**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION****Washington, 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 February 28, 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) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                     Yes    ý     No   o

 

As of March 29, 2002, there were 10,962,157 shares of our common stockoutstanding.

 

EXPLANATORY NOTE

 

THIS FORM 10-Q/A IS BEING FILED FOR THE PURPOSE OF AMENDING ANDRESTATING THE FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2002 SOLELY TO THEEXTENT NECESSARY TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIALSTATEMENTS FOR THE PERIOD ENDED FEBRUARY 28, 2002, TO MAKE CONFORMING CHANGESTO “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS” TO REFLECT SUCH RESTATEMENT, AND TO INCLUDE THE CERTIFICATIONSREQUIRED BY THE SARBANES-OXLEY ACT OF 2002. WE HAVE MADE NO FURTHER CHANGES TO THE PREVIOUSLY FILED 10-Q.  ALL INFORMATION IN THIS FORM 10-Q/A IS AS OFFEBRUARY 28, 2002 AND DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTSOTHER THAN THOSE DESCRIBED IN THIS EXPLANATORY NOTE. 

 

 

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**TROY GROUP, INC.****Quarterly Report on Form 10-Q/A for theQuarterly Period Ended February 28, 2002**

 

**INDEX**

 

# **PART I:  FINANCIAL INFORMATION**

# ** **

| Item 1.                              | Financial Statements                                                                                        |
|--------------------------------------|-------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                        |
|                                 | Consolidated Balance Sheets    February 28, 2002 and November 30, 2001                                      |
|                                 |                                                                                                        |
|                                 | Consolidated  Statements of Operations  for the Three Months ended February 28, 2002  and February 28, 2001 |
|                                 |                                                                                                        |
|                                 | Consolidated  Statements of Cash Flows  for the Three Months ended February 28, 2002  and February 28, 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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**PART I:  FINANCIAL INFORMATION**

 

ITEM 1 – FINANCIALSTATEMENTS

 

**TROYGROUP, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share amounts)**

 
|                                                                                                                                                           |   | **February  28,  2002**   |       | **November  30, 2001** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|------------------------|------------|
|                                                                                                                                                           |   | **(Unaudited)  Restated** |       |                   |       |
| **Assets**                                                                                                                                                     |   |                      |       |                   |       |
| Current assets:                                                                                                                                                |   |                      |       |                   |       |
| Cash and cash equivalents                                                                                                                                      |   | $                         | 3,680      |                   | $          | 1,874 |   |
| Investment in available-for-sale securities                                                                                                                    |   | 3,488                     |       | 5,181                  |       |
| Accounts receivable, less allowance for doubtful  accounts of $1,124 and  $1,130,  respectively                                                           |   | 9,155                     |       | 9,713                  |       |
| Income tax refund receivable                                                                                                                                   |   | 1,240                     |       | 1,059                  |       |
| Inventories                                                                                                                                                    |   | 9,028                     |       | 9,251                  |       |
| Prepaid expenses and other                                                                                                                                     |   | 380                       |       | 358                    |       |
| Deferred tax assets                                                                                                                                            |   | 2,480                     |       | 2,480                  |       |
| Total current assets                                                                                                                                           |   | 29,451                    |       | 29,916                 |       |
| Equipment and leasehold improvements, net                                                                                                                      |   | 2,427                     |       | 2,529                  |       |
| Other assets                                                                                                                                                   |   | 5,219                     |       | 5,226                  |       |
| Total assets                                                                                                                                                   |   | $                         | 37,097     |                   | $          | 37,671 |   |
|                                                                                                                                                           |   |                      |       |                   |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                 |   |                      | ** ** |                   | ** ** |
| Current liabilities:                                                                                                                                           |   |                      |       |                   |       |
| Checks issued not yet presented for payment                                                                                                                    |   | $                         | 1,707      |                   | $          | 664 |   |
| Current portion of long-term debt                                                                                                                              |   | 59                        |       | 70                     |       |
| Accounts payable                                                                                                                                               |   | 2,751                     |       | 4,418                  |       |
| Accrued expenses                                                                                                                                               |   | 2,531                     |       | 2,456                  |       |
| Deferred service revenue                                                                                                                                       |   | 1,270                     |       | 1,138                  |       |
| Total current liabilities                                                                                                                                      |   | 8,318                     |       | 8,746                  |       |
| Long-term debt, net of current portion                                                                                                                         |   | 187                       |       | 193                    |       |
| Stockholders’ equity:                                                                                                                                     |   |                      |       |                   |       |
| Preferred stock, no par value, authorized 5,000,000  shares, issued none                                                                                       |   | —                    |       | —                 |       |
| Common stock, par value $.01 per share; authorized  50,000,000  shares, issued and  outstanding 2002 10,962,157 shares; and 2001   10,921,032 shares |   | 110                       |       | 109                    |       |
| Additional paid-in capital                                                                                                                                     |   | 21,084                    |       | 20,966                 |       |
| Retained earnings                                                                                                                                              |   | 8,573                     |       | 8,753                  |       |
|                                                                                                                                                           |   | 29,767                    |       | 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                                                                                                                                |   | 28,592                    |       | 28,732                 |       |
| Total liabilities and stockholders’ equity                                                                                                                |   | $                         | 37,097     |                   | $          | 37,671 |   |

 

See Notes toConsolidated Financial Statements.

 

3

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**TROYGROUP, INC.CONSOLIDATED STATEMENTSOF OPERATIONS(Unaudited)(in thousands, except per share amounts)**

 
|                                 |   | **Three  Months Ended** |       |
|--------------------------------------|--------|-------------------------|------------|
|                                 |   | **February  28,  2002** |       | **February  28,  2001** |   |
|                                 |   | **Restated**            | ** ** |   | ** ** |
|                                 |   |                    |       |   |   |
| Net sales                            |   | $                       | 13,571     |   | $ | 11,309 |   |
| Cost of goods sold                   |   | 8,057                   |       | 6,856 |   |
| Gross profit                         |   | 5,514                   |       | 4,453 |   |
|                                 |   |                    |       |   |   |
| Operating expenses:                  |   |                    |       |   |   |
| Selling, general and administrative  |   | 3,779                   |       | 4,016 |   |
| Research and development             |   | 1,903                   |       | 1,298 |   |
| Amortization of intangible assets    |   | 130                     |       | 320 |   |
| Operating loss                       |   | (298                    | )          | (1,181 | ) |
|                                 |   |                    |       |   |   |
| Interest income                      |   | 44                      |       | 210 |   |
| Interest expense                     |   | (29                     | )          | (19 | ) |
| Loss before income tax credits       |   | (283                    | )          | (990 | ) |
| Provision for income tax credits     |   | (103                    | )          | (405 | ) |
| Net loss                             |   | $                       | (180       | ) | $ | (585 | ) |
|                                 |   |                    |       |   |   |
| Net loss per share:                  |   |                    |       |   |   |
| Basic                                |   | $                       | (.02       | ) | $ | (.05 | ) |
| Diluted                              |   | $                       | (.02       | ) | $ | (.05 | ) |
|                                 |   |                    |       |   |   |
| Weighted-average shares outstanding: |   |                    |       |   |   |
| Basic                                |   | 10,646                  |       | 10,921 |   |
| Diluted                              |   | 10,646                  |       | 10,921 |   |

 

See Notes toConsolidated Financial Statements.

 

4

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**TROYGROUP, INC.CONSOLIDATED STATEMENTSOF CASH FLOWS(Unaudited)(in thousands)**

 
|                                                                                                               |   | **Three  Months Ended** |       |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                                               |   | **February  28,  2002** |       | **February  28,  2001** |   |
|                                                                                                               |   | **Restated**            | ** ** |   | ** ** |
|                                                                                                               |   |                    |       |   |   |
| Cash flows from operating activities:                                                                              |   |                    |       |   |   |
| Net loss                                                                                                           |   | $                       | (180       | ) | $ | (585 | ) |
| Adjustments to reconcile net loss to net cash  used in operating activities:                                  |   |                    |       |   |   |
| Depreciation and amortization                                                                                      |   | 321                     |       | 510 |   |
| Provision (recovery) for doubtful accounts                                                                         |   | (5                      | )          | — |   |
| Deferred taxes                                                                                                     |   | —                  |       | (29 | ) |
| Accretion of investment discounts                                                                                  |   | (30                     | )          | (140 | ) |
| Changes in working capital components,  net of effects from acquisition of  companies (Increase) decrease in: |   |                    |       |   |   |
| Accounts receivable                                                                                                |   | 563                     |       | 912 |   |
| Income tax refund receivable                                                                                       |   | (181                    | )          | (512 | ) |
| Inventories                                                                                                        |   | 223                     |       | (1,864 | ) |
| Prepaid expenses and other                                                                                         |   | (21                     | )          | (10 | ) |
| Increase (decrease) in:                                                                                            |   |                    |       |   |   |
| Accounts payable                                                                                                   |   | (1667                   | )          | 1,781 |   |
| Accrued expenses                                                                                                   |   | 75                      |       | (303 | ) |
| Deferred service revenue                                                                                           |   | 132                     |       | 73 |   |
| Net cash used in operating activities                                                                              |   | (770                    | )          | (167 | ) |
| Cash flows from investing activities:                                                                              |   |                    |       |   |   |
| Purchase of equipment and leasehold improvements                                                                   |   | (89                     | )          | (321 | ) |
| Purchase of available-for-sale securities                                                                          |   | (1,449                  | )          | (3,985 | ) |
| Maturities of available-for-sale securities                                                                        |   | 3,172                   |       | 2,642 |   |
| Increase in other assets, net                                                                                      |   | (123                    | )          | (58 | ) |
| Net cash provided by (used in) investing activities                                                                |   | 1,511                   |       | (1,722 | ) |
| Cash flows from financing activities:                                                                              |   |                    |       |   |   |
| Net borrowings on revolving line of credit                                                                         |   | —                  |       | 246 |   |
| Payments on notes payable                                                                                          |   | (17                     | )          | (17 | ) |
| Increase (decrease) in checks issued not presented  for payment                                                    |   | 1,043                   |       | (588 | ) |
| Proceeds from issuance of common stock                                                                             |   | 118                     |       | 158 |   |
| Purchase of treasury stock                                                                                         |   | (79                     | )          | — |   |
| Net cash provided by (used in) financing activities                                                                |   | 1,065                   |       | (201 | ) |
| Net increase (decrease) in cash and  cash equivalents                                                         |   | 1,806                   |       | (2,090 | ) |
| Cash and cash equivalents, beginning of period                                                                     |   | 1,874                   |       | 2,090 |   |
| Cash and cash equivalents, end of period                                                                           |   | $                       | 3,680      |   | $ | — |   |

 

See Notes toConsolidated Financial Statements.

 

5

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**TROYGROUP, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

(unaudited)

 

**Note 1.  Basis of Presentation**

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals and adjustments) considered necessary for a fair presentation havebeen included.  Operating results forthe three months ended February 28, 2002 are not necessarily indicative of theresults that may be expected for the year ended November 30, 2002.  For further information, refer to thefinancial statements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for its fiscal year ended November 30, 2001 (File No.000-24413).

 

The quarterly results forthe first and second quarter of fiscal 2002 have been restated to reflect therecording of certain inventory and inventory related accounts payableadjustments discovered in the third quarter of fiscal 2002 to the relevantperiods.  During the third quarterphysical inventory counts were conducted and certain inventory adjustments werediscovered.  The Company completed acomprehensive review of its inventory related internal controls to determinethe cause of the identified inventory differences.  The Company has determined that certain differences arising frominventory and inventory related accounts payable were attributable to the firstand second quarters of fiscal 2002.  TheCompany has restated the results of those quarters and associated year-to-dateamounts in those periods and filed amended Forms 10-Q.

 

The effect of therestatements on the Company’s unaudited interim consolidated quarterlyfinancial statements is as follows:

 

**Summary Balance Sheet Data:**

**(in thousands)**

** **
| **At February 28, 2002:**    |   | **As  previously  reported** |   | **As  restated** |   |
|------------------------------|--------|------------------------------|--------|------------------|--------|
| Inventory                    |   | $                            | 9,445  |             | $      | 9,028 |   |
| Income tax refund receivable |   | 1,133                        |   | 1,240            |   |
| Working capital              |   | 21,331                       |   | 21,133           |   |
| Total assets                 |   | 37,407                       |   | 37,097           |   |
| Accounts payable             |   | 2,863                        |   | 2,751            |   |
| Total liabilities            |   | 8,617                        |   | 8,505            |   |
| Retained earnings            |   | 8,771                        |   | 8,573            |   |
| Stockholders’equity     |   | 28,790                       |   | 28,592           |   |
|                              |        |                              |        |                  |        |  |  |

 

6

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**Summary Statements of OperationsData:**

**(in thousands, except per share data)**

 
| **For the three months ended February 28, 2002:** |   | **As  previously  reported** |   | **As  restated** |   |
|---------------------------------------------------|--------|------------------------------|--------|------------------|--------|
| Net sales                                         |   | $                            | 13,571 |             | $      | 13,571 |   |
| Gross profit                                      |   | 5,797                        |   | 5,514            |   |
| Operating expenses                                |   | 5,790                        |   | 5,812            |   |
| Income (loss) before income taxes (credits)       |   | 22                           |   | (283             | )      |
| Provision for income taxes (credits)              |   | 4                            |   | (103             | )      |
| Net income (loss)                                 |   | $                            | 18     |             | $      | (180 | ) |
| Basic net income (loss) per share                 |   | $                            | — |             | $      | (.02 | ) |
| Diluted net income (loss) per share               |   | $                            | — |             | $      | (.02 | ) |
| Weighted average basic shares outstanding         |   | 10,646                       |   | 10,646           |   |
| Weighted average diluted shares outstanding       |   | 10,705                       |   | 10,646           |   |

 

**Note 2.  Inventories**

 

Inventories consisted ofthe following as of February 28, 2002 and November 30, 2001 (amounts inthousands):

 
|                                             |   | **February  28,  2002** |   | **November  30, 2001** |   |
|--------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                             |   | **Restated**            |   |                   |   |
| Raw materials                                    |   | $                       | 5,335  |                   | $      | 6,997 |   |
| Work-in-process                                  |   | 607                     |   | 455                    |   |
| Finished goods                                   |   | 4,838                   |   | 4,306                  |   |
| Reserve for slow moving and obsolete inventories |   | (1,752                  | )      | (2,507                 | )      |
| Total                                            |   | $                       | 9,028  |                   | $      | 9,251 |   |

 

**Note 3.  Investment in Available-for-sale Securities**

 

As of February 28, 2002,the Company had approximately $3.5 million in corporate debt securities withcontractual maturity dates of up to one year, which management has determinedshould be classified as available-for-sale. Market values approximated carrying values.  Accordingly, no unrealized gains or losses were recorded atFebruary 28, 2002.  There were no gainsor loss recognized for the three months ended February 28, 2002 or February 28,2001.

 

7

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**Note 4.  Stock Option and Stock Warrant Plans**

 

During the three monthsended February 28, 2002, the Company granted options to employees to acquire210,000 shares of common stock at a weighted-average exercise price of $4.30per share and 271,000 options were forfeited at a weighted-average exerciseprice of $6.64 per share.  The followingis a summary of total outstanding options and stock warrants at February 28,2002:

 
|                          |               | **Options  and Warrants Outstanding** |      | **Options  and Warrants Exercisable** |   |
|-------------------------------|--------------------|---------------------------------------|-----------|---------------------------------------|--------|
| **Range of  Exercise Prices** |               | **Number of  Options**                |      | **Weighted-Average  Exercise Price**  |   | **Weighted-Average  Remaining Contractual Life** |   | **Number of  Options** |   | **Weighted-Average  Exercise Price** |   |
| $                             | 2.94 - 4.51        |                                  | 882,666   |                                  | $      | 3.91 |   | 7.9 years |   | 196,385 |   | $ | 3.60 |   |
| $                             | 6.31 – 8.75   |                                  | 1,017,000 |                                  | $      | 7.25 |   | 7.6 years |   | 608,250 |   | $ | 7.01 |   |
| $                             | 13.16 – 14.25 |                                  | 25,000    |                                  | $      | 13.38 |   | 7.8 years |   | — |   | — |   |
|                          |               | 1,924,666                             |      |                                  |   |   |   | 804,635 |   |   |   |

 

At February 28,2002, there were 907,000 shares remaining available for grant under theCompany’s option plans.

 

**Note 5.  Net Loss Per Share**

 

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

 
|                                                                                              |   | **Three  months ended**                            |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                              |   | **(amounts in  thousands, except per share data)** |   |
|                                                                                              |   |                                               |   |
|                                                                                              |   | **February  28, 2002  Restated**                   |   | **February  28, 2001** |   |
|                                                                                              |   |                                               |   |   |   |
| Numerator for basic and diluted net loss per share:                                               |   |                                               |   |   |   |
| Net loss                                                                                          |   | $                                                  | (180   | ) | $ | (585 | ) |
|                                                                                              |   |                                               |   |   |   |
| Denominator for basic and diluted net loss per share  – weighted-average shares outstanding: |   | 10,646                                             |   | 10,921 |   |
|                                                                                              |   |                                               |   |   |   |
| Net loss per share:                                                                               |   |                                               |   |   |   |
|                                                                                              |   |                                               |   |   |   |
| Basic                                                                                             |   | $                                                  | (.02   | ) | $ | (.05 | ) |
| Diluted                                                                                           |   | $                                                  | (.02   | ) | $ | (.05 | ) |

 

The dilutiveeffect of employee stock options and warrants would have been 59,000incremental shares for the period ended February 28, 2002 if the Company hadreported net income.

 

8

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**Note 6.  Business Combination**

 

*Extended Systems Incorporated*

 

On May 31, 2001, theCompany acquired certain assets and assumed certain liabilities of ExtendedSystems Incorporated, a print server manufacturer, in exchange for $1,672,000in cash and $504,000 in direct expenses. The total acquisition cost was $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 acquisitionhas been accounted for as a purchase. Since the acquisition occurred on the last day of the second quarter ofFY 2001, no results of operations for Extended Systems Incorporated areincluded in the Company’s consolidated financial statements for the threemonths ended February 28, 2001.

 

*Unaudited pro forma information*

 

Unaudited pro formaconsolidated results of operations for the three months ended February 28 2001as though Extended Systems Incorporated had been acquired as of December 1,2000 are as follows (amounts in thousands, except per share data):

 
|                          |   | **Three  Months Ended  February 28, 2001** |   |
|-------------------------------|--------|--------------------------------------------|--------|
|                          |   |                                       |   |
| Sales                         |   | $                                          | 15,323 |   |
| Pro forma net loss            |   | $                                          | (579   | ) |
| Pro forma net loss per share: |   |                                       |   |
| Basic                         |   | $                                          | (.05   | ) |
| Diluted                       |   | $                                          | (.05   | ) |

 

The above amounts reflectpro forma adjustments for amortization of intangibles and number of sharesoutstanding.  This pro forma financialinformation does not purport to be indicative of the results of operations hadthe Extended Systems Incorporated acquisition actually taken place at theearlier date.

 

9

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**Note 7.  Segment Information**

 

The following tablessummarize revenues and net loss by operating segment and unallocated corporatefor the three months ended February 28, 2002 and February 28, 2001:

 
|                      |   | **Three  months ended**           |   |
|---------------------------|--------|-----------------------------------|--------|
|                      |   | **(amounts  in thousands)**       |   |
|                      |   |                              |   |
|                      |   | **February  28,  2002  Restated** |   | **February  28,  2001** |   |
| Revenues:                 |   |                              |   |   |   |
|                      |   |                              |   |   |   |
| Troy Systems              |   | $                                 | 10,391 |   | $ | 9,604 |   |
| Troy Wireless             |   | 3,256                             |   | 1,758 |   |
| Less intersegment revenue |   | (76                               | )      | (53 | ) |
|                      |   | $                                 | 13,571 |   | $ | 11,309 |   |
|                      |   |                              |   |   |   |
| Net loss:                 |   |                              |   |   |   |
|                      |   |                              |   |   |   |
| Troy Systems              |   | $                                 | 1,237  |   | $ | 638 |   |
| Troy Wireless             |   | (700                              | )      | (547 | ) |
| Unallocated Corporate     |   | (717                              | )      | (676 | ) |
|                      |   | $                                 | (180   | ) | $ | (585 | ) |

 

Certain reclassificationshave been made to the February 28, 2001 segment information to conform to theFebruary 28, 2002 presentation.

 
|                  |   | **February  28,  2002**

**Restated** |   | **November  30,  2001** |   |
|-----------------------|--------|---------------------------------------|--------|-------------------------|--------|
| Segment Assets:       |   |                                  |   |                    |   |
|                  |   |                                  |   |                    |   |
| Troy Systems          |   | $                                     | 12,994 |                    | $      | 13,395 |   |
| Troy Wireless         |   | 9,789                                 |   | 10,259                  |   |
| Unallocated Corporate |   | 29,499                                |   | 29,327                  |   |
|                  |   | $                                     | 52,282 |                    | $      | 52,981 |   |

 

The followingschedule is presented to reconcile February 28, 2002 and November 30, 2001segment assets to the amounts reported in the Company’s consolidated financialstatements (amounts in thousands).

 
|                                |   | **February  28,  2002**

**Restated** |   | **November  30,  2001** |   |
|-------------------------------------|--------|---------------------------------------|--------|-------------------------|--------|
| Total Assets of Reportable Segments |   | $                                     | 52,282 |                    | $      | 52,981 |   |
| Intersegment Receivables            |   | (14,803                               | )      | (14,928                 | )      |
| Investment in Subsidiaries          |   | (382                                  | )      | (382                    | )      |
| Consolidated assets                 |   | $                                     | 37,097 |                    | $      | 37,671 |   |

 

10

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**Note 8.  Cash Flow Information**

 

Supplemental disclosureof cash flow information

 
|                             |   | **Three  months ended**              |   |
|----------------------------------|--------|--------------------------------------|--------|
|                             |   | **(amounts  in thousands)**          |   |
|                             |   | **February 28,  2002**

**Restated** |   | **February  28,  2001** |   |
| Cash paid during the period for: |   |                                 |   |   |   |
| Interest                         |   | $                                    | 29     |   | $ | 18 |   |
| Income taxes                     |   | $                                    | 3      |   | $ | 35 |   |

 

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ITEM 2

 

**MANAGEMENT’S DISCUSSION AND ANALYSISOFFINANCIAL 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 and other wirelessstandards; the market acceptance of products incorporating wireless printingtechnologies; the ability to continue to develop and market other e-commercepayment, networked payment and wireless and other connectivity technologies;TROY’s ability to refocus its management and resources on these emergingtechnologies; the ability to hire and retain qualified management, technologyand 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 financialdocuments; 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 funds 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&TCorporation, Bank of America Corporation, Eastman Kodak Company, Farmers Group,Inc. (Farmers Insurance), Fidelity Investments, 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, RedCross, G.E. Capital Ireland and Ford Credit Europe are among the TROY customersthat purchased products during 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 premiere supplier of hardwired network printing solutions since1991.  Our wireless products allow awide range of devices to exchange information via *Bluetooth*TM and 802.11bshort-range radio connections.  BrotherIndustries, Ltd., Sony Corporation, Seiko Epson Corporation and DaimlerChryslerAG are among the TROY Wireless customers that have purchased products duringthe last 12 months.

 

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 active customers purchaseour products and services.

 

## **Overview**

 

Net sales are generated from the sale of our wireless technology,electronic payment solutions and services and our products and services relatedto specialized printer applications.  Werecognize revenue from the sale of our products when the goods are shipped tothe customer and we recognize maintenance revenue over the period of thecontract on a straight-line basis.  Werecognize revenue from the sale of software licenses upon receipt of anexecuted sales agreement and shipment to the customer, provided there are nosignificant obligations, except for one agreement which requires the revenue tobe recognized on a per unit basis.  Allsales are made through purchase orders.

 

**Results of 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, 2002,and 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.

 

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The following table setsforth, for the periods indicated, certain information derived from ourconsolidated statements of operations expressed as a percentage of net sales:

 
|                                         |   | **Three Months  Ended** |   |
|----------------------------------------------|--------|-------------------------|--------|
|                                         |   | **February  28,  2002** |   | **February  28,  2001** |   |
|                                         |   | **Restated**            |   |   |   |
| Net sales                                    |   | 100.0                   | %      | 100.0 | % |
| Cost of goods sold                           |   | 59.4                    |   | 60.6 |   |
| Gross Profit                                 |   | 40.6                    |   | 39.4 |   |
| Selling, general and administrative expenses |   | 27.8                    |   | 35.5 |   |
| Research and development expenses            |   | 14.0                    |   | 11.5 |   |
| Amortization of intangible assets            |   | 1.0                     |   | 2.8 |   |
| Operating loss                               |   | (2.2                    | )      | (10.4 | ) |
| Interest income                              |   | 0.3                     |   | 1.8 |   |
| Interest expense                             |   | (0.2                    | )      | (0.2 | ) |
| Loss before income tax credits               |   | (2.1                    | )      | (8.8 | ) |
| Provision for income tax credits             |   | (0.8                    | )      | (3.6 | ) |
| Net loss                                     |   | (1.3                    | )%     | (5.2 | )% |

 

**Three Months Ended February 28, 2002Compared to Three Months Ended February 28, 2001**

 

*NetSales*.  Our net saleswere $13.6 million for the three months ended February 28, 2002, with $10.4million attributable to Troy Systems and $3.2 million attributable to TroyWireless.  Net sales in the three monthsended February 28, 2002 increased by $2.3 million, or 20%, from $11.3 millionin the three months ended February 28, 2001. This increase in net sales represents a $0.7 million increase in salesof our laser printers,  proprietaryimaging supplies, services, and electronic payment solutions, and   an increase of $1.5 million in sales of ourwireless and connectivity products, primarily due to the acquisition of certainassets of Extended Systems, Inc.  Netsales were not significantly affected by price changes.  We anticipate that net sales from the wiredconnectivity products will decline as these products are at or approaching endof life.

 

*Cost ofGoods Sold*.  Cost ofgoods sold increased by $1.2 million or 17.5% to $8.1 million in the threemonths ended February 28, 2002 from $6.9 million in the three months endedFebruary 28, 2001,  primarily due toincreased net sales.  Cost of goods soldas a percentage of net sales decreased to 59.4% in the three months endedFebruary 28, 2002 from 60.6% in the three months ended February 28, 2001,primarily due to cost reductions and a shift in mix to higher margin products.

 

*GrossProfit*.  As a resultof the above factors, gross profit increased by $1.0 million to $5.5 million inthe three months ended February 28, 2002 from $4.5 million in the three monthsended February 28, 2001.  Gross profitas a percentage of net sales increased to 40.6% in the three months endedFebruary 28, 2002 from 39.4% in the three months ended February 28, 2001.

 

*Selling,General and Administrative Expenses*.  Selling, general and administrative expensesdecreased by $237,000 or 5.9% to $3.8 million in the three months endedFebruary 28, 2002 from $4.0 million in the three months ended February 28,2001.  This decrease was due primarilyto cost reduction efforts in Troy Systems which have resulted in loweradministrative expenses, partially offset by increased selling and marketingexpenses in Troy Wireless .  Selling,general and administrative expenses 

 

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as a percentage ofnet sales decreased to 27.8% in the three months ended February 28, 2002 from35.5% in the three months ended February 28, 2001.

 

*Researchand Development Expenses*. Research and development expenses increased by $605,000 or 46.6% to $1.9million in the three months ended February 28, 2002 from $1.3 million in thethree months ended February 28, 2001. Of this increase, approximately $269,000 was due to development expensesfor our electronic payment solutions, $265,000 was due to development for our wireless products, and $51,000was due to development of printers and supplies.  The total research and development expenses for 2002 included$1.1 million for Troy Systems and $.8 million for Troy Wireless.  Research and development expenses as apercentage of net sales was 14.0% in the three months ended February 28, 2002and 11.5% in the three months ended February 28, 2001.

 

*Amortizationof Intangible Assets. *Amortizationof intangible assets decreased by $190,000 or 59.4% to $130,000 in the threemonths ended February 28, 2002 from $320,000 in the three months ended February28, 2001.  This decrease was the resultof the 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 $883,000 to $(298,000) in the three months ended February 28,2002 from a loss of $(1.2 million) in the three months ended February 28,2001.  Operating loss as a percentage ofnet sales was (2.2)% in the three months ended February 28, 2002 comparedto  (10.4)% in the three months endedFebruary 28, 2001.

 

*InterestIncome.*  Interestincome decreased by $166,000 to $44,000 in the three months ended February 28,2002 from $210,000 in the three months ended February 28, 2001.  This decrease is the result of reductions inour investment in available-for-sale securities due to an acquisition, ourstock repurchase program and working capital requirements.

 

*InterestExpense*.  Interestexpense increased by $10,000 to $29,000 in the three months ended February 28,2002 from $19,000 in the three months ended February 28, 2001.  This increase was due to increasedborrowings under our line of credit.

 

*IncomeTaxes*.  Income taxcredit was reduced to a $103,000 tax credit in the three months ended February28, 2002 from a $405,000 tax credit in the three months ended February 28,2001.  This reduction is a result ofreduced loss before income taxes. Income credits as a percentage of pretax loss were (36)% in the threemonths ended February 28, 2002 compared to (41)% in the three months endedFebruary 28, 2001.

 

**Liquidity and Capital Resources**

 

Cash flows used by operating activities were $770,000 in the threemonths ended February 28, 2002 compared to $167,000 used by operatingactivities in the three months ended February 28, 2001.  This increase was due primarily to adecrease in accounts payable and accrued expenses, offset by a decrease inaccounts receivable, and a net loss of $180,000 in 2002 compared to a net lossof $585,000 in 2001.  The accountsreceivable decrease resulted primarily from collections.

 

Cash flows provided by investing activities were $1.5 million in thethree months ended February 28, 2002 compared to $1.7 million used in the threemonths ended February 28, 2001. Included in cash flows provided by investing activities in the threemonths ended February 28, 2002 was $1.7 million in net maturities ofavailable-for-sale securities.   Inconnection with split-dollar life insurance arrangements with our majorstockholder, we had been committed to funding the premium on three lifeinsurance 

 

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policies for theforeseeable future.  Annual premiums onthese policies are approximately $563,000 per year for the next five years.

 

Cash flows provided by financing activities were $1.1 million in thethree months ended February 28, 2002 compared to cash flows used in financingactivities of $201,000 in the three months ended February 28, 2001.  Included in cash flows provided by financingactivities in the three months ended February 28, 2002 was $118,000 in proceedsfrom issuance of common stock under our employee stock purchase plan and $1.0million provided by the increase of checks issued not presented for payment.

 

We currently have a $5.0 million general line of credit with ComericaBank – California, which is secured by substantially all of our assets and issubject to certain financial covenants. In connection with the general line of credit agreement, we have a$650,000 standby letter of credit sublimit agreement of which $80,000 wasoutstanding at February 28, 2002.  As ofFebruary 28, 2002, there were no borrowings outstanding against the generalline of credit and $4.9 million was available under the general line ofcredit.  The general line of credit hasno expiration date.

 

We believe that existing cash balances, cash generated by operatingactivities, and funds available under our credit facility will be sufficient tofinance our operating activities for at least the next 12 months.  To the extent that the funds generated fromthese sources are insufficient to finance our operating activities, we wouldneed to raise additional funds through public or private financing.  We cannot assure you that additionalfinancing will be available on terms favorable to us, 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 ofFebruary 28, 2002, Troy has purchased approximately 320,565 shares of commonstock in the open market, at an average price of $3.67 per share, under thestock repurchase program.  Approximately$2.8 million remains available for future common stock repurchases.

 

## **Recently Issued AccountingStandards**

## ** **

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.  The Company willadopt as of the beginning of fiscal year 2003. We are in the process of determining the expected impact on earnings andexisting goodwill and other intangibles upon adoption, which will include theelimination of goodwill amortization and may include additionalimpairment.  As of February 28, 2002,unamortized goodwill totaled $308,000.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which supersedes previousguidance on financial accounting and reporting for the impairment or disposalof long-lived assets and for segments of a business to be disposed of.  Adoption of SFAS 144 is required no laterthan the beginning of fiscal 2003.  Managementdoes not expect the adoption of SFAS 144 to have a significant impact on ourfinancial position or results of operations. However, further impairment reviews may result in charges againstearning to write down the value of long-lived assets.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the riskof loss to future earnings, to fair values or to future cash flows that mayresult from changes in the price of a financial instrument.  The value of a financial instrument maychange as a result of changes in interest rates, exchange rates, commodityprices, equity prices and other market changes.  Market risk is attributed to all market sensitive financialinstruments, including long-term debt.

 

We do not utilizederivative financial instruments. Accordingly, our exposure to market risk is through our investments inavailable-for-sale securities and our bank debt which bears interest atvariable rates.  Available-for-salesecurities consist of corporate debt and marketable equity securities.  These securities generally have contractualmaturity dates of up to one year.  AtFebruary 28, 2002, market values approximated carrying values.  Due to the short-term maturities of thesesecurities, management believes that there is no significant market risk.  At February 28, 2002, we had approximately$7.2 million in cash, cash equivalents and investments in available-for-salesecurities, and, accordingly, a sustained decrease in the rate of interestearned of 1% would cause a decrease in the amount of interest earned of$72,000.  The bank debt is a revolvingline of credit.  All borrowings bearinterest based upon the reference rate per annum as announced by the bank (5.0%at February 28, 2002) less 0.25%.  AtFebruary 28, 2002, there were no amounts outstanding under the line of creditagreement and, accordingly, a sustained increase in the reference rate of 1%would not cause our annual interest expense to change.

 

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**PART II:  OTHERINFORMATION**

 

ITEM 1 - LEGALPROCEEDINGS

 

Not applicable.

 

ITEM 2 - CHANGES INSECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 3 - DEFAULTS UPONSENIOR SECURITIES

 

Not applicable.

 

ITEM 4 - SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5 - OTHER INFORMATION

 

None.

 

ITEM 6 - EXHIBITS ANDREPORTS ON FORM 8-K

 

(a)                                  Exhibits.

 
| Exhibit  Number |   | Description                                                                                               |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                      |
| 99.1            |   | Certification of the  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|            |   |                                                                                                      |
| 99.2            |   | Certification of the  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

(b)                           Reportson Form 8-K

 

None.

 

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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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