Trio-Tech International - 10-Q quarterly report FY

For the Quarterly Period Ended March 31, 2008

OR

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Commission File Number 1-14523

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           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 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 statements 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. The increase in world-wide oil prices caused companies to incur higher costs. We believe customers have tightened and will continue to tighten their spending, resulting in a decline in the demand for electronic products and semiconductor equipment. We anticipate that this chain effect will hit the Company’s business gradually in the future. See the discussions elsewhere in this Form 10-Q, 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.

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, and distributes semiconductor processing and testing equipment manufactured by others.  The Company operates in three business segments: Testing Services, Manufacturing and Distribution.

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.  We currently operate six testing facilities, one in the United States, three in Southeast Asia and two in China.  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 and China with facilities in Singapore, Malaysia, Thailand and China.  Our facilities require substantial investment to construct and are largely fixed-costs assets once in operation.  Because we own most of the testing capacity, a significant portion of our operating costs is fixed.  In general, these costs do not decline with reductions in customer demand or the utilization of our testing capacity, and can adversely affect profit margins as a result.  Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over the increased output, which should improve profit margins.

Our manufacturing segment manufactures Artic Temperature Controlled Wafer Chucks, which are used for test, characterization and failure analysis of semiconductor wafers, Wet Process Stations, which wash and dry wafers at a series of 100 to 300 additional processing steps after the etching or deposition of integrated circuits, 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.

In the United States, our manufacturing segment focused on marketing used and refurbished equipment, which some of our customers are more willing to purchase since it is less expensive than new equipment.

Due to the competitive environment in the manufacturing segment, we anticipate that we will continue to implement our cost reduction plan by outsourcing a portion of our manufacturing process to outside suppliers, such as electrical and mechanical fabrication houses, and seek competitively priced materials.

Our distribution segment operates primarily in Southeast Asia.  This segment markets and supports distribution of our own manufactured equipment in addition to distributing complementary products supplied by other manufacturers that are used by our customers and other semiconductor and electronics manufacturers.  We expanded the distribution business to include a strategic business unit mainly to serve as a distributor of electronic components to customers.

On January 4, 2008, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with MaoYe Property Ltd., a Chinese company, to purchase an office space of 827.2 square meters on the 35th floor of a 40 story office building located in Chongqing, China.  The total cash purchase price was RMB5,554 (Chinese yuan), equivalent to approximately U.S. $792 based on the exchange rate on March 31, 2008 published by the Federal Reserve System.  Under the terms of the agreement, the Company paid the purchase price in full on January 4, 2008 using internally generated funds of the Company.

On February 12, 2008, the Board of Directors of Registrant declared a cash dividend of eleven cents (U.S. 11¢) per share payable to the shareholders of record on February 25, 2008.  The total number of shares issued and outstanding as of February 25, 2008 was 3,226,430 and the total cash dividends paid on March 25, 2008 were $354.

In the third quarter of fiscal 2008, one of our major customers sent an official notice to the Company that, starting from April 1, 2008, their advanced burn-in testing service contract with us would cease.  Management performed an impairment test on the related testing assets and recorded a write down of these assets to zero. We recorded an impairment loss of $221 on the advanced burn-in testing equipment, which will not be recoverable.  In order to match our expenses with the future cash flows from the loss of this testing revenue, we laid off 65 employees in our Singapore operation in March and recorded $57 in unemployment benefits in the third quarter of 2008.  We also reduced the salary of our chief executives by $93 per quarter effective April 1, 2008. In Singapore, we sent a notice to the landlord to terminate our rental contracts for four plants before the lease expiration. The rental cost of these four plants was $25 per quarter. All these cost saving actions benefited the Company starting from April 1, 2008. The Company is in the early stages of developing new customer relationships in China and Malaysia to replace the lost testing revenues from this contract.

Meanwhile, management is exploring opportunities for business expansion.  Besides the investment in Chongqing, we invested $1,956 in our Malaysian operation for testing machinery and equipment in the third quarter of fiscal 2008.  We also plan to purchase a factory in Malaysia, where we’ve deposited $390, or 10% of the purchase price.  The Company and the seller are still negotiating the final details of the agreement. We have no future obligations to the seller at this time. The testing revenue generated in our Malaysia operation increased by 37.26% to $1,275 in the third quarter of fiscal 2008.  We believe that the demand for our testing services is still strong in Malaysia, and that further development in that operation will help to offset part of the decrease in revenue in other areas of business.

The highlights above are intended to identify some of our more significant events and transactions during the quarter ended March 31, 2008.  These highlights are not intended to be a full discussion of our operating results for this quarter.  These highlights should be read in conjunction with the following discussion and with our unaudited consolidated financial statements and notes thereto accompanying this Quarterly Report.

The following table sets forth our revenue components for the nine and three months ended March 31, 2008 and 2007, respectively.

Net sales for the nine and three months ended March 31, 2008 were $33,376 and $8,455, respectively, a decrease of $4,180 and $5,158, respectively, when compared to the same sales periods of the prior year.  As a percentage, total net sales decreased by 11.1% and 37.9% for the nine and three months ended March 31, 2008, respectively, when compared to total net sales for the same periods of the prior year.

Net sales into and within China and the Southeast Asia regions and other countries (except sales into and within the United Sates) decreased by $3,124 to $29,280 and by $4,909 to $7,403 for the nine months and three months ended March 31, 2008, respectively, compared to the same periods of the prior year.  This decrease was primarily due to a drop in sales in the testing segment in our Singapore and China operations.  Net sales into and within the United States were $4,096 and $1,052 for the nine and three months ended March 31, 2008, respectively, a decrease of $1,056 and $249, respectively, when compared to the same periods of the prior year.

The decrease in net sales in the nine and three months ended March 31, 2008 can be discussed within three segments as follows:

Net sales in the manufacturing segment as a percentage of total net sales were 53.48% and 51.65% for the nine and three months ended March 31, 2008, respectively, a decrease of 1.38% and an increase of 0.79% of total net sales, respectively, when compared to the same periods of the prior year.  The absolute amount of net sales was $17,848 and $4,367 for the nine and three months ended March 31, 2008 respectively, a decrease of $2,754 and $2,556, respectively, when compared to the same periods of the prior year.  The decrease in revenue generated by the manufacturing segment was due to the fact that fewer orders were placed by one of our major customers, which was the result of slowing in that customer’s product line and equipment capacity.

Net sales in the testing segment as a percentage of total net sales were 45.50% and 46.99% for the nine and three months ended March 31, 2008, respectively, a decrease of 4.18% and 0.36%, respectively, of total net sales when compared to the same periods of the prior year.  The absolute amount of net sales in the testing segment decreased by $333 to $15,186 and by $2,375 to $3,973 for the nine and three months ended March 31, 2008, respectively, compared to the same periods of fiscal 2007.

This considerable decrease in sales was due to a significant drop in orders from one of our main customers due to one of their product lines reaching the end of its life cycle earlier than expected, rendering our testing service for that product no longer necessary. Demand for testing services varies from time to time depending on changes taking place in the market and our customers’ forecasts.

Net sales in the distribution segment accounted for 1.02% and 1.36% of total net sales for the nine and three months ended March 31, 2008, respectively, a decrease of 2.80% and 1.15%, respectively, compared to the same periods in fiscal 2007.  The absolute amount of net sales decreased by $1,093 to $342 and by $227 to $115 for the nine and three months ended March 31, 2008, respectively, compared to the same periods in fiscal 2007.  The drop in revenue was due to lower demand in the current market for back-end products such as Vibration equipment and chambers and, we believe, a saturation of equipment and electronic components in the current market.  Product volume for the distribution segment depends on sales activities such as placing orders, queries on products and backlog.  Equipment and electronic component sales are very competitive, as the products are prevalent in the market.

There are several influencing factors which create uncertainties when forecasting performance, such as the ever-changing nature of technology, specific requirements from the customer, declines 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.  Another is that some customers are unable to provide a forecast of the products required in the upcoming weeks; hence it is difficult to plan for the resources needed to meet these customers’ requirements due to short lead time and last minute order confirmation.  This will normally result in a lower margin for these products, as it is more expensive to purchase materials in a short time frame.  However, we have taken certain actions and formulated certain plans to deal with and to help mitigate these unpredictable factors.  For example, in order to meet customers’ demands upon short notice, we maintain higher inventories, but continue to work closely with our customers to avoid stock piling.  We continue to cut costs by upgrading some of our existing facilities to cater to the changing requirements of customers and by maintaining a lean headcount, while still keeping quality high so as to sell new products at a competitive price.  We have also been improving our customer service by keeping our staff updated with regard to the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers.  We believe customers have tightened and will continue to tighten their spending, resulting in a decline in the demand for electronic products and semiconductor equipment. We anticipate that this chain effect will hit the Company’s business gradually in the future. We are exploring new markets and products, looking for new customers, and upgrading and improving burn-in technology, while at the same time searching for improved testing methods of higher technology chips.

The following table sets forth certain consolidated statements of income data as a percentage of net sales for the third quarters of fiscal 2008 and 2007, respectively:

Overall gross margin as a percentage of revenue decreased by 9.7% for the three months ended March 31, 2008, from 26.4% in the third quarter of fiscal 2007 to 16.7%, due primarily to the decrease in the gross margin in the testing and manufacturing segments.  In terms of dollar value, the overall gross margin decreased by $2,188 for the three months ended March 31, 2008, from $3,597 to $1,409, compared to the same quarter of fiscal 2007, resulting from the decrease in revenue and an increase in cost of goods sold.

Gross profit margin as a percentage of revenue in the manufacturing segment decreased by 13.3% for the three months ended March 31, 2008, from 17.7% in the third quarter of fiscal 2007 to 4.4% in the third quarter of fiscal 2008.  The decrease in gross margin was due to a decrease in the average selling prices of burn-in boards and burn-in systems as a result of strong competition in the market place.  In absolute amounts, gross profits decreased by $1,034 to $191 for the three months ended March 31, 2008, from $1,225 for the three months ended March 31, 2007.

Gross profit margin as a percentage of revenue in the testing segment decreased by 7.4% for the three months ended March 31, 2008, from 37.0% to 29.6%, compared to the same quarter of fiscal 2007.  In terms of dollar amount, gross margin in the testing segment in the third quarter of fiscal 2008 was $1,175,a decrease of $1,176 compared to $2,351 in the same period of fiscal 2007.  The decrease in the gross margin was due primarily to a drop in the average selling price of services in the Singapore testing operations. Our customers changed their demands and specifications for burn-in hours, which resulted in a lower average unit selling price for burn-in services.  Another factor contributing to the decline in gross margin was the fact that significant portions of our operating costs are fixed in the testing segment; thus as product demands decrease and factory utilization decreases, the fixed costs are spread over the decreased output, resulting in a drop in profit margin.

Gross profit margin as a percentage of revenue in the distribution segment was 37.4% for the third quarter of fiscal 2008, from 6.1% in the third quarter of fiscal 2007.  The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices compared to related expenses in the third quarter of fiscal 2008 compared to the same period of fiscal 2007. In absolute amounts, gross margin was $43, an increase of $22 compared to $21 in the same period of fiscal 2007.

Operating expenses for the third quarters of fiscal 2008 and 2007 were as follow:

During the third quarter of fiscal year 2008, we reclassified $84 of selling expenses into general and administrative expenses and cost of sales to reflect a better presentation of our operations. Accordingly, $84 of selling expense was reclassified to general and administrative expenses and cost of sales in the third quarter of fiscal 2007 for the purpose of comparison. General and administrative expenses increased by $104, or 5.28%, compared to the same period of fiscal 2007, from $1,971 to $2,075 for the three months ended March 31, 2008.   The increase was attributable to an increase in payroll and related expenses in the Malaysia operation to handle a rise in sales volume and an increase of  $57 in unemployment benefits in the Singapore operations.  In order to lower our costs to match with production activity, we laid off 65 employees in our Singapore operation in March.  In addition, share based compensation expenses, as a result of the stock options granted in the second quarter of fiscal 2008, increased by $32 when compared to the same quarter of fiscal 2007.

Selling expenses decreased by $73, or 27.86%, for the three months ended March 31, 2008, from $262 to $189 compared to the same quarter of fiscal 2007. This was mainly due to a decrease in commission expenses as a result of fewer commissionable sales in the distribution segment.  In addition, we incurred some selling expenses in demo sets, which were given to customers free of charge for promotional purposes in the same quarter of last fiscal year.

Research and development expenses were $7 compared to $18 for the third quarter of fiscal 2007 due to a decrease in payroll expenses in the U.S. operation.

The impairment loss increased by $439 for the three months ended March 31, 2008, from $2 to $441 compared to the same quarter of fiscal 2007.  The impairment loss of $441 in the third quarter of fiscal year 2008 consisted of $221 from certain advanced burn-in testing equipment in the Singapore operation as a result of the termination of the advanced burn-in testing service contract with one of our major customers.  An impairment of $75 related to the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in services, which in turn made certain of our existing burn-in facilities obsolete.  An impairment of $57 related to the building renovations for certain testing projects due to a decrease in a customer’s order in our Shanghai operation in China. The remaining impairment of $88 related to certain testing machinery and equipment in our Singapore operation due to a decrease in our testing backlog and projected future sales.

The impairment loss for the three months ended March 31, 2007 consisted of building renovations with a cost of $4 and related accumulated depreciation of $2. The carrying value of these assets was written down to zero as a result of relocating to a new office unit to accommodate the needs of the testing segment in the Suzhou operation in China.

Loss from operations increased by $2,658 from an income from operations of $1,344 for the three months ended March 31, 2007 to a loss of $1,314 for the three months ended March 31, 2008, mainly due to a decrease in sales in the manufacturing and testing segments and an increase in operating expenses, as previously discussed.

Interest expense for the third quarters of fiscal 2008 and 2007 were as follow:

Interest expenses increased by $40 for the three months ended March 31, 2008, from $53 to $93, primarily due to a new term loan facility of $3,837 entered into during the first quarter of fiscal 2008 to support the expansion plans and potential business opportunities of the Singapore and China operations.

Other (expenses) income for the third quarters of fiscal 2008 and 2007 were as follow:

Other expenses increased by $78 to $33 for the three months ended March 31, 2008 from an income of $45 in the same quarter of fiscal 2007, primarily due to an increase in the currency transaction loss and an increase in provision for the value added tax in our China operation, but offset by an increase in investment income generated from short-term deposits and rental income.  Currency transaction loss increased by $148 for the three months ended March 31, 2008, from $27 to $175, compared to the same quarter of fiscal 2007.  This was attributable to the weakening of the U.S. dollar against foreign currency with regard to transactions denominated in U.S. dollars.  The provision for the value added tax was $25, which was the result of a change in the local tax policy in our Suzhou operation in China.  Investment income was $57 for the three months ended March 31, 2008 and was $18 higher than the interest income generated in the same quarter of fiscal 2007 due to an increase in short-term deposits by placing the idle cash into income generating investments. Rental income, which consisted mainly of space in the Malaysia operation rented to    outside vendors, increased by $12 to $41 for the three months ended March 31, 2008 from $29 in the same period of fiscal 2007.

The net income tax benefit for the three months ended March 31, 2008 was $46, an increase of $285 compared to the income tax provision of $239 for the three months ended March 31, 2007.  Our Singapore operations suffered a loss of $938 for the three months ended March 31, 2008, a decrease of $2,452 compared to a profit of $1,514 for the same period of 2007.  This loss resulted in an income tax benefit of $133 for the third quarter of fiscal 2008. In addition, we reversed a deferred tax liability of $119 in the Singapore operation in the third quarter of fiscal 2008 due to a decrease in the book value of fixed assets as a result of provision from impairment loss.  However, the income tax benefit was offset by a provision for deferred tax liability of $206 as a result of the timing differences related to the recording of depreciation expenses for book and tax purposes in the Malaysia operation.

We assessed our income tax liability of $364 as of March 31, 2008 in accordance with FIN 48, which was related to the allocation of corporate management expenses to our Singapore operation in terms of Singapore tax law.  We did not see any potential benefits arising from this tax position.  Accordingly, no impact of this tax position was recognized in the statement of operations for this quarter of fiscal 2008.  We did not include any potential income tax position in federal and state income tax returns currently filed.

As of March 31, 2008, we held a 55% interest in Trio-Tech Malaysia.  In the third quarter of fiscal 2008, minority interest in the net income of subsidiaries was $17, an increase of $1, compared to a minority interest in the net income of $16 for the same quarter of fiscal 2007.  The increase in the minority interest was attributable to an improvement in the net income generated from the Malaysia testing operation due to stronger market demands from our customers there.

Net loss was $1,411 in the third quarter of fiscal 2008, representing a decrease of $2,492, from a net income of $1,081 during the same period of fiscal 2007.  The decrease in net income was mainly due to a decrease in revenue, an increase in operating expenses, interest expense and a decrease in other income, as previously discussed.

The basic loss per share for the three months ended March 31, 2008 increased by $0.78 to $0.44 from an earning of $0.34 per share, and the diluted loss per share increased by $0.77 to $0.44 from an earning of $0.33 per diluted share as compared to the same quarter of the prior year.

The revenue, gross margin and income from each segment for the third quarter of fiscal 2008 and the third quarter of fiscal 2007, respectively, are presented below.  As the segment revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income from operations is discussed below.

The revenue, gross margin and income from operations for the manufacturing segment for the third quarters of fiscal 2008 and 2007 were as follows:

Loss from the manufacturing segment was $884, an increase of $1,234 for the three months ended March 31, 2008 from an income of $350 in the same quarter of fiscal 2007.  The increase in operating loss was attributable to a decrease in gross profit of $1,034 and an increase in operating expenses of $200.  Operating expenses for the manufacturing segment were $1,075 and $875 for the three months ended March 31, 2008 and 2007, respectively.  The increase in operating expenses was mainly attributable to the impairment loss of $88 related to certain machinery and equipment in our Singapore operation due to a decrease in our backlog and projected future sales.

The revenue, gross margin and income from operations for the testing segment for the third quarters of fiscal 2008 and 2007 were as follows:

Loss from operations in the testing segment in the third quarter of fiscal 2008 was $553, an increase of $1,630, compared to an income of $1,077 in the same period of fiscal 2007.  The increase in operating loss was attributable to a decrease in gross profit of $1,176 due to a drop in sales in the Singapore testing operation and an increase in operating expenses of $454.  One of our significant customer’s product lines reached the end of its product cycle earlier than expected, causing sales orders to drop significantly in the third quarter of fiscal 2008.   Operating expenses were $1,728 and $1,274 for the three months ended March 31, 2008 and 2007, respectively.  The increase in operating expenses was mainly due to an impairment loss of $353 that we recognized in the third quarter of fiscal 2008. Of this amount, an impairment loss of $221 was for certain advanced burn-in testing equipment as a result of the termination of the advanced burn-in testing service contract with one of our major customers. An impairment loss of $75 was for the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in testing services, which in turn made certain of our existing burn-in facilities obsolete. An impairment loss of $57 was for the building renovations for certain testing projects due to a decrease in the customer’s order in our Shanghai operation in China. The other contributing factor for the increase in operation expenses was an increase in payroll and related expenses in the testing segment in the Malaysia operation in order to handle the rise in sales volume there.

The revenue, gross margin and loss from operations for the distribution segment for the third quarters of fiscal 2008 and 2007 were as follows:

Loss from operations in the distribution segment decreased by $22 to $69 for the three months ended March 31, 2008, compared to $91 in the same period of fiscal 2007. The decrease in operating loss was mainly due to an increase in gross margin of $22, as previously discussed. Operating expenses remained the same at $112 for the three months ended March 31, 2008 and 2007.

The income from operations for corporate for the third quarters of fiscal 2008 and 2007 were as follow:

Corporate operating income increased by $184 to $192 for the three months ended March 31, 2008, compared to $8 in the same period of fiscal 2007. The improvement in corporate income was mainly attributable to an increase in the percentage of revenue imposed on all the subsidiaries in the third quarter of fiscal 2008 due to a decrease in the revenue from subsidiaries. The revenue percentage charged on subsidiaries is a reimbursement to the corporate office to cover its operating expenses. Management reviews this percentage periodically to make sure the amount charged is sufficient to cover corporate expenses. This improvement was primarily offset by an increase of $32 in stock option compensation expenses.

The following table sets forth certain consolidated statements of (loss) income data as a percentage of net sales for the nine months ended March 31, 2008 and 2007, respectively:

Overall gross margin as a percentage of revenue decreased by 2.2% to 22.9% for the nine months ended March 31, 2008, from 25.1% for the same period of fiscal 2007. The decrease in the overall gross margin was due primarily to the decrease in the gross margin in the manufacturing and testing segments. However, this was offset by an increase in gross margin in the distribution segment. In terms of dollar value, the overall gross margin decreased by $1,775, or 18.8%, for the nine months ended March 31, 2008, from $9,421 to $7,646 compared to the same period of fiscal 2007, as a result of a decrease in revenue and an increase in cost of goods sold.

Gross profit margin as a percentage of revenue in the manufacturing segment decreased by 2.9% for the nine months ended March 31, 2008 compared to the same period of fiscal 2007, from 16.2% to 13.3%.  In absolute amounts, gross profit was $2,374, a decrease of $969, or 29.0%, for the nine months ended March 31, 2008, from $3,343 in the same period of fiscal 2007. The decrease in gross margin was due to a decrease in average selling prices of burn-in boards and burn-in systems as a result of strong competition in the market place.

Gross profit margin in the testing segment decreased by 3.7% for the nine months ended March 31, 2008 compared to the same period of the prior year, from 37.8% to 34.1%. In absolute amount, gross profits in the testing segment were $5,171, a decrease of $693, or 11.8%, for the nine months ended March 31, 2008, from $5,864 in the same period of fiscal 2007. The decrease in the gross margin was attributable to a considerable decrease in sales volume due to the fact that one of our significant customer’s product lines reached the end of its life cycle in the third quarter of fiscal 2008, as previously discussed. Significant portions of our operating costs are fixed in the testing segment; thus as product demands decrease and factory utilization decreases, the fixed costs are spread over the decreased output, which in turn decreases profit margin.

Gross profit margin as a percentage of revenue in the distribution segment improved by 14.6%, from 14.9% for the nine months ended March 31, 2007 to 29.5% in the same period this fiscal year. The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices compared to related expenses in the nine months of fiscal 2008 compared to the same period of fiscal 2007. In absolute amount, gross profits decreased by $113, or 52.8%, to $101 for the nine months ended March 31, 2008 from $214 for the nine months ended March 31, 2007, due to a drop in sales volume as previously discussed.

The following table presents the operating expenses for the nine months ended March 31, 2008 and 2007, respectively: