Deswell Industries, Inc. announces first quarter results;sales increase 18%, net income up 39%.

HONG KONG--(BUSINESS WIRE)--Aug. 12, 1996--Deswell Industries, Inc. (NASDAQ NM: DSWLF and DSWWF) (the "Company") today announced its results for the first quarter ended June 30, 1996.

Net sales for the quarter were $8.6 million, an increase of 18% compared to sales of $7.3 million in the first quarter ended June 30, 1995. Operating income increased 32% to $2.0 million, compared to $1.5 million in the previous year, and net income increased 39% to $1.7 million, compared to $1.2 million in the previous year. Earnings per share increased 6% to $0.37 (based on 4,550,000 weighted average shares outstanding), compared to $0.35 (based on 3,400,000 weighted average shares outstanding) in the first quarter ended June 30, 1995.

Mr. Richard Lau, Chief Executive Officer stated "I am pleased with the growth recorded during the quarter in both our Jetcrown plastic molding and Kwanasia electronics divisions. Sales at Jetcrown and Kwanasia increased 13.4% and 25.6%, respectively, versus the year ago period.

"After completing our first twelve months as a public company, we continue to see the results of our strategy to generate higher production volumes and higher margin products for our clients. We have also recently strengthened our long-term relationship with Behringer spezeiller studytechnik GmbH (Behringer), whereby Deswell will produce in China, all the plastic and electronic products needed by Behringer to support their rapid growth. We are excited by the many long-term opportunities this relationship affords us and look forward to much success together."

Mr. Lau concluded, "As we completed the first quarter of 1996, our financial position remains strong. Working capital was $17.1 million as of June 30, 1996, compared to $15.4 million as of March 31, 1996, and our current ratio was 5.8 with no long-term debt."

The company also noted that its Annual Shareholders meeting will be held on Wednesday, September 25, 1996.

Deswell manufactures injection-molded plastic parts and components and electronic products and subassemblies for original equipment manufacturers ("OEMs") and contract manufacturers at its factories in the People's Republic of China. The Company produces a wide variety of plastic parts and components used in the manufacture of consumer and industrial products; printed circuit board assemblies using surface mount ("SMT"), and pin-through hole ("PTH") interconnection technologies; and finished products such as telephones, telephone answering machines, sophisticated studio- quality audio equipment and computer peripherals. The Company's customers include Mita Industries (H.K.) Limited, Nam Tai Electronics (Shenzhen) Co. Ltd., Inter-Tel Incorporated, Behringer spezeiller studytechnik GmbH, and Shakespeare (H.K.) Limited. -0-

                          DESWELL INDUSTRIES, INC.
              CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
            (U.S. dollars in thousands, except per share data)

                                                 Quarter ended
                                                    June 30,
                                                 1996     1995

Net sales                                    $  8,568    $ 7,272
Cost of sales                                   5,074      4,624

Gross profit                                    3,494      2,648

Selling, general and administrative expenses    1,460      1,106
Operating income                                2,034      1,542

Interest expense                                  (20)       (70)
Other income, net                                  63         36
                                               ------     ------
Income before income taxes                      2,077      1,508
Income taxes                                       68         30
Income before minority interests                2,009      1,478
Minority interests                                348        286

Net income                                   $  1,661    $ 1,192

Earnings per share                           $   0.37    $  0.35

Average number of shares outstanding
 (in thousands)                                 4,550      3,400

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DESWELL INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEET (UNAUDITIED)
(U.S. dollars in thousands)
                                             June 30,   March 31,
                                               1996       1996
ASSETS

Current assets:
 Cash and cash equivalents                   $ 7,784    $8,920
  Restricted cash                              3,260     2,248
  Accounts receivable, net                     5,430     4,142
  Inventories                                  3,222     2,932
  Prepaid expenses and other current assets      567       495
  Income taxes receivable                        315       266
        Total current assets                  20,578    19,003
Property, plant and equipment - net            7,679     7,369
Goodwill                                         244       248
              Total assets                   $28,501   $26,620

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Short-term borrowings                      $    88   $    81
  Current portion of long-term debt              226       395
  Accounts payable                             2,154     2,111
  Customer deposits and accrued expenses         955     1,017
  Income taxes payable                            99        46
      Total current liabilities                3,522     3,650
Minority interests                             2,232     1,884
Deferred income tax                               11        11

Shareholders' equity
  Common stock
  -  authorized 20,000,000 shares; issued
     and outstanding 4,550,000 shares at
     June 30, 1996 and 3,400,000
     shares at March 31, 1996                     46        46
  Additional paid-in capital                  11,747    11,747
  Retained earnings                           10,943     9,282
       Total shareholders' equity             22,736    21,075
  Total liabilities and shareholders' equity $28,501   $26,620

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                          DESWELL INDUSTRIES, INC.
               CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                         (U.S. dollars in thousands)

                                                 Quarter ended
                                                   June 30,
                                                 1996     1995
Cash flows from operating activities:
  Net income                                 $  1,661  $  1,192
  Adjustments to reconcile net income to
   net cash provided by operating activities:
   Depreciation and amortization                  486       306
   Loss on sale of property, plant and
     equipment                                      1         6
   Minority interests                             348       286
   Changes in current assets and liabilities:
     Increase in accounts receivable           (1,288)   (1,122)
     Increase in inventories                     (290)     (366)
     (Increase) decrease in prepaid expenses
       and other current assets                   (72)      160
     Increase in income taxes receivable          (49)       (3)
     Increase in accounts payable                  43       348
     (Decrease) increase in customer deposits
      and accrued expenses                        (62)      228
     Increase in income taxes payable              53         5
  Net cash provided by operating activities       831     1,040

Cash flows from investing activities
  Increase in restricted cash                  (1,012)        -
  Purchase of property, plant and equipment      (793)   (1,051)
    Net cash used in investing activities      (1,805)   (1,051)

Cash flows from financing activities
  Deferred public offering costs                   --      (160)
  Increase in long-term debt                       --       729
  Repayment of long-term debt                    (169)     (180)
  Increase in short-term borrowings                 7       377
  Repayment of short-term borrowings               --      (660)
     Net cash provided by (used in) financing
      activities                                 (162)      106
                                               -------   ------

Net increase in cash and cash equivalents      (1,136)       95
Cash and cash equivalents, at beginning of
  period                                        8,920     1,144
Cash and cash equivalents, at end of period  $  7,784  $  1,239

Supplementary disclosures of cash flow
  information:
    Cash paid during the period for:
    Interest                                       21        70
    Income taxes                                   64        28

DESWELL INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. dollars in thousands except per share data)

1. Management's Statement

In the opinion of Management, the accompanying unaudited

financial statements contain all adjustments (all of which are

normal and recurring in nature) necessary to present fairly the

financial position of Deswell Industries, Inc. (the Company)

at June 30, 1996 and March 31, 1996, the results of operations

for the quarters ended June 30, 1996 and June 30, 1995, and the

cash flows for the quarters ended June 30, 1996 and June 30, 1995.

The notes to the Consolidated Financial Statements which are

contained in the Form 20-F Annual Report filed on July 12, 1996

under the Securities Exchange Act of 1934 should be read in

conjunction with the Consolidated Financial Statements.

2. Inventories

June 30, March 31,

1996 1996

Inventories by major categories:

Raw materials $ 1,699 $ 1,881

Work in progress 805 340

Finished goods 718 711

$ 3,222 $ 2,932

3. Public Offering of Common Shares and Warrants

In July 1995, the company completed its initial public offering

in the United States (the "IPO") of 1,000,000 Common Shares at

$8.625 per share and 1,000,000 Warrants at $0.01 per Warrant

(each two Warrants exercisable at $9.056 ($4.528 per Warrant)

to purchase one Common Share) and the issuance in August 1995 of

an additional 150,000 Common Shares and 150,000 Warrants upon

the exercise of the over-allotment option by the underwriters in

the IPO. The net proceeds from this offering aggregated

approximately $7,912.

4. Earning Per Share 

The primary earnings per share is computed on the net income

divided by the weighted average number of Common Shares in issue

throughout the relevant periods. The weighted average number of

Common Shares in 1996 takes account of both the IPO 1,000,000

Common Shares issued in July 1995 and the Over-allotment 150,000

Common Shares issued in August 1995.

The Stock Options and Warrants outstanding as of June 30, 1996 did not dilute the primary earnings per share by 3% or more.

DESWELL INDUSTRIES, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

General

The Company's revenues are derived from the manufacture and sale of injection-molded plastic parts and components and of electrical products and subassemblies. The Company carries out all of its manufacturing operations in southern China, where it is able to take advantage of the lower overhead costs and inexpensive labor rates as compared to Hong Kong.

Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995

The Company's net sales for the three months ended June 30, 1996 were $8,568,000, an increase of $1,296,000 or 17.8% as compared to the corresponding period in 1995. The increase in sales was mainly related to additional sales of injection-molding plastic and electronic products of $619,000 and $677,000 respectively, or increases of 13.4% and 25.6% as compared with the net sales in the corresponding period in the prior year. The Company has generated higher volume demands from its customers in this year as a result of the continuous efforts of striving for high quality standards of products.

The gross profit for the quarter ended June 30, 1996 was $3,494,000, representing a gross profit margin of 40.8%. This compares with the overall gross profit and gross profit margin of $2,648,000 or 36.4% for the quarter ended June 30, 1995.

There was a slight increase in the overall gross profit margin of 4.4%. The margin on the sale of plastic parts and components increased to 40.5% as compared to 35.5% in the previous year, and the total gross profit margin contributed was 2,128,000 in 1996, an increase of $485,000 from the previous year. The increase was mainly attributed to the Company's efforts on securing orders with higher margins. Gross margins on sales of electronic orders and subassemblies increased to 41.2%, compared to 38.1% in the previous year, with a total gross profit contribution of $1,366,000, compared to $1,005,000 in the previous year.

Selling, general and administrative expenses for the quarter ended June 30, 1996 were $1,460,000, amounting to 17.0% of total net sales, as compared to $1,106,000 or 15.2% of total net sales for the quarter ended June 30, 1995. The slight increase in selling, general and administrative expenses of $354,000 over the corresponding period was largely due to inflation.

As a result of the increase in net sales, operating income was $2,034,000 for the quarter ended June 30, 1996, an increase of $492,000 or 31.9% as compared with the corresponding quarter in the prior year.

Minority interests represents the 49% minority interest in the electronics subsidiary. The minority interest increased to $348,000 for the quarter ended June 30, 1996 from $286,000 for the quarter ended June 30, 1995.

As a result of the above factors, net income was $1,661,000 for the quarter ended June 30, 1996, an increase of $469,000 or 39.3%, as compared to the quarter ended June 30, 1995 and net income as a percentage of net sales increased to 19.4% from 16.4%.

Liquidity and Capital Resources

Prior to the Company's IPO, the Company has relied primarily upon internally generated funds and short-term borrowings (including trade finance facilities) to finance its operations and expansion, although capital expenditure has been partly financed by long-term debt, including capital leases.

At June 30, 1996, the Company had a working capital surplus of $17,056,000. This compares with a working capital surplus of $15,353,000 at March 31, 1996. The increase in working capital was mainly attributed to net cash generated from its operations.

The Company generates sufficient funds from its operating activities to finance its operations and there is little need for external financing other than short-term borrowings which are used to finance accounts receivable and are generally paid from cash generated from operations and long-term debt used to finance capital expenditure. The Company has outstanding short-term borrowings of $88 at June 30, 1996 and has total long-term debt (including the current portion) of $226,000. The Company's long- term capital leases are generally repayable over periods of up to two years, with the capital leases at June 30, 1996 being repayable through December 1996. The Company's long-term debt is repayable in full in the year ending March 31, 1997.

At June 30, 1996, the company had in place general banking facilities with four financial institutions aggregating approximately $9,563,000. Such facilities, which are subject to annual review, include overdrafts, letters of credit, import facilities, trust receipt financing, inward bills financing, as well as fixed loans. At June 30, 1996, the Company had (i) unused credit facilities of $9,472,000 (ii) cash and cash equivalents of $8,796,000 and (iii) restricted cash of $3,260,000, which has been pledged as collateral for those credit facilities.

The Company's financial condition at,. and its financial results for the three months ended June 30, 1995, do not reflect the completion of the Company's IPO in the United States as mentioned in Note (3). As a result of the IPO and the underwriters' exercise of the over-allotment option, the Company had 4,550,000 Common Shares outstanding at August 15, 1995 (excluding Common Shares issuable upon exercise of (i) the Warrants, (ii) other warrants issued in connection with the IPO or (iii) stock options granted or reserved under the Company's 1995 Stock Option Plan).

The Company expects that working capital requirements and capital additions will be funded through a combination of internally generated funds, existing facilities and the proceeds of the IPO.

CONTACT: John Nesbett, ext. 101

212-838-3777

E-MAIL: [e-mail]