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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

For the fiscal year ended June 30, 2002

OR

For the transition period                              to                             

Commission file number 0-7903

QUIXOTE CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number including area code: (312) 467-6755

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock ($.01²/3 Par Value)
(Title of Class)

        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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý.

        State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing.

        $131,353,776 as of September 16, 2002

        Indicate the number of share outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 7,773,168 shares of the Company's Common Stock ($.01²/3 par value) were outstanding as of September 16, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

        The Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 15, 2002 which will be filed with the Commission on or about October 3, 2002 is incorporated by reference at Part III.

TABLE OF CONTENTS

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PART I
THE COMPANY

        Quixote Corporation was originally incorporated under the laws of the State of Delaware in 1969 as Energy Absorption Systems, Inc. In June, 1980, Energy Absorption Systems, Inc. changed its name to Quixote Corporation. Unless otherwise indicated herein, the terms "Quixote" and the "Company" refer to Quixote Corporation and its subsidiaries.

Item 1. Business

        Quixote Corporation and its subsidiaries develop, manufacture and market energy-absorbing highway crash cushions, sensing devices, weather information systems and services, variable message signs, highway advisory radios and other highway and transportation safety products to protect, direct and inform motorists and highway workers in both domestic and international markets.

        As of June 30, 2002, Quixote Corporation and its subsidiaries employed approximately 752 people.

Description of Business

        The Company's operations are comprised of two reportable segments within the highway and transportation safety industry, concentrating on safety problems and designing products to provide solutions for the highways. 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 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 improving safety on the roads either by minimizing the severity of crashes that occur or by preventing crashes from occurring by directing or guiding traffic. The Company's Inform segment provides solutions for improving traffic flow and safety on the roads by providing information. The Company's products are sold primarily by a single sales force and distribution network to customers in the highway construction and safety business, state departments of transportation, or other governmental transportation agencies.

Protect and Direct Segment

        In the category of products which reduce the severity of crashes within the Protect and Direct segment, the Company's patented highway crash cushions were first conceived and developed in 1969 in response to the high number of fatalities and serious injuries suffered by occupants of errant vehicles in collisions with roadside hazards, such as bridge abutments, overpass piers, overhead sign supports, lane dividers, traffic islands and toll booths. Since that time, various types of highway crash cushions have been installed in front of thousands of life-threatening roadside hazards. The Federal Highway Administration (FHWA) endorses the installation of highway crash cushions as an effective safety program.

        The Company develops, manufactures and markets lines of patented highway crash cushion systems and other barriers which absorb and dissipate the force of impact in collisions between vehicles and fixed roadside objects or slow moving vehicles. The product lines utilize the principles of momentum transfer and kinetic energy to safely decelerate errant vehicles. Energy absorption or energy dissipation is accomplished by using different combinations of water, aluminum, steel, urethane foam systems, cardboard, plastic structures, elastometric cylinders and sand. The Company also manufactures and sells products that prevent crashes and help control the flow of traffic by directing or guiding. These products that direct consist of a line of flexible sign and guide post system (delineators) and a glare screen system. The guide posts are extruded from polyethylene and are used to delineate a travel way, channel vehicles or mark the location of an object. The post features a patented, in-ground anchor system that permits inexpensive repair and replacement techniques.

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The glare screen system, also made from polyethylene, is installed on top of median barriers to eliminate the distraction of lights from oncoming vehicles on roads where the inside lanes are adjacent to the median barrier.

Inform Segment

        To expand the Company's business within the highway and transportation safety industry, in fiscal 1998 the Company began acquiring companies that manufacture ITS products which provide information to improve traffic conditions and prevent crashes from occurring. These products comprise the Company's Inform segment. Highway Information Systems, Inc. (HIS), acquired in April 1998, manufactures and markets highway advisory radio systems that help control the flow of traffic by informing motorists of accidents and traffic delays. In December 1998, the Company acquired Nu-Metrics, Inc., a leading innovator and manufacturer of electronic wireless measuring and sensing devices which gather and use information to relieve traffic congestion. In January 2001, the Company acquired National Signal, Inc. (NSI). NSI is engaged in the business of designing, manufacturing and distributing variable, electronic message signs, directional displays and warning lights for the transportation industry. Effective August 31, 2001, the Company acquired Surface Systems, Inc. (SSI). SSI is a manufacturer of patented pavement sensing equipment and specialized road weather stations and also provides both road condition and weather forecasting services.

        The Company's expanded highway and transportation safety products within the Inform segment include devices which can be used to measure distance and perform repetitive spacing to within one-tenth of an inch per mile and include portable or permanent sensors that record volume, speed, and length classification of vehicles. These sensors also collect, analyze and store traffic and road surface condition and freezing point data which can be relayed on a real-time basis for monitoring at a transportation department's base computer or control center via telephone, cellular link, fiber optic connection or a wireless link. The Company also manufactures and markets road/runway traffic and weather information systems. Using a tower equipped with weather instruments and special detectors, these systems can detect freezing conditions and provide valuable weather and traffic data to transportation departments or airports in order to dispatch salt trucks or automatically activate anti-icing systems. The Company is also a leading manufacturer of highway advisory radio (HAR) systems that broadcast traffic information using an AM radio frequency. HAR systems, in conjunction with flashing lights and message signs, advise drivers to tune into a particular AM station to communicate messages about traffic, road conditions and weather with reception up to six miles from the unit. The messages may be pre-recorded or updated on a real-time basis through a cellular or touch-tone phone or Local Area Network. The Company's products within the Inform segment also include variable message signs and directional displays which provide advance warning and directional information to oncoming drivers to assist in diverting and controlling traffic around areas of potential hazard. These LED signs and displays can be electronic, solar or diesel powered.

        Products within both segments can be further broken down into permanent and construction zone applications and, as such, are sold to those markets. Most of the products for permanent and construction zone applications are approved as acceptable highway hardware according to procedures in the National Cooperative Highway Research Program number 230 or 350 which provide various test levels depending on the application. This approval is gained after a formal submission to the FHWA which makes the products eligible for federal funds for highway projects.

        The Company provides product education, selection and application assistance. The Company, in some cases, performs site preparation and installation for its products. These services are generally performed by the Company's distributor/contractor network.

        Financial information relating to industry segments appears in Note 16 of the notes to Company's consolidated financial statements included herein.

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Competition and Marketing

        The Company's products are sold in all 50 U.S. states and internationally. Domestically, regional managers supervise 48 domestic distributors and make direct sales in areas not covered by distributors. Although the federal government may provide matching funds for the purchase of highway safety products made by state and local governmental agencies, the federal government is not a direct purchaser of the Company's domestic products. The Company sells its products principally to distributors, contractors (on behalf of state and local governments), state departments of transportation, state agencies, local governments, municipalities, and airports located in the U.S., Canada and Europe. For certain products, the Company sells using catalogs and inside sales personnel.

        Many international governments are now beginning to recognize the need for crash cushions and the Company's other highway safety products to ease traffic congestion and reduce traffic fatalities. The Company's products are sold internationally through a network of 65 distributors who make sales to municipal and national governments and contractors who are responding to bids from their respective governments.

        The Company believes it is the leading U.S. manufacturer of highway crash cushions but does experience competition in specific crash cushion product lines within the Protect and Direct segment, particularly in the sand barrel, QuadGuard®, REACT 350® and TMA lines. The Company competes in the U.S. market for crash cushions with Syro, Inc., a subsidiary of Trinity Industries, Inc., (NYSE TRN), with TrafFix Devices, Inc. and with other smaller regional companies. No other company presently markets as broad a line of highway crash cushion systems designed to shield as large a variety of fixed roadside hazards as the Company. A number of other companies manufacture flexible sign and guide post systems. There are several companies that manufacture and sell highway advisory radio systems. The Company's traffic counters and sensors compete with many different technologies including inductive loop detectors, microwave and infra-red sensors and machine-vision (video) that each offer certain advantages.

        Many competitors offer similar products to those sold by the Company, and a few are better capitalized than the Company. Such competition may have an adverse effect on the selling prices and profit margins of certain product lines, and depending on the product mix sold, can adversely affect the Company's financial results. The Company believes it competes effectively through its own advanced product development and patent protection, quality and price, and the effectiveness of its strong distribution network. The awarding of large contract orders by state departments of transportation and the timing of those awards also has an effect on the Company's sales and may affect the Company's results in any one particular fiscal period.

Government Policies and Funding

        The domestic market for highway and transportation safety products is directly affected by federal, state and local governmental policies. A large portion of the Company's sales is ultimately financed by funds provided to the states by the federal government. Historically, these funds have covered 75% to 90% of the cost of highway safety projects on roads constructed or maintained with federal assistance. Legislation called the Transportation Equity Act for the 21^st Century (TEA-21) was passed in May of 1998 and provides federal funding of approximately $218 billion over a six-year period, an increase of more than 40% over previous spending levels. The current federal legislation also includes a guaranteed amount of funding for highway safety programs. These federal funds are currently based on gasoline tax revenues. The states must set aside 10% of the federal funds received each year under TEA-21 for safety construction activities such as hazard elimination. In order for highway devices to be eligible for federal funding, such devices must be approved by the FHWA. The Company is obligated to seek such approval for improvements or upgrades to such devices and for any new devices.

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        TEA-21 expires on September 30, 2003 and it is currently uncertain as to what the future governmental spending levels will be in the next highway funding bill. Current estimates project that federal spending on highways for the year ended September 30, 2003 could be reduced by approximately $4 billion from approximately $32 billion. Currently the majority of states are operating at budget deficits. Any change in the availability of federal funds and the timing of the release of those funds to the state and local governments can have an adverse impact on the Company's financial results.

        Internationally, funding and government policies vary by country in regard to highway and transportation safety. In many cases, additional testing of the Company's products may be required in order to obtain certification.

Backlog

        As of June 30, 2002, 2001, and 2000, the Company had a backlog of unfilled orders for highway safety devices of $12,667,000, $7,986,000 and $10,568,000, respectively. The Company can usually fill an order within two days to 8 weeks of receipt depending on the type of product.

Research and Development; Patents

        Many of the Company's products have patented features and the Company conducts its own research, development and testing of new products before introducing them to the marketplace. The expenditures for research and development activities were $2,468,000, $1,752,000 and $1,614,000 for the years 2002, 2001 and 2000, respectively.

        The Company develops new products by working with federal and state highway officials to determine highway traffic safety needs, and then designs products to satisfy those needs. The Company is also active in promoting cooperation among state highway agencies, contractors and engineers to encourage comprehensive repair and maintenance of roadside crash attenuating systems. In addition to developing new products within the impact technology area, the Company is seeking to develop or to acquire new products which can be sold through its existing distribution networks to its existing customers.

        The Company owns a number of U.S. and foreign patents covering its major products. It actively seeks patent and trademark protection for new inventions and product improvements.

Raw Materials

        The principal raw materials used in the production of highway safety devices are plastic and plastic resins, steel, aluminum and electronic components. These raw materials are purchased from various suppliers and have been readily available throughout the last year. The Company believes that adequate supplies of these materials will continue to be available.

Major Customers

        No single customer of the Company represents a significant portion of total revenues. However, approximately 13% of the Company's consolidated revenues resulted from sales to customers in the State of Texas in fiscal 2002. 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 the Company's sales in that state.

Seasonality

        The Company's sales are seasonal. The domestic highway maintenance and construction season tends to reach its peak

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in the Company's fourth and first fiscal quarters. As a result, the Company's sales and earnings in these quarters are the strongest with weaker sales and earnings occurring in the second and third fiscal quarters.

Foreign and Domestic Operations and Revenues

        The Company's operations consist of two industry segments engaged in the manufacture and sale of highway and transportation safety products. The Company's business is conducted principally in the United States, with sales outside of the United States as follows: $8,596,000, $9,489,000 and $9,820,000 in 2002, 2001 and 2000 respectively.

Other

        Discontinued Operations: In fiscal years 1996 and 1997, the Company sold substantially all of the assets and transferred significant operating liabilities of Disc Manufacturing, Inc. and its legal technologies businesses. During the year ended June 30, 2002, the Company recorded a gain from discontinued operations of $927,000, or $0.11 per diluted share, which was net of income tax provisions of $521,000, due to the reversal of certain accruals related to contingencies which the Company no longer believes are probable and from the favorable outcome of a legal settlement.

Item 2. Properties

        Information relating to the Company's principal facilities is as follows:

        The Company believes that its principal plants are suitable and adequate for the manufacturing and other activities performed at those plants. In addition to the principal facilities listed above, the Company has international locations used primarily for sales activities.

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Item 3. Legal Proceedings

        The Company is subject to various legal proceedings and claims arising out of the conduct of its business. The Company believes, after consultation with counsel, that the outcome of such proceedings and claims will not have a material, adverse effect on the Company's consolidated financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2002.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

        The Company's common stock is quoted on The Nasdaq Stock Market®, under the symbol QUIX. Set forth are the daily high and low sales prices for the Company's common stock for the periods indicated, as reported by the Nasdaq.

        The current quoted price of the stock is listed daily in The Wall Street Journal in the Nasdaq National Market System section. As of September 16, 2002, there were 1,202 shareholders of record.

Dividend Policy

        During 2002, the Company declared semi-annual cash dividends of sixteen cents per share each declaration. During 2001, the Company declared semi-annual cash dividends of fifteen cents per share each declaration.

Equity Compensation Plan Information

        As of June 30, 2002, the Company has two outstanding stock option plans which were approved by the shareholders of the Company in November 2001. Additional information relating to the Company's stock option plans appears in Note 8 to the Company's consolidated financial statements included herein.

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        The following table details information regarding the Company's equity compensation plans as of June 30, 2002:

Item 6. Selected Financial Data

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

2002 Compared to 2001

        The Company's sales decreased 4% to $89,694,000 in 2002 from $93,554,000 for 2001 primarily due to the delay of highway safety construction spending for the Company's products by many states as a result of their revenue collection shortfalls and budget deficits. International sales declined 9% to $8,596,000 in 2002 compared to $9,489,000 for 2001 due to lower sales of the Company's lines of permanent crash cushions and truck-mounted attenuator (TMA) products. Sales in the Protect and Direct segment decreased 14% to $67,225,000 from $78,499,000 for 2001. Sales declined across the Company's Protect and Direct product lines with the exception of sales of parts, the Triton Barrier® product and the FreezeFree™ anti-icing system. Sales of the water-filled Triton Barrier product outpaced last year as interest grew in the product's functionality as a portable security barrier. The Company began to see interest in one of its newer products, the FreezeFree™ anti-icing system, with $768,000 in sales for 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 49% to $22,469,000 from $15,055,000 for fiscal 2001, primarily due to the acquisitions of SSI in August 2001 and National Signal, Inc. (NSI) in January 2001. These two acquisitions added $11,033,000 of sales in fiscal 2002 not comparable to the prior year. Organic sales for this segment decreased 24% as a result of decreased sales of advanced sensing products and highway advisory radios principally due to the more discretionary demand for these products.

        The gross profit margin for 2002 was 40.1% compared to 47.0% for 2001. 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 2002 increased 3% or $676,000 to $23,975,000 from $23,299,000 for 2001. Selling and administrative expenses increased as a percentage of sales to 27% of sales for 2002 from 25% of sales for 2001. The increase in the percentage of sales was due to the fixed component of many of the Company's expenses. The increase in dollars was due to the inclusion of selling and administrative expenses from SSI and NSI which added approximately $3,329,000 in costs for the year. Organic selling and administrative expenses for the year decreased $2,653,000, or 11%, due to both the decline in sales as well as cost containment initiatives.

        Research and development expenditures were $2,468,000 for 2002 compared to $1,752,000 for 2001. The increase was due to greater expenditures for upgrades and modifications to existing products like the recently introduced Safe-Stop® 180^o TMA with an innovative, more compact design including a tilt feature for easy storage and the QuadGuard® HS crash cushion for impacts up to 70 mph. The Company also worked on developing other 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 $9,489,000 in 2002 from $18,887,000 for 2001.

        Interest expense was $1,184,000 for 2002 compared to $1,479,000 for 2001. Interest expense decreased due to the lower interest rates for the current year, offset partially by the higher level of average long-term debt outstanding due to the acquisition of SSI.

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        Other income was $830,000 for 2002 related to the gain on the sale of the Company's non-highway plastic product line.

        The Company's effective income tax rate for 2002 was 36% compared to an effective income tax rate of 38% for 2001. 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 2003 will decrease to approximately 35% due to the Company's effective use of certain state tax planning strategies.

        Earnings from continuing operations for 2002 were $5,897,000 compared to $10,843,000 for 2001. Net earnings were $6,824,000, or $0.84 per diluted share, for the year compared to $10,843,000, or $1.35 per diluted share, for 2001. Net earnings for 2002 included a gain from discontinued operations of $927,000, or $0.11 per diluted share, which was net of income tax provisions of $521,000, due to the reversal of certain accruals related to contingencies which the Company no longer believes are probable of occurring and from the favorable outcome of a legal settlement.

2001 Compared to 2000

        The Company's sales increased 12% to $93,554,000 in 2001 from $83,770,000 for 2000 due to organic sales growth as well as growth from the acquisition of NSI. Organic sales increased 7% primarily due to demand for the Company's line of permanent crash cushion products and highway advisory radio systems. International sales declined 3% to $9,489,000 in 2001 against a difficult comparison of $9,820,000 for 2000 when international sales increased 56% over 1999. Sales for the Protect and Direct segment increased 6% in 2001 to $78,499,000 due to strong sales of the QuadGuard® family of crash cushion products, the REACT 350® crash cushion and part sales. These increases in sales were offset somewhat by declining sales of TMA products, sand-filled barrels, highway delineators and Triton Barrier® products. Sales for the Inform segment increased 50% in 2001 to $15,055,000 from $10,013,000 for 2000. NSI, acquired in January 2001, contributed $3,670,000 for the six months as part of the Company. Sales of highway advisory radio systems increased 81% in 2001 due to increased demand resulting in several large shipments during the year. These increases in sales for the Inform segment were offset somewhat by decreased sales of advanced sensing products.

        The gross profit margin for 2001 decreased to 47.0% from 49.1% for 2000. The gross profit margin for 2001 for the Protect and Direct segment remained consistent with 2000 as changes in product sales mix during 2001 had a minimal impact on the gross margin. The gross profit margin for the Inform segment declined in part as NSI's gross profit margin is below the Company's historical Inform segment gross margin and also due in part to decreased sales of higher margin large system contract work in 2001.

        Selling and administrative expenses for 2001 decreased 4% to $23,299,000 from $24,208,000 for 2000. Selling and administrative expenses declined as a percentage of sales to 25% of sales for 2001 from 29% of sales for 2000. The decline in the percentage of sales was due to the fixed component of many of the Company's expenses. The level of selling and administrative expenses in dollars decreased for 2001 compared to 2000 due principally to decreased legal, bad debt and sales commission expenses in 2001. The acquisition of NSI added $897,000 of selling and administrative expenses for the six months that NSI was a part of the Company. In addition, the equity loss on the investment in the joint venture, Transportation Management Technologies, L.L.C. (TMT), was $870,000 for 2001 compared to $316,000 for 2000. Effective April 2001, the Company liquidated its interest in the TMT joint venture.

        Research and development expenses for 2001 increased 9% to $1,752,000 from $1,614,000 for 2000. During 2001, the Company made expenditures for the development and testing related to new crash cushion technology, additional sensing technology for the recently developed FreezeFree™ system and software projects. The Company made other expenditures for development projects for new applications as well as upgrades and modifications for existing products.

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        Operating profit increased 24% to $18,887,000 for 2001 from $15,289,000 for 2000.

        Interest expense increased to $1,479,000 in 2001 from $932,000 for 2000. The increase in interest expense was related to the higher level of average long-term debt outstanding during 2001 in connection with the acquisition of NSI and the Company's stock repurchase program, offset partially by the effect of a decline in interest rates during the year.

        The Company's effective income tax rate for 2001 was 38%, the same effective income tax rate for 2000.

        Net earnings increased 22% in 2001 to $10,843,000, or $1.35 per diluted share, from $8,919,000, or $1.10 per diluted share, for 2000.

Liquidity and Capital Resources

        The Company had cash and cash equivalents of $1,798,000 and access to additional funds of $17,500,000 under its bank arrangements as of June 30, 2002. Operating activities were a source of cash for the Company for fiscal 2002 providing $12,670,000.

        Investing activities used cash of $18,230,000 during fiscal 2002 including $11,300,000 for the purchase of SSI. Capital expenditures in 2002 were $7,004,000 including amounts in connection with the expansion of the Company's primary manufacturing facility in Pell City, Alabama doubling its size to 300,000 square feet as well as for the upgrade of the Company's information technology systems. The Company also paid $691,000 related to patent expenditures. Offsetting these expenditures somewhat, the Company received $581,000 in cash proceeds and payments on a note receivable in the amount of $184,000 related to the sale of the Company's non-highway plastic product line.

        Financing activities provided cash of $3,196,000 during 2002. The Company borrowed a net $4,500,000 against its outstanding revolving credit facility primarily due to 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 $1,502,000 for the payment of notes payable due in connection with the acquisitions of Roadway Safety Service, Inc., Nu-Metrics, Inc. and NSI. The Company also received cash of $2,549,000 from the exercise of common stock options.

        For fiscal 2003, the Company anticipates needing approximately $3,000,000 in cash for capital expenditures. 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 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 consolidated financial statements included herein 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

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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: Revenues are recognized when either title and risk of loss of products has been transferred to unaffiliated customers or services have been rendered, with appropriate provision for uncollectible accounts.

        Long-Lived Assets: Long-lived assets include such items as goodwill, patents, product rights and equity method investments. 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. Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually using the discounted cash flow method. Patents and product rights are amortized on a straight-line basis over the life of the patent or agreement.

        Amortization expense of $398,000 and $1,835,000 was recognized for the years ended June 30, 2002 and 2001, respectively. 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 be approximately $424,000 for the fiscal year ending June 30, 2003.

Recently Issued Accounting Pronouncements

        The Financial Accounting Standards Board (FASB) issued FAS No. 143, "Accounting for the Obligations Associated with the Retirement of Long-Lived Assets," in June 2001 which is effective for fiscal years beginning after December 15, 2001. The statement establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. The FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in August 2001 which is effective for fiscal years beginning after December 15, 2001. FAS No. 144 establishes a single accounting method for the impairment or disposal of long-lived assets such as property, plant and equipment, amortized intangibles and other long-lived assets, including discontinued operations. In May 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 84 and Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002," which is effective for fiscal years beginning after May 15, 2002. This statement modifies reporting for the adjustment of debt and accounting for leases. The Company does not expect the adoption of these standards 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 the majority of states are currently operating at a deficit. Currently, the Company is encouraged by recent improvements in order flow and backlog. However, given the current uncertain economic conditions, the Company remains cautious about its near-term outlook.

        Looking ahead to fiscal 2003, current estimates project that federal spending on highways could be reduced by approximately $4 billion from approximately $32 billion, which could have an impact on the Company's prospects for 2003. The Company's earnings for fiscal year 2003 also will be dependent on the budgetary positions of the states. In addition, 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. In addition, the Company believes that competition may have an adverse effect on selling prices and gross profit margins for certain product lines.

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Item 7.A. Quantitative and Qualitative Disclosures about Market Risk

        The Company's market risk is primarily the potential loss arising from adverse changes in interest rates. The Company's long-term debt obligations are primarily at variable LIBOR-associated rates and fixed prime-associated interest rates and are denominated in U.S. dollars. In order to minimize the long-term costs of borrowing, the Company manages its interest rate risk by monitoring trends in rates as a basis for determining whether to enter into fixed rate or variable rate agreements. The Company does not have any derivative instruments associated with interest rates and is not a party to any transactions involving leveraged derivatives. As described in Note 7 to the consolidated financial statements, the amount of long-term debt outstanding as of June 30, 2002 and 2001 was $24,772,000 and $21,526,000, respectively. A hypothetical 1% immediate increase in interest rates would adversely affect the Company's 2002 and 2001 net earnings and cash flows by approximately $160,000 and $100,000, respectively.

        The majority of the Company's business is transacted in U.S. dollars and the U.S. dollar is considered the primary currency for the majority of the Company's operations. Although the Company continues to evaluate derivative financial instruments to manage foreign currency exchange rate changes, the Company did not hold derivatives for trading purposes during 2002 or 2001. Assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies for transaction purposes are sensitive to changes in currency exchange rates. However, there were no significant transaction gains or losses during 2002 or 2001 and the Company does not believe it is currently exposed to any material risk of loss from currency exchange fluctuations.

Forward Looking Statements

        Various statements made within the Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report 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 dates of those filings or communications. 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.

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT ACCOUNTANTS

To the board of directors and shareholders of Quixote Corporation:

        In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 35 present fairly, in all material respects, the financial position of Quixote Corporation and its subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 35 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois
August 2, 2002

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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QUIXOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    NATURE OF BUSINESS

        Quixote Corporation and its subsidiaries (the Company) develop, manufacture and market, to both domestic and international markets, energy-absorbing highway crash cushions, sensing devices, variable message signs, highway advisory radios and other highway and transportation safety products to protect, direct and inform motorists and highway workers.

2.    ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

        Cash in excess of operating requirements is invested in income-producing investments generally having initial maturities of three months or less. These investments are stated at cost, which approximates market value. The Company considers these short-term instruments to be cash equivalents.

CONSOLIDATION

        The consolidated financial statements include the accounts of Quixote Corporation and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

EARNINGS PER SHARE

        Basic earnings per share (EPS) is computed by dividing net earnings available to holders of common stock by the weighted average number of shares of common stock outstanding. Diluted EPS is computed assuming the exercise of all stock options that are profitable to the recipients. Under this assumption, the weighted average number of shares is increased accordingly.

FINANCIAL INSTRUMENTS

        The fair value of cash and cash equivalents approximates the carrying value of these assets due to the short-term maturity of these instruments. The fair value of the Company's long-term debt is estimated to approximate the carrying value based upon borrowing rates currently available to the Company for borrowings with similar terms and maturity.

INCOME TAXES

        The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. In addition, the amount of any future tax benefits are reduced by a valuation allowance to the extent such benefits are not expected to be fully realized.

INVENTORIES

        Inventories are valued at the lower of cost (first-in, first-out method) or market.

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LONG-LIVED ASSETS

        Long-lived assets include such items as goodwill, patents, product rights and equity method investments. 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. Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually using the discounted cash flow method. Patents and product rights are amortized on a straight-line basis over the life of the patent or agreement.

MANAGEMENT ESTIMATES

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Management's estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

PROPERTY, PLANT AND EQUIPMENT

        The Company capitalizes expenditures for major renewals and betterments and charges current earnings with the cost of maintenance and repairs. Provisions for depreciation have been computed on a straight-line or systematic method based on the expected useful lives of the assets as indicated below:

        The cost and accumulated depreciation relating to assets retired or otherwise disposed of are eliminated from the respective accounts at the time of retirement or other disposition with the gain or loss credited or charged to earnings.

COMPUTER SOFTWARE

        The Company capitalizes certain costs incurred in connection with developing, obtaining or implementing internal use computer software. During 2002 and 2001, approximately $1,910,000 and $1,191,000, respectively, of computer software was capitalized relating to a new manufacturing and accounting system.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        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 are no longer amortized and that such assets be tested for impairment at least annually.

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        The Financial Accounting Standards Board (FASB) issued FAS No. 143, "Accounting for the Obligations Associated with the Retirement of Long-Lived Assets," in June 2001 which is effective for fiscal years beginning after December 15, 2001. The statement establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. The FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in August 2001 which is effective for fiscal years beginning after December 15, 2001. FAS No. 144 establishes a single accounting method for the impairment or disposal of long-lived assets such as property, plant and equipment, amortized intangibles and other long-lived assets, including discontinued operations. In May 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No. 4, 44 and 84 and Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002," which is effective for fiscal years beginning after May 15, 2002. This statement modifies reporting for the adjustment of debt and accounting for leases. The Company does not expect the adoption of these standards will have a significant impact on fiscal 2003 financial results.

RECLASSIFICATIONS

        Certain prior year balances have been reclassified to conform to current year presentations.

REVENUE RECOGNITION

        Revenues are recognized when either title and risk of loss of products has been transferred to unaffiliated customers or services have been rendered, with appropriate provision for uncollectible accounts.

STOCK-BASED COMPENSATION

        The Company follows the provisions of FAS No. 123, "Accounting for Stock-Based Compensation," which encourages entities to adopt a fair value based method of accounting for stock-based compensation plans in place of the provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," for all arrangements under which employees receive shares of stock or other equity instruments of the employer.

        As allowed by FAS No. 123, the Company applies the provisions of APB No. 25 in accounting for its stock-based employee compensation arrangements, and discloses the pro forma net earnings and earnings per share information in its footnotes as if the fair value method had been applied.

        The Company recognizes compensation cost for stock-based compensation arrangements equal to the difference between the quoted market price of the stock at the date of grant and the price to be paid by the employee upon exercise in accordance with the provisions of APB No. 25. Based upon the terms of the Company's current stock option plans, the stock price on the date of grant and price paid upon exercise are the same, thus no compensation charge is required to be recognized.

3.    ACQUISITIONS

        Effective August 31, 2001, the Company acquired all of the outstanding stock of Surface Systems, Inc. (SSI). The acquisition has been accounted for in accordance with FAS No. 141, 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 for 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.

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        The following unaudited summary presents the estimated fair values of the assets acquired and liabilities assumed as of August 31, 2001, the date of acquisition.

        The allocation of purchase price above reflects adjustments made during fiscal year 2002 based on finalization of valuations of certain assets and liabilities. As a result of these adjustments, goodwill was increased by $1,454,000 during fiscal year 2002. The intangible assets acquired were assigned as follows:

        Effective January 1, 2001, the Company acquired all of the stock of National Signal, Inc. (NSI). The acquisition has been accounted for under the purchase method, and accordingly, the operating results have been included in the consolidated results since the date of acquisition. NSI is engaged in designing, manufacturing and distributing variable message signs, directional displays and warning lights for the transportation industry. NSI is based in La Mirada, California and had revenues for calendar 2000 of approximately $8,000,000. The purchase price was $4,450,000, of which $2,950,000 was paid in cash. The remaining $1,500,000 was paid in a three-year, 5% promissory note, payable in equal annual installments. In addition, the selling shareholders have an opportunity to earn up to $2,500,000, as additional purchase price consideration, by attaining certain sales and earnings targets over the three calendar years following the acquisition date. As of June 30, 2002, no additional purchase price has been recorded. The excess of purchase price over the estimated fair value of the assets acquired approximated $4,100,000. NSI has been included in the Company's Inform segment.

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        The following unaudited pro forma summary presents the consolidated results of operations for each of the years ended June 30 as if the acquisitions had occurred at the beginning of fiscal 2001:

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

        In October 1998, the Company entered into a joint venture, known as Transportation Management Technologies, L.L.C. (TMT), to market pavement inspection and other high technology products and services to highway departments in the United States. The Company invested $1,740,000 in TMT, of which $764,000 was paid in 1999, $361,000 in 2000 and $615,000 in 2001, for a 19% interest in the joint venture. This investment was being accounted for under the equity method of accounting. Effective April 2001, the Company liquidated its remaining $500,000 interest in the TMT joint venture in exchange for one of the venture's pavement inspection vehicles.

4.    DISPOSITIONS AND DISCONTINUED OPERATIONS

        In fiscal years 1996 and 1997, the Company sold substantially all of the assets and transferred significant operating liabilities of Disc Manufacturing, Inc. and its legal technologies businesses. During the year ended June 30, 2002, the Company recorded a gain from discontinued operations of $927,000, or $0.11 per diluted share, which was net of income tax provisions of $521,000, of which $735,000 was due to the reversal of certain accruals in the fourth quarter related to contingencies which the Company no longer believes are probable of occurring and $192,000 from the favorable outcome of a legal settlement. As of June 30, 2002, ongoing lease obligations relating to a facility formerly used by a legal technologies business total $1,028,000, of which $261,000 are classified in other accrued expenses and $767,000 in other long-term liabilities. The amounts relating to discontinued operations included in the balance sheet as of June 30, 2001 have been reclassified to conform to the current year presentation, and accordingly $1,423,000 is classified in other accrued expenses, $955,000 is classified in other long-term liabilities, $494,000 is classified in deferred income tax assets and $474,000 of noncurrent deferred income tax assets are classified in deferred income tax liabilities.

        During the year ended June 30, 2002, the Company recorded other income of $830,000 related to the gain on sale of certain assets of its non-highway plastic product line for $581,000 in cash and $700,000 in a three-year promissory note with interest imputed at 8%.

5.    INVENTORIES

        Inventories consist of the following at June 30:

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6.    INTANGIBLE ASSETS AND GOODWILL

        Intangible assets consist of the following as of June 30: