DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. dollars in thousands, except per share data) 		   
     
     
     
  Quarter ended
  June 30,
  1999 1998
     
Net sales $12,081 $15,447
Cost of sales 7,489 8,771
Gross profit 4,592 6,676
Selling, general and administrative expenses 2,667 3,037
Operating income 1,925 3,639
Interest expense 0 (51)
Other income, net 335 376
Income before income taxes 2,260 3,964
Income taxes 187 101
Income before minority interests 2,073 3,863
Minority interests (40) 701
Net income $2,113 $3,162
     
Basic:    
Net income per share (note 3) $.39 $.58
Weighted average common shares 5,476 5,479
outstanding (in thousands)    
     
Diluted:    
Net income per share (note 3) $.39 $.56
Weighted average common and potential 5,476 5,623
Common shares (in thousands)    





DESWELL INDUSTRIES, INC.    
CONSOLIDATED BALANCE SHEET    
(U.S. dollars in thousands)    
     
  June 30, March 31,
  1999 1999
  (unaudited)  
ASSETS    
Current assets:    
Cash and cash equivalents $25,309 $27,556
Restricted cash 2,918 2,376
Accounts receivable, net 8,878 7,796
Trading investment 0 134
Inventories 6,720 5,902
Prepaid expenses and other current assets 2,134 4,116
Income taxes receivable 397 397
Total current assets 46,356 48,277
Property, plant and equipment - net 15,373 15,639
Goodwill 432 357
Long term investment 1,343 0
Total current assets $63,504 $64,273
     
LIABILITIES AND SHAREHOLDERS' EQUITY    
Current liabilities:    
Accounts payable $3,529 $2,873
Customer deposits and accrued expenses 3,474 4,138
Income taxes payable 280 200
Total current liabilities 7,283 7,211
Minority interests 8,315 8,280
Deferred income tax 15 15
     
Shareholders' equity    
Common stock    
- authorized 20,000,000 shares; issued and outstanding    
5,476,131 shares at June 30, 1999    
and at March 31, 1999 55 55
Additional paid-in capital 26,841 25,355
Retained earnings 20,995 23,357
Total shareholders' equity 47,891 48,767
Total liabilities and shareholders' equity $63,504 $64,273





DESWELL INDUSTRIES, INC.    
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)    
( U.S. dollars in thousands )    
     
  Quarter ended
  June 30,
  1999 1998
Cash flows from operating activities:    
Net income $2,113 $3,162
Adjustments to reconcile net income to net cash    
provided by operating activities :    
Depreciation and amortization 1,109 968
Loss on sale of property, plant and equipment 0 2
Minority interests (40) 700
Changes in current assets and liabilities:    
Accounts receivable (1,082) (1,593)
Investment in trading securities 134 0
Inventories (818) (1939)
Prepaid expenses and other current assets 1,982 (814)
Income taxes receivable 0 (8)
Accounts payable 656 805
Customer deposits and accrued expenses (664) 1,333
In income taxes payable 80 28
Net cash provided by operating activities 3,470 2,644
     
Cash flows from investing activities    
Purchase of property, plant and equipment (837) (651)
Proceeds from disposal of property, plant and equipment 1 0
Acquisition, excluding cash acquired (6) 0
Increase in long term investment (1343) 0
Decrease in restricted cash (542) 86
Net cash used in investing activities (2727) (565)
     
Cash flows from financing activities    
Dividends paid (2,990) (4,110)
Net cash used in financing activities (2,990) (4,110)
     
Net (decrease) / increase in cash and cash equivalents (2,247) (2,031)
Cash and cash equivalents, at beginning of period 27,556 21,902
Cash and cash equivalents, at end of period 25,309 19,871
     
Supplementary disclosures of cashflow information:    
Cash paid during the period for:    
Interest 98 51
Income taxes 107 80
     
Acquisition of subsidiary, excluding cash acquired:    
Goodwill 81 0
Minority Interests (75) 0
Cash paid, net of cash acquired 6 0






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, 1999 and March 31, 1999, the results of operations for the quarters ended June 30, 1999 and June 30, 1998, and the cash flows for the quarters ended June 30, 1999 and June 30, 1998. The notes to the Consolidated Financial Statements, which are contained in the Form 20-F Annual Report filed on July 6, 1999 under the Securities Exchange Act of 1934 should be read in conjunction with these Consolidated Financial Statements.

2. Inventories

 June 30 March 31
  1999 1999
Inventories by major categories :  
Raw materials $ 3,388 $ 3,241
Work in progress 1,797 1,595
Finished goods 1,535 1,066
  $ 6,720 $ 5,902

3. Earnings Per Share

The basic net income per share and diluted net income per share are computed in accordance with the Statement of Financial Accounting Standards No.128 "Earnings Per Share".

The basic net income per share is computed by dividing income available to common holders 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 exercise of options.

The net income for the quarters ended June 30, 1999 and 1998 were both from the Company's continuing 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.

Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998

The Company's net sales for the quarter ended June 30, 1999 were $12,081,000, a decrease of $3,366,000 or 21.8% as compared to the corresponding period in 1998. The decrease in sales was mainly related to decreases in sales of injection-molded plastic, electronic and metallic products of $1,214,000, $1,256,000 and $896,000 respectively. This represented decreases of 13.2%, 24.5% and 78.4% respectively, as compared with the net sales in the corresponding period in the prior year.

The decrease in net sales in respective divisions was mainly due to reduction in orders from its existing customers as a result of the gloomy market conditions faced by our customers in the Asian market, especially the sub-contracted PCB assembly customers. The reduction in orders was coupled with a reduction in selling prices in both OEM and sub-contracted sales as compared with prior year.

The gross profit for the quarter ended June 30, 1999 was $4,592,000, representing a gross profit margin of 38.0%. This compares with the overall gross profit and gross profit margin of $6,676,000 or 43.2% for the quarter ended June 30, 1998.

The decrease in the overall gross profit margin of 5.2% was mainly attributed to the combined effect of the significant reduction in sub-contracted sales and the reduction in selling prices on both sub-contracted and OEM sales of the electronic division. The plastic division was able to maintain its profit margins in the quarter ended June 30, 1999 as compared with prior period.

Selling, general and administrative expenses for the quarter ended June 30, 1999 were $2,667,000, amounting to 22.1% of total net sales, as compared to $3,037,000 or 19.7% of total net sales for the quarter ended June 30, 1998.

As a result of the decrease in net sales and gross profit margin, operating income was $1,925,000 for the quarter ended June 30, 1999, a decrease of $1,714,000 or 47.1% as compared with the corresponding quarter in the prior year.

During the quarter ended June 30, 1999, the Company acquired an additional 7.0% equity interest in the metallic subsidiary. As a result, minority interests represent 49% and 59.9% minority interest in the electronics and metallic subsidiaries, respectively. The decrease in minority interest to a deficiency of $40,000 for the quarter ended June 30, 1999 from $701,000 for the corresponding quarter in the prior year reflects the fact that the electronic and metallic business generated losses in the current period as compared to a profit in the corresponding period in prior year and a breakeven situation in prior year, respectively.

As a result of the above factors, net income was $2,113,000 for the quarter ended June 30, 1999, a decrease of $1,049,000 or 33.2%, as compared to the quarter ended June 30, 1998 and net income as a percentage of net sales decreased to 17.5% from 20.5%.

Liquidity and Capital Resources

Traditionally, 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.

As of June 30, 1999, the Company had a working capital surplus of $39,073,000. This compares with a working capital surplus of $41,066,000 at March 31, 1999. The decrease in working capital was mainly attributed to net cash generated from its operating activities netting off the cash dividend distributed of $2,990,000 in June 1999.

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 with cash generated from operations. The Company has no outstanding short-term borrowings and no long-term debt as of June 30, 1999.

As of June 30, 1999, the Company had in place general banking facilities with three financial institutions aggregating approximately $11,499,000. 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. As of June 30, 1999, the Company had ( i ) unused credit facilities of $11,499,000 ( ii ) cash and cash equivalents of $25,309,000 and ( iii ) restricted cash of $2,918,000. The restricted cash and leasehold land and buildings of $1,431,000 have 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 and existing facilities.

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