CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)

 
March 31,
2010 2011
ASSETS    
Current assets:    
  Cash and cash equivalents $35,120 $35,635
  Marketable securities (note 3) 5,673 1,045
  Accounts receivable, less allowances for doubtful accounts of $223 and $599 at March 31, 2010 and 2011, respectively 14,399 17,210
  Inventories (note 4) 15,808 19,517
  Prepaid expenses and other current assets (note 5) 1,844 2,154
    Total current assets 72,844 75,561
  Property, plant and equipment-net (note 6) 60,705 51,052
  Deferred income tax assets (note 9) 70 154
  Goodwill (note 7) 392 392
    Total assets $134,011 $ 127,159
         
LIABILITIES AND SHAREHOLDERS' EQUITY    
Current liabilities:    
  Accounts payable $7,298 $6,864
  Accrued payroll and employee benefits 2,570 3,971
  Customer deposits 883 1,965
  Other accrued liabilities (note 8) 1,905 1,453
  Income taxes payable - 596
  Deferred income tax liabilities (note 9) 340 213
  Dividend payable - 810
    Total current liabilities 12,996 15,872
Commitments and contingencies (note 10) - -
     
Shareholders' equity:    
  Common shares nil par value-authorized 30,000,000 shares, shares issued and outstanding March 31, 2010 - 16,191,810; March 31, 2011 - 16,194,810 50,803 50,809
  Additional paid-in capital 7,719 7,719
  Accumulated other comprehensive income 5,316 5,316
  Retained earnings 57,177 47,443
    Total shareholders' equity 121,015 111,287
    Total liabilities and shareholders' equity $134,011 $127,159

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(U.S. dollars in thousands, except per share data)
    Year ended March 31,
    2009 2010 2011
Net sales
$131,738
$81,614
$84,022
Cost of sales 111,570 68,958 74,474
Gross profit 20,168 12,656 9,548
Selling, general and administrative expenses 19,291 15,505 13,941
Other income (expenses), net (132) 4,594 (4,435)
Operating income (loss) 745 1,745 (8,828)
Non-operating income, net 168 444 1,096
Income (loss) before income taxes 913 2,189 (7,732)
Income taxes (note 9) (282) 690 382
Net income (loss) attributable to Deswell Industries, Inc. 1,195 1,499 (8,114)
       
Other comprehensive income      
  Foreign currency translation adjustment 1,582 - -
  Comprehensive income (loss) attributable to Deswell Industries, Inc. $2,777 $1,499 $(8,114)
Net income (loss) per share attributable to Deswell Industries, Inc. (note 2)      
Basic:      
  Net income (loss) per share $0.08 $0.09 $(0.50)
  Weighted average common shares outstanding
(shares in thousands)		 15,791 15,965 16,193
Diluted:      
  Net income (loss) per share $0.08 $0.09 $(0.50)
  Weighted average common and potential common shares
(shares in thousands)		 15,805 16,039 16,193


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. dollars in thousands, except per share data)
  Common stock      
   Shares
outstanding		 Amount Additional
paid-in
capital		 Accumulated other comprehensive income Retained
earnings		 Shareholders'
equity
Balance at March 31, 2008 15,790,810 49,923 7,709 3,734 59,891 121,257
Stock-based compensation - - 62 - - 62
Foreign currency translation adjustment - - - 1,582 - 1,582
Net income - - - - 1,195 1,195
Dividends ($0.24 per share) - - - - (3,789) (3,789)
Balance at March 31, 2009 15,790,810 49,923 7,771 5,316 57,297 120,307
Stock-based compensation - - 125 - - 125
Exercise of stock options 401,000 880 (177) - - 703
Net income - - - - 1,499 1,499
Dividends ($0.10 per share) - - - - (1,619) (1,619)
Balance at March 31, 2010 16,191,810 50,803 7,719 5,316 57,177 121,015
Exercise of stock options 3,000 6 - - - 6
Net income - - - - (8,114) (8,114)
Dividends ($0.10 per share) - - - - (1,620) (1,620)
Balance at March 31, 2011 16,194,810 50,809 7,719 5,316 47,443 111,287


CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
     
Year ended March 31,
       
2009
  
2010
  
2011
Cash flows from operating activities            
Net income (loss) $ 1,195 $ 1,499 $ (8,114)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
  Depreciation and amortization   7,264   7,011   6,197
  Provision for doubtful accounts   275   72   378
  Allowances for obsolete inventories   1,585   573   1,408
  Impairment of property, plant and equipment   176   8   4,474
  Loss (gain) on sale of property, plant and equipment   216   (4,339)   (71)
  Unrealized holding loss (gain) on marketable securities   16   (42)   21
  Gain on disposal of marketable securities   -   (160)   (853)
  Stock-based compensation   62   125   -
  Deferred tax   (517)   1,016   (211)
  Changes in operating assets and liabilities:            
    Accounts receivable   (1,193)   7,756   (3,189)
    Inventories   3,338   5,064   (5,117)
    Prepaid expenses and other current assets   1,306   287   (310)
    Income taxes receivable   3   -   -
    Accounts payable   (2,157)   (3,072)   (434)
    Accrued payroll and employee benefits   (376)   97   1,401
    Customer deposits   335   (577)   1,082
    Other accrued liabilities   67   (262)   (452)
    Income taxes payable   74   (705)   596
Net cash provided by (used in) operating activities   11,669   14,351   (3,194)
Cash flows from investing activities            
  Purchase of property, plant and equipment   (7,402)   (1,606)   (1,034)
  Proceeds from sale of property, plant and equipment, net of transaction costs   345   5,528   87
  Purchase of marketable securities   -   (5,631)   (8,049)
  Proceeds from sale of marketable securities   -   260   13,509
Net cash provided by (used in) investing activities   (7,057)   (1,449)   4,513
Cash flows from financing activities            
  Dividends paid   (3,789)   (1,619)   (810)
  Exercise of stock options   -   703   6
Net cash used in financing activities   (3,789)   (916)   (804)
Effect of exchange rate changes   (407)   -   -
Net increase in cash and cash equivalents   416   11,986   515
Cash and cash equivalents, beginning of year   22,718   23,134   35,120
Cash and cash equivalents, end of year $ 23,134 $ 35,120 $ 35,635
Supplementary disclosures of cash flow information:            
Cash paid during the year for:            
  Interest $ - $ - $ -
  Income taxes $ 79 $ 380 $ -

See accompanying notes to consolidated financial statements.


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

1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS

Deswell Industries, Inc. was incorporated in the British Virgin Islands on December 2, 1993.

The principal activities of the Company comprise the manufacture and sale of injection-molded plastic parts and components, electronic products assembling and metallic parts manufacturing. The manufacturing activities are subcontracted to subsidiaries operating in Mainland China. The selling and administrative activities were originally performed in the Hong Kong Special Administrative Region ("Hong Kong") of the People's Republic of China ("China"). From August 2003, these activities were moved to the Macao Special Administrative Region ("Macao") of China.

As the Company is a holding company, the amount of any dividends to be declared by the Company will be dependent upon the amount which can be distributed from its subsidiaries. Dividends from subsidiaries are declared based on profits as reported in their statutory accounts. Such profits differ from the amounts reported under U.S. GAAP. At March 31, 2011, the retained earnings available for distribution as reflected in the statutory books of the subsidiaries were $56,325.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation
The consolidated financial statements, prepared in accordance with generally accepted accounting principles in the United States of America, include the assets, liabilities, revenues, expenses and cash flows of all subsidiaries. Intercompany balances, transactions and cash flows are eliminated on consolidation.

Goodwill
The excess purchase price over the fair value of net assets acquired is recorded on the balance sheet as goodwill. The Company adopted Accounting Standards Codification ("ASC") No. 350, "Intangibles - Goodwill and Other", which requires the carrying value of goodwill to be evaluated for impairment on an annual basis or more frequently if impairment indicators arise. The Company regularly conducted annual impairment evaluation. The impairment test requires to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value should such a circumstance arise.

Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased.

Marketable securities
All marketable securities are classified as trading securities and are stated at fair market value. Market value is determined by the most recently traded price of the security at the balance sheet date. Net realized and unrealized gains and losses on trading securities are included in non-operating income. The cost of investments sold is based on the average cost method and interest earned is included in non-operating income.

Inventories
Inventories are stated at the lower of cost or market value. Cost is determined on the weighted average basis. Work-in-progress and finished goods inventories consist of raw materials, direct labour and overhead associated with the manufacturing process. The Company periodically performs an analysis of inventory to determine obsolete or slow-moving inventory and determine if its cost exceeds market value. Write down of potentially obsolete or slow-moving inventory are recorded based on management's analysis of inventory levels.

Property, plant and equipment
Property, plant and equipment is stated at cost including the cost of improvements. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided on the straight line method based on the estimated useful lives of the assets as follows:

Leasehold land and buildings 30 - 50 years
Plant and machinery 5 - 15 years
Furniture, fixtures and equipment 4 - 5 years
Motor vehicles 3 - 5 years
Leasehold improvements 2 - 5 years

Leases
Leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property's estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases. The Company has no capital leases for any of the periods presented.

Impairment of long-lived assets
Long-lived assets are included in impairment evaluations when events and circumstances exist that indicate the carrying value of these assets may not be recoverable. In accordance with FASB ASC 360 "Property, Plant and Equipment", the Company assesses the recoverability of the carrying value of long-lived assets by first grouping its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows largely independent of the cash flows of other assets and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows that are directly associated with and expected to arise from the use of and eventual disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, the Company records an impairment charge to the extent the carrying value of the long-lived asset exceeds its fair value. The Company determines fair value through quoted market prices in active markets or, if quotations of market prices are unavailable, through the performance of internal analysis using a discounted cash flow methodology. The undiscounted and discounted cash flow analyses based on a number of estimates and assumptions, including the expected period over which the asset will be utilized, projected future operating results of the asset group, discount rate and long-term growth rate.

In evaluation of undiscounted projected cash-flows associated with those assets, the Company assessed that long-lived assets at March 31, 2009, 2010 and 2011 to be less than the fair value and the sum of undiscounted cash flows. Accordingly, the Company impaired that the carrying values of long-lived assets of $176, $8 and $4,474, respectively.

Revenue recognition
Sales of goods are recognized when goods are shipped, title of goods sold has passed to the purchaser, the price is fixed or determinable as stated on the sales contract, and its collectability is reasonably assured. Customers do not have a general right of return on products shipped. The Company permits the return of damaged or defective products and accounts for these actual returns as deduction from sales. Products returns to the Company were insignificant during past years.

Comprehensive income
Other comprehensive income for the years ended March 31, 2009 represented foreign currency translation adjustments and were included in the consolidated statement of operations.

Allowance for doubtful account
The Company regularly monitors and assesses the risk of not collecting amounts owed to the Company by customers. This evaluation is based upon a variety of factors including: ongoing credit evaluations of its customers' financial condition, an analysis of amounts current and past due along with relevant history and facts particular to the customer. Based upon the results of this analysis, the Company records an allowance for uncollectible accounts for this risk. This analysis requires the Company to make significant estimates, and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts. Unanticipated changes in the liquidity or financial position of the Company's customers may require additional provisions for doubtful accounts.

Shipping and handling cost
Shipping and handling costs related to the delivery of finished goods are included in selling expenses. During the years ended March 31, 2009, 2010 and 2011, shipping and handling costs expensed to selling expenses were $1,714, $985 and $863, respectively.

Income taxes
Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Any China tax paid by subsidiaries during the year is recorded. Deferred income taxes are recognized for all significant temporary differences at enacted rates and classified as current or non-current based upon the classification of the related asset or liability in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all, the deferred tax asset will not be realized. The Company classifies interest and/or penalties related to unrecognized tax benefits, if any, as a component of income tax provisions.

The Company adopted the provisions of ASC No. 740 "Income Taxes" ("ASC 740"), which clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides accounting guidance on de-recognition, classification, interest and penalties, disclosure and transition.

Foreign currency translation
The consolidated financial statements of the Company are presented in U.S. dollars as the Company is incorporated in the British Virgin Islands where the currency is the U.S. dollar. The Company's subsidiaries conduct substantially all of their business in Hong Kong dollars, Chinese renminbi or U.S. dollars. The exchange rates between the Hong Kong dollars and the U.S. dollar were approximately 7.7597, 7.7597 and 7.7965 as of March 31, 2009, 2010 and 2011, respectively. The exchange rates between the Chinese renminbi and the U.S. dollar were approximately 6.8417, 6.8417 and 6.583 as of March 31, 2009, 2010, and 2011, respectively.

All transactions in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the transaction dates. Monetary items existing at the balance sheet date denominated in currencies other than the functional currencies are translated at period end rates. Gains and losses resulting from the translation of foreign currency transactions and balances are included in the consolidated statement of operations.

Aggregate net foreign currency transaction gain(loss) included in other income were $704, $(43) and $(372) for the years ended March 31, 2009, 2010 and 2011, respectively.

Prior to January 1, 2009, the functional currencies of our subsidiaries were Hong Kong dollars and Chinese renminbi. Effective January 1, 2009, the functional currencies of all our subsidiaries were changed to U.S. dollars. The U.S. dollar is considered by management to be the most appropriate functional currency of Deswell's subsidiaries because over the years, and especially in our year ended March 31, 2009, most of our customers contracted with our subsidiaries in U.S. dollars.

During the years ended March 31, 2009, 2010 and 2011, 72.4%, 62.7% and 55.1% of our sales of plastic products were denominated in U.S. dollars, respectively. During the years ended March 31, 2009, 2010 and 2011, 95%, 95% and 99.8%, respectively, of sales of products in our electronics segment were denominated in U.S. dollars.

Primarily because of the stability of the exchange rate between the Hong Kong dollar and the U.S. dollar, which has existed since the Hong Kong government pegged the exchange rate at HK$7.80 to US$1.00 in 1983, and, to a lesser degree, because steady of appreciation of the Chinese Renminbi to the U.S. dollar, beginning around July 1, 2008, and the relative stability in the exchange rate of the Chinese Renminbi to the U.S. dollar since then, the actual effect of the change in the functional currency to the U.S. dollar was immaterial to the Company's results of operations, liquidity and cash flows for the years ended March 31, 2009 and March 31, 2010.

Irrespective of our functional currency, however, if the exchange rate of the Chinese Renminbi to U.S. dollar again becomes volatile, our results of operations would be affected, positively or negatively, depending on the amounts of expenses our subsidiaries pay in Chinese Renminbi and whether the Chinese Renminbi depreciates or appreciates to the U.S. dollar. The exchange rate of the RMB resumed significant appreciation to the US dollar beginning in June 2010 when China's central bank announced that it planned to introduce more flexibility in the management of China's currency and appreciated approximately 4.1% at March 31, 2011 from the exchange rate at March 31, 2010. Accordingly, the Company's operating expenses increased, and the Company's results of operations were negatively impacted, by the appreciation of the RMB to US dollar during the year ended March 31, 2011. If the RMB continues appreciating to the U.S. dollar, our operating costs would continue to increase and our financial results would be adversely affected.

Post-retirement and post-employment benefits
The Company and its subsidiaries contribute to a state pension scheme in respect of its Chinese employees.

Stock-based compensation
The Company adopts ASC No. 718, "Compensation - Stock Compensation", which requires that share-based payment transactions with employees, such as share options, be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period.

For the years ended March 31, 2009, 2010 and 2011, the Company records stock-based compensation expenses amounted to $62, $125 and $nil in the statement of operations respectively. There is no tax benefit recognized in relation to the stock-based compensation expenses incurred for the three years.

The fair value of options granted in the years ended March 31, 2009 and 2010 were estimated using the Binomial option pricing model with the following assumptions:

  2009 2010
Risk-free interest rate - weighted average 2.90% 2.88%
Expected life of options - weighted average 10 years 10 years
Stock volatility 40.49% 47.08%
Expected dividend yield 7.35% 6.61%

The Company applied judgment in estimating key assumptions in determining the fair value of the stock options on the date of grant. The Company used historical data to estimate the expected life of options, stock volatility and expected dividend yield. The risk-free interest rate of the option was based on the 10 years U.S. Treasury yield at time of grant.

Net income per share
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share gives effect to all dilutive potential common shares outstanding during the period. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In computing the dilutive effect of potential common shares, the average stock price for the period is used in determining the number of treasury shares assumed to be purchased with the proceeds from the exercise of options.

Basic net income per share and diluted net income per share calculated in accordance with ASC No. 260, "Earnings Per Share", are reconciled as follows (shares in thousands):

  Year ended March 31,
    2009   2010   2011
Net income (loss) attributable to Deswell Industries, Inc. $ 1,195 $ 1,499 $ (8,114)
Basic net income (loss) per share $ 0.08 $ 0.09 $ (0.50)
Basic weighted average common shares outstanding   15,791   15,965   16,193
Effect of dilutive securities - Options   14   74   -
Diluted weighted average common and potential common shares outstanding   15,805   16,039   16,193
Diluted net income (loss) per share $ 0.08 $ 0.09 $ (0.50)

For the years ended March 31, 2009, 2010 and 2011, potential common shares of 726,000, 668,500 and 668,500 shares related to stock options are excluded from the computation of diluted net income per share as their exercise prices were higher than the average market price.

19,000 shares related to stock options are excluded from the calculations of diluted net income per share for the year ended March 31, 2011 because their inclusion would have been anti-dilutive.

Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair value of financial instruments
The fair value of a financial instrument is defined as the exchange price that would be received from an asset or paid to transfer a liability (as exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The carrying amounts of financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and other current assets, accounts payable, and other current liabilities, approximate their fair values because of the short maturity of these instruments and market rates of interest.

Fair Value Measurements
The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.

Its establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

Recent changes in accounting standards
In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements". ASU 2010-06 requires new disclosures and clarifies existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 to now require that (1) a reporting entity must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements and (3) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2010-06 on the Company's financial position, results of operations and cash flows, but does not expect it to have a material impact.

In April 2010, the FASB issued ASU 2010-13, "Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades". It addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. FASB ASC Topic 718, "Compensation-Stock Compensation", was amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trade shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies for equity classification. The amendments will be effective for fiscal years, and interim reporting periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. The Company evaluated the effect of ASU 2010-13 on its financial statements and has concluded that it would have no impact on its financial positions, results of operation and cash flows.

In December 2010, the FASB issued ASU 2010-28, "When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts". This ASU amends guidance for Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. ASU 2010-28 is effective for fiscal years and interim periods beginning after December 15, 2010, with early adoption not permitted. The Company does not expect that the adoption of ASU 2010-28 will have a material impact on its financial position, results of operations, or cash flows.

In May 2011, the FASB issued ASU 2011-04 "Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". This pronouncement is an authoritative guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company's fiscal quarter beginning April 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05 "Comprehensive Income (Topic 220) Presentation of Comprehensive Income". This pronouncement is an authoritative guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. It is applicable to the Company's fiscal year beginning October 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

3. MARKETABLE SECURITIES

The Company acquired equity securities listed in Hong Kong and Singapore.

  March 31,
    2010   2011
Cost $ 5,631 $ 1,066
Market value $ 5,673 $ 1,045


Unrealized gain (loss) for the years ended March 31, 2009, 2010 and 2011 were $(16), $42 and $(21), respectively.

Net proceeds from sale of marketable securities for the years ended March 31, 2009, 2010 and 2011 were $nil, $260 and $13,509, respectively and realized gain from sale of marketable securities for the years ended March 31, 2009, 2010 and 2011 were $nil, $160 and $853, respectively. For the purposes of determining realized gains and losses, the cost of securities sold was determined based on the average cost method.

The marketable securities were classified as Level 1 of the hierarchy established under ASU 2010-06 because the valuations were based on quoted prices for identical securities in active markets.

4. INVENTORIES

Inventories, net of allowances, by major categories are summarized as follows:
  March 31,
    2010   2011
Raw materials $ 10,162 $ 12,280
Work in progress   2,938   4,167
Finished goods   2,708   3,070
  $ 15,808 $ 19,517

Obsolescence allowance for inventory is as follows:
  Year ended March 31,
    2009   2010   2011
Balance at beginning of the year $ 2,082 $ 3,330 $ 3,281
Additional charges   1,585   573   1,408
Written off   (337)   (622)   (273)
Balance at the end of the year $ 3,330 $ 3,281 $ 4,416

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:
  March 31,
    2010   2011
Value added tax receivable $ 749 $ 477
Rental and utility deposit   181   13
Advance to suppliers   458   649
Prepayment   81   510
Others   375   505
  $ 1,844 $ 2,154


6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:
  March 31,
    2010   2011
At cost:        
Land and buildings $ $33,632 $ 33,633
Plant and machinery   55,119   55,627
Furniture, fixtures and equipment   13,722   13,728
Motor vehicles   1,924   1,549
Leasehold improvements   3,294   3,465
Total   107,691   108,002
Less: accumulated depreciation and amortization   (47,152)   (52,662)
Less: impairment   (69)   (4,501)
    60,470   50,839
Construction in progress   315   293
Less: impairment   (80)   (80)
    235   213
Net book value $ 60,705 $ 51,052

Certain comparative figures have been reclassified among different categories of property, plant and equipment to conform the presentation of the current year to reflect the true nature of the assets and such reclassification has no impact on the Company's profit for the year ended March 31, 2010.

Included in furniture, fixture and equipment is computer software with net values of $267 and $317 as of March 31, 2010 and 2011, respectively.

During the years end March 31, 2009, 2010 and 2011, the Company impaired its property, plant and equipment by $176, $8 and $4,474, respectively which were charged to other income (expenses) in consolidation statements of operations and comprehensive income (loss).

During the year ended March 31, 2010, the Company disposed of the old plastic injection factory premises located in Shenzhen, China with a net gain of $4,198 which included in other income.

Cost of land and buildings consist of the following:
  March 31,
    2010   2011
Land use right of state-owned land and buildings erected thereon (a) $
29,451
 $
29,452
Long term leased land and buildings erected thereon (b)   4,181   4,181
  $ 33,632 $ 33,633

(a) The land use rights of state-owned land and buildings erected thereon represent land and buildings located in China on which an upfront lump-sum payment has been made for the right to use the land and building with lease terms of 50 years expiring in 2050.

(b) Long term leased land and buildings erected thereon represent land and buildings on collectively-owned land located in China on which an upfront lump-sum payment has been made for the right to use the land and building for a term of 50 years to 2053. Dongguan Chang An Xiaobian District Co-operation, the lessor, is the entity to whom the collectively-owned land has been granted. According to existing China laws and regulations, collectively-owned land is not freely transferable unless certain application and approval procedures are fulfilled by the Dongguan Chang An Xiaobian District Co-operation to change the legal form of the land from collectively-owned to state-owned. As of March 31, 2011, the Company is not aware of any steps being taken by the Dongguan Chang An Xiaobian District Co-operation for such application.

7. GOODWILL

The impairment in goodwill for the years ended March 31, 2009, 2010 and 2011 were $nil. Details of the goodwill are as follows:

Acquisitions March 31,
    2010   2011
Electronic division $ 393 $ 393
Metallic division   317   317
Foreign exchange differences   (1)   (1)
Impairment - metallic division   (317)   (317)
  $ 392 $ 392


8. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

  March 31,
    2010   2011
Accrued expenses $ 1,333 $ 729
Value added tax payable   49   9
Others   523   715
  $ 1,905 $ 1,453


9. INCOME TAXES

The components of income (loss) before income taxes are as follows:

  Year ended March 31,
    2009   2010   2011
Hong Kong $ (5) $ (1) $ (3)
China   918   2,190   (7,729)
  $ 913 $ 2,189 $ (7,732)


Under the current BVI law, the Company's income is not subject to taxation. Subsidiaries operating in Hong Kong and China are subject to income taxes as described below, and the subsidiaries operating in Macao are exempted from income taxes. Under the current Samoa Law, subsidiaries incorporated in Samoa are not subject to profit tax as they have no business operations in Samoa.

The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% (2009:16.5%, 2010:16.5%) to the estimated taxable income arising in or derived from Hong Kong, if applicable.

Prior to January 1, 2008, enterprise income tax in China was generally charged at 33%, in which 30% is for national tax and 3% is for local tax, of the assessable profit. For foreign investment enterprises established in a Special Economic Zone or Coastal Open Economic Zone, where the subsidiaries of the Company are located, and which are engaged in productionoriented activities, the national tax rate could be reduced to 15% and 24% respectively. The Company's subsidiaries incorporated in China are subject to China income taxes at the applicable tax rates on the taxable income as reported in their Chinese statutory accounts in accordance with the relevant income tax laws applicable to foreign enterprises. Pursuant to the PRC income tax laws, the subsidiaries are fully exempted from China income tax for two years starting from the first profitmaking year, followed by a 50% tax exemption for the next three years.

From January 1, 2008, with the effect of the new PRC Income Tax Law, the standard income tax rate for all companies has been reduced from the rate of 33% to 25%.

Jetcrown Industrial Shenzhen Limited("JISL"), a fully owned subsidiary deregistered on March 24, 2010, had fully enjoyed the above tax holiday and concessions by December 31, 1995. Under the new Income Tax Law, the tax rate applicable to JISL is 18% and 20% for the calender years ended December 31, 2008 and 2009, respectively.

Dongguan Kwan Hong Electronics Company Limited("DKHE") (a subsidiary of the Company) had fully enjoyed the tax holiday and concessions by December 31, 2004. The applicable tax rate of DKHE for the calendar years ended December 31, 2008, 2009 and 2010 is 25%.

In September 2007, Jetcrown Industrial (Dongguan) Limited ("JIDL") (a subsidiary of the Company) had revised its first and second tax exemption year from the calendar year ended December 31, 2004 and 2005 respectively, to the calendar years ended December 31, 2002 and 2003 respectively. The revision was upon a tax reassessment by the PRC tax authorities during the year ended March 31, 2007 regarding the commencement year of exemption and inter-company sales pricing issues. The tax rate applicable for JIDL for calendar years 2002 to 2006 was 24%. JIDL was entitled to a full tax exemption for each of the calendar years ended December 31, 2002 and 2003 and a 50% exemption for each of the calendar years ended December 31, 2004, 2005 and 2006. An aggregate amount of $450 additional income tax provision, which comprised approximately $154, $92, $166 and $38 for taxable calendar years 2004, 2005 and 2006 and the quarter ended March 31, 2007 respectively had been charged to the consolidation income statement for the year ended March 31, 2007. The assessment and payment for income taxes for calendar years 2004 and 2005 were settled and concluded in September 2007 at the amount as provided. The assessment and payment for calendar year 2006 were settled at $101 in January 2008. However, there can be no assurance that the PRC tax authorities will not, in the future, further challenge (i) the reported revenue of JIDL for periods starting from the calendar year ended 31 December 2006; and (ii) revenues reported by JIDL for value-added tax filing purpose. There can also be no assurance that similar reassessments will not be extended to other PRC subsidiaries of the Company. The above reassessments, if conducted in the future, may cause an adverse impact to the net operating results of the Company.

For the calendar year ended December 31, 2008, 2009 and 2010, the tax rate for JIDL is 25%.

Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. The Company is subject to the applicable transfer pricing rules in PRC in connection to the transactions between its subsidiaries located inside and outside PRC. In accordance to Guo Shui Fa [2009] No.2 "Implementation Regulations of Special Tax Adjustments (Provisional)"("Guo Shui Fa [2009] No.2"), which took effect beginning in calendar year 2008 and set out the regulations in relation to transfer pricing, contemporaneous documentation, disclosure and compliance of intercompany transactions, the Company and external consultants have prepared transfer pricing contemporaneous documentations (the "Contemporaneous Documentations") of DKHE and JIDL for the calendar years ended December 31, 2008 and 2009.

In accordance with Guo Shui Fa [2009] No.2, the PRC tax authorities authorities have the right to deem the Company for a tax amount based on the Contemporaneous Documentations or a basis that they considered reasonable.

The amount of current tax represents the estimated deemed profit tax imposed on the Company by the PRC tax authorities for the calendar years ended December 31, 2008, 2009, 2010 and three months period ended March 31, 2011. The amounts have been estimated based on the Contemporaneous Documentations.

The Company has adopted the provisions of ASC 740 on April 1, 2007. The evaluation of a tax position in accordance with ASC 740 begins with a determination as to whether it is more-likely-than-not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured at the largest amount of benefit that if greater than 50 percent likely of being realized upon ultimate settlement for recognition in the financial statements. There is no material impact on the adoption of ASC 740. The Company classifies interest and/or penalties related to unrecognized tax benefits as a component of income tax provisions; however, as of March 31, 2011, there is no interest and penalties related to uncertain tax positions.

The provision for income taxes consists of the following:

  Year ended March 31,
    2009   2010   2011
Current tax            
- China $ 234 $ 380 $ 596
Deferred tax   (516)   310   (214)
  $ (282) $ 690 $ 382


A reconciliation between the provision for income taxes computed by applying the statutory tax rate in China to income before income taxes and the actual provision for income taxes is as follows:

  Year ended March 31,
    2009   2010   2011
Provision for income taxes at statutory tax rate in China $ 227 $ 547 $ (1,933)
Effect of different tax rate in various jurisdictions   (1)   (210)   (1)
Effect of income for which no income tax is chargeable   (1,452)   (212)   (295)
Effect of expense for which no income tax is deductible   1,307   847   1,629
Net change in valuation allowances   (15)   (233)   700
Under (over) provision of income tax in previous years   (348)   (69)   282
Others   -   20   -
Effective tax $ (282) $ 690 $ 382

The components of deferred income tax are as follows:

  March 31,
    2010   2011
Deferred tax asset (liability):        
Net operating loss carry forwards $ 704 $ 434
Provision of employee benefits   242   325
Depreciation and amortization   26   4
Impairment of property, plant and equipment   -   1,114
Revenue recognized for financial reporting purpose before being recognized for tax purpose   (1,285)   (1,258)
Others   43   22
Less: Valuation allowances   -   (700)
Net deferred tax asset (liability) $ (270) $ (59)

A significant portion of the deferred tax assets recognized relates to net operating loss and credit carry forwards. The Company operates through the PRC entities and the valuation allowance is considered on each individual basis.

The net operating loss attributable to those PRC entities can only be carried forward for a maximum period of five years. Tax losses of non-PRC entities can be carried forward indefinitely. The unused tax losses, amounted to $1,188 and $552, will be expired in calendar year ending 2012 and 2015 respectively.

10. COMMITMENTS AND CONTINGENCIES

The Company leases premises under various operating leases, certain of which contain escalation clauses. Rental expenses under operating leases included in the statements of operations were $317, $216 and $102 for the years ended March 31, 2009, 2010 and 2011, respectively.

At March 31, 2011, the Company was obligated under operating leases requiring minimum rentals as follows:

Year ending March 31, 2012 $ 14
Total minimum lease payments $ 14


At March 31, 2011, the Company had capital commitments for purchase of furniture and fixtures totaling $2, which are expected to be disbursed during the year ending March 31, 2012. The Company had capital commitments for system upgrade project at March 31, 2011 totaling $83, which are expected to be disbursed by March 31, 2012. The Company also had capital commitments for leasehold improvements totaling $7, which are expected to be disbursed during the year ending March 31, 2012.

11. EMPLOYEE BENEFITS

The Company contributes to a state pension scheme run by the Chinese government in respect of its employees in China. The expense of $697, $528 and $492 related to this plan, which is calculated at the range of 8% to 11% of the average monthly salary, was provided for the years ended March 31, 2009, 2010 and 2011, respectively.

12. STOCK OPTION PLAN

On March 15, 1995, the Company adopted 1995 Stock Option Plan that permits the Company to grant options to officers, directors, employees and others to purchase up to 1,012,500 shares of Common Stock. On September 29, 1997, the Company approved an increase of 549,000 shares making a total of 1,561,500 shares of common stock available under the stock option plan. On January 7, 2002, the Company adopted 2001 Stock Option Plan to purchase an additional 1,125,000 shares of Common Stock. On September 30, 2003, the Company adopted 2003 Stock Option Plan to purchase an additional 900,000 shares of Common Stock. On September 19, 2005, the Company's shareholders approved an increase of 500,000 shares making a total of 1,400,000 shares of common stock available under the 2003 Stock Option Plan. On August 17, 2007, the Company's Board of Directors, subject to shareholders' approval, approved an increase of 400,000 shares making a total of 1,800,000 shares of common stock available under the 2003 Stock Option Plan. The Company's shareholders approved this amendment at the Company's Annual Shareholders' Meeting held on October 9, 2007. On August 13, 2010, the Company's Board of Directors, subject to shareholders' approval, approved an increase of 800,000 shares making a total of 2,600,000 shares of common stock available under the 2003 Stock Option Plan. The Company's shareholders approved this amendment at the Company's Annual Shareholders' Meeting held on September 16, 2010.

At March 31, 2011, options to purchase an aggregate of 4,269,000 common shares had been granted under the stock option plans. Options granted under the stock option plans will be exercisable for a period of up to 10 years commencing on the date of grant, at a price equal to at least the fair market value of the Common Stock at the date of grant, and may contain such other terms as the Board of Directors or a committee appointed to administer the plan may determine. All the options expire 10 years from the date of grant and vest immediately or over a period of 1 to 10 years. A summary of the option activity (with weighted average prices per share) is as follows:

  Year ended March 31,
  2009 2010 2011
  Number
of stock
options		 Weighted average
exercise
price		 Number
of stock options		 Weighted average exercise price Number
of stock
options		 Weighted average exercise price
Outstanding at beginning of the year 1,119,000 $ 11.14 1,066,000 $ 9.19 690,500 $ 10.19
Granted during the year 190,000 1.34 233,000 2.09 - -
Exercised during the year - - (401,000) 1.75 (3,000) 2.09
Canceled or expired (243,000) 12.03 (207,500) 12.27 - -
Outstanding and exercisable at the end of the year 1,066,000 9.19 690,500 10.19 687,500 10.23
Range of exercise price per share $1.34 to $14.10 $1.34 to $14.10 $1.34 to $14.10

The weighted average fair value of options granted for the years ended March 31, 2009, 2010 and 2011 was $0.33, $0.54 and $nil per share, respectively. The total intrinsic value of options exercised during the years ended March 31, 2009, 2010 and 2011 was $nil, $940 and $4, respectively. At March 31, 2011, the aggregated intrinsic value of options outstanding and exercisable was $25.

There were 243,000, 207,500 and nil options canceled for the years ended March 31, 2009, 2010 and 2011. The weighted average remaining contractual life of the share options outstanding at March 31, 2011 was 4.39 years. At March 31, 2009, 2010 and 2011, there were 243,000, 217,500 and 1,017,500 options available for future grant under the plans respectively.

13. OPERATING RISK

Concentrations of Credit Risk and Major Customers
A substantial percentage of the Company's sales are made to a small number of customers and are typically sold either under letter of credit or on an open account basis. Details of customers accounting for 10% or more of total net sales for each of the three years ended March 31, 2009, 2010 and 2011 are as follows:

  Percentage of net sales
Year ended March 31,
  2009 2010 2011
N&J Company Limited 28.6% 19.2% *
Digidesign, Inc.
12.7%
12.0%
*
VTech Telecommunications Limited
*
10.8%
14.6%

* Less than 10%

Sales to the above customers relate to both injection-molded plastic parts and electronic products.

Debtors accounting for 10% or more of total accounts receivable at March 31, 2010 and 2011, respectively, are as follows:

Percentage of accounts
receivable March 31,
2010 2011
VTech Telecommunications Limited 15.3% 25.0%
Peavey Electronics Corp. 12.6% *
Digidesign, Inc. 10.9% *

* Less than 10%

There were accounts receivable written off of $6, $7 and $7 during the years ended March 31, 2009, 2010 and 2011 respectively. There were provision for doubtful accounts of $275, $72 and $378 during the years ended March 31, 2009, 2010 and 2011 respectively. There were charge off of $nil, $199 and $2 during the years ended March 31, 2009, 2010 and 2011 respectively. At March 31, 2009, 2010 and 2011, allowances for doubtful accounts were $349, $223 and $599 respectively.

Country risk
The Company has significant investments in China. The operating results of the Company may be adversely affected by changes in the political and social conditions in China, and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods taxation, among other things. There can be no assurance, however, those changes in political and other conditions will not result in any adverse impact.

14. SEGMENT INFORMATION

The Company has three reportable segments: plastic injection molding, electronic products assembling and metallic parts manufacturing. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of the acquisition was retained.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

Contributions of the major activities, profitability information and asset information of the Company's reportable segments for the years ended March 31, 2009, 2010 and 2011 are as follows:

  Year ended March 31,
  2009
  Net sales Intersegment Sales Profit (loss)
Segment:      
Injection molded plastic parts $ 75,838 $ 2,437 $ 1,553
Electronic products 57,859 724 29
Metallic parts 1,202 - (669)
Segment total $ 134,899 $ 3,161 $ 913
Reconciliation to consolidated
totals: 		     
Sales eliminations (3,161) (3,161) -
Consolidated totals:      
Net sales $ 131,738 $ -  
Income (loss) before income taxes     $ 913

  Year ended March 31,
  2010
  Net sales Intersegment Sales Profit (loss)
Segment:      
Injection molded plastic parts $ 48,177 $ 1,168 $ 3,734
Electronic products 34,634 51 (1,048)
Metallic parts 36 14 (497)
Segment total $ 82,847 $ 1,233 $ 2,189
Reconciliation to consolidated
totals: 		     
Sales eliminations (1,233) (1,233) -
Consolidated totals:      
Net sales $ 81,614 $ -  
Income (loss) before income taxes     $ 2,189

  Year ended March 31,
  2011
  Net sales Intersegment Sales Profit (loss)
Segment:      
Injection molded plastic parts $ 44,326 $ 1,553 $ (6,662)
Electronic products 41,231 141 (625)
Metallic parts 165 6 (445)
Segment total $ 85,722 $ 1,700 $ (7,732)
Reconciliation to consolidated
totals: 		     
Sales eliminations (1,700) (1,700) -
Consolidated totals:      
Net sales $ 84,022 $ -  
Income (loss) before income taxes     $ (7,732)


  Year ended March 31,
  2009 2010 2011
  Interest income Interest expenses Interest income Interest expenses Interest income Interest expenses
Segment:            
Injection molded plastic parts $ 215 $ - $ 166 $ - $ 122 $ -
Electronic products 12 - 13 - 29 -
Metallic parts - - - - - -
Consolidated total $ 227 $ - $ 179 $ - $ 141 $ -


  Year ended March 31,
  2009
  Identifiable assets Capital expenditure Depreciation and amortization
Segment:      
Injection molded plastic parts $ 101,497 $ 6,648 $ 5,834
Electronic products 34,885 637 1,229
Metallic parts 1,067 117 201
Segment total $ 137,449 $ 7,402 $ 7,264
Reconciliation to consolidated totals:      
Elimination of receivables from intersegments (359) - -
Goodwill allocated to electronic products segment 392 - -
Consolidated totals $ 137,482 $ 7,402 $ 7,264


  Year ended March 31,
  2010
  Identifiable assets Capital expenditure Depreciation and amortization
Segment:      
Injection molded plastic parts $ 105,084 $ 1,308 $ 5,838
Electronic products 32,569 257 1,007
Metallic parts 739 41 166
Segment total $ 138,392 $ 1,606 $ 7,011
Reconciliation to consolidated
totals: 		     
Elimination of receivables from intersegments (4,773) - -
Goodwill allocated to electronic products segment 392 - -
Consolidated totals $ 134,011 $ 1,606 $ 7,011


  Year ended March 31,
  2011
  Identifiable assets Capital expenditure Depreciation and amortization
Segment:      
Injection molded plastic parts $ 92,922 $ 714 $ 5,300
Electronic products 39,933 280 771
Metallic parts (6,093) 40 126
Segment total $ 126,762 $ 1,034 $ 6,197
Reconciliation to consolidated totals:      
Elimination of receivables
from intersegments		 5 - -
Goodwill not allocated to segments 392 - -
Consolidated totals $ 127,159 $ 1,034 $ 6,197


The Company's sales are coordinated through the Macao subsidiaries and a breakdown of sales by destination is as follows:

  Year ended March 31,
  2009 2010 2011
Net sales      
United States of America $ 42,100 $ 36,144 $ 35,044
China 69,617 42,848 35,910
United Kingdom 13,925 1,278 7,580
Hong Kong 1,762 597 571
Europe 2,438 364 2,075
Others 1,896 383 2,842
Total net sales $ 131,738 $ 81,614 $ 84,022

The location of the Company's identifiable assets is as follows:

  Year ended March 31,
  2009 2010 2011
Hong Kong and Macao $ 38,745 $ 52,457 $ 40,951
China 98,345 81,162 85,816
Total identifiable assets $ 137,090 $ 133,619 $ 126,767
Goodwill 392 392 392
Total assets $ 137,482 $ 134,011 $ 127,159


15. SUBSEQUENT EVENTS

On June 28, 2011, the Company declared a dividend of $810, or $0.05 per common share payable on July 28, 2011 to shareholders of record as of July 8, 2011.

16. CONDENSED FINANCIAL INFORMATION OF DESWELL INDUSTRIES, INC.

The condensed financial statements of Deswell Industries, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America. Under the PRC laws and regulations, Deswell Industries, Inc's PRC subsidiaries are restricted in their ability to transfer certain of their net assets to Deswell Industries, Inc in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling $62,371 (equivalent to RMB 427 million) and $72,714 (equivalent to RMB 479 million) as of March 31, 2010 and 2011, respectively.

Balance sheets
 
March 31,
2010
2011
Assets    
Current assets:    
  Cash and cash equivalents $664 $324
  Prepaid expenses and other current assets 28 76
  Amounts due from subsidiaries 60,982 58,380
Total current assets 61,674 58,780
Investments in unconsolidated subsidiaries 59,362 53,313
Property, plant and equipment 212 274
Total assets $121,248 $112,367
         
Liabilities and shareholders' equity
Current liabilities:
  Accrued expenses
$-
$200
  Other liabilities
233
70
  Dividend payable
-
810
Total current liabilities
233
1,080
Total shareholders' equity
121,015
111,287
Total liabilities and shareholders' equity $121,248 $112,367

Statements of operations and comprehensive income (loss)
     
Year ended March 31,
       
2009
  
2010
  
2011
Equity in earnings (loss) of unconsolidated subsidiaries $ 3,274 $ 3,335 $ (6,049)
Operating expenses   2,078   1,836   2,066
Other income (expenses), net   (1)   -   1
Income (loss) before income taxes   1,195   1,499   (8,114)
Income taxes   -   -   -
Net income (loss)   1,195   1,499   (8,114)
Foreign currency translation adjustment   1,582   -   -
Comprehensive income (loss) $ 2,777 $ 1,499 $ (8,114)


Statements of cash flows

     
Year ended March 31,
       
2009
  
2010
  
2011
Cash flows from operating activities            
Net income (loss) $ 1,195 $ 1,499 $ (8,114)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
  Equity in loss (profit) of subsidiaries   (3,274)   (3,335)   6,049
  Depreciation   -   -   48
  Stock-based compensation   62   125   -
  Changes in operating assets and liabilities:            
    Prepaid expenses and other current assets (205)   206   (48)
    Amounts due from subsidiaries 938   2,709   2,602
    Accrued expenses 9   (214)   200
    Other liabilities -   233   (163)
Net cash provided by (used in) operating activities $ (1,275) $ 1,223 $ 574
Cash flows from investing activities            
  Purchase of property, plant and equipment $ - $ (212) $ (110)
  Dividend received   5,140   -   -
Net cash provided by (used in) investing activities $ 5,140 $ (212) $ (110)
Cash flows from financing activities            
  Dividends paid $ (3,789) $ (1,619) $ (810)
  Exercise of stock options   -   703   6
Net cash used in financing activities   (3,789)   (916)   (804)
             
Effect of exchange rate changes $ 180 $ - $ -
             
Net increase (decrease) in cash and cash equivalents   256   95   (340)
Cash and cash equivalents, beginning of year   313   569   664
Cash and cash equivalents, end of year $ 569 $ 664 $ 324


a) Basis of presentation
In Deswell Industries, Inc - only financial statements, Deswell Industries, Inc's investments in subsidiaries are stated at cost plus its equity interest in undistributed earnings of subsidiaries since inception. Accordingly, such financial statements should be read in conjunction with the Company's consolidated financial statements.

Deswell Industries, Inc records its investments in its subsidiaries under the equity method of accounting as prescribed in ASC 323 "Investment-Equity Method and Joint Ventures". Such investment is presented on the balance sheet as "Investments in unconsolidated subsidiaries" and share of the subsidiaries' profit or loss as "Equity in earnings (loss) of unconsolidated subsidiaries",on the statements of operations.

The subsidiaries paid dividends of $5,140, $nil and $nil to Deswell Industries, Inc for the years ended March 2009, 2010 and 2011.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.

b) Related party transactions
For the years ended March 31, 2009, 2010 and 2011, related party transactions mainly composed of $120, $120 and $120, paid to Jetcrown Industrial (Macao Commercial Offshore) Limited as service fee for each year.



Copyright 2011 Deswell Industries, Inc. All rights reserved.