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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ___ to ___ Commission File Number 1-14523 TRIO-TECH INTERNATIONAL  California
    
    95-2086631(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 14731 Califa StreetVan Nuys, California
    
    91411(Address of principle executive offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: 818-787-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
with the Commission by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days . Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ Number of shares of common stock outstanding as of May 3, 2005 is 2,966,042.    1




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TRIO-TECH INTERNATIONALINDEX TO CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE
  
 PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2005 (Unaudited) and June 30, 2004
    
    
    3Consolidated Statements of Operations and Comprehensive Income (loss) for the Three and Nine Months
Ended March 31, 2005 (Unaudited) and March 31, 2004 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2005 (Unaudited) and March
31, 2004 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31Part II. Other InformationItem 1. Legal Proceedings
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32Signatures
    
    
    33EX-31.1EX-31.2EX-32
  2




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES) Mar 31,
    
    
    June 30,2005
    
    
    2004(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    1,249
    
    
    $
    1,357Short-term deposits
    
    
    3,343
    
    
    
    5,649Trade accounts receivable, less allowance for doubtful
accounts of $188 and $165
    
    
    3,871
    
    
    
    3,695Other receivables
    
    
    131
    
    
    
    105Inventories, less provision for obsolete inventory
of $398 and $445
    
    
    1,380
    
    
    
    1,409Prepaid expenses and other current assets
    
    
    150
    
    
    
    98Total current assets
    
    
    10,124
    
    
    
    12,313PROPERTY, PLANT AND EQUIPMENT, Net
    
    
    7,159
    
    
    
    5,202OTHER INTANGIBLE ASSETS, Net
    
    
    411
    
    
    
    OTHER ASSETS
    
    
    442
    
    
    
    485TOTAL ASSETS
    
    $
    18,136
    
    
    $
    18,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Line of credit
    
    $
    151
    
    
    $
    146Accounts payable
    
    
    1,500
    
    
    
    2,316Accrued expenses
    
    
    2,692
    
    
    
    2,166Income taxes payable
    
    
    74
    
    
    
    49Current portion of notes payable
    
    
    608
    
    
    
    506Current portion of capitalized leases
    
    
    169
    
    
    
    246Total current liabilities
    
    
    5,194
    
    
    
    5,429NOTES PAYABLE, net of current portion
    
    
    702
    
    
    
    583CAPITALIZED LEASES, net of current portion
    
    
    112
    
    
    
    210DEFERRED INCOME TAXES
    
    
    684
    
    
    
    644TOTAL LIABILITIES
    
    
    6,692
    
    
    
    6,866MINORITY INTEREST
    
    
    2,042
    
    
    
    2,110SHAREHOLDERS EQUITY:Common stock; no par value, 15,000,000 shares authorized;
2,966,042 shares issued and outstanding as at Mar. 31, 2005, and 2,964,542 shares issued and outstanding as at Jun. 30, 2004, respectively
    
    
    9,532
    
    
    
    9,527Paid-in capital
    
    
    284
    
    
    
    284Accumulated deficit
    
    
    (360
    )
    
    
    (519
    )Accumulated other comprehensive loss-translation adjustments
    
    
    (54
    )
    
    
    (268
    )Total shareholders equity
    
    
    9,402
    
    
    
    9,024TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    18,136
    
    
    $
    18,000
 See notes to condensed consolidated financial statements. 3




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME FOR THE THREE AND NINE
MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004 (UNAUDITED, IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
 Nine Months Ended
    
    
    Three Months EndedMar. 31,
    
    
    Mar. 31,
    
    
    Mar. 31,
    
    
    Mar. 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)NET SALESProduct sales
    
    $
    10,875
    
    
    $
    7,071
    
    
    $
    3,038
    
    
    $
    2,798Services
    
    
    8,775
    
    
    
    6,877
    
    
    
    3,079
    
    
    
    2,24419,650
    
    
    
    13,948
    
    
    
    6,117
    
    
    
    5,042COST OF SALESCost of goods sold
    
    
    8,914
    
    
    
    5,633
    
    
    
    2,510
    
    
    
    2,243Cost of service rendered
    
    
    6,044
    
    
    
    4,769
    
    
    
    2,138
    
    
    
    1,60014,958
    
    
    
    10,402
    
    
    
    4,648
    
    
    
    3,843GROSS PROFIT
    
    
    4,692
    
    
    
    3,546
    
    
    
    1,469
    
    
    
    1,199OPERATING EXPENSES:General and administrative
    
    
    3,613
    
    
    
    2,915
    
    
    
    1,150
    
    
    
    962Selling
    
    
    889
    
    
    
    552
    
    
    
    339
    
    
    
    135Research and development
    
    
    77
    
    
    
    88
    
    
    
    20
    
    
    
    29Gain on disposal of property, plant and equipment
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (62
    )Total
    
    
    4,579
    
    
    
    3,497
    
    
    
    1,509
    
    
    
    1,064INCOME (LOSS) FROM OPERATIONS
    
    
    113
    
    
    
    49
    
    
    
    (40
    )
    
    
    135OTHER INCOME (EXPENSE)Interest expense
    
    
    (137
    )
    
    
    (95
    )
    
    
    (45
    )
    
    
    (29
    )Other income
    
    
    191
    
    
    
    263
    
    
    
    85
    
    
    
    67Total
    
    
    54
    
    
    
    168
    
    
    
    40
    
    
    
    38INCOME (LOSS) BEFORE
INCOME TAXES AND MINORITY INTEREST
    
    
    167
    
    
    
    217
    
    
    
    0
    
    
    
    173INCOME TAX EXPENSES (BENEFIT)
    
    
    25
    
    
    
    40
    
    
    
    (26
    )
    
    
    7INCOME BEFORE MINORITY INTEREST
    
    
    142
    
    
    
    177
    
    
    
    26
    
    
    
    166MINORITY INTEREST
    
    
    17
    
    
    
    (56
    )
    
    
    (4
    )
    
    
    2NET INCOME ATTRIBUTABLE TO
COMMON SHARES
    
    
    159
    
    
    
    121
    
    
    
    22
    
    
    
    168EARNINGS PER SHARE:Basic
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.06Diluted
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.06WEIGHTED AVERAGE NUMBER OF COMMON AND
POTENTIAL COMMON SHARES OUTSTANDINGBasic
    
    
    2,966
    
    
    
    2,931
    
    
    
    2,966
    
    
    
    2,933Diluted
    
    
    3,000
    
    
    
    2,984
    
    
    
    3,025
    
    
    
    3,036COMPREHENSIVE (LOSS) INCOME :Net income
    
    
    159
    
    
    
    121
    
    
    
    22
    
    
    
    168Unrealized loss on investment
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    214
    
    
    
    242
    
    
    
    (64
    )
    
    
    19COMPREHENSIVE INCOME (LOSS)
    
    $
    373
    
    
    $
    318
    
    
    $
    (42
    )
    
    $
    187
 See notes to condensed consolidated financial statements. 4




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2005 AND MARCH 31,
2004 (UNAUDITED, IN THOUSANDS) Nine Months EndedMar 31,
    
    
    Mar 31,2005
    
    

2004(Unaudited)
    
    

(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES :Net income
    
    $
    159
    
    
    $
    121Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    1,095
    
    
    
    885Bad debt expense, net
    
    
    23
    
    
    
    1Gain on sale of property and equipment
    
    
    
    
    
    
    (58
    )Gain on disposal of marketable securities
    
    
    
    
    
    
    (114
    )Deferred income taxes
    
    
    40
    
    
    
    27Minority interest, net
    
    
    (17
    )
    
    
    56Changes in
operating assets and liabilities (excluding business acquisition):Accounts receivable, net
    
    
    (199
    )
    
    
    (56
    )Other receivables
    
    
    (26
    )
    
    
    (74
    )Inventories
    
    
    29
    
    
    
    (38
    )Prepaid expenses and other current assets
    
    
    (52
    )
    
    
    (25
    )Accounts payable and accrued expenses
    
    
    (290
    )
    
    
    420Income taxes payable
    
    
    25
    
    
    
    (43
    )Other assets
    
    
    (414
    )
    
    
    Net cash provided by operating activities
    
    
    373
    
    
    
    1,102CASH FLOWS FROM INVESTING ACTIVITIES :Proceeds
from maturing short-term deposits
    
    
    3,532
    
    
    
    574Investments in short-term deposits
    
    
    (1,226
    )
    
    
    (1,654
    )Capital expenditures
    
    
    (1,691
    )
    
    
    (761
    )Purchase of marketable securities
    
    
    
    
    
    
    (4
    )Acquisition of business in Malaysia
    
    
    (731
    )
    
    
    8Proceeds from disposal of marketable securities
    
    
    
    
    
    
    555Proceeds from sale of property and equipment
    
    
    
    
    
    
    101Net cash used in investing activities
    
    
    (116
    )
    
    
    (1,181
    )CASH FLOWS FROM FINANCING ACTIVITIES :Net payments and borrowings on lines of credit
    
    
    
    
    
    
    (156
    )Payment of
bank guarantee note for acquisition
    
    
    (395
    )
    
    
    Principal
payments of debt and capitalized leases
    
    
    (637
    )
    
    
    (1,217
    )Proceeds from long-term debt
    
    
    683
    
    
    
    1,090Dividends paid to minority interest
    
    
    (54
    )
    
    
    (63
    )Cash received from stock options exercised
    
    
    5
    
    
    
    14Net cash used in financing activities
    
    
    (398
    )
    
    
    (332
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    33
    
    
    
    82NET DECREASE IN CASH
    
    
    (108
    )
    
    
    (329
    )CASH AND CASH EQUIVALENTS , BEGINNING OF  YEAR
    
    
    1,357
    
    
    
    1,495CASH AND CASH EQUIVALENTS , END OF  YEAR
    
    $
    1,249
    
    
    $
    1,166SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    138
    
    
    $
    93Income taxes
    
    $
    (14
    )
    
    $
    83NON-CASH INVESTING AND FINANCING ACTIVITIESAcquisition of property, plant and equipment under capital finance lease
    
    $
    
    
    
    $
    95Advances of property,  plant and equipment paid in previous year
    
    $
    365
    
    
    $
    Deposit for the acquisition of business in Malaysia paid in advance
    
    $
    92
    
    
    $
    Bank
guarantee note for acquisition
    
    $
    395
    
    
    $
    
 See notes to condensed consolidated financial statements. 5




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TRIO-TECH INTERNATIONAL
AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF
SHARES)
  1.
    ORGANIZATION AND BASIS OF PRESENTATIONTrio-Tech International (the Company or TTI hereafter) was incorporated in 1958 under
the laws of the State of California. TTI provides third-party semiconductor testing and
burn-in services primarily through its laboratories in Southeast Asia; in addition, TTI
operates test facilities in the United States and Europe. The Company also designs,
develops, manufactures and markets a broad range of equipment and systems used in the
manufacturing and testing of semiconductor devices and electronic components. TTI conducts
business in three industry segments: Testing Services, Manufacturing and Distribution. TTI
has subsidiaries in the U.S., Singapore, Malaysia, Thailand, China and Ireland as follows: Ownership
    
    LocationExpress Test Corporation
    
    100%
    
    Van Nuys, CaliforniaTrio-Tech Reliability Services
    
    100%
    
    Van Nuys, CaliforniaKTS Incorporated, dba Universal Systems
    
    100%
    
    Van Nuys, CaliforniaEuropean Electronic Test Centre
    
    100%
    
    Dublin, IrelandTrio-Tech International Pte. Ltd.
    
    100%
    
    SingaporeUniversal (Far East) Pte. Ltd.
    
    100%
    
    SingaporeTrio-Tech Thailand
    
    100%
    
    Bangkok, ThailandTrio-Tech Bangkok
    
    100%
    
    Bangkok, ThailandTrio-Tech Malaysia
    
    55%
    
    Penang and Selangor, MalaysiaTrio-Tech Kuala Lumpur  100% owned by
    
    55%
    
    Selangor, MalaysiaTrio-Tech MalaysiaPrestal Enterprise Sdn. Bhd.
    
    76%
    
    Selangor, MalaysiaTrio-Tech (Suzhou) Co. Ltd.
    
    100%
    
    Suzhou, China
 The accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All significant
inter-company accounts and transactions have been eliminated in consolidation. The unaudited
consolidated financial statements are presented in U.S. dollars. Accordingly, the
accompanying financial statements do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included. Operating results for the
nine months ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Companys annual
report for the fiscal year ended June 30, 2004, as amended by Form 10-K/A filed October 29,
2004 and interim Form 10-Qs. Effective July 1, 2004, the Company changed its fiscal report period to end on the last day
of the fiscal quarter. The quarter end dates for periods ending March 31, 2005 and March 31,
2004 were March 31, 2005 and March 26, 2004 respectively. 6




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2.
    INVENTORIESInventories consist of the following: Mar. 31,
    
    
    June 30,2005

(Unaudited)
    
    
    2004Raw materials
    
    $
    909
    
    
    $
    652Work in progress
    
    
    498
    
    
    
    700Finished goods
    
    
    371
    
    
    
    502Provision for obsolete inventory
    
    
    (398
    )
    
    
    (445
    )$
    1,380
    
    
    $
    1,409
  3.
    STOCK OPTIONSThe Company has adopted the intrinsic value method of accounting for employee stock options
as permitted by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation (SFAS No. 123) and discloses the pro forma effect on net loss and
loss per share as if the fair value based method had been applied. For equity instruments,
including stock options, issued to non-employees, the fair value of the equity instruments
or the fair value of the consideration received, whichever is more readily determinable, is
used to determine the value of services or goods received and the corresponding charge to
operations.The following table illustrates the effect on net income and earnings per share as if the
Company had applied the fair value recognition provision of SFAS No. 123 to stock-based
employee compensation. Nine Months Ended
    
    
    Three Months EndedMar. 31,
    
    
    Mar. 31,
    
    
    Mar. 31,
    
    
    Mar. 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net income : as reported
    
    
    
    
    
    $
    159
    
    
    $
    121
    
    
    $
    22
    
    
    $
    168Add: stock based employee compensation
included in reported income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: total stock based employee
compensation
expense determined under fair value
method for all awards
    
    
    
    
    
    
    (27
    )
    
    
    (31
    )
    
    
    (9
    )
    
    
    (10
    )Pro forma net income
    
    
    
    
    
    $
    132
    
    
    $
    90
    
    
    $
    13
    
    
    $
    158Income per share  basicAs reported
    
    
    
    
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.06Pro forma
    
    
    
    
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.05Income per share  dilutedAs reported
    
    
    
    
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.06Pro forma
    
    
    
    
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.05
 As required by SFAS No. 123, the Company provides the following disclosure of estimated
values for these awards. The weighted-average grant-date fair value of options granted
during the first three quarters of fiscal 2005 and the first three quarters of fiscal 2004
was estimated to be from $4.40 to $4.50 for fiscal 2005, and $2.66 for fiscal 2004. 7




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The fair value of each option grant was estimated on the date of grant using a Black-Scholes
option-pricing model with the following weighted average assumptions for the first three
quarters of fiscal 2005 and the first three quarters of fiscal 2004, respectively: risk free
interest rates of 3.73% and 1.58% respectively, expected lives of 2 years for the first
three quarters of fiscal 2005 and the first three quarters of fiscal 2004; volatility of
36.29% and 42.5% and no assumed dividends.  4.
    EARNINGS PER SHAREThe Company adopted SFAS No. 128, Earnings per Share(EPS). Basic Earnings per Share is
computed by dividing net income available to common shareholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during a period. In
computing diluted EPS, the average price for the period is used in determining the number of
shares assumed to be purchased from exercise of stock options and warrants.Stock options to purchase 334,000 shares at exercise prices ranging from $2.25 to $5.63 per
share were outstanding as of March 31, 2005. The following options were excluded from the
computation of diluted EPS because their effect would have been anti-dilutive. Type
    
    Shares
    
    
    Exercise Price
    
    
    ExpirationOptions
    
    
    4,500
    
    
    $
    4.45
    
    
    December 6, 2009Options
    
    
    35,500
    
    
    $
    4.40
    
    
    July 1, 2009Options
    
    
    5,000
    
    
    $
    4.25
    
    
    March 29, 2009Options
    
    
    20,000
    
    
    $
    5.63
    
    
    September 18, 2005Options
    
    
    32,000
    
    
    $
    5.37
    
    
    July 10, 2005
 Stock options to purchase 378,500 shares at prices ranging from $2.25 to $6.00 per share
were outstanding as of March 31, 2004. 101,000 options were excluded in the computation of
diluted EPS because the exercise price was greater than the average market price of the
common shares and therefore were anti-dilutive. The following table is a reconciliation of the weighted average shares used in the
computation of basic and diluted EPS for the years presented herein: Nine Months Ended
    
    
    Three Months EndedMar. 31,
    
    
    Mar. 31,
    
    
    Mar. 31,
    
    
    Mar. 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net income used to compute basic
and diluted earnings per share
    
    $
    159
    
    
    $
    121
    
    
    $
    22
    
    
    $
    168Weighted average number of common
shares outstanding  basic
    
    
    2,966
    
    
    
    2,931
    
    
    
    2,966
    
    
    
    2,933Dilutive effect of stock options and warrants
    
    
    34
    
    
    
    53
    
    
    
    59
    
    
    
    103Number of shares used to compute
earnings per share  diluted
    
    
    3,000
    
    
    
    2,984
    
    
    
    3,025
    
    
    
    3,036
  5.
    ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTSAccounts receivable are customer obligations due under normal trade terms. We sell our
products and services to manufacturers in the semiconductor industry. We perform continuing
credit evaluations of our customers financial condition and although we generally do not
require collateral, letters of credit may be required from our customers in certain
circumstances.Senior management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. We include any accounts receivable balances
that are determined to be uncollectible in our allowance 8




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for doubtful accounts. After all
attempts to collect a receivable have failed, the receivable is written off against the
allowance. Based on the information available to us, we believe our allowance for doubtful
accounts for the nine months ended March 31, 2005 and the twelve months ended June 30, 2004
are adequate. However, actual write-offs might be more or less than the recorded allowance. Mar. 31,
    
    
    June 30,2005
    
    
    2004(Unaudited)Beginning
    
    $
    165
    
    
    $
    157Additions charged to cost and expenses
    
    
    72
    
    
    
    18Recovered
    
    
    (49
    )
    
    
    (4
    )Actual write-offs
    
    
    
    
    
    
    (6
    )Ending
    
    $
    188
    
    
    $
    165
  6.
    WARRANTY ACCRUAL Mar. 31,
    
    
    June 30,2005
    
    
    2004(Unaudited)Beginning
    
    $
    162
    
    
    $
    165Additions charged to cost and expenses
    
    
    118
    
    
    
    41Recovered
    
    
    
    
    
    
    Actual write-offs
    
    
    (25
    )
    
    
    (44
    )Ending
    
    $
    255
    
    
    $
    162
  7.
    ACQUISITION OF A BUSINESSOn July 1, 2004, the Company acquired certain assets from TS Matrix Bhd. (Seller) utilized
by the burn-in testing division of Seller for an aggregate cash purchase price of
approximately $1,218. Seller is one of our competitors. The Company paid approximately $92
by way of a deposit in fiscal 2004 and $731 of the purchase price in cash at the completion
of the acquisition on July 1, 2004, and the balance of approximately $395 was payable in the
form of a bank-guaranteed note which matured at December 31, 2004. Our objectives in
acquiring the burn-in testing division were to service a large electronic device
manufacturer with whom we had been pursuing a business relationship for some time and to
increase our market share in testing services. Upon completion of the acquisition, the
customer signed a five-year agreement with the Company to provide testing services. The
value of obtaining this customer relationship intangible is included in other intangible
assets in the amount of $482. Results of the operations for the burn-in testing business are
included in the Companys income statement effective July 1, 2004.In accordance with the Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the Company allocated the purchase price to the tangible assets and
intangible assets acquired based on their estimated fair values. The fair value assigned to
intangible assets acquired was based on estimates and assumptions determined by the
management. Other intangibles with finite lives are amortized on a straight-line basis over
their respective useful lives. The total purchase price was allocated as follows (in
thousands): 9




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##### Table of Contents



Total purchase price:Cash
    
    $
    823Notes payable
    
    
    395$
    1,218Allocated as follows:Fixed assetsPlant and machinery
    
    $
    711Production equipment
    
    
    13Office equipment
    
    
    5Leasehold improvement
    
    
    7736Intangible assets  customer relationship
    
    
    482$
    1,218
 The excess purchase price over the fair value of tangible assets acquired was attributable to the
customer relationship obtained from the above business acquisition and recorded as other intangible
assets. No goodwill is recognized in this context. The customer relationship intangible will be
amortized over its economic life based on the contract term as stated in the sales agreement with
the customer on a straight-line method over five years. The customer relationship intangible was previously reported in the Form 10-K for the fiscal year
ended June 30, 2004 at $493. The difference of $11 ($493 versus the above $482) is related to
equipment transferred by Seller to the Malaysia Testing operation subsequent to the completion date
on July 1, 2004. Pro Forma Financial Information The unaudited financial information in the table below summarizes the combined results of the
operations of the Company and the new burn-in testing division in Malaysia for the three and nine
months ended March 31, 2004 as if the acquisition had occurred on July 1, 2003. The results from
operations for the three and nine months ended March 31, 2005 included the business acquisition
that was completed at the beginning of the first quarter of fiscal 2005. The pro forma financial information is presented for informational purposes only and is not
necessarily indicative of the results of operations that would have been achieved had the
acquisition taken place at the beginning of the three and nine months ended March 31, 2004. The
unaudited pro forma combined statement of operations for the three and nine months ended March 31,
2004 combines the historical results for the Company for three and nine months ended March 31, 2004
and the historical results for the new burn-in testing division for the period preceding the
acquisition on July 1, 2004. The following amounts are in thousands. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 HistoricalHistoricalHistorical
    
    
    information ofinformation of
    
    
    the acquired
    
    
    Proformathe Company
    
    
    business
    
    
    Adjustments
    
    
    ProformaNet sales
    
    $
    5,042
    
    
    $
    432
    
    
    $
    
    
    
    $
    5,474Net (loss) income
    
    $
    168
    
    
    $
    (12
    )
    
    $
    (24
    )(a)
    
    $
    132Basic earnings per share
    
    $
    0.06
    
    
    
    
    
    
    
    
    
    
    $
    0.05Diluted earnings per share
    
    $
    0.06
    
    
    
    
    
    
    
    
    
    
    $
    0.04Basic weighted average common
shares outstanding
    
    
    2,933
    
    
    
    
    
    
    
    
    
    
    
    2,933Diluted weighted average common
shares outstanding
    
    
    3,036
    
    
    
    
    
    
    
    
    
    
    
    3,036
 10




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##### Table of Contents



UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2004 HistoricalHistoricalHistorical
    
    
    information ofinformation of
    
    
    the acquired
    
    
    Proformathe Company
    
    
    business
    
    
    Adjustments
    
    
    ProformaNet sales
    
    $
    13,948
    
    
    $
    1,384
    
    
    $
    
    
    
    $
    15,332Net (loss) income
    
    $
    121
    
    
    $
    150
    
    
    $
    (72
    )(a)
    
    $
    199Basic earnings per share
    
    $
    0.04
    
    
    
    
    
    
    
    
    
    
    $
    0.07Diluted earnings per share
    
    $
    0.04
    
    
    
    
    
    
    
    
    
    
    $
    0.07Basic weighted average common
shares outstanding
    
    
    2,931
    
    
    
    
    
    
    
    
    
    
    
    2,931Diluted weighted average common
shares outstanding
    
    
    2,984
    
    
    
    
    
    
    
    
    
    
    
    2,984
   (a)
    
    Net earnings was adjusted for pro forma purposes to recognize the effect of the
amortization of the other intangible assets over its economic life of five years on a
straight-line method, assuming that the acquisition took place from July 1, 2003.  8.
    BUSINESS SEGMENTSThe Company operates principally in three industry segments, the testing service industry
(which performs structural and electronic tests of semiconductor devices), the designing and
manufacturing of equipment (which equipment tests the structural integrity of integrated circuits
and other products), and the distribution of various products from other manufacturers in Singapore
and Southeast Asia. The following net sales were based on customer location rather than subsidiary
location.The allocation of the cost of equipment, the current year investment in new equipment and
depreciation expense have been made on the basis of the primary purpose for which the equipment was
acquired.All inter-segment sales are sales from the Manufacturing Segment to the Testing and
Distribution Segment. Total inter-segment sales were $257 and $96 for the nine months ended
March 31, 2005 and 2004, respectively, and $220 and $62 for the three months ended March 31,
2005 and 2004, respectively. Corporate assets mainly consist of cash and prepaid expenses.
Corporate expenses mainly consist of salaries, insurance, professional expenses and
directors fees.The following segment information is unaudited and is in thousands: 11




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##### Table of Contents



Business Segment Information: Three Months
    
    
    
    
    
    
    Operating
    
    
    
    
    
    
    Depr.Ended
    
    
    Net
    
    
    Income
    
    
    Total
    
    
    and
    
    
    CapitalMar. 31,
    
    
    Sales
    
    
    (loss)
    
    
    Assets
    
    
    Amort.
    
    
    ExpendituresManufacturing
    
    FY 2005
    
    $
    2,245
    
    
    $
    (178
    )
    
    $
    2,092
    
    
    $
    16
    
    
    $
    22FY 2004
    
    $
    1,938
    
    
    $
    52
    
    
    $
    2,277
    
    
    $
    23
    
    
    $
    3Testing Services
    
    FY 2005
    
    $
    3,079
    
    
    $
    122
    
    
    $
    14,309
    
    
    $
    338
    
    
    $
    883FY 2004
    
    $
    2,244
    
    
    $
    68
    
    
    $
    14,385
    
    
    $
    246
    
    
    $
    58Distribution
    
    FY 2005
    
    $
    793
    
    
    $
    8
    
    
    $
    1,526
    
    
    $
    34
    
    
    $
    47FY 2004
    
    $
    860
    
    
    $
    (17
    )
    
    $
    579
    
    
    $
    33
    
    
    $
    63Corporate and
    
    FY 2005
    
    $
    
    
    
    $
    8
    
    
    $
    209
    
    
    $
    
    
    
    $
    unallocated
    
    FY 2004
    
    $
    
    
    
    $
    32
    
    
    $
    23
    
    
    $
    2
    
    
    $
    Total Company
    
    FY 2005
    
    $
    6,117
    
    
    $
    (40
    )
    
    $
    18,136
    
    
    $
    388
    
    
    $
    951FY 2004
    
    $
    5,042
    
    
    $
    135
    
    
    $
    17,264
    
    
    $
    304
    
    
    $
    124
 Business Segment Information: Nine Months
    
    
    
    
    
    
    Operating
    
    
    
    
    
    
    Depr.Ended
    
    
    Net
    
    
    Income
    
    
    Total
    
    
    and
    
    
    CapitalMar. 31,
    
    
    Sales
    
    
    (loss)
    
    
    Assets
    
    
    Amort.
    
    
    ExpendituresManufacturing
    
    FY 2005
    
    $
    8,648
    
    
    $
    (81
    )
    
    $
    2,092
    
    
    $
    50
    
    
    $
    75FY 2004
    
    $
    4,559
    
    
    $
    (225
    )
    
    $
    2,277
    
    
    $
    68
    
    
    $
    61Testing Services
    
    FY 2005
    
    $
    8,775
    
    
    $
    151
    
    
    $
    14,309
    
    
    $
    935
    
    
    $
    2,482FY 2004
    
    $
    6,877
    
    
    $
    282
    
    
    $
    14,385
    
    
    $
    720
    
    
    $
    647Distribution
    
    FY 2005
    
    $
    2,227
    
    
    $
    (83
    )
    
    $
    1,526
    
    
    $
    109
    
    
    $
    235FY 2004
    
    $
    2,512
    
    
    $
    21
    
    
    $
    579
    
    
    $
    92
    
    
    $
    148Corporate and
    
    FY 2005
    
    $
    
    
    
    $
    126
    
    
    $
    209
    
    
    $
    1
    
    
    $
    unallocated
    
    FY 2004
    
    $
    
    
    
    $
    (29
    )
    
    $
    23
    
    
    $
    5
    
    
    $
    Total Company
    
    FY 2005
    
    $
    19,650
    
    
    $
    113
    
    
    $
    18,136
    
    
    $
    1,095
    
    
    $
    2,792FY 2004
    
    $
    13,948
    
    
    $
    49
    
    
    $
    17,264
    
    
    $
    885
    
    
    $
    856
 12




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##### Table of Contents



Geographic Area Information: Elimin-Three Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ationsEnded
    
    
    United
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    
    TotalMar. 31,
    
    
    States
    
    
    Europe
    
    
    Singapore
    
    
    Thailand
    
    
    Malaysia
    
    
    Other
    
    
    CompanyNet sales to
    
    FY 2005
    
    $
    609
    
    
    
    719
    
    
    
    3,114
    
    
    
    474
    
    
    
    1,421
    
    
    
    (220
    )
    
    
    6,117customers
    
    FY 2004
    
    $
    1,547
    
    
    
    275
    
    
    
    2,453
    
    
    
    726
    
    
    
    103
    
    
    
    (62
    )
    
    
    5,042Operating
    
    FY 2005
    
    $
    (120
    )
    
    
    58
    
    
    
    8
    
    
    
    1
    
    
    
    4
    
    
    
    9
    
    
    
    (40
    )Income (loss)
    
    FY 2004
    
    $
    17
    
    
    
    66
    
    
    
    20
    
    
    
    6
    
    
    
    1
    
    
    
    25
    
    
    
    135Property, plant
    
    FY 2005
    
    $
    21
    
    
    
    352
    
    
    
    3,646
    
    
    
    978
    
    
    
    2,162
    
    
    
    
    
    
    
    7,159and equipment
    
    FY 2004
    
    $
    19
    
    
    
    401
    
    
    
    3,559
    
    
    
    1,008
    
    
    
    363
    
    
    
    (40
    )
    
    
    5,310
 Geographic Area Information: Elimin-Nine Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ationsEnded
    
    
    United
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    
    TotalMar. 31,
    
    
    States
    
    
    Europe
    
    
    Singapore
    
    
    Thailand
    
    
    Malaysia
    
    
    Other
    
    
    CompanyNet sales to
    
    FY 2005
    
    $
    1,815
    
    
    
    1,674
    
    
    
    9,197
    
    
    
    1,619
    
    
    
    5,602
    
    
    
    (257
    )
    
    
    19,650customers
    
    FY 2004
    
    $
    4,083
    
    
    
    864
    
    
    
    6,951
    
    
    
    1,877
    
    
    
    269
    
    
    
    (96
    )
    
    
    13,948Operating
    
    FY 2005
    
    $
    (203
    )
    
    
    (30
    )
    
    
    122
    
    
    
    22
    
    
    
    76
    
    
    
    126
    
    
    
    113Income (loss)
    
    FY 2004
    
    $
    (35
    )
    
    
    32
    
    
    
    77
    
    
    
    21
    
    
    
    3
    
    
    
    (49
    )
    
    
    49Property, plant
    
    FY 2005
    
    $
    21
    
    
    
    352
    
    
    
    3,646
    
    
    
    978
    
    
    
    2,162
    
    
    
    
    
    
    
    7,159and equipment
    
    FY 2004
    
    $
    19
    
    
    
    401
    
    
    
    3,559
    
    
    
    1,008
    
    
    
    363
    
    
    
    (40
    )
    
    
    5,310
 13




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##### Table of Contents



TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
 The discussions of Trio-Tech Internationals (the Company) business and activities set forth
in this Form 10-Q and in other past and future reports and announcements by the Company may contain
forward-looking statements within meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and assumptions regarding
future activities and results of operations of the Company. In light of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, the following factors, among
others, could cause actual results to differ materially from those reflected in any forward-looking
statement made by or on behalf of the Company: market acceptance of Company products and services;
changing business conditions or technologies and volatility in the semiconductor industry, which
could affect demand for the Companys products and services; the impact of competition; problems
with technology; product development schedules; delivery schedules; changes in military or
commercial testing specifications which could affect the market for the Companys products and
services; difficulties in profitably integrating acquired businesses, if any, into the Company;
risks associated with conducting business internationally and especially in Southeast Asia,
including currency fluctuations and devaluation, currency restrictions, local laws and
restrictions, and possible social, political and economic instability; and other economic,
financial and regulatory factors beyond the Companys control. See the discussions elsewhere in
this Form 10-Q for more information. In some cases, you can identify forward-looking statements by
the use of terminology such as may, will, expects, plans, anticipates, estimates,
potential, believes, can impact, continue, or the negative thereof or other comparable
terminology. We undertake no obligation to update forward-looking statements to reflect subsequent events,
changed circumstances, or the occurrence of unanticipated events. Overview Founded in 1958, Trio-Tech International provides third-party semiconductor testing and burn-in
services primarily through its laboratories in Southeast Asia. The Company operates in three
distinct segments: Distribution, Manufacturing, and Testing. At or from its facilities in
California and Southeast Asia, the Company also designs, manufactures and markets equipment and
systems used in the testing and production of semiconductors, and distributes semiconductor
processing and testing equipment manufactured by others. (i) Results of operations and business outlook The following table sets forth our revenue components for the nine and three months ended March 31,
2005 and 2004, respectively. Revenue Components Nine Months Ended (unaudited)
    
    
    Three Months Ended (unaudited)Mar 31,
    
    
    Mar 31,
    
    
    Mar 31,
    
    
    Mar 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Sales:Manufacturing
    
    
    44.01
    %
    
    
    32.69
    %
    
    
    36.70
    %
    
    
    38.43
    %Testing
    
    
    44.66
    
    
    
    49.31
    
    
    
    50.34
    
    
    
    44.52Distribution
    
    
    11.33
    
    
    
    18.00
    
    
    
    12.96
    
    
    
    17.05Total
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
 Geographically, we operate in the U.S., Singapore, Malaysia, Thailand and Ireland. Our customers
are mainly concentrated in Southeast Asia and they are either semiconductor chip manufacturers or
testing facilities that purchase our testing equipment. After a sudden surge in burn-in systems and boards in the Manufacturing segment in the first and
second quarters, the segment sales were almost at the same level as those for the Testing segment.
The Testing segment regained its position as our primary business in the third quarter. During the
nine months ended March 31, 2005, the sales in the Manufacturing segment, as a percentage of total
sales, increased by 11.3% to 44%, while Testing segment sales, as a percentage of total sales,
dropped by 4.6% from 49.3% in 2004 to 44.7% in 2005 and sales in the Distribution segment, as a
percentage of total sales, decreased by 6.7% to 11.3% in 2005. The Testing segment experienced an increase, as a percentage of total sales, in the three months
ended March 31, 2005 as compared to March 31, 2004 due to a variety of factors. The Testing
operation in Singapore experienced a change in product 14




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##### Table of Contents



mix. We experienced increased Testing sales in Southeast Asia since the newly acquired burn-in
division in Malaysia started operation at the beginning of the fiscal year. The Malaysia division
also set up a new plant in the same area to handle new projects coming in the next few quarters.
Also, the plant in Singapore previously used for the burn-in process of slower speed microprocessor
chips was converted to accommodate the new type of microprocessor chips. The semiconductor market
in Thailand has declined and the burn-in services for that operation were on the low end of
approximately $450 on the quarter to quarter comparison over the past two and a half years. Backlog
increased substantially from the Testing operations in Malaysia and Singapore by 82.5% to $8,103 as
of March 31, 2005, as compared to the $4,440 backlog as of March 31, 2004, due to the ramp up of
services for the increasingly popular new type of microprocessor chips. However, customers
continue to look for ways to reduce their costs, and we predict that the Malaysia division will
face pressure from clients to reduce prices for both existing and new products for testing
services. The Company allocated the purchase price of the newly acquired burn-in division in Malaysia to the
tangible assets and intangible assets acquired based on their estimated fair values. The fair value
assigned to intangible assets acquired was based on estimates and assumptions determined by the
management.
Other intangibles with finite lives are amortized on a straight-line basis over their respective
useful lives. The total purchase price was allocated as follows (in thousands): Total purchase price:Cash
    
    $
    823Notes payable
    
    
    395$
    1,218Allocated as follows:Fixed assetsPlant and machinery
    
    $
    711Production equipment
    
    
    13Office equipment
    
    
    5Leasehold improvement
    
    
    7736Intangible assets  customer relationship
    
    
    482$
    1,218
 The excess purchase price over the fair value of tangible assets acquired was attributed to the
customer relationship obtained from the above busines s acquisition and recorded as other
intangible assets. No goodwill is recognized in this context. The customer relationship intangible
will be amortized over its economic life based on the contract term as stated in the sales
agreement with the customer on a straight-line method over five years. As previously reported in the Form 10-K, the customer relationship intangible was $493. The
difference of $11 ($493 versus the above $482) was related to equipment transferred by Seller to
the Malaysia Testing operation subsequent to the completion date on July 1, 2004. The Manufacturing segment experienced an increase in sales of 89.7% in the first nine months of
fiscal 2005 as compared to the same period last year. The Manufacturing operation in Singapore
focused on back-end products such as burn -in boards and systems in Asia. Conversely, the capital
equipment spending on high-end test equipment in the U.S. continued to decline and delay due, we
believe, to the rise in inventories of most semiconductor manufacturers. Our U.S. Manufacturing
operation continued to focus on marketing used and refurbished equipment, since it is less
expensive than new equipment and thus in greater demand by our customers. The backlog in the
Manufacturing segment as of March 31, 2005 dropped by $91 to $1,769 as of March 31, 2005, as
compared to the backlog as of March 31, 2004, as more backlog was converted to actual sales and
shipped out, resulting in higher sales and less backlog. The Singapore Manufacturing operation
expects a decline in sales in the fourth quarter due to the cyclical effect in the semiconductor
industry and aggressive orders during the first half of the fiscal year. The backlog for the Distribution segment increased by 62% to $972 as of March 31, 2005, as compared
to $599 as of March 31, 2004 as our Singapore Distribution operation closed orders on Vibration
equipment and Test Chambers during the third quarter. In addition, non-semiconductor customers in
Asia spent more on capital equipment. The expanded Distribution operation in Singapore procured
distribution rights from a manufacturer in Asia to sell a range of electronic components, such as
sockets and connectors. One of the Singapore Distribution operations will focus on selling Wet
Process Stations primarily to research institutions and local universities. In addition, this
operation will continue to work on new products to expand into the PCBA manufacturing industry and
semiconductors dealing in microelectronics, with customers mainly in Asian countries. 15




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##### Table of Contents



The Companys key performance indicators are based on market demand. Sales activities such as
bookings, queries on products and backlog also formed part of our performance indicators, as well
as customers forecasts and the financial results of customers and competitors. Another performance
indicator is based on the data in the Worldwide Semiconductor Equipment Market Statistics (SEMS)
Report. According to the SEMS Report, worldwide manufacturing equipment sales totaled $37.1 billion
in 2004, representing a year-over-year increase of 67.1%. Japan, the largest world market, grew
about 49%, followed by the Taiwan market region with a growth of 166.8%, while North America sales
increased by 23% as compared to 2004. In spite of this, SEMS reports that the recovery in the North
American market remains slow. The Company believes the current market trend indicates that the semiconductor industry in Asia is
still on the upswing. According to the SEMS Report, a communication revolution will drive the
Semiconductor industry to new heights. There was a demand in microprocessors, which will be used in
broadband, cell phones and PCs. Cost conscious consumer spending translates to more price pressure
through the supply chain, which means efficiency and productivity are of utmost importance.
Moreover, high-end testing equipment spending remains slow in the U.S. due to high oil prices and
continued concern with the ongoing instability in the Middle East. Therefore, many U.S.
semiconductor companies plan to postpone high-end capital purchases until inventories are reduced
and the semiconductor industry improves. There are several influencing factors which create uncertainties when forecasting performance, such
as the ever-changing nature of technology, specific requirements from the customer, decline in
demand for certain types of burn-in devices or equipment, and other similar factors. An additional
factor is the highly competitive nature of the semiconductor industry itself. Another is that the
life-cycles of certain types of burn-in products are falling quicker than expected. Customers
continue to exert pressure to cut selling prices. While one of the Singapore Distribution
operations bid for high technology products, it is unable to proceed due to the complicated
specifications required by the potential customers. As a result, the Company has taken action to
help protect itself from these uncertainties by, among other things, upgrading and improving its
burn-in technology so as to gain customers confidence and maintain market shares. Additionally,
we are always looking for alternatives to burn-in and exploring new markets, as we have with the
Distribution segment. The Company continues to cut costs, especially material costs, and maintain
a lean headcount. (ii) Financial information During the nine months ended March 31, 2005, total assets increased by $136 from $18,000 at June
30, 2004 to $18,136. The majority of the increase was in trade receivables, property, plant and
equipment, and other intangible assets, but offset with a decrease in cash and short
term deposits of $108 and $2,306, respectively. The increase in accounts receivable from $3,695 at June 30, 2004 to $3,871 at March 31, 2005 was
mainly attributable to the higher sales for the Manufacturing and Testing segments in Southeast
Asia during the first nine months of fiscal 2005 as compared to the first nine months of fiscal
2004, combined with more efficient collections. Sales for all operations for the nine months ended
March 31, 2005 were $19,650, which increased by 40.9% as compared to the sales for the nine months
ended March 31, 2004. At the same time, the operations in Southeast Asia improved their efficiency
in collection, and the Malaysia operation placed more focus in collection of long overdue debts.
The collection period for the Company was shortened from an average of 71 days at June 30, 2004 to
an average of 53 days at March 31, 2005. Property, plant and equipment increased substantially by $1,957 from $5,202 at June 30, 2004 to
$7,159 at March 31, 2005 mainly due to the acquisition of fixed assets by the Testing segment in
Southeast Asia. During the nine months ended March 31, 2005 the additions to property, plant and
equipment totaled $2,792, of which $365 was paid as a deposit before June 30, 2004, but the
renovation was completed and the equipment was received in the first quarter of fiscal 2005. $736
of the additions were due to acquisition of fixed assets located in the new burn-in operation in
Malaysia and $742 related to the purchases of new plant and machinery in Malaysia to meet the new
customers requirements. In addition, we converted three of the existing facilities in the
Singapore Testing operation to be able to handle the burn-in process of the new type of
microprocessor chips to improve cost effectiveness, and hence incurred $755 for the upgrading
of facilities. Other fixed asset purchases included office equipment and machinery by the Singapore
and Thailand operations. The Company recognized $482 as of July 1, 2004 in other intangible assets for the customer
relationship intangible which will be amortized over five years. The amortized expenses of the
customer relationship intangible incurred were $71 for the nine months ended March 31, 2005.
Consequently, the balance of the customer relationship intangible amounted to $411 at March 31,
2005. Other assets decreased by $43
at March 31, 2005 from $485 at June 30, 2004 due to the
capitalization of property, plant and equipment of $92, previously placed
as a deposit for the Malaysia operation, which was offset with a
deposit placed for additional rental of factory and utilities in the Malaysia operation. The drop in cash and short term deposits, which decreased by $2,414 from
$7,006 at June 30, 2004 to
$4,592 at March 31, 2005, was due to several reasons. The total acquisition costs of the burn-in
operation in Malaysia, which amounted to $1,218, 16




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were fully paid by March 31, 2005 through internal
funding. In addition, more plant and machinery, in the amount of $463, were purchased to meet our
new customers requirements; $88 was placed as a deposit for the rental of the factory and
utilities with the landlord and utilities vendor respectively in the Malaysia operation as
mentioned earlier. The existing Malaysia operation paid out dividends of $54 to its minority
interest, which was declared out of reserves for the year ended June 30, 2004. There was a payment
of annual wages, salaries and performance incentives of $218 during the first nine months of fiscal
2005 in the Singapore and Malaysia operations. The Company also made
payments of $115 for the 2004 year-end audit during the nine months
ended March 31, 2005. In addition, the Singapore and Ireland operations paid taxes of
$78 and $23, respectively, during the nine months ended March 31,
2005 which were offset by a tax refund of $115 in the Singapore and
Malaysia operations after the tax assessment for prior years had
been finalized. Total liabilities as of March 31, 2005 were $6,692, reflecting a $174 decrease in total liabilities
from $6,866 at June 30, 2004. Accounts payable at March 31, 2005 decreased by $816 since June 30,
2004 due mainly to fewer materials purchased in the Singapore Manufacturing operation as the
inventories, which were previously stocked up, will be sufficient for usage in the next quarter.
This offset the higher finished goods and raw materials of $576 purchased by the Singapore
Distribution operation and fixed assets purchase of $71 by the Malaysia and Thailand operations
towards the end of the third quarter. The decrease in accounts payable was offset by the increase in accrued expenses and notes payable.
Accrued expenses increased by $526 mainly attributable to the Singapore, Malaysia and U.S.
operations. In the Singapore operation, there was a higher provision for warranty of $93 due to
higher equipment sales and commissions of $41 for a greater number of commissionable sales; final
payment for fixed assets of $143; higher sales tax of $62; offset with lower accrued utilities of
$51 at March 31, 2005. In the Malaysia operation, there was an increase in accrual of payroll for
contract workers of $107, performance incentives of $12 for employees who previously worked for the
Seller of the burn-in operation, and payroll related costs of $10 and higher accrued utilities of
$22 at March 31, 2005. The Malaysia operation also incurred higher audit fees of $15 for SEC
disclosure purposes. In addition, a sales tax of $33 at March 31, 2005 incurred by the previous
Universal System was absorbed by Corporate as the operation became dormant. Notes payable, offset with lower capitalized leases, increased by $46, due to high borrowings of
$683 offset with net payments of $637 during the nine months ended March 31, 2005. As of March 31, 2005, total liabilities (excluding minority interest) were 71.2% of total capital,
compared with 76.1% at June 30, 2004. Total liabilities as a percentage of total capital were lower
in fiscal 2005 mainly due to lower accounts payable as mentioned earlier. Comparison of Third Quarter Ended March 31, 2005 (2005) and March 31, 2004 (2004) The following table sets forth certain consolidated statements of income data as a percentage of
net sales for the third quarters in fiscal 2005 and 2004, respectively: Q3 2005
    
    
    Q3 2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    76.0
    %
    
    
    76.2
    %Gross Margin
    
    
    24.0
    %
    
    
    23.8
    %Operating ExpensesGeneral and administrative
    
    
    18.8
    %
    
    
    19.1
    %Selling
    
    
    5.5
    %
    
    
    2.7
    %Research and development
    
    
    0.4
    %
    
    
    0.6
    %Impairment Loss
    
    
    0.0
    %
    
    
    0.0
    %(Gain) Loss on disposal of PP&E
    
    
    0.0
    %
    
    
    -1.2
    %Total Operating Expenses
    
    
    24.7
    %
    
    
    21.1
    %Income from operations
    
    
    -0.7
    %
    
    
    2.7
    %
 Overall Net Sales and Gross Margin Overall sales for the Company increased $1,075, an increase of 21.3%, from Q3 2004 to Q3 2005. The
increase was attributable primarily to higher sales in the Testing and Manufacturing segments,
offset by lower sales in the Distribution segment. The sales increase in the first two segments
was mostly due to the ramp up of burn-in services for the new type of microprocessor chips in
Singapore and additional sales from the newly acquired testing operation in Malaysia. The overall 17




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gross margin remained constant in spite of a change in sales mix. A surge in demand for low margin
burn-in boards in the Manufacturing segment lowered the group margin, but this was compensated for
by an increased gross margin in the Testing and Distribution segments. Manufacturing Segment The revenue and gross margin for the Manufacturing Segment for the third quarters of 2005 and 2004
were as follows: (In Thousands, unaudited)
    
    Q3 2005
    
    
    Q3 2004Revenue
    
    $
    2,245
    
    
    $
    1,938Gross margin
    
    
    13.2
    %
    
    
    21.7
    %
 There were mixed signals in demand for computers and consumer products in the various regions, but
overall the Manufacturing segment experienced an increase of $307, or 15.8%, in sales from Q3 2004
to Q3 2005. We believe the improvement was due in part to a 160% increase in sales of burn-in
boards with a 46.7% increase in the selling price. Demand for this product derived primarily from
customers in Asia we have pursued for some time. There was also increased demand for electronic
components in the market led by some of our electronic device manufacturing customers, including
the new ones, in order to increase their capacity in the third quarter. However, this increase in sales was offset by a decrease in sales of HAST Systems by $105, as none
were sold in 2005, and an $81 decrease in sales of Environmental Test Equipment, a 25% drop in
quantity sold with a 52.4% drop in price. We believe this was a result of continued slow capital
spending on high-end test equipment in the U.S. due to high oil prices and ongoing instability in
the Middle East. The oversupply of inventories also forced semiconductor companies to push back
any plans to purchase capital equipment. Wet Process Stations sales fell by $429, as none were
sold in Q3 2005. One Wet Process Station was delivered at the end of March 2005, but the Company
was unable to recognize the sale, as we had not yet met the requirements of SAB101 revenue
recognition. As demand for Wet Process Stations in the U.S. market has remained slow, the Company
plans to focus its attention on marketing in Asia to new customers. In spite of the 15.8% rise in overall sales in the Manufacturing segment, the gross margin dropped
by 8.5%. The primary reason for this was the weak margin for burn-in boards. However, management
wishes to continue to manufacture this product in order to maintain market share. Additionally,
the Company shifted focus to Wet Process Stations in Asia due to a weak market in the U.S. Testing Segment The revenue and gross margin for the Testing Segment for the third quarters of 2005 and 2004 were
as follows: (In Thousands, unaudited)
    
    Q3 2005
    
    
    Q3 2004Revenue
    
    $
    3,079
    
    
    $
    2,244Gross margin
    
    
    30.6
    %
    
    
    28.7
    %
 Sales in the Testing segment increased by $835, or 37.2%, from the third quarter of 2004 to the
third quarter of 2005, mainly due to the increasingly popular type of burn-in services for the new
microprocessor chips in the Singapore Testing operation. This was offset by the drop in demand for
services of another type of microprocessor chip. Net sales in the Singapore Testing operation rose
by approximately $310. Another source of the increase in sales in the Testing segment was our
newly acquired burn-in division in Malaysia, which contributed to approximately $500 in sales of
dynamic burn-in. The gross margin increased by 1.9% in the Testing segment. The existing plants in the Singapore
Testing operation, which were previously used for the burn-in services of a slower speed
microprocessor chip, were converted to service the increasingly popular type of microprocessor
chips. Economy of scale was achieved in the Singapore Testing operation when no additional rent
was incurred and the operation saved by incurring minimal upgrading and depreciation costs rather
than renovating the entire plant, which would have cost more. In addition, the margin in the
Thailand Testing operation improved by 8% from 20% in Q3 2004 to 28% in Q3 2005 due to a change in
product mix, hence there were lower sales of low-margin products and higher sales of high-margin
products. Distribution Segment The revenue and gross margin for the Distribution Segment for the third quarters of 2005 and 2004
were as follows: 18




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##### Table of Contents



(In Thousands, unaudited)
    
    Q3 2005
    
    
    Q3 2004Revenue
    
    $
    793
    
    
    $
    860Gross margin
    
    
    29.2
    %
    
    
    15.7
    %
 Sales in the Distribution segment declined by $67 from Q3 2004 to Q3 2005, a difference of 7.8%.
This decline was partly due to the drop of $415 in sales of low margin front-end products, a
decrease of 28.9% in quantity sold and 41.4% in selling price due to declining customer demand.
Additionally, sales of spare parts and services dipped by $16. However, the overall decline was
offset by an increase in demand for Reflow Ovens and Test Chambers, which saw elevated sales of
$343 as six were sold in Q3 2005 at an average unit selling price of $63 while only two were sold
in Q3 2004 at an average unit selling price of $16. Surprisingly, the demand for these products
derived primarily from customers in non-semiconductor industries. With the substantial percentage
increase in quantity and average unit selling price for this equipment, it pulled up Distribution
sales. Concurrently, the semiconductor industry in Asia started slowly to recover, and with past
marketing efforts from the Distribution operations, the Company closed some orders for Vibration
equipment and Test Chambers during this quarter. In spite of a decrease in sales, the gross margin in the Distribution segment almost doubled due to
an improvement in the average unit selling price of Test Chambers and Reflow Ovens, combined with a
decrease in unit volume of low-margin products. As certain customers had various specifications on
the Test Chambers and Reflow Ovens, we were able to quote a higher average unit selling price. Sales by geographical area Geographically, net sales into and within the United States region during Q3 2005 decreased by 61%
compared to Q3 2004. This occurred after the Manufacturing operation in San Jose moved to Singapore
and the Company focused more on capturing the promising Asian market instead. The sales from
Universal Systems contributed to half of the total decline in sales within the U.S and sales of
HAST System and Environmental Test Equipment in the U.S. operations declined due to the rise in
inventories and a decrease in equipment spending in this region. Net sales into and within the Southeast Asia region increased by 52.6% as compared to Q3 2004,
mainly derived from customers in Asia we have pursued for sometime. The increase in demand for
burn-in boards mainly came from our electronic device manufacturing customers. In addition, the
recovery of the consumer and electronic markets in the Asia region boosted the sales for the
Testing and Distribution operations in this area. Sales generated from the new testing operation in
Malaysia contributed to this increase as well. Net sales into and within Ireland and other countries increased by 162.2% as compared to Q3 2004.
This was due to the increase in distribution of equipment and higher programming services in the
Ireland operation. In addition, there were higher sales into other countries, derived mainly from
the Singapore Distribution operation, which sold more equipment and peripherals to Japan, Taiwan
and India. Operating Expenses The operating expenses for the third quarters of 2005 and 2004 were as follow: (In Thousands, unaudited)
    
    Q3 2005
    
    
    Q3 2004General and administrative
    
    $
    1,150
    
    
    $
    962Selling
    
    $
    339
    
    
    $
    135Research and development
    
    $
    20
    
    
    $
    29(Gain) loss on disposal of PP&E
    
    $
    
    
    
    $
    (62
    )$
    1,509
    
    
    $
    1,064
 As a percentage of sales, operating expenses increased by 3.6% from 21.1% in Q3 2004 to 24.7% in Q3
2005. This was mainly attributable to an increase in selling expenses in the Distribution
operations in Southeast Asia, which will be explained later. In addition, there was a gain on
disposal of assets of $62 in Q3 2004, whereas there was none in Q3 2005. As a percentage of sales, general and administrative expenses decreased by 0.3%, to 18.8% in Q3
2005. However, expenses in this area did increase in terms of dollar value by $188 due to several
factors. First, salaries increased in Southeast Asia by $67 due to the new Testing operation in
Malaysia and higher headcount for the Singapore cost center to support the operations in Southeast
Asia. Second, bonuses of $74 were paid out during Q3 2005 due to the Singapore operations
exceptional performance, whereas there was a reversal of bonuses of $43 in Q3 2004 as the
performance of the operation was below the bonus criteria. Similarly, in Q3 2004 there was a
reversal of bonuses of $11 in the U.S. operation for the same reason. A provision for interim
audit fees of $5 in Corporate also contributed to the increase in Q3 2005, whereas there was no
such 19




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##### Table of Contents



provision in Q3 2004. The provision for doubtful debts in the Singapore Manufacturing
operation in Q3 2005 was $26 due to a long overdue debt from a customer, and none in the same
quarter last year. There was a higher depreciation of $23 incurred for office equipment and
fittings in the Singapore and Malaysia operations. Another $23 was incurred as a result of an
increase in amortization costs for customer relation intangibles in the new Malaysia operation.
Operating expenses such as printing and stationary, insurance, upkeep of office and non-capitalized
assets increased by $18 in the Malaysia operation and $5 in one of U.S operations. Higher bank
charges of $9 were generated in the Singapore
operation for the renewal of a bank guarantee, while sales tax of $33 was accrued by the previous
operation in the U.S. Finally, there was an increase in miscellaneous costs of $9 compared to the
same quarter last year. Offsetting all this was a savings of $51 derived from relocating the
operation in San Jose to Singapore, as we were able to save on salaries, equipment rental, rent,
insurance, and professional and audit fees. Also, there was a reduction in Corporate officers
bonuses by $9 as the group performance did not meet bonus criteria, whereas bonuses of $11 were
paid out in Q3 2004. As a percentage of sales, selling expenses increased from 2.7% in 2004 to 5.5% in 2005, a
difference of $204. This was mainly attributable to the Singapore operation where there was an
increase in headcount in Distribution due to expansion, which increased salaries by $21, as well as
higher provision for warranty costs of $34 and commission fees of $65 in both the U.S.
Manufacturing and Singapore Distribution operations due to higher equipment sales. Additionally,
there was commission income of $55 received in Q3 2004 for being an agent, and none in Q3 2005.
Traveling expenses went up by $8 in Singapore in order to oversee the new operation in Malaysia.
Advertising costs went up by $19 to procure new customers and miscellaneous costs increased by $9.
All this was offset by a savings of $8 on rental and utilities when the San Jose operation
relocated to Singapore. Research and development expenses decreased by $9 due to lower sales queries and bookings for Artic
Temperature Controlled Chucks. Income (loss) from operations The income (loss) from operations for the third quarters of 2005 and 2004 were as follow: (In Thousands, unaudited)
    
    Q3 2005
    
    
    Q3 2004Manufacturing Segment
    
    $
    (178
    )
    
    $
    52Testing Segment
    
    $
    122
    
    
    $
    68Distribution Segment
    
    $
    8
    
    
    $
    (17
    )Corporate
    
    $
    8
    
    
    $
    32$
    (40
    )
    
    $
    135
 The Company incurred an operating loss of $40 in Q3 2005 compared to Q3 2004. The deterioration in
results was mainly attributable to the Manufacturing segment. The Manufacturing segment saw a loss of $230 in Q3 2005 compared to Q3 2004. Though sales
increased by 15.8% in this period compared to the same period last year, the impact on the income
from operation was minimal due to the change in product mix, as mentioned earlier. Hence, the bulk
of the increased sales of low-margin burn-in boards was not significant enough to impact the
margin. In terms of dollar value, the gross margin dropped by $124 as compared to Q3 2004. The
low gross margin of 13.2% was not enough to cover the fixed and semi-fixed costs such as salaries,
rental, depreciation, insurance and others, as well as $83 in additional operating expenses such as
provision of warranty, salaries for higher headcount, bonus provision for good performance and
advertising costs. These costs, however, were in line with the increase in sales. In addition,
there was a provision for doubtful debts of $23 for an outstanding debt. The income from operation in Corporate dropped by $24 to $8 in Q3 2005. There was a provision of
audit interim fees of $5, whereas there was none in Q3 2004. Sales tax of $33 incurred by the
previous Universal Systems operation was absorbed by Corporate as the operation became dormant.
This was offset by a lower provision of bonuses of $20 for the Corporate officers compared to Q3
2004. Also, the Corporate office attempts to reimburse its operating expenses by imposing a fee on
all subsidiaries on a fixed percentage of total revenue, and the sudden surge in sales in Singapore
Manufacturing contributed to a recovery of expenses. However, these factors were not enough to
recover the losses incurred in this division. The Testing segment experienced a gain from operations of $54 in Q3 2005 over Q3 2004. This
improvement was due to the increase in gross margin from 28.7% in Q3 2004 to 30.6% in the same
period this year, which was mostly contributed from the Testing operations in Singapore and
Thailand, as previously mentioned. While the bulk of the sales increase derived from Singapore,
its operating expenses did not increase at the same pace. The Singapore Testing operation
maintained the same number of engineers and managers as the same quarter a year ago and still
managed to cope with the surge in sales in Q3 2005. 20




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##### Table of Contents



The Distribution segment saw a gain in operations of $25 over Q3 2004. This improvement was
attributable to the Singapore Distribution operation. The margin for certain equipment improved
due to the increase in average unit selling price and quantity and the other factors previously
mentioned. Additionally, the increase in gross margin was substantial enough to cover the increase
in costs such as commissions and salaries due to greater headcount, a total of approximately $132,
and resulted in a profit of $8 in Q3 2005. Interest Expense The interest expenses for the third quarters of 2005 and 2004 were as follow: (In Thousands, unaudited)
    
    Q3 2005
    
    
    Q3 2004Interest expense
    
    $
    (45
    )
    
    $
    (29
    )
 The increase in interest expense of $16 from Q3 2004 to Q3 2005 was mainly due to the usage of
accounts receivables financing in Singapore, incurring higher interest expenses of $21. This was
slightly offset by the decrease in capitalized lease interest of $3 and term loan interest of $2. Other Income Other income for the third quarters of 2005 and 2004 were as follow: (In Thousands, unaudited)
    
    Q3 2005
    
    
    Q3 2004Other income
    
    $
    85
    
    
    $
    67
 Other income increased by $18 from Q3 2004 to Q3 2005 due to bad debts of $24 which were recovered
in the Thailand operation, whereas none were recovered in Q3 2004. This was slightly offset by a
decrease in interest income of $5 and miscellaneous income of $1. Income Tax The Company was in a tax refundable position of $26 for the three months ended March 31, 2005, as
compared to the income tax provision of $7 in the third quarter of 2004, which was due mainly to
the recoverable tax of $47 for the tax period in 2000 and 2002 in
Malaysia. In contrast, there was
a provision for tax of $21 from one of the Singapore operations in Q3 2005 due to the higher profit of $108
generated in the third quarter of fiscal 2005 as compared to $44 in the third quarter of fiscal
2004. Net Income As a result of all of the factors analyzed above, the net income attributable to common shares for
the third quarter ended March 31, 2005 was approximately $22, which represented a decline of $146
from a net income of approximately $168 attributable to common shares for the third quarter ended
March 31, 2004. Consequently, basic earnings per share for the third quarter ended March 31, 2005
decreased by $0.05 from earnings per share of $0.06 in 2004 to $0.01 per share in 2005. Diluted
income per share for the third quarter ended March 31, 2005 was $0.01, which decreased by $0.05
from $0.06 per share for the third quarter ended March 31, 2004. Year to Date Comparison of the Nine Months Ended March 31, 2005 (2005) to the Nine Months
Ended March 31, 2004 (2004) The following table sets forth certain consolidated statement of income data as a percentage of net
sales for the nine months of fiscal years 2005 and 2004, respectively: 21




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##### Table of Contents



YTD 2005
    
    
    YTD 2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    76.1
    %
    
    
    74.6
    %Gross Margin
    
    
    23.9
    %
    
    
    25.4
    %Operating ExpensesGeneral and administrative
    
    
    18.4
    %
    
    
    20.9
    %Selling
    
    
    4.5
    %
    
    
    4.0
    %Research and development
    
    
    0.4
    %
    
    
    0.6
    %(Gain) Loss on disposal of PP&E
    
    
    0.0
    %
    
    
    -0.4
    %Total Operating Expenses
    
    
    23.3
    %
    
    
    25.1
    %Income from operations
    
    
    0.6
    %
    
    
    0.3
    %
 Overall Net Sales and Gross Margin Overall sales for 2005 increased by 40.9% compared to 2004, a variance of $5,702. The increase in
sales came primarily from the Manufacturing and Testing segments, offset with lower sales in the
Distribution segment. The overall sales increase mainly resulted from the sudden surge in the
Manufacturing segments sales volume of burn-in systems and boards. The Testing segment sales
increase was attributable to the ramp up of burn-in services for the new type of microprocessor
chips in Singapore and additional sales from the newly acquired testing operation in Malaysia.
These were offset by the decrease in sales volume for low margin products in the Distribution
segment due to fewer shipments. The gross margin fell 1.5% from 2004 to 2005. It was negatively
impacted by the Manufacturing segment, where sales of low margin burn-in boards and systems caused
the group margin to slide slightly. The decline in gross margin from Manufacturing was partially
offset by the increased margin from the Testing and Distribution segments due to several factors
which will be later explained. Manufacturing Segment The revenue and gross margin for the Manufacturing segment for the first three quarters of 2005 and
2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Revenue
    
    $
    8,648
    
    
    $
    4,559Gross margin
    
    
    16.2
    %
    
    
    19.8
    %
 Sales in the Manufacturing segment increased by 89.7%, an improvement of $4,089 from 2004 to 2005.
The first nine months of 2005 evidenced a conflicting demand for computers and consumer electronics
products in different regions. The PC market showed evidence of expansion in Asia with high demand
for electronic components, and the increase in sales of burn-in boards derived mainly from
customers in this region we had been pursuing for some time. Sales of burn-in boards increased by
$1,042 in 2005 compared to 2004, with a 109.2% increase in quantity sold and 9.9% drop in selling
price. Burn-in systems experienced a similar spike in sales with a sales increase of $4,196 over
the previous year, a 291.9% increase in quantity sold and an 83.5% increase in average unit selling
price. Certain customers of ours who are electronic device manufacturers increased their capital
equipment in order to meet an increase in production capacity. However, these factors were offset
by lower sales of Artic Temperature Controlled Chucks, which experienced a $77 drop in sales, a
62.5% decline in quantity sold and a 54.5% rise in average unit selling price, and Environmental
Test Equipment, which experienced a $74 drop in sales, a 13% decline in quantity sold and a 30.8%
decline in average unit selling price, due to the fact that capital spending on high-end test
equipment in the U.S. remained slow due to high oil prices and ongoing instability in the Middle
East. We believe an oversupply of inventories also forced semiconductor companies to push back any
plans to purchase capital equipment. Furthermore, Wet Process Station sales dropped by $1,003 from
2004 to 2005, as none sold in 2005. Therefore, the Company plans to focus marketing Wet Process
Stations to research institutions and local universities in Asia, though it will require some time
to establish a presence in the Asian market. Additionally, one Wet Process Station was delivered
at the end of March 2005, but the Company was unable to recognize the sale as we had not yet met
the SAB101 requirements on revenue recognition. The gross margin in the Manufacturing segment decreased by 3.6% in spite of sales almost doubling
compared to 2004. Though the sales of burn-in systems with a better margin almost doubled compared
to last year, it was insufficient to pull up the overall margin as sales of lower margin burn-in
boards were much more significant. However, management wishes to continue to manufacture this
product in order to maintain market share. Furthermore, sales in the U.S. operation dropped by
71% from $2,370 in 2004 to $688 in 2005. However, cost of sales, which include fixed and
semi-fixed expenses, did not 22




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decrease correspondingly, as the operation was already operating at
minimal cost. Additionally, the Company shifted focus on the marketing of Wet Process Stations to
Asia due to a weak market in the U.S. for high-end test equipment. Testing Segment The revenue and gross margin for the Testing segment for the first three quarters of 2005 and 2004
were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Revenue
    
    $
    8,775
    
    
    $
    6,877Gross margin
    
    
    31.1
    %
    
    
    30.7
    %
 Sales in the Testing segment increased by $1,898 from 2004 to 2005, an improvement of 27.6%. This
increase in sales mainly derived from the newly acquired burn-in operation in Malaysia. This
operation contributed approximately $1,459 to burn-in services, whereas it was inactive at this
period last year. The increased demand for burn-in services for the new type of microprocessor
chips, which helped increase sales by $424 compared to 2004, was countered by the fall in services
for another type of microprocessor chip. Despite the changes in sales mix, the overall margin for the Testing segment increased marginally
by 0.4% as compared to this same period in 2004. The Testing operation in Singapore avoided
incurring additional rental cost for the burn-in service for the new microprocessor chips by
upgrading the existing facilities, and the operation saved in terms of minimal upgrading and
depreciation costs rather than incurring the more significant costs of renovating the entire plant.
These factors were offset with slightly higher utilities costs as a percentage of sales, which
increased from 19.7% in the first nine months of 2004 to 20.5% in the first
nine months of 2005 due to the Singapore Testing operations higher utilities consumption for the
burn-in services for the new chips. Distribution Segment The revenue and gross margin for the Distribution segment for the first three quarters of 2005 and
2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Revenue
    
    $
    2,227
    
    
    $
    2,512Gross margin
    
    
    25.1
    %
    
    
    21.1
    %
 Sales in the Distribution segment decreased from 2004 to 2005 by $285, sliding by 11.3%. This
decline mainly derived from decreased sales of low margin front-end products due to falling
customer demand for these products. Sales for these products dropped $740 from 2004 to 2005, a 24%
fall in quantity sold and a 26.3% fall in selling price. Sales of parts and services also dipped
in 2005 by $67 from 2004. Test Chambers, Reflow Ovens and other products sales rose by $532 from
2004 to 2005, as ten were sold in 2004 while twenty were sold in 2005, and a minimal decrease of
2.1% in selling price. Customers in non-semiconductor industries were primarily responsible for
the hike in demand for Test Chambers and Reflow Ovens. The substantial percentage increase in
quantity for this equipment did much to pull up Distribution sales. At the same time, the
Semiconductor industry in Asia began to slowly recover, and with past marketing efforts in our
Distribution operations, we closed orders on Vibration equipment and Test Chambers during the third
quarter. The gross margin in the Distribution segment improved by 4% in 2005 as compared to 2004, as there
was a change of product mix. Though sales of low margin products and spare parts dropped
significantly, this did not have a huge impact on the overall margin. The higher margin this
period derived mainly from the heavier sales of high-margin products such as Test Chambers, Reflow
ovens and other products due to greater demand, as mentioned earlier, and a decrease in unit volume
of low margin products. Sales by geographical area Net sales into and within the United States region decreased by slightly more than half in 2005 as
compared to 2004. This occurred after the Manufacturing segment in San Jose, California moved to
Singapore while the Company focused more of its efforts on capturing the more lucrative Asian
market instead. Lack of sales from this operation contributed to 60% of the total decline in sales
in the U.S., with sales of Artic Temperature Controlled Chucks dropping off due to the rise in
inventories and the continued decline in high-end test equipment spending in the U.S. The slide in
low margin product sales of $740, mentioned earlier, also contributed to the decline in sales in
this region. Net sales into and within Southeast Asia increased by 80.5% from 2004 to 2005, primarily from
customers in Asia the Company had been actively pursuing for some time. In addition, some of our
customers, who are electronic device manufacturers, increased their capital equipment in order to
meet expanded production capacity. Hence, these factors led to a substantial boost 23




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in sales for
burn-in boards and systems, coupled with the recovery of the consumer and electronics market for
the Testing and Distribution operations in the Asian area. Sales generated from the new Testing
operation in Malaysia also contributed to this increase in sales in the Southeast Asia region. Net sales into and within Ireland and other countries doubled in comparison to 2004 due to an
increase in Distribution of equipment and programming services in the Ireland operation. In
addition, Singapore Distribution sold more equipment and peripherals to Japan, Taiwan and India. Operating Expenses The Companys overall operating expenses for the first three quarters of 2005 and 2004 were as
follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004General and administrative
    
    $
    3,613
    
    
    $
    2,915Selling
    
    $
    889
    
    
    $
    552Research and development
    
    $
    77
    
    
    $
    88(Gain) loss on disposal of PP&E
    
    $
    
    
    
    $
    (58
    )$
    4,579
    
    
    $
    3,497
 As a percentage of sales, operating expenses decreased by 1.8% from 25.1% in 2004 to 23.3% in 2005.
This was mainly attributable to a decrease in general and administrative expenses in the
Manufacturing segment as a percentage of sales. Furthermore, there was a gain on disposable assets
of $58 in 2004, whereas there was none in 2005. As a percentage of sales, general and administrative expenses decreased by 2.5% from 20.9% in 2004
to 18.4% in 2005. This was mainly due to the sudden surge in sales of burn-in boards and systems
in the Manufacturing segment, without a corresponding increase in expenses. On the other hand,
general and administrative expenses increased in dollar value by $698 from 2004 to 2005 due to a
number of contributing factors. Salaries increased in Southeast Asia by $155 as the new Testing
operation in Malaysia ramped up, and also as a result of higher headcount in the Singapore cost
center to support the operations in this region. Professional fees increased by $29 in Singapore
for an ISO audit and the outsourcing of accounting services. $18 was incurred to engage a
consultant to work on SOX 404 compliance, and legal fees of $17 were incurred for the audit of the
newly acquired testing operation for SEC disclosure purposes. A higher provision for doubtful
debts in the Southeast Asia Testing and Manufacturing operations occurred in the amount of $55 as
the result of nonpayment by a customer on earlier debts. Amortization costs increased by $69 for
the customer relation intangible deriving from the new operation in Malaysia. There was a reversal
of bonus in the amount of $41 in the U.S. operation in 2004, whereas there was none in 2005. In
2005, bonuses in the amount of $150 were paid out in the Singapore Testing and Manufacturing
operations due to better performance, whereas in 2004 there was a reversal of bonuses of $43 in the
same operations due to performance below that of the bonus criteria. In addition, a provision for
productivity funds in the amount of $32 was reversed in 2004 due to cancellation of the Companys
annual dinner, while a provision of $68 was made in 2005. Higher operating costs such as printing
and stationary, insurance, upkeep of office and non-capitalized assets of $94 were incurred in the
Malaysia operation and $5 in one of the U.S. operations. In the new Malaysia operation, there was
an increase of $15 for legal matters, and Corporate officers incurred an increase of $24 in travel
and entertainment expenditures. There were higher depreciation costs of $37 in the Singapore and
Malaysia operations due to renovation of facilities to cater to new products, and higher bank
charges of $17 in Singapore for the renewal of a guarantee. Universal Systems accrued $33 in sales
tax, and miscellaneous costs increased by $9. However, all this was offset when the Company saved
$42 in salaries by relocating Universal Systems from San Jose to Singapore, along with $17 in
equipment rental, $66 in insurance, and $16 in professional and audit fees. Additionally, a
reduction in Corporate officers bonuses by $34 occurred in 2005 due to unmet bonus criteria, while
bonuses of $11 were paid out in 2004. In addition, there was a lower 2005 year-end audit fee of
$19 as the year end has not yet taken place, thus these fees have not yet been incurred. As a percentage of sales, selling expenses increased by 0.6% from 2004 to 2005. Primarily
responsible for this increase was the Singapore operation, where there was an increase in headcount
in Distribution as well as an increase in commissions due to higher equipment sales, and a
provision for warranty costs in Manufacturing. In terms of dollar value, selling expenses
increased by $337. Salaries increased by $72 due to the increase in headcount for the expansion of
the Distribution segment in Singapore. Provision for warranty increased by $114 and commissions
rose $105 as the result of higher equipment sales in the Manufacturing and Distribution segments in
2005 compared to 2004. Greater participation in trade shows and conferences in order to market our
products resulted in increased costs of $13. Higher traveling expenses of $23 were incurred by
Singapore personnel as they traveled to the new Malaysia operation to help set it up. In addition,
there was income commission of $55 in the Distribution segment in 2004 and none in 2005. Higher
advertising costs of $19 were incurred in 2005 to procure new customers, and
miscellaneous debts increased by $10. All these were offset with a savings of $50 in personnel and
$27 in utilities when the operation in San Jose relocated to Singapore. 24




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Research and development expenses decreased by $11 due to slower activity in this department. Income (loss) from operations The income (loss) from operations for the first three quarters of 2005 and 2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Manufacturing Segment
    
    $
    (81
    )
    
    $
    (225
    )Testing Segment
    
    $
    151
    
    
    $
    282Distribution Segment
    
    $
    (83
    )
    
    $
    21Corporate
    
    $
    126
    
    
    $
    (29
    )$
    113
    
    
    $
    49
 The income from operations increased by $65 from 2004 to 2005. This was mainly attributed to
better results in the Manufacturing and Corporate segments, which offset poorer operating results
in the Testing and Distribution segments. The Manufacturing segment improved the results of its loss from operations by going from a loss
from operations of $225 in 2004 to a loss of $81 in 2005. Partly responsible was the surge in
sales and the improvement of approximately $498 in gross profit from 2004 to 2005, as previously
mentioned. Again, the transfer of Universal Systems from San Jose to Singapore saved the Company
certain fixed costs, such as $92 in salaries, $110 in equipment and office rental, utilities and
insurance costs, and $16 in professional and audit fees. This operation is currently being
operated by existing Singapore Distribution personnel. General and administrative expenses as a
percentage of sales dropped from 14.7% in 2004 to 9.3% in 2005, while selling expenses as a
percentage of sales fell from 5.6% to 2.9%, mainly due to the significant 89.7% rise in sales from
2004 to 2005. The Manufacturing operation in Singapore managed to handle the increase in sales
with its existing headcount and outsourced some projects so as to maintain a lean workforce, thus
able to operate at lower overhead. Corporate contributed to the improvement in operating income by going from a loss of $29 in 2004 to
an income of $126 in 2005, an improvement of $155. The corporate office reimbursed its operating
expenses by imposing a fee to all subsidiaries based on a fixed percentage of total revenue. The
upswing in sales in Singapore Manufacturing resulted in collected fees greater than Corporates
operating expenses despite a decrease of 20% in allocation charges on all subsidiaries. Further
helping was the reduction of $45 in corporate officers bonuses in 2005, as bonus criteria went
unmet. Partly offsetting this rise in income from operations was deterioration in income from operations
in the Testing segment. The Testing segment went from an operating income of $282 in 2004 to $151
in 2005, a loss of $131. Contributing to this decline was a lower margin generated by the Malaysia
operation, as mentioned earlier, resulting in an inability to cover its fixed and semi-fixed
expenses such as printing and stationary, insurance, upkeep of office, and non-capitalized assets
in the amount of $94, and staff salaries in the amount of $205. Additionally, at the initial
set-up of the Malaysia operation, certain new costs were incurred, such as $15 in legal fees for
acquisition and $12 in statutory fees for the disclosure to meet SEC requirements. Furthermore,
more traveling was needed by Singapore personnel in order to set up this new testing operation.
Also contributing to the decrease in operating income in the Testing segment was a fall in burn-in
services in the Thailand operation, dropping sales by $184 from $1,680 in 2004 as the semiconductor
market in Thailand weakened. This drop in sales made the operation unable to cover certain fixed
and semi-fixed costs, resulting in a $61 decline in the operating profit of $223 the previous year.
Although the customer ended up paying promptly, there was a provision for doubtful debts of $29 in
the second quarter of 2005 in the Testing operation in Southeast Asia as we were in the process of
synchronizing the billing function with said customer. Further offsetting the rise in operating income was a decline in the Distribution segment, which
went from an income from operations of $21 in 2004 to a loss from operations of $83 in 2005.
Primarily responsible for this deterioration in results was the Singapore Distribution operation,
which had a lower margin in 2005 due to a change in product mix, as previously mentioned,
negatively impacting the gross profit by $28 compared to the gross profit of $531 in 2004. The
drop in sales in the Singapore Distribution operation resulted in an inability to cover certain
fixed and semi-fixed costs such as salaries, rental, depreciation, insurance, and others. As a
result, selling expenses as a percentage of sales increased from 9% in 2004 to 20.3% in 2005 in
this operation. Salaries increased by $72 due to expansion of the operation, but at the current
level of new sales as an agent, the margin was insufficient to cover the salary and rental costs.
We anticipate that the Singapore Distribution operation will continue to search for products with a
higher margin. Finally, commissions increased by $89 in 2005 due to an increase in sales of
commissionable equipment, and this same operation had commissionable income of $55 in 2004 and none
in 2005. Interest Expense The interest expenses for the first three quarters of 2005 and 2004 were as follows: 25




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(In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Interest expense
    
    $
    (137
    )
    
    $
    (95
    )
 Interest expense increased by $42 from 2004 to 2005, mainly due to higher usage of credit line
facilities in the Singapore operation, incurring higher interest expenses of $63. These were
somewhat offset by a decrease of $17 in capitalized lease interest and $4 in miscellaneous
interest. Other Income Other income for the first three quarters of 2005 and 2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Other income
    
    $
    191
    
    
    $
    263
 Other income decreased by $72 from 2004 to 2005. Contributing to this decline was a gain on
marketable securities of $115 after the Malaysia subsidiary disposed of all investments and
subsequently exited the market in 2004, whereas no such transaction took place in 2005. There was
lower interest income of $8 and lower dividend income of $5, both in the Malaysia subsidiary, and a
decrease in miscellaneous income of $2. This was somewhat offset by an increase in rental income
of $34 due to the leasing out of factories in Ireland and Malaysia, and $24 in recovered debts in
the Thailand operation. Income Tax Current income tax expense for the first nine months of 2005 was approximately $25, a decrease of
$15 compared to the income tax provision of $40 in the first nine
months of 2004. There was a provision for income tax of $95 in one of
the Singapore operations due to the higher profits of $830 generated
during the first nine months of 2005 as compared to $31 during the
first nine months of 2004; a provision for income tax of $21 in the
Thailand operation due to a taxable profit of $75 during the first
nine months of 2005; an advance tax payment of $8 incurred in the
Malaysia operation for 2005 and recognition of a deferred tax
liability of $16 in Singapore. These offset the recoverable tax of $68 and $47 in the Singapore and Malaysia
operations, respectively, during the first nine months of 2005. Because
of the different income tax jurisdictions, the taxable income generated in foreign countries will
not offset the net loss generated in the U.S. and the other separate
entity in the same location. Therefore, we generally incur certain income tax
expenses in any fiscal year. Net Income As a result of all of the factors analyzed above, the net income attributable to common shares for
the first nine months of 2005 was approximately $159, which represented an increase of $38 in 2005
from a net income of approximately $121 in 2004 attributable to common shares for the first nine
months of 2004. Consequently, basic
earnings per share for 2005 increased by $0.01 from earnings per share of $0.04 in 2004 to $0.05
per share in 2005. Diluted income per share for 2005 was $0.05 per share, which increased from
$0.04 per share in 2004. Liquidity and Capital Resources Though the working capital
(defined as current assets minus current liabilities) of $4,930 as of
March 31, 2005 represented a decrease of $1,954, or 28.4%,
compared to working capital of $6,884 as
of June 30, 2004, mainly due to a drop in cash and short-term deposits during the nine months ended
March 31, 2005, the bulk of it was used for long-term investment purposes. The Company
acquired fixed assets of $1,126 located in the new burn-in operation
in Malaysia and $1,497 for the
purchases of a new plant and machinery in Malaysia and Singapore to meet the new customers
requirements. The current ratio (defined as
current assets divided by current liabilities) was 1.95 as of March
31, 2005 compared to 2.27 as of June 30, 2004. We believe that the Company still has the ability to
maintain positive working capital and strong liquidity in the near future. Management believes the Company has the economic wherewithal to satisfy any short-term funding for
several reasons. Our current ratio remains positive at 1.95 as of March 31, 2005. Currently, the
Singapore operations are financed using short-term loans and lines of credit, which are sufficient
to meet their needs. Furthermore, the manufacturing operation in San Jose, California, which
consistently showed a loss, was moved to Singapore and is being operated by the existing Singapore
Distribution personnel. We anticipate that the relocation will ease the need for working capital
used to finance that operation. In addition, the Company followed closely on the collection of
debts and cashflow, especially in the Malaysia operation, on long outstanding debts. 26




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We anticipate that the short-term funding required in the near future will be for the purchase of
other equipment for new products and renovation of approximately $246 and $494, respectively, both
of which 32% has already been paid as upfront payment. In addition, our working capital was tied up
due to credit terms extended to a new customer which were longer than the credit terms extended to
us from our supplier. Conversely, the Singapore Testing operation required funds of $254 to set up
additional facilities for the burn-in services of an increasingly popular new type of
microprocessor chips. We were able to finance this capital expenditure with our existing term loan. The Companys credit rating provides ready and ample access to funds in global capital markets. At
March 31, 2005, the Company had available short-term lines of credit totaling $7,145 of which
$6,978 was unused. Entity with Facility
    
    Type of
    
    
    Interest
    
    
    Credit
    
    
    UnusedTrio-Tech Malaysia
    
    Line of Credit
    
    
    7.00
    %
    
    $
    107
    
    
    $
    91Trio-Tech Bangkok
    
    Line of Credit
    
    
    6.75
    %
    
    
    102
    
    
    
    102Trio-Tech Singapore
    
    Line of Credit
    
    
    5.5 to 6.0
    %
    
    
    6,936
    
    
    
    6,785$
    7,145
    
    
    $
    6,978
 The Company procured a long-term loan of $683 during the nine months ended March 31, 2005 to
convert three of the existing facilities in the Singapore Testing operation to handle the burn-in
process of the new type of microprocessor chips, so as to improve cost effectiveness. The Company
has a loan of approximately $350 upon which the Company has yet to draw. There were no other capital commitments except those that were disclosed as of March 31, 2005. Net cash provided by operating activities during the nine months ended March 31, 2005 was $373,
reflecting a decrease of $729, compared to net cash of $1,102 provided by operating activities
during the nine months ended March 31, 2004. Cashflow from operating activities decreased mainly
due to an
increase in accounts receivable, other receivables, and other factors, and a decrease in minority
interest, accounts payable and accrued expenses which amounted to
approximately $1,367. This was
offset with a decrease in gain on disposal of marketable securities of $114 after the Malaysia
subsidiary disposed of all investments and subsequently exited the market in 2004, while no such
event occurred in 2005, a decline in non-cash adjustments such as depreciation and amortization of
$210, together with other factors of $314, giving a net decrease of $729. The increase in accounts receivable of $143 was mainly attributable to higher sales for the
Manufacturing and Testing segments in Southeast Asia during the first nine months of fiscal 2005 as
compared to the first nine months of fiscal 2004. Sales for these operations for the nine months
ended March 31, 2005 were $19,650, which increased by 40.9% as compared to the sales for the nine
months ended March 31, 2004. At the same time, the operations in Southeast Asia improved their
efficiency in collection, and the Malaysia operation placed more focus on collection of long
overdue debts. The Malaysia operation did not need to make the same effort last year as it was
inactive. Hence, the accounts receivable turnover index (defined as net sales divided by average
ending accounts receivable less bad debt allowance) increased from 5.07 times at March 31, 2004 to
6.93 times at March 31, 2005. Other receivables had a
positive change of $48 at March 31, 2005,  mainly due
to increases in tax recoverable amounts and sundry deposits in
Southeast Asia for the prior period. Other
assets decreased by $414 at March 31, 2005 mainly due to the
non-cash transactions for the capitalization of property, plant and equipment of $92, previously
placed as a deposit for the Malaysia operation, and an advance payment of fixed assets in Singapore in the amount of $365 paid in 2004.
This was offset by the Companys deposits placed for additional rental of factory and
utilities in the Malaysia operation. Minority interest decreased
by $73 as of March 31, 2005 as compared to March 31, 2004, due to share
of loss before taxation in the Malaysia operation of $17 during the nine months ended March 31,
2005. There was a share in profit before taxation of $56 in the same operation during the nine
months ended March 31, 2004. Accounts payable and accrued expenses as of March 31, 2005 decreased by $710 over March 31, 2004
mainly due to $613 in materials purchased in the Singapore Manufacturing operation compared to
$1,323 in the same period last year. This decrease was due to increased inventories in Q3 2005.
This offset the higher finished goods and raw materials of $576 purchased by the Singapore
Distribution operation and fixed assets purchase of $71 by the Malaysia and Thailand operations
towards the end of the third quarter. During the same period last year, Singapore Manufacturing had
large orders for purchases of materials due to an increase in backlog at March 31, 2004. The
decrease in accounts payable was more than enough to offset the increase in accrued expenses. The
factors that contributed to the increase in accrued expenses were mentioned earlier. We sold the investment in marketable securities during the first quarter of fiscal 2004 and
realized a gain of $114 on disposal of the investment. There was no such gain during the first nine
months of fiscal 2005 as we had exited the market in 2004. In 27




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##### Table of Contents



addition, the Company incurred higher depreciation by $139, which derived from fixed assets located
in the new burn-in operation in Malaysia and the purchases of new plant and machinery in Malaysia
and Singapore to meet the new customers requirements. On the other hand, the Singapore Testing
operation converted three of its existing facilities to handle the burn-in process of the new type
of microprocessor chips, thereby incurring higher depreciation expenses on renovation. The
additional amortization costs of $71 in customer relationship intangible during the first nine
months of fiscal 2005 was derived from the newly acquired testing operation in Malaysia at the
beginning of fiscal 2005. Net cash used in investing
activities during the nine months ended March 31, 2005 was $116,
reflecting a decrease of $1,065 compared to $1,181 during the nine months ending March 31, 2004. The
investment in short-term deposits as of March 31, 2005 decreased
by $3,386 from March 31, 2004, due to the decrease of $2,958
from the proceeds from sales
of short-term deposits and higher payment of $428 for
maturing short-term deposits. These short-term deposits were used for multiple purposes. The Company paid the audit and legal fees
of $115 for the 2004 year-end audit; 2004 final dividends of $54 went to the minority interest in
Malaysia; tax payments of $101 were paid during the nine months ended March 31, 2005 in the
Singapore and Ireland operations; and the acquisition of the new testing operation in Malaysia for
$1,126 took place, which included the customer
relationship intangibles of $482. There was a payment of 2004 annual wages and performance
incentives of $218 in the Southeast Asia operations during the first nine months of fiscal 2005.
The Malaysia operation also placed $88 with the landlord and utilities vendor, as a deposit for the
rental of the factory and for the high usage of utilities. Short-term deposits were also used to
invest in capital expenditure in the Southeast Asia operations to meet our new customers
requirements, with an increase of $930 during the nine months ended March 31, 2005. During the same
period last year, the capital expenditure increased by $269, mainly due to the acquisition of
burn-in systems and the extension of a building in the Southeast Asia operations. The increase in
capital expenditure of $930 during the nine months ended March 31, 2005 was mainly due to the
renovation of facilities of $755 in the Singapore Testing operation, which converted three of its
existing facilities to handle the burn-in process of the new type of microprocessor chips. Other
fixed asset purchases included office equipment and machinery by the Southeast Asia operations. There was an acquisition of business in Malaysia which amounted to $1,218 at the beginning of
fiscal 2005 and none in the same period last year. Out of the $1,218, $92 related to the deposit
for the acquisition paid in 2004 and $395 related to the payment for
a bank guarantee note, which matured on December 31, 2004. In addition, we realized the investment in marketable securities
with proceeds of $555 in the first quarter of fiscal 2004 and there were no proceeds on disposal of
marketable securities during the nine months ended March 31, 2005, as we exited the market in 2004.
The lower investments in short-term deposits offset the lower proceeds from disposal of marketable
securities and lower proceeds of $101 from sales of equipment, the higher capital expenditure
incurred and additional investments in Malaysia. Net cash used in financing
activities during the nine months ended March 31, 2005 was $398 compared
to $332 at March 31, 2004. The difference of $66 was due to lower net payments on lines of credit
of $156 and lower payments of debts and capitalized leases of $580 during the nine months ended
March 31, 2005. These offset the lower proceeds of $407 from
long-term loans, which were used to finance the working capital, as well as some of the capital expenditure in Singapore during the nine
months ended March 31, 2005; and a higher payment of $395 for a
bank guarantee note for the acquisition mentioned earlier. Approximately $752 of cash deposits as of March 31, 2005 was held in the Companys 55% owned
Malaysian subsidiary. Of such amount, $593 was denominated in the currency of Malaysia, of which
$137 is currently available for movement to overseas, as authorized by the Central Bank of
Malaysia. There are additional amounts available for distribution as dividends (after making
deductions for income tax) pursuant to Malaysian regulations. Corporate Guarantee Arrangement The Company provides a corporate guarantee to one of its subsidiaries in Southeast Asia of
approximately $1,514 to secure a term loan from a bank to finance the operations of such
subsidiary. With the strong financial position of the subsidiary company, the Company believes this
corporate guarantee arrangement will have no material impact on its liquidity or capital resources. Recently Issued Accounting Pronouncements In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46, as amended by FIN 46(R), issued in January 2003, requires an
investor with a majority of the variable interests in a variable interest entity to consolidate the
entity and also requires majority and significant variable interest investors to provide certain
disclosures. A variable interest entity is an entity in which the equity investors do not have a
controlling financial interest or the equity investment at risk is insufficient to finance the
entitys activities without receiving additional subordinated financial support from other parties.
The provisions of FIN 46(R) are applicable for fiscal years ending after December 15, 2004. The
Company does not have any variable interest entities that must be consolidated. 28




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In December 2004, the FASB announced that SFAS No. 123R (revised December 2004), Share-Based
Payment, sets accounting requirements for share-based compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for awards to
non-employees. This Statement will require the Company to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation issued to employees, but
expresses no preference for a type of valuation model. For public entities, this Statement is effective for the first
fiscal year beginning after June 15, 2005. Accordingly, the Company will adopt this Statement
beginning July 1, 2005. The Company is currently assessing the
financial impact of implementing SFAS No. 123R on our
consolidated financial statement. In November 2004, the FASB issued Statement of Accounting Standards No. 151, Inventory Costs, A
Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 eliminates the so abnormal
criterion in ARB No. 43 Inventory Pricing. SFAS No. 151 no longer permits a company to
capitalize inventory costs on their balances sheets when the production defect rate varies
significantly from the expected rate. SFAS No. 151 reduces the differences between U.S. and
international accounting standards. SFAS No. 151 is effective for inventory cost incurred during
annual periods beginning after June 15, 2005. The Company does not believe that this pronouncement
will have a material effect on the Companys financial position and net income. In December 2004, the FASB issued FASB Staff Position No. FAS109-1 (FSP FAS 109-1), Application of
FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004. FSP FAS 109-1 clarifies that the
deduction will be treated as a special deduction as described in Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the date of enactment. The impact of the
deduction will be reported in the period in which the deduction is
claimed. The Company is currently
assessing the financial impact of implementing FSP FAS 109-1 on our consolidated financial statements. In December 2004, the FASB issued the Statement of Financial Account Standards No. 151, Exchange
of Nonmonetary Assets, An Amendment of APB Opinion No. 29 (SFAS No. 153). SFAS No 153 addresses
the measurement of exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of
APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS No. 153 shall be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after the date this Statement is issued. The provisions of this Statement shall be applied
prospectively. The Company does not believe that this pronouncement
will have a material effect on the Companys financial position
and net income. Critical Accounting Estimates & Policies In response to the SECs Release No. 33-8040, Cautionary Advice Regarding Disclosure About
Critical Accounting Policy, the Company identified the most critical accounting principles upon
which its financial status depends. The Company determined that those critical accounting
principles are related to the use of estimates, inventory valuation, revenue recognition, income
tax and impairment of intangibles and other long-lived assets. The Company states these accounting
policies in the relevant sections in this managements discussion and analysis, including the
Recently Issued Accounting Pronouncements discussed below. Use of Estimates The Companys financial statements have been prepared in accordance with accounting principles
generally accepted in the United States, which require us to make estimates and judgments that
significantly affect the reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. The Company regularly evaluates these estimates,
including those related to inventory valuation, revenue recognition and income taxes. These
estimates are based on historical experience and on assumptions that are believed by management to
be reasonable under the circumstances. The most important estimates included in the financial
statements are the allowance for doubtful accounts, provision for inventory obsolescence,
the estimated useful life of long-lived assets, and valuation allowance for deferred tax assets.
Actual results may differ materially from these estimates, which may impact the carrying values of
assets and liabilities. Inventory Valuation We value our inventories at the lower of cost or market. We write down inventories for not
saleable, excess, or obsolete raw materials, work-in-process and finished goods by charging such
write-downs to cost of sales. In addition to write downs based on newly introduced parts,
statistical and judgmental assessments are calculated for the remaining inventory based on
salability and obsolescence. 29




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Revenue Recognition The Company has three business segments: Manufacturing, Distribution, and Testing services. Revenues generated from sales of products in the Manufacturing and Distribution segments are
recognized when persuasive evidence of an arrangement exists, delivery of the products has
occurred, customer acceptance has been obtained, which means the significant risks and rewards of
the ownership have been transferred to the customer, the price is fixed or determinable and
collectibility is reasonably assured. Certain products sold (in the Manufacturing segment) require
installation and training to be performed. Revenue from product sales is also recorded in accordance with the provisions of Emerging Issues
Task Force (EITF) Statement 00-21 Revenue Arrangements with Multiple Deliverables and Staff
Accounting Bulletin (SAB) 104 Revenue Recognition in Financial Statements which generally
requires revenue earned on product sales involving multiple-elements to be allocated to each
element based on the relative fair values of those elements. Accordingly, the Company allocates
revenue to each element in a multiple-element arrangement based on the elements respective fair
value, with the fair value determined by the price charged when that element is sold and
specifically defined in a quotation or contract. The Company allocates a portion of the invoice
value to products sold and the remaining portion of invoice value to installation work in
proportion of the fair value of products sold and installation work to be performed. Training
elements are valued based on hourly rates, which the Company charges for these services when sold
apart from product sales. The fair value determination of products sold and the installation and
training work is also based on our specific historical experience of the relative fair values of
the elements if there is no easily determinable market price to be considered. In fiscal 2005 and
2004, the installation revenues generated in connection with product sales were immaterial and
included in the product sales revenue line on the consolidated statement of income. The Company
estimates an allowance for sales returns based on historical experience with product returns. Revenue derived from testing service is recognized when testing services are rendered. Income Tax We account for income taxes in accordance with Statement of Financial Accounting Standards No 109,
Accounting for Income Taxes (SFAS No. 109). SFAS No. 109 requires an entity to recognize
deferred tax liabilities and assets. Deferred tax assets and liabilities are recognized for the
future tax consequence attributable to the difference between the tax bases of assets and
liabilities and their reported amounts in the financial statements. Deferred tax assets and
liabilities are measured using the enacted tax rate expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that included the enactment date. Our foreign subsidiaries are subject to income taxes in the regions where they operate. Because of
the different income tax jurisdictions, net losses generated in the U.S. cannot be utilized to
offset the taxable
income generated in foreign countries. Therefore, we may incur certain income tax expenses in any
fiscal year. For U.S. income tax purposes, no provision has been made for U.S. taxes on undistributed earnings
of overseas subsidiaries with which the Company intends to continue to reinvest. It is not
practicable to estimate the amount of additional tax that might be payable on the foreign earnings
if they were remitted as dividends, were lent to the Company, or if the Company should sell its
stock in the subsidiary. However, the Company believes that US foreign tax credits and net
operating losses available would substantially eliminate any additional tax effects. Impairment of Long-Lived Assets Effective July 1, 2002, we adopted the provisions of Statement of Financial Accounting Standard No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No.
144 requires that long-lived assets be reviewed for impairment annually and whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value. Intangible Assets In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30,
2001 is accounted for under the purchase method and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business combination. 30




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Other intangible assets represent the allocation of the purchase price over the fair market value
of any non-tangible asset other than the goodwill. The Company recognized $482 as the customer
relationship intangible and amortized on a straight-line basis for five years over the expected
period to be benefited. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
 Interest Rate Risk. We do not use derivative financial instruments in our investment portfolio. Our
investment portfolio is generally comprised of cash deposits. Our policy is to place these
investments in instruments that meet high credit quality standards. These securities are subject to
interest rate risk, and could decline in value if interest rates fluctuate and thus subject us to
market risk due to those fluctuations. Due to the short duration and conservative nature of our
investment portfolio, we do not expect any material loss with respect to our investment portfolio,
though no assurances can be given that material losses will not occur. The interest on our loans, capitalized leases and lines of credit range from 4.19% to 7.1% per
annum. As of March 31, 2005, the outstanding aggregate principal balance on these loans,
capitalized leases and lines of credit was approximately $1,742. These interest rates are subject
to change and we cannot predict an increase or decrease in rates, if any. Foreign Currency Exchange Rate Risk. Although the majority of our sales, cost of manufacturing and
marketing are transacted in U.S. dollars, significant portions of our revenues are denominated in
Singapore and Euro dollars, Malaysian ringgit, Thai Baht and other currencies. Consequently, a
portion of our costs, revenues and operating margins may be affected by fluctuations in exchange
rates, primarily between the U.S. dollar and such foreign currencies. We are also affected by
fluctuations in exchange rates if there is a mismatch between our foreign currency denominated
assets and liabilities. Foreign currency translation adjustments resulted in an increase of $214
and $242 to shareholders equity for the nine months ended March 31, 2005 and 2004, respectively. We try to reduce our risk of foreign currency fluctuations by purchasing certain equipment and
supplies in U.S. dollars and seeking payment, when possible, in U.S. dollars. However, we may not
be successful in our attempts
to mitigate our exposure to exchange rate fluctuations. Those fluctuations could have a material
adverse effect on the Companys financial results. 
 ITEM 4. CONTROLS AND PROCEDURES 
 An evaluation was carried out by the Companys Chief Executive Officer and Chief Financial Officer
of the effectiveness of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2005,
the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that these disclosure controls and procedures were
effective. During the period covered by this report, there have been no changes in the Companys
internal control over financial reporting that have materially affected or are reasonably likely to
materially affect the Companys internal control over financial reporting. 31




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TRIO-TECH INTERNATIONAL 
 PART II. OTHER
INFORMATION
 
 
 Item 1. Legal Proceedings Not applicable 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Malaysian and Singapore regulations prohibit the payment of dividends if the Company
does not have sufficient retained earnings and tax credit. In addition, the payment of
dividends can only be made after making deductions for income tax pursuant to the
regulations. Furthermore, the cash movements from the Companys 55% owned Malaysian
subsidiary to overseas are restricted and must be authorized by the Central Bank of
Malaysia. California law also prohibits the payment of dividends if the Company does not
have sufficient retained earnings or cannot meet certain asset to liability ratios. 
 Item 3. Defaults Upon Senior Securities Not applicable 
 Item 4. Submission of Matters to Vote of Security Holders Not applicable 
 Item 5. Other Information Not applicable 
 Item 6. Exhibits (a) Exhibits  31.1
    Rule 13a-14(a) Certification of Principal Executive Officer of Registrant31.2
    Rule 13a-14(a) Certification of Principal Financial Officer of Registrant32
    Section 1350 Certification. (b) Reports
on Form 8-K/A The Registrant filed the following reports on Form 8-K/A with the Securities and
Exchange Commission during the third quarter ended March 31, 2005: Form 8-K/A, filed May 9, 2005 (with date of earliest event reported July 1, 2004)
reporting under Item 5. 32




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SIGNATURES 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. TRIO-TECH INTERNATIONALBy:
    
    /s/ Victor H.M. TingVICTOR H.M. TINGVice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: May 13, 2005
 33