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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 December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to Commission File Number 1-14523 TRIO-TECH INTERNATIONAL  California
(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, Including Area Code: 818-787-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
with the Commission by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ Number of shares of common stock outstanding as of February 1, 2005 is 2,966,042.    1




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TRIO-TECH INTERNATIONAL
INDEX TO CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of December 31, 2004 (Unaudited) and June 2004
    
    3Consolidated Statements of Operations and Comprehensive Income (loss) for the Three and Six Months Ended December 31, 2004 (Unaudited) and December 31, 2003 (Unaudited)
    
    4Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2004 (Unaudited) and December 31, 2003 (Unaudited)
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    30Item 4.
    
    Controls and Procedures
    
    30Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    31Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    31Item 3.
    
    Defaults upon Senior Securities
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    31Item 5.
    
    Other Information
    
    31Item 6.
    
    Exhibits
    
    31Signatures
    
    
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32
  2




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 ITEM 1. FINANCIAL STATEMENTS 
 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES) (Unaudited)Dec 31,
    
    
    June 30,ASSETS
    
    2004
    
    
    2004CURRENT ASSETS:Cash
    
    $
    1,126
    
    
    $
    1,357Short-term deposits
    
    
    3,727
    
    
    
    5,649Trade accounts receivable, less allowance for doubtful
accounts of $199 and $165
    
    
    3,478
    
    
    
    3,695Other receivables
    
    
    927
    
    
    
    583Inventories, less provision for obsolete inventory
of $399 and $445
    
    
    1,819
    
    
    
    1,409Prepaid expenses and other current assets
    
    
    159
    
    
    
    105Total current assets
    
    
    11,236
    
    
    
    12,798PROPERTY, PLANT AND EQUIPMENT, Net
    
    
    6,416
    
    
    
    5,202OTHER INTANGIBLE ASSETS, Net
    
    
    434
    
    
    
    TOTAL ASSETS
    
    $
    18,086
    
    
    $
    18,000LIABILITIES
AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Lines of credit
    
    $
    336
    
    
    $
    146Accounts payable
    
    
    1,176
    
    
    
    2,316Accrued expenses
    
    
    2,752
    
    
    
    2,166Income taxes payable
    
    
    58
    
    
    
    49Current portion of notes payable
    
    
    563
    
    
    
    506Current portion of capitalized leases
    
    
    221
    
    
    
    246Total current liabilities
    
    
    5,106
    
    
    
    5,429NOTES PAYABLE, net of current portion
    
    
    676
    
    
    
    583CAPITALIZED LEASES, net of current portion
    
    
    130
    
    
    
    210DEFERRED INCOME TAXES
    
    
    689
    
    
    
    644TOTAL LIABILITIES
    
    
    6,601
    
    
    
    6,866MINORITY INTEREST
    
    
    2,041
    
    
    
    2,110SHAREHOLDERS EQUITY:Common stock; no par value, 15,000,000 shares authorized;
2,966,042 and 2,964,542 shares issued and outstanding
    
    
    9,532
    
    
    
    9,527Paid-in capital
    
    
    284
    
    
    
    284Accumulated deficit
    
    
    (382
    )
    
    
    (519
    )Accumulated other comprehensive loss-translation adjustments
    
    
    10
    
    
    
    (268
    )Total shareholders equity
    
    
    9,444
    
    
    
    9,024TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    18,086
    
    
    $
    18,000
 See notes to condensed consolidated financial statements. 3




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED, IN
THOUSANDS, EXCEPT EARNINGS (LOSS) PER SHARE) Six Months Ended
    
    
    Three Months EndedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,2004
    
    
    2003
    
    
    2004
    
    
    2003NET SALESPRODUCT SALES
    
    $
    7,836
    
    
    $
    4,273
    
    
    $
    2,879
    
    
    $
    2,707SERVICES
    
    
    5,697
    
    
    
    4,633
    
    
    
    2,803
    
    
    
    2,34913,533
    
    
    
    8,906
    
    
    
    5,682
    
    
    
    5,056COST OF SALESCOST OF GOODS SOLD
    
    
    6,848
    
    
    
    3,390
    
    
    
    2,782
    
    
    
    2,048COSTS OF SERVICE RENDERED
    
    
    3,462
    
    
    
    3,169
    
    
    
    1,586
    
    
    
    1,58610,310
    
    
    
    6,559
    
    
    
    4,368
    
    
    
    3,634GROSS PROFIT
    
    
    3,223
    
    
    
    2,347
    
    
    
    1,314
    
    
    
    1,422OPERATING EXPENSES:General and administrative
    
    
    2,463
    
    
    
    1,953
    
    
    
    1,168
    
    
    
    970Selling
    
    
    550
    
    
    
    417
    
    
    
    281
    
    
    
    212Research and development
    
    
    56
    
    
    
    59
    
    
    
    23
    
    
    
    27Impairment loss
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Loss on disposal of property, plant and equipment
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Total
    
    
    3,070
    
    
    
    2,433
    
    
    
    1,472
    
    
    
    1,209INCOME (LOSS) FROM OPERATIONS
    
    
    153
    
    
    
    (86
    )
    
    
    (158
    )
    
    
    213OTHER INCOME
(EXPENSE)Interest expense
    
    
    (92
    )
    
    
    (66
    )
    
    
    (57
    )
    
    
    (31
    )Other income
    
    
    106
    
    
    
    196
    
    
    
    21
    
    
    
    58Total
    
    
    14
    
    
    
    130
    
    
    
    (36
    )
    
    
    27INCOME (LOSS) BEFOREINCOME TAXES AND MINORITY INTEREST
    
    
    167
    
    
    
    44
    
    
    
    (194
    )
    
    
    240INCOME TAX EXPENSE (BENEFIT)
    
    
    51
    
    
    
    33
    
    
    
    (60
    )
    
    
    18INCOME (LOSS) BEFORE MINORITY INTEREST
    
    
    116
    
    
    
    11
    
    
    
    (134
    )
    
    
    222MINORITY INTEREST
    
    
    21
    
    
    
    (58
    )
    
    
    34
    
    
    
    (4
    )NET INCOME (LOSS) ATTRIBUTABLE TOCOMMON SHARES
    
    
    137
    
    
    
    (47
    )
    
    
    (100
    )
    
    
    218EARNINGS (LOSS) PER SHARE:Basic
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.07Diluted
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.07WEIGHTED AVERAGE NUMBER OF COMMON ANDPOTENTIAL COMMON SHARES OUTSTANDINGBasic
    
    
    2,965
    
    
    
    2,930
    
    
    
    2,966
    
    
    
    2,933Diluted
    
    
    2,987
    
    
    
    2,930
    
    
    
    2,966
    
    
    
    2,985OTHER COMPREHENSIVE (LOSS) INCOME:Net income (loss)
    
    
    137
    
    
    
    (47
    )
    
    
    (100
    )
    
    
    218Unrealized loss on investment
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    278
    
    
    
    223
    
    
    
    240
    
    
    
    92COMPREHENSIVE INCOME
    
    $
    415
    
    
    $
    131
    
    
    $
    140
    
    
    $
    310
 See notes to condensed consolidated financial statements. 4




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS) Six Months EndedDec 31,
    
    
    Dec 31,2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    137
    
    
    $
    (47
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    707
    
    
    
    582Bad debt expense, net
    
    
    34
    
    
    
    3Impairment loss
    
    
    1
    
    
    
    Loss on sale of property and equipment
    
    
    
    
    
    
    4Gain on disposal of marketable securities
    
    
    
    
    
    
    (114
    )Deferred income taxes
    
    
    45
    
    
    
    21Minority interest, net
    
    
    (21
    )
    
    
    58Changes in operating assets and liabilities:Accounts receivable, net
    
    
    183
    
    
    
    348Other receivables
    
    
    (804
    )
    
    
    17Inventories
    
    
    (410
    )
    
    
    (26
    )Prepaid expenses and other current assets
    
    
    (54
    )
    
    
    (41
    )Accounts payable and accrued expenses
    
    
    (554
    )
    
    
    360Income taxes payable
    
    
    9
    
    
    
    (19
    )Net cash (used in) provided by operating activities
    
    
    (727
    )
    
    
    1,146CASH FLOWS FROM INVESTING ACTIVITIES:Short term deposits
    
    
    1,922
    
    
    
    (461
    )Capital expenditures
    
    
    (737
    )
    
    
    (638
    )Purchase of marketable securities
    
    
    
    
    
    
    (4
    )Acquisition of business in Malaysia
    
    
    (1,126
    )
    
    
    1Proceeds from disposal of marketable securities
    
    
    
    
    
    
    555Proceeds from sale of property and equipment
    
    
    201
    
    
    
    38Net cash provided by (used in) investing activities
    
    
    260
    
    
    
    (509
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net payments and borrowings on lines of credit
    
    
    178
    
    
    
    (156
    )Principal payments of debt and capitalized leases
    
    
    (385
    )
    
    
    (919
    )Proceeds from long-term debt
    
    
    430
    
    
    
    986Dividends paid to minority interest
    
    
    (53
    )
    
    
    (62
    )Cash received from stock options exercised
    
    
    5
    
    
    
    14Net cash provided by (used in) financing activities
    
    
    175
    
    
    
    (137
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    61
    
    
    
    35NET (DECREASE) INCREASE IN CASH
    
    
    (231
    )
    
    
    535CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    1,357
    
    
    
    1,495CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    1,126
    
    
    $
    2,030SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the year for:Interest
    
    $
    93
    
    
    $
    64Income taxes
    
    $
    97
    
    
    $
    52NON-CASH INVESTING AND FINANCING ACTIVITIESAcquisition of property, plant and equipment under capital finance lease
    
    $
    
    
    
    $
    94Capitalization of property, plant and equipment paid in advance
    
    $
    368
    
    
    $
    Deposit for the acquisition of business in Malaysia paid in advance
    
    $
    92
    
    
    $
    
 See notes to condensed consolidated financial statements. 5




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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF SHARES) 
  1.
    ORGANIZATION AND BASIS OF PRESENTATION  Trio-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%
    
    Van Nuys, CaliforniaEuropean Electronic Test Centre
    
    100%
    
    Dublin, IrelandTrio-Tech International Pte. Ltd.
    
    100%
    
    SingaporeUniversal (Far East) Services Pte. Ltd.
    
    100%
    
    SingaporeTrio-Tech Thailand
    
    100%
    
    Bangkok, ThailandTrio-Tech Bangkok
    
    100%
    
    Bangkok, ThailandTrio-Tech Malaysia
    
    55%
    
    Penang and Selangor, MalaysiaTrio-Tech Kuala Lumpur  100% owned by
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
six months ended December 31, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Companys annual
report for the fiscal year ended June 30, 2004, as amended by Form 10-K/A filed October 29,
2004.  Effective July 1, 2004, the Company changed its fiscal report period to end on the last day
of the fiscal quarter. The quarter end dates for periods ending December 31, 2004 and
December 31, 2003 were December 31, 2004 and December 26, 2003 respectively. 6




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2.
    INVENTORIES  Inventories consist of the following: Dec. 31,
    
    
    June 30,2004
    
    
    2004(Unaudited)Raw materials
    
    $
    1,011
    
    
    $
    652Work in progress
    
    
    752
    
    
    
    700Finished goods
    
    
    455
    
    
    
    502Less: provision for obsolete inventory
    
    
    (399
    )
    
    
    (445
    )$
    1,819
    
    
    $
    1,409
  3.
    STOCK OPTIONS  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 (loss) and earnings (loss) per
share as if the Company had applied the fair value recognition provision of SFAS No. 123 to
stock-based employee compensation. Six Months Ended
    
    
    Three Months EndedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)Net income (loss): as reported
    
    $
    137
    
    
    $
    (47
    )
    
    $
    (100
    )
    
    $
    218Add: stock based employee compensation
included in reported income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: total stock based employee
compensation
expense determined under fair value method for all awards
    
    
    (18
    )
    
    
    (44
    )
    
    
    (9
    )
    
    
    Pro forma net income (loss)
    
    $
    119
    
    
    $
    (91
    )
    
    $
    (109
    )
    
    $
    218Earnings (loss) per share  basicAs reported
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.07Pro forma
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    0.07Earnings (loss) per share  dilutedAs reported
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.07Pro forma
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    0.07
  As required by SFAS No. 123, the Company provides the following disclosure of estimated
values for these awards. The weighted-average grant-date fair value of options granted
during the first half of 2005 and the first half of 2004 was estimated to be from $4.40 to
$4.50 for fiscal 2005, and $2.66 for fiscal 2004. 7




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The fair value of each option grant was estimated on the date of grant using a Black-Scholes
option-pricing model with the following weighted average assumptions for the first half of
fiscal 2005 and the first half of fiscal 2004, respectively: risk free interest rates of
3.01% and from 1.91% to 2.93%, expected lives of 2 years for the first half of fiscal 2005
and the first half of fiscal 2004; volatility of 36.84% and 41.41% and no assumed dividends.  4.
    EARNINGS PER SHARE  The 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 381,000 shares at prices ranging from $2.25 to $6.00 per share
were outstanding during the six months ended December 31, 2004. The following options were
excluded from the computation of diluted EPS because their effect would have been
anti-dilutive. Type
    
    
    Shares
    
    Price
    
    
    ExpirationOptions
    
    20,000
    
    $
    5.63
    
    
    September 18, 2005Options
    
    32,000
    
    $
    5.37
    
    
    July 10, 2005Options
    
    47,000
    
    $
    6.00
    
    
    March 27, 2005
  Stock options to purchase 388,500 shares at prices ranging from $2.25 to $6.00 per share
were outstanding during the six months ending December 31, 2003. 128,000 options were
excluded in the computation of diluted EPS because the exercise price was greater than the
average market price of the common shares and therefore were anti-dilutive.  The following table is a reconciliation of the weighted average shares used in the
computation of basic and diluted EPS for the years presented herein: Six Months Ended
    
    
    Three Months EndedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)Net income (loss) used to compute basic
and diluted earnings (loss) per share
    
    $
    137
    
    
    $
    (47
    )
    
    $
    (100
    )
    
    $
    218Weighted average number of common
shares outstanding  basic
    
    
    2,965
    
    
    
    2,930
    
    
    
    2,966
    
    
    
    2,933Dilutive effect of stock options and warrants
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    52Number of
shares used to compute earnings per share  diluted
    
    
    2,987
    
    
    
    2,930
    
    
    
    2,966
    
    
    
    2,985
  5.
    ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS  Accounts receivable are customer obligations due under normal trade terms. We sell our
products and services to manufacturers in the semiconductor industry. We perform continuing
credit evaluations of our customers financial condition and although we generally do not
require collateral, letters of credit may be required from our customers in certain
circumstances.  Senior management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. We include any accounts receivable balances
that are determined to be uncollectible in our allowance for doubtful accounts. After all
attempts to collect a receivable have failed, the receivable is written off against the
allowance. Based on the information available to us, we believe our allowance for doubtful
accounts for the six months ended December 31, 2004 is adequate. However, actual write-offs
might exceed the recorded allowance. 8




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Dec. 31,
    
    
    June 30,2004
    
    
    2004(Unaudited)Beginning
    
    $
    165
    
    
    $
    157Additions charged to cost and expenses
    
    
    52
    
    
    
    18Recovered
    
    
    (18
    )
    
    
    (4
    )Actual write-offs
    
    
    
    
    
    
    (6
    )Ending
    
    $
    199
    
    
    $
    165
  6.
    WARRANTY ACCRUAL Dec. 31,
    
    
    June 30,2004
    
    
    2004(Unaudited)Beginning
    
    $
    162
    
    
    $
    165Additions charged to cost and expenses
    
    
    87
    
    
    
    41Recovered
    
    
    
    
    
    
    Actual write-offs
    
    
    (17
    )
    
    
    (44
    )Ending
    
    $
    232
    
    
    $
    162
  7.
    ACQUISITION OF A BUSINESS  On July 1, 2004, the Company acquired certain assets from TS Matrix Bhd. (the Seller)
utilized by the burn-in testing division of Seller for an aggregate cash purchase price of
approximately $1,218. Seller is one of our competitors. The Company paid approximately $92
by way of a deposit in fiscal 2004 and $731 of the purchase price in cash at the completion
of the acquisition on July 1, 2004, and the balance of approximately $395 was payable in the
form of a bank-guaranteed note, which matured at December 31, 2004. Our objectives in
acquiring the burn-in testing division were to service a large electronic device
manufacturer with whom we had been pursuing a business relationship for some time and to
increase our market share in testing services. Upon completion of the acquisition, the
customer signed a five-year agreement with the Company to provide testing services. The
value of obtaining this customer relationship intangible is included in other intangible
assets in the amount of $482. Results of the operations for the burn-in testing business are
included in the Companys income statement effective July 1, 2004.  In accordance with the Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the Company allocated the purchase price to the tangible assets and
intangible assets acquired based on their estimated fair values. The fair value assigned to
intangible assets acquired was based on estimates and assumptions determined by the
management. Purchase intangibles with finite lives are amortized on a straight-line basis
over their respective useful lives. The total purchase price was allocated as follows (in
thousands): 9




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##### Table of Contents



Total purchase price:Cash
    
    $
    823Notes payable
    
    
    395$
    1,218Allocated as follows:Fixed assetsPlant and machinery
    
    $
    711Production equipment
    
    
    13Office equipment
    
    
    5Leasehold improvement
    
    
    7736Intangible assets  customer relationship
    
    
    482$
    1,218
  The excess purchase price over the fair value of tangible assets acquired was attributed to
the customer relationship obtained from the above business acquisition and recorded as other
intangible assets. No goodwill is recognized in this context. The customer relationship
intangible will be amortized over its economic life based on the contract term as stated in
the sales agreement with the customer on a straight-line method over five years.  As previously reported in the Form 10-K, the customer relationship intangible is $493. The
difference of $11 ($493 versus the above $482) was related to equipment given by the Seller
to the Malaysia Testing operation subsequent to the completion date on July 1, 2004.  Pro Forma Financial Information  The unaudited financial information in the table below summarizes the combined results of
the operations of the Company and the new burn-in testing division in Malaysia for the three
and six months ended December 31, 2003 as if the acquisition had occurred on July 1, 2003.
The results from operations for the three and six months ended December 31, 2004 included
the business acquisition that was completed at the beginning of the first quarter of fiscal
2005.  The pro forma financial information is presented for informational purposes only and is not
necessarily indicative of the results of operations that would have been achieved had the
acquisition taken place at the beginning of the three and six months ended December 31,
2003. The unaudited pro forma combined statement of operations for the three and six months
ended December 31, 2003 combines the historical results for the Company for three and six
months ended December 31, 2003 and the historical results for the new burn-in testing
division for the period preceding the merger on July 1, 2004. The following amounts are in
thousands, except per share amounts. 10




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##### Table of Contents



UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 HistoricalHistorical
    
    
    Historicalinformation of the
    
    
    information of the
    
    
    ProformaCompany
    
    
    acquired business
    
    
    Adjustments
    
    
    
    
    
    
    ProformaNet sales
    
    $
    5,056
    
    
    $
    476
    
    
    $
    
    
    
    
    
    
    
    $
    5,532Net income
    
    $
    218
    
    
    $
    65
    
    
    $
    (24
    )
    
    
    (a
    )
    
    $
    259Basic earnings per share
    
    $
    0.07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.09Diluted earnings per share
    
    $
    0.07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.09Basic weighted average
common shares outstanding
    
    
    2,933
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,933Diluted weighted average
common shares outstanding
    
    
    2,985
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,985
 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 HistoricalHistorical
    
    
    Historicalinformation of the
    
    
    information of the
    
    
    ProformaCompany
    
    
    acquired business
    
    
    Adjustments
    
    
    
    
    
    
    ProformaNet sales
    
    $
    8,906
    
    
    $
    952
    
    
    $
    
    
    
    
    
    
    
    $
    9,858Net (loss) income
    
    $
    (47
    )
    
    $
    131
    
    
    $
    (48
    )
    
    
    (a
    )
    
    $
    36Basic (loss) earnings per share
    
    $
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.01Diluted (loss) earnings per share
    
    $
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.01Basic weighted average common
shares outstanding
    
    
    2,930
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,930Diluted weighted average common
shares outstanding
    
    
    2,930
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,930
  (a)
    Net earnings was adjusted for pro forma purposes to recognize the effect of the
amortization of the other intangible assets over its economic life of five years on a
straight-line method, assuming that the acquisition took place from July 1, 2003.  8.
    BUSINESS SEGMENTS  The 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. 11




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##### Table of Contents



All inter-segment sales are sales from the Manufacturing Segment to the Testing and
Distribution Segment. Total inter-segment sales were $37 and $34 for the six months ended
December 31, 2004 and 2003, respectively, and $8 and $9 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.  The following segment information is unaudited and is in thousands: Business Segment Information: Three Months
    
    
    
    
    
    
    Operating
    
    
    
    
    
    
    Depr.Ended
    
    
    Net
    
    
    Income
    
    
    
    
    
    
    and
    
    
    CapitalDec. 31,
    
    
    Sales
    
    
    (loss)
    
    
    Assets
    
    
    Amort.
    
    
    ExpendituresManufacturing
    
    FY 2005
    
    $
    2,425
    
    
    $
    5
    
    
    $
    2,138
    
    
    $
    17
    
    
    $
    32FY 2004
    
    
    1,715
    
    
    
    4
    
    
    
    2,573
    
    
    
    23
    
    
    
    3Testing Services
    
    FY 2005
    
    
    2,803
    
    
    
    (77
    )
    
    
    14,427
    
    
    
    315
    
    
    
    241FY 2004
    
    
    2,349
    
    
    
    132
    
    
    
    14,169
    
    
    
    242
    
    
    
    114Distribution
    
    FY 2005
    
    
    454
    
    
    
    (94
    )
    
    
    1,293
    
    
    
    38
    
    
    
    21FY 2004
    
    
    992
    
    
    
    76
    
    
    
    460
    
    
    
    31
    
    
    
    70Corporate and
    
    FY 2005
    
    
    
    
    
    
    8
    
    
    
    228
    
    
    
    
    
    
    
    unallocated
    
    FY 2004
    
    
    
    
    
    
    1
    
    
    
    31
    
    
    
    2
    
    
    
    Total Company
    
    FY 2005
    
    $
    5,682
    
    
    $
    (158
    )
    
    $
    18,086
    
    
    $
    370
    
    
    $
    294FY 2004
    
    $
    5,056
    
    
    $
    213
    
    
    $
    17,233
    
    
    $
    298
    
    
    $
    187
 Business Segment Information: Six Months
    
    
    
    
    
    
    Operating
    
    
    
    
    
    
    Depr.Ended
    
    
    Net
    
    
    Income
    
    
    
    
    
    
    and
    
    
    CapitalDec. 31,
    
    
    Sales
    
    
    (loss)
    
    
    Assets
    
    
    Amort.
    
    
    ExpendituresManufacturing
    
    FY 2005
    
    $
    6,403
    
    
    $
    97
    
    
    $
    2,138
    
    
    $
    35
    
    
    $
    53FY 2004
    
    
    2,621
    
    
    
    (277
    )
    
    
    2,573
    
    
    
    45
    
    
    
    58Testing Services
    
    FY 2005
    
    
    5,697
    
    
    
    29
    
    
    
    14,427
    
    
    
    596
    
    
    
    1,600FY 2004
    
    
    4,633
    
    
    
    214
    
    
    
    14,169
    
    
    
    474
    
    
    
    589Distribution
    
    FY 2005
    
    
    1,433
    
    
    
    (91
    )
    
    
    1,293
    
    
    
    75
    
    
    
    188FY 2004
    
    
    1,652
    
    
    
    38
    
    
    
    460
    
    
    
    59
    
    
    
    85Corporate and
    
    FY 2005
    
    
    
    
    
    
    118
    
    
    
    228
    
    
    
    1
    
    
    
    unallocated
    
    FY 2004
    
    
    
    
    
    
    (61
    )
    
    
    31
    
    
    
    4
    
    
    
    Total Company
    
    FY 2005
    
    $
    13,533
    
    
    $
    153
    
    
    $
    18,086
    
    
    $
    707
    
    
    $
    1,841FY 2004
    
    $
    8,906
    
    
    $
    (86
    )
    
    $
    17,233
    
    
    $
    582
    
    
    $
    732
 12




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##### Table of Contents



Geographic Area Information: Elimin-Three Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ationsEnded
    
    
    United
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    
    TotalDec. 31,
    
    
    States
    
    
    Europe
    
    
    Singapore
    
    
    Thailand
    
    
    Malaysia
    
    
    Other
    
    
    CompanyNet sales to
    
    FY 2005
    
    $
    538
    
    
    
    500
    
    
    
    3,001
    
    
    
    492
    
    
    
    1,159
    
    
    
    (8
    )
    
    
    5,682customers
    
    FY 2004
    
    $
    1,453
    
    
    
    250
    
    
    
    2,650
    
    
    
    601
    
    
    
    111
    
    
    
    (9
    )
    
    
    5,056Operating
    
    FY 2005
    
    $
    (58
    )
    
    
    (52
    )
    
    
    (36
    )
    
    
    (6
    )
    
    
    (14
    )
    
    
    8
    
    
    
    (158
    )Income (loss)
    
    FY 2004
    
    $
    69
    
    
    
    (14
    )
    
    
    124
    
    
    
    28
    
    
    
    5
    
    
    
    1
    
    
    
    213Property, plant
    
    FY 2005
    
    $
    7
    
    
    
    394
    
    
    
    3,538
    
    
    
    886
    
    
    
    1,631
    
    
    
    (40
    )
    
    
    6,416and equipment
    
    FY 2004
    
    $
    74
    
    
    
    437
    
    
    
    3,683
    
    
    
    1,029
    
    
    
    337
    
    
    
    (40
    )
    
    
    5,520
 Geographic Area Information: Elimin-Six Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ationsEnded
    
    
    United
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    
    TotalDec. 31,
    
    
    States
    
    
    Europe
    
    
    Singapore
    
    
    Thailand
    
    
    Malaysia
    
    
    Other
    
    
    CompanyNet sales to
    
    FY 2005
    
    $
    1,207
    
    
    
    954
    
    
    
    6,083
    
    
    
    1,145
    
    
    
    4,181
    
    
    
    (37
    )
    
    
    13,533customers
    
    FY 2004
    
    $
    2,537
    
    
    
    590
    
    
    
    4,497
    
    
    
    1,150
    
    
    
    166
    
    
    
    (34
    )
    
    
    8,906Operating
    
    FY 2005
    
    $
    (98
    )
    
    
    (76
    )
    
    
    111
    
    
    
    21
    
    
    
    77
    
    
    
    118
    
    
    
    153Income (loss)
    
    FY 2004
    
    $
    (80
    )
    
    
    (36
    )
    
    
    70
    
    
    
    18
    
    
    
    3
    
    
    
    (61
    )
    
    
    (86
    )Property, plant
    
    FY 2005
    
    $
    7
    
    
    
    394
    
    
    
    3,538
    
    
    
    886
    
    
    
    1,631
    
    
    
    (40
    )
    
    
    6,416and equipment
    
    FY 2004
    
    $
    74
    
    
    
    437
    
    
    
    3,683
    
    
    
    1,029
    
    
    
    337
    
    
    
    (40
    )
    
    
    5,520
 13




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##### Table of Contents



TRIO-TECH INTERNATIONAL AND SUBSIDIARIES 
  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 
 The discussions of Trio-Tech Internationals (the Company) business and activities set forth
in this Form 10-Q and in other past and future reports and announcements by the Company may contain
forward-looking statements within meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and assumptions regarding
future activities and results of operations of the Company. In light of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, the following factors, among
others, could cause actual results to differ materially from those reflected in any forward-looking
statement made by or on behalf of the Company: market acceptance of Company products and services;
changing business conditions or technologies and volatility in the semiconductor industry, which
could affect demand for the Companys products and services; the impact of competition; problems
with technology; product development schedules; delivery schedules; changes in military or
commercial testing specifications which could affect the market for the Companys products and
services; difficulties in profitably integrating acquired businesses, if any, into the Company;
risks associated with conducting business internationally and especially in Southeast Asia,
including currency fluctuations and devaluation, currency restrictions, local laws and
restrictions, and possible social, political and economic instability; and other economic,
financial and regulatory factors beyond the Companys control. See the discussions elsewhere in
this Form 10-Q for more information. In some cases, you can identify forward-looking statements by
the use of terminology such as may, will, expects, plans, anticipates, estimates,
potential, believes, can impact, continue, or the negative thereof or other comparable
terminology. We undertake no obligation to update forward-looking statements to reflect subsequent events,
changed circumstances, or the occurrence of unanticipated events. Overview Founded in 1958, Trio-Tech International provides third-party semiconductor testing and burn-in
services primarily through its laboratories in Southeast Asia. The Company operates in three
distinct segments: Distribution, Manufacturing, and Testing. At or from its facilities in
California and Southeast Asia, the Company also designs, manufactures and markets equipment and
systems used in the testing and production of semiconductors, and distributes semiconductor
processing and testing equipment manufactured by others. (i) Results of operations and business outlook The following table sets forth our revenue components for the three and six months ended December
31, 2004 and 2003, respectively. Revenue Components Six Months Ended
    
    
    Three Months EndedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net Sales:Testing
    
    
    42.08
    %
    
    
    52.02
    %
    
    
    49.31
    %
    
    
    46.45
    %Manufacturing
    
    
    47.33
    
    
    
    29.43
    
    
    
    42.69
    
    
    
    33.93Distribution
    
    
    10.59
    
    
    
    18.55
    
    
    
    8.00
    
    
    
    19.62Total
    
    
    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 Manufacturing segment replaced our core segment, the Testing segment, with the highest sales
for the six months ended December 31, 2004. This increase in Manufacturing sales was primarily the
result of a surge in burn-in systems and burn-in boards volume in Asia. In the Manufacturing
segment, backlog in the Singapore operation remained high at approximately $1,700, an increase of
180% compared to the second quarter of fiscal year 2004. Currently, the business volume for the
Singapore Manufacturing operation derives mainly from Asia, and will be focusing on back-end
products, such as burn-in boards and systems, for the Asian region. The U.S. operation, however,
will continue to listen to customer demand and market used and refurbished equipment, as it is more
cost-effective for our customers than purchasing new equipment. 14




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##### Table of Contents



The Testing segment experienced a decline in sales as a percentage of the overall sales for the six
months ended December 31, 2004 as compared to December 31, 2003 as a result of a variety of
factors. The operation in Singapore incorporated a change in product mix during the six months
ended December 31, 2004. The operation will provide more services for an increasingly popular new
type of microprocessor chip. Once they have set up additional facilities for the burn-in services
of the said microprocessor chip component, it will more than make up for the drop in demand for the
burn-in services of another type of microprocessor chip. Since the beginning of the fiscal year,
the burn-in services provided by the Testing operation in Malaysia contributed approximately $950
to the overall sales for Southeast Asia. In addition, the semiconductor market in Thailand
experienced a decline, and burn-in services for Thailand dropped to $450, their lowest point in two
and half years. The Company allocated the purchase price of the newly acquired burn-in division in Malaysia to the
tangible assets and intangible assets acquired based on their estimated fair values. The fair value
assigned to intangible assets acquired was based on estimates and assumptions determined by the
management. Purchase intangibles with finite lives are amortized on a straight-line basis over
their respective useful lives. The total purchase price was allocated as follows (in thousands): Total purchase price:Cash
    
    $
    823Notes payable
    
    
    395$
    1,218Allocated as follows:Fixed
assetsPlant and machinery
    
    $
    711Production equipment
    
    
    13Office equipment
    
    
    5Leasehold improvement
    
    
    7736Intangible assets  customer relationship
    
    
    482$
    1,218
 The excess purchase price over the fair value of tangible assets acquired was attributed to the
customer relationship obtained from the above business acquisition and recorded as other intangible
assets. No goodwill is recognized in this context. The customer relationship intangible will be
amortized over its economic life based on the contract term as stated in the sales agreement with
the customer on a straight-line method over five years. As previously reported in the Form 10-K, the customer relationship intangible was $493. The
difference of $11 ($493 versus the above $482) was related to equipment given by the Seller to the
Malaysia Testing operation subsequent to the completion date on July 1, 2004. The sales volume in the Distribution segment declined due to a drop in demand for low margin
front-end products. The backlog for the Singapore Distribution operation remained constant at
approximately $400. The operation is currently working on new products to expand into the Printed
Circuit Board Assembly (PCBA) manufacturing industry, as well as semiconductors for
microelectronics, which are mostly in Asian countries. Additionally, the operation is working with
research bodies in Asia on certain types of film equipment. In the long run, the operation will
likely expand its capabilities to media maker storage. With the appreciation of the European euro,
the operation will be purchasing less from European countries so as to avoid incurring higher
costs. The Companys key performance indicators are based on market demand. Sales activities such as
bookings, queries on products and backlog also formed part of our performance indicators, as well
as customers forecasts and the financial results of customers and competitors. According to the
analysts participating in the ISS2005 press conference, semiconductor device sales growth will be
flat in 2005 while chip equipment sales will go down to 15% from 10% in the U.S. Double digit
growth should resume in 2006 at 14.6%. Another analyst, IC Insights, predicted that China will
emerge as the worlds largest consumer of Integrated Circuits (IC) in 2005, surpassing Japan and
North America and accounting for more than 20% of global IC consumption. The Company believes the current market trend indicates that the semiconductor industry in Asia is
still positive, though the demand for computer and consumer electronics in Q2 2005 slowed down
slightly as compared to Q1 2005. Cost conscious consumer spending translates to more price
pressure through the supply chain, which means efficiency and productivity are of 15




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##### Table of Contents



utmost importance. Moreover, current equipment spending remains slow in the U.S. due to high oil
prices and continued concern with the ongoing instability in the Middle East. Therefore, many U.S.
semiconductor companies plan to postpone back-end purchases until inventories are reduced and the
semiconductor industry improves. There are several influencing factors which create uncertainties when forecasting performance, such
as the ever-changing nature of technology; for instance, the specific requirements from the
customer, decline in demand for certain types of burn-in devices or equipment, and other similar
factors. One of these factors is the highly competitive nature of the semiconductor industry
itself. Another is that the life-cycles of certain types of burn-in products are falling more
quickly than expected. Operations are given a very short lead time to generate products, as orders
are confirmed at the last minute, not to mention the complications of special requirements from
customers. Customers continue to exert pressure to cut selling prices. As a result, the Company
has taken action to help protect itself from these uncertainties by, among other things, upgrading
and improving its burn-in technology so as to gain customers confidence and maintain market
shares, as well as looking for alternatives for burn-in and exploring new markets, as we have with
the Distribution segment. The Company continues to cut costs, especially material costs, and
maintain a lean headcount. The various operations continue to stockpile in order to meet short
notices. (ii) Financial information During the six months ended December 31, 2004, total assets increased by $86 from $18,000 at June
30, 2004 to $18,086. The majority of the increase was in other receivables, inventory, property,
plant and equipment and other intangible assets, but offset with a decrease in cash, short term
deposits and accounts receivable of $231, $1,922 and $217, respectively. Inventories increased by $410 from June 30, 2004 to $1,819 at December 31, 2004. This was mainly
due to an increase in raw materials and works-in-progress after provision for stock obsolescence of
$408 and $52, respectively, which was offset with a $50 decrease in finished goods. The increase in
raw materials and works-in-progress in the Singapore Manufacturing operation was mainly to meet
orders anticipated in the third and fourth quarters. On the other hand, the increase in finished
goods in the Singapore Distribution operation mainly related to the deferred revenue of equipment,
which will be explained at a later point. Property, plant and equipment increased substantially by $1,214 from $5,202 at June 30, 2004 to
$6,416 at December 31, 2004 mainly due to the acquisition of fixed assets by the Testing segment in
Southeast Asia. During the six months ended December 31, 2004, the additions to property, plant and
equipment totaled $1,841, of which $368 was paid as a deposit before June 30, 2004, but the
renovation was completed and the equipment was received in the first quarter of fiscal 2005. $736
of the additions were due to acquisition of fixed assets located in the new burn-in operation in
Malaysia and $385 related to the purchases of new plant and machinery in Malaysia to meet the new
customers requirements. In addition, we combined two of the facilities in the Singapore Testing
operation to improve cost effectiveness, and hence incurred $427 for renovation of facilities.
Other fixed asset purchases included office equipment and machinery by the Singapore and Thailand
operations. The Company recognized $482 in other intangible assets for the customer relationship intangible and
it will be amortized over five years. The amortized expenses incurred were $48 for the six months
ended December 31, 2004. Consequently, the balance of the customer relationship intangible amounted
to $434 at December 31, 2004. Other receivables also increased by $344 from June 30, 2004 to $927 at December 31, 2004. This was
mainly due to the increase in upfront payment of $398 for fixed assets; deposits of $78 placed for
rental and utilities in the Malaysia operation; $119 advance payment to the suppliers on
inventories; and tax recoverable of $68 for the tax period between 1999 and 2001 in Singapore. This
was offset with $368 in upfront payments on fixed assets paid before June 30, 2004, although the
renovation was completed and the equipment was received in the first half of 2005. The significant drop in cash and short term deposits, which decreased by $2,153 from $7,006 at June
30, 2004 to $4,853 at December 31, 2004, was due to several reasons. The total acquisition costs of
the burn-in operation in Malaysia, which amounted to $1,218, was fully paid by December 31, 2004
through internal funding. In addition, more plant and machinery, in the amount of $193, were
purchased to meet our new customers requirements and $78 was placed with Sellers landlord as a
deposit for the rental of the factory previously used by the Seller in such burn-in operation. The
existing Malaysia operation paid out dividends of $122 to its minority interest, which was declared
out of reserves for the year ended June 30, 2004. The Singapore and Ireland operations paid taxes
of $57 and $21 respectively during the six months ended December 31, 2004. The Company also made
payments of $115 for the 2004 year-end audit during the six months ended December 31, 2004. The decrease in accounts receivable from $3,695 at June 30, 2004 to $3,478 at December 31, 2004 was
mainly attributable to the higher sales for the Manufacturing and Testing segments in Southeast
Asia during the first half of fiscal 2005 as compared to the first half of 2004, combined with more
efficient collections. Sales for these operations for the six months ended December 31, 2004 were
$11,280, which increased by 107% as compared to the sales for the six months ended December 31,
2003. At the same time, the operations in Southeast Asia maintained their efficiency in collection.
The collection period in Southeast Asia was shortened from 71 days at June 30, 2004 to 48 days at
December 31, 2004. 16




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##### Table of Contents



Total liabilities as of December 31, 2004 were $6,601, reflecting a $265 decrease in total
liabilities from $6,866 at June 30, 2004. Accounts payable at December 31, 2004 decreased by $1,140
since June 30, 2004 due mainly to fewer materials purchased in the Singapore Manufacturing
operation as the inventories, which were previously stocked up, will be sufficient for usage in the
next quarter. This offset the higher finished goods and raw materials of $385 purchased by the
Singapore Distribution operation towards the end of the second quarter. The decrease in accounts payable was offset by the increase in accrued expenses and lines of
credit. Accrued expenses increased by $586 mainly attributable to the Singapore and Malaysia
operations. In the Singapore operation, there was a higher provision for warranty of $75 due to
higher equipment sales and commissions of $22 for a greater number of commissionable sales; higher
accrued purchases of $130 due to the receipt of raw materials for work orders close to the quarter
closing for which vendors have not yet billed; utilities of $64; final payment for fixed assets of
$45 and higher sales tax of $48 at December 31, 2004. In the Malaysia operation, there was an
increase in accrual of payroll for contract workers of $79, performance incentives of $33 for
employees who previously worked for the Seller of the burn-in operation, and payroll related costs
of $46. In addition, the Malaysia operation will incur higher audit fees of $15 for the SEC
disclosure purposes and utilities costs of $21. The line of credit increased by $190 from $146 at
June 30, 2004, mainly attributable to the drawdown of short-term loans in Singapore. As of December 31, 2004, total liabilities (excluding minority interest) were 70% of total capital,
compared with 76.1% at June 30, 2004. Total liabilities as a percentage of total capital was lower
in fiscal 2005 mainly due to lower accounts payable as mentioned earlier. Comparison of Second Quarter Ended December 31, 2004 (2005) and December 31, 2003 (2004) The following table sets forth certain consolidated statements of income data as a percentage of
net sales for the second quarters in fiscal years 2005 and 2004, respectively: Q2 2005
    
    
    Q2 2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    76.9
    %
    
    
    71.9
    %Gross Margin
    
    
    23.1
    %
    
    
    28.1
    %Operating
ExpensesGeneral and administrative
    
    
    20.6
    %
    
    
    19.2
    %Selling
    
    
    5.0
    %
    
    
    4.2
    %Research and development
    
    
    0.4
    %
    
    
    0.5
    %Total Operating Expenses
    
    
    25.9
    %
    
    
    23.9
    %Income from operations
    
    
    -2.8
    %
    
    
    4.2
    %
 Overall Net Sales and Gross Margin Overall, sales for the Company increased by $626 from $5,056 in Q2 2004 to $5,682 in Q2 2005, a
12.4% rise. The majority of this boost in sales was in the Manufacturing segment, which
experienced a surge in sales volume for burn-in systems and burn-in boards, with a smaller
contribution from the Testing segment. The overall gross margin declined by 5% from Q2 2004 mostly
due to a change in product mix in the Manufacturing and Testing segments, where sales volume of
lower margin products increased. This will be elaborated upon in the next few sections. Manufacturing Segment The revenue and gross margin for the Manufacturing Segment for the second quarters of 2005 and 2004
were as follows: (In Thousands, unaudited)
    
    Q2 2005
    
    
    Q2 2004Revenue
    
    $
    2,425
    
    
    $
    1,715Gross margin
    
    
    19.0
    %
    
    
    23.5
    %
 The improvement in sales of $710 for the Manufacturing segment was primarily due to an increase in
sales of burn-in boards of $696 in Q2 2005 with a 165% increase in quantity sold and a 101.9%
increase in average unit selling price, and burn-in systems, which experienced a sales increase of
$395, a 75% increase in quantity sold with a 4.1% decrease in average unit selling price. Some of
our customers, who are electronic device manufacturers, augmented their capital equipment in order
to 17




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##### Table of Contents



meet greater production capacity, thus accounting for our increased sales. Sales of burn-in boards
also rose due to the increased demand for electronic components, primarily from customers in Asia. However, the increase in burn-in board and burn-in systems sales was offset by lower sales of
Artic Temperature Controlled Chucks and Wet Process Stations. Artic Temperature Controlled Chucks
sales fell $88, a 100% drop in both quantities sold and selling price, as a result of low spending
for capital equipment in the U.S. We believe the lower spending was due to higher oil prices and
concern over the ongoing instability in the Middle East. Added to that was an oversupply of
inventories which also forced semiconductor companies to push back certain purchases of capital
equipment. Sales of Wet Process Stations fell by $545, also a 100% decrease in both quantities
sold and selling price. Although there was an order for this particular equipment from a research
institution in Q2 2005, the actual sales will not be completed until next quarter. The
semiconductor market in the U.S. remained stagnant; hence we refocused on the Asian market. The gross margin declined by 4.5%, as the majority of the sales was derived from burn-in boards.
Despite doubling the average unit selling price of burn-in boards, the margin for this product
remained weak and was unable to make a significant impact on the overall margin. In addition, the
Company shifted focus from the weak market in the U.S. to the stronger market in Asia. Therefore,
no Wet Process Station was sold in Q2 2005 as the transition was made, thereby foregoing its
margin. Testing Segment The revenue and gross margin for the Testing Segment for the second quarters of 2005 and 2004 were
as follows: (In Thousands, unaudited)
    
    Q2 2005
    
    
    Q2 2004Revenue
    
    $
    2,803
    
    
    $
    2,349Gross margin
    
    
    28.4
    %
    
    
    32.5
    %
 The increase in sales of $454 in the Testing Segment, a 19.3% rise, derived mainly from the newly
acquired burn-in operation in Malaysia. The Testing operation in Malaysia attributed approximately
$450 of sales to burn-in services, as the existing operation was of a small scale last year and
generated no sales for Q2 2004. The increase in burn-in services for an increasingly popular new
type of microprocessor chip in the Singapore Testing operation also contributed to the sales;
however, this was offset by a drop in demand for services of another type of microprocessor chip.
As a result, the net increase in sales for the Singapore Testing operation was approximately $46
from Q2 2004. The gross margin for the Testing segment dropped 4.1% from 32.5% in Q2 2004 to 28.4% in Q2 2005.
Despite the increase in burn-in services for the new type of microprocessor chip in the Singapore
Testing operation, the average unit selling price dropped due to customers changing requirements.
In addition, a 5% lower margin was generated in the new Malaysian Testing operation as the
operation had already geared up its headcount for a new project, which did not come in as expected
in Q2 2005. The utilities cost in the Testing segment, as a percentage of sales, increased from 20%
in Q2 2004 to 21.6% in Q2 2005, primarily due to the Singapore Testing operation which required
higher utilities consumption for the new type of burn-in device and higher administrative charges
by an outside vendor. Distribution Segment The revenue and gross margin for the Distribution Segment for the second quarters of 2005 and 2004
were as follows: (In Thousands, unaudited)
    
    Q2 2005
    
    
    Q2 2004Revenue
    
    $
    454
    
    
    $
    992Gross margin
    
    
    20.2
    %
    
    
    24.0
    %
 Sales in the Distribution segment declined by 54.2% in Q2 2005, a drop of $538 when compared to Q2
2004. This decline was mainly the result of a decrease in sales of low margin front-end products
due to declining customer demand for these products. Sales of these products dropped $282 compared
to Q2 2004, with a 22.5% drop in quantities sold and a 31.2% decrease in average unit selling
price. According to the president of Advanced Forecasting, wafer shipments will continue to
decline in 2005. Additionally, sales of Vibration equipment and Reflow ovens also dropped in Q2
2005. Sales decreased $142 in spite of a 100% increase in quantities sold and a 71% decrease in
selling price. Customers were hesitant to make large purchases of high-end products like
Vibration products and therefore orders were infrequent, though the operation continues to liaise
with customers on their requirements and future sales are hopeful. In addition, the recognition of
revenue of a Reflow oven worth approximately $250 was deferred to the third quarter in the
Singapore Distribution operation, as the delivery of said oven in the second quarter did not
meet the revenue recognition policy. Nonetheless, based on the number of bookings on Test chambers
and the interest in Vibration products, there was a steady demand from the PCBA manufacturing
industry for these types of equipment. 18




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##### Table of Contents



Gross margin for the Distribution segment decreased by 3.8% from Q2 2004 to Q2 2005. The cause of
the decrease was mainly due to the sales of Test Chambers, which have a much lower margin than
the Vibration equipment sold in Q2 2004, and the deferred revenue as mentioned earlier. The
average unit selling price of Test Chambers fell by 71% as compared to Q2 2004. In addition, the
Singapore Distribution operation was engaged as an agent to market personal electronic products,
components for trading, and also delved into the knitting business. While the potential for this
market was great, the margin was low and hence contributed to the decline in gross margin. Sales by geographical area Geographically, net sales into and within the United States in Q2 2005 decreased by 63% compared to
Q2 2004. This occurred after the Manufacturing operation in San Jose relocated to Singapore as the
Company focused more on capturing the promising Asian market instead. The decrease in sales from
Universal Systems accounted for 64.1% of the total decline in sales within the U.S. Furthermore,
sales of Artic Temperature Controlled Chucks in the U.S. declined due to an oversupply of
inventories in the market and a decrease in equipment spending in this region. The drop in sales
of low margin products of $282, mentioned earlier, also contributed to the decline of sales in the
U.S. Net sales into and within Southeast Asia increased by 38.4% as compared to Q2 2004, mainly
due to the higher demand for burn-in boards and burn-in systems in Malaysia, Singapore and China.
In addition, the recovery of the consumer and electronic markets in the Asian region boosted the
sales of the Testing and Manufacturing operations in this area. Sales generated from the new
testing operation in Malaysia contributed to the increase as well. Net sales into and within
Ireland and other countries doubled compared to Q2 2004. The reason for this rise was the increase
in programming services in the Ireland operation. In addition, there were higher sales into other
countries, derived mainly from the Singapore Distribution operation, which sold more equipment and
peripherals to Japan, Taiwan and India. Operating Expenses The Companys operating expenses for the second quarters of 2005 and 2004 were as follow: (In Thousands, unaudited)
    
    Q2 2005
    
    
    Q2 2004General and administrative
    
    $
    1,168
    
    
    $
    970Selling
    
    $
    281
    
    
    $
    212Research and development
    
    $
    23
    
    
    $
    27$
    1,472
    
    
    $
    1,209
 As a percentage of sales, operating expenses increased by 2% from 23.9% in Q2 2004 to 25.9% in Q2
2005. This was due mainly to the increase in general and administrative expenses incurred in the
Testing segment in Southeast Asia. As a percentage of sales, general and administrative expenses
increased by 1.4% from 19.2% in Q2 2004 to 20.6% in Q2 2005, which was a result of an increase in
these expenses at all the operations. General and administrative expenses rose $198 compared to this same period last year for a number
of reasons. Salaries increased $88 in Southeast Asia due to the newly opened test center in
Malaysia and increased headcount in the Singapore cost center to support the operations in
Southeast Asia. There was an increase in professional fees of $29 in Southeast Asia for expenses
such as the ISO audit and the outsourcing of payroll and bookkeeping services. A higher provision
for doubtful debts of $29 was accrued in Q2 2005 in Southeast Asia, whereas doubtful debts of $14
were recovered in Q2 2004. Similarly, there was a reversal of bonuses in Q2 2004 while no such
reversal occurred in Q2 2005. Amortization costs of $23 for customer relation intangibles were
derived from the new operation in Malaysia, as well as higher operating expenses of $38 for such
expenses as printing and stationery, insurance, upkeep of the office and non-capitalized assets.
The Singapore operation was charged higher bank fees of $8 and incurred higher depreciation of $6.
Miscellaneous costs rose $9. However, all this was offset by the savings from the relocation of
the San Jose operation to Singapore, primarily from $15 in salaries, $13 in insurance and $14 in
professional and audit fees. Added to that was a savings of $34 in Corporate officer bonuses due
to unmet criteria this quarter. As a percentage of sales, selling expenses increased slightly from 4.2% in 2004 to 5% in 2005, a
difference of $69. The increase was mainly attributed to the Singapore operation where greater
headcount in the Distribution segment generated an increase in salaries of $29, as well as a higher
provision for warranty costs of $53 due to higher equipment sales. Traveling expenses increased by
$6 as we set up the new operation in Malaysia, and miscellaneous expenses increased by $9. This
overall increase was offset with the transfer of the San Jose facility to Singapore which resulted
in a savings of $20 in salaries for sales personnel and $7 for rentals and utilities. Research and development expensed diminished by $4 due to slower activities in the Manufacturing
operation in the U.S. 19




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##### Table of Contents



Income (loss) from operations The income (loss) from operations for the second quarters of 2005 and 2004 were as follow: (In Thousands, unaudited)
    
    Q2 2005
    
    
    Q2 2004Manufacturing Segment
    
    $
    5
    
    
    $
    4Testing Segment
    
    $
    (77
    )
    
    $
    132Distribution Segment
    
    $
    (94
    )
    
    $
    76Corporate
    
    $
    8
    
    
    $
    1$
    (158
    )
    
    $
    213
 The Company incurred an operating loss of $158 in Q2 2005 compared to an operating profit of $213
in Q2 2004. The loss was primarily in the Testing and Distribution segments. The Testing segment experienced a loss from operations of $77, down $209 from the Q2 2004 gain from
operations of $132. Due to the lower margin generated by the operation as mentioned earlier, the
Testing segment was not able to cover its fixed costs. $38 in fixed and semi-fixed operating
expenses such as printing and stationery, insurance, upkeep of the office and non-capitalized
assets were incurred in Q2 2005 in the Malaysian operation, as well as $77 in staff salaries.
Although the customer paid promptly, there was a provision for doubtful debts of $29 in Q2 2005
from the Testing segment in the Southeast Asia operation, as we were in the process of
synchronizing our billing function with the customer. The burn-in services for Thailand, as
mentioned earlier, dropped to approximately $450, the lowest quarterly sales for the Testing
segment in that region in two and half years. Hence sales for burn-in services were inadequate to
cover the fixed and semi-fixed costs such as salaries, depreciation, insurance, and other similar
expenses. As a result, the operating profit for the Thailand operation declined by $69 from an
operating profit of $58 in Q2 2004. The Distribution segment also experienced a loss from operations income, dropping $170 from an
operating gain of $76 in Q2 2004 to an operating loss of $94 in Q2 2005. The main contributor to
this decline in operating profit was the Singapore Distribution operation, which had a lower margin
due to the 71% drop in average unit selling price of Test Chambers in Q2 2005, as mentioned
earlier. In addition, the recognition of revenue of a Reflow oven was deferred to the third quarter
in the Singapore Distribution operation, as the delivery of the said oven in the second quarter did
not meet the revenue recognition policy, as previously mentioned. The drop in Singapore sales was
unable to cover the fixed and semi-fixed costs such as salaries, rentals, depreciation, insurance,
and other similar expenses, and salaries as a percentage of sales increased from 18.5% in Q2 2004
to 24.7% in Q2 2005. Salaries increased $29 due to the expansion of the Distribution operation in
Singapore, but at the current level of sales as an agent, the margin was not sufficient to cover
the increase in salaries and rental costs. The operation will continue to search for products with
a higher margin. The Manufacturing segment saw a slight increase in operating income, up $1 from 2004 to 2005.
Though the sales increased by 41.4% from Q2 2004, the increase in income from operation was minimal
due to the change in product mix mentioned earlier. Hence, the increase in sales from low-margin
burn-in boards was not enough to significantly impact the margin. Also, a provision for warranty
of $53 increased due to higher equipment sales in Q2 2005 compared to Q2 2004. Corporate increased its income from operations from $1 in Q2 2004 to $8 in Q2 2005. The corporate
office attempts to reimburse its operating expenses by imposing a fee on all subsidiaries on a
fixed percentage of total revenue. The sudden surge in sales in the Singapore Manufacturing
operation resulted in collected fees greater than Corporates operating expenses, despite a
decrease in allocation charges of 30% to the subsidiaries. Interest Expense The interest expenses for the second quarters of 2005 and 2004 were as follow: (In Thousands, unaudited)
    
    Q2 2005
    
    
    Q2 2004Interest expense
    
    $
    (57
    )
    
    $
    (31
    )
 Interest expenses increased $26 from $31 in Q2 2004 to $57 in Q2 2005, primarily due to higher
usage of credit line facilities in the Singapore operation. Higher interest expenses of $32 were
incurred, though this was offset with the decrease in lease financing interest of $6. Other Income Other income for the second quarters of 2005 and 2004 was as follow: (In Thousands, unaudited)
    
    Q2 2005
    
    
    Q2 2004Other income
    
    $
    21
    
    
    $
    58
 20




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##### Table of Contents



Other income decreased by $37, from $58 in Q2 2005 to $21 in Q2 2004. There was an increase in
unrealized loss of $49, mostly from the Thailand operation, due to the depreciation of the Thailand
baht against the U.S. dollar. Also, the Company accumulated lower interest income of $6 from the
Malaysian subsidiary, though the overall loss of other income was offset by an increase of $18 in
rental income from the leasing out of factories in Ireland and Malaysia. Income Tax The Company was in a tax refundable position of $60 for the three months ended December 31, 2004,
as compared to the income tax provision of $18 in the second quarter of 2005, which was due mainly
to the recoverable tax of $68 for the tax period between 1999 and 2001 in Singapore. In contrast,
there was a provision for tax of $16 from the Thailand operation in Q2 2004 due to the higher
profit of $128 generated in the second quarter of fiscal 2004 as compared to $60 the second quarter
of fiscal 2005. Net (Loss)/ Income As a result of all of the factors analyzed above, the net loss attributable to common shares for
the quarter ended December 31, 2004 was approximately $100, which represented a decline of $318 in
income from a net income of approximately $218 attributable to common shares for the quarter ended
December 31, 2003. Consequently, basic earnings per share for the quarter ended December 31, 2004
decreased by $0.10 from earnings per share of $0.07 in 2004 to a loss of $0.03 per share in 2005. Year to Date Comparison of the Six Months Ended December 31, 2004 (2005) to the Six Months
Ended December 31, 2003 (2004) The following table sets forth certain consolidated statement of income data as a percentage of net
sales for the first half of fiscal years 2005 and 2004, respectively: YTD 2005
    
    
    YTD 2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    76.2
    %
    
    
    73.6
    %Gross Margin
    
    
    23.8
    %
    
    
    26.4
    %Operating
ExpensesGeneral and administrative
    
    
    18.2
    %
    
    
    21.9
    %Selling
    
    
    4.1
    %
    
    
    4.7
    %Research and development
    
    
    0.4
    %
    
    
    0.7
    %Impairment Loss
    
    
    0.0
    %
    
    
    0.0
    %(Gain) Loss on disposal of PP&E
    
    
    0.0
    %
    
    
    0.1
    %Total Operating Expenses
    
    
    22.7
    %
    
    
    27.3
    %Income from operations
    
    
    1.1
    %
    
    
    -0.9
    %
 Overall Net Sales and Gross Margin Overall sales for 2005 were $13,533, up $4,627 from $8,906 for 2004, an increase of 52.0%. The
sales increase mainly resulted from the sudden surge in sales volume for burn-in systems and
burn-in boards. In addition, the new testing operation in Malaysia contributed to the rise of
sales in the Testing segment. The gross margin receded slightly by 2.6%, from 26.4% in 2004 to
23.8% in 2005 due mainly to the Manufacturing segment, where there was an increase in sales volume
of lower margin burn-in boards. Also, there was a change in product mix, which will be further
explained at a later point. Manufacturing Segment The revenue and gross margin for the Manufacturing segment for the first half of 2005 and 2004 were
as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Revenue
    
    $
    6,403
    
    
    $
    2,621Gross margin
    
    
    17.1
    %
    
    
    18.4
    %
 21




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##### Table of Contents



The first half of fiscal year 2005 evidenced a conflicting trend in demand for computers and
consumer electronic products in different regions. Sales improved in the Manufacturing segment by
$3,782, or 144.3%, from 2004 to 2005. This increase was due in part to the increase in capital
equipment spending by some of our electronic device manufacturing customers in Asia to meet their
increased production capacity. The PC market is expanding in Asia with a high demand for
electronic components, and the increase in burn-in board sales of $3,230 in 2005, with a 421.3%
increase in quantity sold and a 104.3% increase in selling price, derived mainly from a new
customer in Southeast Asia whom the operation there had pursued for some time. Sales of burn-in
systems increased as well, with sales of $1,056, an increase in quantity sold of 213.9% with a
10.3% drop in selling price. HAST systems saw heightened sales of $76, a 20% increase in quantity
sold and a 12.8% increase in selling price. This was offset, however, by lower sales of Artic
Temperature Controlled Chucks due to decreased spending in the U.S. for capital equipment.
Furthermore, the oversupply of inventories forced semiconductor companies to delay any plans for
capital equipment purchases. Artic Temperature Controlled Chucks experienced a drop in sales of
$119, with a 100% drop in quantity sold and 66.1% increase in selling price. Sales of Wet Process
Stations dropped $574, a 100% decline in both quantities sold and selling price, although there was
an order from a research institution for this piece of equipment in Q2 2005. However, the actual
sale will not come to fruition until at least next quarter. Even though sales increased 144.3% in the Manufacturing department, the gross margin decreased
slightly by 1.3% as compared to 2004. In spite of a doubling in sales of burn-in boards, the
margin for this product remained weak and was unable to make a significant impact on the margin.
Sales in the U.S. operation dropped significantly by 64.9% from $1,603 in 2004. Cost of sales,
however, which included fixed and semi-fixed costs, did not decrease proportionately as the
facility was already operating at a minimum cost. As a result, the margin in the operation fell
correspondingly with its sales. Testing Segment The revenue and gross margin for the Testing segment for the first half of 2005 and 2004 were as
follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Revenue
    
    $
    5,697
    
    
    $
    4,633Gross margin
    
    
    31.9
    %
    
    
    31.6
    %
 In the first half of fiscal year 2005 revenue increased $1,064 from $4,633 in 2004 to $5,697, a
23.0% increase. The increased sales mainly derived from our newly acquired burn-in operation in
Malaysia. The testing segment in Malaysia contributed approximately $950 to burn-in services
revenue. In addition, the slow but steady increase in demand for burn-in services for an
increasingly popular new type of microprocessor chip aided the sales by $192 compared to 2004.
However, this was offset by the fall in demand for burn-in services for another type of
microprocessor chip. Despite the change in sales mix, the overall margin in the Testing segment remained comparable to
2004. Higher margin derived from the burn-in services for the new type of microprocessor chip was
able to make up for the loss of margin from the fall in burn-in services for another type of
microprocessor chip. In addition, the utility costs as a percentage of sales remained constant at
15.2%, as in 2004; hence there was very little fluctuation in the gross margin. Distribution Segment The revenue and gross margin for the Distribution segment for the first half of 2005 and 2004 were
as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Revenue
    
    $
    1,433
    
    
    $
    1,652Gross margin
    
    
    20.1
    %
    
    
    20.0
    %
 Revenue in the Distribution segment fell $219 in the first half of 2005, down to $1,433 from $1,652
in 2004, a 13.3% difference. We believe that the lagging sales in the Distribution segment were
affected by the declining customer demand for low margin front-end products. Net sales of these
products dropped $325 compared to 2004, a 21.7% dip in quantity sold, and a 15% drop in average
unit selling price. According to the president of Advanced Forecasting, demand for wafer shipments
will continue to decline in 2005. Net sales of parts and services also dropped in 2005 by $51. In
addition, the recognition of revenue of a Reflow oven worth approximately $250 was deferred to
the third quarter in the Singapore Distribution operation, as the delivery of said oven in the
second quarter did not meet the revenue recognition policy. Slightly offsetting this overall drop
in net sales was an increase in sales of Vibration equipment, chambers, and other equipment, such as
wafer fabricators, due to the recovery of the semiconductor industry and electronics market in Asia.
There was continued demand from the PCBA manufacturing industry based on the increased number of
sales bookings on Vibration equipment as well as Test Chambers. The sales team placed greater
focus on meeting the stringent requirements of our customers. 22




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##### Table of Contents



Gross margin went virtually unaffected from the first half of 2004 to the first half of 2005, in
spite of a change in product mix. Though there was a significant drop in sales of low margin
products and spare parts, it did not have significant impact on the overall margin. Higher margin
derived mainly from Vibration and Wafer Fabrication equipment due to our ability to meet the
stringent demands of our customers was enough to offset the drop in margin for low-margin products. Sales by geographical area Net sales into and within the United States region decreased by half compared to 2004, which
occurred after the operation in San Jose relocated to Singapore as the Company shifted its focus to
capturing the Asian market instead. The loss of sales from Universal Systems contributed to at
least 65% of the total decline in sales in the U.S. Sales of Artic Temperature Controlled Chucks
in the U.S. operation declined due to the oversupply of inventories and the decrease in equipment
spending budgets in the U.S. The slide in sales of low margin products of $325 mentioned earlier
was another contributing factor to the overall drop in U.S. sales. Net sales into and within the Southeast Asia region increased by 96.3% due to the high demand for
burn-in systems in Singapore and China. In addition, the recovery of the consumer and electronic
markets in Asia boosted the sales for the Testing, Manufacturing and Distribution operations in
this area. Sales generated from the new testing operation in Malaysia and sales of burn-in boards
to a new, highly pursued customer also contributed to this increase in the Southeast Asia region. Net sales into and within Ireland and other countries doubled compared to the first half of 2004.
This was due to the increase in programming services in the Ireland operation and the increase in
sales into other countries derived from the Singapore Distribution operation. Singapore
Distribution sold more equipment and peripherals to Japan, Taiwan and India due to the recovery of
the consumer and electronic markets in the Asian region. Operating Expenses The Companys overall operating expenses for the first half of 2005 and 2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004General and administrative
    
    $
    2,463
    
    
    $
    1,953Selling
    
    $
    550
    
    
    $
    417Research and development
    
    $
    56
    
    
    $
    59Impairment loss
    
    $
    1
    
    
    $
    Loss on disposal of PP&E
    
    $
    
    
    
    $
    4$
    3,070
    
    
    $
    2,433
 As a percentage of sales, operating expenses decreased by 4.7% from 27.3% in the first half of
fiscal year 2004 to 22.7% in the first half of 2005. The decrease in operating expenses was due
mainly to a decrease in general and administrative expenses of 3.7% from 2004 to 2005. As a percentage of sales, general and administrative expenses decreased by 3.7% from 21.9% in 2004
to 18.2% in 2005, attributable primarily to the sudden surge in sales of burn-in boards and burn-in
systems in the Manufacturing segment. Operating expenses in this segment did not increase
correspondingly. On the other hand, general and administrative expenses increased in terms of
dollar value by $510, from $1,953 in the first half of 2004 to $2,463 in the first half of 2005.
Salaries increased $88 in Southeast Asia to support the new testing operation in Malaysia and to
compensate the higher headcount in the Singapore cost center which supports the operations in
Southeast Asia. An increase in professional fees such as the ISO audit and the outsourcing of
payroll and bookkeeping services contributed another $29 to the increase in expenses. $50 was
spent to engage a consultant to assist with SOX 404 requirements, and higher audit fees of $15 were
incurred for the audit of the newly acquired testing operation for SEC disclosure purposes. A
higher provision for doubtful debts of $29 was allotted in the second quarter of 2005 from the
Testing operation in Southeast Asia as we were in the process of synchronizing our billing function
with the customer. An increase of $46 in amortization costs was incurred for customer relation
intangibles which derived from the new operation in Malaysia, and a reversal of $30 in bonuses in
the U.S. operation occurred in Q2 2004 whereas no such reversal took place in Q2 2005. Along those
same lines, a provision for bonuses of $76 took place in 2005 due to better performance in the
Singapore Testing and Manufacturing operations. Similarly, there was a reversal of $32 for
provision of productivity funds in 2004 due to the cancellation of the Companys annual dinner,
whereas a provision of $68 was made in 2005. Higher operating expenses of $76 were incurred in the
Malaysia operation for expenses such as printing and stationery, insurance, upkeep of the office
and non-capitalized assets. An increase of $15 for legal matters relating to the newly acquired
business took place in the first half of 2005, and there was more traveling by corporate officers
in 2005 which resulted in an increase of $24 in travel and entertainment expenses. The Singapore
and Malaysia operations required a renovation of facilities to cater to the burn-in services of new
devices, thus higher depreciation costs of $14 were incurred. Higher bank fees of $8 were charged
to the Singapore operation for the renewal of a guarantee, and there was an increase in 23




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miscellaneous costs of $26 in 2005. The increase in operating expenses was offset with the savings
incurred when the operation in San Jose moved to Singapore and the Company saved $30 in salaries,
$46 in insurance and $14 in audit fees. Also, Corporate officers bonuses were reduced by $25 in
2005 due to lagging performance. As a percentage of sales, selling expenses decreased from 4.7% in 2004 to 4.1% in 2005. Again,
this was attributable to the sudden surge in the Manufacturing segments sales while selling
expenses did not increase accordingly. However, in terms of dollar value, selling expenses
increased by $133, from $417 in the first half of 2004 to $550 in the first half of 2005 as a
result of several factors. Salaries increased by $51 in 2004 due to an increase in headcount for
the expansion of the Distribution operation in Singapore. Higher equipment sales in 2005 resulted
in an increase in provision for warranty of $80 and commissions of $40. Greater participation in
trade shows and conferences in order to market our products increased costs by $13. Traveling
expenses also increased by $15 as Singapore personnel traveled to Malaysia to set up the new
testing operation there. Miscellaneous costs increased $3. The increase in selling expenses was
offset with the savings we managed from relocating the San Jose operation to Singapore, resulting
in savings of $50 in sales personnel salaries and $19 in rental and utilities. Research and development expenses remained relatively flat. Income (loss) from operations The income (loss) from operations for the first half of 2005 and 2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Manufacturing Segment
    
    $
    97
    
    
    $
    (277
    )Testing Segment
    
    $
    29
    
    
    $
    214Distribution Segment
    
    $
    (91
    )
    
    $
    38Corporate
    
    $
    118
    
    
    $
    (61
    )$
    153
    
    
    $
    (86
    )
 The Company turned an operating loss of $86 in the first half of 2004 to an operating profit of
$153 in the first half of 2005. The Manufacturing and Corporate segments, which showed the
greatest profits, were mostly responsible for this turnaround and managed to offset the poor
results from the Testing and Distribution segments, which will be explained later. The Manufacturing segment managed an operating gain of $97 in the first half of 2005, up $374 from
an operating loss of $277 in 2004. The surge in sales and the improvement of approximately $600 in
gross profit as compared to 2004 boosted the results for the Manufacturing segment significantly.
After relocating Universal Systems from San Jose to Singapore, certain fixed costs that were
incurred in 2004 did not recur in 2005, resulting in savings of $125 in salaries, $63 in rental,
utilities, and insurance costs, $6 in commissions and $14 in professional and audit fees. The
operation is currently being managed by the existing Singapore Distribution personnel. General and
administrative expenses as a percentage of sales in the Manufacturing segment dropped from 16.7% in
2004 to 8.2% in 2005, while selling expenses as a percentage of sales dropped from 7% to 2.4%,
mainly due to the significant upsurge in sales of 144.3% from 2004 to 2005. The Singapore
Manufacturing operation managed the sales increase with its existing office headcount and
outsourced some of the projects so as to maintain a lean workforce. With this strategy, the
operation was able to operate with lower overhead. Corporate also contributed to the improvement in operating income by bringing in an operating
income of $118 in 2005, up $179 from an operating loss of $61 in 2004. The corporate office
reimbursed its operating expenses by imposing a fee to all subsidiaries based on a fixed percentage
of total revenue. The upswing in sales in the Singapore Manufacturing operation resulted in
collected fees greater than Corporates operating expenses despite a decrease in allocation charges
of 30% to subsidiaries. Also helping was the reduction of $25 in corporate officers bonuses in
2005, since they did not meet the bonus criteria. Offsetting the profits shown by these divisions was the deterioration in results in the Testing and
Distribution segments. The Testing segment went from an operating income of $214 in 2005 and
dropped $185 to an operating income of only $29 in 2005. Due to the lower margin generated by the
Malaysian operation as mentioned earlier, the sales volume in that operation was insufficient to
cover its fixed and semi-fixed costs. These fixed and semi-fixed costs for operating expenses in
the Malaysian operation included $76 in printing and stationery, insurance, and upkeep of office
and non-capitalized assets, and $154 in staff salaries. Although the customer ended up paying
promptly, there was a provision of doubtful debts in 2005 of $29 in the Testing operation in
Southeast Asia, as we were in the process of synchronizing the billing function with the customer.
As mentioned earlier, burn-in services for Thailand dropped by $83 from $1,120 in 2004 to $1,037 in
2005 as the semiconductor market in Thailand weakened. Hence, the sales were unable to cover the
fixed and semi-fixed costs such as salaries, depreciation, insurance, and other similar expenses,
and as a result the operating profit of the Thailand operation declined by $68 from $128 in 2004.
The initial setup of the new operation in Malaysia required costs such as legal fees of $15 24




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incurred for acquisition and statutory fees of $15 for the disclosure to meet SEC requirements.
For the same reason, more traveling took place by Singapore personnel to set up the new testing
operation. The Distribution segment experienced a decline of $129 in income from operations, going from an
income of $38 in 2004 to a loss of $91 in 2005. This deterioration in operating profit mainly came
from the Singapore operation, where lower margin in 2005 was the result of a change in product mix
and dropped the gross profit by $42 from $330 in 2004 to $288 in 2005. In addition, the
recognition of revenue of a Reflow oven was deferred to the third quarter in the Singapore
Distribution operation, as the delivery of said oven in the second quarter did not meet the revenue
recognition policy, as mentioned earlier. This drop in sales meant that Singapore Distribution was
unable to cover its fixed and semi-fixed costs such as salaries, rental, depreciation, insurance,
and other similar expenses, and selling expenses as a percentage of sales increased from 11.8% in
2004 to 19.5% in 2005. In fact, salaries increased by $51 due to the expansion of the Distribution
operation in Singapore. However, at the current level of new sales generated from operating as an
agent, the margin was not sufficient enough to cover the salaries and rental costs of expansion.
The operation will continue to search for products with a higher margin. In addition, commissions
increased by $35 from 2004 to 2005 due to an increase in sales of commissionable equipment. Interest Expense The interest expenses for the first half of 2005 and 2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Interest expense
    
    $
    (92
    )
    
    $
    (66
    )
 Interest expenses increased by $26 during the first six months of 2004 compared to the same period
in 2005, mainly due to higher usage of credit line facilities by the Singapore operation. This
incurred higher interest expenses of $41, which was offset with the decrease in lease financing
interest of $15. Other Income Other income for the first half of 2005 and 2004 were as follows: (In Thousands, unaudited)
    
    YTD 2005
    
    
    YTD 2004Other income
    
    $
    106
    
    
    $
    196
 Other income decreased $90 from $196 in the first half of 2004 to $106 in 2005. Contributing to
this difference was a gain on marketable securities of $114 after the Malaysia subsidiary disposed
of all investments and subsequently exited the market in 2004, while no such transaction occurred
in 2005. Additionally, interest income decreased by $6 in the Malaysia subsidiary and dividend
income dropped $5. This was, however, offset with an increase in rental income of $32 for the
leasing out of factory space in Ireland and Malaysia and of $3 in miscellaneous income. Income Tax Current income tax expense for the first half of 2005 was approximately $51, an increase of $18,
compared to the income tax provision of $33 in the first half of 2004. This resulted from higher
taxable profits of $95 generated from Singapore in the first half of 2005, which was offset with
the recoverable tax of $68 in the same period in Singapore and the lower taxable profits of $7 from
Thailand. 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 first half of 2005 was approximately $137, which represented an upswing of $184 in net income
from a net loss of approximately $47 attributable to common shares for the first half of 2004.
Consequently, basic earnings per share for 2005 increased by $0.07 to $0.05 per share in 2005, from
a loss of $0.02 per share in 2004. Diluted income per share for 2005 was $0.05 per share,
representing an increase of $0.07 per share from a loss of $0.02 per share in 2004. Liquidity and Capital Resources Though the working capital (defined as current assets minus current liabilities) of $6,130 as of
December 31, 2004 represents a decrease of $1,239, or 16.8%, compared to working capital of $7,369
as of June 30, 2004, we still believe our financial condition remains strong. The current ratio
(defined as current assets divided by current liabilities) was 2.20 as of December 31, 2004
compared 25




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to 2.36 as of June 30, 2004. We believe that the Company has the ability to maintain positive
working capital and strong liquidity in the near future. Management believes the Company has the economic wherewithal to satisfy any short-term funding for
several reasons. Our current ratio remains positive at 2.20 as of December 31, 2004. Currently,
the Singapore operations are financed using short-term loans and lines of credit, which are
sufficient to meet their needs. Furthermore, the manufacturing operation in San Jose, California,
which consistently showed a loss, was moved to Singapore and is being operated by the existing
Singapore Distribution personnel. We anticipate that the relocation will ease the need for working
capital used to finance that operation. The burn-in testing operation in Malaysia made several major payments during the six months ended
December 31, 2004, such as the second and final payment of the acquisition; renovation of its
office; deposit placement with its landlord to use its facilities; and purchases of equipment to
meet the new customers requirements. We anticipate that the short-term funding required in the
near future will be for the purchase of other equipment for new products and renovation of
approximately $137 and $268, respectively, both of which 30% was already paid as upfront payment.
In addition, our working capital was tied up due to credit terms extended to a new customer which
were longer than the credit terms extended to us from our supplier. Conversely, the Singapore
Testing operation required funds of $451 to set up additional facilities for the burn-in services
of an increasingly popular new type of microprocessor chip. We are able to finance this capital
expenditure with our existing term loan, which has yet to be utilized. The Companys credit rating provides ready and ample access to funds in global capital markets. At
December 31, 2004, the Company had available short-term lines of credit totaling $5,172 of which
$4,836 was unused. The unused portion included a line of credit of $611 in the Singapore operation
which expired in October 2004. The Company anticipates that it will renew its line of credit at a
later date, but there is no assurance that the Company will do so, or will be able to do so on
terms satisfactory to the Company, or on terms at least as favorable as those of the expired line
of credit. However, the line of credit of $611 will be extended until the renewal of facilities is
finalized. Entity with Facility
    
    Type of
    
    
    Interest
    
    
    Credit
    
    
    UnusedTrio-Tech Malaysia
    
    Line of Credit
    
    
    7.00
    %
    
    $
    91
    
    
    $
    91Trio-Tech Bangkok
    
    Line of Credit
    
    
    6.75
    %
    
    
    103
    
    
    
    103Trio-Tech Singapore
    
    Line of Credit
    
    
    4.25 to 6.0
    %
    
    
    4,978
    
    
    
    4,642$
    5,172
    
    
    $
    4,836
 The Company procured a long-term loan of $430 during the six months ended December 31, 2004 to
consolidate facilities in the Singapore Testing operation in order to improve cost effectiveness.
The Company also procured another loan of approximately $610 upon which the Company has yet to
draw. There were no other capital commitments except those that were disclosed as of December 31, 2004. Net cash used in operating activities during the six months ended December 31, 2004 was $727,
reflecting a decrease of $1,873, compared to net cash of $1,146 provided by operating activities
during the six months ended December 31, 2003. Cashflow from operating activities decreased mainly
due to an increase in accounts receivable, other receivables, inventories, and a decrease in
accounts payable and accrued expenses which amounted to approximately $2,284. This was offset
with a decrease in gain on disposal of marketable securities of $114 after the Malaysia subsidiary
disposed of all investments and subsequently exited the market in 2004, together with other factors
of $297, giving a net decrease of $1,873. The increase in accounts receivable of $165 was mainly attributable to the higher sales for the
Manufacturing and Testing segments in Southeast Asia during the first half of 2005 as compared to
the first half of 2004. Sales for these operations for the six months ended December 31, 2004 were
$11,280, which increased by 107% as compared to the sales for the six months ended December 31,
2003. At the same time, the operations in Southeast Asia maintained their efficiency in collection.
Hence, the accounts receivable turnover index (defined as net sales divided by average ending
accounts receivable less bad debt allowance) increased from 5.14 times at December 31, 2003 to 7.55
times at December 31, 2004. Other receivables increased by $821 at December 31, 2004 due to the increase in upfront payment of
$30 for fixed assets; deposits of $78 placed for rental and utilities in the Malaysia operation;
advance payment of $119 to the suppliers on inventories; tax recoverable of $68 in Singapore;
capitalization of property, plant and equipment and deposit for investment in Malaysia, in the amount
of $460 paid in 2004. Inventory increased by $384 at December 31, 2004 as compared to December 31, 2003, as the Singapore
Distribution and Manufacturing operations stocked up inventories to meet orders anticipated in the
third and fourth quarters. The inventory 26




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turnover index (defined as cost of sales divided by average ending inventory) increased from 12.35
times at December 31, 2003 to 12.78 times at December 31, 2004. Accounts payable and accrued expenses as of December 31, 2004 decreased by $914 over December 31,
2003 mainly due to fewer materials of $1,640 purchased in the Singapore Manufacturing operation due
to increased inventories. This offset the higher finished goods and raw materials of $385 purchased
by the Singapore Distribution operation towards the end of the second quarter. The decrease in
accounts payable was more than enough to offset the increase in accrued expenses. The factors that
contributed to the increase in accrued expenses were mentioned earlier. We sold the investment in marketable securities during the first quarter of fiscal 2004 and
realized a gain of $114 on disposal of the investment. There was no such gain in the first half of
2005 as we had exited the market in 2004. Net cash provided by investing activities during the six months ended December 31, 2004 was $260,
reflecting an increase of $769 compared to $509 used in investing activities during the six months
ending December 31, 2003. The investment in short-term deposits as of December 31, 2004 decreased
by $2,383 from December 31, 2003, as the short-term deposits were used for multiple purposes. The
Company paid the audit and legal fees of $145 for the 2004 year-end audit; 2004 final dividends of
$122 went to the minority interest in Malaysia; tax payments of $78 were paid during the six months
ended December 31, 2004 in the Singapore and Ireland operations; and the acquisition of the new
testing operation in Malaysia of $1,126 took place, which included the customer relationship
intangibles of $482. Lastly, the short-term deposits were also used to reinvest in capital
expenditure, with an increase of $99 during the period ended December 31, 2004. The increase in capital expenditure of $99 during the six months ended December 31, 2004 was mainly due
to the purchases of new plant and machinery in Malaysia to meet our new customers requirements.
There was an acquisition of business in Malaysia which amounted to $1,218 at the beginning of
fiscal 2005 and none in the same period last year. Out of the $1,218, $92 related to the deposit
for the acquisition paid in 2004. In addition, we realized the investment in marketable securities
with proceeds of $555 in the first quarter of fiscal 2004 and there were no proceeds on disposal of
marketable securities during the six months ended December 31, 2004, as we had exited the market in
2004. The lower investments in short-term deposits and higher proceeds of $163 from sales of
equipment during the six months ended December 31, 2004 offset the lower proceeds from disposal of
marketable securities, the higher capital expenditure incurred and addition investment in Malaysia. Net cash provided by financing activities during the six months ended December 31, 2004 was $175
compared to $137 used in financing activities at December 31, 2003. The difference of $312 was due
to higher borrowings on lines of credit of $334 and lower payments of debts and capitalized leases
of $534 during the six months ended December 31, 2004. These offset the lower proceeds of $556 from
long-term loans, which were used to finance working capital as well as some of the capital
expenditure in Singapore during the six months ended December 31, 2004. Approximately $456 of cash deposits as of December 31, 2004 was held in the Companys 55% owned
Malaysian subsidiary. Of such amount, $184 was denominated in the currency of Malaysia, of which
$140 is currently available for movement to overseas, as authorized by the Central Bank of
Malaysia. There are additional amounts available for distribution as dividends (after making
deductions for income tax) pursuant to Malaysian regulations. Corporate Guarantee Arrangement The Company provides a corporate guarantee to one of its subsidiaries in Southeast Asia of
approximately $1,222 to secure a term loan from a bank to finance the operations of such
subsidiary. With the strong financial position of the subsidiary company, the Company believes this
corporate guarantee arrangement will have no material impact on its liquidity or capital resources. Recently Issued Accounting Pronouncements In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46, as amended by FIN 46(R), issued in January 2003, requires an
investor with a majority of the variable interests in a variable interest entity to consolidate the
entity and also requires majority and significant variable interest investors to provide certain
disclosures. A variable interest entity is an entity in which the equity investors do not have a
controlling financial interest or the equity investment at risk is insufficient to finance the
entitys activities without receiving additional subordinated financial support from other parties.
The provisions of FIN 46(R) are applicable for fiscal years ending after December 15, 2004. The
Company does not have any variable interest entities that must be consolidated. In December 2004, the FASB announced that SFAS No. 123R (revised December 2004), Share-Based
Payment, sets accounting requirements for share-based compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for awards to
non-employees. This Statement will require the Company to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation issued to employees, but 27




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expresses no preference for a type of valuation model. For public entities, this Statement is
effective for the first interim period beginning after June 15, 2005. The Company will adopt this
Statement in the second quarter of fiscal 2005 and is evaluating this pronouncements effect on the
Companys financial position and net income. In November 2004, the FASB issued Statement of Accounting Standards No. 151, Inventory Costs, A
Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 eliminates the so abnormal
criterion in ARB No. 43 Inventory Pricing. SFAS No. 151 no longer permits a company to
capitalize inventory costs on their balances sheets when the production defect rate varies
significantly from the expected rate. SFAS No. 151 reduces the differences between U.S. and
international accounting standards. SFAS No. 151 is effective for inventory cost incurred during
annual periods beginning after June 15, 2005. The Company does not believe that this pronouncement
will have a material effect on the Companys financial position and net income. In December 2004, the FASB issued FASB Staff Position No. FAS109-1 (FSP FAS 109-1), Application of
FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004. FSP FAS 109-1 clarifies that the
deduction will be treated as a special deduction as described in Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the date of enactment. The impact of the
deduction will be reported in the period in which the deduction is claimed. We are currently
assessing the financial impact of FSP FAS 109-1 on our consolidated financial statements. In December 2004, the FASB issued the Statement of Financial Account Standards No. 151, Exchange
of Nonmonetary Assets, An Amendment of APB Opinion No. 29 (SFAS No. 153). SFAS No 153 addresses
the measurement of exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of
APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS No. 153 shall be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after the date this Statement is issued. The provisions of this Statement shall be applied
prospectively. We are currently assessing the financial impact of SFAS No. 153 on our consolidated
financial statements. Critical Accounting Estimates & Policies In response to the SECs Release No. 33-8040, Cautionary Advice Regarding Disclosure About
Critical Accounting Policy, the Company identified the most critical accounting principles upon
which its financial status depends. The Company determined that those critical accounting
principles are related to the use of estimates, inventory valuation, revenue recognition, income
tax and impairment of intangibles and other long-lived assets. The Company states these accounting
policies in the relevant sections in this managements discussion and analysis, including the
Recently Issued Accounting Pronouncements discussed below. Use of Estimates The Companys financial statements have been prepared in accordance with accounting principles
generally accepted in the United States, which require us to make estimates and judgments that
significantly affect the reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. The Company regularly evaluates these estimates,
including those related to inventory valuation, revenue recognition and income taxes. These
estimates are based on historical experience and on assumptions that are believed by management to
be reasonable under the circumstances. The most important estimates included in the financial
statements are the allowance for doubtful accounts, provision for inventory obsolescence, the
estimated useful life of long-lived assets, and valuation allowance for deferred tax assets.
Actual results may differ materially from these estimates, which may impact the carrying values of
assets and liabilities. Inventory Valuation We value our inventories at the lower of cost or market. We write down inventories for not
saleable, excess, or obsolete raw materials, work-in-process and finished goods by charging such
write-downs to cost of sales. In addition to write downs based on newly introduced parts,
statistical and judgmental assessments are calculated for the remaining inventory based on
salability and obsolescence. Revenue Recognition The Company has three business segments: Manufacturing, Distribution, and Testing services. 28




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Revenues generated from sales of products in the Manufacturing and Distribution segments are
recognized when persuasive evidence of an arrangement exists, delivery of the products has
occurred, customer acceptance has been obtained, which means the significant risks and rewards of
the ownership have been transferred to the customer, the price is fixed or determinable and
collectibility is reasonably assured. Certain products sold (in the Manufacturing segment) require
installation and training to be performed. Revenue from product sales is also recorded in accordance with the provisions of Emerging Issues
Task Force (EITF) Statement 00-21 Revenue Arrangements with Multiple Deliverables and Staff
Accounting Bulletin (SAB) 104 Revenue Recognition in Financial Statements which generally
requires revenue earned on product sales involving multiple-elements to be allocated to each
element based on the relative fair values of those elements. Accordingly, the Company allocates
revenue to each element in a multiple-element arrangement based on the elements respective fair
value, with the fair value determined by the price charged when that element is sold and
specifically defined in a quotation or contract. The Company allocates a portion of the invoice
value to products sold and the remaining portion of invoice value to installation work in
proportion of the fair value of products sold and installation work to be performed. Training
elements are valued based on hourly rates, which the Company charges for these services when sold
apart from product sales. The fair value determination of products sold and the installation and
training work is also based on our specific historical experience of the relative fair values of
the elements if there is no easily determinable market price to be considered. In fiscal 2005 and
2004, the installation revenues generated in connection with product sales were immaterial and
included in the product sales revenue line on the consolidated statement of income. The Company
estimates an allowance for sales returns based on historical experience with product returns. Revenue derived from testing service is recognized when testing services are rendered. Income Tax We account for income taxes in accordance with Statement of Financial Accounting Standards No 109,
Accounting for Income Taxes (SFAS No. 109). SFAS No. 109 requires an entity to recognize
deferred tax liabilities and assets. Deferred tax assets and liabilities are recognized for the
future tax consequence attributable to the difference between the tax bases of assets and
liabilities and their reported amounts in the financial statements. Deferred tax assets and
liabilities are measured using the enacted tax rate expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that included the enactment date. Our foreign subsidiaries are subject to income taxes in the regions where they operate. Because of
the different income tax jurisdictions, net losses generated in the U.S. cannot be utilized to
offset the taxable income generated in foreign countries. Therefore, we may incur certain income
tax expenses in any fiscal year. For U.S. income tax purposes, no provision has been made for U.S. taxes on undistributed earnings
of overseas subsidiaries with which the Company intends to continue to reinvest. It is not
practicable to estimate the amount of additional tax that might be payable on the foreign earnings
if they were remitted as dividends, were lent to the Company, or if the Company should sell its
stock in the subsidiary. However, the Company believes that US foreign tax credits and net
operating losses available would substantially eliminate any additional tax effects. Impairment of Long-Lived Assets Effective July 1, 2002, we adopted the provisions of Statement of Financial Accounting Standard No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No.
144 requires that long-lived assets be reviewed for impairment annually and whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value. Intangible Assets In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30,
2001 is accounted for under the purchase method and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business combination. Other intangible assets represent the allocation of the purchase price over the fair market value
of any non-tangible asset other than the goodwill. The Company recognized $482 as the customer
relationship intangible and amortized on a straight-line basis for five years over the expected
period to be benefited. 29




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Interest Rate Risk. We do not use derivative financial instruments in our investment portfolio. Our
investment portfolio is generally comprised of cash deposits. Our policy is to place these
investments in instruments that meet high credit quality standards. These securities are subject to
interest rate risk, and could decline in value if interest rates fluctuate and thus subject us to
market risk due to those fluctuations. Due to the short duration and conservative nature of our
investment portfolio, we do not expect any material loss with respect to our investment portfolio,
though no assurances can be given that material losses will not occur. The interest on our loans, capitalized leases and lines of credit range from 4.19% to 7.25% per
annum. As of December 31, 2004, the outstanding aggregate principal balance on these loans was
approximately $1,926. These interest rates are subject to change and we cannot predict an increase
or decrease in rates, if any. Foreign Currency Exchange Rate Risk. Although the majority of our sales, cost of manufacturing and
marketing are transacted in U.S. dollars, significant portions of our revenues are denominated in
Singapore and Euro dollars, Malaysian ringgit, Thai Baht and other currencies. Consequently, a
portion of our costs, revenues and operating margins may be affected by fluctuations in exchange
rates, primarily between the U.S. dollar and such foreign currencies. We are also affected by
fluctuations in exchange rates if there is a mismatch between our foreign currency denominated
assets and liabilities. Foreign currency translation adjustments resulted in an increase of $278
and $223 to shareholders equity for the six months ended December 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 amended) as of December 31,
2004, the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that these disclosure controls and
procedures were effective. During the period covered by this report, there have been no changes in
the Companys internal control over financial reporting that have materially affected or are
reasonably likely to materially affect the Companys internal control over financial reporting. 30




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PART II. OTHER INFORMATION  
 Item 1. Legal Proceedings Not applicable 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Malaysian and Singapore regulations prohibit the payment of dividends if the Company
does not have sufficient retained earnings and tax credit. In addition, the payment of
dividends can only be made after making deductions for income tax pursuant to the
regulations. Furthermore, the cash movements from the Companys 55% owned Malaysian
subsidiary to overseas are restricted and must be authorized by the Central Bank of
Malaysia. California law also prohibits the payment of dividends if the Company does not
have sufficient retained earnings or cannot meet certain asset to liability ratios. 
 Item 3. Defaults Upon Senior Securities Not applicable 
 Item 4. Submission of Matters to Vote of Security Holders An annual meeting of shareholders was held December 6, 2004. The only matter voted on at
the annual meeting was the election of Directors. Proxies for the annual meeting were
solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was
no solicitation in opposition to managements nominees for Directors as listed in the Proxy
Statement. All of such nominees were elected. The number of votes for each of such
nominees was as follows (there being no abstentions or votes withheld): Director
    
    For
    
    
    Against
    
    
    Abstain
    
    
    No Vote
    
    
    TotalJason Adelman
    
    
    2,687,786
    
    
    
    51,362
    
    
    
    
    
    
    
    225,394
    
    
    
    2,964,542Richard Horowitz
    
    
    2,737,486
    
    
    
    1,662
    
    
    
    
    
    
    
    225,394
    
    
    
    2,964,542Yong Siew Wai
    
    
    2,737,486
    
    
    
    1,662
    
    
    
    
    
    
    
    225,394
    
    
    
    2,964,542A. Charles Wilson
    
    
    2,735,886
    
    
    
    3,262
    
    
    
    
    
    
    
    225,394
    
    
    
    2,964,542
 
 Item 5. Other Information Not applicable 
 Item 6. Exhibits  31.1
    Rule 13a-14(a) Certification of Principal Executive Officer of Registrant31.2
    Rule 13a-14(a) Certification of Principal Financial Officer of Registrant32
    Section 1350 Certification. 31




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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. TING
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: February 4, 2005
 32