**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

 

**FORM 10-Q/A**

 

| **(Mark One)** |
|----------------|
|           |
| **ý**     |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the quarterly period ended May  31, 2002.** |
|           |   |   |
| **o**          |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the transition period from                          to                        ** |

 

**Commission File Number:  000-24413**

 

| **TROY GROUP, INC.**                                            |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in its  charter)         |
|                                                            |   |   |
| **Delaware**                                                    |   | **33-0807798** |
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |   |
| **2331  South Pullman Street  Santa Ana, California**           |   | **92705** |
| (Address of principal executive offices)                        |   | (Zip code) |
|                                                            |   |   |
| **(949)  250-3280**                                             |
| (Registrant’s telephone number, including area code)       |

 

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

 

As of July 12, 2002, there were 10,969,657 shares ofour common stock outstanding.

 

EXPLANATORY NOTE

 

THIS FORM 10-Q/A IS BEING FILED FOR THE PURPOSE OF AMENDING ANDRESTATING THE FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2002 SOLELY TO THE EXTENTNECESSARY TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTSFOR THE PERIOD ENDED MAY 31, 2002, TO MAKE CONFORMING CHANGES TO “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” TOREFLECT SUCH RESTATEMENT, AND TO INCLUDE THE CERTIFICATIONS REQUIRED BY THESARBANES-OXLEY ACT OF 2002.  WE HAVEMADE NO FURTHER CHANGES TO THE PREVIOUSLY FILED 10-Q.  ALL INFORMATION IN THIS FORM 10-Q/A IS AS OF MAY 31, 2002 ANDDOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THOSEDESCRIBED IN THIS EXPLANATORY NOTE.

 

 

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**TROY GROUP,INC.**

**QuarterlyReport on Form 10-Q/A for the**

**QuarterlyPeriod Ended May 31, 2002**

 

**INDEX**

 
| **PART I:  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |
| Item  1.                                |   | Financial  Statements |
|                                    |   |   |
|                                    |   | Consolidated Balance Sheets    May 31, 2002 and November 30, 2001 |
|                                    |   |   |
|                                    |   | Consolidated Statements of  Operations for the   Three and Six Months ended May 31, 2002 and 2001 |
|                                    |   |   |
|                                    |   | Consolidated Statements of Cash  Flows for the   Six Months ended May 31, 2002 and 2001 |
|                                    |   |   |
|                                    |   | Notes to Consolidated Financial  Statements |
|                                    |   |   |
| Item  2.                                |   | Management’s Discussion and  Analysis of   Financial Condition and Results of Operations |
|                                    |   |   |
| Item  3.                                |   | Quantitative  and Qualitative Disclosures About Market Risk |
|                                    |   |   |
| **PART II:  OTHER INFORMATION**    |
|                                    |   |   |
| Item 1.                                 |   | Legal Proceedings |
|                                    |   |   |
| Item 2.                                 |   | Changes in Securities and Use of Proceeds |
|                                    |   |   |
| Item 3.                                 |   | Defaults Upon Senior Securities |
|                                    |   |   |
| Item 4.                                 |   | Submission of Matters to a Vote of  Security Holders |
|                                    |   |   |
| Item 5.                                 |   | Other Information |
|                                    |   |   |
| Item 6.                                 |   | Exhibits and Reports on Form 8-K |

 

2

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**PARTI:  FINANCIAL INFORMATION**

 

ITEM 1 – FINANCIALSTATEMENTS

 

**TROYGROUP, INC.CONSOLIDATED BALANCE SHEETS**

 

**(inthousands, except per share amounts)**

 
|                                                                                                                                                                     |   | **May 31,  2002**         |       | **November 30,  2001** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|------------------------|------------|
|                                                                                                                                                                     |   | **(Unaudited)  Restated** |       |                   |       |
| **Assets**                                                                                                                                                               |   |                      |       |                   |       |
| Current assets:                                                                                                                                                          |   |                      |       |                   |       |
| Cash and cash  equivalents                                                                                                                                               |   | $                         | 3,678      |                   | $          | 1,210 |   |
| Investment in  available-for-sale securities                                                                                                                             |   | 2,743                     |       | 5,181                  |       |
| Accounts receivable,  less allowance for doubtful accounts of $793 and $1,130, respectively                                                                              |   | 8,687                     |       | 9,713                  |       |
| Income tax refund  receivable                                                                                                                                            |   | 1,242                     |       | 1,059                  |       |
| Inventories                                                                                                                                                              |   | 8,245                     |       | 9,251                  |       |
| Prepaid expenses and  other                                                                                                                                              |   | 366                       |       | 358                    |       |
| Deferred tax assets                                                                                                                                                      |   | 2,480                     |       | 2,480                  |       |
| Total current assets                                                                                                                                                     |   | 27,441                    |       | 29,252                 |       |
| Equipment and leasehold  improvements, net                                                                                                                               |   | 2,349                     |       | 2,529                  |       |
| Other assets, including  notes receivable from stockholders of $2,039 at May 31, 2002 and  $1,666 at November 30, 2001                                              |   | 5,320                     |       | 5,226                  |       |
| Total assets                                                                                                                                                             |   | $                         | 35,110     |                   | $          | 37,007 |   |
|                                                                                                                                                                     |   |                      |       |                   |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                           |   |                      | ** ** |                   | ** ** |
| Current liabilities:                                                                                                                                                     |   |                      |       |                   |       |
| Current portion of  long-term debt                                                                                                                                       |   | $                         | 70         |                   | $          | 70 |   |
| Accounts payable                                                                                                                                                         |   | 2,360                     |       | 4,418                  |       |
| Accrued expenses                                                                                                                                                         |   | 2,780                     |       | 2,456                  |       |
| Deferred revenue                                                                                                                                                         |   | 1,233                     |       | 1,138                  |       |
| Total current  liabilities                                                                                                                                               |   | 6,443                     |       | 8,082                  |       |
| Long-term debt, net of  current portion                                                                                                                                  |   | 159                       |       | 193                    |       |
| Stockholders’ equity:                                                                                                                                               |   |                      |       |                   |       |
| Preferred stock, par  value $.01 per share, authorized 5,000,000 shares, issued none                                                                                     |   | —                    |       | —                 |       |
| Common stock, par value  $.01 per share; authorized 50,000,000 shares,  issued  10,969,657  shares at May 31, 2002; and 10,921,032 shares at November 30, 2001 |   | 110                       |       | 109                    |       |
| Additional paid-in  capital                                                                                                                                              |   | 21,113                    |       | 20,966                 |       |
| Retained earnings                                                                                                                                                        |   | 8,460                     |       | 8,753                  |       |
|                                                                                                                                                                     |   | 29,683                    |       | 29,828                 |       |
| Less cost of treasury  stock – 320,565 common shares in 2002 and 295,320 in 2001                                                                                    |   | 1,175                     |       | 1,096                  |       |
| Total stockholders’  equity                                                                                                                                         |   | 28,508                    |       | 28,732                 |       |
| Total liabilities and  stockholders’ equity                                                                                                                         |   | $                         | 35,110     |                   | $          | 37,007 |   |

 

See Notes to Consolidated Financial Statements.

 

3

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**TROYGROUP, INC.**

**CONSOLIDATED STATEM****ENTSOF OPERATIONS**

**(Unaudited)**

**(inthousands, except per share amounts)**

 
|                                    |   | **Three Months Ended May 31,** |       | **Six Months Ended May 31,** |       |
|-----------------------------------------|--------|--------------------------------|------------|------------------------------|------------|
|                                    |   | **2002**                       |       | **2001**                     |       | **2002** |   | **2001** |   |
|                                    |   | **Restated**                   | ** ** |                         | ** ** | **Restated** | ** ** |   | ** ** |
| Net sales                               |   | $                              | 14,025     |                         | $          | 9,800 |   | $ | 27,596 |   | $ | 21,109 |   |
| Cost of goods sold                      |   | 8,387                          |       | 6,226                        |       | 16,444 |   | 13,082 |   |
| Gross profit                            |   | 5,638                          |       | 3,574                        |       | 11,152 |   | 8,027 |   |
|                                    |   |                           |       |                         |       |   |   |   |   |
| Operating expenses:                     |   |                           |       |                         |       |   |   |   |   |
| Selling, general and  administrative    |   | 4,088                          |       | 3,933                        |       | 7,867 |   | 7,949 |   |
| Research and development                |   | 1,622                          |       | 1,723                        |       | 3,525 |   | 3,021 |   |
| Amortization of  intangible assets      |   | 130                            |       | 320                          |       | 260 |   | 640 |   |
| Operating loss                          |   | (202                           | )          | (2,402                       | )          | (500 | ) | (3,583 | ) |
|                                    |   |                           |       |                         |       |   |   |   |   |
| Interest income                         |   | 35                             |       | 156                          |       | 79 |   | 366 |   |
| Interest expense                        |   | (1                             | )          | (45                          | )          | (30 | ) | (64 | ) |
| Loss before income  taxes               |   | (168                           | )          | (2,291                       | )          | (451 | ) | (3,281 | ) |
| Provision for income  tax credits       |   | (56                            | )          | (710                         | )          | (159 | ) | (1,115 | ) |
| Net loss                                |   | $                              | (112       | )                            | $          | (1,581 | ) | $ | (292 | ) | $ | (2,166 | ) |
|                                    |   |                           |       |                         |       |   |   |   |   |
| Net loss per share:                     |   |                           |       |                         |       |   |   |   |   |
| Basic                                   |   | $                              | (.01       | )                            | $          | (.15 | ) | $ | (.03 | ) | $ | (.20 | ) |
| Diluted                                 |   | $                              | (.01       | )                            | $          | (.15 | ) | $ | (.03 | ) | $ | (.20 | ) |
|                                    |   |                           |       |                         |       |   |   |   |   |
| Shares used in per  share computations: |   |                           |       |                         |       |   |   |   |   |
| Basic                                   |   | 10,643                         |       | 10,860                       |       | 10,645 |   | 10,891 |   |
| Diluted                                 |   | 10,643                         |       | 10,860                       |       | 10,645 |   | 10,891 |   |

 

See Notes to Consolidated Financial Statements.

 

4

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**TROYGROUP, INC.**

**CONSOLIDATED STATEMENT****SOF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
|                                                                                             |   | **Six Months Ended May 31,** |       |
|--------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                             |   | **2002**                     |       | **2001** |   |
|                                                                                             |   | **Restated**                 | ** ** |   | ** ** |
|                                                                                             |   |                         |       |   |   |
| Cash flows from  operating activities:                                                           |   |                         |       |   |   |
| Net loss                                                                                         |   | $                            | (292       | ) | $ | (2,166 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in)  operating activities: |   |                         |       |   |   |
| Depreciation and  amortization                                                                   |   | 685                          |       | 1,016 |   |
| Recovery of doubtful  accounts                                                                   |   | (337                         | )          | (57 | ) |
| Deferred taxes                                                                                   |   | —                       |       | (59 | ) |
| Accrued interest on  available for sales securities                                              |   | (72                          | )          | (308 | ) |
| Changes in operating  assets and liabilities, net of effects from acquisitions:                  |   |                         |       |   |   |
| Accounts receivable                                                                              |   | 1,363                        |       | 2,588 |   |
| Income tax refund  receivable                                                                    |   | (183                         | )          | 177 |   |
| Inventories                                                                                      |   | 1,006                        |       | (1,236 | ) |
| Prepaid expenses and  other                                                                      |   | (9                           | )          | 103 |   |
| Accounts payable                                                                                 |   | (2,058                       | )          | (1,146 | ) |
| Accrued expenses                                                                                 |   | 324                          |       | (166 | ) |
| Deferred revenue                                                                                 |   | 95                           |       | 118 |   |
| Net cash provided by  (used in) operating activities                                             |   | 522                          |       | (1,136 | ) |
| Cash flows from  investing activities:                                                           |   |                         |       |   |   |
| Acquisition of  businesses                                                                       |   | —                       |       | (1,203 | ) |
| Purchase of equipment  and leasehold improvements                                                |   | (244                         | )          | (630 | ) |
| Purchase of  available-for-sale securities                                                       |   | (1,449                       | )          | (4,435 | ) |
| Maturities of  available-for-sale securities                                                     |   | 3,959                        |       | 6,963 |   |
| Capitalization of  software development costs                                                    |   | —                       |       | 263 |   |
| Increase in other  assets, net                                                                   |   | (355                         | )          | (559 | ) |
| Net cash provided by  investing activities                                                       |   | 1,911                        |       | 399 |   |
| Cash flows from  financing activities:                                                           |   |                         |       |   |   |
| Net borrowings on  revolving line of credit                                                      |   | —                       |       | 775 |   |
| Payments on notes payable                                                                        |   | (34                          | )          | (34 | ) |
| Proceeds from issuance  of common stock                                                          |   | 148                          |       | 158 |   |
| Purchase of treasury  stock                                                                      |   | (79                          | )          | (918 | ) |
| Net cash provided by  (used in) financing activities                                             |   | 35                           |       | (19 | ) |
| Net increase (decrease)  in cash and cash equivalents                                            |   | 2,468                        |       | (756 | ) |
| Cash and cash  equivalents, beginning of period                                                  |   | 1,210                        |       | 1,235 |   |
| Cash and cash  equivalents, end of period                                                        |   | $                            | 3,678      |   | $ | 479 |   |

 

See Notes to Consolidated Financial Statements.

 

5

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**TROYGROUP, INC.**

**NOTES TO CONSOLIDAT****EDFINANCIAL STATEMENTS**

(unaudited)

 

 

**Note1.  Basis of Presentation**

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals andadjustments) considered necessary for a fair presentation have beenincluded.  Operating results for thethree and six months ended May 31, 2002 are not necessarily indicative of theresults that may be expected for the year ending November 30, 2002.  For further information, refer to theconsolidated financial statements and footnotes thereto included in theCompany’s Annual Report on Form 10-K for its fiscal year ended November 30,2001 (File No. 000-24413).

 

The quarterly results for the first and second quarterof fiscal 2002 have been restated to reflect the recording of certain inventoryand inventory related accounts payable adjustments discovered in the thirdquarter of fiscal 2002 to the relevant periods.  During the third quarter physical inventory counts were conductedand certain inventory adjustments were discovered.  The Company completed a comprehensive review of its inventoryrelated internal controls to determine the cause of the identified inventorydifferences.  The Company has determinedthat certain differences arising from inventory and inventory related accountspayable were attributable to the first and second quarters of fiscal 2002.  The Company has restated the results ofthose quarters and associated year-to-date amounts in those periods and filedamended Forms 10-Q.

 

The effect of the restatements on the Company’sunaudited interim consolidated quarterly financial statements is as follows:

 

**SummaryBalance Sheet Data:**

**(inthousands)**

 
| **At May 31,  2002:**         |   | **As previously  reported** |   | **As restated** |   |
|-------------------------------|--------|-----------------------------|--------|-----------------|--------|
| Inventory                     |   | $                           | 8,825  |            | $      | 8,245 |   |
| Income tax refund  receivable |   | 1,059                       |   | 1,242           |   |
| Working capital               |   | 21,339                      |   | 20,998          |   |
| Total assets                  |   | 35,507                      |   | 35,110          |   |
| Accounts payable              |   | 2,416                       |   | 2,360           |   |
| Total liabilities             |   | 6,658                       |   | 6,602           |   |
| Retained earnings             |   | 8,801                       |   | 8,460           |   |
| Stockholders’equity      |   | 28,849                      |   | 28,508          |   |
|                               |        |                             |        |                 |        |  |  |

 

6

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**SummaryStatements of Operations Data:**

**(inthousands, except per share data)**

 
|                                         |   | **Three months ended May 31, 2002** |   | **Six months ended May 31, 2002** |   |
|----------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **As previously  reported**         |   | **As restated**                   |   | **As previously  reported** |   | **As restated** |   |
| Net sales                                    |   | $                                   | 14,025 |                              | $      | 14,025 |   | $ | 27,596 |   | $ | 27,596 |   |
| Gross profit                                 |   | 5,850                               |   | 5,638                             |   | 11,647 |   | 11,152 |   |
| Operating expenses                           |   | 5,833                               |   | 5,840                             |   | 11,623 |   | 11,652 |   |
| Income (loss) before  income taxes (credits) |   | 51                                  |   | (168                              | )      | 73 |   | (451 | ) |
| Provision for income  taxes (credits)        |   | 21                                  |   | (56                               | )      | 25 |   | (159 | ) |
| Net income (loss)                            |   | $                                   | 30     |                              | $      | (112 | ) | $ | 48 |   | $ | (292 | ) |
| Basic net income (loss)  per share           |   | $                                   | — |                              | $      | (.01 | ) | $ | — |   | $ | (.03 | ) |
| Diluted net income  (loss) per share         |   | $                                   | — |                              | $      | (.01 | ) | $ | — |   | $ | (.03 | ) |
| Weighted average basic  shares outstanding   |   | 10,643                              |   | 10,643                            |   | 10,645 |   | 10,645 |   |
| Weighted average  diluted shares outstanding |   | 10,758                              |   | 10,643                            |   | 10,731 |   | 10,645 |   |

 

**Note 2.  Inventories**

 

Inventories consisted ofthe following as of May 31, 2002 and November 30, 2001 (amounts in thousands):

 
|                                              |   | **May 31, 2002** |   | **November 30, 2001** |   |
|---------------------------------------------------|--------|------------------|--------|-----------------------|--------|
|                                              |   | **Restated**     |   |                  |   |
| Raw materials                                     |   | $                | 4,118  |                  | $      | 6,997 |   |
| Work-in-process                                   |   | 653              |   | 455                   |   |
| Finished goods                                    |   | 5,078            |   | 4,306                 |   |
| Reserve for slow moving  and obsolete inventories |   | (1,604           | )      | (2,507                | )      |
| Total                                             |   | $                | 8,245  |                  | $      | 9,251 |   |

 

**Note3.  Investment in Available-for-saleSecurities**

 

As of May 31, 2002, the Company had approximately $2.7million in corporate debt securities with contractual maturity dates of up toone year, which management has determined should be classified asavailable-for-sale.  Market valuesapproximated carrying values.  Accordingly,no unrealized gains or losses were recorded at May 31, 2002.  There were no gains or losses recognized forthe three or six months ended May 31, 2002 or 2001.

 

7

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**Note4.  Stock Option and Stock Warrant Plans**

 

During the six months ended May 31, 2002, the Companygranted options to employees to acquire 315,000 shares of common stock at aweighted-average exercise price of $4.10 per share, 10,000 options wereexercised at a weighted-average exercise price of $2.94 per share,  and 461,000 options were forfeited at aweighted-average exercise price of $6.66 per share.  The following is a summary of total outstanding options and stockwarrants at May 31, 2002:

 
|                          |   | **Options  and Warrants Outstanding** |   | **Options and Warrants Exercisable**   |   |
|-------------------------------|--------|---------------------------------------|--------|----------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number of  Shares**                 |   | **Weighted-  Average  Exercise Price** |   | **Weighted-  Average  Remaining  Contractual Life** |   | **Number of  Shares** |   | **Weighted-  Average  Exercise Price** |   |
| $2.94 — 4.51             |   | 977,666                               |   | $                                      | 3.90   |   | 8.4 years |   | 227,915 |   | $ | 3.34 |   |
| 6.31 — 8.75              |   | 827,000                               |   | 7.38                                   |   | 7.4 years |   | 466,500 |   | 7.26 |   |
| 13.16 — 14.25            |   | 25,000                                |   | 13.38                                  |   | 7.5 years |   | — |   | — |   |
|                          |   | 1,829,666                             |   |                                   |   |   |   | 694,415 |   |   |   |
|                               |        |                                       |        |                                        |        |  |  |  |  |  |  |  |  |

 

At May 31, 2002, there were 1,002,000 shares remaining available forgrant under the Company’s option plans.

**Note5.  Net Loss Per Share**

 

The following table setsforth the computation of basic and diluted net loss per share:

 
|                                                                                             |   | **Three months ended May 31,**                     |   | **Six months ended May 31,**                       |   |
|--------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                             |   | **(amounts in thousands, except  per share data)** |   | **(amounts in thousands, except  per share data)** |   |
|                                                                                             |   | **2002**                                           |   | **2001**                                           |   | **2002** |   | **2001** |   |
|                                                                                             |   | **Restated**                                       |   |                                               |   | **Restated** |   |   |   |
| Numerator for basic and diluted net loss per share:                                              |   |                                               |   |                                               |   |   |   |   |   |
|                                                                                             |   |                                               |   |                                               |   |   |   |   |   |
| Net loss                                                                                         |   | $                                                  | (112   | )                                                  | $      | (1,581 | ) | $ | (292 | ) | $ | (2,166 | ) |
|                                                                                             |   |                                               |   |                                               |   |   |   |   |   |
| Denominator for basic  and diluted net loss per share – weighted-average shares outstanding |   | 10,643                                             |   | 10,860                                             |   | 10,645 |   | 10,891 |   |
|                                                                                             |   |                                               |   |                                               |   |   |   |   |   |
| Net loss per share:                                                                              |   |                                               |   |                                               |   |   |   |   |   |
|                                                                                             |   |                                               |   |                                               |   |   |   |   |   |
| Basic                                                                                            |   | $                                                  | (.01   | )                                                  | $      | (.15 | ) | $ | (.03 | ) | $ | (.20 | ) |
| Diluted                                                                                          |   | $                                                  | (.01   | )                                                  | $      | (.15 | ) | $ | (.03 | ) | $ | (.20 | ) |

 

The dilutive effect of incremental shares of employeestock options and warrants for the periods ended May 31, 2002 and 2001 wouldhave been 93,000 and 76,000 for the three and six months ended May 31, 2002,respectively, and 43,000 and 47,000 for the three and six months ended May 31,2001, respectively.

 

8

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**Note6.  Business Combination**

 

*ExtendedSystems Incorporated*

 

On May 31, 2001, the Company acquired certain assets and assumedcertain liabilities of Extended Systems Incorporated, a print servermanufacturer, in exchange for $1,672,000 in cash and $504,000 in directexpenses.  The total acquisition costwas $2,051,000 and was allocated as follows:

 
| Inventories                 |   | $        | 1,600,000 |   |
|-----------------------------|--------|----------|-----------|--------|
| Equipment                   |   | 46,000   |      |
| Goodwill                    |   | 530,000  |      |
| Current liabilities assumed |   | (125,000 | )         |
|                        |   |     |      |
|                        |   | $        | 2,051,000 |   |

 

The acquisition has been accounted for as a purchasewith the operating results of Extended Systems Incorporated included in theCompany’s operations beginning June 1, 2001.

 

*Unauditedpro forma information*

 

Unaudited pro forma consolidated results of operationsfor the three and six months ended May 31, 2001 as though Extended SystemsIncorporated had been acquired as of December 1, 2000 are as follows (amountsin thousands, except per share data):

 
|                                                   |   | **Three Months Ended** |   | **Six Months Ended** |   |
|--------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                   |   | **May 31, 2001**       |   | **May 31, 2001**     |   |
| Pro forma net sales                                    |   | $                      | 12,882 |                 | $      | 28,205 |   |
| Pro forma net loss                                     |   | $                      | (1,429 | )                    | $      | (2,008 | ) |
| Pro forma net loss per  share:  basic and diluted |   | $                      | (0.13  | )                    | $      | (0.18 | ) |

 

The above amounts reflect pro forma adjustments foramortization of intangibles and number of shares outstanding for the purposesof calculating basic and diluted net loss per share.  This pro forma financial information does not purport to beindicative of the results of operations had the Extended Systems Incorporatedacquisition actually taken place at the earlier date.

 

9

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**Note7.  Segment Information**

 

The following tables summarize net sales and netincome (loss) by the Company’s operating segments, Troy Systems and TroyWireless, and unallocated corporate for the three and six months ended May 31,2002 and 2001:

 
|                       |   | **Three months ended May 31,** |   | **Six months ended May 31,** |   |
|----------------------------|--------|--------------------------------|--------|------------------------------|--------|
|                       |   | **(amounts in thousands)**     |   | **(amounts in thousands)**   |   |
|                       |   | **2002**                       |   | **2001**                     |   | **2002** |   | **2001** |   |
|                       |   | **Restated**                   |   |                         |   | **Restated** |   |   |   |
| Net sales:                 |   |                           |   |                         |   |   |   |   |   |
|                       |   |                           |   |                         |   |   |   |   |   |
| Troy Systems               |   | $                              | 11,196 |                         | $      | 8,093 |   | $ | 21,587 |   | $ | 17,697 |   |
| Troy Wireless              |   | 2,901                          |   | 1,770                        |   | 6,157 |   | 3,528 |   |
| Less intersegment  revenue |   | (72                            | )      | (63                          | )      | (148 | ) | (116 | ) |
|                       |   | $                              | 14,025 |                         | $      | 9,800 |   | $ | 27,596 |   | $ | 21,109 |   |
|                       |   |                           |   |                         |   |   |   |   |   |
| Net loss:                  |   |                           |   |                         |   |   |   |   |   |
|                       |   |                           |   |                         |   |   |   |   |   |
| Troy Systems               |   | $                              | 1,298  |                         | $      | (203 | ) | $ | 2,535 |   | $ | 469 |   |
| Troy Wireless              |   | (555                           | )      | (490                         | )      | (1,255 | ) | (1,071 | ) |
| Unallocated Corporate      |   | (855                           | )      | (888                         | )      | (1,572 | ) | (1,564 | ) |
|                       |   | $                              | (112   | )                            | $      | (1,581 | ) | $ | (292 | ) | $ | (2,166 | ) |

 

Certain reclassifications have been made to the May31, 2001 segment information to conform to the May 31, 2002 presentation(amounts in thousands).

 
|                  |   | **May 31, 2002** |   | **November 30, 2001** |   |
|-----------------------|--------|------------------|--------|-----------------------|--------|
|                  |   | **Restated**     |   |                  |   |
| Segment Assets:       |   |             |   |                  |   |
|                  |   |             |   |                  |   |
| Troy Systems          |   | $                | 42,809 |                  | $      | 37,438 |   |
| Troy Wireless         |   | 13,002           |   | 13,067                |   |
| Unallocated Corporate |   | 40,400           |   | 34,367                |   |
|                  |   | $                | 96,211 |                  | $      | 84,872 |   |

 

The following schedule is presented to reconcile May31, 2002 and November 30, 2001 segment assets to the amounts reported in theCompany’s consolidated financial statements (amounts in thousands).

 
|                                 |   | **May 31, 2002** |   | **November 30, 2001** |   |
|--------------------------------------|--------|------------------|--------|-----------------------|--------|
|                                 |   | **Restated**     |   |                  |   |
| Total assets of  reportable segments |   | $                | 96,211 |                  | $      | 84,872 |   |
| Intersegment  receivables            |   | (60,719          | )      | (47,483               | )      |
| Investment in  subsidiaries          |   | (382             | )      | (382                  | )      |
| Consolidated assets                  |   | $                | 35,110 |                  | $      | 37,007 |   |

 

10

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**Note8.  Cash Flow Information**

 

Supplemental disclosureof cash flow information

 
|                                                                                           |   | **Six months ended**       |   |
|------------------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                           |   | **(amounts in thousands)** |   |
|                                                                                           |   | **May 31, 2002**           |   | **May 31, 2001** |   |
|                                                                                           |   | **Restated**               |   |   |   |
| Cash paid during the  period for:                                                              |   |                       |   |   |   |
| Interest                                                                                       |   | $                          | 36     |   | $ | 64 |   |
| Income taxes                                                                                   |   | $                          | 5      |   | $ | 63 |   |
| Supplemental disclosure  of noncash investing and financing activities Purchase of businesses: |   |                       |   |   |   |
| Total purchase price                                                                           |   | —                     |   | $ | 1,831 |   |
| Less payable to seller                                                                         |   | —                     |   | (628 | ) |
| Cash purchase price                                                                            |   | —                     |   | $ | 1,203 |   |

 

11

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ITEM 2

 

**MANAGEMENT’S DISCUSSION****ANDANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis should be read in conjunctionwith our Consolidated Financial Statements and related Notes included in thisreport.  This report containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Thestatements contained in this report that are not historical in nature,particularly those that utilize terminology such as “may,” “will,” “should,”“expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparableterminology, are forward-looking statements based on current expectations andassumptions.

 

Various risks and uncertainties could cause actual results to differmaterially from those expressed in forward-looking statements.  These risks and uncertainties include thegrowth in acceptance of TROY’s electronic payment solutions by online brokeragefirms, e-merchants and other bill payment applications; the timely andsuccessful development and integration of the Bluetooth, 802.111b and otherwireless standards; the market acceptance of products incorporating wirelessprinting technologies; the ability to continue to develop and market othere-commerce payment, networked payment and wireless and other connectivitytechnologies; TROY’s ability to refocus its management and resources on theseemerging technologies; the ability to hire and retain qualified management,technology and other personnel; the impact of competition from existing and newtechnologies and companies; the ability to identify and assimilate acquiredcompanies and technologies; the continued demand for printed financial documents;and other factors.

 

We own or have rights to trademarks that we use in connection with thesale of our products.  TROY®, *e*CheckSecureTM, PrintraNetTM, TROYmarkTM, StarACHTM, EtherwindTM, WindconnectTM, WindportTM, EtherSyncTM, Exact MICRTechnologyTM (ExMTTM) and Exact Positioning TechnologyTM (ExPTTM) are among thetrademarks that we own.  This reportalso makes reference to trademarks and trade names of other companies.

 

**Background**

 

TROY Group, Inc. is a worldwide provider of enterprise outputsolutions.  For the past three years wehave been expanding beyond our core business in digital check printing systemsand related consumables by developing electronic payment systems and wired andwireless networking solutions.  Most ofthis new product expansion was accomplished through the acquisition and furtherinvestment in five small technology companies. These acquisitions have been organized under two primary businesssegments:  TROY Systems and TROYWireless.

 

TROY Systems provides state-of-the-art payment systems ranging fromhigh security digital check printing systems to electronic payment and fundstransfer solutions.  Our systems areused to transfer monies between bank accounts using paper checks or electronicACH (Automated Clearing House) processes. Our products provide our customers with payment solutions that offersecurity, speed, flexibility and efficiency. Ameritrade, Inc., AT&T Corporation, Bank of America Corporation,Eastman Kodak Company, Farmers Group, Inc. (Farmers Insurance), FidelityInvestments, Ford Motor Company, IBM, Manpower Inc., Morgan Stanley Dean Witter& Co., CSFBdirect, Track Data, Mr. Stock, Wal–Mart Stores, Inc.,Wells Fargo & Company, Comerica Bank, Red Cross, G.E. Capital Ireland andFord Credit Europe are among the TROY customers that purchased payment productsduring the last 12 months.

 

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TROY Wireless provides hardware and software solutions that enableenterprises to share intelligent devices like printers either wirelessly orusing traditional networks.  We havebeen a supplier of hardwired network printing solutions since 1991.  Our wireless products allow a wide range ofdevices to exchange information via *Bluetooth*TM and 802.11b short-range radioconnections.  Brother Industries, Ltd.,Sony Corporation, Seiko Epson Corporation and DaimlerChrysler AG are among theTROY Wireless customers that have purchased these products during the last 12months.

 

We serve a wide variety of industries including financial services,insurance, telecommunications, computer hardware, automotive, personnel,government and others.  We distributeour solutions around the world and market our products through a direct salesforce and a network of distributors and value-added resellers.  More than 5,000 customers have purchased ourproducts and services during the last 12 months.

 

**Critical Accounting Policies andEstimates**

 

*RevenueRecognition*

 

We recognize revenue from the sale of our equipment and supplies to endusers, distributors, original equipment manufacturers (OEM) and resellers whenthe product is shipped and the title is transferred to the buyer, net of anallowance for estimated returns, as long as no significant post-deliveryobligations exist and collection of the resulting receivable is probable.  Revenue from equipment maintenance contractsis recorded as deferred income when billed and is recognized straight-line overthe term of the contract.  We accrue forwarranty expense at the time revenue is recognized and maintain a warrantyaccrual for estimated future warranty obligations based upon the relationshipbetween historical and anticipated warranty costs and sales volumes.  To the extent we experience increasedwarranty claim activity or increased costs associated with servicing those claims,our warranty accrual will increase resulting in decreased gross profit.

 

We recognize revenue from software arrangements in accordance withStatement of Position (“SOP”) 97-2, “Software Revenue Recognition” as amendedby SOP 98-9, “Modification of SOP 97-2 with Respect to Certain Transactions.”Revenue is recognized when persuasive evidence of an arrangement exits anddelivery has occurred, provided the fee is fixed or determinable,collectibility is probable and the arrangement does not require significantcustomization or modification of the software. For arrangements where the software requires significant customizationor modification, the Company recognizes revenue for the software license andconsulting services portion of the arrangement upon customer acceptance.  Maintenance revenue is recognized ratablyover the term of the maintenance contract, typically 12 months.

 

Revenue from software license agreements with OEMs whereby the Companyprovides ongoing support over the term of the contract is recognized based onthe greater of royalties’ earned or straight line over the term of thecontract.

 

*Allowancefor doubtful accounts*

 

We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments.  The amount of the reserve is based onhistorical experience and our analysis of the accounts receivableoutstanding.  If the financial conditionof our customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required which wouldresult in an additional expense in the period such determination was made.

 

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*Inventories*

 

Inventories are valued at the lower of cost or market on a first-in,first-out basis. We use a standard cost system for purposes of determiningcost. The standards are adjusted periodically to ensure they approximate actualcosts. We write down the carrying value of our inventory to market value forestimated obsolete or excess inventory based upon assumptions about futuredemand and market conditions. We compare current inventory levels on a productbasis to our current sales forecasts in order to assess our inventory balance.Our sales forecasts are based on economic conditions and trends (both currentand projected), anticipated customer demand, expected future products and otherassumptions. If actual market conditions are less favorable than thoseprojected by management, additional write-downs may be required.

 

*CapitalizedSoftware Development Costs*

 

Costs incurred for computer software development prior to establishingtechnological feasibility are expensed as incurred.  Software development costs that we incur following technologicalfeasibility,  and prior to the time theproduct is available for general release to customers are capitalized.  Technological feasibility is determined atthe earlier of completion of a detailed program design or a working model.  Capitalized software costs are amortized overthe greater of (1) the ratio of current gross revenue for the product to thecurrent and anticipated future gross revenues or (2) the straight-line methodover the remaining economic life of the product, estimated to be five years.

 

*Incometaxes*

 

Deferred taxes are provided on a liability method whereby deferred taxassets are recognized for deductible temporary differences and operating lossand tax credit carry forwards and deferred tax liabilities are recognized fortaxable temporary differences.  Temporarydifferences are the differences between the reported amounts of assets andliabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

**Resultsof Operations**

 

On October 15, 2002, we issued a press release announcing that thefiling of our Form 10-Q for the fiscal quarter ended August 31, 2002 would bedelayed.  We had conducted physicalinventory counts and discovered certain inventory shortfalls and otheradjustments, which we preliminarily estimated to be approximately $1.5million.  We delayed the filing of ourForm 10-Q for the fiscal quarter ended August 31, 2002 in order to give ussufficient time to review the causes of such inventory adjustments and todetermine if any of the financial statements for prior periods would need to berestated.  Following completion of thisreview, we determined that the final adjustments total approximately $1.2million, and that it would be necessary to restate our consolidated financialstatements as of and for the periods ended February 28, 2002 and May 31, 2002and to make conforming changes to “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” to reflect suchrestatement.  We have made no furtherchanges to the “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included in our previously filed 10-Q other than asnecessary to reflect such restatement.

 

The following table sets forth, for the periods indicated, certaininformation derived from our consolidated statements of operations expressed asa percentage of net sales:

 

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|                                          |   | **Three Months Ended May 31,** |   | **Six Months Ended May 31,** |   |
|-----------------------------------------------|--------|--------------------------------|--------|------------------------------|--------|
|                                          |   | **2002**                       |   | **2001**                     |   | **2002** |   | **2001** |   |
|                                          |   | **Restated**                   |   |                         |   | **Restated** |   |   |   |
| Net sales                                     |   | 100.0                          | %      | 100.0                        | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |   | 59.8                           |   | 63.5                         |   | 59.6 |   | 62.0 |   |
| Gross profit                                  |   | 40.2                           |   | 36.5                         |   | 40.4 |   | 38.0 |   |
| Selling, general and  administrative expenses |   | 29.1                           |   | 40.1                         |   | 28.5 |   | 37.7 |   |
| Research and  development expenses            |   | 11.6                           |   | 17.6                         |   | 12.8 |   | 14.3 |   |
| Amortization of  intangible assets            |   | 0.9                            |   | 3.3                          |   | 0.9 |   | 3.0 |   |
| Operating loss                                |   | (1.4                           | )      | (24.5                        | )      | (1.8 | ) | (17.0 | ) |
| Interest income                               |   | 0.2                            |   | 1.6                          |   | 0.3 |   | 1.7 |   |
| Interest expense                              |   | —                         |   | (0.4                         | )      | (0.1 | ) | (0.3 | ) |
| Loss before income  taxes                     |   | (1.2                           | )      | (23.3                        | )      | (1.6 | ) | (15.6 | ) |
| Provision for income  tax credits             |   | (0.4                           | )      | (7.2                         | )      | (0.5 | ) | (5.3 | ) |
| Net loss                                      |   | (0.8                           | )%     | (16.1                        | )%     | (1.1 | )% | (10.3% | )% |

 

**ThreeMonths Ended May 31, 2002 Compared to Three Months Ended May 31, 2001**

 

*NetSales*.  Our net saleswere $14.0 million for the three months ended May 31, 2002, with $11.1 millionattributable to Troy Systems and $2.9 million attributable to TroyWireless.  Net sales in the three monthsended May 31, 2002 increased by $4.2 million, or 43.1%, from $9.8 million inthe three months ended May 31, 2001.  Thisincrease in net sales represents a $3.1 million increase in sales of our laserprinters,  proprietary imaging supplies,services, and electronic payment solutions, and an increase of $1.1 million insales of our wireless and connectivity products, primarily due to theacquisition of the print server business of Extended Systems, Inc. on May 31,2001.  Beginning June 1, 2001, theoperating results of the Extended Systems acquisition have been included in ouroperating results.  Net sales were notsignificantly affected by price changes.

 

*Cost ofGoods Sold*.  Cost ofgoods sold increased by $2.2 million or 34.7% to $8.4 million in the threemonths ended May 31, 2002 from $6.2 million in the three months ended May 31,2001.  This increase was primarily due toincreased net sales.  Cost of goods soldas a percentage of net sales decreased to 59. 8% in the three months ended May31, 2002 from 63.5% in the three months ended May 31, 2001, primarily due toreductions in manufacturing overhead costs, $400,000 in restructuring costs in the three months ended May 31, 2001,and a shift in mix to higher margin products. Cost of goods sold as a percent of sales will fluctuate based on shiftsin the mix of products sold.

 

*GrossProfit*.  As a resultof the above factors, gross profit increased by $2.0 million to $5.6 million inthe three months ended May 31, 2002 from $3.6 million in the three months endedMay 31, 2001.  Gross profit as apercentage of net sales increased to 40.2% in the three months ended May 31,2002 from 36.5% in the three months ended May 31, 2001.

 

*Selling,General and Administrative Expenses*.  Selling, general and administrative expensesincreased by $155,000 or 3.9% to $4.1 million in the three months ended May 31,2002 from $3.9 million in the three months ended May 31, 2001.  This increase was due primarily to $315,000in severance and related expenses and $303,000 additional expenses in TroyWireless, due to the acquisition of the print server business of ExtendedSystems, Inc. on May 31, 2001, partially offset by a $225,000 reduction in theallowance for doubtful accounts related to improved collections and other costcontrol measures. The three months ended May 31, 2001 included $350,000 ofexpenses related to increases in personnel,

 

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promotions andrestructuring. Selling, general and administrative expenses as a percentage ofnet sales decreased to 29.1% in the three months ended May 31, 2002 from 40.1%in the three months ended May 31, 2001, as sales increased at a higher ratethan expenses.

 

*Researchand Development Expenses*. Research and development expenses decreased by $101,000 or 5.9% to $1.6million in the three months ended May 31, 2002 from $1.7 million in the threemonths ended May 31, 2001 due to reduced project spending in Troy Systems.  The total research and development expensesfor the second quarter of 2002 included $1.1 million for Troy Systems, and $.5million for Troy Wireless.  The threemonths ended May 31, 2001 included $653,000 of expenses related to increases inpersonnel and related costs and restructuring costs. There were no softwaredevelopment costs capitalized in the three months ended May 31, 2002 and$125,000 were capitalized in the three months ended May 31, 2001.  Research and development expenses as apercentage of net sales were 11.6% in the three months ended May 31, 2002 and17.6% in the three months ended May 31, 2001.

*Amortization of IntangibleAssets. *Amortizationof intangible assets decreased by $190,000 or 59.4% to $130,000 in the threemonths ended May 31, 2002 from $320,000 in the three months ended May 31,2001.  This decrease was the result ofthe write-down of impaired long-lived assets at the end of fiscal year 2001.

 

*OperatingLoss*.  As a result ofthe above factors, the operating loss was reduced by $2.2 million to $(202,000)in the three months ended May 31, 2002 from a loss of $(2.4) million in thethree months ended May 31, 2001. Operating loss as a percentage of net sales was (1.4)% in the threemonths ended May 31, 2002 compared to (24.5)% in the three months ended May 31,2001.

 

*InterestIncome.*  Interestincome decreased by $121,000 to $35,000 in the three months ended May 31, 2002from $156,000 in the three months ended May 31, 2001.  This decrease is the result of reductions in our investment inavailable-for-sale securities due to an acquisition, our stock repurchaseprogram and working capital requirements.

 

*InterestExpense*.  Interestexpense decreased by $44,000 to $1,000 in the three months ended May 31, 2002from $45,000 in the three months ended May 31, 2001.  This decrease was due to decreased borrowings under our line ofcredit.

 

*IncomeTaxes*.  Income taxbenefits decreased to a $56,000 tax benefit in the three months ended May 31,2002 from a $710,000 tax benefit in the three months ended May 31, 2001.  Income tax benefit as a percentage of pretaxloss was (33.3)% in the three months ended May 31, 2002 compared to (31.0)% inthe three months ended May 31, 2001.

 

**SixMonths Ended May 31, 2002 Compared to Six Months Ended May 31, 2001**

 

*NetSales*.  Our net saleswere $27.6 million for the six months ended May 31, 2002, with $21.5 millionattributable to Troy Systems and $6.1 million attributable to TroyWireless.  Net sales in the six monthsended May 31, 2002 increased by $6.5 million, or 30.7%, from $21.1 million inthe six months ended May 31, 2001.  Thisincrease in net sales represents a $3.9 million increase in sales of our laserprinters,  proprietary imaging supplies,services, and electronic payment solutions, and an increase of $2.6 million insales of our wireless and connectivity products, due to the acquisition of  the print server business of ExtendedSystems, Inc. on May 31, 2001. Beginning June 1, 2001, the operating results of the Extended Systemsacquisition have been included in our operating results.  Net sales were not significantly affected byprice changes.

 

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*Cost ofGoods Sold*.  Cost ofgoods sold increased by $3.4 million or 25.7% to $16.4 million in the sixmonths ended May 31, 2002 from $13.1 million in the six months ended May 31,2001 primarily due to increased net sales. Cost of goods sold as a percentage of net sales decreased to 59.6% inthe six months ended May 31, 2002 from 62.0% in the six months ended May 31,2001, primarily due to cost reductions, $400,000 in restructuring costs in the six months ended May 31, 2001,and a shift in mix to higher margin products. Cost of goods sold as a percent of sales will fluctuate based on shiftsin the mix of products sold.

 

*GrossProfit*.  As a resultof the above factors, gross profit increased by $3.1 million to $11.2 millionin the six months ended May 31, 2002 from $8.0 million in the six months endedMay 31, 2001.  Gross profit as apercentage of net sales increased to 40.4% in the six months ended May 31, 2002from 38.0% in the six months ended May 31, 2001.

 

*Selling,General and Administrative Expenses*.  Selling, general and administrative expensesdecreased by $82,000 or 1.0% to $7.9 million in the six months ended May 31,2002 from $7.9 million in the six months ended May 31, 2001.  This decrease was primarily due to costcontrol measures put in place and a $225,000 reduction in the allowance fordoubtful accounts related to improved collections, partially offset by $315,000in severance and related expenses and $475,000 increased expenses in Troy Wireless due to the acquisition ofthe print server business of Extended Systems, Inc. on May 31, 2001.  The six months ended May 31, 2001 included$957,000 of expenses related to increases in personnel, promotions andrestructuring.  Selling, general andadministrative expenses as a percentage of net sales decreased to 28.5% in thesix months ended May 31, 2002 from 37.7% in the six months ended May 31, 2001.

 

*Research and Development Expenses*.  Research and development expenses increasedby $504,000 or 16.7% to $3.5 million in the six months ended May 31, 2002 from$3.0 million in the six months ended May 31, 2001.  Of this increase, approximately $295,000 was due to developmentexpenses for our electronic payment solutions, and $180,000 was due todevelopment for our wireless products,. The total research and development expenses for 2002 included $2.2million for Troy Systems and $1.3 million for Troy Wireless.  There were no software development costscapitalized in the six months ended May 31, 2002 and $263,000 were capitalizedin the six months ended May 31, 2001. Research and development expenses as apercentage of net sales were 12.8% in the six months ended May 31, 2002 and14.3% in the six months ended May 31, 2001.

 

*Amortizationof Intangible Assets. *Amortizationof intangible assets decreased by $380,000 or 59.4% to $260,000 in the sixmonths ended May 31, 2002 from $640,000 in the six months ended May 31,2001.  This decrease was the result ofthe write-down of impaired long-lived assets at the end of fiscal year 2001.

 

*OperatingLoss*.  As a result ofthe above factors, the operating loss was reduced by $3.1 million to $(500,000)in the six months ended May 31, 2002 from a loss of $3.6 million in the sixmonths ended May 31, 2001.  Operatingloss as a percentage of net sales was 1.8% in the six months ended May 31, 2002compared to (17.0)% in the six months ended May 31, 2001.

 

*InterestIncome.*  Interestincome decreased by $287,000 to $79,000 in the six months ended May 31, 2002from $366,000 in the six months ended May 31, 2001.  This decrease is the result of reductions in our investment inavailable-for-sale securities due to an acquisition, our stock repurchaseprogram and working capital requirements.

 

17

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*InterestExpense*.  Interestexpense decreased by $34,000 to $30,000 in the six months ended May 31, 2002from $64,000 in the six months ended May 31, 2001.  This decrease was due to decreased borrowings under our line ofcredit.

 

*IncomeTaxes*.  Income taxbenefit decreased to a $(159,000) tax benefit in the six months ended May 31,2002 from a $1.1 million tax benefit in the six months ended May 31, 2001.  Income tax benefit as a percentage of pretaxloss was 35.3% in the six months ended May 31, 2002 compared to (34.0)% in thesix months ended May 31, 2001.

 

**Liquidityand Capital Resources**

 

Cash flows provided by operating activities were $522,000 in the sixmonths ended May 31, 2002 compared to $1.1 million used by operating activitiesin the six months ended May 31, 2001. This increase was due primarily to net loss of $292,000 in the first sixmonths of 2002 compared to a net loss of $2.2 million in the first six monthsof 2001 and a decrease in inventories and accounts receivable, partially offsetby a decrease in accounts payable.  Theaccounts receivable decrease resulted primarily from collections.

 

Cash flows provided by investing activities were $1.9 million in thesix months ended May 31, 2002 compared to $399,000 in the six months ended May31, 2001.  Included in cash flowsprovided by investing activities in the six months ended May 31, 2002 was $2.5million in net maturities of available-for-sale securities.  In connection with split-dollar lifeinsurance arrangements with our major stockholder, we are committed to fundingthe premium on three life insurance policies for the foreseeable future.  Annual premiums on these policies areapproximately $586,000 per year for the next five years.

 

Cash flows provided by financing activities were $35,000 in the sixmonths ended May 31, 2002 compared to cash flows used in financing activitiesof $19,000 in the six months ended May 31, 2001.

 

We have a $5,000,000 line-of-credit agreement with a bank.  As of May 31, 2002, there were no borrowingsoutstanding against the line of credit. Borrowings under the line of credit bear interest at the lesser of thebank’s reference rate (5.0% at May 31, 2002) less 0.25% or the bank’s LIBORrate (6.56% at May 31, 2002) plus 2% and are limited to 80% of eligibleaccounts receivable and 50% of eligible inventories if total liabilities totangible effective net worth is greater than two to one.  In connection with the line-of-creditagreement, we have a $650,000 standby letter-of-credit sublimit agreement ofwhich approximately $80,000 was outstanding at May 31, 2002.  This line of credit is secured bysubstantially all of our assets.  Ourborrowing arrangement requires us to comply with certain financial covenants,and at May 31, 2002 we were in compliance with those covenants.  As of May 31, 2002, we had approximately$4,920,000 in availability under the line of credit.  The line-of-credit borrowings are due on demand.  The agreement may be terminated by eitherparty.

 

We believe that existing cash and cash equivalents, available for salesecurities, cash generated by operating activities, and funds available underour credit facility will be sufficient to finance our operating activities forat least the next 12 months.  To theextent that the funds generated from these sources are insufficient to financeour operating activities, we would need to raise additional funds throughpublic or private financing.  We cannotassure you that additional financing will be available on terms favorable tous, or at all.

 

In March 2001, Troy established a stock repurchase program under whichTroy’s common stock, with an aggregate market value up to $4.0 million, may beacquired in the open market.  As of May31, 2002, Troy has purchased approximately 320,565 shares of common stock inthe open market, at an

 

18

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average price of$3.67 per share, under the stock repurchase program.  Approximately $2.8 million remains available for future commonstock repurchases.

 

**Contractual Obligations andCommercial Commitments**

 

The Company has the following contractual obligationsand commercial commitments.

 
|                                |   | **Total** |      | **Less than 1  year** |    | **1 – 3 years** |   | **4 – 5 years** |    | **After 5  years** |      |
|-------------------------------------|--------|-----------|-----------|-----------------------|---------|----------------------|--------|----------------------|---------|--------------------|-----------|
| Notes payable                       |   | $         | 229,000   |                  | $       | 36,000               |   | $                    | 193,000 |               | —    |   | — |   |
|                                |   |      |      |                  |    |                 |   |                 |    |               |      |
| Related party operating  lease      |   | $         | 1,573,000 |                  | $       | 135,000              |   | $                    | 809,000 |               | $         | 539,000 |   | $ | 90,000 |   |
|                                |   |      |      |                  |    |                 |   |                 |    |               |      |
| Other operating leases              |   | $         | 891,000   |                  | $       | 268,000              |   | $                    | 623,000 |               | —    |   | — |   |
|                                |   |      |      |                  |    |                 |   |                 |    |               |      |
| Split dollar life  insurance policy |   |      | **        | $                     | 293,000 |                 | $      | 1,755,000            |    | $                  | 1,170,000 |   |   | ** |
|                                     |        |           |           |                       |         |                      |        |                      |         |                    |           |  |  |  |  |  |

 

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** The Company has committed to making payments on thesplit dollar life insurance policy based on continued employment.

 

The annualcommitments are based on the Company’s November 30 year end.

 

As of November 30, 2001 and May 31, 2002, the Company had advanced$1,666,000 and $2,039,000, respectively, to stockholders in connection with thepurchase of split dollar life insurance policies.  The Company and the stockholders have executed a split dollararrangement governing the unsecured, non-interest-bearing receivable for theamount of the advance.  The advance isdue on demand, however the Company does not anticipate demanding payment in thenext 12 months and accordingly has classified this amount as long-term.

 

**Recently IssuedAccounting Standards**

 

In June 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 141 (SFAS No. 141), *BusinessCombinations*, and Statement of Financial Accounting Standards No.142 (SFAS No. 142), *Goodwill and Other Intangible Assets*.  SFAS No. 141 addresses financial accountingand reporting for business combinations and is effective for all businesscombinations after June 30, 2001.  SFASNo. 142 addresses financial accounting and reporting for acquired goodwill andother intangible assets and is effective for fiscal years beginning afterDecember 15, 2001.  We will adopt SFASNo. 142 as of the beginning of fiscal year 2003.  We are in the process of determining the expected impact onearnings and existing goodwill and other intangibles upon adoption, which willinclude the elimination of goodwill amortization and may include an  impairment charge.  As of May 31, 2002, unamortized goodwill totaled $272,000.

 

TheFASB recently issued SFAS No. 143, *Accounting for Asset Retirement Obligations,*addressing financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs. SFAS No. 143 requires an enterprise to record the fair valueof an asset retirement obligation as a liability in the period in which itincurs a legal

 

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obligationassociated with the retirement of a tangible long-lived asset. SFAS No. 143also requires the enterprise to record the contra to the initial obligation asan increase to the carrying amount of the related long-lived asset and todepreciate that cost over the remaining useful life of the asset. The liabilityis changed at the end of each period to reflect the passage of time and changesin the estimated future cash flows underlying the initial fair value measurement.SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Weare currently examining the impact of this pronouncement on the results of ouroperations and financial position.

 

In August 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, which supersedes previous guidance onfinancial accounting and reporting for the impairment or disposal of long-livedassets and for segments of a business to be disposed of.  Adoption of SFAS No. 144 is required nolater than the beginning of fiscal 2003. Management does not expect the adoption of SFAS No.144 to have asignificant impact on our financial position or results of operations.  However, further impairment reviews mayresult in charges against earning to write down the value of long-lived assets.

 

On April 30, 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44and 64, Amendment of FASB Statement No. 13, and Technical Corrections*.This statement updates, clarifies and simplifies existing accountingpronouncements. Statement 145 rescinds Statement 4, which required all gainsand losses from extinguishment of debt to be aggregated and, if material,classified as an extraordinary item, net of related income tax effect. As aresult, the criteria in Opinion 30 will now be used to classify those gains andlosses. Statement 64 amended Statement 4, and is no longer necessary becauseStatement 4 has been rescinded. Statement 44 was issued to establish accountingrequirements for the effects of transition to the provisions of the MotorCarrier Act of 1980. Because the transition has been completed, Statement 44 isno longer necessary. Statement 145 amends Statement 13 to require that certainlease modifications that have economic effects similar to sale-leasebacktransactions be accounted for in the same manner as sale-leasebacktransactions. This amendment is consistent with the FASB’s goal of requiringsimilar accounting treatment for transactions that have similar economic effects.The Company will adopt Statement 145 in fiscal 2003. Statement 145 is notexpected to have a material impact on the Company’s results of operations orfinancial position.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

Market risk is the risk of loss to future earnings, to fair values orto future cash flows that may result from changes in the price of a financialinstrument.  The value of a financialinstrument may change as a result of changes in interest rates, exchange rates,commodity prices, equity prices and other market changes.  Market risk is attributed to all marketsensitive financial instruments, including long-term debt.

 

We do not utilize derivative financial instruments.  Accordingly, our exposure to market risk isthrough our investments in available-for-sale securities and our bank debtwhich bears interest at variable rates. Available-for-sale securities consist of corporate debt and marketableequity securities.  These securitiesgenerally have contractual maturity dates of up to one year.  At May 31, 2002, market values approximatedcarrying values.  Due to the short-termmaturities of these securities, management believes that there is nosignificant market risk.  At May 31,2002, we had approximately $7.7 million in cash, cash equivalents andinvestments in available-for-sale securities, and, accordingly, a sustaineddecrease in the rate of interest earned of 1% would cause a decrease in theamount of annual interest earned of $77,000. The bank debt is a revolving line of credit.  All borrowings bear interest based upon the reference rate perannum as announced by the bank (5.0% at May 31, 2002) less 0.25%.  At May 31, 2002, there were no amountsoutstanding under the line of credit agreement and, accordingly, a sustainedincrease in the reference rate of 1% would not cause our annual interestexpense to change.

 

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**PART II:  OTHER INFORMATION**

 

ITEM 1 - LEGALPROCEEDINGS

 

Not applicable.

 

ITEM 2 - CHANGESIN SECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 3 - DEFAULTSUPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4 - SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Our Annual Meeting of Stockholders was held on April11, 2002.  The following individualswere elected at the Annual Meeting as Directors of the Company to serve untilthe next annual meeting or until their respective successors are elected andqualified.  Shares voted in favor ofthese Directors and shares withheld were as follows:

 
| **Director**        |   | **Shares For** |   | **Shares Withheld** |   |
|---------------------|--------|----------------|--------|---------------------|--------|
| Patrick J. Dirk     |   | 10,061,510     |   | 31,286              |   |
| Brian P. Dirk       |   | 10,061,510     |   | 31,286              |   |
| Norman B. Keider    |   | 10,083,382     |   | 9,414               |   |
| John B. Zaepfel     |   | 10,083,582     |   | 9,214               |   |
| Dr. Harold L. Clark |   | 10,083,582     |   | 9,214               |   |

 

ITEM 5 - OTHERINFORMATION

 

None.

 

ITEM 6 - EXHIBITSAND REPORTS ON FORM 8-K

 

(a)           Exhibits.

 

ExhibitNumber                                                                                                                                                      Description

 

99.1                                                                                                                                                                           Certificationof the Chief Executive Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

99.2                                                                                                                                                                           Certificationof the Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

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(b)           Reports on Form8-K

 

On June 4, 2002, we filed a Current Report on Form 8-Kdated May 28, 2002 under Item 4 regarding the decision by our Board ofDirectors to dismiss McGladrey & Pullen LLP as our  independent public accountants.

 

On July 9, 2002, we filed a Current Report on Form 8-Kdated July 5, 2002 under Item 4 regarding our engagement of KPMG LLP asour  independent public accountants.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 
|           | TROY GROUP, INC.                                               |
|----------------|----------------------------------------------------------------|
|           |                                                           |
|           |                                                           |
| March 17, 2003 | /s/ Patrick J. Dirk                                            |
|           | Patrick J. Dirk                                                |
|           | Chairman, President and Chief Executive Officer                |
|           |                                                           |
|           | /s/ James W. Klingler                                          |
|           | James W. Klingler                                              |
|           | Vice President-Finance, Treasurer and Chief  Financial Officer |

 

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CERTIFICATIONS

 

I, Patrick J. Dirk, certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q/A of Troy Group, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport; and

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 
| March 17, 2003 | /s/ Patrick J. Dirk                    |
|----------------|----------------------------------------|
|           | Patrick J. Dirk                        |
|           | President and Chief  Executive Officer |

 

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CERTIFICATIONS

 

I, James W. Klingler, certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q/A of Troy Group, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport; and

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 
| March 17, 2003 | /s/James W.  Klingler                                          |
|----------------|----------------------------------------------------------------|
|           | James W. Klingler                                              |
|           | Vice President-Finance, Treasurer and Chief  Financial Officer |

 

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