Trojan Technologies Announces Results for Four Months Ended December 31, 2002 Revenue growth and strong margins contribute to profitable results.

Order backlog at record levels.



    LONDON, ON, March 17 /PRNewswire-FirstCall/ - Trojan Technologies
 (TUV:TSX) today announced its operating and financial results for the four
 months ended December 31, 2002.
     The Company announced in December 2002 that it would change its year-end
 from August 31 to December 31 to align the Company's financial reporting
 periods with its industry peers to better enable investors, the financial
 community and Trojan's management to make meaningful comparisons between the
 Company and its peers. The results being announced today reflect the four-
 month period from September 1, 2002 to December 31, 2002. In accordance with
 accepted accounting practice, the comparative financial statements are for the
 twelve months ended August 31, 2002.
     "I am pleased to report continued revenue growth, strong gross margins
 and profitable results despite a short reporting period." said Allan
 Bulckaert, Trojan's President and CEO. "We are confident that we can continue
 this momentum in 2003 and beyond as we continue to diversify our revenue
 streams and grow in all markets, both organically and through acquisition."
 
     Financial highlights include:
 
     - For the period ended December 31, 2002, revenues were $31.8 million
       compared to $92.7 million in the year ended August 31, 2002 and
       $18.6 million in the three months ended November 30, 2001. This
       represents average monthly revenues during the four months of
       $7.9 million, an increase of 28% over the average monthly revenues of
       $6.2 million in the three-month period ended November 30, 2001.
 
     - Consolidated gross margin for the 4 months was 41% or $13.0 million,
       compared to 44% or $40.9 million in the prior full year and 37% in the
       three months ended November 30, 2001.
 
     - For the four month period, net income after tax was $0.2 million,
       compared to $3.7 million for the fiscal year 2002. On a per share
       basis, the Company reported basic earnings per share of $0.01 compared
       to $0.19 per share in the prior fiscal year. During the 3 months ended
       November 30, 2001, the Company reported a net loss of $0.4 million or
       $0.02 per share.
 
     - Shareholders' equity has grown to $84.5 million from $84.3 million at
       August 31, 2002. Cash on hand and marketable securities at December 31,
       2002 totalled $5.7 million.
 
     - Order backlog increased by over 15% to $69.4 million at December 31,
       2002 compared to $60.1 million at August 31, 2002.
 
     During the four-month period ending December 31, 2002, marketplace
 highlights included:
 
     - Municipal wastewater disinfection market - The municipal wastewater
       market was by far the largest market for Trojan's ultraviolet systems
       during the period. Revenues in the four months were $18.7 million,
       representing average monthly revenues of $4.7 million, an increase of
       10% over the average monthly revenues in the three-month period ended
       November 30, 2001. The percentage of total revenue from the municipal
       wastewater market decreased to 59% of total revenue in the four months
       compared to 78% in the fiscal year 2002. This reduction in percentage
       reflects the Company's strategy to diversify its business in other
       markets and reduce its dependence on the wastewater market to maintain
       growth and profitability.
 
       Bid activity in this market arena continued to grow. During the four
       months ended December 31, 2002, Trojan submitted bids totaling
       $47.5 million, an average of $11.9 million per month. This represents
       an increase of 21.4% per month from the average of $9.8 million per
       month during the fiscal year 2002 for a total of $117 million. Total
       order backlog at December 31, 2002 in municipal wastewater was
       $30.6 million compared to $31.1 million at August 31, 2002.
 
     - Municipal drinking water market - Revenues in this market arena
       increased to $3.3 million in the four months exceeding revenues of
       $3.1 million in the entire fiscal year ending August 31, 2002. Revenues
       in the four months averaged $0.84 million per month, an increase of
       231% over the average monthly revenue of $0.25 million in the
       three-month period ended November 30, 2001. The percentage of total
       revenue from the drinking water market increased to 11% in the four
       months compared to 3% in the fiscal year 2002. Revenues in North
       America increased to $3.0 million in the four months from $2.4 million
       in the entire fiscal year 2002 reflecting the rapid development of the
       market.
 
       Bidding activity continues to grow in this market arena as
       municipalities prepare multi-barrier solutions to their drinking water
       treatment processes. During the four-month period, the Company
       submitted bids on 32 projects in North America with a total bid value
       of $6.1 million. Of these bids, 21 contracts totaling $4.4 million have
       been awarded to date and of these Trojan has been awarded 16 (76%) with
       a value of $3.7 million (84%). Total order backlog at December 31, 2002
       in municipal drinking water was $15.7 million compared to $9.9 million
       at August 31, 2002.
 
     - Environmental contaminant treatment (ECT) - Revenues in the
       environmental contaminant treatment market in the four-month period
       were approximately $3.3 million compared to $4.4 million in the fiscal
       year 2002. Revenues in the four months averaged $0.83 million per month
       an increase of 41% over the average monthly revenue of $0.59 million in
       the three-month period ended November 30, 2001. The percentage of total
       revenue from the environmental contaminant treatment market increased
       to 10% in the four months compared to 5% in the fiscal year 2002. Total
       order backlog at December 31, 2002 in the environmental contaminant
       treatment market arena was $23.1 million compared to $19.1 million at
       August 31, 2002.
 
     - Industrial and commercial process water treatment - Revenues in the
       industrial and commercial market in the four months ended December 31,
       2002 were approximately $4.6 million compared to $7.4 million in the
       fiscal year 2002. Revenues in the four months average $1.14 million per
       month, an increase of 60% over the average monthly revenues of
       $0.71 million in the three-month period ended November 30, 2001. The
       percentage of total revenue from the industrial and commercial market
       increased to 14% in the four months compared to 8% in the fiscal year
       2002.
 
       Revenues in Europe for the four-month period were $2.5 million compared
       to $1.6 million in the full fiscal year ending August 31, 2002. The
       increase is attributable to contract wins in Scandinavia and revenue
       from Ueberall GmbH acquired in May, 2002.
 
     - Residential drinking water market - Revenues in the residential market
       during the four-month period were approximately $1.8 million compared
       to $5.5 million in the fiscal year 2002. Revenues in the four months
       averaged $0.45 million per month, an increase of 19% over the average
       monthly revenues of $0.38 million in the three-month period ended
       November 30, 2001. The percentage of total revenue from the residential
       market was unchanged at 6% in the four months compared the fiscal year
       2002.
 
     Review of Financial Results for the Four Months ended December 31, 2002
 
     Gross Margin
 
     In the four months ended December 31, 2002, gross margin was 41% compared
 to 44% in the fiscal year 2002 and 37% in the three months ended November 30,
 2001. There are number of factors that have contributed to the sustained
 improvement in gross margin:
 
     - Economies of scale - The increased level of production revenue in the
       four-month period and the fiscal year 2002, were achieved without any
       increase in the physical production facilities. As a result, fixed
       overheads were spread over a larger business base and production
       economies were achieved from the larger production volumes. At the same
       time, changes have been introduced to the layout of the production
       area, which are intended to increase the efficiency of the assembly and
       testing processes.
     - Warranty costs continued to decline as a percentage of revenue in the
       four-month period. This reduction reflects the Company's increased
       emphasis on quality and reliability, the co-operation of suppliers and
       product design improvements introduced in recent years.
     - A number of business initiatives have contributed to improved margins
       including an increased focus on quality processes, ensuring effective
       management of suppliers as well as testing protocols on systems prior
       to shipment.
 
     Administration and Selling Expenses
 
     In the four months ended December 31, 2002, administration and selling
 expenses were $9.9 million or 31% of revenue, compared to $28.0 million or 30%
 of revenue in the fiscal year 2002 and $5.4 million or 29% of revenue in the
 three months ended November 30, 2001.
     In the four-month period, sales commissions paid were $1.3 million or 4%
 of revenue, compared to $5.4 million or 5.8% of revenue in the fiscal year
 2002 and $0.8 million or 4% of revenue in the three months ended November 30,
 2001. Sales commissions are paid primarily in the municipal wastewater and
 drinking water markets.
     Selling and marketing expenses were $5.1 million or 16% of revenue,
 compared to $12.1 million or 13.1% of revenue in the full year ending August
 31, 2002 and $2.6 million or 14.0% of revenue in the three months ended
 November 30, 2001. The increase is attributable to the inclusion of marketing
 costs of recently acquired companies that were not owned throughout the prior
 periods. Expenses also reflect efforts to position European operations for
 growth including participation at the major bi-annual trade show and other
 initiatives to increase presence in the market.
     Administration expenses were $3.5 million or 11% of revenue compared to
 $10.5 million or 11.3% of revenue in the fiscal year 2002 and $2.0 million or
 11% of revenue in the three months ended November 30, 2001. Administration
 expenses in the four months averaged $0.88 million per month, an increase of
 31% over the average monthly expenses of $0.67 million in the three-month
 period ended November 30, 2001. Insurance costs increased significantly
 following policy renewals on October 1, 2001 and October 1, 2002. These
 increases reflect the general condition of global insurance markets, the
 growth in Trojan's business and some limited coverage extensions initiated
 after a comprehensive review of Trojan's insurance programs. Legal costs
 related to ongoing intellectual property matters also contributed to the
 increase.
 
     Research and Development Expenses
 
     Research and development expenses were $1.6 million or 5% of revenue
 compared to $4.2 million or 5% of revenue in the fiscal year ending August 31,
 2002 and $1.0 million or 5% of revenue in the three months ended November 30,
 2001. The research and development efforts are directed at both product and
 technology development. During the four months ended December 31, 2002, Trojan
 was focused on two important initiatives; the further development of Trojan's
 range of drinking water products and the development of large systems in the
 environmental contaminant treatment market.
 
     Amortization
 
     In the four months ended December 31, 2002, amortization expense was
 $1.2 million compared to $3.3 million in the fiscal year 2002 and $0.7 million
 in the three months ended November 30, 2001. Amortization expense has
 increased because of validation costs incurred on new products introduced
 primarily in the municipal drinking water market and the amortization of
 intangibles acquired in acquisitions completed in 2002. These costs are
 amortized over periods of three to five years.
 
     Other Income (Expenses)
 
     During the four-month period, other income was $0.2 million compared to
 an expense of $0.7 million in the fiscal year 2002 and an expense of
 $0.4 million in the three months ended November 30, 2001. Net interest expense
 was $0.1 million for the four months compared to an expense of $1.0 million
 respectively in fiscal year 2002. After completing two equity issues in fiscal
 2002, Trojan was able to repay all of its bank indebtedness and has cash and
 marketable securities invested to generate interest income. During the fiscal
 year 2002, Trojan sold 17 acres of undeveloped land deemed to be excess to the
 Company's future needs at a loss of $0.64 million.
 
     Income (Loss) before Taxes
 
     Income before taxes in the four months ended December 31, 2002, was
 $0.4 million compared to $4.6 million in the fiscal year 2002 and a loss of
 $0.6 million in the three months ended November 30, 2001. The increase in
 production revenue and the improvement in gross margin were the primary
 reasons behind this improvement from the prior year. Compared to the fiscal
 year 2002, income before taxes was lower because of the levels of production
 revenue. Historically, revenues in the September to December period are lower
 than the remainder of the year as fewer wastewater systems, which represent
 the major part of Trojan's business, are installed during the winter months.
 
     Cash Flow
 
     Cash Flow from Operating Activities
 
     The net cash flow from operations was $0.5 million in the four months
 compared to an outflow $2.6 million in the fiscal year 2002. Net income for
 the four months was $0.2 million, compared to $3.7 million in the year ended
 August 31, 2002. Amortization is also a "non-cash" charge in the amount of
 $1.2 million in the four months compared to $3.3 million in the fiscal year
 2002.
     Net cash flow from operations is also impacted by changes in non-cash
 working capital balances. In the four months, operations consumed $0.6 million
 of cash compared to $9.0 million in the fiscal year 2002. As at August 31,
 2002, $11.4 million of the unbilled revenue of $20.6 million represented a
 single contract. During the four months ended December 31, 2002, this contract
 was delivered to the customer and, once invoiced, the account was included in
 accounts receivable - trade. Subsequent to December 31, 2002, the account has
 been paid in full.
     At December 31, 2002, trade accounts receivable were $34.4 million,
 including $8.1 million of customer holdbacks compared to $24.7 million,
 including approximately $8.1 million in customer holdbacks at August 31, 2002.
 The principal cause of the increase was the single large contract explained in
 the preceding paragraph.
     Unbilled revenue decreased to $9.8 million at December 31, 2002 from
 $20.6 million at August 31, 2002. This account represents the value of
 contracts in progress, using percentage of completion accounting. The
 reduction is attributable to the delivery during the period of a single large
 contract of over $11.4 million that was in progress at August 31, 2002.
 
     Cash Flow from Investing Activities
 
     In the four months ended December 31, 2002, cash from investing
 activities totaled $4.5 million compared to being a use of $15.5 million in
 the fiscal year 2002. During the four-month period, Trojan realized
 $6.7 million net from the purchase and sale of marketable securities, compared
 to making a net investment of $10.4 million in fiscal year 2002.
 
     Cash Flow from Financing Activities
 
     Financing activities in the four months ended December 31, 2002
 represented a net cash outflow of $6.6 million compared to a net cash inflow
 of $20.7 million. During the four month period, $2.8 million was applied to
 reduce bank indebtedness, $3.1 million was applied to repay long term debt and
 $1.3 million was used to make payments on the acquisition of intellectual
 property. During the fiscal year 2002, $36.4 million was raised through the
 successful completion of two equity issues of which $12.9 million was applied
 to the reduction of bank indebtedness and $2.1 million was applied to the
 repayment of long-term debt.
 
     Credit Facilities
 
     In the four months ended December 31, 2002, Trojan had a line of credit
 of $30 million available for operating purposes.
 
     Outlook
 
     The Company believes it is well positioned for growth. Order backlog is
 at record levels with $54.0 million of orders in hand for 2003 and
 $15.4 million already in place for 2004. The 2003 backlog represents
 approximately 83% of anticipated project revenue in the municipal wastewater,
 municipal drinking water and environmental contaminant businesses. In addition
 to the businesses in which the Company measures order backlog, revenue is
 derived from after market sales and service, as well as from the industrial
 and residential markets.
     It is management's objective to achieve an increase in revenues to over
 $110 million and basic earnings in the range of 40 cents per share for the
 year ended December 31, 2003, approximately double the performance achieved in
 the year ended August 31, 2002.
     A conference call and webcast will be held for investors, analysts and
 media at 4:15 pm EST on March 17, 2003. The conference call will be hosted by
 Allan Bulckaert, President & CEO, and will include Douglas Alexander,
 Executive Vice President and Chief Financial Officer and Marvin DeVries,
 Executive Vice President. The phone number to call is (416) 640-4127 or
 (800) 814-4853. A taped version of the call will be available until midnight
 Monday, March 24, 2003 by calling (416) 640-1917 or (877) 289-8525 and dialing
 passcode number 243055(number sign). The live webcast and a rebroadcast will
 be available at www.trojanuv.com.
     Trojan Technologies is a Canadian based, high technology environmental
 Company operating internationally. With over 25 years of experience, Trojan
 has the largest installed base of UV disinfection systems operating around the
 world. Trojan designs, manufactures and sells ultraviolet disinfection systems
 for municipal wastewater, drinking water systems for residential, municipal
 and commercial use, and industrial systems for food and beverage,
 pharmaceutical, and semiconductor applications. Its equipment destroys water-
 borne pathogens such as E.coli, Giardia and Cryptosporidium in a highly
 effective, cost efficient and environmentally safe manner. Trojan also designs
 and installs treatment technology for the environmental contaminant and
 micropollutant destruction market.
     Trojan has over 350 employees around the world. Headquartered in London,
 Ontario, Trojan has offices in Germany, the U.K., Netherlands, Norway, Spain,
 and the U.S. Its shares are listed on The Toronto Stock Exchange under the
 trading symbol TUV.
 
     This document contains certain statements that are forward-looking
     relative to the Company's future strategy and performance. They involve
     known and unknown risks and uncertainties that may cause the Company's
     actual results in future periods to be materially different from any
     future performance suggested in this document. Further, the Company
     operates in an industry where it may be influenced by economic and other
     factors beyond the Company's control.
 
 
     FINANCIAL HIGHLIGHTS
     (Thousands of Canadian dollars, except for share and per share data and
     percentages)
 
 
                                                       Four month
                                                     period ended  Year ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
 
     Revenue                                               31,755      92,677
     Cost of Goods Sold                                    18,747      51,752
     Gross Margin                                          13,008      40,925
     Gross Margin percentage                                41.0%       44.2%
     Income before other income (expenses)                    193       5,360
     Net Income                                               172       3,675
 
 
     Earnings per share
       Basic                                                 0.01        0.19
       Fully diluted                                         0.01        0.18
 
 
     Weighted Average Number of Shares
       Basic                                           21,851,520  19,796,240
       Fully diluted                                   22,217,390  20,036,832
 
 
 
 
                                                            As at       As at
                                                      December 31   August 31
                                                             2002        2002
                                                     -------------------------
     Working Capital                                       47,473      49,145
     Shareholders' Equity                                  84,526      84,257
     Per share Shareholders' Equity                          3.87        3.86
     Number of Shares Outstanding                      21,855,382  21,840,057
 
 
 
 
     TROJAN TECHNOLOGIES INC.
     CONSOLIDATED BALANCE SHEETS
     (Thousands of Canadian dollars)
 
 
     As at                                            December 31   August 31
                                                             2002        2002
     -------------------------------------------------------------------------
     ASSETS
     Current
     Cash and cash equivalents                              2,011       3,526
     Marketable securities                                  3,688      10,366
     Accounts receivable - trade                           34,437      24,715
     Accounts receivable - other                            1,502       1,978
     Unbilled revenue                                       9,842      20,613
     Inventory                                             13,967      12,127
     Prepaid expenses                                       1,289         584
     Income taxes receivable                                    -       1,055
     -------------------------------------------------------------------------
     Total current assets                                  66,736      74,964
 
     Investment                                             2,683       2,375
     Government incentives recoverable (note 4)             5,591       5,959
     Future income taxes (note 4)                           2,955       2,926
     Capital assets, net                                   20,193      20,315
     Patents and other intangible assets, net (note 5)      8,474       7,745
     Goodwill (note 5)                                      5,923       5,923
     -------------------------------------------------------------------------
                                                          112,555     120,207
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
 
     LIABILITIES AND SHAREHOLDERS' EQUITY
     Current
     Bank indebtedness                                        386       3,183
     Accounts payable and accrued charges                  16,823      17,786
     Income taxes payable                                     147           -
     Current portion of long-term debt                        528       3,460
     Current portion of other long-term liabilities
      (notes 2 and 3)                                       1,379       1,390
     -------------------------------------------------------------------------
     Total current liabilities                             19,263      25,819
     -------------------------------------------------------------------------
 
     Long-term debt                                         3,060       3,230
     -------------------------------------------------------------------------
     Other long-term liabilities (notes 2 and 3)            5,706       6,901
     -------------------------------------------------------------------------
 
     Shareholders' equity
     Share capital (note 6)                                84,466      84,369
     Retained earnings (deficit)                               60        (112)
     -------------------------------------------------------------------------
                                                           84,526      84,257
     -------------------------------------------------------------------------
                                                          112,555     120,207
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     See accompanying notes
 
 
 
     TROJAN TECHNOLOGIES INC.
     CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
     (Thousands of Canadian dollars)
 
                                                       Four month
                                                     period ended  Year ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
     Deficit, beginning of period                            (112)     (1,919)
     Net income                                               172       3,675
     Share issue costs, net of taxes (note 6)                   -      (1,868)
     -------------------------------------------------------------------------
     Retained earnings (deficit), end of period                60        (112)
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     See accompanying notes
 
 
 
     TROJAN TECHNOLOGIES INC.
     CONSOLIDATED STATEMENTS OF INCOME
     (Thousands of Canadian dollars)
 
                                                       Four month
                                                     period ended  Year ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
 
 
     REVENUE                                               31,755      92,677
     Cost of goods sold                                    18,747      51,752
     -------------------------------------------------------------------------
     Gross margin                                          13,008      40,925
     -------------------------------------------------------------------------
 
     EXPENSES
     Administrative and selling expenses                    9,998      28,046
     Research and development, net                          1,633       4,237
     Amortization                                           1,184       3,282
     -------------------------------------------------------------------------
                                                           12,815      35,565
     -------------------------------------------------------------------------
     Income before other income (expenses)                    193       5,360
 
     Other income (expenses)
     Interest, net                                           (140)       (970)
     Loss on sale of capital assets                             -        (642)
     Income from equity investment                            308         878
 
     -------------------------------------------------------------------------
     Income before taxes                                      361       4,626
     Income tax provision (note 4)                            189         951
     -------------------------------------------------------------------------
 
     Net income                                               172       3,675
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     Earnings per share
       Basic                                                 0.01        0.19
       Fully diluted                                         0.01        0.18
 
 
     See accompanying notes
 
 
 
     TROJAN TECHNOLOGIES INC.
     CONSOLIDATED STATEMENTS OF CASH FLOW
     (Thousands of Canadian dollars)
 
                                                       Four month
                                                     period ended  Year ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
 
     CASH PROVIDED BY (USED IN)
     OPERATING ACTIVITIES
     Net income                                               172       3,675
     Add (deduct) charges (credits) to operations
      not involving cash
       Amortization                                         1,184       3,282
       Income from equity investment                         (308)       (878)
       Future income taxes                                    (29)        852
       Government incentives                                   29      (1,331)
       Loss on sale of capital assets, net                      -         642
       Interest on pension obligation                          18          83
       Foreign exchange loss                                   43           -
     Net change in non-cash working capital
      balances related to operations                         (620)     (8,967)
     -------------------------------------------------------------------------
                                                              489      (2,642)
     -------------------------------------------------------------------------
 
     INVESTING ACTIVITIES
     Additions to capital assets                             (764)     (2,200)
     Additions to patents and other intangible assets        (103)       (972)
     Purchase of marketable securities                     (2,731)    (12,880)
     Sale of marketable securities                          9,409       2,514
     Acquisitions, net of cash acquired (note 5)           (1,265)     (1,968)
     -------------------------------------------------------------------------
                                                            4,546     (15,506)
     -------------------------------------------------------------------------
 
     FINANCING ACTIVITIES
     Decrease in bank indebtedness                         (2,797)    (12,864)
     Issuance of common shares                                 97      36,374
     Share issue costs                                          -      (2,598)
     Cash proceeds on sale of capital assets                    -         286
     Repayable advances from TPC                              519       1,567
     Payment on intellectual property                      (1,267)          -
     Advances of long-term debt                                 -          17
     Repayment of long-term debt                           (3,102)     (2,086)
     -------------------------------------------------------------------------
                                                           (6,550)     20,696
     -------------------------------------------------------------------------
 
     Net increase (decrease) in cash and cash
      equivalents, during the period                       (1,515)      2,548
     Cash and cash equivalents, beginning of period         3,526         978
     -------------------------------------------------------------------------
     Cash and cash equivalents, end of period               2,011       3,526
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
 
     Trojan Technologies Inc.
     December 31, 2002
     (Thousands of Canadian dollars)
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
     1.  BASIS OF PRESENTATION
 
     The Company changed its fiscal year-end from August 31 to December 31
     effective December 31, 2002.
 
     The accompanying audited consolidated financial statements have been
     prepared by the Company in accordance with Canadian generally accepted
     accounting principles. These audited condensed notes to the consolidated
     financial statements should be read in conjunction with the audited
     financial statements and notes included in the Company's Annual Report
     for the fiscal year ended August 31, 2002.
 
     2.  DEFERRED PAYMENTS FOR INTELLECTUAL PROPERTY
 
     On March 6, 2001, the Company acquired the assets of Advanced Ultraviolet
     Solutions (AUVS) for initial consideration of US$500 (CA$778) plus costs
     of CA$138. The assets acquired included technology, know-how (in the form
     of owned and licensed intellectual property) and market opportunity.
     Under the original purchase agreement, additional consideration was
     payable upon the achievement of certain sales and margin targets during a
     specific time period. Consideration was payable as a percentage of
     revenue up to a maximum of US$10,000 or for a period of 10 years
     whichever came first. During the year ended August 31, 2002, this
     agreement was renegotiated, resulting in a fixed purchase price of
     US$4,000. The three remaining payments of US$860 (CA$1,356) each have
     been discounted at a rate of 6%, and are included in other long-term
     liabilities, net of the current portion of $1,304 ($1,340 at August 31,
     2002).
 
     3.  DEFERRED TECHNOLOGY CREDIT
 
     During 2001, the Company entered into an agreement with Technology
     Partnerships Canada ("TPC"), which will provide funding from TPC for a
     three-year period up to a maximum of approximately $3,300 relating to
     specific research projects having a total estimated cost of $10,000. The
     Company is obligated under its agreement to pay TPC by way of a royalty
     originally commencing in 2004 based upon the total revenue of the
     Company. During the current period, the Company did not utilize all of
     the available funding. Accordingly, TPC has granted an eleven-month
     extension on the funding period. The repayment period has also been
     extended by eleven months with payments commencing in December 2005. The
     agreement contemplates that this royalty will have both a minimum and a
     maximum amount.
 
     At December 31, 2002, approximately $2,907 has been claimed under the TPC
     agreement. Of this amount, $2,086, which approximates the minimum royalty
     commitments, was reflected on the consolidated balance sheets under the
     caption Other long-term liabilities, with the remainder having been
     applied as a reduction of the applicable research and development
     expenses. Of the $2,907 claimed, approximately $2,425 ($1,567 at August
     31, 2002) has been received while the remaining amount of approximately
     $482 ($519 at August 31, 2002) is reflected as Accounts receivable -
     other.
 
     The fair market value of the Deferred technology credit using a 6%
     discount rate is $1,513.
 
 
     4.  INCOME TAXES
 
     At December 31, 2002, the Company has approximately $267 of Federal and
     $5,700 of Ontario non-capital losses as well as $484 of Ontario corporate
     minimum tax that will start to expire in 2005. A future tax asset has
     been recorded in respect of these losses carrying forward.
 
     At December 31, 2002, the Company's subsidiaries have approximately
     $4,780 of net operating losses carrying forward. A future tax asset has
     been recorded in respect of $3,280 of the losses carrying forward.
 
     At December 31, 2002, unused Scientific Research and Experimental
     Development (SRED) deductions of approximately $12,989 are available for
     carryforward indefinitely for Federal and Ontario tax purposes. A future
     tax asset has been recorded in respect of these deductions.
 
     In addition, the Company has approximately $5,591 of investment tax
     credits available to reduce future Federal taxes payable that will start
     to expire in 2005 which are included on the consolidated balance sheets
     under the caption Government incentives recoverable.
 
 
     Significant components of the Company's future income tax liabilities and
     assets are as follows:
 
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
 
     Future Tax Assets
     Net operating loss carryforwards                       2,176       2,374
     Current and capital scientific expenditures
      available to reduce future years' taxable income      4,309       4,302
     Reserves deductible in future periods                  1,300       1,424
     Undeducted finance costs                                 650         718
     Ontario corporate minimum tax                            484         484
     -------------------------------------------------------------------------
                                                            8,919       9,302
     Less valuation allowance related to
      foreign subsidiary losses                              (461)       (461)
     -------------------------------------------------------------------------
                                                            8,458       8,841
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     Future Tax Liabilities
     Revenue holdbacks                                     (2,743)     (2,779)
     Tax on future recognition of government incentives    (1,884)     (1,987)
     Capital cost allowance in excess of
      book amortization                                      (847)       (915)
     Other                                                    (29)       (234)
     -------------------------------------------------------------------------
                                                           (5,503)     (5,915)
     -------------------------------------------------------------------------
     Net future tax asset                                   2,955       2,926
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
 
     Provision for income taxes consists of the following amounts:
 
                                                       Four month        Year
                                                     period ended       ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
 
     Current income taxes                                     218          99
     -------------------------------------------------------------------------
 
     Future income tax provision (recovery) relating to
      origination and reversal of temporary differences       (29)      1,212
     Future income tax benefit resulting from rate changes      -        (360)
     -------------------------------------------------------------------------
     Future income taxes                                      (29)        852
     -------------------------------------------------------------------------
     Income tax provision                                     189         951
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
 
     The reconciliation of income tax computed at the statutory tax rates to
     the provision for income taxes is as follows:
 
                                                       Four month        Year
                                                     period ended       ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
 
     Combined Federal and Provincial income tax rate         38.6%       39.4%
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     Income before taxes                                      361       4,626
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     Income tax provision computed at statutory rates         139       1,823
     Increase (decrease) in taxes payable resulting from:
       Income from equity investment                         (119)       (346)
       Manufacturing and processing deduction                 (20)       (215)
       Tax benefit based on future rate decreases               -        (360)
       Federal large corporations tax                          49         185
       Non-deductible expenses                                 36          93
       Other                                                  104        (229)
     -------------------------------------------------------------------------
     Income tax provision                                     189         951
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
 
     5.  ACQUISITIONS
 
     Four month period ended December 31, 2002
     Eisenwerk Fried Wilh. Duker AG & Co. KgaA (Duker)
 
     Effective November 15, 2002, the Company acquired the assets of Duker for
     consideration and related costs of (euro) 797 (CA $1,265). Consideration
     consisted of cash of (euro) 755 (CA $1,199) and related costs of (euro)
     42 (CA $66).
 
     Duker, established in Laufach, Germany, provides UV equipment to the
     municipal drinking water market.
 
     These consolidated financial statements include the results of
     operations of Duker from the date of acquisition.
 
     The fair values of the assets acquired were as follows:
 
                                                                        $
     ------------------------------------------------------------------------
 
     Inventory                                                          341
     Capital assets                                                      64
     Customer list                                                      860
     -------------------------------------------------------------------------
     Net cash paid on purchase                                        1,265
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     Year ended August 31, 2002
 
     (a) Pureflow Ultraviolet Inc.
 
         Effective September 1, 2001, the Company purchased 100% of the issued
         shares of Pureflow Ultraviolet Inc. (Pureflow) for consideration and
         related costs of $5,860.
 
         Pureflow, established in 1978, is a distributor of ultraviolet
         equipment to the industrial and commercial market in North America.
 
         Consideration consisted of 479,040 shares of the Company valued at
         $4,637 and cash of $1,223, including expenses. The value of the
         479,040 shares was determined based on the average market price of
         the company's common shares over the two day period before and after
         the terms of the acquisition were agreed to and announced.
 
     (b) Ueberall Umweltschutz UV-Desinfection and Wasseraufbereitung GmbH
         (Ueberall)
 
         Effective May 8, 2002, the Company purchased 100% of the issued
         shares of Ueberall for cash consideration and related costs of
         $1,819.
 
         Ueberall, located in Germany, was established in 1967 and provides UV
         equipment for purifying drinking water aboard ships, including UV
         disinfection systems for the treatment of ballast water and marine
         wastewater.
 
         During the current period, the company name Ueberall Umweltschutz
         UV-Desinfection and Wasseraufbereitung GmbH was changed to Ueberall
         Gmbh.
 
         Both of these acquisitions have been accounted for as purchase
         transactions, and accordingly, these consolidated financial
         statements include the results of operations of both entities from
         the date of acquisition.
 
         The fair values of the assets acquired and liabilities assumed in
         these two acquisitions were as follows:
 
                                                Pureflow   Ueberall     TOTAL
                                                    $          $          $
         ---------------------------------------------------------------------
 
         Cash (bank indebtedness)                 1,241       (167)     1,074
         Total assets other than cash,
          including intangibles                     642        420      1,062
         Total liabilities                          (93)      (204)      (297)
         Excess of purchase price over fair
          value of net assets (goodwill)          4,070      1,770      5,840
         ---------------------------------------------------------------------
         Total purchase price                     5,860      1,819      7,679
         (Less cash acquired) add bank
          indebtedness assumed                   (1,241)       167     (1,074)
         ---------------------------------------------------------------------
         Purchase price paid net of
          cash acquired                           4,619      1,986      6,605
         Less consideration paid
          through share issuance                 (4,637)         -     (4,637)
         ---------------------------------------------------------------------
         Net cash paid (acquired) on purchase       (18)     1,986      1,968
         ---------------------------------------------------------------------
         ---------------------------------------------------------------------
 
         6.  SHARE CAPITAL
 
     Authorized
     Unlimited number of common shares
 
     Issued
                                                               No.          $
     -------------------------------------------------------------------------
 
     Balance, August 31, 2001                          17,168,392      43,358
     Issued pursuant to public offerings                4,110,000      35,825
     Issued pursuant to acquisition of Pureflow
      (note 5)                                            479,040       4,637
     Issued pursuant to exercise of options                58,000         346
     Issued pursuant to exercise of warrants               24,625         203
     -------------------------------------------------------------------------
     Balance, August 31, 2002                          21,840,057      84,369
     Issued pursuant to exercise of options                15,000          94
     Issued pursuant to exercise of warrants                  325           3
     -------------------------------------------------------------------------
     Balance, December 31, 2002                        21,855,382      84,466
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     On December 17, 2001, the Company issued 2,110,000 units at a price of
     $7.50 per unit, for total gross proceeds of $15,825. Each unit consisted
     of one common share of the Company and one-half of one warrant to
     purchase a common share. Each whole warrant is exercisable for a period
     of 18 months from its date of issue and entitles the holder to purchase
     one common share at a price of $8.25. The net proceeds after costs were
     used to repay the bank indebtedness.
 
     On April 30, 2002, the Company issued 1,800,000 common shares at $10.00
     per common share for aggregate proceeds of $18,000. On May 30, 2002, the
     Company issued an additional 200,000 common shares at $10.00 per common
     share for aggregate proceeds of $2,000 to cover over-allotments. The net
     proceeds will be used to pursue the Company's growth strategy and for
     general corporate purposes.
 
     The costs of the above share issues, net of tax, have been charged to
     retained earnings.
 
     As at December 31, 2002, there are 1,030,050 warrants outstanding to be
     exercised by June 16, 2003.
 
     Stock options
 
     (a) Option Plans
 
     At December 31, 2002, the Company has four stock-based compensation plans
     with options outstanding.
 
     (a)  During the year ended August 31, 2002, the 1995 Employee Profit
          Sharing and Stock Option Plan (the "1995 Plan") and the Sunwater
          Limited 1998 Employee Profit Sharing and Stock Option Plan (the
          "Sunwater Plan") were terminated. Options to purchase 170,124 and
          3,200 shares of common stock under the 1995 Plan and the Sunwater
          Plan, respectively, are currently outstanding and will remain valid
          until they are exercised or expire in accordance with their terms.
          No further distributions will be made under either plan.
 
     (b)  Under the 1997 Stock Option Plan (the "1997 Plan"), the Company may
          grant options to purchase shares of common stock to its employees
          and directors. During the year ended August 31, 2002, the 1997 Plan
          was amended to limit its future application to full-time employees
          and full-time contractors, and to increase the cumulative maximum
          number of shares for which options may be granted under the plan to
          1,987,192.
 
     (c)  During the year ended August 31, 2002, the Directors' Stock Option
          Plan (the "Directors' Plan") was established. Under the Directors'
          Plan, the Company may grant options to directors for up to 250,000
          shares of common stock.
 
     Under all four plans, the exercise price of each option is set at the
     weighted average trading price of the Company's common shares for the
     five trading days immediately preceding the date on which such option is
     granted. Options become exercisable at a date specified at the time each
     option is granted.
 
     Options granted under the 1995 Plan, the 1997 Plan and the Sunwater Plan
     expire five years after the date of grant and are subject to early
     termination if the option holder ceases to be an employee or director.
     The average vesting period under these three plans is eighteen months.
     Under the 1997 Plan, 131,000 of the options granted to employees
     excluding senior management were cancelled in the current period.
     Following amendments to the 1997 Plan, and with the approval of the
     Toronto Stock Exchange, the 131,000 options were reissued with a revised
     exercise price of $9.77. These new options vest one-third on each of the
     first three anniversary dates from the date of reissuance and will expire
     five years after the date of reissuance.
 
     Options granted under the Directors' Plan will vest one year after the
     date of grant, and will expire ten years after the date of grant.
 
     A summary of the status of the Company's four stock option plans with
     outstanding options and changes during the periods ending on those dates
     is presented below:
 
                                    Four month
                                   period ended               Year ended
                                 December 31, 2002         August 31, 2002
                             ------------------------ ------------------------
                                          Weighted                 Weighted
                                          average                  average
                                Options   exercise       Options   exercise
                                           price                     price
                                    $         $              $         $
     -------------------------------------------------------------------------
 
     Outstanding,
      beginning of period        1,334,298    10.16         998,188    10.78
     Granted                       117,500      9.74         507,000     9.07
     Cancelled                    (131,000)    11.54              --       --
     Reissued                      131,000      9.77              --       --
     Exercised                     (15,000)     6.30         (58,000)    5.97
     Expired                      (171,770)    13.37        (112,890)   12.94
     -------------------------------------------------------------------------
     Outstanding,
      end of period              1,265,028     9.55       1,334,298    10.16
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     The following table summarizes information about fixed stock options
     outstanding at December 31, 2002:
 
                            Options outstanding          Options exercisable
                    ------------------------------------ ---------------------
                                    Weighted-
                         Number      average   Weighted-   Number    Weighted-
        Range of    outstanding at  remaining  average   exercisable  average
     exercise prices   December   contractual  exercise  at December exercise
                        31, 2002      life      price     31, 2002     price
                                     (years)      $                      $
     -------------------------------------------------------------------------
 
     $ 4.50 to $ 6.50   509,900       2.9        5.98      400,900      5.88
     $ 7.50 to $10.00   439,500       4.5        9.15       25,000      9.13
     $11.00 to $14.50    74,000       3.3       12.14       24,000     13.38
     $16.50 to $20.00   241,628       0.9       17.02      241,628     17.02
 
 
     b) Compensation expense
 
     The Company does not recognize compensation expense for stock options
     granted to employees and directors. The table below presents pro forma
     net income and basic and fully diluted income per common share as if
     compensation expense for stock options granted to employees and directors
     had been determined based on the fair value method. The table includes
     all stock options granted by the Company on or after September 1, 2001.
 
                                                       Four month        Year
                                                     period ended       ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
 
     Income for the period                                    172       3,675
     Compensation expense for the period                     (439)       (506)
     -------------------------------------------------------------------------
     Pro forma income (loss) for the period                  (267)      3,170
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
                                                       Four month        Year
                                                     Period ended       ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
 
     Basic income (loss) per share:
       As reported                                           0.01        0.19
       Pro forma                                            (0.01)       0.16
 
     Diluted income (loss) per share:
       As reported                                           0.01        0.18
       Pro forma                                            (0.01)       0.16
 
 
     For the four month period ended December 31, 2002, the fair value of the
     options granted and reissued was estimated at the date of grant using the
     Black-Scholes option pricing model with the following weighted average
     assumptions: risk free interest rate of 4.50%, expected dividend yield of
     0%, expected volatility of 0.482 and expected option life of three years.
     The weighted-average fair value of the options granted during the period
     was $3.70.
 
     For the year ended August 31, 2002, the following weighted average
     assumptions were used: risk free interest rate of 4.25%, expected
     dividend yield of 0%, expected volatility of 0.489 and expected option
     life of three years. The weighted-average fair value of the options
     granted during the year was $3.81.
 
     The Black-Scholes model, used by the Company to calculate option values,
     as well as other accepted option valuation models, were developed to
     estimate fair value of freely tradeable, fully transferable options
     without vesting restrictions, which significantly differ from the
     Company's stock option awards. These models also require four highly
     subjective assumptions, including future stock price volatility and
     expected time until exercise, which greatly affect the calculated values.
     Accordingly, management believes that these models do not necessarily
     provide a reliable single measure of the fair value of the Company's
     stock option awards.
 
     7. SEGMENT INFORMATION
 
     Trojan Technologies Inc. is a Canadian-based high technology company,
     which provides technological solutions to the environmental problem of
     microbial pollution in water. Trojan designs, manufactures and sells
     ultraviolet ("UV") disinfection systems for municipal wastewater,
     drinking water systems for residential, municipal and commercial use, and
     industrial systems for food and beverage, pharmaceutical, and
     semiconductor applications. Trojan also designs and installs treatment
     technology for the environmental contaminant and micropollutant
     destruction market.
 
     Trojan operates worldwide in five strategic segments or arenas: Municipal
     Wastewater, Municipal Drinking Water, Environmental Contaminant
     Treatment, Industrial/Commercial and Residential. The Municipal
     Wastewater arena sells and services UV systems that serve as the final
     step in municipal wastewater treatment that destroy potentially harmful
     bacteria and viruses prior to discharge into the environment. The
     Municipal Drinking Water arena sells UV systems for use in potable water
     treatment prior to release into public water distribution networks. The
     Environmental Contaminant Treatment arena sells optimized UV light
     treatment systems to destroy certain chemicals in contaminated
     groundwater supplies and to provide an additional barrier against organic
     micropollutants. The Industrial/Commercial arena sells UV products that
     destroy microorganisms in water and other liquids used in many industrial
     processes. The Residential arena sells UV products for disinfection of
     private water supplies for homes, cottages, farms, rural commercial
     establishments and resorts.
 
     Business Segments - four month period ended December 31, 2002
     -------------------------------------------------------------
 
                                      Environ-
                                       mental
                                        Conta-  Indus-
                             Municipal minant   trial
                    Municipal Drinking  Treat- Commer-  Resi-   Other
                   Wastewater    Water   ment    cial dential     (1)   Total
                            $       $       $       $       $      $        $
     -------------------------------------------------------------------------
 
     Revenue (2)       18,727   3,348   3,305   4,573   1,802      -   31,755
     Net
      contribution (4)  3,118   1,144   1,138     830     307      -    6,537
     Amortization         718     125     189     118      34      -    1,184
     Additions to
      capital
      assets (3)        1,189     270     194     115      23      -    1,791
     Segment
      goodwill (3)          -       -       -   5,923       -           5,923
     Segment assets    15,250   2,704   8,284   7,722     632 77,963  112,555
 
 
     Business Segments - year ended August 31, 2002
     -----------------------------------------------
 
                                      Environ-
                                       mental
                                        Conta-  Indus-
                             Municipal minant   trial
                    Municipal Drinking  Treat- Commer-  Resi-   Other
                   Wastewater    Water   ment    cial dential     (1)   Total
                            $       $       $       $       $      $        $
     -------------------------------------------------------------------------
 
     Revenue (2)       72,312   3,071   4,400   7,376   5,518      -   92,677
     Net
      contribution (4) 20,158     267     351   1,454   1,154      -   23,384
     Amortization       2,611     120     225     203     123      -    3,282
     Additions to
      capital
      assets (3)        2,639     119   5,076   6,001      99      -   13,934
     Segment
      goodwill (3)          -       -       -   5,923       -      -    5,923
     Segment assets    18,418     800   6,819   7,112     834 86,224  120,207
 
 
     Reconciliation of net contribution to net income:
 
                                                       Four month        Year
                                                     period ended       ended
                                                      December 31   August 31
                                                             2002        2002
                                                                $           $
     -------------------------------------------------------------------------
 
     Total net contribution  (4)                            6,537      23,384
     Less
       Administrative expenses                              3,527      10,505
       Research and development, net                        1,633       4,237
       Amortization                                         1,184       3,282
       Interest, net                                          140         970
       Loss on capital transactions                             -         642
       Income from equity investment                         (308)       (878)
     -------------------------------------------------------------------------
     Income before taxes                                      361       4,626
     Income tax provision                                     189         951
     -------------------------------------------------------------------------
     Net income                                               172       3,675
     -------------------------------------------------------------------------
 
 
     Geographic Information
     ----------------------
 
                                     December 31              August 31
                                        2002                     2002
                               ----------------------- -----------------------
                                            Capital                  Capital
                               Revenue (5)  Assets (3) Revenue (5)  Assets (3)
                                   $           $           $           $
     -------------------------------------------------------------------------
     Canada                         3,087      22,381       9,472      21,416
     United States                 19,708       9,825      71,639      10,317
     Europe                         6,812       2,384       8,603       2,250
     Other                          2,148           -       2,963           -
     -------------------------------------------------------------------------
                                   31,755      34,590      92,677      33,983
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     (1) Other segment assets include all current assets, investment in other
         company, government incentives and future income taxes.
 
     (2) In the year ended August 31, 2002, a single customer in the municipal
         wastewater segment represented more than 10% of consolidated revenue.
 
     (3) Capital assets include capital assets, patents and other intangible
         assets, and goodwill. In the year ended August 31, 2002, additions to
         goodwill in the Industrial/Commercial segment include $4,070 in the
         United States and $1,770 in Germany.
 
     (4) Net contribution is defined as gross margin less selling expenses
         directly attributable to the segment.
 
     (5) Revenue is based on geographic location of the external customer.
 
 

SOURCE Trojan Technologies Inc.

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