Business Report 2003

Transcription

1 Business Report 2003 Year ended March 31, 2003 NIPPON SYSTEM DEVELOPMENT CO., LTD.

2 Profile Since its inception in 1969, Nippon System Development (NSD) has worked hard and established itself as an independent software house and one of Japan s foremost systems integrators. Now, NSD provides integrated services from the development and design of information systems to the operation of maintenance systems in a wide range of industries. It also develops various solution packages including security-related solutions such as electronic authentication. NSD was listed on the first section of the Osaka Securities Exchange in 1998, followed by a listing on the first section of the Tokyo Stock Exchange in Taking full advantage of cutting edge technology, NSD will continue its commitment to the delivery of optimal services that meet customers needs and to the maximization of corporate value. Consolidated Financial Highlights Years ended March 31, 2003 and FOR THE YEAR Net sales... 36,705 41,739 $305,875 Operating income... 4,891 7,027 40,758 Ordinary income... 4,935 6,930 41,125 Net income... 2,149 3,338 17,908 Per share (in yen and U.S. dollars) Net income $ 0.68 Shareholders equity... 1, , Cash dividends AT YEAR-END Shareholders equity... 29,499 27,956 $245,825 Total assets... 40,487 40, ,392 Note: The U.S. dollar amounts represent translations of yen amounts at the rate of 120=U.S.$1.00. CONTENTS 01 To Our Investors 02 NSD NSD at A Glance 04 Topics 05 Consolidated Selected Financial Data 06 Management s Discussion and Analysis 10 Consolidated Balance Sheets 12 Consolidated Statements of Income Consolidated Statements of Retained Earnings 13 Consolidated Statements of Cash Flows 14 Notes to Consolidated Financial Statements 16 Non-Consolidated Selected Financial Data 18 Non-Consolidated Balance Sheets 19 Non-Consolidated Statements of Income Non-Consolidated Statements of Retained Earnings 20 Directory and Subsidiaries 21 Board of Directors and Auditors, Corporate Data

3 To Our Investors Chairman & CEO, Shinichiro Uchikubo President & COO, Isao Ogishi We would like to express our sincere gratitude to you for extending your support to us. To our great regret, we must begin by announcing that our net sales and ordinary income declined after seven years of consecutive increases. The decrease was attributable to corporate cutbacks and deferred spending on IT-related investments due to the slow-down of the Japanese economy and leveled-off sales to financial institutions, whose industry wide moves for mergers and integrations have subsided. Although we will be forced to operate in this difficult business environment again in the coming term, we will redouble our efforts to expand our customer base and to boost our profitability through improved productivity and a more stringent quality-control structure. Parallel to these efforts, we will work hard to sustain our growth while special measures will be carried out for the expansion and the strengthening of our solutions business. As part of such measures, we have set up Identrus Japan, Inc., a joint venture with Identrus LLC of the United States, and through this we have gained entry into the field of digital authentication, where we plan to offer global standard authentication systems. Looking ahead, all of us at Nippon System Development are committed to better business results and further business growth. We thank you for your cooperation and are looking forward to your continued support. NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

4 NSD at A Glance The NSD Group comprises 14 subsidiaries and two affiliated companies in addition to Nippon System Development, and is engaged in information services, software products and staffing services. Information Services Division With its principal focus on software development and facilities management, this mainstay business segment accounts for 90.8% of total sales. The core activities of this business segments are related primarily to software development. Software Development NSD creates various software applications based on customer orders, primarily including mission critical systems. Our software has found applications in a broad spectrum of business sectors including the financial, communications, manufacturing, and distribution sectors. NSD, on the strength of being an independent and thus unbiased software house, does not have to restrict itself to products from any particular manufacturer of hardware or software, and is thus positioned to offer optimal solutions seamlessly ranging from upstream processes for systems all the way down to maintenance and operational support for those same systems. Our latest area of focus is the development of systems with a multitude of built-in security functions and other systems to enhance customer satisfaction, using state-of-the-art technology. A few of our recent innovations in new software the results of freeing ourselves from conventional wisdom and techniques include an electronic commerce system that takes advantage of an electronic certificate (PKI: Public Key Infrastructure), an integrated mobile Internet banking system compatible with all mobile terminals (including PDAs, i-mode, and EZweb, among others), and an ecrm system based on dialogue-type AI robotics technology, which understands natural sentences keyed in by customers and delivers information and services accordingly. Facilities Management We have won contracts with top-tier companies in a variety of industrial sectors to run and manage their entire computer-related facilities. With ample experience in managing mainframe computers, UNIX, Windows servers and a multitude of hardware types run on a variety of operational systems, we offer facilities management services on a 24-hour/365-day basis. The know-how in the sphere of facilities management that NSD has accumulated over many years is also utilized to the fullest in the running of systems support, help desk, and outsourcing businesses. Furthermore, our systems support is positioned to better address the needs of customers, as sales activities for systems support are performed in conjunction with those geared for software development. 2 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

5 Net Sales by Division (%) Information Services Software Products Staffing Services : 90.8% : 7.0% : 2.2% Year ended March 31, 2003 Software Products Division Plans are underway to increase exposure in the area of highly profitable packaged software sales, including software applications developed exclusively by NSD and the latest business applications NSD imports from its overseas corporate alliances. In addition, the division will conduct sales activities designed to encourage sales of total systems, where software development is integrated with an optimized combination of hardware. Staffing Services Division Our staffing services business, run by Nippon Technical Service Co., Ltd., one of our subsidiaries, involves dispatching personnel to a wide range of companies outside the NSD Group and also to NSD, especially in the sections engaged in information services. Needs for personnel on a temporary basis are expected to grow further, and attempts will be made to maximize these opportunities by giving a stronger boost to this segment. Clients Information Services N S D Software Products Subcontract of software development, etc. Consolidated subsidiaries Shonan Information Service Co., Ltd. Link Concept Corporation NSD Kyusyu Co., Ltd. Identrus Japan, Inc. NSD Security Inc. NSD America Inc. Subcontract of computer room operation and management Consolidated subsidiary NSD System Service Co., Ltd. Consultation of software development Consolidated subsidiaries NSD System Institude Co., Ltd. NI Consulting Co., Ltd. Subcontract of staffing services, computer room operation and management, etc. Consolidated subsidiaries Nippon Technical Service Co., Ltd. D Access Co., Ltd. Subcontract of software development Consolidated subsidiaries Fukushima Sougo Keisan Center Co., Ltd. Nippon Sangyo System Co., Ltd. Consolidated subsidiary Inter World Corporation Japan K.K. Information services and software products Information services Information services Information services Staffing and information services Note: The affiliates of Fukushimaken Chuo Keisan Center Co., Ltd. and NSD (SINGAPORE) PTE. LTD. (operations suspended) are not included due to their insignificance. Software products NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

6 Topics Full-fledged Entry into the Electronic Authentication Market In January 2003, the NSD Group formed Identrus Japan, Inc., a joint venture with Identrus LLC of the United States, to gain entry into the electronic authentication market. NSD has an 80% stake while Identrus LLC holds the balance in this venture, with total paid-in capital amounting to 460 million yen. Identrus LLC of the United States was founded in New York in April It is an electronic authentication organization in which 59 major financial institutions around the world currently have stakes or participate. Leveraging the superb credit ratings of the world s first-tier banks, Identrus is the only organization positioned to provide a de facto global standard for identity authentication to be used in business-to-business transactions where identity assurance is needed, when closing contracts, with respect to the corporate identity and electronic signatures that substitute for corporate seals registered with banks. Of the Japanese financial institutions, four megabanks (UFJ Bank, Mizuho Corporate Bank, Sumitomo Mitsui Banking, and Bank of Tokyo-Mitsubishi) are participating members. With the further intensification of global corporate competition as seen in recent years, the use of networks will find wider applications in areas of business that include, in addition to conventional exchanges of information, actual business transactions where contracts are closed and payments are settled online. In an era where product enquiries and request for estimates are submitted electronically 24 hours a day from locations across the globe, the emergence of a system based on whatever technology is available for performing personal and corporate identity authentication online is inevitable. Identrus has set forth a globally uniform set of stringent rules for issuing digital certificates to be complied with by banks. By connecting the certifying authority of each of its member banks to the Internet, Identrus has come up with a system capable of providing cross authentication on a real-time basis for corporations located in 160 countries. Identrus Japan, Inc. will commence joint certificate authority services geared towards financial institutions in Japan in September 2003, ahead of numerous major financial institutions across the world. UFJ Bank Limited and Mizuho Corporate Bank, Ltd. have signed up to be the first banks to take advantage of these services. Expansion of Solutions Business in the United States As part of its solutions business conducted in the United States, the NSD Group formed NSD Security Inc. in San Mateo, California in January 2003 for the development and sale of products providing sophisticated protection for individual items of information including personal and corporate data. The product is based on a new method, which, despite being a solution based on sophisticated PKI technology, has significantly lowered costs compared to conventional models. Another characteristic of the product is its ease of operation. With contracts from financial sectors and health care sectors, among others, already under its belt, NSD Security is well poised for further growth and expansion. 4 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

7 Consolidated Selected Financial Data Years ended March 31, 2003, 2002, 2001, 2000 and FOR THE YEAR Net sales... 36,705 41,739 37,442 31,033 27,339 $305,875 Information services... 33,320 38,463 34,728 28, , (90.8) (92.2) (92.8) (92.4) Software products... 2,570 2,494 2,022 1,808 21, (7.0) (6.0) (5.4) (5.8) Staffing services , (2.2) (1.8) (1.8) (1.8) Operating income... 4,891 7,027 6,491 4,858 3,913 40,758 Ordinary income... 4,935 6,930 6,482 4,541 3,770 41,125 Net income... 2,149 3,338 1,925 2,600 1,784 17,908 Per share (in yen and U.S. dollars) Net income $ 0.68 Shareholders equity... 1, , , , , Cash dividends AT YEAR-END Shareholders equity... 29,499 27,956 27,241 25,897 23,428 $245,825 Total assets... 40,487 40,420 40,095 35,757 33, ,392 Number of employees... 3,339 3,145 2,891 2,775 Notes: 1. Full of remaining portion of liabilities for employees retirement benefits, equating to 2,176 million, is accounted for as an extraordinary loss in fiscal year ended March The U.S. dollar amounts represent translations of yen amounts at the rate of 120=U.S.$ Figures in parenthesis are percentages of total net sales. Ratio to net sales (%) Thousands of yen U.S. dollars Gross profit SGA expenses Operating income Ordinary income Net income Return on equity (%) Shareholders equity ratio (%) Price/earning ratio (times) Net sales per employee... 10,993 13,272 12,951 11,183 $91,608 Net income per employee , ,367 Note: The U.S. dollar amounts represent translations of yen amounts at the rate of 120=U.S.$1.00. NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

8 Management s Discussion and Analysis SALES AND PROFITS Sales Although the business environment remained harsh amid prolonged economic stagnation in Japan, we at Nippon System Development strove to expand our business capacity in FY 2002 (ended March 31, 2003, the fiscal year hereafter). The company improved the productivity of its Information Services Division, while concentrating increasingly on sales of our pre-packaged solutions software products. Orders decreased, however, since customers curtailed or postponed IT investments due to the stagnant economy. The company therefore failed to make up for a drop in orders from financial institutions, which had previously spent heavily on IT equipment in line with their management integration activities. As a result, consolidated sales fell 12.1% from the previous fiscal year to 36,705 million yen. Business Outlook by Division Information Services Division In a bid to receive more orders, the Information Services Division focused on improving its planning capability to stimulate demand from customers and anchor its technical strength. It has also implemented joint development projects with user companies and vigorously cultivated new customers. In addition, the division introduced a group system to reorganize and fortify operating structures, and enhanced customer-oriented sales activities by setting higher levels of customer satisfaction as business goals. Sales in the division fell below the level achieved in the previous fiscal year because the market environment was harmed through corporations curtailing or postponing IT investment, reflecting Japan s weakened economy. We intend to expand the division s operating base by improving our technical expertise; developing proposals to fit customers needs; and enhancing synergies with the Software Products Division. Sales in the division dropped 13.4% from the previous fiscal year to 33,320 million yen, and accounted for 90.8% of the company s total sales, down from 92.1% in the previous fiscal year. Net sales by division , ,022 2,570 27, ,808 28,660 34,728 38,463 '99 '00 '01 '02 '03 33,320 Staffing services Software products Information services Operation income 3,913 4,858 6,491 7,027 4,891 '99 '00 '01 '02 '03 Disclosure of net sales by division started in fiscal year ended March Only total net sales figures are shown for fiscal year ended March NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

9 Software Products Division Aiming at amplification of its lineup of pre-packaged solutions software products, the Software Products Division is active in promoting alliances with leading IT companies both at home and abroad. Among products newly released in the fiscal year were: NSD- Assistant, a customer services, in alliance with e-gain (U.S.A.); Web ALARM, a web content monitoring and recovery system, in alliance with e-lock (Malaysia); and NFR, a network intrusion detection system, in alliance with NFR Security (U.S.A.). However, demand for existing products, including the division s staple merchandise Virus Scan, was weak due to the deterioration of the market environment. Sales in the division were pegged at only slightly higher than those for the previous fiscal year. We wish to retain a focus on pre-packaged solution software products and, at the same time, act in cooperation with the Software Development Group as a total systems integrator. Sales in the division increased 3.0% from the previous fiscal year to 2,570 million yen, accounting for 7.0% of total sales, up from 6.0% in the previous fiscal year. Staffing Services Division Despite increased competition, the Staffing Services Division marked sales growth as its steady efforts to seek new customers proved successful. The company intends to improve profitability further through acquiring more staff members with high IT-associated skills, and through seeking new customers as well as developing the existing customer base. Sales in the division climbed 4.3% from the previous fiscal year to 814 million yen, accounting for 2.2% of total sales, up from 1.9% in the previous fiscal year. Ordinary income 3,770 4,541 6,482 6,930 4,935 Net income 3,338 2,600 1,784 1,925 2,149 Return on equity '99 '00 '01 '02 '03 '99 '00 '01 '02 '03 '99 '00 '01 '02 '03 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

10 Operating Income, Ordinary Income, and Net Income We reduced manufacturing costs further and took other measures towards meeting our goals for satisfactory business performance and ensuring profits. Operating income, however, slipped 30.4% to 4,891 million yen with operating income ratio at 13.3%, down from 16.8% in the previous year, because the operating rate declined due to a decrease in the amount of orders, and because prices of orders fell under pressure from customers. Selling, general and administrative costs were up 6.7% to 3,997 million yen, mainly due to increases in the costs of hiring personnel to work on and improve company in-house systems. Research and development costs increased by 50.2% to 140 million yen. Among the main research and development activities are development of object-oriented techniques, research/study of stateof-the-art technology by our U.S. local unit (NSD America Inc.), establishment of a technology base related to improving quality and productivity, and research and development of pre-packaged solutions products. The company reported losses from sale of securities and valuation losses reflecting the rapid deterioration of the stock market. Ordinary income dropped 28.8% from the previous year to 4,935 million yen, with net income down 35.6% at 2,149 million yen. As a result, net income per share stood at yen, compared with yen in the previous fiscal year. The dividend per share remained unchanged from the previous fiscal year at 18 yen, and the dividend payout ratio came to 19.4%, compared with 13.7% in the previous fiscal year. Return on equity fell from 12.1% to 7.5%. FINANCIAL CONDITION Current assets as of March 31, 2003 stood at 22,136 million yen, up 0.6% from the end of the previous fiscal year. Fixed assets increased 0.3% to 18,351 million yen and total assets were up 0.2% at 40,487 million yen. Meanwhile, current liabilities stood at 7,060 million yen as of the end of the fiscal year, down 12.2%, mainly because accounts payable decreased 18.0% year on year in line with the company s Total assets 33,775 35,757 40,095 40,420 40,487 Shareholders' equity and ratio 23,428 25,897 27,241 29,499 27,956 Interest-bearing debt 2,944 2,794 2,584 2,043 1, '99 '00 '01 '02 '03 '99 '00 '01 '02 '03 '99 '00 '01 '02 '03 8 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

11 curtailment of outsourcing costs. Accordingly, the current ratio rose to 313.5%, compared to 273.6% as of the end of the previous fiscal year. Fixed liabilities fell 10.6% year on year to 3,810 million yen. The main reason for this is that long-term accounts payable decreased by 600 million yen from the previous year when the company s lease obligation expired. Interest-bearing debts as of the end of the fiscal year came to 1,907 million yen, down 6.6% year on year. As a result, total liabilities were 11.7% lower at 10,870 million yen. Shareholders equity increased 5.5% from the previous fiscal year end to 29,499 million yen, with shareholders equity ratio up 3.7% to 72.9%. Cash flows 3,115 CASH FLOWS Although we reported expenditure on acquisition of tangible fixed assets and stocks, cash and cash equivalents stood at 10,431 million yen as of March 31, 2003, up 7.0% from the end of the previous fiscal year. (Cash flow from operating activities) The increase of cash provided by operating activities stood at 3,115 million yen in the fiscal year, down 48.9% from the previous fiscal year. The company paid 2,334 million yen in the form of corporate and other taxes, while the purchase obligation decreased by 389 million yen. However, the company reported a net profit of 4,117 million yen before tax adjustment and a decrease of receivables by 245 million yen. (Cash flow from investment activities) Net cash used in investment activities were 1,187 million yen in the fiscal year, down 53.5% from the previous fiscal year. Although the company reported cancellation of time deposits worth 489 million yen and sales of investment securities at 338 million yen, it paid 1,799 million yen for acquisition of tangible fixed assets and 424 million yen for investment securities. (Cash flow from financing activities) The decrease of net cash used in financing activities registered 1,231 million yen in the fiscal year, down 35.7% from the previous fiscal year, mainly due to 626 million yen paid as lease obligations and 460 million yen paid as dividends. 679 Cash flow from operating activities (1,187) (1,231) Cash flow from investing activities Cash flow from financing activities Net increase in cash and cash equivalents NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

12 Consolidated Balance Sheets As of March 31, 2003 and 2002 ASSETS Current assets: Cash and time deposit... 9,446 9,303 $ 78,717 Notes and accounts receivable trade... 9,794 10,038 81,617 Marketable securities... 1,028 1,098 8,567 Inventories... 1,185 1,033 9,875 Deferred tax assets current ,650 Other ,208 Allowance for doubtful accounts... (23) (22) (192) Total current assets... 22,136 22, ,467 Investments and other assets: Investments in securities... 2,140 2,705 17,833 Lease and guarantee deposits... 1,629 1,762 13,575 Deferred tax assets noncurrent... 1,855 1,762 15,458 Revaluation-related differed tax assets... 1,564 1,593 13,033 Other ,183 Allowance for doubtful accounts... (66) (62) (550) Total investments and other assets... 7,866 8,681 65,550 Fixed assets: Buildings and structures... 3,261 3,093 27,175 Land... 4,259 4,175 35,492 Construction in process... 1,231 10,258 Other ,358 Total fixed assets... 9,396 8,011 78,300 Intangible assets... 1,089 1,718 9,075 Total amount of assets... 40,487 40,420 $337,392 See accompanying notes to consolidated financial statements. 10 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

13 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable... 1,775 2,165 $ 14,792 Short-term loans... 1,835 1,940 15,292 Accrued income taxes... 1,265 1,434 10,542 Accrued bonuses to employees ,900 Other... 1,595 1,851 13,292 Total current liabilities... 7,060 8,045 58,833 Long-term liabilities: Long-term debt Accrued liabilities Allowance for retirement benefits... 3,285 2,939 27,375 Reserve for benefits for retired directors and auditors ,767 Total long-term liabilities... 3,810 4,262 31,750 Total liabilities... 10,870 12,308 90,583 Minority interests Minority interests Shareholders equity: Common stock 100,000,000 Authorized 100,000,000 25,586,080 Outstanding 25,586, ,205 7,205 60,042 Additional paid-in capital... 6,868 6,868 57,233 Retained earnings... 17,842 16, ,683 Revaluation surplus of land... (2,223) (2,199) (18,525) Net unrealized loss on available-for-sale securities... (158) (204) (1,317) Foreign currency translation adjustments... (24) 47 (200) Treasury stock... (10) (4) (83) Total shareholders equity... 29,499 27, ,825 Total liabilities, minority interests and shareholders equity... 40,487 40,420 $337,392 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

14 Consolidated Statements of Income and Retained Earnings Years ended March 31, 2003 and Net sales... 36,705 41,739 $305,875 Cost of sales... 27,816 30, ,800 Gross profit... 8,889 10,773 74,075 Selling, general and administrative expenses... 3,997 3,746 33,308 Operating income... 4,891 7,027 40,758 Non-operating income: Interest and dividend income House rent received Insurance income Cancellation of insurance Other Total non-operating income Non-operating expenses: Interest expenses Loss on sales of securities Other Total non-operating expenses Ordinary income... 4,935 6,930 41,125 Extraordinary gains: Gain on sales of fixed assets Gain on reversal of allowance for doubtful accounts Total extraordinary gains Extraordinary losses: Loss on sales of fixed assets Loss on sales of investment securities Loss from devaluation of investment securities ,367 Valuation loss on golf memberships Other Total extraordinary losses ,038 6,817 Income before income taxes... 4,117 5,907 34,308 Income, inhabitants and enterprise taxes... 1,943 2,546 16,192 Minority interests Net income... 2,149 3,338 $ 17, Capital surplus Capital surplus at beginning of the year... 6,868 13,378 $ 57,233 Capital surplus at beginning of the year... 6,868 13,378 57,233 Capital surplus at end of the year... 6,868 13,378 57,233 Retained earnings Retained earnings at beginning of the year... 16,244 13, ,367 Retained earnings at beginning of the year... 16,244 13, ,367 Increase in retained earnings... 2,149 3,338 17,908 Net income... 2,149 3,338 17,908 Decrease in retained earnings ,592 Cash dividends ,833 Bonuses to directors and statutory auditors Reversal of revaluation surplus of land Retained earnings at end of the year... 17,842 16,244 $148, NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

15 Consolidated Statements of Cash Flows Years ended March 31, 2003 and Cash flow from operating activities: Income before income taxes... 4,117 5,907 $ 34,308 Depreciation and amortization ,192 Amortization of consolidation adjustment account Increase in allowance for doubtful accounts Decrease in accrued bonuses... (65) (102) (542) Accrual of allowance for retirement benefits ,875 Accrual of reserve for retired directors and auditors... (167) 41 (1,392) Loss from devaluation of investment securities ,367 Valuation loss on golf memberships Loss on sales of marketable securities Loss on sales of investment securities Gain on sales of fixed assets... 0 (4) 0 Loss on sales of fixed assets Loss on retirement of fixed assets Interest and divided income... (23) (54) (192) Interest expenses Decrease in trade receivables ,042 Increase in inventories... (151) (62) (1,258) Increase in other current assets... (63) (2) (525) Decrease in other investments Increase (decrease) in trade payables... (389) 216 (3,242) Decrease in accrued consumption taxes... (123) (72) (1,025) Increase (decrease) in other current liabilities... (89) 35 (742) Bonuses to directors and auditors... (88) (88) (733) Other... (5) (22) (42) Subtotal... 5,474 9,379 45,617 Interest and dividends received Interest paid... (64) (101) (533) Income taxes paid... (2,334) (3,218) (19,450) Net cash provided by operating activities... 3,115 6,098 25,958 Cash flow from investing activities: Increase in time deposits... (6) (687) (50) Decrease in time deposits ,075 Purchase of marketable securities... (2,700) Sales of marketable securities , Purchase of fixed assets... (1,799) (2,769) (14,992) Proceeds form sales of fixed assets , Purchase of intangible assets... (91) (59) (758) Purchase of investment securities... (424) (301) (3,533) Proceeds from sales of investment securities ,817 Acquisition of subsidiaries stock resulting in change in scope of consolidation... (774) Collection of long-term loans... 1 Payment of lease deposits... (123) Repayment of lease deposits ,242 Payment of insurance premiums... (86) Repayment of insurance premiums Other Net cash used in investing activities... (1,187) (2,555) (9,892) Cash flow from financing activities: Net decrease in short-term loans... (70) (227) (583) Proceeds from long-term debt Repayment of long-term debt... (65) (219) (542) Repayment of liabilities for finance leases... (626) (606) (5,217) Redemption of bonds... (603) Proceeds from issuance of common stock... 2 Cash dividends paid... (460) (383) (3,833) Payment to acquire treasury stock... (6) (13) (50) Proceeds from sales of treasury stock... 9 Other... (1) (1) (8) Net cash used in financing activities... (1,231) (1,913) (10,258) Effects of exchange rate changes on cash and cash equivalents... (17) 47 (142) Net increase in cash and cash equivalents ,676 5,658 Cash and cash equivalents at beginning of the year... 9,751 8,074 81,258 Cash and cash equivalents at end of the year... 10,431 9,751 $ 86,925 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

16 Notes to Consolidated Financial Statements (abbreviated version) Year ended March 31, 2003 Basis of Presenting Consolidated Financial Statements Scope of Consolidation The accompanying consolidated financial statements include the account of the Company and all of its subsidiaries. The consolidated subsidiaries consist of the following 14 companies. Nippon Technical Service Co., Ltd. Shonan Information Service Co., Ltd. Link Concept Corporation NSD System Service Co., Ltd. Nippon Sangyo System Co., Ltd. Fukushima Sougo Keisan Center Co., Ltd. D Access Co., Ltd. NI Consulting Co., Ltd. Inter World Corporation Japan K.K. NSD America Inc. Identrus Japan, Inc. NSD Systems Institute Co., Ltd. NSD Kyushu Co., Ltd. NSD Security Inc. Shonan Information Entry Co., Ltd. was renamed to Identrus Japan, Inc. NSD System Institute Co., Ltd., NSD Kyushu Co., Ltd., and NSD Security Inc. were newly established. Summary of Significant Accounting Policies (1) Valuation standard and method for significant assets (a) Securities Other securities Securities with fair market value are stated at fair market value based on the quoted market price as of the fiscal year end. (The related valuation differences are directly charged or credited to the shareholders equity and cost of securities sold is computed by the moving average method.) Securities without fair market value are stated at cost being determined by the moving average method. (b) Inventories Merchandise is carried by specific cost method. Work in process is also carried by specific cost method. (2) Depreciation method of significant depreciable assets (a) Fixed assets Fixed assets are depreciated by declining balance method. However, buildings acquired on and after April 1, 1998 are depreciated by straightline method, except for building attachments. The range of useful lives is from 3 to 60 years for buildings and structures. (b) Intangible assets Software Software for sale is amortized based on the larger amount of amortization amount based on the expected sales volume, or equally allocated amount over the expected effective periods within three years. Software for internal use is amortized by straight-line method over the expected available periods within five years. Others Other intangible assets are amortized by straight-line method. (c) Other investments are amortized by straight-line method. (3) Accounting for significant allowances and reserves (a) Allowance for doubtful accounts To reserve for loss on doubtful accounts such as trade receivables and loans, etc., general allowances are provided using a rate determined by past bad debts experience and also specific allowances are provided for the estimated amounts considered to be uncollectible after reviewing individual collectibility of certain doubtful accounts. 14 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

17 (b) Accrued bonuses to employees To provide for payment of bonuses to employees, accrued bonuses are recorded in an amount expected to paid. (c) Allowance for retirement benefits To provide for the employees retirement benefits, reserve for retirement benefits is recorded based on the projected retirement benefit obligations and related pension assets of the current consolidated fiscal year end. Prior service cost is to be charged to expenses from the following consolidation fiscal year using a straight-line method based on determined years (5-14 years) within average remaining service years of the employees when incurred. Actuarial differences are to be charged to expenses from the following consolidation fiscal year using a straight-line method based on determined years (5-14 years) within average remaining service years of the employees when incurred. (Additional information) The company and several domestic consolidated subsidiaries have received approval to not pay a portion of the employees pension fund that the company has been shouldering in place of the government. This approval was given by the Minister of Health, Labor and Welfare on February 1, 2003 after the Law Concerning Defined-Benefit Corporate Pension Plans was passed. The company and the several domestic consolidated subsidiaries concerned do not have to adopt the transitional steps stipulated by No.47-2 of Practical Guidelines Concerning Retirement Benefits Accounting (interim report) or Report No.13 by the accounting system committee at the Japanese Institute of Certified Public Accountants. If the company takes the transitional steps under guideline No.47-2, the estimated difference in extraordinary gains will be 2,633,655 thousand yen. (d) Reserve for benefits for retired directors and auditors To provide for benefits for retired directors and auditors, reserve for benefits for retired directors and auditors are recorded in an actual amount needed on the current fiscal year end based on the company s regulations. Amortization of Consolidation Adjustments Account Consolidation adjustment account is amortized uniformly over a fiveyear period. Notes to Balance Sheets Revaluation of Land: The Company revaluated its business-use land in accordance with the Law Concerning Revaluation of Land (Law No.34 enforced on March 31,1998) and the Law to Partially Modify the Law Concerning Revaluation of Land (Law No.24 enforced on March 31,1999), and included in the shareholders equity as the revaluation difference that is the amount of the revaluation difference minus the revaluation-related deferred tax. Method of revaluation: Method based on the appraisal value by real estate appraisers as specified by Clause 5, Article 2 of the Enforcement Regulations of the Law Concerning Revaluations of Land (Ordinance No.119 enforced on March 31,1998), and computation by reasonable adjustment of the fixed asset valuation as specified by Clause 3, Article 2 of the same Ordinance Date of revaluation: March 31, 2002 Difference between market value on the current fiscal year end after revaluation of land and book value after revaluation: (410,647) thousand yen The U.S. dollar amounts are included solely for convenience and have been translated at the rate of 120-U.S.$1.00, the exchange rate prevailing in the Tokyo foreign exchange market at March 31, NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

18 Non-Consolidated Selected Financial Data Years ended March 31, 2003, 2002, 2001, 2000 and FOR THE YEAR Net sales... 32,567 37,095 35,196 29,230 25,467 $271,391 Operating income... 5,035 6,890 6,385 4,792 3,811 41,958 Ordinary income... 5,106 6,785 6,394 4,203 3,666 42,550 Net income... 2,436 3,349 1,905 2,413 1,741 20,300 Per share (in yen and U.S. dollars) Net income $ 0.77 Shareholders equity... 1, , , , , Cash dividends AT YEAR-END Shareholders equity... 29,737 27,830 27,133 25,808 23,467 $247,808 Total assets... 39,417 38,823 39,391 35,296 33, ,475 Number of shares outstanding (thousand)... 25,586 25,586 25,584 21,315 21,256 Thousands of yen U.S. dollars Ratio to net sales (%) Gross profit SGA expenses Operating income Ordinary income Net income Return on assets (%) Return on equity (%) Payout ratio (%) Dividends to equity (%) Interest coverage ratio (times) Net sales per employee... 15,176 17,174 14,882 12,502 11,650 $126,467 Net income per employee... 1,135 1, , ,458 Notes: 1. Full of remaining portion of liabilities for employees retirement benefits, equating to 2,073 million, is accounted for as an extraordinary loss in fiscal year ended March The U.S. dollar amounts represent translations of yen amounts at the rate of 120=U.S.$1.00. Note: The U.S. dollar amounts represent translations of yen amounts at the rate of 120=U.S.$1.00. Net sales 35,196 37,095 32,567 25,467 29,230 '99 '00 '01 '02 '03 Net sales by division Operating income, Ordinary income, Net income 3,811 3,666 1,741 4,792 4,203 2,413 6,890 6,385 6,785 6,394 1,905 3,349 5,035 5,106 '99 '00 '01 '02 '03 2,436 Operating income Ordinary income Net income Net sales by user industry 1,511 2,782 21,174 1,695 2,679 24,855 1,925 2,813 30,457 2,087 2,940 32,067 '99 '00 '01 '02 '03 2,052 2,793 27,723 Software products Facilities management Software development 25,467 29,230 35,196 37,095 32,567 '99 '00 '01 '02 '03 Others Trading Public Manufacturing Services ranspotation & Telecommunications Finance 16 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

19 FOR THE YEAR Net sales by division: Software development... 27,723 32,067 30,457 24,855 21,174 $231, (85.1) (86.4) (86.5) (85.0) (83.1) Facilities management... 2,793 2,940 2,813 2,679 2,782 23, (8.6) (7.9) (8.0) (9.2) (10.9) Software products... 2,052 2,087 1,925 1,695 1,511 17, (6.3) (5.6) (5.5) (5.8) (5.9) Total... 32,567 37,095 35,196 29,230 25, , (100.0) (100.0) (100.0) (100.0) (100.0) Net sales by user industry (%): Finance Manufacturing Services Transportation & Telecommunications Public Trading Others Total Number of employees at year-end... 2,146 2,160 2,365 2,338 2,186 Number of recruit for the next year Notes: 1. The U.S. dollar amounts represent translations of yen amounts at the rate of 120=U.S.$ Figures in parenthesis are percentages of total net sales. 3. Figures are percentages of sales exclusive of Software products FOR THE YEAR Cost of sales: Personnel costs... 13,058 13,955 14,645 13,395 12,460 $108, (57.3) (54.7) (59.6) (65.9) (69.4) Subcontracting costs: Software development... 5,507 7,055 6,285 3,967 2,975 45, [26.6] [30.6] [28.0] [21.6] [18.9] Facilities management... 1,988 2, , [93.4] [84.5] [39.3] [32.2] [31.1] Total... 7,495 9,123 7,143 4,625 3,646 62, (32.9) (35.8) (29.1) (22.7) (20.3) Rental costs , , (3.8) (3.6) (4.3) (4.8) (5.0) Cost of information services... 22,771 25,517 24,588 20,330 17,957 $189,758 Cost of products sold... 1,622 1,656 1,572 1,363 1,256 13,517 Total... 24,393 27,174 26,161 21,694 19, ,275 SGA expenses: Personnel costs... 1,639 1,505 1,398 1,411 1,357 $ 13,658 (Educational costs)... (94) (86) (56) (54) (60) (783) Rental costs ,133 Enterprise and business office taxes Total... 3,138 3,030 2,649 2,744 2,442 26,150 Capital expenditure... 1,794 2,645 1,168 1,253 1,733 $ 14,950 Depreciation and amortization ,925 Notes: 1. The U.S. dollar amounts represent translations of yen amounts at the rate of 120=U.S.$ Figures in parenthesis ( ) are percentages of cost of information services. 3. Figures in parenthesis [ ] are percentages of cost of divisional sales. NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

20 Non-Consolidated Balance Sheets As of March 31, 2003 and 2002 ASSETS Current assets: Cash and time deposit... 7,655 7,700 $ 63,792 Notes receivable-trade Accounts receivable-trade... 8,813 8,983 73,442 Marketable securities... 1,028 1,098 8,567 Merchandise ,208 Works in process ,292 Deferred tax assets current ,275 Other ,650 Allowance for doubtful accounts... (17) (18) (142) Total current assets... 19,509 19, ,575 Investments and other assets: Investments in subsidiaries... 2,505 1,907 20,875 Investments in securities... 2,033 2,600 16,942 Admission fee ,508 Lease and guarantee deposits... 1,558 1,693 12,983 Insurance reserve ,883 Deferred tax assets noncurrent... 1,880 1,793 15,667 Revaluation-related differed tax assets... 1,564 1,593 13,033 Other Allowance for doubtful accounts... (46) (42) (383) Total investments and other assets... 10,190 10,431 84,917 Fixed assets: Buildings... 3,057 2,881 25,475 Structures Vehicles and carriers Tools, furniture and fixtures ,933 Land... 4,054 3,970 33,783 Construction in process... 1,231 10,258 Total fixed assets... 8,991 7,599 74,925 Intangible assets: Land lease rights Software ,226 5,608 Other Total Intangible assets ,283 6,042 Total amount of assets... 39,417 38,823 $328,475 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable-trade... 1,728 2,004 $ 14,400 Short-term loans... 1,080 1,250 9,000 Accounts payable-other ,087 7,942 Accrued expenses Accrued income taxes... 1,198 1,351 9,983 Accrued consumption taxes ,467 Advance received Deposits received Accrued bonuses to employees ,867 Other Total current liabilities... 5,787 6,674 48,225 Long-term liabilities: Accrued liabilities Allowance for retirement benefits... 3,098 2,780 25,817 Reserve for benefits for retired directors and auditors ,467 Allowance for losses from acceptances and guarantees ,150 Total long-term liabilities... 3,893 4,318 32,442 Total liabilities... 9,680 10,993 80,667 Shareholders equity: Common stock... 7,205 7,205 60,042 Additional surplus... 6,868 6,868 57,233 Additional paid-in capital... 6,868 6,868 57,233 Retained earnings... 18,043 15, ,358 Reserve of surplus ,408 Voluntary reserve for software programming Reserve for deferred fixed assets Special reserve... 6,250 4,250 52,083 Unappropriated retained earnings... 11,259 11,355 93,825 (Net income)... (2,436) (3,349) (20,300) Revaluation surplus of land... (2,223) (2,199) (18,525) Revaluation surplus of stocks... (145) (191) (1,208) Treasury stock... (10) (4) (83) Total shareholders equity... 29,737 27, ,808 Total liabilities, and shareholders equity... 39,417 38,823 $328, NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

21 Non-Consolidated Statements of Income and Retained Earnings Years ended March 31, 2003 and Net sales... 32,567 37,095 $271,392 Cost of sales... 24,393 27, ,275 Gross profit... 8,173 9,921 68,108 Selling, general and administrative expenses... 3,138 3,030 26,150 Operating income... 5,035 6,890 41,958 Non-operating income: Interest and dividend income Insurance income House rent received Cancellation of insurance Other Total non-operating income ,058 Non-operating expenses: Interest expenses Loss on sales of securities Other Total non-operating expenses Ordinary income... 5,106 6,785 42,550 Extraordinary gains: Gain on sales of fixed assets Gain on reversal of allowance for doubtful accounts Gain on reversal of provision for loss on guarantees Total extraordinary gains Extraordinary losses: Loss on sales of fixed assets Loss on retirement of fixed assets Loss on sales of investment securities Loss from devaluation of investment securities ,367 Valuation loss on golf memberships Other Total extraordinary losses ,034 6,692 Income before income taxes... 4,303 5,832 35,858 Income, inhabitants and enterprise taxes... 1,867 2,483 15,558 Net income... 2,436 3,349 20,300 Retained earnings brought forward... 8,825 8,005 73,542 Reversal of revaluation surplus of land... (2) (17) Unappropriated retained earnings... 11,259 11,355 $ 93, Unappropriated retained earnings... 11,259 11,355 $93,825 Transfer from voluntary reserve for software programming Transfer from reserve for deferred fixed assets Total... 11,275 11,368 93,958 Appropriations: Cash dividends ,833 Bonuses to directors and statutory auditors Voluntary reserve for software programming Reserve for deferred fixed assets Special reserve... 2,000 2,000 16,667 Unappropriated retained earnings to be carried forward... 8,752 8,825 $72,933 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

22 Directory and Subsidiaries As of March 31, 2003 HEAD OFFICES Osaka Edobori, Nishi-ku, Osaka TEL: (06) FAX: (06) Tokyo Nishi-shinjuku, Shinjuku-ku, Tokyo TEL: (03) FAX: (03) BRANCH OFFICES Mito Minami-machi, Mito, Ibaraki TEL: (029) FAX: (029) Nagoya Sakae, Naka-ku, Nagoya, Aichi TEL: (052) FAX: (052) SALES OFFICES Fujisawa Kugenumaishigami, Fujisawa, Kanagawa TEL: (0466) FAX: (0466) Hamamatsu Itaya-cho, Hamamatsu, Shizuoka TEL: (053) LIAISON OFFICE Ohtsu Chuo, Ohtsu, Shiga TEL: (077) FAX: (077) CONSOLIDATED DOMESTIC SUBSIDIARIES Nippon Technical Service Co., Ltd Kitahama, Chuo-ku, Osaka Shonan Information Service Co., Ltd Kugenumaishigami, Fujisawa, Kanagawa Link Concept Corporation 4-8 Kouji-machi, Chiyoda-ku, Tokyo Identrus Japan, Inc Nishi-shinjuku, Shinjuku-ku, Tokyo NSD System Service Co., Ltd Edobori, Nishi-ku, Osaka Nippon Sangyo System Co., Ltd Kousei-cho, Okayama Fukushima Sougo Keisan Center Co., Ltd Uchigomimaya-machi, Iwaki, Fukushima D Access Co., Ltd Oh-machi, Uchigo takasaka-machi, Iwaki, Fukushima NI Consulting Co., Ltd Momoyamadai, Suita, Osaka Inter World Corporation Japan K.K Nishi-shinjuku, Shinjuku-ku, Tokyo NSD Kyushu Co., Ltd Hakataekimae, Hakata-ku, Fukuoka NSD System Institute Co., Ltd Nishi-shinjuku, Shinjuku-ku, Tokyo CONSOLIDATED OVERSEAS SUBSIDIARIES NSD America Inc Fashion Island Boulevard. Suite 201, San Mateo, California U.S.A. NSD Security Inc Fashion Island Boulevard. Suite 201, San Mateo, California U.S.A. NSD America Inc Fashion Island Boulevard. Suite 201, San Mateo, California U.S.A Fashion Island Boulevard. Suite 201, San Mateo, California U.S.A. 20 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report 2003

23 Board of Directors and Auditors As of June 27, 2003 Chairman and Chief Executive Officer: Shinichiro Uchikubo President and Chief Operating Officer: Isao Ogishi Deputy President: Yukyo Kida Senior Managing Director: Masahiko Hashida Managing Directors: Senichiro Hagura Hiroaki Masuda Directors: Hiromu Hashimoto Hiroshi Sakai Yasuhiro Osawa Shinya Eguchi Yukio Umehara Takahiro Mori Kazuyuki Tsujisawa Auditors: Tetsuo Yamada* Hisashi Watanuki* Hisashi Beniyama Ryozo Nishigaki Full-time corporate auditors Corporate Data As of March 31, 2003 Name of Company: NIPPON SYSTEM DEVELOPMENT CO., LTD. (NSD) Foundation: April 8, 1969 Capital: 7,205,864,914 yen Number of Shares: Authorized: 100,000,000 Outstanding: 025,586,080 Major Shareholders (March 31, 2003): Daido Life Insurance Company I.P.C Co., Ltd. The Master Trust Bank of Japan, Ltd. Kazuko Daitoh Japan Trustee Services Bank, Ltd. Number of Shareholders (March 31, 2003): 8,747 Stock Listing: Osaka Stock Exchange, 1st Section Tokyo Stock Exchange, 1st Section Number of Employees (March 31, 2003): 2,146 NIPPON SYSTEM DEVELOPMENT CO., LTD. Business Report

24 Osaka Head Office Nipponkoa Higobashi Bldg.16F Edobori, Nishi-ku, Osaka , Japan Phone: Fax: URL: Tokyo Head Office Daiichi Seimei Bldg.16F Nishishinjuku, Shinjuku-ku, Tokyo , Japan Phone: Fax: Printed in Japan