Quixote Corporation

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Quixote Corporation

One East Wacker Drive
Chicago, Illinois 60601
U.S.A.
(312) 467-6755
Fax: (312) 467-1356

Public Company
Incorporated: 1969 as Energy Absorption Systems, Inc.
Employees: 1,599
Sales: $ 185.4 million (1995)
Stock Exchanges: NASDAQ
SICs: 3089 Plastic Products Not Elsewhere Classified

Quixote Corporation operates as a holding company for leading manufacturers in two specialized technology areas. Quixote’s Energy Absorption Systems, Inc. (EAS) subsidiary is the world’s leading manufacturer of energy-absorbing highway crash cushions, guardrails, and related highway safety devices. EAS and its subsidiaries, Spin-Cast Plastics, Inc. and Safe-Hit Corporation, design and manufacture crash-cushion components, flexible guide posts, portable sign systems, and other plastic products at four company-owned plants in California, Alabama, and Indiana. Quixote’s Disc Manufacturing, Inc. (DMI) is the United States’ largest independent designer and supplier of compact discs for the audio and CD-ROM markets. DMI’s two production facilities in Anaheim, California, and Huntsville, Alabama, combine for a production capacity of 200 million units per year. DMI accounted for 47 percent of Quixote’s $185 million sales in 1995. EAS provided 25 percent of sales. In February 1996, Quixote sold off the remaining principal units of its failing third subsidiary, Legal Technologies, Inc., including Stenograph Corporation and Integrated Information Services, Inc., which together had produced $40.6 million of the Quixote’s 1995 sales. Founder Philip E. Rollhaus, Jr., continues to function as chairman and chief executive officer. Leslie J. Jezuit was named president and chief operating officer in January 1996.

Making an Impact in the 1970s

Philip Rollhaus, together with group of fellow entrepreneurs, formed Energy Absorption Systems, Inc. in Chicago in 1969. Rollhaus’ road to entrepreneurship was as diverse as his company’s growth would prove to be. Raised near New York City, Rollhaus graduated from Wesleyan University with a degree in English Literature. Rollhaus then joined the Navy’s Officers Candidate School, where a misreading of the E-N-G of his degree led him to a four-year stint as an engineering officer at sea. That exposure to technology would become pivotal to Rollhaus’ later career.

Upon his discharge from the Navy, Rollhaus entered Oxford University to continue his English studies. He soon left the university, traveling to Paris, where he attempted to write a novel. During his time in Paris, Rollhaus began developing his entrepreneurial skills, starting up a literary magazine, selling cars, and eventually opening Paris’ first coin-operated laundry. After five years in Paris, however, Rollhaus returned to the United States, joining an investment banking firm in Chicago.

As Rollhaus would later say, it was at the investment banking firm that he developed “an affinity for inventors and their ideas, and a passion for them to succeed.” In 1969, Rollhaus left his position with the investment firm and with his associates set out to acquire and develop a series of patents for a product that had come to Rollhaus’ attention: a bumper for automobiles called the Hi-Dro Cell Cushion Bumper. The Hi-Dro bumper was molded from plastic bumper and filled with water, and later foam, providing greater impact protection than the standard chrome bumpers of the time. In exchange for stock in EAS, Rollhaus acquired certain of the rights to the Hi-Dro bumper, providing marketing services to the Sacramento, California company that manufactured them.

The new company quickly hit a snag. While their bumper sold to a number of taxicab companies and bus lines, the automobile manufacturers and automotive aftermarket displayed little interest in the product, believing that their consumers would not easily give up the traditional chrome bumper. EAS struggled to remain profitable.

Facing the reluctance of the automobile industry to convert its bumper systems, EAS turned to a related product being developed by the Sacramento company. This product, call the Hi-Dro Cell Barrier, was a highway attenuater guardrail system based on the same energy absorption and dissipation principles as the Hi-Dro bumper. EAS submitted the Cell Barrier to the Federal Highway Administration, which approved it for experimental use. The company also developed a foamed urethane bumper system for transit bus use, called the Tránsate bumper. EAS continued to market the Hi-Dro bumper, but the automobile manufacturers remained intransigent.

Public concern for highway safety, however, was starting to build during the early 1970s. Rollhaus next recognized a potential market for designing, developing, and manufacturing another product related to the Cell Barrier, that of highway crash cushions. In 1972, the FHA removed the Cell Barrier and EAS’s crash cushions from its experimental list, approving them for highway use. Acceptance of these new systems, while applauded by the motoring public, was slow at first. But by 1973, EAS’s sales had topped $2 million, and the company turned a profit of $470,000. In 1976, as a settlement for a patent infringement lawsuit filed against the company, EAS made a cash purchase to acquire the basic patent to the highway crash cushion field.

Sales climbed slowly but steadily through the 1970s, reaching $4.2 million in 1977. By then, the federal government had begun to mandate the use of energy-absorbing bumper systems on all newly manufactured automobiles. EAS, however, faced strong competition for this market as the automobile manufacturers and their suppliers began producing their own impact absorption systems. Its Transafe bus bumper was also under attack by traditional suppliers to the bus industry. The competition in the vehicle bumper market, which formed 12 percent of EAS’s sales, forced down EAS’s profit margins, and quickly its profits as well. In 1977, EAS made the decision to exit the vehicle bumper market, licensing its patents, and turned its impact absorption focus entirely on its highway barrier systems.

Acceptance of these highway barriers continued to grow, but remained dependent on government funding initiatives, making growth unstable and unpredictable. Faced with becoming a oneproduct company with an uncertain market, EAS made its first attempt to diversify, with the $1.6 million purchase of Melley Energy Systems, Inc. of Pompano Beach, Florida, in October 1976. Melley was a producer of mobile power generating systems, chiefly for the foreign market. Despite an early $9 million order from Saudi Arabia, EAS found itself under pressure to repay the loans needed to finance its Melley purchase while expanding that company’s production and marketing efforts. As its Melley operation began to cut into its Energy Absorption capital, EAS saw its profits drop from a net of $253,000 in 1976 to $72,000 in 1977. By June of that year, EAS sold Melley for $1.67 million.

EAS continued in its efforts to diversify its business. Rollhaus and company identified two areas that they wanted to pursue, those of vapor capture and solar energy. Two new divisions were formed, the Clean Air Division, later called the QualAir Division, and the Solarstor Division. Through the Clean Air Division, EAS purchased the rights to equipment designed to recapture the vapors escaping when gasoline was pumped into automobiles at service stations, converting the vapors back into gasoline. Encouraged by the California Air Resources Board and other agencies, EAS turned its R & D efforts toward perfecting the vapor capture device. The device, however, met resistance from the oil companies, which pushed through their own vapor capture design. EAS’s solar energy efforts under its Solarstor division included developing fiberglass solar collector panels and water heating tanks. But in the late 1970s, the rush was on to develop solar-energy based products, and, faced with a market overburdened by manufacturers, EAS soon shut down its solar energy activities.

Despite these difficulties, Rollhaus’s interest in high-technology and his willingness to pursue and develop new markets were already beginning to shape the future of EAS. Meanwhile, sales of its highway impact absorption products were rising steadily, to $7.3 million by 1979, providing a cushion for the company’s continued desire for diversification.

The Technology of the 1980s

With its crash cushion profits, EAS next purchased Stenograph Corporation of Skokie, Illinois. Stenograph was by then a fading, 40-year-old company serving the country’s court reporter market. The Stenograph machine allowed a court reporter to type as fast as people spoke, producing transcripts in phonetic code which then had to be translated and retyped into plain English. Under EAS, Stenograph moved to incorporating the new developments in computer technology, which by then were producing the first small-scale personal computers. By 1980, after acquiring and merging Cimarrón Systems, Inc. of Greenville, Texas, into Stenograph, the company was ready with its first computer-aided transcription system, using computers to translate the phonetic code into plain English. Success for the new product was immediate, and Stenograph’s revenues quickly grew five-fold and its market share grew to 90 percent of the country’s court reporters.

In 1980, the company went public, restructuring its EAS and Stenograph subsidiaries under a holding company named Quixote Corporation. Taking a venture capital strategy, nicknamed “Long Shots Incorporated” within Quixote, the company next established a new subsidiary, LaserVideo, Inc. Begun by giving an inventor “$60,000 a year, a white coat and a laboratory,” as Rollhaus told Financial World, LaserVideo developed a proprietary process for manufacturing laser discs for the newly developing compact disc technology.

Buoyed by EAS and Stenograph, which together produced nearly $27 million in sales and a $1.36 million net profit by 1983, Quixote poured some $13 million into developing its disc production capacity, positioning itself as one of only two U.S.-based compact disc manufacturers when the market broke open in the mid-1980s. Its production capacity at its Anaheim, California, plant would grow to three million units per year; the addition of a new plant in Huntsville, Alabama, would bring total production capacity to 60 million units per year, more than the entire compact disc market in the United States at the time. However, the compact disc market was growing at a phenomenal rate, from under six million units in 1984 to nearly 23 million in 1985, with predictions of over 300 million units by the end of the decade. Focused on the small-label market, LaserVideo would have the U.S. production to themselves for most of the 1980s. Nevertheless, LaserVideo operated at a loss for much of the decade, posting a $3.6 million operating loss on only $1.9 million in revenues in 1985. The surging position of EAS—which now provided its barrier systems to seven countries and throughout the United States—and Stenograph continued to cushion the development of LaserVideo and Quixote’s new technology ventures.

Quixote’s and Rollhaus’s interest in “taking ideas and making them work against all odds” led the company into several new areas during the 1980s. The first was the acquisition of Amtel Systems Corp. in 1984 and the development of an interoffice messaging system, a simplified type of local area network, with early clients featuring such giants as Citicorp, PepsiCo, and Goldman, Sachs, as well as General Electric. Quixote’s next formed a joint venture with Allstate Insurance called Synthetic Blood Corp. after scientists had contacted Rollhaus with their design for producing a synthetic, whole-blood substitute. Development of this venture too would be supported by Quixote’s EAS and Stenograph earnings, which combined to provide sales of $4 million and a net profit of nearly $2 million in 1986. In that year, Quixote also acquired an 80 percent interest in Ocean Scientific, Inc., a manufacturer of instruments for medical diagnostics testing, an area which, with the rise of AIDS and other infectious diseases, was showing promise during the 1980s. By then LaserVideo had begun to branch out into the newly developing CD-ROM market.

Quixote’s heavy investments in such long-term projects—at the time, testing for its synthetic blood, for example, was expected to require three to five years; ten years later, there were still no synthetic bloods approved for use—cut into the company’s earnings, at a time when its Stenograph and EAS subsidiaries were experiencing their own troubles. The failure of the Federal government to approve funding for its highway crash systems in 1987 crippled EAS’s sales. The launch of Stenograph’s newest computer-aided transcription systems failed, forcing Stenograph to withdraw the new line. 1987 sales barely passed those of 1986, and the company posted a net loss of nearly $2.2 million. The following year, despite a rise in revenues to $56 million, the company posted a loss of $107,000.

With competition in the compact disc market heating up, Quixote sold off its LaserVideo subsidiary to Disctronics, Ltd., for $55.5 million, with $29 million in cash, in 1988. The next year, with federal funding assured for five years, EAS rebounded, the company’s revenues neared $65 million, and profits again climbed past $2 million.

Streamlined for the 1990s

Quixote’s troubles were not behind them. As the country entered the recession of the early 1990s, Quixote posted two more losing years, with a loss of nearly $3.7 million in 1990 followed by a $3.1 million loss in 1991. During the first half of the decade, the company would exit its unprofitable ventures, retaining its still-profitable subsidiaries, EAS and Stenograph, which would be reorganized as Legal Technologies, Inc. to reflect Quixote’s new pursuit of a position in software and other products and services for the legal community. These subsidiaries were again joined by LaserVideo, renamed by Disctronics as Disc Manufacturing Inc. (DMI), after Disctronics defaulted on its remaining $26.5 million obligation in 1990. By then, demand for compact discs had grown beyond expectations, and the market for laser discs and especially CD-ROMs was just beginning to explode. Meanwhile, Disctronics’ capital improvements had increased DMI’s capacity to 3.2 million units per month, making DMI the largest independent supplier of compact discs in the United States. Its largest customer was BMG Music, which accounted for 38-40 percent of its sales. Quixote made plans to boost capacity still higher, to 4.5 million units per month. By 1992, the company posted net earnings of nearly $8 million on $129 million in sales.

The rise of multimedia personal computers in the mid-1990s boosted revenues still higher. From 1993 to 1994, DMI’s sales of CD-ROMs increased 155 percent. Sales climbed to $145 million in 1993 and nearly $177 million in 1994. Earnings rose as well, to $11.6 million in 1994. In response to falling compact disc prices, Quixote stepped up production, opening a new manufacturing facility in Anaheim and expanding its Hunts-ville, Alabama, plant. By 1995, DMI accounted for 47 percent of Quixote’s total sales of $185 million.

In that year, Quixote announced its intention to discontinue its Legal Technologies subsidiary, beginning with its Litigation Sciences, Inc. unit acquired in 1993. In February 1996, Quixote completed the sale of Integrated Information Services, Inc., also acquired in 1993, as well as Stenograph Corporation to Chicago-based The Heico Companies.

At the end of 1995, BMG Music ended its supply account with DMI. However, Rollhaus, who stepped down from Quixote’s presidency in January 1996, announced the streamlined company’s intention to step up DMI’s activity in the fast-growing CD-ROM market, while maintaining its commitment to its steady-selling, original namesake, Energy Absorption Systems.