TRIO-TECH INTERNATIONAL - Annual Report: 2003 (Form 10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended June 30, 2003

OR

Commission File Number 1-14523

TRIO-TECH INTERNATIONAL
(Exact name of Registrant as specified in its Charter)

Registrant’s Telephone Number: 818-787-7000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o      No þ

     The aggregate market value of voting stock held by non-affiliates of Registrant, as of December 27, 2002, was approximately $6.1 million (based upon the last sales price for shares of Registrant’s Common Stock as reported by the AMEX on December 27, 2002, the last business day of the Company’s most recently completed second fiscal quarter). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock (including shares with respect to which a holder has the right to acquire beneficial ownership within 60 days) have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares of common stock outstanding as of September 5, 2003 was 2,927,542.

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TRIO-TECH INTERNATIONAL

INDEX

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TRIO-TECH INTERNATIONAL
PART I

NOTE CONCERNING FORWARD-LOOKING STATEMENTS

The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-K and in other past and future reports and announcements by the Company may contain forward-looking statements within the 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-K, including under the heading “Certain Risks That May Affect Our Future Results”, 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.

ITEM 1 – BUSINESS

Trio-Tech International was incorporated in 1958 under the laws of the State of California. As used herein, the term “Trio-Tech” or “Company” or “we” or “us” or “Registrant” includes Trio-Tech International and its subsidiaries unless the context otherwise indicates. Our mailing address and executive offices are located at 14731 Califa Street, Van Nuys, California 91411, and our telephone number is (818) 787-7000.

With more than 45 years dedicated to the semiconductor and related industries, we have applied our expertise to our global customer base in test services, design, engineering, manufacturing, and distribution.

General

Founded in 1958, Trio-Tech International provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. The Company also designs, manufactures and markets equipment and systems used in the testing and production of semiconductors at its facilities in California and Southeast Asia, and distributes semiconductor processing and testing equipment manufactured by others.

The Company operates in three business segments: Testing Services, Manufacturing and Distribution.

Our core business, Testing Services, is expected to show growth in the coming year and has changed the direction of our strategic growth plan. We currently operate five testing facilities, one in the United States, one in Europe and three in Southeast Asia. These facilities provide customers with a full range of testing services, such as burn-in and product life testing for finished or packaged components. In fiscal 2003, other than providing burn-in test services, the Company also began programming services in Ireland’s operation.

We manufacture “wet” processing and cleaning stations used in the manufacturing of semiconductor circuits and temperature controlled chucks that are used to manufacture and test silicon wafers and other microelectronic substrates in what is commonly called the “front-end”, or creation of semiconductor circuits. Additionally, we also manufacture centrifuges, leak detectors, HAST (Highly Accelerated Stress Test) systems and “burn-in” systems that are used primarily in the “back-end” of the semiconductor manufacturing process to test finished semiconductor devices and electronic components.

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Our business in Southeast Asia has an active distribution business. Additionally, the Southeast Asia operation markets and supports distribution of their own manufactured equipment in addition to distributing complementary products from other manufacturers that are used by the Company’s customers and other semiconductor and electronics manufacturers.

Subsequent to the year end, the Company has decided to move one of the operations in the United States, Universal Systems, to Singapore and this transition is anticipated to be completed in fiscal 2004.

Company History

Subsequent Events

Subsequent to the year end, management made the decision to relocate one of the manufacturing operations in the United States to Singapore. This transition is anticipated to be completed in fiscal 2004.

The Company also incorporated a wholly owned subsidiary, Trio-Tech (Suzhou) Co. Ltd., in the People’s Republic of China, with a registered capital of approximately $70.

Analysis of Sales

Complete Business Segment and Geographic Area Information is set forth under Note 15 to the Consolidated Financial Statements for the years ended June 30, 2003, 2002 and 2001 and is incorporated herein as part of this Form 10-K.

Background

In 2002, the worldwide market for semiconductor devices was estimated at $141 billion, approximately 1.3% greater than the year 2001, with shipments of $139 billion. The Semiconductor Industry Association (SIA) expects the growth rate to accelerate to 23% in 2003 and 20% in 2004 with wireless and digital consumer products leading the growth of semiconductor sales.

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In addition to the growing demand for semiconductors, integrated circuits (IC’s) are continually shrinking in size while increasing in capacity, complexity, and versatility. In order to fabricate these semiconductors, manufacturers must continually improve their equipment, packaging and test facilities. Semiconductor Equipment and Materials International (SEMI) reported recently that worldwide sales of semiconductor manufacturing equipment totaled $19 billion in 2002, a 32% year-over-year decline, the worst drop in sales on record. However, SEMI has projected that worldwide semiconductor equipment sales will recover and grow by 3.9% in 2003, and the chip-making tool market will rebound and increase by 24% in 2004 and 18% in 2005. The market for semiconductor manufacturing equipment can be divided into “front-end” applications, including wafer fabrication and assembly, and “back-end” applications, comprised of packaging and testing. SIA estimated that the semiconductor equipment market was approximately 70% front-end equipment, 20% back-end equipment and 10% facilities.

“Back-End”

Trio-Tech’s test services are concentrated on the back-end screening and testing of semiconductor devices. With the high concentration of semiconductor assembly and packaging facilities in Southeast Asia, a large demand exists for third party test services in this region. Customers use third party test services to accommodate fluctuations in output or to benefit from economies that can be offered by third party service providers.

Finished devices are put through a series of tests, such as burn-in and electrical testing, to ensure that they meet the necessary performance and quality standards, before shipment to the customer. Our component centrifuges, leak detectors, HAST equipment and COBIS burn-in systems are all used to test and screen finished semiconductor devices to ensure that they meet the specifications required by the manufacturers and customers.

“Front-End”

Semiconductor devices are fundamental building blocks used in electronic equipment and systems. Each semiconductor device consists of an integrated circuit designed to perform a specific electronic function. Integrated circuits are manufactured through a series of complex steps on a wafer substrate, etching or depositing the circuit pattern on a surface, typically a circular silicon wafer, measuring three to twelve inches in diameter. Multiple integrated circuit patterns are transferred to the wafer, and each completed integrated circuit is called a device or die. The number of devices or dies depends on the size of the circuit and the size of the wafer. Manufacturers can significantly increase the number of devices or dies per wafer by shrinking the circuit size or by expanding the wafer size. The transition to increased wafer size, from 200mm (8 inch) to 300mm (12 inch) wafers, is currently underway throughout the industry.

After etching or deposition of integrated circuits, wafers are typically sent through a series of 100 to 300 additional processing steps. At many of these process steps, the wafer is washed and dried using wet process stations, which we manufacture.

The finished wafer is then put through a series of tests in which each separate integrated device on the wafer is tested for functionality. Our Artic temperature chucks are used with a wafer prober to test semiconductor wafers at accurately controlled temperatures. After testing, the wafer is “diced” or cut up, and each die is then placed into a packaging material, usually plastic or ceramic, with lead wires to permit mounting onto printed circuit boards.

Testing Services

We own and operate facilities that provide testing services for semiconductor devices and other electronic components to meet the requirements of military, aerospace, industrial and commercial applications. Testing services represented approximately 45%, 46% and 31% of sales for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.

The Company uses its own proprietary equipment for certain burn-in, centrifugal and leak tests, and commercially available equipment for various other environmental tests. The Company conducts the majority of its testing operations in Southeast Asia with facilities in Singapore, Malaysia and Thailand. All of the facilities in Southeast Asia are ISO 9002 as well as QS 9000 certified. The Company also operates test facilities in Ireland.

The testing services are used by manufacturers and purchasers of semiconductors and other components who either lack testing capabilities or whose in-house screening facilities are insufficient for testing devices to military or certain commercial specifications. For those customers with adequate in-house capabilities, we offer testing services for their “overflow” requirements and also provide independent testing verification services.

Trio-Tech’s laboratories perform a variety of tests, including stabilization bake, thermal shock, temperature cycling, mechanical shock, constant acceleration, gross and fine leak tests, electrical testing, static and dynamic burn-in tests, and vibration testing. The laboratories also perform qualification testing, consisting of intense tests conducted on small samples of output from manufacturers who require qualification of their processes and devices.

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Manufacturing Products

The Company designs, develops, manufactures and markets equipment for the manufacturing and testing of semiconductor wafers, devices and other electronic components. Revenue from the sale of products manufactured represented approximately 22%, 26% and 51% of sales for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.

Front-End Products

Wet Process Stations

Wet process benches are used for cleaning, rinsing and drying semiconductor wafers, magnetic disks, flat panel displays and other microelectronic substrates. The wet process bench product line, which is manufactured by the Company’s subsidiary, Universal Systems, includes manual, semi-automated and automated wet process stations, and features radial and linear robots, state-of-the-art PC touch-screen controllers and sophisticated scheduling and control software.

Artic Temperature Controlled Wafer Chucks

The Artic Temperature Controlled Chucks are used for test, characterization and failure analysis of semiconductor wafers and other components at accurately controlled hot and cold temperatures. Several models are available, with temperature ranges from -65°C to +400°C, and in diameters from 4 to 12 inch. These systems provide excellent performance to meet the most demanding customer applications. Several unique mechanical design features, for which patents are pending, provide excellent mechanical stability under high probing forces and across the temperature ranges.

Back-End Products

Autoclaves and HAST (Highly Accelerated Stress Test) Equipment

We manufacture a range of autoclaves and HAST systems and specialized test fixtures. Autoclaves provide pressurized, saturated vapor (100% relative humidity) test environments for fast and easy monitoring of integrated circuit manufacturing processes. HAST equipment, which provides a pressurized high temperature environment with variable humidity, is used to determine the moisture resistance of plastic encapsulated devices. HAST provides a fast and cost-effective alternative to conventional non-pressurized temperature and humidity testing.

Burn-in Equipment and Boards

We manufacture burn-in systems, burn-in boards and burn-in board test systems. Burn-in equipment is used to subject semiconductor devices to elevated temperatures while testing them electrically to identify early product failures and to assure long-term reliability. Burn-in testing approximates, in a compressed time frame, the electrical and thermal conditions to which the device would be subjected during its normal life.

The Company manufactures the COBIS II burn-in system which offers state-of-the-art dynamic burn-in capabilities and a Windows-based operating system with full data logging and networking features. The Company developed, and now offers, a new Power Line Conditioner for the COBIS II, which reduces all varieties of electrical interruptions. The Company also offers burn-in boards for its BISIC, COBIS and COBIS II burn-in systems and other brands of burn-in systems. Burn-in boards are used to mount devices during high temperature environmental stressing. The Burn-in Board Tester is an extremely accurate software programmable burn-in board tester, which can be programmed to check up to 1024 sockets’ pins.

In 2000 through 2002, the Company developed several new products to complement the burn-in processes, including semi-automatic (LUBIBM) and automatic burn-in board loaders & unloaders (LUBIB). These products were designed to perform precise, high-speed transfer of IC packages from the semiconductor holding tray to the burn-in board, or vice-versa, while maintaining the integrity of the IC’s leads. Additional features have been further integrated into the LUBIB to improve productivity and minimize human handling including the integration of automatic burn-in board handling systems and the automatic electrical board check station. We have improvised the LUBIBM with built-in test functions for a major microprocessor company to study device characteristics and to weed out device failures. Burn-in-board cleaning systems (CUBIB) are designed to perform wet or dry cleaning for burn-in boards and other modular boards. Recently, we jointly developed a fully automatic CUBIB with one of our major customers. We also recently developed and introduced a new innovation, the burn-in Socket Contact Conditioner (SCC), which removes fragments of solder residue from the contact pins of an IC Socket, improving the productivity of the test process and reducing contact failure on socket pins.

In 2002 through 2003, the Company was chosen by a customer to be its major supplier to build Smart Burn-In (SBI) electrical testers to test microprocessors. This tester is a higher-end method of testing microprocessor devices. While providing integrated burn-in solutions, our sales team presented the total burn-in automation solutions (in the BITS conference in Phoenix, Arizona in

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March 2003) to improve products’ yield, reduce process downtime and improve efficiency. In addition, the Company developed a cooling solution for high power heat dissipation semiconductor devices. This solution involves the cooling or maintaining of the temperature of high power semiconductor devices.

Component Centrifuges and Leak Detection Equipment

Component centrifuges and leak detection equipment are used to test the mechanical integrity of ceramic and other hermetically sealed semiconductor devices and electronic parts for high reliability and aerospace applications. The Company’s centrifuges spin these devices and parts at specific acceleration rates, creating gravitational-forces (g’s) up to 30,000 g’s (900,000 pounds per square inch), thereby indicating any mechanical weakness in the devices. Leak detection equipment is designed to detect leaks in hermetic packaging by first pressurizing the devices in a tracer gas or fluid and then visually scanning for bubble trails emanating from defective devices. Applications include automotive and aerospace markets.

Distribution Activities

The Company’s Singapore subsidiary continues to develop its international distribution division. The distribution operation markets, sells and supports our products in Southeast Asia. In addition to our own products, this operation also distributes complementary products from other manufacturers based in the United States, Europe, Japan and other countries. These products are widely used by high quality and volume production manufacturers in the semiconductor and electronic industries. The products include environmental chambers, shaker systems, handlers, interface systems, vibration systems, solderability testers and other manufacturing products. Revenue from distribution activities represented approximately 33%, 29% and 18% of sales for the years ended June 30, 2003, 2002 and 2001, respectively.

Product Research and Development

We continue to invest in research and development to improve our products and services. Our previous efforts have been concentrated on products for the “Front End” and in developing new testing technology that allows us to offer more advanced processes. However, the management has decided to reduce research and development activities as the demand for customized products in the Manufacturing Segment was reduced. The Company incurred research and development costs of $121,000 in fiscal 2003, $331,000 in fiscal 2002 and $216,000 in fiscal 2001.

During 2000 through 2002, the Company developed new equipment and facilities to participate in a new generation of burn-in technology known as HBI and SBI. This technology was developed to meet the unique test requirements of the latest microprocessor products. The HBI and SBI test systems are multiple positions, independently programmable systems that can economically run long test times at unique burn-in conditions. We developed significant facilities, including a power sub-station and improved environmental controls, to house the HBI and SBI technology.

Marketing, Distribution and Services

The Company markets its products and services worldwide, directly and through independent sales representatives. Additionally, we have approximately 16 independent sales representatives operating in the United States and another 17 in various foreign countries. Of the 33 sales representatives, 5 represent the Distribution Segment and the others represent the Manufacturing Segment. Trio-Tech’s United States marketing efforts are coordinated from its California locations. Southeast Asia marketing efforts are assigned to its subsidiary in Singapore. The Company advertises its products in trade journals and participates in trade shows.

Independent testing laboratories, users, assemblers and manufacturers of semiconductor devices, including many, large well-known corporations, purchase the Company’s products and services. These customers depend on the current and anticipated market demand for integrated circuits and products utilizing semiconductor devices. In fiscal 2003, 2002, and 2001, sales of equipment and services to our two largest customers (Catalyst Semiconductor and AMD) accounted for approximately 49.3%, 55%, and 40%, respectively, of our net revenues. Our ability to maintain close, satisfactory relationships with our customers is essential to our stability and growth. The loss of or reduction or delay in orders from our significant customers, or delays in collecting accounts receivable from our significant customers, could adversely affect our financial condition and results of operations. During the fiscal year ended June 30, 2003, the Company had sales of $3,563,000 (17%) and $6,904,000 (32%) to Catalyst Semiconductor and AMD, respectively.

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Backlog

The following table sets forth the Company’s backlog at the dates indicated (amounts in thousands):

Based upon past experience, the Company does not anticipate any significant cancellations or renegotiation of sales. The purchase orders for manufacturing, testing and distribution require delivery within the next 12 months. The Company does not anticipate any difficulties in meeting delivery schedules. Our backlog (in thousands), as of September 5, 2003, is $1,408, $4,220 and $484 for manufacturing, testing and distribution, respectively and totals $6,112.

Manufacturing and Supply

The Company’s products are designed by its engineers and are assembled and tested at its facilities in California, Singapore and Ireland. We purchase all parts, and certain components, from outside sources for assembly by the Company. We have no written contracts with any of our key suppliers.

Competition

There are numerous competing testing laboratories in Southeast Asia that perform a range of testing services similar to those offered by the Company. However, recent severe competition and attrition in the Asian test and burn-in services industry has reduced the total number of the Company’s competitors to approximately three. Product performance and reliability in the Testing Segment, although fundamentally equivalent, are provided by using our own proprietary equipment for certain burn-in, centrifugal and leak tests. As the Company has sold and will continue to sell its products to competing laboratories, and as other test products are available from many other manufacturers, the Company’s competitors can offer the same testing capabilities. Testing equipment is also available to semiconductor manufacturers and users who might otherwise use outside testing laboratories, including the Company, to perform environmental testing. The existence of competing laboratories and the availability of testing equipment to semiconductor manufacturers and users pose competitive threats to the Company’s future testing services revenues and earnings. Although the aforementioned laboratories and new competitors may challenge the Company at any time, the Company believes that other factors, including its reputation, long service history and strong customer relationships, are important factors in determining the Company’s position in the market.

The Southeast Asia Distribution Segment sells a wide range of more than 27 different testing products, of which 3% are front-end products, the sales volumes of which are highly dependent on customer capital expenditure plans. That segment has one main competitor. Through 45 years dedicated to the semiconductor and related industries, we have formed lasting relationships with key suppliers in our Distribution Segment which allows us to competitively price our distributed products.

The semiconductor equipment manufacturing industry is highly competitive. There are approximately three competitors in our Manufacturing Segment for Burn-in Boards and Burn-in Ovens. In the United States, we have one competitor for HAST Systems, one for Artic Thermal Chucks, and one for Gross Leak Test Equipment. There are approximately four competitors of the same size as one another in the Western United States for Wet Benches. There can be no assurance that competition will not increase or that the Company’s technological advantages may not be reduced or lost as a result of technological advances by competitors or changes in semiconductor processing technology. We continue to invest in research and development to improve our products and services.

We believe that the principal competitive factors in the manufacturing industry include product performance, reliability, service and technical support, product improvements, price, established relationships with customers and product familiarity. The Company makes every effort to compete favorably with respect to each of these factors. For example, we believe that the products manufactured by the Company meet or exceed customer applications through unique design features, which applications demand systems that work year after year in a production setting. Our manufactured systems have a track record of reliability. The Company has been in business for more than 45 years and has facilities in several regions of the world. The Company believes those factors have combined not only to help establish long-term relationships with customers but also to

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allow it to continue to do business with customers upon their relocation to other regions in which the Company conducts business. The Company believes that its pricing of manufactured and distributed systems is competitive in the market. Our competitive position in the markets we are serving is not readily determinable, because there is no information publicly available regarding our competitors who are privately held companies.

Patents

Trio-Tech’s Manufacturing Segment holds a United States Patent granted in 1987 in relation to its pressurization humidity testing equipment. The Company also holds a United States Patent granted in 1994 on certain aspects of its Artic temperature test systems. In 2000, the Company filed, and was granted in 2001, a new United States patent (20 years) for several aspects of its new range of Artic temperature chucks. Although the Company believes these patents are an integral part of our Manufacturing Segment, the capitalized cost of the patents was written off in fiscal 2002 because of the impairment assessed by our management. This assessment was based on an examination of the estimated undiscounted future cash flows which are generated by the subsidiaries where certain long-lived assets (goodwill and certain fixed assets) are used.

Several unique mechanical design features, for which patents are pending, provide excellent mechanical stability under high probing forces and across the temperature ranges.

It is typical in the semiconductor industry to receive notices from time to time alleging infringement of patents or other intellectual property rights of others. The Company does not believe that it infringes on the intellectual property rights of others. However, should any claims therefore be brought against the Company, the cost of litigating such claims, and any damages that may result there from, could materially and adversely affect our business, financial condition or results of operations.

Employees

As of June 30, 2003, the Company had approximately 27 employees in the United States, 361 in Southeast Asia and 10 in Ireland for a total of approximately 398 employees. None of the Company’s employees are represented by a labor union. There are approximately 314 employees in the testing segment, 65 employees in the manufacturing segment, 16 in the distribution segment and 3 in Corporate. Currently, as of September 5, 2003, there are approximately 391 employees.

ITEM 2 – PROPERTIES

At this time, the Company believes that it uses about 53% of its fixed property capacity. The Company also believes that its existing facilities are under-utilized and are adequate and suitable to cover any sudden increase in the Company’s needs in the foreseeable future.

The following table sets forth information as to the location and general character of the principal manufacturing and testing facilities of the Registrant:

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ITEM 3 – LEGAL PROCEEDINGS

The Company is, from time to time, the subject of litigation claims and assessments arising out of matters occurring in its normal business operations. In the opinion of management, resolution of these matters will not have a material adverse effect on the Company’s financial statements.

There are no material proceedings to which any director, officer or affiliate of the Registrant, any beneficial owner of more than five percent of the Registrant’s common stock, or any associate of such person is a party that is adverse to the Registrant or its properties.

There was no litigation relating to environmental action which arose from operations.

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Registrant’s common stock is traded on the American Stock Exchange under the symbol “TRT”. The following table sets forth, for the periods indicated, the range of high and low sales prices of our common stock as quoted by AMEX:

There were approximately 609 shareholders of record of our common stock as of September 5, 2003. Approximately 2,133,324 shares are held by Cede and Co., a clearinghouse that holds stock certificates in “street” name for an unknown number of shareholders.

The Company has never declared any cash dividends on its common stock. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company at that time and such other factors as the Board of Directors may deem appropriate. It is anticipated that no dividends will be paid to holders of common stock in the foreseeable future.

The following table sets forth certain information regarding equity compensation plans of the Company:

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ITEM 6 — SELECTED FINANCIAL DATA

(In thousands, except (Loss) Earnings per share)

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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-K 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, SARS virus, 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-K 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. 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.

During the fiscal year ended June 30, 2003, total assets decreased by $2,364 from $19,075 at June 30, 2002 to $16,711 at June 30, 2003. The majority of the decrease was in short-term deposits as a result of payments on lines of credit, notes payable, capital lease obligations, accounts payable. Accounts receivable have decreased due to faster collection of debt from customers.

The accounts receivable turnover index (defined as net sales divided by average ending accounts receivable less bad debt allowance) totaled 5.45 times at June 30, 2003, compared with 4.57 times at June 30, 2002. The Company believes that the foregoing reflects its consistent emphasis on the collection of accounts receivable. The accounts receivable at June 30, 2003 decreased by $505 or 12.2%, compared to accounts receivable at June 30, 2002. Net sales for the fiscal year ended June 30, 2003 were 8.3% higher than net sales for the fiscal year ended June 30, 2002. The increased sales were the primary factor in the improvement in the accounts receivable turnover.

The inventory turnover ratio (defined as cost of sales divided by average ending inventory) increased from 10.86 times at June 30, 2002 to 15.75 times at June 30, 2003. Inventories at June 30, 2003 increased marginally by $35 from $1,014 at June 30, 2002 to $1,049 at June 30, 2003. The increase in inventories was attributable to an increase in finished goods of $463, and offset with decreases in work in progress and raw materials in the amount of $104 and $324, respectively. The inventory turnover rate improved from 34 days in fiscal 2002 to 23 days in fiscal 2003, partly due to inventory of $511 written down in fiscal 2002 because of obsolescence.

In addition, short-term deposits and investments in marketable securities decreased by $1,788 from $6,581 at June 30, 2002 to $4,793 at June 30, 2003. The cash proceeds coming from the decrease in short-term deposits and investment in marketable securities were used to pay lines of credit, notes payable, capital lease obligations and accounts payable.

During fiscal 2003, the additions to property, plant and equipment totaled $1,262, including fixed assets under capital lease arrangements.

Total liabilities at June 30, 2003 were $6,013, reflecting a $2,128 decrease from $8,141 at June 30, 2002. The decrease was due mainly to payments on lines of credit and accounts payable. As of June 30, 2003, total liabilities (excluding minority interest) was 70% of total capital, compared with 94.5% at June 30, 2002. The Company believes its strong cash position provides ready and ample access to funds in the global capital market.

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The following table sets forth our revenue components for the past three years:

Revenue Components

Geographically, we operate in the U.S., Singapore, Malaysia, Thailand, and Ireland. Our customers are mainly concentrated in Southeast Asia and they are either semiconductor chip manufacturers or testing facilities that purchase our testing equipment.

Our cost of sales is made up of the cost of inventories, labor, depreciation, utilities (which is a major component of costs for testing services), and overhead relating to manufacturing, testing and distribution segments.

Our operating expenses can be classified into three general categories: selling expense, general and administrative expense, and research and development expense. Selling expenses include expenses, such as sales commissions, payroll and payroll taxes for employees working in the selling department, advertising, utilities and other expenses directly related to selling activities. General and administrative expenses include management payroll, property taxes, rental expense, depreciation of fixed assets used by the management function, utilities, employee fringe benefits, office supplies, travel and entertainment, professional expense, outside services and other expenses related to management and administration processes. Research and development expenses include payroll and payroll tax, travel, and any other expenses that are directly related to research activities.

Critical Accounting 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 unsalable, excess or obsolete raw materials, work-in-process and finished goods by charging such write-downs to cost of sales. In addition to write downs based on newly introduced parts, statistical and judgmental assessments are calculated for the remaining inventory based on salability and obsolescence.

Revenue Recognition

The Company has three business segments: manufacturing, distribution, and testing services.

In the manufacturing segment, the products manufactured are mainly back-end products that require installation work and certain minor training work in the field with the customer’s employees, depending on whether the machine or equipment is standardized or customized. The value of this type of arrangement varies depending on the quantity of equipment ordered by the customer and on the complexity of the equipment set. In general, the common practice is to recognize revenue upon shipment of the

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product, provided that both title and risk of loss have passed to the customer, collection is reasonably assured and the customer has accepted the shipment in terms of any customer acceptance provisions. In general, the sales contracts are written such that they may list separate installation (including training) and upgrades as a separate line item. Not all machinery and equipment manufactured requires installation work. In the case where installation is required we allocate a portion of the invoice value to the machine and the remaining portion to the value of the installation work to be performed, based on the relative fair value of the elements. The revenue allocated to installation and training is recognized upon completion of the installation and training services. The allocation of value between the machinery and the installation and training work is based on our specific historical experience of the relative fair values of the elements. Such allocation is a critical accounting estimate for our revenue recognition purposes.

In the distribution segment, the products distributed are front-end and back-end products that may require certain installation work. In general, the common practice is to recognize revenue upon shipment of the distributed product, provided that both title and risk of loss have passed to the customer, and collection is reasonably assured and the customer has accepted the shipment in terms of any customer acceptance provisions. In those cases where installation is required, the installation work in the distribution segment is normally less than 40 hours of our technician labor. Similar to those in the manufacturing segment, our sales contracts are written so that they may either list separate installation (including training) and upgrades as a separate line item. In addition, most front-end products (which account for approximately 82% of the total revenue in the distribution segment for fiscal 2003 and 2002) do not require installation work. In the case where installation is required, we allocate a portion of the invoice value to the distributed product and the remaining portion to the value of the installation work to be performed, based on the relative fair value of the elements. The revenue allocated to installation and training is recognized upon completion of the installation and training services. The allocation of value between the distributed products and the installation and training work is based on our specific historical experience of the relative fair values of the elements. Such allocation is a critical accounting estimate for our revenue recognition purposes.

The Company estimates an allowance for sales returns based on historical experience with product returns.

Regarding the testing segment, revenue is recognized when testing services have been rendered.

Income Tax

We account for income taxes in accordance with Statement of Financial Accounting Standards No 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 requires an entity to recognize deferred tax liabilities and assets. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.

Our foreign subsidiaries are subject to income taxes in the regions where they operate. Because of the different income tax jurisdictions, net losses generated in the U.S. cannot be utilized to offset the taxable income generated in foreign countries. Therefore, we may incur certain income tax expenses in any fiscal year.

For US income tax purposes, no provision has been made for US 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.

Year Ended June 30, 2003 (“2003”) Compared to Year Ended June 30, 2002 (“2002”)

Sales

Net sales for the Company increased by $1,629 or 8.3% from $19,617 in fiscal 2002 to $21,246 in fiscal 2003, due to the recovery of semiconductor sales, such as wireless and digital consumer products. The Semiconductor Industry Association (SIA) expects

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the growth rate for these products to be approximately 23% in fiscal 2003 and 20% in fiscal 2004. The Testing Operation in Bangkok and sales of low margin products in the Distribution Segment mainly contributed to this increase in net sales.

The sales in the Manufacturing Segment decreased by $348 or 6.9% from $5,022 in fiscal 2002 to $4,674 in fiscal 2003. The decrease was attributed mainly to operations in the United States, which we believe were affected by the conservative capital spending by customers. The decrease in demand resulted in a decrease in sales of approximately $500 for Artic Temperature Controlled Chucks, a 58% decrease in the number of units sold combined with an 11% decrease in the average selling price, and $70 related to the decrease in sales for Environmental Test Equipment, a 20% decrease in the number of units sold combined with a 38% decrease in the average selling price. However, the decrease in sales was offset by a $200 increase from the sale of Burn-in Equipment as a result of an increase in the average selling price of the units without a material effect on the number of units sold. The types of products we manufacture cover a broad range, resulting in a wide range of prices (our selling price of our products range from $5 to $200). Revenue in the Manufacturing Segment depends heavily on customers’ specific demands which correlate to their capital budgets.

Net sales in Testing Services Segment increased by $563 or 6.3% from $8,942 in fiscal 2002 to $9,505 in fiscal 2003. Of such increase, $461 was attributable to our Thailand operation because of new contracts secured from existing customers and new customers. There was an increase in activities for the Thailand operation without material effect on the average selling price. The remaining $102 increase was attributable to our Singapore operation with an increase in activities which had an immaterial effect on the average selling price. Of the increase of $461, approximately $102 of revenue in Thailand was attributable to a customer who moved their production from Malaysia to its facility in Thailand. Revenue from this particular customer decreased in fiscal 2002, in anticipation of their relocation from Malaysia to Thailand.

The sales in the Distribution Segment increased by $1,414 or 25% from $5,653 in fiscal 2002 to $7,067 in fiscal 2003. Of such increase, $1,213 represented a 70% increase in the average selling price with prices ranging from $0.1 to $1.2, despite a 25.8% decrease in the number of units sold for low margin products. Furthermore, $201 of such increase was due to the increase in demand for test chambers and vibration products with selling prices ranging from $11 to $46. Revenue in the Distribution Segment depends heavily on customers’ specific demands, which correlate to their capital budgets.

Geographically, net sales into and within the United States increased by $955 or 11.8% from $8,083 in fiscal 2002 to $9,038 in fiscal 2003, which related mainly to the Distribution Segment. The increase of $955 was attributable primarily to an increased demand in the U.S. for front-end low margin products from the Distribution Segment in Singapore. Net sales within Southeast Asia increased $1,213 or 12.0% from $10,093 in fiscal 2002 to $11,306 in fiscal 2003. Of the increase of $1,213, $461 was primarily related to new burn-in testing services in the Thailand operation. Furthermore, $797 of the increase was due to an increase in demand for burn-in equipments and boards, which related to the Manufacturing Segment in Singapore. Net sales in Europe decreased by $536 or 36.2% from $1,479 in fiscal 2002 to $943 in fiscal 2003, of which $490 was attributed to the Manufacturing Segment and $46 was primarily due to a decline in demand for testing services, which occurred when several large customers moved out of Europe.

Cost of Sales

The Company’s cost of sales increased by $319 or 2% from $15,926 in fiscal 2002 to $16,245 in fiscal 2003. Of the increase of $319, the majority was related to an increase in material costs of $970, which is consistent with the increase in sales, offset by the reduction in net payroll costs of $467 and overheads of $184 from the Manufacturing Segment. However, as a percentage of sales, the cost of sales decreased 4.7% from 81.2% in fiscal 2002 to 76.5% in fiscal 2003. This decrease in cost of sales, as a percentage of sales, was due primarily to the inventory obsolescence of $511 recorded in fiscal 2002 which did not recur in fiscal 2003, and lower depreciation expenses of $234 incurred due to the impairment loss of fixed assets recorded in fiscal year 2002 which did not recur in fiscal 2003. Along with cost-cutting measures being adopted in the U.S. operations, the effect of reducing payroll related expense in Singapore by $261 in fiscal 2003 also contributed to the decrease of cost of sales as a percentage of revenue.

Operating Expenses

Operating expenses decreased by $1,982 or 27.3% from $7,270 in fiscal 2002 to $5,288 in fiscal 2003. As a percentage of total revenue, our operating expenses in fiscal 2003 decreased from 37.1% in fiscal 2002 to 24.9%. The major reduction in operating expenses was attributable to (1) a reduction in impairment loss of $1,273, (2) a reduction of $120 in net payroll related expense, (3) a reduction of $210 in research and development, (4) a reduction of $322 in selling expenses related to commission and warranty expense, and (5) a reduction of $57 in other costs.

General and Administrative

General and Administrative (“G&A”) expenses decreased by $149 or 3.6% from $4,141 in fiscal 2002 to $3,992 in fiscal 2003. As a percentage of sales, G&A decreased by 2.3% from 21.1% in 2002 to 18.8% in fiscal 2003. Although we had a $333

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decrease in G&A during fiscal 2003 as a result of a decrease in payroll related expenses, primarily in the U.S. operations, such decrease was offset by $264 increase in payroll expenses in Southeast Asia as operations increased based on increased sales. In addition, we had a $40 decrease in rental, relocation, and insurance expense due to relocation to smaller facilities in Van Nuys, California, and a $40 decrease in depreciation expense due to the impairment loss of assets recorded in fiscal 2002.

Selling

Selling expenses decreased by $498 or 41.5% from $1,200 in fiscal 2002 to $702 in fiscal 2003. As a percentage of sales, selling expenses decreased 2.8% from 6.1% in fiscal 2002 to 3.3% in fiscal 2003. Of the $498, (1) $195 was related to a decrease in commission expense as a result of a decrease in commission-related sales in the Distribution and Manufacturing segments, (2) $127 was related to a decrease in warranty expense incurred in Southeast Asia reflecting the fact that the products sold that require warranty were reduced in fiscal 2003, (3) a $60 decrease was due to an impairment loss recorded in fiscal 2002, which did not recur in fiscal 2003, (4) an approximate $50 decrease in travel and related costs was due to fewer sales trips made in the second half of fiscal 2003 as a result of the Iraq war and the SARS outbreak in Asia, and (5) a $66 decrease in other expense items was a result of cost-cutting measures implemented during fiscal 2003.

Research and Development

Research and development expense decreased by $210 or 63.4% from $331 in fiscal 2002 to $121 in fiscal 2003. This decrease was due primarily to management’s decision to reduce research and development activities on its Automated Wet Benches and Artic Temperature Controlled Chucks, based on reduced demand for these customized products in the Manufacturing Segment.

Impairment loss

Impairment loss decreased by $1,273 or 78.1%, from $1,631 in fiscal 2002 to $358 in fiscal 2003. The decrease of $1,273 was primarily due to the remaining fixed and intangible assets written to their fair value in fiscal 2003, which was not written down previously. The Company recorded an impairment loss based on its examination of the estimated undiscounted future cash flows generated by the subsidiaries where certain long-lived assets (certain fixed assets) are used.

The impairment loss of $358 in fiscal 2003 consisted of machinery and equipment, furniture and fixtures, and leasehold improvements (pertaining to the Malaysia and Singapore Testing Segments) due to changes in demand for certain burn-in services which in turn made certain of our existing burn-in facilities obsolete.

(Gain) Loss on Sale of Property, Plant and Equipment

The result of disposing of property, plant and equipment decreased by $148 from a gain of $33 in fiscal 2002 to a loss of $115 in fiscal 2003. The disposal loss was related to the disposal of the obsolete burn-in facilities in Southeast Asia due to the development and advancement in technology.

Income (Loss) from Operations

For segment reporting purposes, the loss from operations in our Manufacturing Segment was reduced by $3,211 from $4,013 in fiscal 2002 to $802 in fiscal 2003, due to (1) a reduction of $1,045 in impairment loss of machinery and equipment recorded in fiscal 2002, (2) a reduction of $234 depreciation expense in 2003 as a result of impairment charge recorded in fiscal 2002 which did not recur in fiscal 2003, (3) a reduction of $788 in payroll related expense as a result of implementing cost-cutting measures in fiscal 2003, and a reduction of $284 in cost of sales in the U.S. operations consistent with the decrease in revenue, (4) an inventory obsolescence of $511 recorded in fiscal 2002 not recurring in fiscal 2003, (5) a reduction in research and development costs of $210 due to a change in demand for products sold by our Manufacturing Segment, and (6) reducing rent, insurance, travel and other miscellaneous expenses by $139.

Income from operations in our Testing Services Segment increased by $123 or 18.1% from $680 in fiscal 2002 to $803 in fiscal 2003 due to (1) a reduction in impairment loss of $130 in fiscal 2003 which consisted of machinery and equipment, furniture and fixtures, and leasehold improvements pertaining to the Malaysia and Singapore Testing Segments, and (2) lower depreciation of $75 due to machinery and equipment disposed of during fiscal 2003 compared to a loss of $67 in fiscal 2002. These were offset by higher losses of $147 incurred in Ireland in fiscal 2003 compared to a loss of $67 in fiscal 2002.

Loss from operations in our Distribution Segment increased by $143 from $69 in fiscal 2002 to $212 in fiscal 2003. The increase of $143 in loss from operations resulted primarily from the increase in products sold with low margins. Due to the fierce competition in the capital equipment market and the decrease in customers’ capital spending budgets, customers took advantage of price reductions to obtain necessary equipment, which, although increasing our revenue, reduced our margins. Because the prices of products distributed by us range widely (from $0.1 to $46), the increase in sales volume was not sufficient in fiscal 2003 to offset the effects of the price reduction.

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Corporate operating loss decreased from $177 in fiscal 2002 to $76 in fiscal 2003 due to an increase in the allocation percentage being charged to our subsidiaries based on sale volume, which increased corporate income by $101.

Interest Expenses

Interest expense decreased by $22 or 10.6% from $207 in fiscal 2002 to $185 in fiscal 2003. This decrease was primarily due to net repayments of $932 on the line of credit and payments of $1,284 on long-term debt and capitalized leases.

Other Income (Expense)

Other income increased by $41 or 13.4% from $306 in fiscal 2002 to $347 in fiscal 2003. Changes in other income in fiscal 2003 compared to that in fiscal 2002 consist of mainly of (1) an increase in gain on disposal of marketable securities of $50, (2) increase in exchange gain of $116 in fiscal 2003 and, (3) a decrease in interest income of $99 in fiscal 2003.

Income Tax

The total income tax provision increased by $41 or 77% from $53 in fiscal 2002 to $94 in fiscal 2003. Of the change of $41, $19 was related to the current portion of income tax due to the increase of $18 in foreign income tax expense and $1 in state income tax expense compared to those in fiscal 2002. The remaining $22 related to the deferred portion of income taxes expense. The increase of $18 in current foreign income tax expense was a result of an increase in income in Thailand from a loss of $36 in fiscal 2002 to an income of $288 in fiscal 2003, which was offset by the decrease in income in Singapore of $466 in fiscal 2002 to $182 in fiscal 2003. Though Singapore had a higher income in fiscal 2002, the allowance on depreciation for tax purposes reduced the taxable income and thus resulted in lower tax provision in fiscal 2002.

The deferred portion of income tax provision increased by $22 from $20 in fiscal 2002 to $42 in fiscal 2003, which was attributed in the increase in the deferred tax liability incurred mainly in Singapore. The increase in deferred income tax expense was the result of the timing differences related to the recording of depreciation expense for book and tax purposes. We did not recognize any income tax benefits related to the losses generated in the U.S. We believe that when the future taxable income exceeds the cumulative losses, it is likely that such benefits will be realized.

The Company’s effective income tax rate increased from 2% in fiscal 2002 to 75% in fiscal 2003. The increase in the effective income tax rate in fiscal 2003 was due to the decrease in net loss generated in the U.S. and the increase in the net income before taxes generated by the operations conducted in foreign countries. In addition, the net loss incurred in the U.S. cannot offset the taxable income in Singapore and Thailand. Therefore, the main portion of income tax expense of $94 was incurred in Singapore and Thailand.

The Company files income tax returns in the U.S., Singapore, Thailand, Malaysia, and Ireland, respectively. Income taxes are provided in those countries where taxable income is earned. Income in one country is not offset by losses in another country. Accordingly, no benefit is provided for losses in the countries except where the loss can be carried back against income recognized in previous years. The effect of providing tax against taxable income while not providing benefit for losses results in an effective tax rate that differs from the federal statutory rate. The nature and terms of income tax holidays, abatements, rate reductions and similar arrangements granted by foreign taxing authorities and their impact on the provision for income taxes are as follows: