Deswell Industries announces third quarter results.

HONG KONG--(BUSINESS WIRE)--Jan. 27, 1997--

Sales Increase 71%, Net Income Up 51%

Deswell Industries, Inc. (NASDAQ NM: DSWLF and DSWWF) (the "Company") today announced its results for the third quarter ended December 31, 1996.

Net sales were $13.3 million, an increase of 71% compared to sales of $7.8 million in the third quarter ended December 31, 1995. Operating income increased 53% to $3.2 million, compared to $2.1 million in the previous year, and net income increased 51% to $2.7 million, compared to $1.8 million in the previous year. Earnings per share increased 50% to $0.59 (based on 4,601,000 weighted average shares outstanding), compared to $0.40 (based on 4,550,000 weighted average shares outstanding) in the third quarter ended December 31, 1995.

Net sales for the nine months ended December 31, 1996 were $31.9 million, an increase of 38% compared to sales of $23.1 million for the corresponding period in 1995. Operating income increased 48% to $8.0 million, compared to $5.4 million in the previous year, and net income increased 47% to $6.5 million, compared to $4.4 million in the previous year. Earnings per share increased 31% to $1.42 (based on 4,579,000 weighted average shares outstanding), compared to $1.09 (based on 4,082,000 weighted average shares outstanding) for the nine months ended December 1995.

Mr. Richard Lau, Chief Executive Officer commented, "I am pleased to report that Deswell's strong earnings growth continued during the third quarter. In addition to increased volume from existing customers, this quarter's results begin to show the benefits of our Kwanta Precision Metal Products Co. Ltd. acquisition. In its first three months as a subsidiary of Deswell, Kwanta has already contributed $790,000 in revenues. Moreover, the construction of the 60,000 square foot new factory of Kwanta in Douggan, China and the installation of new machinery in it will be completed by March 1997. This acquisition provides us with new business opportunities and will accelerate Deswell's expansion. Furthermore, during the quarter we leased an additional 40,000 square feet of factory space in Shenzhen, China to meet the demand for our injection molded plastic products, bringing our total production space to 225,000 square feet and providing us with the capacity to carry us through 1997."

Mr. Lau continued, "Our financial position continues to be strong. Working capital was $16.4 million as of December 31, 1996, versus $15.4 million as of March 31, 1996, and our current ratio was 3.2, with no long term debt."

Mr. Lau concluded, "Our strong financial performance continues to be driven by increasing customer demand, the successful Kwanta acquisition and additional production capacity. We are optimistic that Deswell will achieve all of its goals for the remainder of the year."

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 studiotechnik GmbH, Prod-Art Company Limited 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    Nine months ended
                               December 31,       December 31,
                              1996     1995      1996     1995

Net sales                  $ 13,323  $ 7,778  $ 31,864  $ 23,093
Cost of sales                 7,560    4,169    18,118    13,676
Gross profit                  5,763    3,609    13,746     9,417
Selling, general and
 administrative expenses      2,545    1,500     5,719     3,995
Operating income              3,218    2,109     8,027     5,422
Interest expense                (11)     (28)      (48)     (157)
Other income, net               162      136       323       275
Income before income taxes    3,369    2,217     8,302     5,540
Income taxes                     11       46       162       113
Income before minority
 interests                    3,358    2,171     8,140     5,427
Minority interests              625      365     1,627       990
Net income                  $ 2,733  $ 1,806   $ 6,513   $ 4,437

Earnings per share           $ 0.59   $ 0.40    $ 1.42    $ 1.09

Average number of shares
 outstanding                  4,601    4,550     4,580     4,082
(in thousands)
-0-

                      DESWELL INDUSTRIES, INC.
                     CONSOLIDATED BALANCE SHEET
                     (U.S. dollars in thousands)

                              December 31,   March 31,
                                  1996         1996
                              (Unaudited)
ASSETS

Current assets:
Cash and cash equivalents       $ 7,844      $ 8,920
Restricted cash                   2,845        2,248
Accounts receivable, net          6,119        4,142
Inventories                       5,294        2,932
Prepaid expenses and other
 current assets                   1,135          495
Income taxes receivable             484          266
      Total current assets       23,721       19,003
Property, plant and
 equipment - net                 11,744        7,369
Goodwill                            411          248
     Total assets              $ 35,876     $ 26,620

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Short-term borrowings          $     60     $     81
Current portion of
 long-term debt                       -          395
Accounts payable                  4,290        2,111
Customer deposits and accrued
 expenses                         2,774        1,017
Income taxes payable                202           46
  Total current liabilities       7,326        3,650
Minority interests                3,257        1,884
Deferred income tax                  11           11

Shareholders' equity
Common stock
-  authorized 20,000,000 shares;
   issued and outstanding 4,600,500
   shares at December 31, 1996
   and 4,550,000 shares at
   March 31, 1996                    46           46
Additional paid-in capital       12,196       11,747
Retained earnings                13,040        9,282
  Total shareholders' equity     25,282       21,075
Total liabilities and
 shareholders' equity          $ 35,876     $ 26,620
-0-

DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(U.S. dollars in thousands)
                                          Nine months ended
                                              December 31,
                                           1996        1995
Cash flows from operating activities:
  Net income                             $ 6,513     $ 4,437
  Adjustments to reconcile net
    income to net cash provided
    by operating activities:
      Depreciation and amortization        1,614         999
      Loss on disposal of property,
        plant and equipment                    3          24
      Minority interests                   1,373         989
      Changes in current assets and
        liabilities:
       Increase in accounts receivable    (1,977)     (1,964)
       Increase in inventories            (2,362)       (649)
       Increase in prepaid expenses and
        other current assets                (640)       (114)
       Increase in income taxes receivable  (218)        (13)
       Increase in accounts payable        2,179          95
       Increase in customer deposits and
        accrued expenses                   1,757         943
       Increase in income taxes payable      156         172
  Net cash provided by operating
   activities                              8,398       4,919

Cash flows from investing activities
  Increase in restricted cash               (597)     (1,293)
  Proceeds from disposal of property,
   plant and equipment                        26           -
  Acquisition of subsidiary (excluding
   cash acquired)                           (177)          -
  Purchase of property, plant and
   equipment                              (6,004)     (4,046)
    Net cash used in investing activities (6,752)     (5,339)

Cash flows from financing activities
  Cash from issued shares under IPO
   (adjusted for expenses already
   paid at March 31, 1995 of $265)             -       8,164
  Additional shares issued                   449           -
  Dividends paid                          (2,755)          -
  Increase in long-term debt                   -         729
  Repayment of long-term debt               (395)       (829)
  Increase in short-term borrowings           67         377
  Repayment of short-term borrowings         (88)     (2,267)
    Net cash (used in)/provided by
     financing activities                 (2,722)      6,174

Net increase in cash and cash equivalents (1,076)      5,754
Cash and cash equivalents, at beginning
 of period                                 8,920       1,144
Cash and cash equivalents, at end of
 period                                    7,844       6,898

Supplementary disclosures of cashflow information :
  Cash paid during the period for:
  Interest                                    48         158
  Income taxes                               233          45

Acquisition of subsidiary, excluding
 cash acquired:
  Fair value of assets acquired            1,005           0
  Goodwill                                   177           0
  Liabilities assumed                       (652)          0
  Minority interests                        (353)          0
Cash paid, net of cash acquired              177           0

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 December 31,

1996 and March 31, 1996, the results of operations for the quarters

and nine months ended December 31, 1996 and December 31, 1995, and

the cash flows for the nine months ended December 31, 1996 and

December 31, 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 these Consolidated Financial Statements.

2. Inventories

December 31, March 31,

1996 1996

Inventories by major categories:

Raw materials $ 2,665 $ 1,881

Work in progress 898 340

Finished goods 1,731 711

$ 5,294 $ 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 $7,903.

In July 1996, Stock Options of 38,500 Common Shares and Advisor's

Option of 8,000 Common Shares and 8,000 Warrants were exercised

respectively.

3. Earnings 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 the IPO 1,000,000 Common Shares issued in

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

1995 and the additional Common Shares issued upon the exercise of

Stock Options and Advisor's Option in July 1996. The weighted

average number of Common Shares in 1995 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 at December 31, 1996

did not dilute the primary earnings per share by 3% or more.

4. Acquisition of Subsidiary

In October 1996, the Company acquired a controlling (33.1%) interest

in Kwanta Precision Metal Products Co. Ltd. ("Kwanta") from its

three former shareholders for $177 in cash, since which time it has

controlled the strategic, financial and operational policies and

decisions of Kwanta. This acquisition has been accounted for as a

purchase and the results of Kwanta have been included in the

consolidated financial statements from the date of acquisition. The

cost of acquisition exceeded the fair value of the net assets

acquired by $177 and this is recorded as goodwill.

-0- 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 (i) injection-molded plastic parts and components, (ii) electronic products and subassemblies and (iii) metallic parts and components. 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 December 31, 1996 Compared to Three Months Ended December 31, 1995

The Company's net sales for the three months ended December 31, 1996 were $13,323,000, an increase of $5,545,000 or 71.3% as compared to corresponding period in 1995. The increase in sales was mainly related to additional sales of injection-molded plastic, electronic products and metallic products of $2,550,000, $2,205,000 and $790,000 respectively, or increases of 52.9%, 74.5% and 100% as compared with the net sales in the corresponding period in the prior year. The metallic product operation is generated from a newly acquired subsidiary. Moreover, 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 December 31, 1996 was $5,763,000, representing a gross profit margin of 43.3%. This compares with the overall gross profit and gross profit margin of $3,609,000 or 46.4% for the quarter ended December 31, 1995.

There was a slight decrease in the overall gross profit margin of 3.1%. The margin on the sale of plastic parts and components decreased slightly to 46.0% as compared to 48.6% in the previous year, with a total gross profit margin contribution of $3,389,000 in 1996, an increase of $1,047,000 from the previous year. The gross profit margin on sales of electronic orders and subassemblies decreased slightly 41.2% compared to 42.8% in the previous year, with a total gross profit contribution of $2,130,000, compared to $1,267,000 in the previous year. The gross profit margin on the sales of metallic parts and components was 30.9% in the quarter ended December 31, 1996.

Selling, general and administrative expenses for the quarter ended December 31, 1996 were $2,545,000, amounting to 19.1% of total net sales, as compared to $1,500,000 or 19.3% of total net sales for the quarter ended December 31, 1995. The increase in selling, general and administrative expenses of $1,045,000 over the corresponding period was largely due to the growth in the Company's operations.

As a result of the increase in net sales, operating income was $3,218,000 for the quarter ended December 31, 1996, an increase of $1,109,000 or 52.6% as compared with the corresponding quarter in the prior year.

Minority interests represent the 49% and 66.9% minority interest in the electronics and metallic subsidiaries respectively. The increase in minority interest to $625,000 for the quarter ended December 31, 1996 from $365,000 for the quarter ended December 31, 1995 reflects the fact that the electronic business generated significant profits in the current period as compared to the corresponding period in 1995. As the operation of metallic subsidiary is in preliminary stage, the operating results and the minority interest effects were not material in the quarter ended December 31, 1996.

As a result of the above factors, net income was $2,733,000 for the quarter ended December 31, 1996, an increase of $927,000 or 51.3%, as compared to the quarter ended December 31, 1995 and net income as a percentage of net sales decreased slightly to 20.5% from 23.2%.

Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31, 1995

The Company's net sales for the nine months ended December 31, 1996 were $31,864,000, an increase of $8,771,000 or 38.0% as compared to corresponding period in 1995. The increase in sales was mainly related to additional sales of injection-molded plastic, electronic and metallic products of $3,976,000, $4,005,000 and $790,000 respectively, or increases of 27.6%, 46.0% and 100% respectively 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 nine months ended December 31, 1996 was $13,746,000, representing a gross profit margin of 43.1%. This compares with the overall gross profit and gross profit margin of $9,417,000 or 40.8% for the nine months ended December 31, 1995.

There was a slight increase in the overall gross profit margin of 2.3%. The margin on the sale of plastic parts and components increased to 43.0% as compared to 40.3% in the previous year, and the total gross profit margin contributed was $7,894,000 in 1996, an increase of $2,096,000 from the previous year. The gross profit margin on sales of electronic orders and subassemblies increased as the Company concentrated its efforts on securing orders with higher margins. Gross margins on these products increased to 44.1% compared to 41.5% in the previous year, with a total gross profit contribution of $5,608,000, compared to $3,619,000 in the previous year. The gross profit margin on the sales of metallic parts and components was 30.9% for the nine months ended December 31, 1996.

Selling, general and administrative expenses for the nine months ended December 31, 1996 were $5,719,000, amounting to 17.9% of total net sales, as compared to $3,995,000 or 17.3% of total net sales for the nine months ended December 31, 1995. The increase in selling, general and administrative expenses of $1,724,000 over the corresponding period was largely due to the growth in the Company's operations.

As a result of the increase in net sales, operating income was $8,027,000 for the nine months ended December 31, 1996, an increase of $2,605,000 or 48.0% as compared with the corresponding period in the prior year.

Minority interests represent the 49% and 66.9% minority interest in the electronics and metallic subsidiaries respectively. The increase in minority interest to $1,627,000 for the nine months ended December 31, 1996 from $990,000 for the nine months ended December 31, 1995 reflects the fact that the electronic business generated significant profits in the current period as compared to the corresponding period in 1995. As the operation of metallic subsidiary is in preliminary stage, the operating results and the minority interest effects were not material in the nine months ended December 31, 1996.

As a result of the above factors, net income was $6,513,000 for the nine months ended December 31, 1996, an increase of $2,076,000 or 46.8%, as compared to the nine months ended December 31, 1995 and net income as a percentage of net sales increased to 20.4% from 19.2%.

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. After the IPO, the Company has utilized part of its net proceeds of the IPO and its internally generated funds to finance its capital expansion. During the nine months ended December 31, 1996, the Company has increased its net capital assets by $4,375,000.

At December 31, 1996, the Company had a working capital surplus of $16,395,000. 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 has generated 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 $60,000 at December 31, 1996 and has no long-term debt outstanding. The Company has repaid all of its long-term capital leases as at December 31, 1996.

At December 31, 1996, the Company had in place general banking facilities with three financial institutions aggregating approximately $8,269,000. 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 December 31, 1996, the Company had (i) unused credit facilities of $8,208,000 (ii) cash and cash equivalents of $7,844,000 and (iii) restricted cash of $2,845,000, which has been pledged as collateral for those credit facilities.

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 IPO.

CONTACT: Lippert/Heilshorn & Associates

John Nesbett, ext. 101

212-838-3777

E-MAIL: [e-mail]