Trojan Technologies Announces Second Quarter Results Quarterly Revenue Reaches Record of $29.4 million



    LONDON, ON, Aug. 20 /PRNewswire-FirstCall/ - Trojan Technologies Inc.
 (TSX/TUV) today announced its financial and operating results for the three-
 month and six- month periods ended June 30, 2003.
     "Revenue in the quarter reached a record of over $29 million," stated
 Marvin DeVries, President and Chief Executive Officer of Trojan Technologies
 Inc. "I am pleased with the growth rate of 17% and, in particular, with the
 increased diversification of our revenue. We have seen very strong growth in
 our drinking water and industrial/commercial businesses confirming that our
 strategies for growth outside our core wastewater business are winning in the
 marketplace. Order backlog continues to be strong as we reach the mid-point of
 2003. We delivered a profit this quarter and are on track to deliver on our
 revenue and income objectives for the year."
     Because the Company has changed its financial year-end from August to
 December, the second quarter results in this report are compared to the three
 months and six months ended May 31, 2002, the Company's third quarter under
 its previous reporting schedule. In accordance with accepted practice, this
 period has been selected as the comparative because it is the closest to
 June 30.
 
     Financial highlights include:
     -  Revenue for the quarter was $29.4 million, an increase of 17.0%
        compared to $25.2 million in the third quarter of fiscal 2002. For the
        six months ended June 30, 2003, revenues grew 17.0% to $56.0 million
        from $47.9 million in the six months ended May 31, 2002.
 
     -  For the quarter, consolidated gross margin was $11.5 million or 39.1%
        compared to $11.9 million or 47.3% in the similar period last year.
        Consolidated gross margin for the six-month period was $21.8 million
        or 38.9%, compared to $21.5 million or 44.8% in the six-month period
        ended May 31, 2002. The gross margin is impacted by business mix from
        both a geographic and product perspective during the first six months
        of the year.
 
     -  For the quarter, income before other income and expenses was
        $1.5 million compared to $2.6 million in the third quarter of fiscal
        2002. Net income is adversely impacted by $0.6 million of costs
        associated with management changes in the second quarter. On a
        year-to-date basis, income before other income and expenses amounted
        to $2.3 million compared to $4.3 million in the six months ended
        May 31, 2002.
 
     -  In the second quarter, Trojan reported net income after tax of
        $1.1 million or $0.05 per share compared to $1.2 million or $0.06 per
        share in the similar quarter last year. For the six-month period,
        Trojan reported a net loss of $6.0 million or $0.27 per share,
        compared to net income of $2.4 million or $0.12 per share in the six-
        month period ending May 31, 2002. The results for the six months ended
        June 30, 2003 were negatively impacted by $9.5 million pre-tax of
        abandoned transaction costs recognized in the first quarter.
 
     -  Order backlog at June 30, 2003 was $77.3 million, compared to
        $81.4 million at March 31, 2003 and $37.3 million at May 31, 2002.
 
     -  Cash and marketable securities totalled $3.9 million compared to
        $9.4 million at March 31, 2003. This decrease reflects the payment of
        almost all of the $9.5 million of abandoned transaction costs but does
        not include approximately $8 million of cash generated by the
        renegotiation of the hedging program subsequent to June 30, 2003
 
     -  Shareholders' equity was $80.9 million compared to $84.5 million at
        December 31, 2002.
 
     More details about Trojan Technologies' financial performance are
 contained in the following Report to Shareholders.
 
     Report to Shareholders for the Six Months Ended June 30, 2003
 
     President's Message
     To Our Shareholders
 
     I am happy to present to you my first quarterly Report to Shareholders as
 President and CEO of Trojan Technologies. I am excited to be leading this very
 dynamic company. Having held senior management positions within Trojan for the
 past 15 years, I am very familiar with the exciting opportunities that lie
 ahead for the company and the drive and focused determination needed to take
 full advantage of them.
     With a solid financial foundation and strong operational systems, I
 believe Trojan is now well positioned to achieve substantial growth and
 profitable financial results over the coming years. Our strategy will continue
 to focus on expansion across all five market arenas through ongoing organic
 growth supplemented by strategic partnerships and acquisitions. Together, with
 my colleagues on the executive team, we have a renewed enthusiasm and
 commitment as well as the knowledge and experience needed, to achieve both our
 short and long term objectives.
     Revenue in the quarter reached a record of over $29 million. I am pleased
 with the growth rate of 17% and, in particular, with the increased
 diversification of our revenue. We have seen very strong growth in our
 drinking water and industrial/commercial businesses confirming that our
 strategies for growth outside our core wastewater business are winning in the
 marketplace. Order backlog continues to be strong as we reach the mid-point of
 2003. We delivered a profit this quarter and are on track to deliver on our
 revenue and income objectives for the year.
     Much of the revenue growth is attributed to success in our North American
 municipal drinking water market as well as industrial and commercial business
 generated overseas. In general, the industrial and commercial market has
 slowed, but we continue to grow our market share due to the successful
 integration of previous acquisitions.
     Gross margin of 38.9% is lower than last year and below full year
 expectations primarily for two reasons. Last year's margins benefited from two
 large municipal wastewater projects. Secondly, the current mix of business has
 lowered the aggregate margins, as there was minimal Environmental Contaminant
 Treatment revenue recognized in the quarter. As I look ahead into the final
 two quarters of this year, I remain confident that we will achieve our revenue
 and gross margin targets for the full year.
     Our growth strategy continues to be to achieve revenues of $250 million
 by 2006 through organic growth supplemented by acquisitions and strategic
 alliances. Our revenue mix has diversified from our core wastewater business
 with significant growth in our four other market arenas. We remain focused on
 executing this strategy. We continue to evaluate acquisition opportunities
 that will strengthen our distribution reach or will complement our existing
 product offerings.
     I am committed to further improving our customers' satisfaction in their
 experience with Trojan systems - both with the performance of the equipment
 but also our delivery of aftermarket sales and service. Customer surveys
 received over the last six months indicate a high level of satisfaction and
 have provided very helpful feedback to guide further improvements.
     In summary, Trojan is a dynamic and vibrant company. We are moving
 forward with determination and confidence to deliver results. Our operations
 are strong and we are well positioned to provide our customers with the clean
 water solutions they need. We have renewed our commitment to our customers
 through ongoing product improvements and by providing enhanced customer
 service and aftermarket support. By executing diligently on our plan, we can
 deliver value for our customers, shareholders and employees.
 
     Marvin DeVries
     President and Chief Executive Officer
     August 20, 2003
 
 
     Financial Analysis of Results
 
     For the six months ended June 30, 2003, revenues grew 17.0% to
 $56.0 million from $47.9 million in the six months ended May 31, 2002. Revenue
 for the quarter was $29.4 million, an increase of 17.0% compared to
 $25.2 million in the third quarter of fiscal 2002.
     On a year-to-date basis, income before other income and expenses amounted
 to $2.3 million compared to $4.3 million in the six months ended May 31, 2002.
 For the quarter, income before other income and expenses amounted to
 $1.5 million compared to $2.6 million in the third quarter of fiscal 2002.
     For the six-month period, Trojan reported a net loss of $6.0 million or
 $0.27 per share, compared to net income of $2.4 million or $0.12 per share in
 the six-month period ending May 31, 2002. In the second quarter, Trojan
 reported net income after tax of $1.1 million or $0.05 per share compared to
 $1.2 million or $0.06 per share in the similar quarter last year.
 
     Analysis by Market
 
     Revenue from municipal wastewater disinfection declined but was more than
 offset by increases in the municipal drinking water, industrial and commercial
 and residential businesses. Results by segment are as follows:
 
     -  Municipal wastewater disinfection revenue was $37.9 million compared
        to $40.5 million for the six-month period ending May 30, 2002. On a
        quarterly basis, revenue declined to $19.5 million from $21.9 million
        in the previous year. Revenue last year was positively impacted by two
        large contracts. In the absence of these large contracts, the Company
        had forecasted a decline in wastewater project revenue in the current
        year and the quarterly results are in line with expectations. Revenue
        from after market sales and service increased by 39.3% in the quarter
        to $5.5 million compared to $4.0 million in the previous year.
 
        Order backlog in this segment increased to $43.9 million at the end of
        June compared to $41.0 million at the end of March, 2003.
 
        During the quarter, the Company announced that it had been awarded a
        $1.6 million contract by Wessex Water Services located in the UK to
        provide UV disinfection solutions to three wastewater treatment plants
        on the southern coast of England. Other contracts received in the
        quarter include a $1 million order for Trojan UV systems for municipal
        wastewater treatment for Bloomington-Normal in Illinois, USA as well
        over $0.4 million for UV systems for delivery to a municipality in
        China. These China projects are significant because they represent the
        leading edge of what we believe will be a rapidly developing market.
 
     -  Municipal drinking water revenue was $8.7 million year-to-date, an
        increase of 424% compared to $1.7 million in the similar period last
        year. For the quarter, municipal drinking water revenue increased by
        507% to $4.6 million from $0.8 million in the comparable quarter last
        year. During the quarter, the Company shipped systems to Lethbridge,
        Alberta and Seattle, Washington, designed to treat 40 and 150 millions
        gallons of water per day respectively. In addition, production
        commenced on a large system for Victoria, British Columbia with
        delivery completed in July, 2003.
 
        Order backlog in this market segment totaled $12.4 million at the end
        of June, 2003 compared to $18.4 million three months prior.
 
        In May, the Company announced that it was awarded a contract to supply
        UV systems to the City of Newark, Ohio for municipal drinking water
        treatment. The contract, valued at over $0.8 million, calls for the
        disinfection of up to 57 million litres (15 million gallons) of water
        a day. The systems will be installed at the city's drinking water
        facility this fall. Additional contract awards were received in the
        quarter to supply drinking water equipment to many municipalities
        including the Region of Halton, Ontario, Sechelt, British Columbia,
        and Iqaluit, Nunavut, Canada and Lander, Wyoming, USA.
 
     -  Environmental contaminant treatment revenue was $0.3 million and
        $0.1 million in the six-month and three-month periods respectively. No
        revenue was recorded in the three months and six months ended May 31,
        2002. Because of the timing of projects, there was very little
        production revenue recognized during these periods. With $6.2 million
        of project backlog for delivery in 2003 and further orders anticipated
        that will require production this year, revenues will pick up in
        future quarters. Total backlog in the ECT arena totaled $21.0 million
        compared to $22.0 million at the end of March 2003.
 
        Trojan continues to be successful in receiving the majority of
        contract awards in this segment. During the quarter, Trojan announced
        at the American Water Works Association (AWWA) 2003 Annual Conference
        and Exposition held in Anaheim, California that it had been awarded
        another major contract for its environmental contaminant treatment
        (ECT) systems in the San Gabriel Basin. Trojan is now the UV supplier
        at all five groundwater treatment facilities for the Baldwin Park
        Operable Unit Superfund Site. The Company also finalized a purchase
        order, valued at $4.1 million, with PWN Water Supply Company North
        Holland for UV equipment to treat both microorganisms and
        micropollutants, such as pesticides and herbicides, in drinking water.
        This contract represents the third phase of the Research and Product
        Development Agreement announced in April, 2001.
 
     -  Industrial and commercial revenue increased by 85% to $6.1 million
        year-to-date from $3.3 million in the previous year. For the quarter,
        revenue in this arena nearly tripled to $3.6 million from $1.2 million
        in the comparable quarter last year. Approximately, $2.2 million of
        revenue was generated in Europe industrial. In general, the industrial
        and commercial market has slowed, but we continue to grow our market
        share due to the alignment of previous acquisitions.
 
     -  Residential market revenue increased by 25% to $3.0 million compared
        to $2.4 million for the six months ended May 31, 2002 and by 25% to
        $1.6 million in the quarter from $1.3 million last year. Revenue
        growth reflects success of promotions to acquire new accounts and
        generate sales.
 
     Backlog for municipal and ECT markets was $77.3 million. Approximately
 $30.7 million will be produced in 2003 with the remaining $46.6 million
 building the foundation for a strong backlog for production in 2004.
 
     Gross Margin
 
     Consolidated gross margin for the six-month period was $21.8 million or
 38.9%, compared to $21.5 million or 44.8% in the six-month period ended May
 31, 2002. For the quarter, consolidated gross margin was $11.5 million or
 39.1% compared to $11.9 million or 47.3% in the similar period last year.
     The gross margin at 39.1% is below the Company's target for the year and
 is impacted by business mix, from both a geographic and product perspective.
 Revenue generated from the European market increased substantially to
 $8.8 million for the six months compared to $8.3 million for the 12 months
 ended August 2002. While this business growth is very encouraging, the margins
 earned by Trojan in Europe are lower than margins generated in North America.
 The mix of business by product line has also impacted margins on a year to
 date basis. The growth in drinking water revenue is a positive development for
 the Company, but there are increased costs associated with the production and
 performance monitoring of systems in this relatively new line of business. As
 a consequence, the gross margins earned on drinking water revenues are
 currently below the Company's average. In the Environmental Contaminant
 segment very little production has taken place in the first six months as most
 projects are scheduled for delivery in the third and fourth quarters. With
 backlog of $6.2 million and further orders anticipated that will require
 production this year, the revenue and gross margin contribution from this
 segment will increase significantly. Because of its technology leadership in
 this segment, the Company is able to deliver a competitively priced product to
 its customers while generating attractive margins. By comparison, last year's
 gross margin performance benefited from two very large wastewater projects.
 
     Operating Expenses
 
     The Company's objective is to reduce operating expenses, excluding
 amortization, to less than 30% of revenue. Operating expenses, excluding
 amortization, increased by 13.8% to $17.8 million but declined to 31.8% of
 revenue from $15.6 million or 32.7% of revenue for the six months ended May
 30, 2002. For the second quarter, operating expenses excluding amortization
 increased by 7.9% to $9.1 million but declined to 31.0% of revenue, compared
 to $8.5 million or 33.6% of revenue in the similar period last year. The
 increase in costs is largely attributable to the 17% growth in the business.
 Without the $0.6 million of costs associated with management changes during
 the period, operating expenses would have been the same as the similar quarter
 in the prior year. Research and development costs were $3.0 million compared
 to $2.4 million for the six months ended May 30, 2002 reflecting increased
 activity in the development of product for the municipal drinking market. At
 5.3% of revenue, research and development costs are outside the normal range
 of between 4% and 5%. This reflects the timing of certain product development
 initiatives and costs are expected to return to within the anticipated range
 over the balance of the year.
 
     Other Expenses
 
     Interest and bank charges were reduced to approximately $0.13 million in
 the quarter compared to $0.23 million for the three months ended May 30, 2002
 reflecting reduced indebtedness and increased balances of cash and marketable
 securities.
 
     Liquidity and Capital Resources
 
     At June 30, 2003, net cash on hand was $3.9 million compared to
 $5.7 million at December 31, 2002. Cash used in operating activities for the
 quarter was $6.7 million compared to $2.1 million at May 31, 2002. The
 increase in cash utilization is attributable to the payment of the costs
 associated with the abandoned transaction. Excluding these payments, cash flow
 from operations was positive for the quarter.
     As at June 30, 2003 there are 650,500 warrants outstanding to purchase
 common shares at $8.25. During the quarter, the TSX approved an extension of
 the expiry date of these warrants from June 17, 2003 to December 17, 2003.
     In order to protect the Company from the possibility of loss related to
 the cash flows relating to future export sales in U.S. dollars should the
 value of the U.S. dollar decline relative to the Canadian dollar, the Company
 has entered into forward foreign exchange rate contracts that oblige it to
 sell specific amounts of U.S. dollars at set future dates at predetermined
 exchange rates. Subsequent to the quarter end, the Company unwound
 US$48 million of forward currency sale contracts maturing at various rates
 through to September 2005. At the same time, the Company entered into a series
 of forward currency sale contracts from July 2003 to December 2005 aggregating
 US$60 million at an exchange rate of CAD$1.40.
     The Company's capital position is strong with long-term debt of
 $3.3 million and shareholders' equity of $80.9 million. Subsequent to the
 quarter end, the Company repaid its long-term debt that was denominated in
 Canadian dollars and has refinanced by borrowing in Euros. This transaction
 has reduced borrowing costs to 4.63% for the next year from 6.5% and has, at
 the same time, reduced the Company's exposure to fluctuations in the Euro/CAD
 exchange rate.
 
     A conference call and webcast will be held for investors, analysts and
 media at 2.30 pm EST on August 20, 2003. The conference call will be hosted by
 Marvin DeVries, President & CEO, and will include Douglas Alexander, Executive
 Vice President and Chief Financial Officer. The phone number to call is
 (416) 913-8746 or (800) 814-4890. The live webcast and a rebroadcast will be
 available at www.trojanuv.com. A taped version of the call will be available
 until midnight Wednesday, August 27, 2003 by calling (416) 640-1917 or
 (877) 289-8525 and dialling passcode number 21013803 followed by the number
 sign.
 
     Trojan Technologies is a Canadian based, high technology environmental
 company operating internationally. Trojan designs, manufactures and sells UV
 systems for municipal wastewater and drinking water facilities, as well as for
 the industrial, commercial and residential markets. The company also provides
 UV treatment for the removal of toxic chemicals from water. With 26 years of
 experience and over 3,000 municipal facilities in more than 25 countries using
 its technology, Trojan has the largest installed base of UV systems in the
 world.
     The company 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 press release contains certain forward looking statements. All
 statements, other than statements of historical fact included herein
 including, without limitation, statements regarding results and future plans
 are forward looking statements that involve risks and uncertainties. There can
 be no assurance that such statements will prove to be accurate and actual
 results and future events could differ materially from those anticipated in
 such statements. Important factors that could cause actual results to differ
 materially from the expectations are disclosed under the heading "risk
 factors" and elsewhere in Trojan's documents filed with the Toronto Stock
 Exchange and Canadian securities regulatory authorities.
 
 
     Trojan Technologies Inc.
     Incorporated under the laws of Ontario
 
     CONSOLIDATED BALANCE SHEETS
 
     Unaudited
 
 
     (Thousands of Canadian dollars)                     June 30  December 31
                                                            2003         2002
                                                               $            $
     -------------------------------------------------------------------------
                                                                      (note 1)
     ASSETS
     Current
     Cash and cash equivalents                             2,746        2,011
     Marketable securities                                 1,139        3,688
     Accounts receivable - trade                          30,608       34,437
     Accounts receivable - other                             829        1,502
     Deferred foreign exchange asset (note 3)              2,583            -
     Unbilled revenue (note 4)                            12,645        9,842
     Inventory                                            15,985       14,281
     Prepaid expenses                                        733        1,289
     -------------------------------------------------------------------------
     Total current assets                                 67,268       67,050
 
     Investment                                            3,058        2,683
     Government incentives recoverable (note 7)            4,405        5,591
     Future income taxes (note 7)                          5,459        2,955
     Capital assets, net                                  19,646       20,193
     Patents and other intangible assets, net              8,629        8,474
     Goodwill                                              5,923        5,923
     -------------------------------------------------------------------------
                                                         114,388      112,869
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     LIABILITIES AND SHAREHOLDERS' EQUITY
     Current
     Bank indebtedness (note 8)                                -          386
     Accounts payable and accrued charges                 20,987       16,309
     Deferred revenue (note 4)                             2,425          828
     Income taxes payable                                     62          147
     Current portion of long-term debt (note 8)              510          528
     Current portion of other long-term liabilities        1,230        1,379
     -------------------------------------------------------------------------
     Total current liabilities                            25,214       19,577
     -------------------------------------------------------------------------
 
     Long-term debt (note 8)                               2,805        3,060
     -------------------------------------------------------------------------
     Other long-term liabilities                           5,456        5,706
     -------------------------------------------------------------------------
 
     Shareholders' equity
     Share capital (note 9)                               87,257       84,466
     Retained (deficit) earnings                          (6,344)          60
     -------------------------------------------------------------------------
     Total shareholders' equity                           80,913       84,526
     -------------------------------------------------------------------------
                                                         114,388      112,869
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     See accompanying notes
 
     On behalf of the Board:        On behalf of the Board:
 
 
     H.J. (Hank) Vander Laan        George S. Taylor
 
 
 
 
     Trojan Technologies Inc.
 
     CONSOLIDATED STATEMENTS OF
     RETAINED EARNINGS (DEFICIT)
 
     Unaudited
 
 
     (Thousands of Canadian dollars)
 
                            Six months   Six months Three months Three months
                                 ended        ended        ended        ended
                               June 30,      May 31,     June 30,      May 31,
                                  2003         2002         2003         2002
     -------------------------------------------------------------------------
                                            (note 1)                  (note 1)
     Retained earnings
      (deficit),
      beginning of
      period                        60       (2,332)      (7,044)      (2,080)
     Net (loss) income          (6,017)       2,388        1,087        1,244
     Share issue costs,
      net of taxes
      (note 9(b))                    -       (1,868)           -         (976)
     Premium on common
      shares purchased
      for cancellation
      (note 9(a))                 (387)           -         (387)           -
     -------------------------------------------------------------------------
     Deficit, end of period     (6,344)      (1,812)      (6,344)      (1,812)
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     See accompanying notes
 
 
 
 
     Trojan Technologies Inc.
 
     CONSOLIDATED STATEMENTS OF (LOSS) INCOME
 
     Unaudited
 
 
     (Thousands of Canadian dollars)
 
                            Six months   Six months Three months Three months
                                 ended        ended        ended        ended
                               June 30,      May 31,     June 30,      May 31,
                                  2003         2002         2003         2002
                                     $            $            $            $
     -------------------------------------------------------------------------
                                            (note 1)                  (note 1)
 
     REVENUE (note 4)           56,027       47,897       29,428       25,159
     Cost of goods sold         34,235       26,434       17,925       13,263
     -------------------------------------------------------------------------
     Gross margin               21,792       21,463       11,503       11,896
     -------------------------------------------------------------------------
 
     EXPENSES
     Administrative and
      selling expenses          14,850       13,283        7,725        7,015
     Research and
      development, net           2,953        2,365        1,398        1,441
     Amortization                1,702        1,494          882          813
     -------------------------------------------------------------------------
                                19,505       17,142       10,005        9,269
     -------------------------------------------------------------------------
     Income before other
      (expenses) income          2,287        4,321        1,498        2,627
 
     Other (expenses) income
     Interest, net                (262)        (465)        (131)        (231)
     Loss on sale of
      capital assets, net            -         (642)           -         (642)
     Income from equity
      investment                   375          320          187          160
     Abandoned transaction
      costs (note 5)            (9,500)           -            -            -
     -------------------------------------------------------------------------
     (Loss) income
      before taxes              (7,100)       3,534        1,554        1,914
     Income tax
      (recovery)
      provision (note 7)        (1,083)       1,146          467          670
     -------------------------------------------------------------------------
 
     Net (loss) income          (6,017)       2,388        1,087        1,244
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     (Loss) earnings
      per share (note 9)
     Basic and fully diluted     (0.27)        0.12         0.05         0.06
 
     Number of shares
     Basic                  21,963,871   19,898,545   22,060,495   20,403,546
     Fully diluted          21,963,871   20,060,312   22,224,475   20,800,961
 
     See accompanying notes
 
 
 
 
     Trojan Technologies Inc.
 
     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
     Unaudited
 
 
     (Thousands of Canadian dollars)
 
                            Six months   Six months Three months Three months
                                 ended        ended        ended        ended
                               June 30,      May 31,     June 30,      May 31,
                                  2003         2002         2003         2002
                                     $            $            $            $
     -------------------------------------------------------------------------
                                            (note 1)                  (note 1)
 
     CASH PROVIDED BY
      (USED IN)
      OPERATING ACTIVITIES
     Net (loss) income          (6,017)       2,388        1,087        1,244
     Add (deduct) charges
      (credits) to
      operations not
      involving cash
       Amortization              1,702        1,494          882          813
       Income from
        equity investment         (375)        (320)        (187)        (160)
       Future income taxes      (1,232)       1,092          405          641
       Government incentives      (130)        (616)        (205)        (494)
       Loss on sale of
        capital assets, net          -          642            -          642
       Interest on
        pension obligation          44           41           21           41
       Interest on deferred
        intellectual
        property payments          113            -           62            -
       Foreign exchange gain      (529)           -         (276)           -
     -------------------------------------------------------------------------
                                (6,424)       4,721        1,789        2,727
     Net change in non-cash
      working capital items:
       Accounts
        receivable - trade       3,829        2,607       (5,998)         658
       Accounts
        receivable - other         (57)         852          158          690
       Deferred foreign
        exchange asset          (2,583)           -       (1,751)           -
       Unbilled revenue         (2,803)     (12,013)       2,650       (6,805)
       Inventory                (1,704)        (794)         331       (1,561)
       Prepaid expenses            556           47          139          119
       Income taxes
        receivable                   -          156            -           20
       Accounts payable
        and accrued charges      4,678        4,491       (6,925)       2,093
       Deferred revenue          1,597            -        2,922            -
       Income taxes payable        (41)           -           (2)           -
     -------------------------------------------------------------------------
                                (2,952)          66       (6,687)      (2,060)
     -------------------------------------------------------------------------
     INVESTING ACTIVITIES
     Additions to
      capital assets              (971)      (1,061)        (608)        (677)
     Additions to patents
      and other
      intangible assets           (338)        (229)        (167)        (198)
     Sale of marketable
      securities                 2,549            -        2,549            -
     Acquisition, net
      of cash acquired               -       (1,967)           -       (1,967)
     -------------------------------------------------------------------------
                                 1,240       (3,257)       1,774       (2,842)
     -------------------------------------------------------------------------
     FINANCING ACTIVITIES
     Decrease in bank
      indebtedness                (386)     (15,568)        (374)           -
     Issuance of common
      shares (note 9(b))         3,169       36,039        3,030       20,214
     Purchase of common
      shares for
      cancellation (note 9(a))    (765)           -         (765)           -
     Share issue
      costs (note 9(b))              -       (2,636)           -       (1,408)
     Cash proceeds on
      sale of capital assets         -          286            -          286
     Repayable advances
      from TPC                     730        1,216          248          357
     Payment on pension
      obligation                   (28)           -          (16)           -
     Advances of
      long-term debt                 -           17            -            -
     Repayment of
      long-term debt              (273)      (1,546)        (143)        (919)
     -------------------------------------------------------------------------
                                 2,447       17,808        1,980       18,530
     -------------------------------------------------------------------------
 
     Net increase
      (decrease) in cash and
      cash equivalents,
      during the period            735       14,617       (2,933)      13,628
     Cash and cash
      equivalents,
      beginning of period        2,011        1,018        5,679        2,007
     -------------------------------------------------------------------------
     Cash and cash
      equivalents,
      end of period              2,746       15,635        2,746       15,635
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
     See accompanying notes
 
 
 
 
     Notes to Consolidated Financial Statements - Unaudited
     June 30, 2003 (Thousands of Canadian Dollars, Except for Per Share Data)
 
 
     1.  CHANGE IN YEAR-END
 
     Trojan Technologies Inc. (the "Company") changed its fiscal year-end from
     August 31 to December 31 effective December 31, 2002. Accordingly, for
     the statements of retained earnings (deficit), (loss) income and cash
     flows, the comparative interim periods for the three and six month
     periods ended June 30, 2003 are the three and six month periods ended
     May 31, 2002.
 
 
     2.  BASIS OF PRESENTATION
 
     The accompanying unaudited consolidated financial statements have been
     prepared by management in accordance with Canadian generally accepted
     accounting principles ("Canadian GAAP") on a consistent basis with prior
     years. These unaudited condensed notes to the consolidated financial
     statements should be read in conjunction with the audited financial
     statements and notes included in the Company's 2002 Report to
     Shareholders for the four-month period beginning September 1, 2002 and
     ending December 31, 2002.
 
 
     3.  DEFERRED FOREIGN EXCHANGE ASSET
 
     Monetary assets and liabilities are translated at the rate of exchange in
     effect at the dates of the consolidated balance sheets ("spot" rate), and
     the resulting exchange gain or loss is included in income. Other assets
     and liabilities and revenue and expense transactions are translated at
     the actual rates of exchange in effect at the time of the transaction.
     Exchange gains and losses are included in income.
 
     Foreign exchange contracts that are determined to be effective hedges of
     the future settlement of U.S. dollar denominated accounts receivable and
     unbilled revenue are recorded on the balance sheet at the time the
     related revenue is recognized. The deferred foreign exchange asset
     represents the difference between the monetary asset balances that are
     considered to be effectively hedged at the balance sheet date translated
     at the foreign exchange contract, or "hedge", rate, and the same monetary
     asset balances translated at the "spot" rate. The related revenue
     transactions are translated at the hedge rate.
 
 
     4.  REVENUE RECOGNITION
 
     Revenues from the sale of manufactured residential and
     industrial/commercial water treatment products are recognized upon
     delivery of the product to the customer. Revenues and profits from
     wastewater, drinking water and environmental contaminant treatment
     projects and consulting contracts are recorded on the percentage-of-
     completion basis. The excess of contract billings over costs and gross
     margin earned on contracts is included in deferred revenue. Unbilled
     revenue represents amounts earned but not billed.
 
 
     5.  ABANDONED TRANSACTION COSTS
 
     On May 7, 2003, the Company announced that negotiations to acquire 100%
     of the shares of a publicly traded, European-based water treatment
     company, had been called off after several months of negotiations. Trojan
     had prepared and negotiated extensive documentation including draft
     business combination and other legal agreements. Because of the
     complexity of acquiring a public company under the applicable takeover
     code, the Company incurred advisor fees and expenses amounting to
     approximately $9,500 that was charged to income for the three months
     ended March 31, 2003.
 
 
     6.  FORWARD FOREIGN EXCHANGE CONTRACTS
 
     Subsequent to the quarter end, the Company unwound US$48,000 of forward
     currency sale contracts maturing at various rates through to September
     2005. At the same time, the Company entered a series of forward currency
     sale contracts from July 2003 to December 2005 aggregating US$60,000 at
     an exchange rate of CA$1.40. The net effect of this transaction was an
     immediate cash receipt of approximately CA$8,018 and an extension of the
     Company's risk management program to December 2005. The transaction had
     no impact on reported earnings, but will generate a deferred gain of
     CA$8,018 being the net present value of the equity in the forward
     currency contracts that have been unwound. The gain will be deferred and
     recognized in future periods, consistent with the income recognition had
     the forward currency contracts been held to maturity.
 
     7.  INCOME TAXES
 
     At June 30, 2003 the Company has approximately $6,369 of Federal and
     $11,129 of Ontario non-capital losses that will start to expire in 2005.
     A future tax asset has been recorded in respect of these losses carrying
     forward.
 
     At June 30, 2003, the Company's subsidiaries have approximately $2,766 of
     net operating losses carrying forward. A future tax asset has been
     recorded in respect of $1,299 of the losses carrying forward.
 
     At June 30, 2003, unused Scientific Research and Experimental Development
     (SRED) deductions of approximately $12,361 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 $4,405 of investment tax
     credits available to reduce future Federal taxes payable that will start
     to expire in 2007 which are included on the consolidated balance sheets
     under the caption Government incentives recoverable.
 
 
     8.  BANK INDEBTEDNESS AND BANK TERM LOANS
 
     An operating line of credit of $30,000 is available to the Company
     through The Bank of Nova Scotia (the Bank), subject to borrowing base
     calculations and annual review. Interest on the operating line is
     calculated and payable monthly at the Bank's prime rate for Canadian
     currency loans (5% at June 30, 2003; 4.5% at December 31, 2002) and at
     the Bank's USD Base Rate in Canada for U.S. currency loans (4.5% at
     June 30, 2003; 4.75% at December 31, 2002).
 
     At June 30, 2003, the operating line facility was held through a US
     operating loan amounting to US$800, bearing a rate of 4.5%. At December
     31, 2002, the operating line facility was held through a Canadian
     operating loan amounting to CA$590, bearing a rate of 4.5%.
 
     As collateral for this line of credit and the bank term loans, the
     Company has provided a general security agreement having a first fixed
     charge over all machinery and equipment valued in excess of $100, a
     floating charge on all present and future personal property and
     undertaking of the Company with replacement cost fire insurance coverage
     and any other insurance coverage the Bank may reasonably require, loss if
     any, payable to the Bank.
 
     The loan agreement with the bank contains general conditions concerning
     the maintenance of certain financial ratios. As at June 30, 2003, the
     Company was in compliance with those conditions.
 
     Subsequent to the end of the quarter, the Company renegotiated the terms
     of its banking arrangement with the Bank of Nova Scotia. Pursuant to the
     new agreement, the Company repaid its Canadian dollar denominated bank
     term loan amounting to $3,315, bearing an interest rate of prime plus
     1.5%, or 6.5% at June 30, 2003, and was advanced a new Euro denominated
     bank term loan amounting to (euro) 2,076, bearing an interest rate of 12
     month LIBOR plus 2.5%, or 4.63%.
 
 
     9.  SHARE CAPITAL
 
     (a) Normal Course Issuer Bid
 
     During the quarter, the Company announced that the Toronto Stock Exchange
     (the "TSX") had approved of Trojan's normal course issuer bid effective
     June 6, 2003. The Company was authorized to purchase up to 5% of its
     public float in the twelve-month period following the bid's effective
     date. During the quarter, the Company purchased for cancellation 96,000
     of its common shares for $765. The Company, in accordance with the rules
     and by-laws of the TSX, may purchase its common shares at the market
     prices of such shares.
 
     (b) Share issuances and warrants
 
     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 was 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.
 
     During the quarter, the TSX approved an extension of the expiry date of
     these warrants from June 17, 2003 to December 17, 2003. The number of
     warrants outstanding at June 30, 2003 was 650,500 (1,030,050 at December
     31, 2002; 1,036,300 at May 31, 2002).
 
     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.
 
     During the three months ended June 30, 2003, the Company issued 367,350
     common shares for aggregate proceeds of $3,031 pursuant to the exercise
     of warrants. No options were exercised during this quarter. During the
     three months ended March 31, 2003, the Company issued 12,200 common
     shares for aggregate proceeds of $101 pursuant to the exercise of
     warrants and 6,000 common shares for aggregate proceeds of $38 pursuant
     to the exercise of options.
 
     The number of shares outstanding at June 30, 2003 was 22,144,932
     (21,855,382 at December 31, 2002; 21,785,632 at May 31, 2002).
 
     (c) Stock Options
 
     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 diluted income per common share as if stock
     options granted to employees 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.
 
                               For the      For the      For the      For the
                            six months   six months three months three months
                                 ended        ended        ended        ended
                               June 30,      May 31,     June 30,      May 31,
                                  2003         2002         2003         2002
                                     $            $            $            $
     -------------------------------------------------------------------------
 
     (Loss) income for
      the period                (6,017)       2,388        1,087        1,244
     Compensation expense         (944)        (212)        (630)        (132)
     -------------------------------------------------------------------------
     Pro forma (loss)
      income for the period      (6,961)       2,176         457        1,112
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
 
                               For the      For the      For the      For the
                            six months   six months three months three months
                                 ended        ended        ended        ended
                               June 30,      May 31,     June 30,      May 31,
                                  2003         2002         2003         2002
                                     $            $            $            $
     -------------------------------------------------------------------------
 
     Basic (loss)
      income per share:
       As reported               (0.27)        0.12         0.05         0.06
       Pro forma                 (0.32)        0.11         0.02         0.05
 
     Diluted (loss)
      income per share:
       As reported               (0.27)        0.12         0.05         0.06
       Pro forma                 (0.32)        0.11         0.02         0.05
 
 
     136,541 options were granted during the three months ended June 30, 2003.
     No options were granted during the three months ended March 31, 2003.
     85,000 and 124,000 options were granted during the three months ended May
     31, 2002 and February 28, 2002 respectively.
 
     For the following three month periods, the fair value of the options
     granted was estimated at the date of grant using the Black-Scholes option
     pricing model with an expected dividend yield of 0%, and the following
     weighted average assumptions:
 
 
                                                                     Weighted-
                                          Expected      Expected       average
                                         weighted-     weighted-    fair value
                           Risk free       average       average    of options
                       interest rate    volatility   option life       granted
 
                                  (%)                     (Years)            $
     -------------------------------------------------------------------------
 
     Three months ended
      June 30, 2003            5.00%         0.492           5.3          3.97
     Three months ended
      May 31, 2002             4.25%         0.488           3.0          3.65
     Three months ended
      February 28, 2002        4.25%         0.491           3.0          2.82
 
 
     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 tradable, 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.
 
 
     10. SEGMENT INFORMATION
 
     Trojan operates worldwide in five strategic segments or arenas: municipal
     wastewater, municipal drinking water, environmental contaminant
     treatment, industrial and 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 ground
     water supplies and to provide an additional barrier against organic micro
     pollutants. The industrial and 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.
 
 
     -------------------------------------------------------------------------
                         Municipal Environmental Industrial
              Municipal  Drinking   Contaminant     and
              Wastewater   Water     Treatment   Commercial Residential Total
                  $          $           $            $          $        $
     -------------------------------------------------------------------------
 
 
                         Six months ended June 30, 2003
     -------------------------------------------------------------------------
     Revenue   37,899      8,733         300        6,137      2,958   56,027
     -------------------------------------------------------------------------
     Net
      contri-
      bution    8,997      1,177        (199)       1,083        848   11,906
     -------------------------------------------------------------------------
 
 
                         Six months ended May 31, 2002
     -------------------------------------------------------------------------
     Revenue   40,546      1,666           -        3,313      2,372   47,897
     -------------------------------------------------------------------------
     Net
      contri-
      bution   12,258        246        (721)         792        327   12,902
     -------------------------------------------------------------------------
 
 
                         Three months ended June 30, 2003
     -------------------------------------------------------------------------
     Revenue   19,487      4,623         149        3,593      1,576   29,428
     -------------------------------------------------------------------------
     Net
      contri-
      bution    5,221        316         (70)         443        468    6,378
     -------------------------------------------------------------------------
 
 
                         Three months ended May 31, 2002
     -------------------------------------------------------------------------
     Revenue   21,898        762           -        1,241      1,258   25,159
     -------------------------------------------------------------------------
     Net
      contri-
      bution    7,120         70        (350)         140        149    7,129
     -------------------------------------------------------------------------
 
     Net contribution is defined as gross margin less selling expenses.
 
 
     Reconciliation of net contribution to net (loss) income:
 
 
                               For the      For the      For the      For the
                            six months   six months three months three months
                                 ended        ended        ended        ended
                               June 30,      May 31,     June 30,      May 31,
                                  2003         2002         2003         2002
                                     $            $            $            $
     -------------------------------------------------------------------------
 
     Total net contribution     11,906       12,902        6,378        7,129
     Less
       Administrative
        expenses                 4,964        4,722        2,600        2,249
       Research and
        development              2,953        2,365        1,398        1,441
       Amortization              1,702        1,494          882          813
       Interest, net               262          465          131          231
       Loss on sale of
        capital assets,
        net                          -          642            -          642
       Income from
        equity investment         (375)        (320)        (187)        (160)
       Abandoned
        transaction costs        9,500            -            -            -
     -------------------------------------------------------------------------
     Operating
      (loss) income             (7,100)       3,534        1,554        1,914
     Income tax
      (recovery) provision      (1,083)       1,146          467          670
     -------------------------------------------------------------------------
     Net (loss)
      income                    (6,017)       2,388        1,087        1,244
     -------------------------------------------------------------------------
     -------------------------------------------------------------------------
 
 
     11. COMPARATIVE AMOUNTS
 
     Certain comparative amounts have been reclassified to reflect the
     presentation adopted in the current period.
 
 
 

SOURCE Trojan Technologies Inc.

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