INTELLIGENCE ADDS VALUE,
ADDED VALUE GENERATES GROWTHANNUAL REPORT 2003
Year Ended March 31, 2003

NEC System Integration & Construction, Ltd.

PROFILE
NEC System Integration & Construction, Ltd. (NESIC) has been a driving force of the information society as aleading systems integrator since its establishment in 1953, growing in tandem with telecommunications andinformation networks in Japan. Today, NESIC offers a comprehensive portfolio of systems integration solutions tomeet customer needs from consulting to design, software development, construction and equipment supply. The
Company’s expertise also includes maintenance and operation of systems and related facilities.
NESIC’s strong overseas presence extends to system construction and facility engineering in more than 150
countries and territories. Growth in the information and communications industry, driven by the shift toward
network broadband, Internet protocol (IP), mobile, digital and other technologies, offers the potential for further
successes. Based on its numerous technologies and long track record, NESIC aims to provide increasingly
sophisticated business solutions that earn customer trust, thereby increasing earnings and shareholder value.

FINANCIAL HIGHLIGHTSNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31

Thousands of
U.S. dollars(except per
share amounts)1

Millions of yen(except per share amounts)

2003

2002

2001

2003

For the year:
Net sales ............................................................................
Operating income ...............................................................
Net income.........................................................................

¥202,419
5,675
1,512

¥230,064
4,526
617¥220,096
8,745
3,018

$1,684,018
47,213
12,579At year-end:
Total assets ........................................................................
Shareholders’ equity ...........................................................

¥116,289
51,822¥136,172
51,134¥148,964
51,107$ 967,463
431,131

Per share of common stock (yen and U.S. dollars):
Net income2 (basic) .............................................................
Cash dividends ...................................................................

¥ 33.93
10.00¥ 13.15
12.50¥ 70.40
12.50$

Ratios:Operating income/Net sales.................................................
Net income/Net sales ..........................................................
Return on equity .................................................................

2.8%
0.7
2.9

2.0%
0.3
1.2

0.28
0.08

4.0%
1.4
6.1

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥120.20=U.S.$1.00, the approximate Tokyo foreignexchange market rate as of March 31, 2003.
2. A new accounting standard for earnings per share became effective April 1, 2002. See Note 13 of Notes to Consolidated Financial Statements(page 31) for details.

CONTENTS
1
2
6
10
14
19
20
34
35

Our Business Concept
To Our Shareholders
Intelligence Adds Value,
Added Value Generates Growth
Review of Operations
Management’s Discussion & Analysis
Four-year Summary of Selected Financial Data
Financial Section
Directors and Corporate Auditors/Network
Investor Information

NEC System Integration & Construction, Ltd. Annual Report 2003

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements concerning NESIC and its
consolidated subsidiaries’ current plans, projections, strategies and performance. These
forward-looking statements are not historical facts. Rather they represent the assumptions
and beliefs of NESIC management based on information currently available. NESIC therefore
wishes to caution readers that actual results may differ materially from expectations, and thatforward-looking statements are subject to a number of risks or uncertainties.

OUR BUSINESS CONCEPT
Effective customer support that provides a one-stop service for network and IT solutions
NESIC offers continuous, effective support that aims to solve the management problems of customers in a wide range of industries andbusinesses by creating solutions driven by network and information technology and providing them through a one-stop service that
includes outsourcing.

CUSTOMER VALUE
Improved
customer satisfaction

01

Strengthened market
competitivenessImprovedknowledge value

Business model
construction

National agencies,
local governments

OUR BUSINESS CONCEPTTCO reduction

Corporate users
Overseas
customers

Carriers, service
providersInformation and
Network Integration

Operation and
MaintenanceOperation, maintenance

Education,
training

Planning,
consulting

DesignOne-stop service
Experimentadjustment

Material procurement,
product and software supply

Outsourcing
Intelligent Building andFacility Engineering

Annual Report 2003 NEC System Integration & Construction, Ltd.

TO OUR SHAREHOLDERS

As a solution provider, NESIC continues to work toward creating new value in the fields of networks andinformation technology (IT). By accelerating its shift to the solutions business, the Company is able torespond to the abrupt changes taking place in the business environment. By grasping opportunity throughchange, we strive for creativity and improved corporate value.
To succeed in this challenging environment,
NESIC must increase orders in value-added areas
such as network integration, maintenance andoutsourcing, while improving the Company’s
capabilities in consulting, planning and systems
integration. Moreover, to achieve cost reductions

02
TO OUR SHAREHOLDERS
Yukihiko Baba
President

PERFORMANCE DURING
THE YEAR TO MARCH 31, 2003
In general, the business environment surrounding
NEC System Integration & Construction (NESIC)for the fiscal year ended March 31, 2003
remained severe. Domestically, the national
government’s “e-Japan Project” helped toencourage investment by regional governments
both in information systems and in facilities
related to the commencement of terrestrial digital
broadcasting. However, capital investment by theprivate sector and communication enterprises,
particularly mobile service providers, remained
stagnant. Overseas, demand related totelecommunication infrastructure decreased,
resulting in continued challenging businessconditions.

NEC System Integration & Construction, Ltd. Annual Report 2003

that exceed market price downturns in thesedeflationary economic conditions, we are placingemphasis on innovating our construction
technology and improving our procurement
processes.
For the fiscal year ended March 31, 2003,
consolidated orders received decreased 9.1 percent
year-on-year to ¥203,038 million, and net sales
declined 12.0 percent year-on-year to ¥202,419
million. Orders received in traditional businesses,
including telecommunication construction projects
and equipment sales, were down 21 percent
compared with the previous year because of adecrease in orders for mobile communication basestations from telecommunications carriers. Orders
in high-value-added businesses such as network
integration, maintenance and outsourcing,however, increased 18 percent compared with thepreceding year. Regional governments increasedorders for emergency information systems andhigh-level information and telecommunication
networks. Orders increased from NEC Corporationand its group companies for network outsourcing
and software development. Telecommunication
carriers also increased orders for broadband
networks they supply to the private sector, which
include Internet protocol virtual private networks(IP-VPN) and wide-area Ethernet projects. Sales in
NESIC’s traditional business sectors were down 22

percent, while sales in high-value-added businesses
gained 13 percent year-on-year.
Gross profit increased 200 basis points as apercentage of net sales to 11.4 percent as a resultof our improved product mix and cost reductions,which supported a 25.4 percent year-on-yearincrease in operating income to ¥5,675 million. Net
income increased 145.0 percent year-on-year to¥1,512 million, and was influenced by several nonoperating factors accounted for as other income
and expenses. In connection with the Company’s
retirement benefit program, gain on return of thesubstitutional portion of the welfare pension fundtotaled ¥1,338 million, while amortization of net
retirement benefit obligation at transition totaled¥2,356 million. In addition, new legislation changed
the aggregate statutory tax rate, which increaseddeferred income taxes by ¥141 million.
The amortization of the Company’s retirement
benefit obligation has resulted in increased extraordinary expenses, but NESIC has now completed
three of the five annual amortizations. Beginning in
the year ending March 2006, the Company will also
begin amortizing actual loss on pension plan assets.
Absent the amortization burden of the past several
years, however, NESIC expects earnings to increase
substantially.

promote business innovation under the doctrine of“high-value-added business.” This entails creatinghigh customer value through robust adaptation to
rapid technological innovation while balancing theneeds of customers with quicker, less costly
solutions.

PROGRESS IN INNOVATING AND
STRENGTHENING OPERATIONS
In networks and the IT sector, which comprise ourareas of expertise, competition has escalated withthe rapid progress of technological innovation andwith new players entering the market. At the sametime, customer needs are diversifying because of
the shift in networks to IP and broadband, and theincreasing importance of software. In order to
respond adeptly to the rapid changes taking placein this business environment, we continue to

3. Expanding and Enhancing New
Business Sectors
We are opening new markets by launching original products that we have developed and by
seeking out and launching the products of small
venture firms.

We view five areas of focus as critically important.

03
TO OUR SHAREHOLDERS

1. Expanding High–Value–Added
Businesses
NESIC is strengthening both its ability to propose
user-centric solutions that seamlessly integrate withcustomer business models, and its technologicalcapabilities in structuring systems. Our Customer
Support Center is available 24 hours, 365 days ayear, anchoring our ability to provide customer
support of the highest quality while we continue toexpand our maintenance and outsourcing operations as well.
2. Strengthening Market Response byAggressively Building Alliances
Beginning with NEC and NEC Group companies, wehave raised our competitiveness by forming
alliances with strong vendors, telecommunications
carriers and outstanding marketing partners both
domestically and overseas.

Annual Report 2003 NEC System Integration & Construction, Ltd.

04

4. Improving Profitability throughComprehensive Cost Reduction
NESIC is strengthening its cost competitiveness in a
number of ways. We are employing market
mechanisms including online purchasing andnetwork-based bid solicitation, as well as
centralizing and aggregating procurement. We havealso innovated our construction technology bystandardizing designs and using more packages,
while promoting in-company production andoperating cost efficiency.

TO OUR SHAREHOLDERS

5. Fostering a Culture of Learning that
Cultivates Professionals
NESIC is fostering a learning culture in which ourpeople are motivated to improve the skills thatenhance their job performance, and are keenly
aware of the issues resulting from changes in ouroperating environment. Cultivating professionals of
this caliber enhances NESIC’s capabilities increating customer value through consulting,planning and system construction.
The telecommunication construction businesshas contracted and its underlying business model
has changed dramatically. In networks and IT,
technological innovation has become extremely
rapid. We can only continue to grow by developing
our technological strengths to keep pace with
innovation and by swiftly understanding market
needs. The five points outlined above are of thegreatest strategic importance to NESIC as a
network and IT solutions provider.
EXPANDING SALES IN NEW AREAS BY
LAUNCHING STRATEGIC NEW PRODUCTS
One of NESIC’s objectives is to expand in the areasof network integration, operation and maintenance,and outsourcing. As discussed earlier, however, wecannot look forward to a business environment of
rapid growth. Rather, downward price pressure has

NEC System Integration & Construction, Ltd. Annual Report 2003

begun to intensify. Responding to these conditions,
NESIC is working to expand and strengthen its
presence in new markets. We are deploying ourstrengths, making full use of our know-how insoftware development and our network
technologies to develop new products, and areentering new markets with our own products
developed both here and abroad by small venturecompanies.
Three representative new products launched in
new markets during the past fiscal year include
virtual service switch (VSS) solutions, total internet
protocol (IP) telephony service solutions, andStarOffice21 solutions. We shipped our first VSS
solutions device in December 2002, and anticipate
that the Japanese data center market will growsubstantially. Building our presence in total IP
telephony solutions, in March 2003 we beganmarketing Voice over Internet Protocol — Terminal
Adapter (VoIP-TA) to IP telephony service
subscribers using our proprietary technologies.
StarOffice21 is a corporate information portal madeby NEC. We acquired experience and know-how inconstructing and managing StarOffice21 solutions
for NEC and NEC Group companies, and are now
supplying solutions that are integrated from portal
implementation to maintenance and operation to abroad range of customers. We expect these initiatives to compensate for any decrease in construction revenues, which currently account for morethan half of net sales.
CORPORATE GOVERNANCE POLICIESNESIC has taken steps to optimize the number ofmembers of the Board of Directors to ensure an
adept response to the changing business environment. Our key emphases in corporate governancehave given rise to the creation of a management
system that is able to make decisions swiftly while

TO OUR SHAREHOLDERS

MAXIMIZING CORPORATE VALUE THROUGHMANAGEMENT REFORMNESIC is increasing corporate value by steadily
working to innovate its businesses, reforming its
management structure and raising overallmanagement efficiency. As NESIC’s newpresident, I inherit a corporate philosophy thathas evolved over the past half-century with asincere desire to energetically drive business
innovation that is precisely suited to theCompany’s market environment. We arecommitted to retaining the trust and support ofour shareholders.

YUKIHIKO BABAPRESIDENT

05
TO OUR SHAREHOLDERS

engendering sound, transparent management
through timely, appropriate disclosure. Moving toenhance management oversight, NESIC createdthe Executive Committee, formed to consider
primary management policies, and the Business
Execution Committee to discuss policies pertaining to key management and operating issues, aswell as business plans and the status of their
execution. Moreover, half of NESIC’s corporate
auditors are from outside the company. Auditors
attend key meetings of the Board of Directors,
thus contributing to this robust system for scrutinizing the execution of the Board of Directors’
responsibilities.
NESIC is also building a framework forcompliance company-wide. We have establishedthe NESIC Corporate Behavior Charter and the
Corporate Behavior Subcommittee to provide athorough legal and ethical basis for corporate
activities. In June 2000, NESIC optimized thenumber of members of the Board of Directors
and implemented the Executive Officer systemwith the objectives of clearly separatingsupervision and execution, while delineating theauthority of executive officers, and speeding up
the decision-making process of the Board of
Directors.
NESIC adopted its present auditing system
by basing its management structure on therevised Commercial Code. However, we
continue to examine mechanisms that willfurther improve corporate governance. With
this in mind, we established the NEC System
Integration & Construction Code of Corporate
Behavior in January 2000 to provide a thoroughlegal and ethical basis for corporate activities
and link them to our corporate philosophy. In
March 2003, NESIC further strengthened adherence to this code by establishing a complianceconsultation hotline.

TO OUR SHAREHOLDERS

Annual Report 2003 NEC System Integration & Construction, Ltd.

I N T E L L I G E N C E A D D S VA L U E , A D D E D
Added Value through the Development of New Business Sectors

06

NESIC’s core business has been telecommunication infrastructure construction, but factors such as
reduced capital investment are causing this market to contract. As a result, we are concentrating on
network integration, maintenance and outsourcing operations from the viewpoint of advancing growth
on a market scale and aiming at a higher profit ratio.
As part of its business innovations, NESIC has been concentrating its management resources on theInternet and mobile communications. In the past fiscal year, however, NESIC demonstrated its
capabilities in the new markets of network integration, maintenance and outsourcing by launching
relevant new products and services. Key examples include Virtual Service Switch (VSS) solutions, total
Internet protocol (IP) telephony service solutions, and StarOffice21 solutions. These three products areat the center of NESIC’s business model for expanding revenues in new areas.

INTELLIGENCE ADDS VALUE, ADDED VALUE GENERATES GROWTH

ORDERS BY BUSINESS AREA(%)

¥2,233billion(9.1%)¥2,030billion(1.5%)

100

80¥2,000billion
6.0%

Network
Integration,
maintenance,outsourcing

40.0%

30.9%

41.5%

60

40

Construction(traditional business)

69.1%

60.0%

2002

2003

52.5%

20

0

2004 (Projected)

SALES BY BUSINESS AREA
(%)

100

80

¥2,300billion(12.0%)

Network
Integration,
maintenance,outsourcing

28.9%¥2,024billion(5.6%)¥1,910billion
5.2%

37.1%
39.3%

60
Construction

40(traditional business)

71.1%

62.9%

55.5%

20

0

2002

Note: Graphs are based on fiscal years ended March 31.

NEC System Integration & Construction, Ltd. Annual Report 2003

New areas

2003

2004 (Projected)

New areas

VA L U E G E N E R AT E S G R O W T H
Network and IT Systems
NESIC is active in forming partnerships with NEC and other unique companies with leading-edge technology, both in Japan and overseas.
The aim is to find the best match between NESIC’s integration capabilities, including products developed in-house, and the partner’s
components. Optimal coordination allows NESIC to maximize added value for customers.

Customers

07

Network AppliancesServers
Domestic Overseas
Vendors Vendors

Service
ProvidersApplications

Facilities

Major Alliance Partners
CompanyCountry

Alliance Area

Inkra Networks, Inc.

U.S.A.

Virtual service switches

Top Layer Networks

U.S.A.

Network management equipment

ArrayNetworks Inc.

U.S.A.

Network management equipment

Mirapoint, Inc.

U.S.A.

Non-stop mail server, etc.

Improvista Interactive Music, Inc.

Japan

E-commerce software for cellular phones

SonicWALL, Inc.

U.S.A.

VPN firewall

Nippon Information Control System, Inc.

Japan

Terminal adapter for VoIPDASAN Networks, Inc.

Korea

IP switches

F5 Networks, Inc.

U.S.A.

Load balancers

INTELLIGENCE ADDS VALUE, ADDED VALUE GENERATES GROWTH

NESIC

Annual Report 2003 NEC System Integration & Construction, Ltd.

VSS SOLUTIONSIn May 2002, NESIC concluded an exclusive distribution agreement for Japan with the California
based company, Inkra Networks, Inc., covering its VSS products, which enable next-generation
data center solutions. “Virtualization” is the operative principle of these VSS solutions increating an integrated and networked system that provides virtual and independent access tothe functions multiple users need, whenever users need them.
Up to now, Internet data centers (IDC) have been constructed on a serial or sequential basis
incorporating firewalls, SSL accelerators, load balancers, virtual private networks (VPN) andother network services where users accessed the IDC from fixed installations. With VSS, network
service functions are integrated within a single unit, and multiple users can simultaneously
access information.
The merits of implementing this kind of system include lower costs at the initial installation
stage, as testing, evaluation and other functions require one-sixth the cost of conventional data
centers. Moreover, operating costs are substantially lower, and time to start-up is significantly
shorter, taking minutes instead of the days required by conventional set-ups. VSS solutions
therefore respond to customer needs with unprecedented efficiency by reducing costs for bothinstallation and operation. Target customer segments for VSS solutions include any user with
sufficient IT infrastructure, including telecommunications carriers, Internet service providers (ISP),
data centers, businesses in general, schools and government entities.
Having independently evaluated Inkra’s products, we offer these products to the Japanesemarket, fully backed by consistent, nationwide services in sales, engineering and maintenance.
In July 2002, NESIC began marketing the Inkra 4000, a product for new data center constructionthat allows one unit to provide services to 1,000 discrete users. In December 2002, NESIC alsobegan marketing the Inkra 1000, which can provide services to 25 discrete users.
NESIC’s business model for supplying VSS solutions encompasses business development inJapan using platforms created with superior products and concepts from entrepreneurial
companies outside Japan. However, in addition to sales of equipment, we also expect increased
opportunities for orders from data centers requesting maintenance services, as a result of ourefforts in developing this business.

08
INTELLIGENCE ADDS VALUE, ADDED VALUE GENERATES GROWTHTOTAL INTERNET PROTOCOL (IP) TELEPHONY SERVICE SOLUTIONSNEC System Integration & Construction, Ltd. Annual Report 2003

NESIC delivers total IP telephony solutions that encompass its proprietary Voice over Internet
Protocol — Terminal Adapter (VoIP-TA1) for session initiation protocol (SIP2), used in customer
data management, billing and other systems. NESIC is therefore able to provide server systems,
network construction planning and consulting, construction, and operation support for
seamless delivery of services from IP telephony providers to end users.
In 2003, a number of telecommunication carriers, ISPs, cable television providers and otherfirms began providing full-scale IP telephony services. Connection from conventional landlines
to IP telephones, which became possible in summer 2003, is projected to significantly
accelerate the diffusion of IP telephony. Given this background, numerous companies haveannounced plans to adopt the VoIP-TA standard protocol for SIP, indicating that demand forconstruction of SIP-based networks will increase.
From delivery to the end user to installation and support services, NESIC is able to offer asimple one-step solution through our SIP compliant VoIP-TA, with our own internally developed
auto-configuration functions3 built in. In addition, NESIC employs its highly developed know-how and experience acquired in providing telecommunication carriers with design, construction
and maintenance services for networks and ancillary equipment to provide optimal, full ranging
services required for the IP telephony business, from network creation to operation support.
Target markets include IP telephone access providers, ISPs, IP backbone providers, and regional
governments implementing the e-Japan Strategy.
NESIC is using its broad customer database and know-how built over many years as a basefor developing its solutions business. NESIC is complementing this base with its technologicalstrength and proprietary technology from venture firms in Japan and alliances with overseas
manufacturers to create its own original platforms.
Notes:
1. VoIP-TA: A terminal adapter transmission technology used in IP
networks, such as the Internet and intranets, that splits voice
signals into packets.

IP Telephone Access Providers
Center Facilities
Billing systems
Customer data management systems■ Sound quality evaluation systems■■

IP Telephony Systems

PrivateVoIP–TA
FG–1000S

Corporate

SIP server■ Profile system■ GW system■

VoIP–TA
FG–1000S

3. NESIC’s auto-configuration functions: This technology facilitates
instant use of IP telephony services by employing an exclusiveembedded application to enable automatic user confirmation byreceipt of user ID, telephone number and other information from the
IP service provider’s customer data control server with one click.

STAROFFICE21 SOLUTIONSStarOffice21 is part of the Enterprise Information Portal (EIP), an NEC product. NESIC hasestablished a foundation of experience and know-how in structuring and managing StarOffice21
solutions for NEC and its group companies. Our StarOffice21 business model provides integrated
system construction, maintenance and operation services for customers when installing or adding
to an enterprise portal.
Greater management speed has become essential for Japanese companies, increasing theneed to share and distribute information and effectively deploy business-processing systems.
However, many companies currently use a hodgepodge of discrete systems, and lack theframework for swift, efficient selection and deployment of internal information. A rapidly growing
number of companies are adopting EIP as a concrete means to rationally resolve these issues.
Using StarOffice21 makes internal information systems more convenient and user-friendly
through such means as the single sign-on function, which allows for a simple, one-time inputof authentication (ID or password). This authentication was required each time users accessed
previous systems. In addition, it allows access to internal information via a single Webinterface, and new business systems can easily be connected to existing information systems
without restructuring.
From diagnostics performed on existing internal information systems, to systemconstruction, maintenance and operations, with the introduction of StarOffice21, NESIC seesto all of its customers’ needs by providing a one-stop solution. NESIC’s capabilities also
extend to other information systems including knowledge management, customer relationshipmanagement (CRM) and sales force automation (SFA) systems.

09
INTELLIGENCE ADDS VALUE, ADDED VALUE GENERATES GROWTH

IP
Network

Operating Systems

2. SIP: A communication control protocol for Internet telephonyand other applications. Compared with similar protocols, SIP
has functions that are close to those of the public telephone
network, including the transfer and calling number
identification functions in the specifications issued by theInternet Engineering Task Force (IETF) in March 1999. The
format for addresses assigned to each terminal is similar to thatfor e-mail addresses, and standardization is possible in the
future.

Annual Report 2003 NEC System Integration & Construction, Ltd.

REVIEW OF OPERATIONS

10

The ongoing transition to Internet protocol (IP) networks and broadband has been expanding new businesses and services. The
diffusion of IP-VPN and wide-area Ethernet supplied by telecommunications providers, the construction of corporate networks basedon these systems, and the expansion of new services using the Internet, such as IP telephone services and data centers, application
service providers (ASP) and electronic transactions, have heightened the focus on the importance of network security.
In the field of mobile communications, convergence with the Internet through the long-awaited, full-fledged start of thirdgeneration (3G) mobile telephone services using IMT-2000 standards is engendering new developments. In the field of broadcasting,phased implementation of terrestrial digital broadcasting is scheduled to begin in December 2003, leading to the future convergencewith communications and the development of new services, including high-definition and interactive data broadcasts.
The role of solution providers who can swiftly understand customer needs and create customer value will become increasingly
important. NESIC will promote business innovation through transition to a high-value-added business organization that works tocreate outstanding customer value. In addition to the network construction and software development technologies it has acquired
over many years, NESIC will deploy its background in IP and Internet-related technologies in shifting to the network integration,
maintenance and outsourcing businesses.

REVIEW OF OPERATIONSCOMPOSITION OF NET SALES BY BUSINESS SEGMENT(Year ended March 31, 2003)

Operation and Maintenance

20.2%
Intelligent Building andFacility Engineering

11.1%
68.7%

Information and
Network Integration

Intelligent Building
and Facility Engineering

Planning and Consulting
DesignMaterials Procurement,
Product and Software Sales

Construction,
Testing Quality Control

Education & Training
Operation & MaintenanceOperation and Maintenance

NEC System Integration & Construction, Ltd. Annual Report 2003

Information and
Network Integration➤ INFORMATION AND NETWORK INTEGRATION
Broadcasting-related business grew due to increased orders in connection with the changeover to

NET SALES

digital studio and transmission equipment in preparation for the start of terrestrial digital(Millions of yen)
200,000

broadcasting. Restrained capital investment among domestic telecommunications carriers, however,resulted in decreased construction of mobile communication base stations, and orders from the

165,557
156,873

central government related to internal information systems for government ministries also decreased.
150,000

Orders decreased by 12.4 percent to ¥138,149 million, and net sales decreased 16.0 percent to146,158

138,997¥138,997 million.
In this segment, NESIC is primarily involved in consulting, design, construction, software
100,000

development and related businesses for local area networks (LAN), wide area networks (WAN) and11

other internal corporate information systems; network systems for communications carriers, including
50,000and video broadcasting systems.
At present, the accelerating pace of network switchover to IP and broadband is significantly
changing market needs. As a result, there is strong demand from customers for network solutions

0

that improve competitiveness, including the creation of business models.

2000

Implementation of Railway Station Operating System
Figure 1 presents an overview of a total system implementation

elevators, escalators, shutters and passenger information

project for a railway company’s station operations. With andisplays. As a result, the system has improved station

optical IP system that integrates video, audio and other data as

management efficiency, customer service and security.

its backbone, a remote station provides control, supervision andThis customer has begun providing unmanned, remote

operational support for train station equipment such as ticket

passenger service at eight train stations from a central station.

gates, ticket vending equipment and fare adjustment machines;

Moreover, in recognition of NESIC’s ability to deliver suchinteractive television (ITV) equipment including monitors andadvanced solutions, the customer plans to increase the number

remote cameras; and for facilities within the station such asof stations covered by this system.

Automated Station A
CameraCameraAutomatic Ticket Gate
Ticket MachineIntercom

CameraFare Adjustment
MachineCameraImage Processing
System

2001

2002

2003

REVIEW OF OPERATIONS

station switching equipment and mobile network base stations; wireless communication systems;

Station Operations
CenterStation Office
Equipment Control
Elevator

Ticket Machine
Manufacturer

Voice Guidance
Monitoring Console

Optical IP Network

Intercom System

Automated Station B
Automated Station H
Figure 1
Annual Report 2003 NEC System Integration & Construction, Ltd.

➤ INTELLIGENT BUILDING AND FACILITY ENGINEERING
Construction of information infrastructure by regional governments increased. However, constructionof mobile communication base stations declined, and overseas business decreased due to theabsence of the large-scale overseas orders in the previous fiscal year. Orders decreased by 9.3 percent

NET SALES(Millions of yen)
30,00028,125to ¥23,874 million, and net sales decreased by 16.5 percent to ¥22,559 million.

26,13327,02825,000NESIC’s primary business areas in this segment include consulting, design, construction and other

22,559businesses related to network base stations and pylons; communication lines; power supply
20,000equipment; lighting equipment; heating, ventilation and air-conditioning (HVAC) systems; as well as
fire prevention and security systems.

12

15,000In addition to installation of information infrastructures for regional governments in connection
with their accelerating shift to digitization, future areas of focus will include the construction of

REVIEW OF OPERATIONS

10,000security infrastructure and building renovation projects, driven by increasing demand for IT-based
environments in offices and housing complexes. Overseas, NESIC will emphasize construction of

5,000

power generation, power supply and lighting systems for large-scale facilities such as international
airports and various types of production facilities.

0

2000

2001

Relocation and Integration of IT Networks
Figure 2 outlines our proposal for the relocation and integration of

In a short two-week period, NESIC handled the relocation of

the headquarters and its backbone network in connection with thethe different network environments used in the five merging

merger of five financial firms by providing project management forcompanies, including some 1,000 personal computers.

the transfer of each company’s IT equipment and networks. NESIC

Conditions for executing the project were extremely challenging,worked to reduce the time, man-hours and cost required to handle

as installation and construction could only take place on

the complex mix of client-server and communications systems

weekends, when the customer was not open for business. By

involved in this office relocation project. Moreover, precise,

employing its wealth of knowledge and know-how in providing

efficient planning and execution were essential to ensure thatsuch a strong solution for this project, NESIC received high praise

there were no operating impediments after the relocation.

from this client.

New Head Office Network

Network in Company A

Network in Company E

Network in Company D

Network in Company B

Figure 2

NEC System Integration & Construction, Ltd. Annual Report 2003

Network in Company C

2002

2003

➤ OPERATION AND MAINTENANCE
Communication network outsourcing from NEC and its group companies increased, as did orders

NET SALES

from regional governments for maintenance of fire and disaster systems, as well as regional network(Millions of yen)
50,000systems. As a result, orders increased by 4.2 percent to ¥41,013 million, and net sales increased 9.0
percent to ¥40,863 million.
NESIC’s primary business areas in this segment are maintenance, outsourcing and related

40,86340,000operations for internal corporate information systems and for the network systems of

37,08937,47834,242

telecommunications carriers.

30,000Stable operation and maintenance management have become indispensable for increasingly
advanced network systems. The ideal system can be realized through a regimen of support services

13

20,000that perform maintenance operations for such systems.

10,000addition, NESIC has established a full-scale system for remote maintenance, rapid supply of parts andother services at approximately 200 service offices and 40 parts centers.
0

NESIC also provides outsourcing services that offer total coordination support, regardless of the

2000

2001

manufacturer or telecommunications carrier. As the best partner for its customers, NESIC consistently
provides optimal, highly reliable management for the operation of their information assets.

2002

2003

REVIEW OF OPERATIONSNESIC’s Customer Support Centers comprise the nucleus of 19 service centers located throughout
Japan that allow our Company to respond to customer calls 24 hours a day, 365 days a year. In

Maintenance of Mobile Telephone Switching System
Figure 3 provides an overview of the maintenance of a switchingsystem for a major mobile telephone company. NESIC has

backup service for this mobile telephone provider’s core system.
By taking advantage of our advanced technical know-how

deployed approximately 270 maintenance specialists to thisand many years of experience in communication network

company’s more than 30 switching system facilities for digitalsystems, NESIC will continue to support new systems thatmobile communications systems throughout Japan. By providing

employ third-generation mobile telephone switching systems andaround-the-clock maintenance, NESIC is able to offer powerful

IP-related technologies.

PDC Network
Radio
SystemDigitalSwitching
SystemServers

LAN
Equipment
ISDN
FR Network

CorporateLAN

ISP

PSTN (Fixed Network)

Routers, etc.

IMT2000 Network
Radio
SystemDigitalSwitching
SystemSystems targeted for maintenance

Gateway
SystemSystems targeted for failure isolation support

Figure 3

Annual Report 2003 NEC System Integration & Construction, Ltd.

MANAGEMENT’S DISCUSSION & ANALYSISNESIC and its nine consolidated subsidiaries (together, the Company) are primarily engaged in theconstruction and maintenance of telecommunications and information systems and other facilities.

CONSOLIDATED SALES BY SECTOR AND PERCENTAGE OF TOTAL NET SALES

18.7%

18.9%

14

(Millions of yen)

60,00055,020MANAGEMENT’S DISCUSSION & ANALYSIS

40,00038,25530,00016.8%(Millions of yen)

50,00040,00050,00742,120NEC/NEC GROUP

PUBLIC SECTOR

TELECOMMUNICATIONS

41,23333,72832,34037,765

2001

2002

2000

2003

OV E R S E A S(Millions of yen)

30,43833,917

2001

2002

2003

2000

2001

2002

2003

FINA NCE/INSU R A NCE

8.7%

8.3%

(Millions of yen)

30,00020,00020,18023,885
19,941

18,477

10,000(Millions of yen)

30,00020,00018,411

18,743

17,662

21,574

19,47016,78410,00010,000

01
2000

2001

2002

2003

BR O A D C A S T IN G

2000

2002

(Millions of yen)

9,838

8,000

6,000

7,949

7,934

7,071

5,650

6,595

2001

2002

2003

2000

2001

2002

Note: All graphs in this Management’s Discussion & Analysis are based on fiscal years ended March 31.

NEC System Integration & Construction, Ltd. Annual Report 2003

2003

(Millions of yen)

30,00020,00019,417

21,95822,42823,121

2001

2002

2003

10,000

2,000

2,000

2002

11.4%

4,000

5,634

2001

O TH ER S(Millions of yen)

8,000

6,880

2000

2000

2003

3.2%

10,000

6,000

2001

M ANUF A CTU R ING

4.9%

4,000

33,05426,75330,00020,00034,264C OM M E R CE/SER VICE

9.1%

40,00032,615

10,00010,0002000

30,00020,00020,00020,000(Millions of yen)

40,0002003

2000

REVIEW OF CONSOLIDATED OPERATIONSNet Sales
During the fiscal year ended March 31, 2003, in Japan, local government investment in systems
as part of the national government’s e-Japan Strategy supported orders received, as did firm
investment associated with the upcoming start of terrestrial digital broadcasting. Public-sector
demand, however, did not fully compensate for restrained investment among private-sector
companies and telecommunication carriers, particularly in the mobile communications
segment. Conditions overseas remained challenging because of weak investment intelecommunications infrastructure.
As a result, consolidated orders received decreased 9.1 percent year-on-year to ¥203,038
million, and net sales declined 12.0 percent year-on-year to ¥202,419 million. The Company isa majority-owned subsidiary of NEC Corporation (NEC). Consolidated net sales included sales
to NEC totaling ¥53,271 million. Sales to NEC accounted for 26.3 percent of net sales,
compared to 29.3 percent for the previous fiscal year.

MANAGEMENT’S DISCUSSION & ANALYSIS

Operating Income
Cost of sales decreased 14.0 percent to ¥179,325 million, in tandem with the decrease in net
sales. Gross profit therefore increased 7.3 percent to ¥23,094 million, and the gross marginrose from 9.4 percent to 11.4 percent as a result of improved product mix and cost reductions.
Selling, general and administrative expenses increased 2.5 percent to ¥17,418 million despite
efforts to reduce expenses, due mainly to increased costs in connection with expansion of
network integration operations and increased amortization of software for the Company’s newinternal information system. Operating income increased 25.4 percent year-on-year to ¥5,675
million, and accounted for 2.8 percent of net sales, compared to 2.0 percent for the previous
fiscal year.

15

OPERATING INCOME(Millions of yen)
10,000

8,745
8,000

6,000

5,675

5,562
4,526

4000,

2,000

Research and Development Expenses
Research and development expenses are included in selling, general and administrative
expenses and manufacturing costs, and totaled ¥58 million for the past fiscal year. NESIC’s
R&D programs are focused on two fields. One is information and communication technology, afield that draws on the Company’s many years of experience in the provision of
telecommunications and related systems. The other field is solutions for customer needs in the
IP network market and high-value-added systems integration (SI) technologies.
Other Expenses
Other expenses, net, totaled ¥2,346 million, compared to ¥2,617 million for the previous fiscal
year. Interest expense decreased 28.0 percent to ¥190 million, reflecting the reduction in longterm debt from the redemption of convertible bonds during the fiscal year. The Company also
recorded an exchange loss of ¥764 million, compared to an exchange gain of ¥228 million forthe previous fiscal year. Gain on return of the substitutional portion of the welfare pension
fund plan, detailed in Note 8 of the notes to the consolidated financial statements, totaled¥1,338 million, offsetting amortization of net retirement benefit obligation at transition
totaling ¥2,356 million. Loss on disposal of inventories totaled ¥397 million.

0

2000

2001

2003

NET INCOME AND
NET INCOME PER SHARE*(Millions of yen)
3,500

(Yen)
100

3,018

3,000

80

70.40
2,500
60

2,000

1,500

1,512
1,292

33.93

40

1,000

30.27

Income before Income Taxes and Minority Interests, and Net Income
Income before income taxes and minority interests increased 74.4 percent to ¥3,329 million,
while income taxes net of deferrals increased 41.1 percent to ¥1,714 million. Consequently, net
income increased 145.0 percent year-on-year to ¥1,512 million. Net income per share increasedto ¥33.93 from ¥13.15 for the previous fiscal year.

2002

617

20

500

13.15
0

2000
2001
2002
2003
Net Income (left scale)
Net Income per Share (right scale)0* See Note 13 of Notes to Consolidated Financial
Statements (page 31).

Annual Report 2003 NEC System Integration & Construction, Ltd.

NET SALES BY SEGMENT

Dividends
NESIC’s basic dividend policy is to strengthen earnings capabilities to maintain stable dividends
while retaining sufficient internal reserves to invest in raising competitiveness and future
growth. Cash dividends per share totaled ¥10.00, compared to ¥12.50 for the previous fiscal
year, in light of the Company’s capital requirements as it improves its competitiveness in a
deflationary operating environment.

(Millions of yen)
250,000

37,47837,089200,000

34,242
26,13327,02840,86328,12522,559150,000

100,000

165,557
146,158 156,873
138,99716

50,000MANAGEMENT’S DISCUSSION & ANALYSIS

0

2000

2001

2002

2003

■ Operation & Maintenance■ Intelligent Building & Facility Engineering■ Information & Network Integration

RESULTS BY SEGMENT
Information and Network Integration
Orders received decreased 12.4 percent to ¥138,149 million, while segment sales decreased
16.0 percent to ¥138,997 million. Segment operating income increased 11.8 percent to ¥6,508
million. Primary factors in the decrease in orders included restrained investment among
domestic telecommunication carriers, which resulted in reduced construction of mobile
communication base stations.
Intelligent Building and Facility Engineering
Orders received decreased 9.3 percent to ¥23,874 million, reflecting reduced demand formobile communication base stations and the absence of the large-scale overseas orders in theprevious fiscal year. Segment sales decreased 16.5 percent to ¥22,559 million. Segment
operating income increased 410.8 percent to ¥1,501 million.
Operation and Maintenance
Orders received increased 4.2 percent to ¥41,013 million, reflecting increased outsourcing orders
from NEC and its Group companies and from regional and local governments for fire and disastersystems, and for maintenance of regional network systems. Segment sales increased 9.0 percent
to ¥40,863 million. Segment operating income decreased 15.9 percent to ¥3,346 million.

FINANCIAL POLICYNESIC is working to make its operations more innovative by raising efficiency andimplementing structural reforms companywide. A key emphasis in this drive is further
enhancing the Company’s financial position. In the past fiscal year, NESIC reduced total assets
by ¥19,883 million, which raised the ratio of shareholders’ equity to total assets by 700 basis
points to 44.6 percent. The Company deployed free cash flow to pay dividends, develop new
products and production technology, and repay interest-bearing debt, thereby improving theCompany’s balance sheet and reducing interest expenses.

CASH FLOWSCASH FLOW HIGHLIGHTS
Year ended March 31

2003

Net cash provided byoperating activities
6,668
Net cash used ininvesting activities(1,256)
Net cash used infinancing activities (11,917)

2002

2001

5,109

5,697

(2,476)(2,756)(1,182)(5,186)

NEC System Integration & Construction, Ltd. Annual Report 2003

Net cash provided by operating activities increased 30.5 percent year-on-year to ¥6,668
million, primarily reflecting the increase in income before income taxes and minority interests.
Depreciation and amortization increased 33.2 percent to ¥1,464 million. Net changes inworking capital increased cash flow by ¥6,022 million, compared to ¥3,231 million in theprevious fiscal year, supported by the year-on-year gain in cash generated by reduction of tradereceivables.
Net cash used in investing activities decreased to ¥1,256 million from ¥2,476 million in theprevious fiscal year. The Company reduced purchases of property and equipment by 49.9

percent to ¥743 million, and reduced purchases of intangibles, net of allowance foramortization, by 56.8 percent to ¥453 million.
Information systems represent the majority of the Company’s capital expenditures. In theyear ended March 31, 2003, these expenditures amounted to ¥755 million, a decrease of 49.9
percent compared with the previous year. The main items were investment in new equipment
including purchases of maintenance equipment and software development outlays.
Net cash used in financing activities was ¥11,917 million, more than 10 times higher than in
the previous fiscal year because of the redemption with cash totaling ¥11,292 million of 0.375
percent convertible bonds that were due in 2002. The Company funded the redemption using
internal capital resources. Decrease in short-term bank loans totaled ¥166 million, and cash
dividends paid totaled ¥434 million.
As a result, cash and cash equivalents at the end of the year decreased ¥6,594 million froma year earlier to ¥8,865 million.

TOTAL ASSETS ANDSHAREHOLDERS’ EQUITY RATIO(Millions of yen)
160,000(%)
50

148,964
130,094
36.7

17

37.6

40

116,289

34.3

FINANCIAL POSITION
AssetsTotal assets decreased 14.6 percent, or ¥19,883 million, from a year earlier to ¥116,289
million. Return on average total assets increased to 1.2 percent from 0.4 percent for theprevious fiscal year.
Current assets decreased 17.0 percent, or ¥19,708 million, from a year earlier to ¥96,084
million. The redemption of convertible bonds discussed above resulted in a decrease in cash
and cash equivalents. The Company also reduced notes and accounts receivable by ¥13,344
million to ¥65,725 million as a result of its efforts to speed up collection of receivables.
Property and equipment, net, decreased ¥339 million from a year earlier to ¥8,412 million.
The decrease reflected the completion of the current cycle of investment in the Company’s newinternal information system.
Liabilities
Total liabilities decreased 24.3 percent, or ¥20,509 million, to ¥63,923 million. Current
liabilities decreased ¥21,546 million to ¥54,119 million, due largely to reductions in notes andaccounts payable and accrued income taxes. Redemption of convertible bonds totaling ¥11,292
million was a key factor in the decrease in notes and accounts payable. NESIC recorded theredemption in the fiscal year to March 31, 2003 because March 31, 2002, the final day of theprevious fiscal year and the redemption date for the convertible bonds, was a bank holiday.
Working capital totaled ¥41,965 million, compared to ¥40,126 million a year earlier, while
the current ratio was 1.8 to 1, compared to 1.5 to 1 at the end of the previous fiscal year.
Long-term liabilities increased 11.8 percent, or ¥1,036 million, to ¥9,803 million because of
an increase in accrued employees’ retirement benefits.
Interest-Bearing Debt
The Company had no long-term debt on its balance sheet as of March 31, 2003. Interestbearing debt consisted entirely of short-term bank loans, which decreased 3.3 percent year-onyear to ¥5,617 million through repayments. The debt-to-equity ratio, defined as interestbearing debt divided by shareholders’ equity, was 10.8 percent, compared to 11.4 percent a
year earlier.

30
80,00020

40,000
10

0

2000

2001

2002

2003

0

Total Assets (left scale)
Shareholders’ Equity Ratio (right scale)

INTEREST-BEARING DEBT AND
DEBT-TO-EQUITY RATIO(Millions of yen)
25,000MANAGEMENT’S DISCUSSION & ANALYSIS

120,000

44.6
136,172

(%)
50

47.4
22,64040

20,00017,30733.9
15,00030

10,000

20

5,000

0

2000

2001

11.4

10.8

5,811

5,617

2002

2003

10

0

Interest-bearing Debt (left scale)
Debt-to-Equity Ratio (right scale)

Annual Report 2003 NEC System Integration & Construction, Ltd.

RETURN ON SHAREHOLDERS’ EQUITYAND RETURN ON ASSETS
(%)
7

6.1
6

5

4

2.9

3

MARKET RISKS

2.7

18

2

2.2

MANAGEMENT’S DISCUSSION & ANALYSIS

1

1.2

1.2

0.4
2002

2003

1.0
0

Shareholders’ Equity
Shareholders’ equity increased 1.3 percent, or ¥687 million, to ¥51,822 million. Retained
earnings increased ¥1,002 million to ¥26,672 million, but capitalized foreign currencytranslation adjustments increased to ¥614 million from ¥353 million for the previous fiscal
year. Total capital, the sum of interest-bearing debt and shareholders’ equity, was ¥57,439
million, compared to ¥56,946 million a year earlier, and shareholders’ equity accounted for90.2 percent of total capital, compared to 89.8 percent a year earlier. The ratio of shareholders’equity to total assets improved 700 basis points to 44.6 percent from 37.6 percent a year
earlier.

2000

2001

Return on Shareholders’ Equity (ROE)
Return on Assets (ROA)

NEC System Integration & Construction, Ltd. Annual Report 2003

Stock Price Volatility Risk
NESIC holds shares of certain companies to maintain relationships essential to its businessactivities. The potential market risk is limited to the shares held in publicly owned companies.
As of March 31, 2003, equity investments in such companies amounted to ¥312 million, andwould not have a material impact on the Company’s earnings.
Interest Rate Risk
Of the Company’s interest-bearing debt, ¥5,491 million is subject to interest rate risk. NESIC
has, however, entered into interest rate swap transactions to hedge against risks arising frominterest rate increases.
Foreign Exchange Rate Risk
Exports account for approximately 10 percent of the Company’s total net sales, and there isnormally a significant amount of receivables denominated in foreign currencies at each fiscal
year-end. In the past fiscal year, the Company recorded a nominal exchange loss, mainly
because of the strong yen.

FOUR-YEAR SUMMARY OF SELECTED FINANCIAL DATANEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
For years ended March 31

Thousands of
U.S. dollars(except per
share figures)1

Millions of yen(except per share figures)
2002

2001

2000

2003

For the year
Orders ..............................................................................
Net sales ..........................................................................
Information and network integration................................
Intelligent building and facility engineering ......................
Operation and maintenance ...........................................
Selling, general and administrative expenses ......................
Operating income ..............................................................
Net income .......................................................................
Total assets ......................................................................
Shareholders’ equity .........................................................
Capital expenditures .........................................................
Depreciation and amortization ..........................................
Research and development costs ......................................

¥203,038
202,419
138,997
22,55940,863
17,4185,675
1,512
116,289
51,822
755
1,464
58

¥223,337
230,064
165,557
27,02837,47816,994
4,526
617
136,172
51,134
1,506
1,099
57

¥ 231,893
220,096
156,873
26,13337,08916,9098,745
3,018
148,964
51,107
686
1,033
52

¥ 210,709
208,526
146,158
28,12534,242
18,0855,562
1,292
130,094
47,765
1,010
1,001
131

$1,689,168
1,684,018
1,156,381
187,679
339,958
144,908
47,213
12,579967,463431,131
6,281
12,179482

Per share figures (yen and U.S. dollars)
Net income per share (EPS)2 ...............................................
Shareholders’ equity per share (BPS) ..................................
Cash flows per share (CFPS) ..............................................
Cash dividends per share ..................................................

¥ 33.93
1,202.58
67.95
10.00

¥ 13.15
1,187.31
39.86
12.50

¥

¥

$

Ratios and return indicators (%)
Operating income to net sales ...........................................
Return on shareholders’ equity (ROE) .................................
Return on assets (ROA) ......................................................
Shareholders’ equity ratio ..................................................

2.8%
2.9
1.2
44.6

2.0%
1.2
0.4
37.6

70.40
1,186.95
94.49
12.50

4.0%
6.1
2.2
34.3

30.27
1,118.95
53.73
10.00

0.28
10.00
0.56
0.08

2.7%
2.7
1.0
36.7

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥120.20=U.S.$1.00, the approximate Tokyo foreignexchange market rate as of March 31, 2003.
2. A new accounting standard for earnings per share became effective April 1, 2002. See Note 13 of Notes to Consolidated Financial Statements(page 31) for details.

19
FOUR-YEAR SUMMARY OF SELECTED FINANCIAL DATA

2003

Annual Report 2003 NEC System Integration & Construction, Ltd.

CONSOLIDATED BALANCE SHEETSNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
As of March 31, 2003 and 2002

Thousands of
U.S. dollars (Note 3)

Millions of yen

Assets

2003

2002

2003

Cash and cash equivalents ...............................................................................

¥ 8,865¥ 15,460$ 73,752

Short-term investments (Note 4) .......................................................................

65

65

541

Notes and accounts receivable:.........................................................................

65,72579,070546,797

Less allowance for doubtful receivables .........................................................

(1,083)(1,009)(9,010)Inventories (Note 5) ..........................................................................................

16,455

16,109136,897

Deferred income taxes (Note 7).........................................................................

2,246

2,376

18,686

Other current assets.........................................................................................

3,809

3,718

31,689Total current assets ..................................................................................

96,084

115,792

799,368

Property and equipment:..................................................................................

14,67914,733

122,121Land ...............................................................................................................

2,806

2,806

23,344

Buildings and structures ...................................................................................

6,900

6,904

57,404

Machinery and vehicles ....................................................................................

132

198

1,098

Furniture and fixtures .......................................................................................

4,632

4,199

38,536

Construction in progress...................................................................................

207

624

1,722

Accumulated depreciation ................................................................................

(6,266)(5,981)(52,130)

Property and equipment, net .....................................................................

8,412

8,752

69,983

Investment in an unconsolidated subsidiary .......................................................

19

19

158

Investment securities (Note 4)...........................................................................

578

821

4,809

Intangibles, net of allowance for amortization.....................................................

2,369

2,546

19,709Deferred income taxes (Note 7).........................................................................

3,662

2,897

30,466

Other assets ....................................................................................................

5,162

5,342

42,945

Total investments and other assets............................................................

11,791

11,62798,095

Total assets .....................................................................................................

¥116,289¥136,172$967,463

Current assets:

20
CONSOLIDATED BALANCE SHEETS

Investments and other assets:

NEC System Integration & Construction, Ltd. Annual Report 2003

Thousands of
U.S. dollars (Note 3)

Millions of yen

Liabilities and shareholders’ equity

2003

2002

2003

Short-term bank loans (Note 6)...........................................................................

¥ 5,617¥ 5,811$ 46,730

Notes and accounts payable...............................................................................

33,99940,751

282,854

Advances received.............................................................................................

6,801

9,616

56,581

Accrued income taxes (Note 7) ...........................................................................

887

1,721

7,379

Other accounts payable .....................................................................................

—

13,181—

Current liabilities:

Other current liabilities.......................................................................................

6,813

4,582

56,681

Total current liabilities ....................................................................................

54,11975,665450,241

21
Accrued employees’ retirement benefits (Note 8).................................................

9,795

8,730

81,489Other liabilities ..................................................................................................

7

35

58

Total long-term liabilities ............................................................................

9,803

8,766

81,556

Minority interests in consolidated subsidiaries .........................................................

543

605

4,517

Issued — 43,069,207 shares ........................................................................

13,122

13,122

109,168

Capital surplus ..................................................................................................

12,622

12,622

105,008

Retained earnings..............................................................................................

26,672

25,670221,897

Shareholders’ equity (Notes 9 and 17):
Common stock, without par value:
Authorized — 100,000,000 shares

Unrealized holding gain on securities ..................................................................

36

75

300

Foreign currency translation adjustments ............................................................

(614)

(353)

(5,108)51,83951,137431,273

Treasury stock, at cost.......................................................................................

(17)

(2)

(141)

Shareholders’ equity, net .......................................................................................

51,822

51,134431,131¥116,289¥136,172$967,463

CONSOLIDATED BALANCE SHEETSLong-term liabilities:

Contingent liabilities (Note 10)
Total liabilities and shareholders’ equity ..............................................................
See notes to consolidated financial statements.

Annual Report 2003 NEC System Integration & Construction, Ltd.

CONSOLIDATED STATEMENTS OF INCOME
NEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31, 2003 and 2002

Thousands of
U.S. dollars (Note 3)

Millions of yen

22
CONSOLIDATED STATEMENTS OF INCOME

2003

2002

2003

Net sales (Note 15) ..............................................................................................

¥202,419¥230,064$1,684,018

Cost of sales (Note 12) ........................................................................................

179,325

208,544

1,491,889

Gross profit .......................................................................................................

23,094

21,520

192,130

Selling, general and administrative expenses (Note 12) ...................................

17,41816,994

144,908

Operating income ..............................................................................................

5,675

4,526

47,213

Interest and dividend income..............................................................................

141

121

1,173

Interest expense ................................................................................................

(190)

(264)

(1,581)

Exchange gain (loss) ..........................................................................................

(764)

228

(6,356)

Provision for doubtful receivables .......................................................................

(136)

(157)

(1,131)

Amortization of net retirement benefit obligation at transition................................

(2,356)(2,663)(19,601)

Gain on return of the substitutional portion of the welfare pension fund plan..........

1,338

—

11,131

Loss on disposal of inventories ...........................................................................

(397)

—

(3,303)

Other, net .........................................................................................................

19

119

158

(2,346)(2,617)(19,517)

3,329

1,909

27,696

Current .............................................................................................................

2,321

2,638

19,309Deferred ...........................................................................................................

(606)(1,423)(5,042)

1,714

1,215

14,260Minority interests...............................................................................................

102

76

849

Net income (Note 13):..........................................................................................

¥ 1,512

Other income (expenses):

Income before income taxes and minority interests........................................
Income taxes (Note 7):

See notes to consolidated financial statements.

NEC System Integration & Construction, Ltd. Annual Report 2003

¥

617

$

12,579

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31, 2003 and 2002

Millions of yen
Number ofshares ofcommon stock

Commonstock

CapitalsurplusRetainedearnings

Unrealized
holding gains
on securities

Foreign currencytranslation
adjustment

Treasurystock

Balance at March 31, 2001 .........................

43,058,127¥13,112¥12,612¥25,801¥ —¥(418)¥(0)

Conversion of convertible bonds ...............

11,080

10

10

—

—

—

—

Bonuses to directors and statutory auditors.....

—

—

—

(102)

—

—

—

Cash dividends paid .................................

—

—

—

(645)

—

—

—

ended March 31, 2002.........................

—

—

—

617

—

—

—

Unrealized holding gain on securities .........

—

—

—

—

75

—

—

Foreign currency translation adjustments ...

—

—

—

—

—

64

—

Treasury stock .........................................

—

—

—

—

—

—

(2)

Balance at March 31, 2002..........................

43,069,207

13,122

12,622

25,670

75

(353)

(2)

Bonuses to directors and statutory auditors ....

—

—

—

(51)

—

—

—

Cash dividends paid .................................

—

—

—

(430)

—

—

—

ended March 31, 2003.........................

—

—

—

1,512

—

—

—

Decrease of consolidated subsidiaries .......

—

—

—

(29)

—

—

—

Unrealized holding gain on securities .........

—

—

—

—

(39)

—

—

Foreign currency translation adjustments ...

—

—

—

—

—

(261)

—

Treasury stock .........................................

—

—

—

—

—

—

(15)

Balance at March 31, 2003 ......................

43,069,207¥13,122¥12,622¥26,672¥ 36¥(614)¥(17)

Commonstock

Thousands of U.S. dollars (Note 3)
Unrealized
CapitalRetained
holding gains
surplusearnings
on securities

Foreign currencytranslation
adjustment

Treasurystock

Net income for the year

Balance at March 31, 2002..............................................

$109,168$105,008$213,561$ 624$(2,937)$ (17)

Bonuses to directors and statutory auditors....................

—

—

(424)

—

—

—

Cash dividends paid .....................................................

——(3,577)———

Net income for the year ended March 31, 2003.............

——

12,579———Decrease of consolidated subsidiaries ...........................

—

—

(241)

—

—

—

Unrealized holding gain on securities .............................

—

—

—

(324)

—

—

Foreign currency translation adjustments.......................

—

—

—

—

(2,171)—

Treasury stock .............................................................

—

—

—

—

—

(125)

Balance at March 31, 2003...........................................

$109,168$105,008$221,897$ 300$(5,108)$(141)CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Net income for the year23

See notes to consolidated financial statements.

Annual Report 2003 NEC System Integration & Construction, Ltd.

CONSOLIDATED STATEMENTS OF CASH FLOWSNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31, 2003 and 2002

Thousands of
U.S. dollars (Note 3)

Millions of yen

24
CONSOLIDATED STATEMENTS OF CASH FLOWS

2003

2002

2003

¥ 3,329
1,464
(31)
1,062
(141)
190
—
13,091(362)(6,706)(2,053)9,843¥ 1,909
1,099
(31)
2,438
(121)
264
(8)
12,761
2,698(12,227)
1,670
10,452$ 27,696
12,180(258)
8,835(1,173)
1,581—
108,910(3,012)(55,790)(17,080)
81,889Interest and dividends received .............................................................................
Interest paid ........................................................................................................
Income taxes paid ................................................................................................
Net cash provided by operating activities ...........................................................

138
(173)
(3,139)
6,668

118
(265)
(5,195)
5,109

1,148
(1,439)(26,115)
55,474

Investing activities
Sales of short-term investments............................................................................
Purchases of property and equipment ...................................................................
Sales of property and equipment...........................................................................
Purchases of intangibles, net of allowance for amortization.....................................
Purchases of investment securities .......................................................................
Sales of investment securities...............................................................................
Loans receivable made.........................................................................................
Collection of loans receivable................................................................................
Other ..................................................................................................................
Net cash used in investing activities...............................................................

—
(743)
28
(453)
(70)
127
(52)
77
(168)
(1,256)

10(1,485)86(1,049)
—
7
(38)
32
(39)
(2,476)—(6,181)233(3,769)
(582)
1,057
(433)
641
(1,398)(10,449)(166)(11,292)(434)(25)(11,917)(163)(6,668)15,46074¥ 8,865

(520)
—
(643)
(18)
(1,182)
97
1,547
13,912—¥15,460(1,381)(93,943)(3,611)(208)(99,143)(1,356)(55,474)
128,619616$ 73,752¥¥$

Operating activities
Income before income taxes and minority interests ................................................
Depreciation and amortization...............................................................................
Amortization of excess of costs over net assets acquired ........................................
Provision for accrued employees’ retirement benefits .............................................
Interest and dividend income ................................................................................
Interest expense ..................................................................................................
Equity in earnings of affiliates ...............................................................................
Trade notes and accounts receivable.....................................................................
Inventories...........................................................................................................
Trade notes and accounts payable ........................................................................
Other ..................................................................................................................

Financing activities
Decrease in short-term bank loans........................................................................
Repayment of long-term debt ...............................................................................
Cash dividends paid.............................................................................................
Other ..................................................................................................................
Net cash used in financing activities ..............................................................
Effect of exchange rate changes on cash and cash equivalents ..................................
Net increase in cash and cash equivalents ................................................................
Cash and cash equivalents at beginning of the year ...................................................
Increase due to the inclusion of subsidiaries in consolidation ......................................
Cash and cash equivalents at end of the year ............................................................
Supplemental information:
Conversion of convertible bonds into common stock and capital surplus..................
See notes to consolidated financial statements.

NEC System Integration & Construction, Ltd. Annual Report 2003

—

20

—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
March 31, 2003

1. BASIS OF PREPARATION
NEC System Integration & Construction, Ltd. (the “Company”) and its domestic subsidiaries maintain their books of account in conformity
with the financial accounting standards of Japan, and its foreign subsidiaries maintain their books of account in conformity with those of
their countries of domicile.
The accompanying consolidated financial statements have been compiled from the consolidated financial statements prepared by theCompany as required under the Securities and Exchange Law of Japan, and have been prepared in accordance with accounting principles
and practices generally accepted in Japan, which may differ in certain material respects from accounting principles and practices generally
accepted in countries and jurisdictions other than Japan.
As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, thetotals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sumof the individual amounts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

b. Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated into yen at the exchange rates prevailing at the balance
sheet dates, except for assets and liabilities hedged by forward foreign exchange contracts. All other assets and liabilities denominated inforeign currencies are translated at their historical rates.
All revenues and expenses associated with foreign currencies are translated at the rates of exchange prevailing when such transactions
were made. The resulting exchange gain or loss is credited or charged to income.
The revenue and expense accounts of the foreign subsidiaries are translated into yen at the average exchange rates prevailing during
the year, and, except for the components of shareholders’ equity, the balance sheet accounts are translated at the rates of exchange in
effect at the balance sheet date. The components of shareholders’ equity are translated at their historical exchange rates. Translation
adjustments are presented as a component of shareholders’ equity and minority interests in the accompanying consolidated financial
statements.
c. Cash equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents.
d. Securities
Securities other than those of subsidiaries and affiliates are classified into three categories: trading, held-to-maturity or other securities.
Trading securities are carried at fair value and held-to-maturity securities are carried at amortized cost. Marketable securities classified asother securities are carried at fair value with any changes in unrealized holding gain or loss, net of the applicable income taxes, included
directly in shareholders’ equity. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold isdetermined by the moving average method.

25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

a. Basis of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates
The accompanying consolidated financial statements include the accounts of the Company and the significant companies controlled
directly or indirectly by the Company. Companies over which the Company exercises significant influence in terms of their operating andfinancial policies have been included in the consolidated financial statements on an equity basis. All significant intercompany balances andtransactions have been eliminated in consolidation.
The excess of costs over underlying net assets at fair value at the respective dates of acquisition is amortized by the straight-line
method over a period of five years.
Investments in affiliates which are not accounted for by the equity method are stated at cost.

e. Inventories
Work in process is stated at cost determined on a specific project basis. Purchased goods, materials and supplies are stated at cost
determined primarily by the moving average method.
f. Depreciation and amortization
Depreciation of property and equipment is principally computed by the declining-balance method based on the estimated useful lives of
the respective assets. Significant renewals and betterments are capitalized at cost. Maintenance and repairs are charged to income.
The useful lives of property and equipment are summarized as follows:
Buildings and structures 2 to 47 years
Machinery and vehicles
5 years
Furniture and fixtures
2 to 20 years
Intangible assets are amortized by the straight-line method over their estimated useful lives.

Annual Report 2003 NEC System Integration & Construction, Ltd.

g. Allowance for doubtful receivables
The allowance for doubtful receivables is provided at an amount determined based on the historical experience of bad debt with respect toordinary receivables, plus an estimate of uncollectible amounts determined by reference to specific doubtful receivables from customers
which are experiencing financial difficulties.
h. Leases
Non-cancelable lease transactions are accounted for as operating leases (whether such leases are classified as operating or financeleases) except that lease agreements which stipulate the transfer of ownership of the leased assets to the lessee are accounted for as
finance leases.
i. Research and development costs
Research and development costs are charged to income as incurred.

26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

j. Retirement benefits
Accrued employees’ retirement benefits are provided mainly at an amount calculated based on the retirement benefit obligation and thefair value of the pension plan assets at the balance sheet dates, as adjusted for the unrecognized net retirement benefit obligation attransition, unrecognized actuarial gain or loss and unrecognized prior service cost. The retirement benefit obligation is attributed to eachperiod by the straight-line method over the estimated years of service of the eligible employees. The net retirement benefit obligation attransition is being amortized over a period of 5 years by the straight-line method. Actuarial gain or loss is being amortized in the year
following the year in which the gain or loss is recognized primarily by the straight-line method over the average remaining years of serviceof the employees. Prior service cost is being amortized as incurred by the straight-line method over the average remaining years of serviceof the employees.
See Note 8 for the method of accounting for the separation of the substitutional portion of the benefit obligation from the corporate
portion of the benefit obligation under Welfare Pension Fund Plan.
k. Income taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets andliabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.
l. Appropriation of retained earnings
Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial period is made by resolutionof the shareholders at a general meeting held subsequent to the close of such financial period and, therefore, the accounts for the period
do not reflect such appropriations. See Note 17.
m. Derivative financial instruments
Derivatives positions are carried at their fair value with any changes in unrealized gain or loss charged or credited to operations, except for
those which meet the criteria for deferral hedge accounting under which unrealized gain or loss is deferred as an asset or a liability.
Receivables and payables hedged by qualified forward foreign exchange contracts are translated at the corresponding foreign exchange
contract rates.
n. Revenue recognition
Revenues from construction contracts of the Company and the domestic consolidated subsidiaries are recognized by the completedcontract method except that those from construction work with contracted amounts exceeding ¥100 million are recognized by thepercentage-of-completion method. Revenues from construction work of the foreign consolidated subsidiaries are generally recognized by
the percentage-of-completion method.
o. Treasury stock and reduction of legal reserves
Effective April 1, 2002, the Company adopted a new accounting standard for treasury stock and reduction of legal reserves. The effect of
the adoption of this new standard was immaterial.

3. U.S. DOLLAR AMOUNTS
The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been
made, as a matter of arithmetic computation only, at ¥120.20 = U.S.$1.00, the approximate rate of exchange on March 31, 2003. The
translation should not be construed as a representation that yen have been, could have been, or could in the future be, converted into U.S.
dollars at that or any other rate.

NEC System Integration & Construction, Ltd. Annual Report 2003

4. SECURITIESa) The components of unrealized gain or loss on marketable securities classified as other securities at March 31, 2003 and 2002 weresummarized as follows:
Millions of yen

Thousands of U.S. dollars

Acquisition
cost

Carrying
value

Unrealized
gain or loss

Acquisition
cost

Carrying
value

Unrealized
gain or loss

Securities whose carrying value exceeds their acquisition cost:
Equity securities ....................................................
Debt securities.......................................................
Other......................................................................
Subtotal .............................................................

¥ 73
5
—
78

¥147
5
—
152

¥ 74
0
—
74

$ 607
42
—
649

$1,223
42
—
1,265

$ 616
0
—
616

Securities whose acquisition cost exceeds their carrying value:
Equity securities ....................................................
Debt securities.......................................................
Other......................................................................
Subtotal .............................................................
Total.......................................................................

176
—
—
176
¥255

164
—
—
164
¥317

(12)
—
—
(12)
¥ 61

1,464
—
—
1,464
$2,121

1,364
—
—
1,364
$2,637

(100)
—
—
(100)
$ 507

March 31, 2003

27
March 31, 2002

Securities whose carrying value exceeds their acquisition cost:
Equity securities ....................................................
Debt securities.......................................................
Other......................................................................
Subtotal .............................................................
Securities whose acquisition cost exceeds their carrying value:
Equity securities ....................................................
Debt securities.......................................................
Other......................................................................
Subtotal .............................................................
Total...................................................................

Acquisition
cost

Carrying
value

Unrealized
gain or loss

¥125
9
—
134

¥267
9
—
276

¥141
0
—
141

225
—
84
310
¥445

213
—
84
298
¥575

(11)
—
—
(11)
¥129

b) Sales of securities classified as other securities for the years ended March 31, 2003 and 2002 are summarized as follows:
Thousands of
U.S. dollars

Millions of yen
2003

Proceeds from sales..............................................................................................................
Gains on sales .......................................................................................................................
Losses on sales .....................................................................................................................

2002

¥134
6
17

2003

¥10
2
—

$1,11550141c) The components of non-marketable securities classified as other securities at March 31, 2003 and 2002 were summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Other securities:
Unlisted securities (except for OTC securities) .....................................................................
Other......................................................................................................................................
Total...................................................................................................................................

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Millions of yen

2003

2002

2003

¥266
6
¥273

¥265
67
¥333

$2,21350$2,271d) The redemption schedule for securities with maturity dates classified as other securities as of March 31, 2003 is summarized as follows:

March 31, 2003

Debt securities .................................................
Other ................................................................
Total..............................................................

Due in one
year or lessMillions of yen
Due after
one yearthroughfive years

Due after
five years
through ten
years

¥5
—
¥5

¥—
—
¥—

¥—
—
¥—

Thousands of U.S. dollars
Due after
Due after
one yearfive years
Due in one
throughthrough ten
year or lessfive years
years

$42
—
$42

$—
—
$—

$—
—
$—

Annual Report 2003 NEC System Integration & Construction, Ltd.

5. INVENTORIESInventories at March 31, 2003 and 2002 were as follows:
Thousands of
U.S. dollars

Millions of yen

Work in process.....................................................................................................................
Purchased goods, materials and supplies ............................................................................

2003

2002

2003

¥16,176278¥16,455¥15,721388¥16,109$134,576
2,313$136,897

6. SHORT-TERM BANK LOANS AND LONG-TERM DEBT
Short-term bank loans are unsecured. The weighted average interest rates of short-term bank loans for the years ended March 31, 2003 and2002 were approximately 2.0% and 3.2%, respectively.

7. INCOME TAXES

28

Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, enterprise and inhabitants’ taxes, which, in theaggregate, resulted in a statutory tax rate of approximately 42.1% for both 2003 and 2002. Income taxes of the foreign subsidiaries are based
generally on the tax rates applicable in their countries of incorporation.
The effective tax rates reflected in the consolidated statements of income for the years ended March 31, 2003 and 2002 differ from thestatutory tax rate for the following reasons:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Statutory tax rate.................................................................................................................................................
Effect of:
Expenses not deductible for income tax purposes.........................................................................................
Dividend income deductible for income tax purposes....................................................................................
Inhabitants tax per capita levy ........................................................................................................................
Adjustment in deferred tax assets and liabilities due to the change in tax rates ............................................
Other, net.........................................................................................................................................................
Effective tax rates................................................................................................................................................

2003

2002

42.1%

42.1%

4.8
(0.7)
2.6
4.3
(1.6)
51.5%

11.5
(0.9)
4.3
—
6.7
63.7%

New legislation was enacted in March 2003 which will change the aggregate statutory tax rate from 42.1% to 40.5% effective the fiscal
year beginning after March 31, 2004. The effect of this tax rate change was to decrease deferred tax assets by ¥141 million ($1,173 thousand)at March 31, 2003 and to increase income tax – deferred by ¥141 million ($1,173 thousand) for the year ended March 31, 2003.
The significant components of deferred tax assets and liabilities as of March 31, 2003 and 2002 were as follows:
Thousands of
U.S. dollars

Millions of yen

Deferred tax assets:
Accrued bonuses...............................................................................................................
Allowance for doubtful receivables ...................................................................................
Accrued enterprise tax ......................................................................................................
Notes and accounts receivable .........................................................................................
Unrealized profit on inventories.........................................................................................
Foreign tax credits.............................................................................................................
Accrued retirement benefits ..............................................................................................
Other..................................................................................................................................

Deferred tax liabilities:
Advanced depreciation of property and equipment..........................................................
Unrealized holding gain on securities................................................................................
Other..................................................................................................................................
Net deferred tax assets .........................................................................................................

NEC System Integration & Construction, Ltd. Annual Report 2003

2003

2002

2003

¥1,187
555
64
116
9
311
3,321
370
5,936

¥ 813
470
150
684
10
232
2,713
258
5,333

$ 9,875
4,617
532
965
75
2,587
27,6293,078
49,384

(1)
(25)
(1)
(27)
¥5,908

(1)
(54)
(3)
(59)
¥5,273

(8)
(208)
(8)
(224)
$49,151

8. RETIREMENT BENEFIT PLANS
The Company and certain consolidated subsidiaries have defined benefit plans, i.e., Welfare Pension Fund Plans (“WPFP”) and lump-sum
payment plans, covering substantially all employees who are entitled to lump-sum or annuity payments, the amounts of which are determinedby reference to their basic rates of pay, length of service, and the conditions under which termination occurs.
The following table sets forth the funded and accrued status of the plans, and the amounts recognized in the consolidated balance sheets
as of March 31, 2003 and 2002 for the Company’s and the consolidated subsidiaries’ defined benefit plans:
Thousands of
U.S. dollars

Millions of yen
2003

Retirement benefit obligation ................................................................................................ ¥(27,734)
Plan assets at fair value.........................................................................................................
6,843
Unfunded retirement benefit obligation............................................................................. (20,890)
Unrecognized actuarial loss ..................................................................................................
7,938
Unrecognized prior service cost............................................................................................
(1,119)Unrecognized net retirement benefit obligation at transition ................................................
4,276
Accrued employees’ retirement benefits........................................................................... ¥ (9,795)

2002

2003

¥(35,361)
14,929(20,432)
5,867(2,155)7,989¥ (8,730)$(230,732))
56,930(173,794)
35,574(9,309)66,040$ (81,489)

Thousands of
U.S. dollars

Millions of yen

Service cost...........................................................................................................................
Interest cost...........................................................................................................................
Expected return on plan assets.............................................................................................
Amortization of actuarial loss ................................................................................................
Amortization of prior service cost..........................................................................................
Amortization of net retirement benefit obligation at transition ..............................................
Subtotal .............................................................................................................................
Gain on return of the substitutional portion of WPFP ...........................................................
Total.......................................................................................................................................

2003

2002

2003

¥ 1,429
1,017
(633)
264
(99)
2,356
4,334
(1,338)¥ 2,995¥ 1,596
1,127
(815)
178
(134)
2,663
4,617
—
¥4,617$ 11,889
8,461(5,266)2,196(824)
19,601
36,057(11,131)$ 24,917

2003

2002

3.0%
5.5%

3.5%
5.5%

The assumptions used in accounting for the above plans were as follows:
Discount rate ..................................................................................................................................................
Expected return on plan assets .....................................................................................................................

29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Following the enactment of the Welfare Pension Insurance Law in Japan, on September 1, 2002 the Welfare Pension Fund, in which theCompany and its domestic consolidated subsidiaries participate, obtained an approval from the Minister of Health, Labor and Welfare for
exemption from the future benefit obligation with respect to the portion of the Employees Pension Fund that the Company and its domestic
consolidated subsidiaries operate on behalf of the Government (the so-called substitutional portion).
In accordance with the transitional provision stipulated in “Practical Guidelines for Accounting for Retirement Benefits,” the Company
accounted for the separation of the substitutional portion of the benefit obligation from the corporate portion of the benefit obligation under
its WPFP as of the date of approval of its exemption assuming that the transfer to the Japanese government of the substitutional portion of
the benefit obligation and related pension plan assets had been completed as of that date. As a result, the Company recognized a gain of¥1,338 million ($11,131 thousand) for the year ended March 31, 2003. The pension assets which are to be transferred were calculated at¥6,765 million ($56,281 thousand) at March 31, 2003.
The components of retirement benefit expenses for the years ended March 31, 2003 and 2002 are outlined as follows:

9. SHAREHOLDERS’ EQUITY
In accordance with the Commercial Code of Japan (the “Code”), the Company has provided a legal reserve, which was included in retained
earnings. The Code provides that an amount equal to at least 10% of the amount to be disbursed as a distribution of earnings be
appropriated to the legal reserve until the total of such reserve and the capital surplus account equals 25% of the common stock account.
The legal reserve amounted to ¥546 million ($4,542 thousand) as of both March 31, 2003 and 2002.
The Code provides that neither capital surplus nor the legal reserve is available for dividends, but both may be used to reduce or eliminate
a deficit by resolution of the shareholders or may be transferred to common stock by resolution of the Board of Directors. On October 1,
2001, an amendment (the “Amendment”) to the Code became effective. The Amendment provides that if the total amount of capital surplus
and the legal reserve exceeds 25% of the amount of common stock, the excess may be distributed to the shareholders either as a return ofcapital or as dividends subject to the approval of the shareholders. In addition, the Amendment eliminates the stated par value of theCompany’s outstanding shares, which resulted in all outstanding shares having no par value as of October 1, 2001. The Amendment also
provides that all share issuances after September 30, 2001 will be of shares with no par value. Prior to the date on which the Amendment
came into effect, the Company’s shares had a par value of ¥500.

Annual Report 2003 NEC System Integration & Construction, Ltd.

10. CONTINGENT LIABILITIESAt March 31, 2003, the Company was contingently liable as guarantor of indebtedness of a third party and the Company’s employees in theaggregate amount of ¥2,030 million ($16,889 thousand).

11. LEASESa) Finance leases
The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of the leased property as ofMarch 31, 2003 and 2002, which would have been reflected in the consolidated balance sheets if finance lease accounting had been applied
to the finance leases currently accounted for as operating leases:
Thousands of
U.S. dollars

Millions of yen

Acquisition costs:
Machinery and vehicles .....................................................................................................
Furniture and fixtures.........................................................................................................

30

Accumulated depreciation:
Machinery and vehicles .....................................................................................................
Furniture and fixtures.........................................................................................................

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net book value:
Machinery and vehicles .....................................................................................................
Furniture and fixtures.........................................................................................................

2003

2002

2003

¥ 199
3,525
¥3,724¥ 222
4,319¥4,541$ 1,656
29,326$30,982

¥ 105
1,833
¥1,938¥ 129
1,929¥2,058$ 873
15,250$16,123¥ 95
1,692¥1,787¥ 92
2,390¥2,483$ 790
14,077$14,867

Lease payments relating to finance leases accounted for as operating leases amounted to ¥1,120 million ($9,318 thousand) and ¥1,312
million for the years ended March 31, 2003 and 2002, respectively. The depreciation expense of the leased assets computed by the straightline method over the respective lease terms and the interest expense portion included in the lease payments amounted to ¥977 million($8,128 thousand) and ¥79 million ($657 thousand), respectively, for the year ended March 31, 2003 and ¥1,214 million and ¥110 million,
respectively, for the year ended March 31, 2002.
Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2003 for finance leases accounted for as
operating leases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Due within one year...............................................................................................................
Due over one year .................................................................................................................
Total ...............................................................................................................................

2003

2002

2003

¥ 876
966
¥1,843¥1,0901,588¥2,678$ 7,288
8,037$15,333b) Operating leases
Future minimum operating lease payments subsequent to March 31, 2003 for non-cancelable operating leases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Due within one year...............................................................................................................
Due over one year .................................................................................................................
Total ...............................................................................................................................

2003

2002

2003

¥20
35
¥56

¥24
38
¥63

$166
291
$466

12. RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in selling, general and administrative expenses and manufacturing costs amounted to ¥58 million($483 thousand) and ¥57 million for the years ended March 31, 2003 and 2002, respectively.

NEC System Integration & Construction, Ltd. Annual Report 2003

13. AMOUNTS PER SHARE
Yen

U.S. dollars

2003

Net income ............................................................................................................................
Cash dividends applicable to the year ..................................................................................
Net assets..............................................................................................................................

¥

33.93
10.00
1,202.58

2002

2003

13.15
12.50
1,186.13

$0.28
0.08
10.00

¥

In accordance with a new accounting standard for earnings per share which became effective April 1, 2002, net income per share for theyear ended March 31, 2003 was computed based on the net income available for distribution to shareholders of common stock and theweighted average number of shares of common stock outstanding during the year, and amounts per share of net assets at March 31, 2003
was computed based on net assets available for distribution to the shareholders and the number of shares of common stock outstanding at
the year end.
Net income per share and amount per share of net assets for the year ended March 31, 2002 have been recomputed based on this new
accounting standard and are restated in the accompanying financial statements.
Cash dividends per share represent the cash dividends declared as applicable to the respective years together with the interim cash
dividends paid.

14. DERIVATIVES

15. RELATED PARTY TRANSACTIONSThe Company is a majority-owned subsidiary of NEC Corporation (“NEC”). Consolidated net sales included those to NEC in amounts of¥53,271 million ($443,186 thousand) and ¥67,427 million for the years ended March 31, 2003 and 2002, respectively. In addition, theCompany purchased communications equipment and other from NEC in amounts of ¥48,149 million ($400,574 thousand) and ¥51,180 million
during the years ended March 31, 2003 and 2002, respectively.
The terms of the transactions referred to above were negotiated and determined on an arm’s-length basis.

16. SEGMENT INFORMATIONThe Company and its consolidated subsidiaries are primarily engaged in the manufacture and sale of products in Japan and foreign countries
in three major segments: the information and network integration segment, the intelligent building and facility engineering segment, and theoperation and maintenance segment.
Business segments
The business segment information for the Company and its consolidated subsidiaries for the years ended March 31, 2003 and 2002 issummarized as follows:
Millions of yen

Year ended March 31, 2003

Information
andnetwork
integration

Intelligent
building
and facility
engineering

Operation
andmaintenance

Total

Eliminations
or Corporate

Consolidated

I. Sales:(1) Sales to third parties................................
(2) Intersegment sales ..................................
Total sales.................................................
Operating expenses .....................................
Operating income .........................................

¥138,997—
138,997
132,448¥ 6,508¥22,559—
22,55921,057¥ 1,501¥40,863—
40,86337,516¥ 3,346¥202,419—
202,419
191,062¥ 11,357

¥

—
—
—
5,681
¥(5,681)¥202,419—
202,419
196,743¥ 5,675

II. Assets, depreciation expenses, capital expenditures:
Assets...........................................................
Depreciation expenses.................................
Capital expenditures ....................................

¥ 67,135
238
220¥11,692
5
0¥10,467381
413¥ 89,295
625
634¥26,993840
584¥116,289
1,465
1,218

31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has entered into various derivative transactions in order to manage certain risks arising from adverse fluctuations in foreign
currency exchange rates and interest rates.
At March 31, 2003 and 2002, the disclosure of fair value information for derivatives has been omitted since all derivatives have beenaccounted for as hedges.

Annual Report 2003 NEC System Integration & Construction, Ltd.

Thousands of U.S. dollars

Year ended March 31, 2003

Information
andnetwork
integration

Intelligent
building
and facility
engineering

Operation
andmaintenance

Total

I. Sales:(1) Sales to third parties...................................
(2) Intersegment sales......................................
Total sales....................................................
Operating expenses.........................................
Operating income ............................................

$1,156,381—
1,156,381
1,101,897$ 54,143$187,679—
187,679
175,183$ 12,488$339,958—
339,958
312,113$ 27,837$1,684,018—
1,684,018
1,589,534$ 94,484$———
47,263$(47,263)$1,684,018—
1,684,018
1,636,797$ 47,213

II. Assets, depreciation expenses, capital expenditures:
Assets ..............................................................
Depreciation expenses ....................................
Capital expenditures........................................

$ 558,527
1,980
1,830

$ 97,27142
0$ 87,080
3,170
3,436

$ 742,887
5,200
5,275

$224,567
6,988
4,859

$ 967,463
12,188
10,133Eliminations
or Corporate

Consolidated

Eliminations
or Corporate

Consolidated

Millions of yen

Year ended March 31, 2002

Information
andnetwork
integration

Intelligent
building
and facility
engineering

Operation
andmaintenance

Total

I. Sales:(1) Sales to third parties...................................
(2) Intersegment sales......................................
Total sales....................................................
Operating expenses.........................................
Operating income ............................................

¥165,557—
165,557
159,737¥ 5,820¥27,028—
27,02826,734¥ 293¥37,478—
37,47833,498¥ 3,979¥230,064—
230,064
219,971¥ 10,093

¥

—
—
—
5,567
¥ (5,567)¥230,064—
230,064
225,538¥ 4,526

II. Assets, depreciation expenses, capital expenditures:
Assets ..............................................................
Depreciation expenses ....................................
Capital expenditures........................................

¥ 75,511
202
782¥17,4743
0¥12,371279
606¥105,357
486
1,389¥30,814613
1,176¥136,172
1,099
2,565

32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Geographical segments
As net sales and total assets of the foreign operations constituted less than 10% of the consolidated totals for the years ended March 31,
2003 and 2002, the disclosure of geographical segment information has been omitted.
Overseas sales
As overseas sales constituted less than 10% of the consolidated net sales for the year ended March 31, 2003, the disclosure of overseas
sales information was omitted.
Overseas sales, which include export sales of the Company and its domestic consolidated subsidiaries and sales (other than exports toJapan) of its foreign consolidated subsidiaries, for the year ended March 31, 2002 is summarized as follows:
Millions of yen
Year ended March 31, 2002

Overseas sales ..........................................................................................
Consolidated net sales ..............................................................................
Ratio of overseas sales to consolidated net sales ....................................

Asia

South America

Other

Total

¥18,901—
8.2%¥6,185—2.7%¥5,350—2.3%¥ 30,438
230,064
13.2%

17. SUBSEQUENT EVENTS(i) The following appropriations of retained earnings of the Company, which have not been reflected in the accompanying consolidated
financial statements for the year ended March 31, 2003, were approved at a meeting of the shareholders held on June 27, 2003:

Cash dividends (¥5.00 = $0.042 per share)....................................................................................................
Bonuses to directors and statutory auditors ..................................................................................................
(ii) On June 27, 2003, the shareholders approved a stock repurchase plan as described below:a) Class of shares to be repurchased:
Shares of common stock of the Companyb) Aggregate number of shares to be repurchased: Up to 21,500,000 shares (5% of the outstanding shares)c) Aggregate amount of repurchase price:
Not to exceed ¥2,000 million

NEC System Integration & Construction, Ltd. Annual Report 2003

Millions of yen

Thousands of
U.S. dollars

¥215
51

$1,789424

REPORT OF INDEPENDENT AUDITORSThe Board of Directors and Shareholders
NEC System Integration & Construction, Ltd.

We conducted our audits in accordance with auditing standards, procedures and practices generally
accepted and applied in Japan. Those standards, procedures and practices require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of NEC System Integration & Construction, Ltd. and consolidated subsidiaries
at March 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for theyears then ended in conformity with accounting principles and practices generally accepted in Japan.

33
REPORT OF INDEPENDENT AUDITORS

We have audited the accompanying consolidated balance sheets of NEC System Integration & Construction,
Ltd. and consolidated subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements
of income, shareholders’ equity, and cash flows for the years then ended, all expressed in yen. These
financial statements are the responsibility of the Company’s management. Our responsibility is toindependently express an opinion on these financial statements based on our audits.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year
ended March 31, 2003 are presented solely for convenience. Our audit also included the translation of yen
amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis
described in Note 3 to the consolidated financial statements.

June 27, 2003
See Note 1 to the consolidated financial statements which explains the basis of preparation of the consolidated financial
statements of NEC System Integration & Construction, Ltd. and consolidated subsidiaries under Japanese accounting
principles and practices.

Annual Report 2003 NEC System Integration & Construction, Ltd.

DIRECTORS AND CORPORATE AUDITORS(as of June 27, 2003)

DIRECTORSCORPORATE AUDITORSPRESIDENT

Mamoru Kataoka (full-time)
Tsunatoshi Sakakura (full-time)
Kunitomo Matsuoka
Yasuo Matoi

Yukihiko Baba

SENIOR VICE PRESIDENTS
Hitoshi Kinoshita
In charge of Networks Operations Unit, Plant Engineering Division, and
SI & Services Operations Unit

Hideaki Kihara
In charge of Administration Division, Personnel Relations Division,
New Business Promotion Office, Information Systems Division, Staff Center
Corporate Planning Division, and Corporate Finance & Controller Division

Sadao Harada34

In charge of Purchasing Division and Regional Operations Group

DIRECTORS AND CORPORATE AUDITORS/NETWORK

Hiroshi Watanabe
In charge of Marketing & Sales Development Unit

Yukio Yamazaki

NETWORK(as of March 31, 2003)

Head Office:Subsidiaries and Affiliates:

1-39-9 Higashishinagawa, Shinagawa-ku,
Tokyo 140-8620, Japan
Tel: +81-3-5463-1111
Fax: +81-3-5463-7781
http://www.nesic.co.jp

NESIC BRASIL S/A
Head Office: São PauloEstablished: November 1, 1976

Domestic Regional Offices:

NESIC CHILE S.A.
Head Office: Santiago
Established: December 4, 1989

Hokkaido, Tohoku, Shinetsu, Kitakanto,
Chiba, Kanagawa, Shizuoka, Chubu,
Hokuriku, Kansai, Keiji, Kobe, Shikoku,
KyushuNESIC (Thailand) Ltd.
Head Office: Bangkok
Established: March 7, 1991

Overseas Representative Offices
Brazil, Chile, Thailand, Philippines,
Indonesia, China

NESIC PHILIPPINES, INC.
Head Office: Manila
Established: April 10, 1991
P.T. NESIC BUKAKAHead Office: Jakarta
Established: May 10, 1993
NESIC (GUANGZHOU) CO., LTD.
Head Office: Guangzhou
Established: August 4, 1998

NEC System Integration & Construction, Ltd. Annual Report 2003

INVESTOR INFORMATION(as of March 31, 2003)

NEC SYSTEM INTEGRATION & CONSTRUCTION, LTD.
Established:

Distribution of Shareholders:November 26, 1953

Securities Companies 0.66%
Foreign Investors 6.43%

Number of Employees:
3,163 (non-consolidated)
4,331 (consolidated)

Individuals and Others 20.89%
Financial Institutions 42.41%

Fiscal Year:
April 1 — March 31
Annual meeting held in June

Domestic Companies 29.61%

Common Stock Authorized:
Major Shareholders:

100,000,000 shares

Issued:Percentage
of Total
SharesOutstanding

NEC Corporation

11,29126.22%

6,400
2,860
2,069
1,200
860
633

14.86
6.64
4.81
2.79
2.00
1.47

507
491
476

1.18
1.14
1.11

Japan Trustee Services Bank, Ltd.

Number of Shareholders:(re-entrustment of portion of NEC Corporation
retirement benefit trust account held by
The Sumitomo Trust and Banking Company, Limited)

17,138Paid-in Capital:¥13,122 million

Listing:
The Tokyo Stock Exchange, First Section(Ticker Code: 1973)

Transfer Agent:
The Sumitomo Trust and Banking Company, Limited
4-4 Marunouchi 1-chome, Chiyoda-ku,
Tokyo 100-8233, Japan

Independent Auditor:

Japan Trustee Services Bank, Ltd. (trust account)
The Master Trust Bank of Japan, Ltd. (trust account)
Sumitomo Realty & Development Co., Ltd.
Employees’ Stock Ownership Plan
UFJ Trust Bank Limited (trust account A)
The Sumitomo Trust and Banking
Company, Limited (trust account B)
Trust & Custody Services Bank, Ltd. (trust account A)
The Chase Manhattan Bank 380560

35
INVESTOR INFORMATION

43,069,207 shares

Name of Shareholder

Number of
Shares Held(Thousands)

Note: In a Notification of Change (notification under Article 27-26-2 of the Securities and Exchange Law) dated
March 12, 2003 and submitted by Nomura Securities Co., Ltd., the Company received notification that Nomura
Asset Management Co., Ltd. held 3,053 thousand shares of the Company’s stock as of February 28, 2003.
However, the Company was unable to determine the actual number of shares held as of March 31, 2003.

Shin Nihon & Co.

MONTHLY STOCK DATA (TOKYO STOCK EXCHANGE)
(Yen)
3,000

Monthly Stock Price Range
Common stock price range (¥)

Tokyo Price Index Close

2,500
2,000
1,500
1,000
500
0
(Thousands of Shares)
3,500

Monthly Trading Volume

3,000
2,500
2,000
1,500
1,000
500
0
1999

2000

2001

2002

2003

Annual Report 2003 NEC System Integration & Construction, Ltd.

1-39-9 Higashishinagawa, Shinagawa-ku, Tokyo 140-8620, Japan
http: //www.nesic.co.jp

This annual report is printed on recycled paper.
Printed in Japan