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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, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File Number 1-14523 TRIO-TECH INTERNATIONAL  California
(State or other jurisdiction of
incorporation or organization)
    
    95-2086631
(I.R.S. Employer
Identification Number)14731 Califa Street
Van Nuys, California
(Address of principle executive offices)
    
    91411
(Zip Code)
 Registrants Telephone Number: 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 x      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 x Number of shares of common stock outstanding as of May 4, 2004 is 2,954,542.    1




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TRIO-TECH INTERNATIONAL
INDEX TO CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE PagePart I.
    
    Financial InformationItem 1.
    
    Consolidated Balance Sheets as of Mar. 31, 2004 (Unaudited) and June 30, 2003
    
    
    3Consolidated Statements of Operations and Comprehensive Income (loss) for the Three and Nine Months Ended Mar. 31, 2004 (Unaudited) and Mar. 31, 2003 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended Mar. 31, 2004 (Unaudited) and Mar. 31, 2003 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    25Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    25Item 3.
    
    Defaults upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    25Signatures
    
    
    
    
    26EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE
AMOUNTS)
 Mar 31,
    
    June 30,Note
    
    2004
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    
    
    
    
    $
    1,166
    
    
    $
    1,495Short term deposits
    
    
    
    
    
    
    5,388
    
    
    
    4,308Investments in marketable securities
    
    
    
    
    
    
    
    
    
    
    485Trade accounts receivable, less allowance for doubtful accounts
of $158 at Mar. 31, 2004 and $157 at Jun. 30,
2003, respectively
    
    
    
    
    
    
    3,698
    
    
    
    3,643Other receivables
    
    
    
    
    
    
    450
    
    
    
    373Inventories, less provision for obsolete stock of $467 at Mar. 31, 2004
and $735 at Jun. 30, 2003, respectively
    
    
    
    
    
    
    1,087
    
    
    
    1,049Prepaid expenses and other current assets
    
    
    
    
    
    
    165
    
    
    
    140Total current assets
    
    
    
    
    
    
    11,954
    
    
    
    11,493PROPERTY, PLANT AND EQUIPMENT, Net
    
    
    
    
    
    
    5,310
    
    
    
    5,210OTHER ASSETS, Net
    
    
    
    
    
    
    0
    
    
    
    8TOTAL ASSETS
    
    
    
    
    
    $
    17,264
    
    
    $
    16,711LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Lines of credit
    
    
    
    
    
    $
    148
    
    
    $
    300Accounts payable
    
    
    
    
    
    
    1,466
    
    
    
    1,080Accrued expenses
    
    
    
    
    
    
    2,130
    
    
    
    2,096Income taxes payable
    
    
    
    
    
    
    8
    
    
    
    56Current portion of notes payable
    
    
    
    
    
    
    578
    
    
    
    632Current portion of capitalized leases
    
    
    
    
    
    
    235
    
    
    
    302Total current liabilities
    
    
    
    
    
    
    4,565
    
    
    
    4,466NOTES PAYABLE, net of current portion
    
    
    
    
    
    
    680
    
    
    
    492CAPITALIZED LEASES, net of current portion
    
    
    
    
    
    
    245
    
    
    
    344DEFERRED INCOME TAXES
    
    
    
    
    
    
    738
    
    
    
    711TOTAL LIABILITIES
    
    
    
    
    
    
    6,228
    
    
    
    6,013COMMITMENTS AND CONTINGENCIESMINORITY INTEREST
    
    
    
    
    
    
    2,114
    
    
    
    2,108SHAREHOLDERS EQUITY:Common stock; no par value, authorized, 15,000,000 shares; issued
and outstanding 2,932,542 shares at Mar. 31, 2004
and 2,927,542 shares at Jun. 30, 2003,
respectively
    
    
    
    
    
    
    9,437
    
    
    
    9,423Additional paid-in capital
    
    
    
    
    
    
    284
    
    
    
    284Retained earnings (accumulated deficit)
    
    
    
    
    
    
    (618
    )
    
    
    (739
    )Accumulated other comprehensive income-marketable securities
    
    
    
    
    
    
    
    
    
    
    45Accumulated other comprehensive loss-translation adjustment
    
    
    
    
    
    
    (181
    )
    
    
    (423
    )Total shareholders equity
    
    
    
    
    
    
    8,922
    
    
    
    8,590TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    
    
    
    
    $
    17,264
    
    
    $
    16,711
 See notes to condensed consolidated financial statements. 3




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##### Table of Contents



TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE ) Nine Months Ended
    
    Three Months EndedMar. 31,
    
    Mar. 31,
    
    Mar. 31,
    
    Mar. 31,2004
    
    2003
    
    2004
    
    2003NET SALES
    
    $
    13,948
    
    
    $
    16,527
    
    
    $
    5,042
    
    
    $
    5,561COST OF SALES
    
    
    10,402
    
    
    
    12,378
    
    
    
    3,843
    
    
    
    4,535GROSS PROFIT
    
    
    3,546
    
    
    
    4,149
    
    
    
    1,199
    
    
    
    1,026OPERATING EXPENSES:General and administrative
    
    
    2,915
    
    
    
    3,192
    
    
    
    962
    
    
    
    822Selling
    
    
    552
    
    
    
    655
    
    
    
    135
    
    
    
    182Research and development
    
    
    88
    
    
    
    89
    
    
    
    29
    
    
    
    34(Gain) loss on disposal of property, plant
and equipment
    
    
    (58
    )
    
    
    112
    
    
    
    (62
    )
    
    
    Total
    
    
    3,497
    
    
    
    4,048
    
    
    
    1,064
    
    
    
    1,038INCOME (LOSS) FROM OPERATIONS
    
    
    49
    
    
    
    101
    
    
    
    135
    
    
    
    (12
    )OTHER INCOME (EXPENSE)Interest expense
    
    
    (95
    )
    
    
    (145
    )
    
    
    (29
    )
    
    
    (48
    )Other income
    
    
    263
    
    
    
    241
    
    
    
    67
    
    
    
    76Total
    
    
    168
    
    
    
    96
    
    
    
    38
    
    
    
    28INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST
    
    
    217
    
    
    
    197
    
    
    
    173
    
    
    
    16INCOME TAXES
    
    
    40
    
    
    
    71
    
    
    
    7
    
    
    
    21INCOME (LOSS) BEFORE MINORITY INTEREST
    
    
    177
    
    
    
    126
    
    
    
    166
    
    
    
    (5
    )MINORITY INTEREST
    
    
    (56
    )
    
    
    49
    
    
    
    2
    
    
    
    33NET INCOME ATTRIBUTABLE TO
COMMON SHARES
    
    
    121
    
    
    
    175
    
    
    
    168
    
    
    
    28OTHER COMPREHENSIVE INCOME (LOSS):Unrealised loss on investment
    
    
    (45
    )
    
    
    (24
    )
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    242
    
    
    
    (66
    )
    
    
    19
    
    
    
    (58
    )COMPREHENSIVE INCOME (LOSS)
    
    $
    318
    
    
    $
    85
    
    
    $
    187
    
    
    $
    (30
    )EARNINGS PER SHARE:Basic
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.01Diluted
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.01WEIGHTED AVERAGE NUMBER OF COMMON AND
POTENTIAL COMMON SHARES OUTSTANDINGBasic
    
    
    2,931
    
    
    
    2,928
    
    
    
    2,933
    
    
    
    2,928Diluted
    
    
    2,984
    
    
    
    2,928
    
    
    
    3,036
    
    
    
    2,928
 See notes to condensed consolidated financial statements. 4




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS) Nine Months EndedMar. 31,
    
    Mar. 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    121
    
    
    $
    175Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    885
    
    
    
    965Bad debt expenses (recovery), net
    
    
    1
    
    
    
    (14
    )Stock Compensation
    
    
    
    
    
    
    14(Gain) loss on sale of property and equipment
    
    
    (58
    )
    
    
    112Gain on disposal of marketable securities
    
    
    (114
    )
    
    
    (45
    )Deferred income taxes
    
    
    27
    
    
    
    Minority interest
    
    
    56
    
    
    
    (49
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (56
    )
    
    
    (474
    )Other receivables
    
    
    (74
    )
    
    
    (150
    )Inventories
    
    
    (38
    )
    
    
    202Prepaid expenses and other current assets
    
    
    (25
    )
    
    
    (39
    )Accounts payable and accrued expenses
    
    
    420
    
    
    
    (494
    )Income taxes payable
    
    
    (43
    )
    
    
    (47
    )Net cash provided by operating activities
    
    
    1,102
    
    
    
    156CASH FLOWS FROM INVESTING ACTIVITIES:Short term deposits
    
    
    (1,080
    )
    
    
    1,895Capital expenditures
    
    
    (761
    )
    
    
    (492
    )Purchase of marketable securities
    
    
    (4
    )
    
    
    (371
    )Other assets
    
    
    8
    
    
    
    61Proceeds from disposal of marketable securities
    
    
    555
    
    
    
    529Proceeds from sale of property and equipment
    
    
    101
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (1,181
    )
    
    
    1,622CASH FLOWS FROM FINANCING ACTIVITIES:Net payments and borrowings on lines of credit
    
    
    (156
    )
    
    
    (698
    )Payments on debt and capitalized leases
    
    
    (1,217
    )
    
    
    (1,279
    )Principal borrowings on debt and capitalized leases
    
    
    1,090
    
    
    
    898Dividends paid to minority interest
    
    
    (63
    )
    
    
    (71
    )Cash received from stock options exercised
    
    
    14
    
    
    
    Net cash used in financing activities
    
    
    (332
    )
    
    
    (1,150
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    82
    
    
    
    (79
    )NET (DECREASE) INCREASE IN CASH
    
    
    (329
    )
    
    
    549CASH, BEGINNING OF PERIOD
    
    
    1,495
    
    
    
    1,128CASH, END OF PERIOD
    
    $
    1,166
    
    
    $
    1,677SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    93
    
    
    $
    145Income taxes
    
    $
    83
    
    
    $
    102NON-CASH INVESTING AND FINANCING ACTIVITIES- Acquisition of property, plant and equipment under capital finance lease
    
    $
    95
    
    
    $
    363- Capitalization of property, plant and equipment paid in advance
    
    $
    
    
    
    $
    333
 See notes to condensed consolidated financial statements. 5




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN
THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)  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 manufacture 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
    %
    
    San Jose, CaliforniaEuropean Electronic Test Centre
    
    
    100
    %
    
    Dublin, IrelandTrio-Tech International Pte. Ltd.
    
    
    100
    %
    
    SingaporeTrio-Tech Test Services Pte. Ltd.
    
    
    100
    %
    
    SingaporeTrio-Tech Thailand
    
    
    100
    %
    
    Bangkok, ThailandTrio-Tech Bangkok
    
    
    100
    %
    
    Bangkok, ThailandTrio-Tech Malaysia
    
    
    55
    %
    
    Penang, MalaysiaTrio-Tech Kuala Lumpur  100% owned by
Trio-Tech Malaysia
    
    
    55
    %
    
    Selangor, 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, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 2004. 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, 2003.The Companys fiscal quarters generally end on the last Friday of the end
of the fiscal quarter. The quarter end dates for the periods ending March
31, 2004 and March 31, 2003 were March 26, 2004 and March 28, 2003,
respectively.Certain prior period balances have been reclassified to conform with the
current period presentation. 6




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##### Table of Contents



2. INVENTORIES  Inventories consist of the following: Mar 31,
    
    June 30,2004
    
    2003(Unaudited)Raw materials
    
    $
    599
    
    
    $
    873Work in progress
    
    
    557
    
    
    
    166Finished goods
    
    
    398
    
    
    
    745Less: provision for obsolete inventory
    
    
    (467
    )
    
    
    (735
    )$
    1,087
    
    
    $
    1,049
  3.
    
    STOCK OPTIONSIn September 2002, the Board of Directors amended the Directors Stock
Option Plan to require that the exercise price of options granted
thereunder be equal to 100% of the fair market value of the Companys
Common Stock as of the date of grant.The 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 income 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 31,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    
    
    (Unaudited)Net income: as reported
    
    $
    121
    
    
    $
    175
    
    
    $
    168
    
    
    $
    28Add: stock based employee compensation
included in reported income
    
    $
    
    
    
    $
    14
    
    
    $
    
    
    
    $
    Deduct: total stock based employee
compensation
expense determined under fair value
method for
all awards
    
    
    (31
    )
    
    
    (18
    )
    
    
    (10
    )
    
    
    (6
    )Pro forma net income
    
    $
    90
    
    
    $
    171
    
    
    $
    158
    
    
    $
    22Income per share  basicAs reported
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.01Pro forma
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.01Income per share  dilutedAs reported
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.01Pro forma
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.01
 7




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As required by SFAS 123, the Company provides the following disclosure of
estimated values for these awards. The weighted-average grant-date fair
value of options granted during 2004 and 2003 was estimated to be $2.66
and $2.25 respectively.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 2004 and 2003, respectively; risk free interest
rates of 1.58% and 2.93%, expected lives of 2 years for 2004 and 1 year
for 2003; volatility of 42.5% and 45.99% 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 378,500 shares at prices ranging from $2.25 to
$6.00 per share were outstanding during the nine months ending March 31,
2004. The following 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: Type
    
    Shares
    
    Price
    
    ExpirationOptions
Options
Options
    
    20,000
32,000
49,000
    
    $5.63
$5.37
$6.00
    
    September 18, 2005
July 10, 2005
March 27, 2005
  Stock options and warrants to purchase 469,500 shares at prices ranging
from $2.25 to $6.00 per share were outstanding during the nine months
ended March 31, 2003 and were excluded from the computation of diluted EPS
because their effect would have been 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. 312004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    
    
    (Unaudited)Net income used to compute basic
and diluted earnings per share
    
    $
    121
    
    
    $
    175
    
    
    $
    168
    
    
    $
    28Weighted average number of common
shares outstanding  basic
    
    
    2,931,000
    
    
    
    2,928,000
    
    
    
    2,933,000
    
    
    
    2,928,000Dilutive effect of stock options
    
    
    53,000
    
    
    
    
    
    
    
    103,000
    
    
    
    Number of shares used to compute
earnings per share  diluted
    
    
    2,984,000
    
    
    
    2,928,000
    
    
    
    3,036,000
    
    
    
    2,928,000
  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. 8




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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 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 as of March 31, 2004 is adequate.
However, actual write-offs might exceed the recorded allowance. Mar 31,
    
    June 30,2004
    
    2003(Unaudited)Beginning
    
    $
    157
    
    
    $
    174Additions charged to cost and expenses
    
    
    8
    
    
    
    Recovered
    
    
    (7
    )
    
    
    (17
    )Actual write-offs
    
    
    
    
    
    
    Ending
    
    $
    158
    
    
    $
    157
  6.
    
    WARRANTY ACCRUAL Mar 31,
    
    Jun 30,2004
    
    2003(Unaudited)Beginning
    
    $
    165
    
    
    $
    305Additions charged to cost and expenses
    
    
    
    
    
    
    1Recovered
    
    
    
    
    
    
    (126
    )Actual write-offs
    
    
    (20
    )
    
    
    (15
    )Ending
    
    $
    145
    
    
    $
    165
  7.
    
    SUBSEQUENT EVENTSTrio-Tech Malaysia (Buyer), one of the Malaysia subsidiaries, entered
into an agreement with TS Matrix Bhd, a Malaysian company (Seller) on
March 29, 2004. Buyer has agreed to acquire certain assets of Seller
utilized by the burn-in testing division of Seller for an aggregate cash
purchase price of 3,500,000 Ringgit Malaysia (or approximately $921,052
(US) based on the spot exchange rate published in Federal Reserve as of
March 29, 2004). Buyer will also acquire additional assets with a purchase
price of not less than 700,000 Ringgit Malaysia (or approximately $184,211
(US) based on the spot exchange rate published in Federal Reserve as of
March 29, 2004). The completion of the Agreement and thus Buyers
obligation to purchase such assets is subject to various conditions
precedent including Buyers satisfactory due diligence examination and
Buyer entering into a new business contract with the existing customer of
the Seller. The conditions precedent must be satisfied within three
calendar months from the date of the Agreement. 10% was paid as a deposit
towards the aggregate purchase price.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 $96 and
$39 for the nine months ended March 31, 2004 and 2003 respectively, and $62
and $8 for the three months ended 2004 and 2003 respectively. Corporate
assets mainly consist of cash and prepaid expenses. Corporate
expenses mainly consist of salaries, insurance, professional expenses
and directors fees. 9




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##### Table of Contents



The following segment information is unaudited and is in thousands: Business Segment Information: Three Months
    
    
    
    
    
    Operating
    
    
    
    
    
    Depr.Ended
    
    Net
    
    Income
    
    
    
    
    
    and
    
    CapitalMar. 31,
    
    Sales
    
    (loss)
    
    Assets
    
    Amort.
    
    ExpendituresManufacturing
    
    FY 2004
    
    $
    1,938
    
    
    $
    52
    
    
    $
    2,277
    
    
    $
    23
    
    
    $
    3FY 2003
    
    $
    902
    
    
    $
    (264
    )
    
    $
    2,792
    
    
    $
    23
    
    
    $
    1Testing Services
    
    FY 2004
    
    $
    2,244
    
    
    $
    68
    
    
    $
    14,385
    
    
    $
    246
    
    
    $
    58FY 2003
    
    $
    2,327
    
    
    $
    228
    
    
    $
    14,083
    
    
    $
    269
    
    
    $
    65Distribution
    
    FY 2004
    
    $
    860
    
    
    $
    (17
    )
    
    $
    579
    
    
    $
    33
    
    
    $
    63FY 2003
    
    $
    2,332
    
    
    $
    (6
    )
    
    $
    450
    
    
    $
    27
    
    
    $
    10Corporate and
    
    FY 2004
    
    $
    
    
    
    $
    32
    
    
    $
    23
    
    
    $
    2
    
    
    $
    unallocated
    
    FY 2003
    
    $
    
    
    
    $
    30
    
    
    $
    473
    
    
    $
    2
    
    
    $
    Total Company
    
    FY 2004
    
    $
    5,042
    
    
    $
    135
    
    
    $
    17,264
    
    
    $
    304
    
    
    $
    124FY 2003
    
    $
    5,561
    
    
    $
    (12
    )
    
    $
    17,798
    
    
    $
    321
    
    
    $
    76
 Business Segment Information: Nine Months
    
    
    
    
    
    Operating
    
    
    
    
    
    Depr.Ended
    
    Net
    
    Income
    
    
    
    
    
    and
    
    CapitalMar. 31,
    
    Sales
    
    (loss)
    
    Assets
    
    Amort.
    
    ExpendituresManufacturing
    
    FY 2004
    
    $
    4,559
    
    
    $
    (225
    )
    
    $
    2,277
    
    
    $
    68
    
    
    $
    61FY 2003
    
    $
    4,037
    
    
    $
    (526
    )
    
    $
    2,792
    
    
    $
    65
    
    
    $
    6Testing Services
    
    FY 2004
    
    $
    6,877
    
    
    $
    282
    
    
    $
    14,385
    
    
    $
    720
    
    
    $
    647FY 2003
    
    $
    7,238
    
    
    $
    836
    
    
    $
    14,083
    
    
    $
    812
    
    
    $
    1,139Distribution
    
    FY 2004
    
    $
    2,512
    
    
    $
    21
    
    
    $
    579
    
    
    $
    92
    
    
    $
    148FY 2003
    
    $
    5,252
    
    
    $
    (125
    )
    
    $
    450
    
    
    $
    84
    
    
    $
    43Corporate and
    
    FY 2004
    
    $
    
    
    
    $
    (29
    )
    
    $
    23
    
    
    $
    5
    
    
    $
    unallocated
    
    FY 2003
    
    $
    
    
    
    $
    (84
    )
    
    $
    473
    
    
    $
    4
    
    
    $
    Total Company
    
    FY 2004
    
    $
    13,948
    
    
    $
    49
    
    
    $
    17,264
    
    
    $
    885
    
    
    $
    856FY 2003
    
    $
    16,527
    
    
    $
    101
    
    
    $
    17,798
    
    
    $
    965
    
    
    $
    1,188
 10




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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 2004
    
    $
    1,547
    
    
    
    275
    
    
    
    2,453
    
    
    
    726
    
    
    
    103
    
    
    
    (62
    )
    
    $
    5,042customers
    
    FY 2003
    
    $
    2,747
    
    
    
    222
    
    
    
    2,029
    
    
    
    476
    
    
    
    95
    
    
    
    (8
    )
    
    $
    5,561Operating
    
    FY 2004
    
    $
    17
    
    
    
    66
    
    
    
    20
    
    
    
    6
    
    
    
    1
    
    
    
    25
    
    
    $
    135Income (loss)
    
    FY 2003
    
    $
    (55
    )
    
    
    (56
    )
    
    
    54
    
    
    
    13
    
    
    
    2
    
    
    
    30
    
    
    $
    (12
    )Property, plant
    
    FY 2004
    
    $
    19
    
    
    
    401
    
    
    
    3,559
    
    
    
    1,008
    
    
    
    363
    
    
    
    (40
    )
    
    $
    5,310and equipment  net
    
    FY 2003
    
    $
    119
    
    
    
    441
    
    
    
    3,781
    
    
    
    826
    
    
    
    575
    
    
    
    (40
    )
    
    $
    5,702
 Geographic Area Information: Elimin-Nine Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ationsEnded
    
    United
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    TotalMar. 31,
    
    States
    
    Europe
    
    Singapore
    
    Thailand
    
    Malaysia
    
    Other
    
    CompanyNet sales to
    
    FY 2004
    
    $
    4,083
    
    
    
    864
    
    
    
    6,951
    
    
    
    1,877
    
    
    
    269
    
    
    
    (96
    )
    
    $
    13,948customers
    
    FY 2003
    
    $
    6,705
    
    
    
    716
    
    
    
    6,783
    
    
    
    1,617
    
    
    
    745
    
    
    
    (39
    )
    
    $
    16,527Operating
    
    FY 2004
    
    $
    (35
    )
    
    
    32
    
    
    
    77
    
    
    
    21
    
    
    
    3
    
    
    
    (49
    )
    
    $
    49Income (loss)
    
    FY 2003
    
    $
    32
    
    
    
    (120
    )
    
    
    203
    
    
    
    49
    
    
    
    22
    
    
    
    (85
    )
    
    $
    101Property, plant
    
    FY 2004
    
    $
    19
    
    
    
    401
    
    
    
    3,559
    
    
    
    1,008
    
    
    
    363
    
    
    
    (40
    )
    
    $
    5,310and equipment  net
    
    FY 2003
    
    $
    119
    
    
    
    441
    
    
    
    3,781
    
    
    
    826
    
    
    
    575
    
    
    
    (40
    )
    
    $
    5,702
 11




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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; market demand for higher-end semiconductor equipment; the impact
of competition on products and pricing; losses or curtailments of purchases
from key customers; 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,
opinion, 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: Sales, 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. The key performance indicators for the Company are based on market demand.
Sales activities such as booking, 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. Statistics obtained from the
Semiconductor Industry Association (SIA) indicate, in managements opinion, an
upward trend of demand for computers and consumer electronic products which
will continue until 2006, after which time no forecast has been given. The SIA
report shows that Asia makes up 70% of the semiconductor market region, and
there is evidence of a trend in the market of increasing revenue in Asia,
mostly into Japan and China. The Company believes that the current market trend indicates that the overall
semiconductor market is responding to the increase in demand for computer and
consumer electronics. We believe capital equipment spending is increasing for
both commercial and military electronic device manufacturers. However, it
appears that customers are still cautious, and are unwilling to spend on
high-end equipment at this time. There are several influencing factors which create uncertainty when forecasting
performance, such as the ever-changing nature of technology. For example, the
life-cycle of certain types of burn-in products appears to be on the downswing.
Additionally, the semiconductor industry is highly competitive. As a result,
the Company has taken action to protect itself by, among other things, looking
for business opportunities at trade shows, upgrading and improving its burn-in
technology as well as looking for alternatives for burn-in, and exploring new
markets. During the nine months ended March 31, 2004, total assets increased by $553
from $16,711 at June 30, 2003 to $17,264. The majority of the increase was in
short term deposits, other receivables, property, plant and equipment, but
offset with a decrease in cash of $329 and investments in marketable securities
of $485. The increase in short-term deposits of $1,080 from $4,308 at June 30, 2003 to
$5,388 at March 31, 2004 mainly derived from cash proceeds from the disposal of
marketable securities. All of the $485 of the investments in marketable
securities at June 30, 2003 were sold in the second quarter of 2004 in order to
take advantage of the increase in market value, utilize the profit and exit the
market. In addition, most of the lines of credit were paid off during the nine
months ended March 31, 2004, thus decreasing the balance of the lines of credit
by 77.7%. The Company reinvested additional cash balances into short-term 12




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deposits. Furthermore, the early repayment of a loan in Singapore and the
payment of 2003 bonuses contributed to the decrease in cash. Property, plant and equipment increased in 2004, mainly due to the acquisition
of fixed assets in Southeast Asia. During fiscal 2004, the additions to
property, plant and equipment totaled $856, including fixed assets under
capital lease arrangements. The additions mainly included an extension to a
building in the Thailand subsidiary in anticipation of increased capacity, and
burn-in systems acquired to meet new customers requirements. Total liabilities at March 31, 2004 were $6,228, reflecting a $215 increase in
total liabilities from $6,013 at June 30, 2003. Accounts payable increased by
$386 since June 30, 2003 due mainly to a rise in quantity of materials
purchased before payment for a few of the operations in Southeast Asia at the
end of the third quarter. This was offset by a decrease in line of credit as a
result of the net repayment of $152. As of March 31, 2004, total liabilities
(excluding minority interest) were 69.8% of total capital, compared with 70% at
June 30, 2003. The Company believes its strong credit rating provides ready and
ample access to funds in the global capital market. The long term portion of the notes payable increased by $188, from $492 at June
30, 2003, mainly attributed to Singapore operations where three additional
loans were obtained in 2004 compared to one loan obtained in 2003. The following table sets forth our revenue components for the three and nine
months ended March 31, 2004 and 2003, respectively. Revenue Components Nine Months Ending
    
    Three Months EndingMar 31,
    
    Mar 31,
    
    Mar 31,
    
    Mar 31,2004
    
    2003
    
    2004
    
    2003Net Sales:Testing
    
    
    49.31
    %
    
    
    43.79
    %
    
    
    44.52
    %
    
    
    41.85
    %Manufacturing
    
    
    32.69
    
    
    
    24.43
    
    
    
    38.43
    
    
    
    16.21Distribution
    
    
    18.00
    
    
    
    31.78
    
    
    
    17.05
    
    
    
    41.94Total
    
    
    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. Our cost of sales is made up of the cost of inventories, labor, depreciation,
utilities (which are a major component of costs for testing services), and
overhead relating to the Manufacturing, Testing and Distribution segments. Our operating expenses can be classified into three general categories: selling
expense, general and administrative expense, and research and development
expense. Selling expenses include expenses such as sales commissions, payroll
and payroll taxes for employees working in the sales department, advertising,
utilities and other expenses directly related to sales activities. General and
administrative expenses include management payroll, property taxes, rental
expense, depreciation of fixed assets used by the management function,
utilities, employee fringe benefits, office supplies, travel and entertainment,
professional expense, outside services and other expenses related to management
and administration processes. Research and development expenses include
payroll and payroll tax, travel, and any other expenses that are directly
related to research activities. 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 13




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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. Revenue Recognition The Company has three business segments: Manufacturing, Distribution, and
Testing services. In the Manufacturing Segment, the products manufactured are mainly back-end
products that require installation work and certain minor training work in the
field with the customers employees, depending on whether the machine or
equipment is standardized or customized. The value of this type of arrangement
varies depending on the quantity of equipment ordered by the customer and on
the complexity of the equipment set. In general, the common practice is to
recognize revenue upon shipment of the product, provided that both title and
risk of loss have passed to the customer, collection is reasonably assured and
the customer has accepted the shipment in terms of any customer acceptance
provisions. In general, the sales contracts are written such that they may list
separate installation (including training) and upgrades as a separate line
item. Not all machinery and equipment manufactured requires installation work.
In the case where installation is required we allocate a portion of the invoice
value to the machine and the remaining portion to the value of the installation
work to be performed, based on the relative fair value of the elements. The
revenue allocated to installation and training is recognized upon completion of
the installation and training services. The allocation of value between the
machinery and the installation and training work is based on our specific
historical experience of the relative fair values of the elements. Such
allocation is a critical accounting estimate for our revenue recognition
purposes. In the Distribution Segment, the products distributed are front-end and
back-end products that may require certain installation work. In general, the
common practice is to recognize revenue upon shipment of the distributed
product, provided that both title and risk of loss have passed to the customer,
collection is reasonably assured and the customer has accepted the shipment in
terms of any customer acceptance provisions. In those cases where installation
is required, the installation work in the Distribution segment is normally less
than 40 hours of our technician labor. Similar to those in the manufacturing
segment, our sales contracts are written so that they may list separate
installation (including training) and upgrades as a separate line item. In
addition, most front-end products (which account for approximately 67.0% and
82.4% of the total revenue in the Distribution Segment for the periods ended
March 31, 2004 and March 31, 2003, respectively) do not require installation
work. In the case where installation is required, we allocate a portion of the
invoice value to the distributed product and the remaining portion to the value
of the installation work to be performed, based on the relative fair value of
the elements. The revenue allocated to installation and training is recognized
upon completion of the installation and training services. The allocation of
value between the distributed products and the installation and training work
is based on our specific historical experience of the relative fair values of
the elements. Such allocation is a critical accounting estimate for our revenue
recognition purposes. The Company estimates an allowance for sales returns based on historical
experience with product returns. Regarding the Testing Segment, revenue is recognized when testing services have
been 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. 14




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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. Comparison of Third Quarter Ended March 31, 2004 (2004) and March 31, 2003
(2003) The following table sets forth certain consolidated statements of income data
as a percentage of net sales for the third quarter in fiscal year 2004 and
2003: Q3 2004
    
    Q3 2003Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    76.2
    %
    
    
    81.5
    %Gross Margin
    
    
    23.8
    %
    
    
    18.5
    %Operating Expenses
General and administrative
    
    
    19.1
    %
    
    
    14.8
    %Selling
    
    
    2.7
    %
    
    
    3.3
    %Research and development
    
    
    0.6
    %
    
    
    0.6
    %Impairment Loss
    
    
    0.0
    %
    
    
    0.0
    %(Gain) Loss on disposal of PP&E
    
    
    1.2
    %
    
    
    0.0
    %Total Operating Expenses
    
    
    21.2
    %
    
    
    18.7
    %Income from operations
    
    
    2.6
    %
    
    
    -0.2
    %
 Net Sales Overall sales for Q3 2004 were $5,042, a decrease of $519 or 9.34% from overall
sales for Q3 2003. This drop in sales was mainly derived from the Distribution
segment. However, the Manufacturing revenue cut the decline in Distribution
segment sales by half with its increased sales volume and prices. When broken down by segment, the majority of the decline in sales can be
attributed to the Distribution segment. Sales for low margin front-end
products decreased, as there were fewer shipments when compared with Q3 2003.
Vibration products also declined in sales due to the fact that this equipment
has an average selling price of more than $100. In general, customers remained
conservative in making larger investments, hence demand was low and a few of
our customers showed a preference to substitute equipment at an average unit
selling price below $30, instead. However, the drop in sales in the Distribution segment was offset by an
improvement in sales in the Manufacturing segment. Overall, the semiconductor
market appears to be responding positively to the increase in demand for
computers and consumer electronics products. Sales of burn-in systems and
burn-in boards increased as those of our customers who are electronic device
manufacturers increased their capital equipment in order to meet the increased
production capacity. Specifically, burn-in systems were sold to customers
requiring them for the new type of burn-in. Sales of burn-in boards also
increased with the demand for electronic components, and the boost in our sales
was primarily the result of orders from other burn-in houses in China. Sales
of Environmental test equipment were boosted as capital equipment spending
increased for both commercial and military electronic device manufacturers.
Because of our ability to meet certain customers specialized demands, sales of
Wet process benches increased and we were able to charge at a higher rate.
Unfortunately, there will be a lack of bookings in Q4 2004 for Wet process
benches as we transfer manufacturing operations from San Jose in the U.S. to
Singapore. In the Testing segment, sales are low due to decreased demand for
burn-in services in the Singapore operation. 15




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##### Table of Contents



Geographically, net sales into and within the Southeast Asia region increased
by 26.2% compared to Q3 2003 as Asia continues to grow as a global presence in
the manufacturing arena due to its lower manufacturing costs. According to SIA
forecasts, Asia makes up 70% of the semiconductor market region. Net sales
into and within Ireland and other countries increased by 23.9% compared to Q3
2003 due to increased sales in the Ireland operation. Net sales into and
within the United States region decreased by 43.7% compared to Q3 2003. This
was due to a reduction in demand in the U.S. for front-end products from the
Distribution segment in Singapore, and Artic Temperature Controlled Chucks from
one of the U.S. operations. Gross margin Overall gross margin increased from 18.5% in Q3 2003 to 23.8% in Q3 2004, a
difference of 5.3%. Gross margin for the Manufacturing segment improved
primarily due to the increase in sales volume and unit selling price by at
least one fold for Burn-in systems and Environmental test equipment. This was
offset with a reduction in the Testing segment due to increased utilities
costs, as well as a reduction in service fees made in an effort to maintain
market share and lure new customers in an increasingly competitive market. In
addition, the cost of goods sold and operating expenses comprised of fixed and
semi-fixed costs such as rental, depreciation, and salaries, did not decrease
despite the decrease in sales. While the sales in the Distribution segment
decreased by $1.3 million as compared to Q3 2003, its gross margin dropped by
only 4%, as the bulk of the sales decline was attributable to front-end low
margin products with little impact on the group margin. Manufacturing Segment The revenue and operating income for the Manufacturing Segment for the third
quarter of 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    Q3 2004
    
    Q3 2003Revenue
    
    $
    1,938
    
    
    $
    902Operating income (loss)
    
    $
    52
    
    
    $
    (264
    )
 Net sales in the Manufacturing segment increased by 115% in Q3 2004 when
compared to Q3 2003. This increase in net sales was due to several elements.
First, the sales for Environmental test equipment rose by $102, a 140% increase
in quantity sold and a 111.9% increase in average unit selling price.
Secondly, Burn-in board sales for Q3 2004 rose by $131 due to increased sales
into China, a significant increase in quantity sold with a 78.8% drop in
average unit selling price. Thirdly, sales of Burn-in systems went up $716 as
compared to Q3 2003, as no system was sold in the same quarter last year. And
finally, Wet process stations saw a sales increase of $111 in Q3 2004 in spite
of a 75% drop in quantity sold, due primarily to the increase in average unit
selling price. Operating income was $52 in Q3 2004 up from an operating loss of $264 in Q3
2003. The turn from an operating loss in Q3 2003 to an operating income in Q3
2004 was due to an improvement of 14.3% in gross margin as the sales volume and
prices for the aforementioned products increased. Although sales increased one
fold as compared to Q3 2003, the operating expenses did not increase at the
same pace. In fact, General and administrative expenses as a percentage of
sales decreased from 22.5% in Q3 2003 to 16% in Q3 2004. The Manufacturing segment in Singapore managed the sales increase with its
existing headcount and tried to outsource some of the projects so as to
maintain a lean workforce. With this strategy, the operation was able to
operate at lower overhead. Additionally, as the operation in San Jose has
completely closed down, we saved $37 in salaries due to staff lay-offs in
operating expenses as a whole. Testing Segment The revenue and operating income for the Testing Segment for the third quarter
of 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    Q3 2004
    
    Q3 2003Revenue
    
    $
    2,244
    
    
    $
    2,327Operating income
    
    $
    68
    
    
    $
    228
 The Testing segment saw a decrease in revenue from $2,327 in Q3 2003 to $2,244
in Q3 2004, as well as a decrease in operating income from $228 in Q3 2003 to
$68 in the same quarter 2004. A portion of the drop in net sales was due to
lower burn-in volume as customers burn-in requirements changed, and a fall in
demand in the Singapore operation for one particular burn-in device. As a
result of this fall in demand, the sections used for this particular burn-in
device were utilized at only 41% of capacity in Q3 2004, down from 42% of
capacity in Q2 2004. In order to counter this, the Testing segment is
currently working on another type of burn-in services required by one of our
customers, but the volume for this service has yet to ramp up. The Testing
segment was and continues to be faced with pricing pressure from customers.
Service fees were reduced in an 16




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##### Table of Contents



effort to maintain market share and capture new clients in an increasingly
competitive market. Because utility rates increased, the cost of utilities did
not decrease along with the decline in sales, contributing to the drop in gross
margin. The Thailand operation also generated lower margin due to a change in
product mix, where more services were provided at a lower margin to one
particular customer with whom we have a long history. Finally, the cost of
services and operating expenses comprised of fixed and semi-fixed costs such as
rental, depreciation, and administrative salaries remained fixed despite the
decrease in sales. Distribution Segment The revenue and operating income for the Distribution Segment for the third
quarter of 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    Q3 2004
    
    Q3 2003Revenue
    
    $
    860
    
    
    $
    2,332Operating loss
    
    $
    (17
    )
    
    $
    (6
    )
 Net sales in the Distribution segment decreased from $2,332 in Q3 2003 to $860
for the same quarter in 2004. Sales of low-margin products dropped $1,275, the
result of a 43.9% decrease in quantity sold and a 36.2% decrease in average
unit selling price. Vibration and other products sales declined by $196, with
a 71.4% drop in quantity sold and a 50.9% drop in average unit selling price.
In spite of the decrease of $1.3 million in the Distribution segment sales as
compared to Q3 2003, the gross margin dropped by only 4%, as the bulk of the
sales decline was attributable to front-end low margin products which have
little impact on the gross margin. Operating Expenses The operating expenses for the third quarter of 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    Q3 2004
    
    Q3 2003General and adminstrative
    
    $
    962
    
    
    $
    822Selling
    
    $
    135
    
    
    $
    182Research and development
    
    $
    29
    
    
    $
    34(Gain) on disposal of PP&E
    
    $
    (62
    )
    
    $
    
 As a percentage of sales, operating expenses increased by 2.5% from 18.7% in
2003 to 21.2% in 2004. This was mainly due to an increase of 4.3% from 14.8%
in 2003 to 19.1% in 2004 in General and administrative expenses as a percentage
of sales, attributable primarily to the Distribution segment. Though the sales
in the Distribution segment decreased significantly, the headcount did not
reduce accordingly, as the segment was already operating with a lean workforce. General and administrative expenses increased by $140 in Q3 2004 as compared to
Q3 2003, which was not due to a significant rise in expenses in 2004 but rather
to the fact that expenses for 2003 were lower than usual for several reasons.
In the Singapore operation, bonus accruals were lowered by $32 in 2003. In the
Manufacturing segment, there was a reduction in provision of doubtful debts of
$29 in 2003, whereas no such reduction took place in 2004. In 2003, we also
reversed the provision for contingent liabilities by $51 for a court case
settlement in which we were not found liable for paying the legal fees. In
2004, corporate officers did more traveling, contributing to an increase in
travel and entertainment expenses of $11. There was a hike in equipment rental
of $14 at Universal Systems. And finally, there was an increase of $3 in
miscellaneous expenses. As a percentage of sales, selling expenses decreased from 3.3% in 2003 to 2.7%
in 2004, decreasing by $47. This was due in part to sales staff being laid off
in Universal Systems, resulting in a savings in salaries of $23. In addition,
the Distribution segment earned a commission income of $38 from its agents in
Q3 2004, which helped reduce the impact of the reduction of commission expense
in Universal Systems of $14 in Q3 2003. Hence, the net effect was a decrease
of $24 on the commission for the group. There was a decrease in expenses for research and development, from $34 in Q3
2003 to $29 in the same quarter of 2004. As San Jose (Universal Systems) was
completely closed down there were no research and development activities,
resulting in a savings in utilities and labor costs of $5 when compared to Q3
2003. Gain on Disposal of Property, Plant and Equipment The gain on disposal of fixed assets of $62 was mainly derived from our Ireland
operations, which managed to sell some equipment that was written off several
years ago, hence recognizing the sales proceeds as total gain for those
operations. 17




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##### Table of Contents



Interest Expense The interest expense for the third quarter of 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    Q3 2004
    
    Q3 2003Interest expense
    
    $
    (29
    )
    
    $
    (48
    )
 Interest expense decreased from $48 in Q3 2003 to $29 in Q3 2004. This was
mainly due to the repayment of $300 on a line of credit and the net repayment
of long-term and capitalized leases of $1,188. This was offset by additional
borrowings obtained for construction of a building extension and Burn-in
systems during the second quarter. Other Income The other income for the third quarter of 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    Q3 2004
    
    Q3 2003Other income
    
    $
    67
    
    
    $
    76
 There was a decrease in other income of $9 from Q3 2003 to Q3 2004. This
decrease was caused by the currency exchange loss of $2 incurred in Q3 2004
compared to an exchange gain of $43 in Q3 2003 and a decrease in sundry income
of $10 in Q3 2004. These were offset by the increase in rental income of $22
from our Ireland operations for leasing out of a warehouse and part of the
office. Furthermore, there were no losses on marketable securities in Q3 2004
as compared to the $20 loss in Q3 2003. Income Tax Current income tax expense for the third quarter of 2004 was approximately $7,
a decrease of $14, compared to the income tax provision of $21 which was due
mainly to lower taxable profits generated from Southeast Asia in the third
quarter of 2004. 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. 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 quarter ended March 31, 2004 was approximately $168,
which represented a decrease of $140, from a net income of approximately $28
attributable to common shares for the quarter ended March 31, 2003.
Consequently, basic earning per share for the quarter ended March 31, 2004
increased by $0.05 from basic earnings per share of $0.01 in 2003 to $0.06 per
share in 2004. Diluted income per share for the quarter ended March 31, 2004
was $0.06 per share, representing an increase of $0.05 per share from diluted
income per share of $0.01 in 2003. 18




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##### Table of Contents



Year to Date Comparison of the Nine Months Ended March 31, 2004 (2004) to the
Nine Months Ended March 31, 2003 (2003) The following table sets forth certain consolidated statements of income data
as a percentage of net sales for the nine months ended 2004 and 2003,
respectively. YTD 2004
    
    YTD 2003Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    74.6
    %
    
    
    74.9
    %Gross Margin
    
    
    25.4
    %
    
    
    25.1
    %Operating Expenses
General and adminstrative
    
    
    20.9
    %
    
    
    19.3
    %Selling
    
    
    4.0
    %
    
    
    4.0
    %Research and development
    
    
    0.6
    %
    
    
    0.5
    %Impairment Loss
    
    
    0.0
    %
    
    
    0.0
    %(Gain) Loss on disposal of PP&E
    
    
    -0.4
    %
    
    
    0.7
    %Total Operating Expenses
    
    
    25.1
    %
    
    
    24.5
    %Income from operations
    
    
    0.4
    %
    
    
    0.6
    %
 Net Sales Overall sales decreased 15.6% from $16,527 in 2003 to $13,948 in 2004, a
difference of $2,579. This decrease was mainly attributed to the Testing and
Distribution segments. In the Distribution segment, the deterioration was a
result of fewer shipments of low margin front-end products as compared to 2003.
Sales for these products decreased by $2.6 million. Furthermore, demand for
vibration products diminished, as this equipment has an average unit selling
price greater than $100. We believe customers generally continued to be
conservative about making large investments, hence demand was low and a few of
our customers showed a preference to purchase substitute equipment at an
average unit selling price below $30. The deterioration in sales in the Testing segment was due to a shift in
customers burn-in requirements, and the fall in product demand for one
particular type of burn-in device, primarily within the Singapore market.
Moreover, a reduction in service fees in an effort to maintain market share and
lure new customers in an increasingly competitive market also contributed to
the drop in sales in this segment. The decline in sales in the Testing segment was offset by an improvement in
sales in the Manufacturing segment. An increase in sales of burn-in systems
and burn-in boards was the result of certain of our customers who are
electronic device manufacturers increasing their capital equipment in order to
meet increased production capacity. Sales for burn-in boards also increased
with the demand for electronic components, especially into China. Geographically, net sales into and within the United States region decreased by
39.1% compared to this same period 2003. There is declining demand in the U.S.
for front-end products from the Distribution segment in Singapore, and for
Artic Temperature Controlled Chucks from one of the U.S. operations. Net sales
into and within Ireland and other countries increased by 20.7% compared to 2003
due to increased sales in the Ireland operation and a greater number of burn-in
boards sold into China from the Manufacturing segment. Gross Margin Although the gross margin remained at 25% for 2004, there was a change in
product mix within the Testing and Distribution segments. In the Testing
segment, gross margin deteriorated as a result of lower burn-in volume as
customers burn-in requirements changed. Service fees were reduced in an
effort to maintain market share and attract new customers as the market
continued to grow competitive. Also, material costs such as utilities rose as
rates increased and certain products garnered higher usage. While the sales in the Distribution segment did decrease, the margin showed
improvement. The bulk of the sales decline was contributed by the decrease in
unit volume of low-margin products. This decrease in unit volume, combined with
the improvement in the average unit selling price of Vibration products,
resulted in an improved margin. 19




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##### Table of Contents



Manufacturing Segment The revenue and operating income for the Manufacturing Segment for the year to
date 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    YTD 2004
    
    YTD 2003Revenue
    
    $
    4,559
    
    
    $
    4,037Operating loss
    
    $
    (225
    )
    
    $
    (526
    )
 Net sales in the Manufacturing segment increased by $522 in 2004 as compared to
2003. The upswing in sales was the result of increased sales of burn-in boards
and burn-in systems. The increase in burn-in board sales, primarily to other
burn-in houses in China, was $186, a 92.8% increase in quantity sold, with a
28.5% drop in average unit selling price. The increase in sales of burn-in
systems was $732, in spite of a 45.7% reduction in average unit selling price,
due to a significant increase in percentage sold. On the other hand, sales for
Artic Temperature Controlled Chucks dropped $342, with a 57.9% abatement in
quantity sold and a 17.2% reduction in average unit selling price. The reduction in operating loss was consistent with the increase in sales.
Though sales increased by 12.9%, the General and administrative expenses as a
percentage of sales diminished from 20.3% in 2003 to 14.7% in 2004. This was
attributed to the Singapore Manufacturing operation where the administrative
salaries remained constant when compared to 2003, despite the increase of $918
in sales. Singapore Manufacturing generated higher sales at the same level of headcount
and operating expenses as 2003. With this strategy, the lower operating costs
incurred were able to make up for the drop in selling prices of burn-in boards
and burn-in systems. In addition, the operation in San Jose has completely
closed down, hence there was a savings in salaries of $125, rental of $25, and
commission of $30 in operating expenses as a whole when compared to 2003. Testing Segment The revenue and operating income for the Testing Segment for the year to date
2004 and 2003 were as follows: (In Thousands, unaudited)
    
    YTD 2004
    
    YTD 2003Revenue
    
    $
    6,877
    
    
    $
    7,238Operating income
    
    $
    282
    
    
    $
    836
 The Testing segment had lower burn-in volume in 2004 due to a change in
customers burn-in requirements and the fall in product demand for a certain
type of burn-in device, mainly contributed from the Singapore operation. In
order to counter this, the Testing segment is currently working on another type
of burn-in service required by one of our customers, but the volume for this
service has yet to ramp up. The Testing segment continues to face price
pressure from customers and has lowered prices in an attempt to maintain market
share and lure new customers in an increasingly competitive market, which also
contributed to the drop in gross margin. Other factors included an increase in
burn-in hours required by certain products, hence extended utilities usage.
This was compounded by inflated utilities rates. Therefore, utilities as part
of material costs increased by 16%, or approximately $140, from 2003. Although the Thailand operation saw boosted sales, it generated lower margin
due to a change in product mix, where more services at a lower margin were
provided to one particular customer with whom Trio-Tech has a long standing
relationship. In addition, cost of goods sold and operating expenses comprised of fixed and
semi-fixed costs such as rental, depreciation, and administrative salaries
remained fixed despite the overall decrease in sales in the Testing segment. Distribution Segment The revenue and operating income for the Distribution segment for the year to
date 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    YTD 2004
    
    YTD 2003Revenue
    
    $
    2,512
    
    
    $
    5,252Operating income (loss)
    
    $
    21
    
    
    $
    (125
    )
 Net revenue in the Distribution segment decreased by $2,740 in 2004 as compared
to 2003. The majority of this decline was attributable to diminished sales of
low-margin products of $2,645, a 45.4% abatement in quantity sold with a 28.8%
drop in average unit selling price. Sales of Vibration and other products also
tapered off by $105 even with a 26.1% increase in average unit selling price,
due to a 33.3% decline in quantity sold. 20




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##### Table of Contents



While sales in the Distribution segment decreased significantly, the margin
showed improvement. The bulk of the sales decline was contributed by the
decrease in unit volume of low-margin products combined with the improvement of
average unit selling price of Vibration products. We were able to justify the
increase in average selling price of Vibration products due to our ability to
meet certain customers specialized demands, hence customers were willing to
pay more. As a result of all these factors, Distribution managed to turn an
operating loss of $125 to an operating income of $21. Corporate The operating loss for Corporate for the year to date 2004 and 2003 were as
follows: (In Thousands, unaudited)
    
    YTD 2004
    
    YTD 2003Operating loss
    
    $
    (29
    )
    
    $
    (84
    )
 Corporate saw a decrease in operating loss of $55 in 2003 as compared to 2004,
due to a combination of several factors. An increase of 7.1% in allocation
percentage was charged on our subsidiaries based on the same level of sales
compared to 2003. In addition, a compensation cost of $14 was charged in 2003
because of the grant of certain stock options having exercise prices at less
than the fair market value of the underlying Common Stock. No similar
compensation cost was charged in 2004. Operating Expenses The operating expenses for the year to date 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    YTD 2004
    
    YTD 2003General and adminstrative
    
    $
    2,915
    
    
    $
    3,192Selling
    
    $
    552
    
    
    $
    655Research and development
    
    $
    88
    
    
    $
    89(Gain) loss on disposal of PP&E
    
    $
    (58
    )
    
    $
    112
 As a percentage of sales, operating expenses increased by 1.5% from 24.5% in
2003 to 25.1% in 2004. This increase was caused primarily by an upswing in
General and administrative expenses as a percentage of sales. As a percentage of sales, General and administrative expenses increased by 1.6%
from 19.3% in 2003 to 20.9% in 2004, mainly attributed to the Distribution
segment. Though the sales of the Distribution segment decreased significantly,
the headcount did not reduce proportionately, as the segment was already
operating with a lean workforce. On the other hand, General and administrative expenses as a whole decreased by
$277 in 2004. This was due to a reduction in bonus provision of $180 in the
Singapore operation due to poorer performance for a few of the operations in
2004. Salaries were reduced by $78 in Southeast Asia and $101 in the U.S., and
insurance and rental costs were reduced by $20 in the U.S. as part of cost
cutting measures. In addition, there was a reduction in legal and statutory
fees of $26 in Corporate headquarters. Finally, there was a decrease in
compensation costs of $14 due to the grant of certain stock options in 2003
which had an exercise price at less than the fair market value. All the same,
this was offset by several factors, including a reversal in provision for
contingent liabilities of $51 in Q3 of 2003, as a court case was settled in
which we were not found liable for paying the legal fees. No such event
occurred in 2004. Also, a provision of $35 for corporate officers bonuses
went into effect in 2004, whereas in 2003, $54 in bonuses was reversed out due
to unmet expectations for group performance. Finally, there was an increase of
$2 in miscellaneous expenses. As a percentage of sales, selling expenses remained consistent at 4% in 2004,
as in 2003. Overall, selling expenses decreased in 2004 by $103. Contributing
to this decrease was a savings of $23 in salaries as sales staff at Universal
Systems was laid off. Likewise, we saved $43 by reducing headcount in the
Singapore operations. Also, there was an increase of $1 in miscellaneous
expenses, offset by commission income of $38 earned by the Distribution segment
from its agents in 2004. Research and development expenses remained essentially flat from 2003 to 2004.
Primarily, this was due to the bonus paid in 2004 to the research group in our
profitable U.S. operation based on 2003 performance, offset with the low
research and development activities in the U.S. operations in 2004. (Gain) loss on Disposal of Property, Plant and Equipment The loss on disposal of property, plant and equipment of $112 in 2003 was
related to the write off of obsolete burn-in equipment in Southeast Asia in
2003. On the other hand, the gain on disposal of $62 in 2004 was primarily
derived from the Ireland operation, which managed to sell equipment that had
been written off several years ago and thus the sales proceeds 21




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##### Table of Contents



were recognized as total gain for the operation. However, this was offset by
miscellaneous losses of $4 resulting in a net gain of $58. Interest Expense The interest expense for the year to date 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    YTD 2004
    
    YTD 2003Interest expense
    
    $
    (95
    )
    
    $
    (145
    )
 Interest expense decreased from 2003 to 2004 by $50. This outcome was mainly
due to lower interest incurred on our line of credit, as Singapore repaid one
of the lines of credit fully during the end of 2003. Moreover, lower interest
was incurred on a term loan in the Singapore operation as more than 50% of that
loan was repaid. This offset the interest from an additional borrowing
obtained for the construction of a building extension and burn-in systems in
the second quarter. Other Income The other income for the year to date 2004 and 2003 were as follows: (In Thousands, unaudited)
    
    YTD 2004
    
    YTD 2003Other income
    
    $
    263
    
    
    $
    241
 Other income increased from 2003 to 2004 by $22 due to a $64 increase in rental
income, a net gain on disposal of marketable securities of $90, and an increase
in miscellaneous income of $2. This was offset by a drop in sundry income of
$15, a reduction in royalty income of $20 and a decrease in dividends and
interest income of $26. In addition, there was a currency exchange loss of $42
in 2004 due to depreciation of U.S. dollars against Singapore dollars, while
there was an exchange gain of $31 in 2003. Income Tax Current income tax expense for 2004 was approximately $40, a decrease of $31
compared to the income tax expenses of $71 for 2003, mainly due to lower
profits generated from Southeast Asia. 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. 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 nine months ended 2004 was approximately $121, which
represented a decrease of $54 in 2004 from a net income of approximately $175
in 2003 attributable to common shares for the nine months ended 2003.
Consequently, basic earnings per share for the nine months ended 2004 decreased
by $0.02 from basic earnings per share of $0.06 in 2003 to $0.04 in 2004.
Diluted earnings per share for the nine months ended 2004 was $0.04 per share,
representing a decrease of $0.02 per share from diluted earnings per share of
$0.06 in 2003. Liquidity and Capital Resources Our financial condition remains strong. The working capital (defined as current
assets minus current liabilities) of $7,389 as of March 31, 2004 increased by
$362, or 5%, compared to working capital of $7,027 as of June 30, 2003. The
current ratio (defined as current assets divided by current liabilities) was
2.62 as of March 31, 2004 compared to 2.57 as of June 30, 2003. The Company
had positive working capital for the nine fiscal years prior to the year ended
June 30, 2003. We believe that the Company has the ability to maintain
positive working capital and strong liquidity in the near future. The Companys credit rating provides ready and ample access to funds in global
capital markets. At March 31, 2004, the Company had available short-term lines
of credit totaling $3,690 of which $3,542 was unused.  22




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##### Table of Contents



Entity with Facility
    
    Type of
    
    Interest
    
    Credit
    
    UnusedTrio-Tech Malaysia
    
    Line of Credit
    
    
    7.00
    %
    
    $
    91
    
    
    $
    91Trio-Tech Bangkok
    
    Line of Credit
    
    
    5.75
    %
    
    
    50
    
    
    
    50Trio-Tech Singapore
    
    Line of Credit
    
    
    5.5 to 6.0
    %
    
    
    3,549
    
    
    
    3,401$
    3,690
    
    
    $
    3,542
 Net cash provided by operating activities during the nine months ended March
31, 2004 was $1,102, reflecting a significant increase of $946, compared to net
cash of $156 provided by operating activities during the nine months ended
March 31, 2003. Movements in working capital included increases in accounts
receivable and accounts payable, and a decrease in inventories. The increase in accounts receivable of $418 was mainly attributable to the
increased sales in the U.S and Ireland operations towards the end of the nine
months ended March 31, 2004. The accounts receivable turnover index (defined as
net sales divided by average ending accounts receivable less bad debt
allowance) remained consistent at 5 times at March 31, 2003 and 2004,
indicating that the Company remains efficient in its collection. Accounts payable increased by $914 over March 31, 2003 mainly due to larger
orders for purchases of materials, especially in the Singapore operation, to
meet orders in the fourth quarter 2004. There was a sudden increase in our
Manufacturing backlog in 2004, which increased from $640 in March 2003 to
$1,859 in March 2004. However, inventory decreased by $240 at March 31, 2004 as compared to March 31,
2003, which was due to the improvement in the inventory turnover index. The
inventory turnover index (defined as cost of sales divided by average ending
inventory) was 13 times at March 31, 2004, down from 18.09 times at March 31,
2003. The reduction in inventories mainly derived from the U.S operations,
which converted the finished goods into actual sales towards the end of the
nine months ended March 31, 2004. The bulk of the cash provided from operating activities during the third
quarter 2004 was invested in short-term deposits, because of our view that cash
will be required in the short term for new investments in Malaysia. The
investment in short-term deposits increased $1,377 from $4,011 in March 2003 to
$5,388 in March 2004. This contributed mostly to the net cash used in investing
activities during the nine months ended March 31, 2004 of $1,181 compared to
net cash provided of $1,622 in the nine months ended March 31, 2003. In
addition, the capital expenditure increased by $269 in 2004 mainly due to the
acquisition of burn-in systems and the extension of a building. These were
offset with the higher proceeds of $101 from sales of equipment and lower
purchase of marketable securities of $367 in 2004. Net cash used in financing activities during the nine months ended March 31,
2004 was $332, reflecting a decrease of $818 compared to $1,150 used in
financing activities during 2003. Out of the decrease of $818, $796 was due to
lower net repayment on lines of credit, debt and capitalized leases during the
nine months ended March 31, 2004 compared to net repayment of $1,079 for the
nine months ended March 31, 2003. Approximately $1,582 of cash deposits as of March 31, 2004 is held in the
Companys 55% owned Malaysian subsidiary. Of such amount, $1,315 is
denominated in the currency of Malaysia, of which $152 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. The future cash requirements are mainly for the acquisition of a burn-in
testing division in Malaysia and investment in additional machineries and
equipment for this new division. Other requirements will be for the use in
daily operations. The subsidiaries are projected to generate positive cashflow
in the short term as they continue to implement strict cost-control measures
such as maintaining a lean workforce, even though the outlook in the market is
recovering. There are no capital commitments except those that have been
disclosed as of March 31, 2004 or in the foreseeable future. Corporate Guarantee Arrangement The Company provides a corporate guarantee to one of its subsidiaries in
Southeast Asia of approximately $1,479 to secure line-of-credit and term loans
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. 23




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Recently Issued Accounting Pronouncements In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 clarifies the accounting for
certain financial instruments with characteristics of both liabilities and
equity, and requires that those instruments be classified as liabilities in the
balance sheets. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 did not have a material impact on the Companys results of
operations and financial condition. In January 2003, FASB issued Financial Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements to
those entities defined as Variable Interest Entities (more commonly referred
to as special purpose entities) in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately
to all Variable Interest Entities created after January 31, 2003 and by the
beginning of the first interim or annual reporting period commencing after June
15, 2003 for Variable Interest Entities created prior to February 1, 2003. On
October 9, 2003, the FASB issued FASB Staff Position 46-6 (FSP 46-6)
deferring the effective date for applying the provisions of FIN 46 for public
entities with variable interests in entities created before February 1, 2003,
until the end of the first interim or annual period ending after December 15,
2003. In December 2003, the FASB issued a revised version of FIN 46. This
revised version defers the effective date for public entities that are not
small business issuers to the first reporting period beginning March 15, 2004.
The Company has no variable interests in entities. 
 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 as a result of 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. The interest on our loans, capitalized leases and lines of credit range from
4.19% to 13% per annum. As of March 31, 2004, the outstanding aggregate
principal balance on these loans was approximately $1,886. These interest rates
are subject to change and we cannot predict an increase or decrease in rates,
if any. Foreign Currency Exchange Rate Risk. Significant portions of our revenues are
denominated in Singapore 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. These are displayed after the
translation into the reporting currency. Gains and losses on non-US currency
assets would generally be offset by the corresponding losses and gains on the
related liabilities, hence this reduces the impact on foreign currency
adjustments. We are affected by fluctuations in exchange rates if there is a
mismatch between our foreign currency denominated assets and liabilities.
Foreign currency adjustments resulted in an increase of $242 and a decrease of
$66 to shareholders equity for the nine months ended March 31, 2004 and 2003,
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 of March 31, 2004. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that these disclosure controls and procedures were effective. During the
Companys third fiscal quarter, there were no changes in the Companys internal
control over financial reporting that materially affected or are reasonably
likely to materially affect the Companys internal control over financial
reporting. 24




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TRIO-TECH INTERNATIONAL
PART II. OTHER INFORMATION 
  Item 1.
    Legal Proceedings  Not applicable 
  Item 2.
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities  Not applicable 
  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 and reports on Form 8-K  (a)
    
    Exhibits 31.1
    
    
    Certification of Principal Executive Officer of Registrant
Pursuant to Section 302 of the Sarbanes-Oxley Act Of 200231.2
    
    
    Certification of Principal Financial Officer of Registrant
Pursuant to Section 302 of the Sarbanes-Oxley Act Of 200232
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
  (b)
    
    Reports on Form 8-K  The Registrant filed the following reports on Form 8-K with the Securities
and Exchange Commission during the third quarter ended March 31, 2004:Form 8-K, filed April 7, 2004 (with date of earliest event reported
of March 29, 2004) reporting under Item 5. 25




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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. TINGDated: May 7, 2004
    
    Vice President and
Chief Financial Officer
(Principal Financial Officer) 26