| QUIXOTE CORP Item 1A Risk Factors There are many factors that pose material risks to our business, operating results and financial condition which are frequently beyond our control |
| These factors include, but are not limited to, the following: A decrease or delay in federal government funding of transportation safety and highway construction and maintenance may cause our revenues and profits to decrease |
| We depend substantially on federal, state and municipal funding for transportation safety, highway construction and maintenance and other related infrastructure projects |
| Any decrease or delay in government funding for transportation safety, highway construction and maintenance and other related infrastructure projects could cause our revenues and profits to decrease |
| Federal government funding for infrastructure projects is usually accomplished through highway authorization bills, which establish funding over a multi-year period |
| The most recent highway authorization bill, SAFETEA-LU, became law in August 2005, after the prior law which authorized federal spending through September 30, 2003 was extended at then current funding levels eleven times over almost two years |
| Until the new law was passed, the transportation safety allotment in federal and state budgets was uncertain, and we believe this uncertainty negatively impacted spending on the products and services offered by the Company |
| The delayed passage of the new highway funding bill adversely affected our financial performance in fiscal year 2004 and fiscal year 2005 |
| Even after federal legislation is enacted, funding appropriations may be revised in future congressional sessions, and federal funding for infrastructure projects may be reduced in the future |
| In addition, Congress could pass legislation in future sessions which would divert highway funds for other national purposes or would restrict funding for infrastructure projects unless states comply with certain federal policies |
| Constraints on state and local government budgets may adversely affect our financial performance |
| Many states reduced spending on highways due to budget constraints given the national and local economies |
| Such budgetary constraints adversely affect the ability of states to fund transportation, highway and infrastructure projects, and therefore reduce the demand for our products |
| Municipalities also suffer from budget constraints that can reduce transportation safety spending |
| We believe that reduced state and municipal spending due to budget restraints adversely affected our performance in fiscal year 2004 and fiscal year 2005 |
| Downturns in the US economy or the transportation safety and highway construction industries may adversely affect our revenues and operating results |
| General economic downturns, including downturns in the transportation safety and highway construction industries, could result in a material decrease in our revenues and operating results |
| We believe that the economic downturn and the related political uncertainty during fiscal years 2002 through 9 ______________________________________________________________________ 2005 negatively affected our expected revenue growth |
| Sales of our products are sensitive to foreign, domestic and regional economies in general, and in particular, changes in government infrastructure spending |
| Sales of our products often are subject to government testing, inspection and approval |
| We frequently supply products and services pursuant to agreements with general contractors that have entered into contracts with federal, state or municipal government agencies |
| In some cases we enter into contracts directly with government agencies |
| At times these contracts require engineered systems which combine our Inform and Intersection Control products, sometimes in conjunction with our Protect and Direct products, into complex systems which may themselves be incorporated into other systems |
| The successful completion of our obligations under these contracts is often subject to satisfactory testing, inspection and approval of such products and services by a representative of the contracting agency |
| Although we endeavor to satisfy the requirements of each of these contracts to which we are a party, no assurance can be given that the necessary approval of our products and services will be granted on a timely basis or at all, and that we will receive any payments due to us |
| In some cases, we may be dependent on others to complete these projects which may also delay payments to us |
| Any failure to obtain these approvals and payments may have a material adverse effect on our business and future financial performance |
| Past and future acquisitions involve risks that could adversely affect our future financial results |
| We have completed seven acquisitions since 1997 and may acquire additional businesses in the future |
| We may be unable to achieve the benefits expected to be realized from our acquisitions |
| In addition, we may incur additional costs and our management’s attention may be diverted because of unforeseen expenses, difficulties, complications, delays and other risks inherent in acquiring businesses, including the following: · we may have difficulty integrating the acquired businesses as planned, which may include integration of systems of internal controls over financial reporting and other financial and administrative functions; · acquisitions may divert management’s attention from our existing operations; · we may have difficulty in competing successfully for available acquisition candidates, completing future acquisitions or accurately estimating the financial effect of any businesses we acquire; · we may have delays in realizing the benefits of our strategies for an acquired business; · we may not be able to retain key employees necessary to continue the operations of an acquired business; · acquisition costs may be met with cash or debt, increasing the risk that we will be unable to satisfy current financial obligations; · we may acquire businesses that are less profitable or have lower profit margins than our historical profit margins; and · acquired companies may have unknown liabilities that could require us to spend significant amounts of additional capital |
| In May and December, 2003, we made two acquisitions in the Intersection Control segment |
| Integration of these businesses, combined with reduced demand for our products adversely affected our financial performance in fiscal 2004, 2005 and 2006 |
| Given substandard performance of our Intersection 10 ______________________________________________________________________ Control segment, we recorded asset impairment charges in that segment of dlra22cmam735cmam000 for the year ended June 30, 2004 and dlra13cmam374cmam000 for the year ended June 30, 2006 |
| Confronted with the continued underperformance of the Intersection Control business, on April 25, 2006, our Board of Directors approved a restructuring plan for our Intersection Control business that includes further rationalizing of operations and divesting certain non-core product lines |
| Management’s estimates and assumptions affect reported amounts of expenses |
| Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually, and the results of such testing may adversely affect our financial results |
| We use a third party appraisal firm to assist our determination of fair values, but the impairment review is highly judgmental and involves the use of significant estimates and assumptions |
| These estimates and assumptions have a significant impact on the amount of any impairment charge recorded, and actual results may differ significantly from the estimates and assumptions used |
| We recognize deferred tax assets and liabilities for the expected future tax consequences of events which are included in the financial statements or tax returns |
| In assessing the realizability of the deferred tax assets, management makes certain assumptions about whether the deferred tax assets will be realized |
| We expect the deferred tax assets currently recorded to be fully realizable, however there can be no assurance that an increased valuation allowance would not need to be recorded in the future |
| Our business could be adversely affected by reduced levels of cash, whether from operations or from bank borrowings |
| Our principal sources of funds have historically been cash flows from operations and borrowings from banks |
| Our financial performance in fiscal year 2004 adversely affected our cash flow from operations and required us to modify our bank credit agreement in order to avoid the occurrence of events of defaults relating to certain covenants and financial ratios |
| Amendments to the credit agreement in fiscal 2005 required us to modify certain covenants, pledge our assets as collateral, reduce the maximum amount of availability under the revolving credit facility to dlra38 million, and limit our dividend payments |
| Although we are currently in compliance with the covenants of the credit agreement, our ability to remain in compliance in the future will depend on our future performance and may be affected by events beyond our control |
| There can be no assurance that we will generate sufficient earnings and cash flow to remain in compliance with the credit agreement, or that we will be able to obtain future amendments to the credit agreement to avoid a default |
| In the event of a default, there can be no assurance that we could negotiate a new credit agreement or that we could obtain a new credit agreement with satisfactory terms and conditions within a reasonable time period |
| If we are unable to protect our proprietary technology from infringement or if our technology infringes technology owned by others, then the demand for our products may decrease or we may be forced to modify our products which could increase our costs |
| We hold numerous patents covering technology and applications related to many of our products and systems, and numerous trademarks and trade names registered with the US Patent and Trademark Office and in foreign countries |
| Our existing or future patents or trademarks may not adequately protect us against infringements, and pending patent or trademark applications may not result in issued patents or trademarks |
| Our patents, registered trademarks and patent applications may not be upheld if challenged, and competitors may develop similar or superior methods or products outside the protection of our patents |
| This could increase competition for our products and materially decrease our revenues |
| If our products are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify the design of our products, change the name of our products or obtain a license for the use of some of the technologies used in our products |
| We may be unable to do any of the foregoing in a timely manner, 11 ______________________________________________________________________ upon acceptable terms and conditions, or at all, and the failure to do so could cause us to incur additional costs or lose expected revenue |
| Our success depends on our management and other employees |
| The single largest factor in our ability to profitably execute our work is our ability to attract, develop and maintain qualified personnel |
| Our success in attracting qualified people is dependent on the resources available in individual geographic areas and the impact on the labor supply due to general economic conditions as well as our ability to provide a competitive compensation package and work environment |
| Leslie J Jezuit, our Chairman and President, and Daniel P Gorey, our Chief Financial Officer, are of significant importance to our business and operations and neither has an employment agreement with us |
| The loss of their services may adversely affect our business |
| In addition, our ability to attract and retain qualified engineers, skilled manufacturing and marketing personnel and other professionals, either through direct hiring or acquisition of other businesses employing such professionals, will also be an important factor in determining our future success |
| Difficulties in managing and expanding in international markets could affect future growth in these markets |
| In fiscal year 2006, international sales represented approximately dlra21cmam821cmam000 or 14prca, of our total sales and we believe international markets could be an important source of growth |
| In connection with any increase in international sales efforts, we need to hire, train and retain qualified personnel in countries where language, cultural or regulatory barriers may exist |
| Moreover, funding and government requirements vary by country with respect to transportation safety |
| In a number of countries there are no governmental requirements or funding for transportation safety and we must educate officials and demonstrate the need for and benefits of our products |
| In addition, international revenues are subject to the following risks: · fluctuating currency exchange rates could reduce the demand for or profitability of foreign sales by affecting the pricing of our products; · the burden of complying with a wide variety of foreign laws and regulations, including the requirements for additional testing of our products; · dependence on foreign sales agents; · political and economic instability of foreign governments; and · the imposition of protective legislation such as import or export barriers |
| We depend on principal customers |
| We depend on principal customers, however no single customer of Quixote represents a significant portion of total revenues |
| However, in fiscal 2006, approximately 11prca and 9prca of our consolidated revenues resulted from sales to customers in the States of California and Texas, respectively |
| Customers may consist of distributors, contractors, departments of transportation, state agencies, local governments or municipalities |
| A change in policy in state spending could materially affect our sales in either state |
| The loss of, or a significant reduction in, orders from these or our other major customers could have a material adverse effect on our financial condition and results of operations |
| We are in a competitive marketplace |
| To the extent one or more of our current or future competitors introduce products that better address customer requirements, or are less expensive than our products, our business could be adversely affected and we may be unable to maintain our leadership position in certain products |
| Competition may adversely 12 ______________________________________________________________________ affect the selling prices and the profit margins on our products |
| We may not be successful in developing and marketing our existing products or new products or incorporating new technology on a timely basis or at a reduced cost |
| If we are unable to timely develop and introduce new products, or enhance existing products, or reduce costs, in response to changing market conditions or customer requirements or demands, our business and results of operations could be materially and adversely affected |
| We have acquired complementary businesses over the past several years and, as a part of our strategy, may continue to acquire complementary businesses |
| The gross profit margins of certain acquired product lines are lower than our historical gross profit margin, which adversely affects our gross profit margin |
| Given competitive conditions, we may be unable to improve our gross profit margins for these businesses and products |
| We have been affected by increased prices for certain commodities, particularly aluminum, steel and resin, which are a significant component of the cost of certain of our products |
| Such price increases negatively impact our gross margin for certain products, because we have been unable to pass along to our customers these cost increases |
| Increasing fuel and freight costs adversely affected our performance in fiscal 2006 |
| Our facilities or facilities of our customers and suppliers could be susceptible to natural disasters |
| Two of our major facilities are located in the Southeastern US Should a natural disaster such as a hurricane, tornado, earthquake or flood severely damage one of our major manufacturing facilities, or damage a major facility of one or more of our significant customers or suppliers, our business could be materially disrupted |
| Our insurance coverage could be inadequate |
| In accordance with risk management practices, we continually re-evaluate risks, their potential costs and the cost of minimizing them |
| To reduce our exposure to material risks, we purchase insurance in certain circumstances |
| We believe that we maintain adequate insurance coverage, however, certain risks are inherent in our business and our insurance may not be adequate to cover potential claims |
| Although we maintain liability insurance, we cannot assure that the coverage limits under these insurance programs will be adequate to protect us against future claims, or that we can and will maintain this insurance on acceptable terms in the future |
| Our quarterly operating results are likely to fluctuate, which may affect our stock price |
| Our quarterly revenues, expenses, operating results and gross profit margins vary significantly from quarter to quarter |
| As a result, our operating results may fall below the expectations of securities analysts and investors in some quarters, which could result in a decrease in the market price of our common stock |
| The reasons our quarterly results may fluctuate include: · seasonality inherent in our transportation safety and highway construction and maintenance business; · variations in profit margins attributable to product mix; · changes in the general competitive and economic conditions; · delays in, or uneven timing in the delivery of, customer orders; · the introduction of new products by us or our competitors; and · delays in federal highway funding and budgetary restraints on state and local government spending |
| 13 ______________________________________________________________________ Period to period comparisons of such items should not be relied on as indications of future performance |
| We may experience volatility in our stock price |
| The market price of our common stock may be subject to significant fluctuations in response to various factors, including: · the relatively small public float of our stock; · quarterly fluctuations in our operating results, as described in the prior risk factor; · changes in securities analysts’ estimates of our future earnings; and · loss of significant customers or significant business developments relating to us or our competitors |
| Our failure to meet analysts’ expectations, even if minor, could cause the market price of our common stock to decline |
| In addition, stock markets have generally experienced a high level of price and volume volatility, and the market prices of equity securities of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies |
| These broad market fluctuations may adversely affect our common stock’s market price |
| In the past, securities class action lawsuits frequently have been instituted against companies following periods of volatility in the market price of such companies’ securities |
| If any such litigation is instigated against us, it could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, results of operations and financial condition |
| Acts of war could adversely impact our business and operating results |
| Acts of war (wherever located around the world) may cause damage or disruption to our employees, facilities, suppliers, distributors or customers, which could significantly impact our sales, costs, expenses and financial condition |
| The potential for acts of war or hostility may create many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted |
| We are uninsured for losses and interruption caused by acts of war |
| The foregoing list is not exhaustive |
| There can be no assurance that we have correctly identified and evaluated all factors affecting our business |
| Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact us |
| Should any risks and uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition and results of operations |
| For these reasons, the reader is cautioned not to place undue reliance on our forward-looking statements |