,223,000 ------------ ------------ Total current assets.......................... 42,013,000 37,518,000 ------------ ------------ Property, plant and equipment, at cost........ 146,839,000 145,545,000 Less accumulated depreciation................. (63,043,000) (57,219,000) ------------ ------------ 83,796,000 88,326,000 ------------ ------------ Other assets.................................. 4,506,000 3,985,000 ------------ ------------ $130,315,000 $129,829,000 ============ ============ See Notes to Consolidated Condensed Financial Statements. -4- QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Condensed Balance Sheets DECEMBER 31, JUNE 30, ---------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1996 - ------------------------------------------------------------------------------- (Unaudited) Current liabilities: Long-term debt.............................$ 54,500,000 Accounts payable........................... 4,899,000 $ 3,648,000 Dividends payable.......................... 957,000 946,000 Accrued expenses........................... 15,680,000 13,259,000 ------------ ------------ Total current liabilities.................... 76,036,000 17,853,000 ------------ ------------ Long-term debt............................... 58,000,000 Net liabilities of discontinued operations... 3,792,000 4,428,000 Deferred income taxes........................ 1,929,000 1,929,000 Shareholders' equity: Common stock............................... 145,000 145,000 Capital in excess of par value of stock.... 29,812,000 29,751,000 Retained earnings.......................... 24,074,000 23,196,000 Treasury stock, at cost.................... (5,473,000) (5,473,000) ------------ ------------ Total shareholders' equity 48,558,000 47,619,000 ------------ ------------ $130,315,000 $129,829,000 ============ ============ See Notes to Consolidated Condensed Financial Statements. -5- QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (Unaudited) SIX MONTHS ENDED DECEMBER 31, ------------------------------- 1996 1995 ---- ---- Net earnings (loss)................................. $ 1,835,000 $(10,245,000) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization..................... 7,064,000 8,833,000 Provision for losses on accounts receivable....... 467,000 74,000 Changes in operating assets and liabilities: Accounts receivable............................. (1,385,000) (379,000) Inventories..................................... (339,000) (1,896,000) Other current assets............................ (622,000) (772,000) Accounts payable and accrued expenses........... 3,672,000 1,226,000 Income taxes payable............................ (1,567,000) Discontinued operations-noncash charges and working capital changes......................... (636,000) 12,602,000 ----------- ----------- Net cash provided by operating activities........... 10,056,000 7,876,000 ----------- ----------- Investing activities: Purchase of property, plant and equipment......... (2,312,000) (21,941,000) Capitalized systems, design and software costs.... (339,000) Decrease in funds deposited with IDB trustee...... 1,536,000 Other............................................. (743,000) (652,000) ----------- ----------- Net cash used in investing activities............... (3,055,000) (21,396,000) ----------- ----------- Financing activities: Net proceeds (payments) under revolving credit agreement....................................... (3,500,000) 14,450,000 Payment of semi-annual cash dividend.............. (946,000) (861,000) Proceeds from exercise of common stock options.... 61,000 ----------- --------- Net cash used in (provided by) financing activities. (4,385,000) 13,589,000 ----------- ---------- Net change in cash and cash equivalents............ 2,616,000 69,000 Cash and cash equivalents at beginning of period... 2,250,000 2,093,000 ----------- ----------- Cash and cash equivalents at end of period.......... $ 4,866,000 $ 2,162,000 =========== =========== Note: During the six months ended December 31, 1996, the Company made cash payments of $902,000 for income taxes and paid $2,053,000 for interest. During the same period last year the Company made cash payments of $451,000 for income taxes and paid $2,866,000 for interest. See Notes to Consolidated Condensed Financial Statements. -6- QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements (Unaudited) 1. The interim financial statements are prepared pursuant to the requirements for reporting on Form 10-Q. The June 30, 1996 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company's latest annual report on Form 10-K. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for interim periods. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending June 30, 1997. 2. During the second quarter, the Company entered into an agreement to sell substantially all of the assets and transfer some of the liabilities of Disc Manufacturing, Inc. to Cinram Inc. and its Canadian parent, Cinram Ltd. for approximately $80 million in cash. The Company will retain the Huntsville, Alabama land and building as well as DMI's litigation. The sale is subject to stockholder approval. DMI's financial position and results of operations will be included in the Company's continuing operations until stockholder approval is obtained. The cash proceeds from the sale of DMI assets will be used, in part, to pay all of the Company's long-term debt. As a result, the Company has classified this debt as current in the accompanying Consolidated Condensed Balance Sheet at December 31, 1996. 3. During the first quarter of fiscal 1996, the Company discontinued the operations of Legal Technologies, Inc., which was involved in the development, manufacture and sale of products and systems for the legal community. The results of operations of the legal technologies segment and the estimated loss on its disposition are presented as discontinued operations in the accompanying consolidated statements of operations. The income tax benefit for discontinued operations for the six months ended December 31, 1996 was $8,000,000. -7- 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 six months of fiscal 1997 decreased 10% to $65,976,000 from $73,710,000 in the same period last year due to declines in sales at both Disc Manufacturing, Inc. (DMI) and Energy Absorption Systems, Inc. (Energy). Sales at DMI decreased 11% in the six month period to $45,685,000 from $51,422,000 in the same period last year due principally to the loss of a major customer, BMG Music, that occurred in the second quarter of last year. BMG Music accounted for approximately $12 million in sales in the first six months last year compared to sales of less than $500,000 in the comparable period this year. As a result, CD-Audio unit sales decreased 13% in the six month period from the same period last year. CD-ROM unit sales increased 5% during the six month period from the same period last year. As a result of declines in the average unit selling prices of these products, CD-Audio sales dollars declined 26% and CD-ROM sales dollars decreased 4% during the six month period from the same period last year. Sales at Energy for the six months were $20,291,000 compared to $22,288,000 in the same period last year due to a decline in sales of Energy's GREAT-Registered Trademark- product line. The Company believes this was due to, among other things, increased competition in this product line. In addition, the Company believes that some customers may be postponing their purchases in anticipation of several new products to be introduced by Energy that qualify under the new federal testing and evaluation guidelines known as NCHRP 350, coupled with a delay in certifying one of these new products. The gross profit margin in the current six month period increased to 31.5% from 29.1% in the same period last year due to margin improvements at DMI. DMI's gross profit margin increased mainly due to a decline in the cost of materials, principally jewel boxes. DMI also improved gross profit margins due to a decline in direct labor from certain production efficiencies. These improvements in gross margin were offset partially by the continued decline in the selling prices of DMI's products. The Company expects to experience continued pressure on disc selling prices which may have a limiting effect on its gross profit margins. Energy's gross profit margin for the current six month period decreased due to a change in product mix and, to a lesser extent, volume inefficiencies as a result of the decrease in sales. Increased costs due to the expansion of Energy's Pell City, Alabama facility also adversely affected gross profit margins but to a lesser extent. Selling and administrative expenses in the current six month period increased 7% to $14,817,000 from $13,830,000 in the same period last year. DMI's selling and administrative expenses increased principally due to an increase in legal expenses related to defending a patent infringement claim against DMI. DMI also had an increase in its selling expenses for CD-Audio and mastering equipment sales. Energy's selling and administrative expenses decreased slightly due to last year's inclusion of expenses related to the write-off of Energy's sewer rehabilitation business. Research and development expenses in the current six month period increased 82% to $1,049,000 compared to $575,000 in the same period last year. This increase is due to expenditures at Energy related to the development of new products as well as for the upgrade of its existing product line to meet the revised NCHRP standards. -8- Interest income in the current six month period was $1,000 compared to $165,000 in the same period last year due to the Company's redemption of its $6 million certificate of deposit posted as injunction security for certain litigation. The Company replaced this certificate of deposit with a surety bond backed by a letter of credit in the third quarter of last year. Interest expense in the current six month period decreased 31% to $2,205,000 from $3,184,000 in the same period last year. This was due to a decrease in long-term debt to $54,500,000 as of December 31, 1996 compared to $82,450,000 at the same time last year. Other expenses in the current six month period decreased to $114,000 compared to $422,000 in the same period last year. The Company's effective tax rate decreased in the current six month period to 30% from 38% in the same period last year due to the anticipated realization of certain tax benefits in the current year along with the settlement of certain tax contingencies. CURRENT YEAR QUARTER VERSUS PRIOR YEAR QUARTER - ---------------------------------------------- The Company's sales for the second quarter of fiscal 1997 decreased 5% to $34,383,000 from $36,067,000 in the same quarter last year due to declines in sales at both DMI and Energy. Sales at DMI decreased 3% in the quarter to $25,188,000 from $25,993,000 in the same quarter last year due principally to the decline in the selling prices of its products despite an overall increase in unit sales of 8%. CD-Audio unit sales increased 20% in the quarter from the same quarter last year. CD-ROM unit sales increased 1% during the quarter from the same quarter last year. As a result of declines in the average unit selling prices of these products, CD-Audio sales dollars increased only 1% and CD-ROM sales dollars decreased 10% during the quarter from the same quarter last year. Sales at Energy for the quarter decreased 9% to $9,195,000 from $10,074,000 in the same quarter last year due to a decline in sales of Energy's GREAT- Registered Trademark- product and other permanent systems. This was offset somewhat by an increase in sales of the truck-mounted attenuator (TMA), Energite-Registered Trademark- and parts sales. The gross profit margin in the current quarter increased to 31.7% from 26.8% in the same quarter last year due to margin improvements at DMI. DMI's gross profit margin increased mainly due to a decline in the cost of materials, principally jewel boxes. This reduction in material was offset partially by the continued decline in the selling price of DMI's products. DMI also improved gross margins due to a decline in direct labor from certain production efficiencies. Energy's gross profit margin for the quarter remained at a level consistent with last year. Selling and administrative expenses in the current quarter increased 11% to $7,646,000 from $6,877,000 in the same quarter last year. DMI's selling and administrative expenses increased principally due to an increase in its selling expenses for CD-Audio and mastering equipment sales consistent with the unit increases in sales. Energy's selling and administrative expenses decreased slightly due to last year's inclusion of expenses related to the write-off of Energy's sewer rehabilitation business and reductions in personnel at Energy's Safe-Hit operation. Administrative expenses at the corporate level increased due to an increase in salaries and pension expense. Research and development expenses in the current quarter increased 118% to $605,000 compared to $277,000 in the same quarter last year. This increase in R&D is due to expenditures at Energy for the development of new products as well as for the upgrade of its existing product line to meet the revised NCHRP 350 standards. -9- There was no interest income in the current quarter compared to $90,000 in the same quarter last year due to the Company's redemption of its $6 million certificate of deposit posted as injunction security for certain litigation. Interest expense in the current quarter decreased 32% to $1,113,000 from $1,627,000 in the same quarter last year. This was due to a decrease in long- term debt to $54,500,000 as of December 31, 1996 compared to $82,450,000 at the same time last year. Other expenses in the current quarter decreased to $55,000 compared to $249,000 in the same quarter last year. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company had cash of $4,866,000 and additional funds of $28,500,000 available under its bank arrangements at December 31, 1996. Operating activities were a source of cash for the Company for the first six months of fiscal 1997 providing cash of $10,056,000. Cash of $3,055,000 was used during the six month period for investing activities. The Company's primary investing activity was the purchase of $2,312,000 in plant and equipment for both Energy and DMI. Financing activities used cash of $4,385,000 principally due to payments made on the Company's bank debt and, to a lesser extent, by the payment of a semiannual cash dividend to its shareholders. As discussed in Note 2 to the Consolidated Condensed Financial Statements, during the second quarter, the Company entered into an agreement to sell substantially all of the assets and transfer some of the liabilities of DMI to Cinram Inc. and its Canadian parent, Cinram Ltd. for approximately $80 million in cash (the transaction). In the transaction, the Company retains DMI's Huntsville, Alabama land and building as well as responsibility for DMI's litigation. The Company expects that it will recognize a loss of approximately $4 million (net of income tax benefits) on the sale. The sale is subject to stockholder approval. DMI's financial position and results of operations will be included in the Company's continuing operations until such time that stockholder approval is obtained. Upon the closing of the transaction, the Company will be in violation of certain covenants of its revolving credit facility including the income and asset sales covenants. The Company is currently in discussions with its lenders to amend the current credit facility. The Company will receive cash proceeds (net of expenses) of approximately $78 million. This cash will be used, in part, to pay all of the Company's debt including its bank debt and convertible debentures. The remaining cash will be invested initially in short-term instruments. The Company plans to make acquisitions in the highway safety and equipment market with these funds along with borrowings under a revised credit facility. During the balance of fiscal 1997, the Company anticipates needing approximately $1,000,000 in cash for capital expenditures for Energy. Also, Energy will require additional investments in working capital to maintain growth. These expenditures will be financed either through the DMI sale proceeds, cash generated from operations or from borrowings available under the Company's current or revised revolving credit facility. The Company believes its cash generated from operations and funds available under its existing credit facility are sufficient for all planned operating and capital requirements. -10- II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- 1. DISC MANUFACTURING, INC. ET AL. V. MASSEY ET AL., CV90-1214L (Madison County Circuit Court, Alabama). The parties' respective Applications for Rehearing of the Alabama Supreme Court's September 1996 opinion were denied November 22, 1996 and that decision is now final. See the Company's Form 10-K Report for the fiscal year ended June 30, 1996, item 3, for additional information. 2. JEFFREY SMITH V. ENERGY ABSORPTION SYSTEMS INC., NO. GD941220, Court of Common Pleas of Allegheny County, Pennsylvania. This case has been scheduled for trial on March 18, 1997. See the Company's Form 10-K Report for the fiscal year ended June 30, 1996, item 3, for additional information. 3. MICRO DYNAMICS V. STENOGRAPH CORPORATION, No. CD-94-1805, U.S. District Court for the District of Maryland. The trial of this matter was concluded in January 1997. The judge ruled that Micro Dynamics was unreasonable in its refusal to assign its software to Stenograph, including its Integrated Information Services division, and that Stenograph had an implied license to use the Micro Dynamics software. The judge denied Stenograph's counterclaims and ruled that Stenograph owed plaintiff $162,000 in royalty payments. There is still time for either side to appeal. See the Company's Form 10-K Report for the fiscal year ended June 30, 1996, item 3, for additional information. ITEM 2. CHANGES IN SECURITIES - ----------------------------- None. ITEM 3. DEFAULT UPON SENIOR SECURITIES - --------------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ The Company's Annual Meeting of Shareholders was held on November 14, 1996. The matters voted on at the Annual Meeting were as follows: (i) The election of Philip E. Rollhaus, Jr. and David S. Ruder to serve as directors. (ii) The approval of Coopers & Lybrand, L.L.P. as independent auditors for the Company. -11- Messrs. Rollhaus and Ruder were elected and all other matters were approved as follows: VOTES ABSTAIN OR FOR AGAINST WITHHELD NO VOTE ----- ------- ---------- ------- Election of Directors Philip E. Rollhaus, Jr. 6,247,442 1,240,709 David S. Ruder 6,269,565 1,218,586 Approval of Coopers and Lybrand, L.L.P. 7,422,780 24,418 40,953 ITEM 5. OTHER INFORMATION - -------------------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) On December 16, 1996, the Company filed a report on Form 8-K dated the same date, reporting under, "Item 5 - Other Events", that the Company had entered into an agreement on December 8, 1996 to sell substantially all of the assets of its subsidiary, Disc Manufacturing, Inc., for approximately $80 million in cash to Cinram, Inc. and its Canadian parent company, Cinram Ltd. In connection with the purchase, Quixote and Disc Manufacturing, Inc. will retain the Huntsville, Alabama building and land and certain liabilities, including, but not limited to, those associated with certain litigation. The transaction is subject to Quixote stockholder approval and is expected to close in the quarter ended March 31, 1997. (b) Exhibits * Management contract, compensatory plan or agreement 10.(a) *Amended Executive Employment Agreements dated November 14, 1996 between the Company and each of Philip E. Rollhaus, Jr., James H. DeVries and Myron R. Shain; Second Amendment to Executive Employment Agreement dated January 12, 1997 between the Company and Philip E. Rollhaus, Jr.; Second Amendment to Employment Agreement dated January 10, 1997 between the Company and James H. DeVries; Amendment to Key Employee Severance Agreement dated January 12, 1997 between the Company and Leslie J. Jezuit; Amendment to Key Employee Severance Agreement dated January 12, 1997 between the Company and George D. Ebersole; Key Employee Severance Agreement dated February 17, 1989 between the Company and Daniel P. Gorey; Amendment to Key Employee Severance Agreement dated January 10, 1997 between the Company and Daniel P. Gorey. 10.(b) Fourth Amendment to Lease dated as of September 18, 1996 between the Company and United Insurance Company of America. 10.(c) Asset Purchase Agreement dated as of December 8, 1996 among the Company, Disc Manufacturing, Inc., Cinram Ltd. and Cinram Inc. 11. Computation of earnings per average common and common equivalent share. -12- 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 December 31, 1996 to be signed on its behalf by the undersigned thereunto duly authorized. QUIXOTE CORPORATION DATE: FEBRUARY 13, 1997 /s/ Daniel P. Gorey ---------------------- ----------------------------------- DANIEL P. GOREY Chief Financial Officer, Vice President and Treasurer (Chief Financial & Accounting Officer) -13-