Selection. Growth. and. Annual Report Year ended March 31,2003

Transcription

1 Selection and Annual Report Year ended March 31,2003 Growth

2 Profile Corporate Mission The mission of NIF Ventures Co., Ltd. is to contribute to the global New Economy through its private equity business. Management Policies 1. Focus on the private equity business 2. Invest globally and build a worldwide network 3. Take a hands-on approach to spur growth in portfolio companies Maxims for Employees Ever Forward 1. Boldly rise to the challenge of innovation 2. Practice true venture capitalism NIF Ventures, a member of Daiwa Securities Group mainly engaged in venture capital investment, provides equity financing and a broad array of other services to assist venture companies in maximizing their corporate value as they boldly meet the challenge of the future. In addition, NIF Ventures provides investment opportunities to corporate and individual investors through the Investment Enterprise Partnerships it manages. NIF Ventures has amassed a wealth of experience in global perspectives and technical assessments in the 20 years since its founding, and the Company has readily available integrated supports of the Daiwa Securities Group. Not satisfied to rest on our laurels, NIF Ventures is committed to enhancing these advantages in the years to come. Ever Forward, our guiding precept, expresses our mission of advancing ever forward with start-ups as they fulfill significant roles in the success of Japan s industrial restructuring. Fin Contents Financial Highlights Year in Review To Our Shareholders Business Model Business Performance Management's Discussion and Analysis Consolidated Financial Statements Board of Directors Global Network Corporate Data Shareholder Information Forward-Looking Statements This annual report contains forward-looking statements related to management s projections about future business conditions. Actual business conditions may differ significantly from management s expectations and accordingly affect our sales and profitability. Actual results may differ as a result of factors over which we have no control, including unexpected changes in competitive and economic conditions, government regulations, technology and other factors.

3 NIF Ventures Co., Ltd. and its Consolidated Subsidiaries (Years Ended March 31, 2001 through 2003) Years ended March 31: Total net sales... Total cost of sales... Gross profit... Operating profit (loss)... Net income (loss)... 11,500 10, (3,344) (9,635) 17,226 9,349 7,877 3,313 3,264 20,586 10,521 10,065 4,970 2,668 95,833 89,533 6,300 (27,867) (80,292) As of March 31: Total assets... Total shareholders' equity ,175 20, ,847 33, ,101 24, , ,475 Yen Per share data: Net income (loss)*... Cash dividends paid... Shareholders' equity*... (33,339.75) 70, , , , , ,500 93, (277.83) Other data: Number of employees** Notes : 1. Unless indicated otherwise, all dollar figures herein refer to U.S. currency. Dollar amounts represent translations at the rate of 120=U.S.1, the rate prevailing on March 31, Net income (loss) and shareholders' equity per share are computed based on the average number of shares outstanding during the year. 3. NIF Ventures Co., Ltd. (the "Company", formerly Daiwa Finance Co. Ltd.) merged with Nippon Investment & Finance Co. Ltd. on April 1, *. On August 1, 2001, the Company made a stock split at the ratio of 10 shares of stock (with par value of 5,000) for each share of stock (with par value of 50,000) held. The amounts per share for 2001 were computed based on the effect of the stock split on the beginning balance of the year. And per share data of 2001 is adjusted retroactively to reflect the stock split. **.Figures are the sum of the Company and its consolidated subsidiaries. 1 ancial Highlights Total net sales () 20,586 17,226 Operating profit (loss) () 4,970 3,313 Net income (loss) () 3,264 2,668 11, (3,344) (9,635) Total assets () 125, , ,175 Total shareholders' equity () 24,746 33,865 20,

4 Year in Review 2002 June Venture Capital Investment Limited Partnership NIF Global Fund established 2002 July Business alliance formed with Merlin Biosciences Ltd. of the U.K September Acquired shares of K.K. Higa Industries 2002 October Regional revitalization fund jointly established with The Ashikaga Bank, Ltd December Seconded a joint researcher to the Office of University Corporate Relations of the University of Tokyo 2003 January Joined membership of Isis Innovation Ltd. of Oxford University of the U.K January Academia-industry cooperation fund established, jointly with the Japan Small & Medium Enterprise Corp February Regional revitalization fund established, jointly with The Bank of Kansai, Ltd March Fund specializing in buyout jointly established with Aozora Bank, Ltd March Business alliance formed with Campus Create Co., Ltd.

5 I would like to extend my best wishes to you all. I was appointed as president of NIF Ventures Co., Ltd. at a meeting of the board of directors following the 20th annual general shareholders' meeting. I will devote myself to the development of our business and the improvement of shareholder value in order to meet your expectations. During fiscal year 2002 (from April 1, 2002 to March 31, 2003), difficult conditions continued for the Japanese economy, with no real prospects for recovery due to the influence of the uncertainty over the world economy, while share prices declined to the levels of 20 years ago, around the time of the firm's inception. The Japanese economic situation is expected to remain harsh in the near term. As the private equity business in which we are engaged is to seek the growth To Our Shareholders seek the growth potential of companies and industries... encourage the creation of venture businesses... improve our business performance as a comprehensive private equity house potential of companies and industries from the medium and long-term perspectives, we believe we have enormous business chances in light of "sowing the seeds for the future" at a time when investment costs are low. Furthermore, there have been new positive signs for the private equity business, including moves to encourage the creation of venture businesses, which will serve as the driving force for the newly born industries stemming from the collaboration between the academic and industrial sectors as well as regional clusters, and the expansion of the business buyout markets following the reform of industry structures in Japan. Capitalizing on such new trends, we will do our utmost to improve our business performance as a comprehensive private equity house. We earnestly request the continued support of our shareholders. Shin-ichi Yamamura, President & CEO

6 Business Model Operations as a comprehensive private equity house The corporate mission of NIF Ventures Co., Ltd. is to "contribute to the global New Economy through its private equity business." We acquire shares of unlisted companies as well as provide management supports to nurture them to raise their corporate value. We can make profits through the sale of our shareholdings after the public listing of shares and sales of shares through M&A. We can also earn administrative fees and success fees by establishing and managing investment funds. The private equity business is divided into two types of investment: venture investment in enterprises which have innovative technologies or business models; and buyout investment aimed at restructuring and revitalization of companies or businesses. We have mainly engaged in venture investment since our founding. The buyout business market has been rapidly expanding in the past several years, following the trends for realignment of companies and industries, aimed at reviving the Japanese economy. It is drawing attention to market of growth potential. In response to such moves, we set up a task force specializing in buyout investment in fiscal 2001 to be prepared for our entry into the field of buyout investment, and fully entered into the market during fiscal We will operate as a comprehensive private equity house by further strengthening the field of buyout investment to make it our core business, along with the venture investment, by optimally leveraging the know-how and experience we fostered through venture investment in the buyout investment field. Progress to become comprehensive private equity house Buyout division: identifying new targets Private equity Debt Corporate restructuring MBO Venture investment Buyout investment Equity VC New targets Seed Incubation Mature industry

7 Finding high-potential investment targets We are seeking out companies for prospective investment via extensive external networks, including Daiwa Securities Group and domestic, as well as overseas business alliance partners, primarily utilizing extensive personal networks by our personnel in charge of investment. We are also closely watching the predominant trends of academia-industry cooperation, and proactively deepening our ties with universities. Hands-on approach We are providing various kinds of support to improve corporate value of our investee companies. In addition to direct involvement in the management of companies by seconding directors to them or the introduction of personnel and business alliance partners, we can also take a technical hands-on investment approach, since we formed a business alliance with Campus Create Co., Ltd., the technology licensing organization (TLO) of the University of Electro-Communications, in March this year. Finding Due diligence Execution on investment Hands-on approach EXIT 4.5 Due diligence on prospective investment targets We are systematically and widely carrying out due diligence, including reviewing business plans by officers in charge of investment and detailed examinations of financial information, as well as investigations into industrial trends by the middle office section. We also have a technical advisor office, which includes former major electric manufacturers, university professors among others. The office has enabled us to make advanced technical assessments in the fields which require various expertise such as in IT and biotechnology-related categories. Consulting Introduction of human resources Introduction of business alliance partners Secondment of directors EXIT We recoup the full amount of investment through merger and acquisition, or public offering of shares. Of the total 1,475 firms in which we have invested, 442, accounting for some 30% of the total, had gone public by the end of March Execution of investment Our investment decisions are made after extensively deliberating on the propriety of each investment project in the Investment Committee.

8 Business Performa (1) Academia-industry cooperation field The U.S. government has been pushing forward with policies to link intellectual assets of universities and other academic institutions with businesses since the 1980s in a bid to revitalize the economy. As a result, the establishment of start-ups originating in universities is proliferating. In Japan, considerable hopes are pinned on the creation of new industries and businesses and the production of venture businesses by spinning off technologies developed on university campuses, as a means to enable the nation to get out of the prolonged economic doldrums. The Japanese government proposed a "plan to create 1,000 start-ups originating from universities," and is promoting cooperation of industrial, academic and government sectors for their knowledge and expertise. With the number of venture companies emerging from universities standing at 531 at the end of March 2003, the government's efforts to bring the total to 1,000 by the end of fiscal 2004 are now within reach. We are striving to find and invest in seeds emerging from universities and early-stage companies. We had invested in 17 venture businesses originating in universities by the end of March 2003, of which Trans Genic Inc. went public on the Mothers market of the Tokyo Stock Exchange in December We concentrated our efforts on the building of networks with universities and the establishment of funds fostering collaboration between the academic and the industrial sectors in fiscal We seconded a joint researcher to the Office of University Corporate Relations, established by the University of Tokyo with a view to promoting the cooperation between universities and the public, in December We are jointly conducting "trial research on the feasibility schemes of companies emerging from universities" to promote the commercialization of technical seeds and creation of venture firms originating in the University of Tokyo. We also seconded an innovation fellow to the Kyoto University International Innovation Center and formed a business alliance with Campus Create Co., Ltd., the TLO of the University of Electro- Communications in March 2003, further enhancing our networks with universities. We joined the Isis Innovation Ltd. forum of Oxford University in January 2003, following our designation as a founding member of the University of Cambridge Entrepreneurship Center in fiscal We will enhance and expand the academiaindustry cooperation function by utilizing the results of such joint research and business alliances in nurturing and assisting start-ups and hands-on approach, to our portfolio companies. We established "Venture Capital Investment Limited Partnership NIF University-Industry Fund 1," with the capital of 2 billion yen, in January 2003, jointly with the Japan Small & Medium Enterprise Corporation. The fund is aimed at primarily investing in start-up firms based on technologies developed on university campuses from the start-up stage, irrespective of region or business category. Assistance for and enhancement of overall management, in addition to financial aid, is indispensable to the growth of startup firms. The fund is also based on a hands-on investment approach, featuring direct involvement in the management of portfolio companies. Hands-on approach to portfolio companies by utilizing the collaboration between the academic and the industrial sector University of Electro-Communications Consultation and joint research by university professors and graduate school students NIF NIF-backed companies Campus Create Co., Ltd. (TLO of the University of Electro-Communications) Start-ups with technological problems

9 nce (2) Biotechnology-related venture businesses With the aging population and environmental issues becoming increasingly critical, biotechnology is expected to make contributions in various industrial categories, including medicine and eco-friendly energy, toward the achievement of longevity and health, as well as the realization of a sustainable recycling society. In Japan, biotechnology industry is positioned as a strategic industry of the 21st century, along with IT. The government is pushing forward with the building of infrastructure aimed at creating biotechnology-based industries. The Biotechnology Strategy Council, headed by Prime Minister Junichiro Koizumi, has set a goal of creating a market worth about 25 trillion and over 1 million jobs by 2010 for the new biotechnology sector. We are also closely monitoring biotechnology industries as a promising market and proactively investing in biotechnology companies. As part of our strenuous efforts to build overseas networks, we formed a business alliance in fiscal 2002 with Merlin Biosciences Ltd. of the U.K., the largest European venture capital provider specializing in investment in bio-related companies. Under this accord, we will receive information and support from Merlin, while we will jointly invest in bio-related start-ups spotted by Merlin as well as cooperate with the British partner to closely review biotechnology investment proposals. NIF Ventures has a Technical Advisor System in place to handle technical assessments of prospective investment targets. We increased the number of Technical and Business Advisors, who are specialized in biotechnology fields, from three to nine. We will continue to enhance investment in biotechnology companies by assessing state-of-the-art biotechnologies from the academic and business perspectives. 6.7 Future prospects for new biotechnology industries about 25 trillion yen 8.4 trillion yen Bio-medical industry Preventive medical treatment, tailor-made medical care and regenerative medical services 1.3 trillion yen 6.3 trillion yen 4.2 trillion yen 5.3 trillion yen At present 2010 Source: "Compilation of strategical overview of Biotechnology" of the Biochemical-Industry Division of the Ministry of Economy, Trade and Industry Bio-food industry Functional food, microbial materials and bio-inspection equipment Bio-environmental/Bio-process industries Biomass energy, plant-based plastics and high-performance chemicals Bio-tool / Information industries Development of clinical tools and research support tools, and the proliferation of such tools to industries other than the medical industry

10 Business Performa (3) Regional revitalization Based on the recognition that revitalization of regional economies is indispensable to the medium and long-term development of the Japanese economy, the Ministry of Economy, Trade and Industry is currently promoting an "industrial cluster plan" (regional revitalization/industrial accumulation plan). The advancement of such a plan and the growth of start-ups in regional communities offer the possibility of leading to the development and revitalization of regional industries and expansion of regional employment, thus creating next-generation industries. We have been doing our utmost to discover and nurture start-up firms that will play a leading role in regenerating regional economies, as well as striving to establish regional revitalization funds jointly with regional banks, Shinkin banks (or credit associations) and other institutions. We established the "Ashikaga Enterprise Development Fund No. 1 Venture Capital Investment Limited Partnership" in October 2002 with The Ashikaga Bank, Ltd. and a "Kansai Venture Development Fund No. 1 Venture Capital Investment Limited partnership" in February 2003 with The Bank of Kansai, Ltd. Situation of establishment of regional revitalization funds The Akita Bank, Ltd. The Ashikaga Bank, Ltd. Shonan Shinkin Bank The Bank of Kyoto, Ltd. Hiroshima Industrial Promotion Organization Yamaguchi Capital Co., Ltd. The Bank of Ikeda, Ltd. Existing Fiscal 2002 The Bank of Kansai, Ltd.

11 nce (4) Buyout investment We set up a special task force to enter the buyout business in fiscal 2001, and acquired 67% of the outstanding shares of K.K. Higa Industries in September 2002 through the firm's third party share allocation and the subsequent share transfer. K.K. Higa Industries obtained the franchise in Japan for the U.S. Domino's Pizza chain in 1985, and has contributed to the establishment of the door-todoor pizza delivery business in Japan as a pioneer in the market. We are working on business restructuring and management reform of K.K. Higa Industries to improve its corporate value. We established a 60 billion-yen buyout fund, "Take-off Japan No. 1 Venture Capital Investment Limited Partnership," in March 2003, jointly with Aozora Bank, Ltd. The first fund specializing in buyout investment in small and medium-sized companies in Japan, which have excellent management resources, in order to aid their business restructuring. The extensive network of small- and medium-sized companies in which Aozora Bank has a stake, as well as the bank's investment track record in the buyout businesses, are expected to have a substantial synergistic effect on our know-how of investing in and nurturing of start-up companies. The buyout investment fund is jointly managed by our wholly owned subsidiary NIF Buyout Management Co., Ltd. and JABOC, Ltd., a subsidiary of Aozora Bank. 8.9 Enhancement of buyout investment Utilization of venture investment track record and know-how Abundant investment track record Extensive networks Technical assessment/ evaluation of marketability Hands-on approach Asset liquidation know-how Utilization of financial restructuring know-how Full-scale entry into buyout investment market January 2002 Buyout investment division established September 2002 Acquired shares of K.K. Higa Industries March 2003 Joint fund established, with Aozora Bank Enhancement of buyout investment Sourcing capability Hands-on approach and improvement of corporate value Establishment of funds Financial restructuring capability

12 Management, sdiscu Business Environment Performance During fiscal year 2002 (from April 1, 2002 to March 31, 2003), the economic recovery in the U.S., which appeared to be on its way at the beginning of the year, was unlikely with the worsening of the employment climate, as well as the cooling down of consumer confidence, mainly due to such factors as sluggish stock markets, bankruptcies of major companies and geopolitical risks. Though the European economy showed signs of a gentle recovery at first, it decelerated in the latter half of the year as the global economy, including the U.S. economy, tapered off. While China achieved continued growth, the overall Asian economy only recovered slightly. The Japanese economy remained sluggish, with few prospects for improvement. There were signs of a business recovery at the beginning of the year because of the expansion of exports to the U.S. and the effects of corporate restructuring. However, while the world economy was uncertain with laggard stock markets, the domestic demands (including consumer spendings and capital investments) did not pick up due to the worsened employment conditions, the slow-down of export growth and the prolonged problems of non-performing loans by financial institutions. In fiscal 2002, a total of 105 companies were newly listed in the three young domestic stock markets of Jasdaq, TSE Mothers and OSE Hercules (formerly Nasdaq Japan), a sharp decline from 147 of the previous fiscal year. Under such circumstances, the consolidated business results of NIF Ventures in fiscal 2002 were lackluster. Due to the stagnation in the stock markets around the globe, the number of our investee companies which went public was down to 17 from 24 in the preceding fiscal year. As proceeds from sales of operational investment securities stood at 7,180 million, down 39.3% from the previous fiscal year, consolidated net sales decreased to 11,500 million, a 33.2% reduction from the previous year and capital gain declined to 3,305 million, a 40.3% decrease from the previous year. Valuation losses of operational investment securities increased to 2,087 million, up 127.8% from the previous fiscal year, due to falls in stock prices. Gross profit plunged to 756 million, a year-on-year reduction of 90.4%, since we recorded 3,853 million, a yearly increase of 378.4%, in provision for possible investment losses after examining the financial positions of unlisted investee companies more conservatively. Selling, general and administrative expenses were reduced to 4,100 million, a 10.2% reduction from a year earlier, mainly thanks to our efforts to curb expenses. However, we posted an operating loss of 3,344 million, against an operating profit of 3,313 million in the previous fiscal year. We booked other expenses of 6,246 million, including: valuation losses of investment securities of 3,968 million up 878.1% from fiscal 2001; and a provision for doubtful accounts of 2,832 million based on the more conservative DCF method for receivables. As a result, we posted a net loss of 9,635 million, against a net income of 3,264 million in the previous fiscal year.

13 sion and Analysis Sales breakdown () Proceeds from sales of operational investment securities/capital gain () 20,000 15,000 10,000 5, , ,737 17, ,586 4,631 2,629 11, ,127 2,590 12,637 12,446 7, Other Interest income from loans Investment management fees Revenues from operational investment securities 12,000 10,000 8,000 6,000 4,000 2, ,970 6, ,831 5, ,180 3, Capital gains Cost of sales Amount of allowance for possible investment losses () Changes in provision for doubtful accounts () ,158 39,695 40,000 20% 36,617 Non-listed operational investment securities 3,000 2,832 30,000 20,000 15% 13.0% Rate of allowance for possible investment losses 10% 2,000 10, % 1, % 1, , % Balance of allowance for possible investment losses 0% 1,

14 Management, sdiscu Investment Strategies and the Results in Fiscal 2002 The market climate for investment business remained harsh in fiscal 2002 as stock markets were sluggish. As we regard such market environment as a good opportunity for our future growth to invest in companies with large potentials at reasonable cost, we proactively invested in venture companies that looked promising from a mid- to long-term perspective. NIF Ventures and its consolidated subsidiaries invested a total of 20,056 million, a yearly increase of 23.3% in 89 companies. Of the total, "direct investment" category (Note 1) accounted for 5,835 million, up 4.5% from a year earlier, while "investment enterprise partnerships" category (Note 2) amounted to 14,221 million, up 33.2% from a year earlier. As a result, the investment balance at the end of fiscal 2002 stood at 83,846 million, a yearly increase of 5.3% in 697 companies. Our total investments in Japan in fiscal 2002 were almost equal to those in overseas, as was the case in fiscal Investment in Asia outside Japan increased to 3,572 million, a 185.3% increase from a year earlier, as we jointly invested in Chinese companies with Taiwanese venture capital companies. Though the proportion of investment in Europe and other regions fell to 11.2% from the previous year's 11.7%, the value of the investment in those regions increased to 2,247 million, a 17.6% rise from a year earlier. Investment breakdown by business category showed that investment in the biotechnology-related category, which was expected to grow, soared to 2,413 million, up 228.9% from the previous fiscal year. In the buyout division, on which we were putting our efforts to make it a core business along with the venture capital investment, we purchased 67% of Amount of investment the outstanding shares of K.K. Higa Industries for approximately 4,000 million in September 2002, and provided management supports, such as the secondment of directors to the company. Portfolio Europe, other Asia 15.7% by Region 6.9% North America 17.0% Investment balance 83.8 billion Japan 60.4% Materials, chemistry 3.8% Finance 4.9% Bio-related 6.6% Retail / Foods 6.6% Machinery, autos by Business category Consumables 10.7% Services Business result of each business segment is as follows. [Investment Business] (Investment Service) A total of 17 investee companies went public in the fiscal year (14 domestic and 3 overseas companies). This brought the aggregate number of investee companies to 1,475 as of March 31, 2003, of which 442, or some 30% of the total, went public. Proceeds from sales of operational investment securities in the fiscal year totaled 7,180 million, down 39.3% from the previous year. With dividend and interest income of 226 million added (a 63.3% decrease from the previous year), revenues from operational investment securities stood at 7,406 million, down 40.5% from fiscal % 8.5% Investment balance 83.8 billion Performance by Segment Number of investee companies which went public Construction /Real estate 3.7% 44.7% Other 3.0% IT related (computers, telecommunications, electronics) by Region Europe, other 11.2% North America Annual 21.3% investment 20.1 billion Asia 17.8% Japan 49.7% by Business category IT related Other (computers, Bio-related 12.6% telecommunications, electronics) 12.0% Annual investment 49.6% 20.1 Retail / billion Foods 21.7% 4.1% Services Overseas Japan

15 sion and Analysis (Management and Administration of Investment Funds) In fiscal 2002, six new investment funds where NIF Ventures or its consolidated subsidiaries make independent investment decisions were established by NIF Ventures. <They were: "Venture Capital Investment Limited Partnership NIF Global Fund," "Ashikaga Enterprise Development Fund No.1 Venture Capital Investment Limited Partnership," Investment Enterprise Partnership "NIF. BE Fund," "Venture Capital Investment Limited Partnership NIF University-Industry Fund 1," "Kansai Venture Development Fund No.1 Venture Capital Investment Limited Partnership" and "Take-off Japan No.1 Venture Capital Investment Limited Partnership."> The aggregate paid-in amount of new investment funds came to 20,673 million in the fiscal year, an 8.1% reduction from the previous fiscal year. Management fees from investment funds stood at 2,590 million, down 1.5% from the preceding fiscal year. Of the total fees, administrative fees accounted for 2,586 million, a 1.6% increase from the previous fiscal year, and success fees amounting to 4 million, down 95.2% from a year earlier. We will continue to endeavor to increase administrative fee income in a bid to secure stable earnings. Net sales of investment business were 10,314 million, down 33.2% from the previous fiscal year, with operating losses of 4,004 million, against an operating profit of 2,650 million in fiscal Establishment of funds Billions of Yen Changes in management fees from Investment Enterprise Partnerships 5,000 4,000 3,000 2,000 1, ,631 2,300 2, , , [Finance Business] (Finance) NIF Ventures continued its efforts to monitor and collect outstanding debt claims in fiscal This resulted in operational loans of 13,767 million as of March 31, 2003, a yearly decrease of 31.7%, and the balance of defective credits decreased to 16,767 million (a yearly reduction of 11.3%) after deducting an allowance of 13,111 million for doubtful accounts. Interest income from loans fell to 1,127 million, a 28.9% decrease from the previous fiscal year. As a result, Finance Business posted net sales of 1,186 million, down 33.7% from the previous fiscal year, and operating profit of 660 million, a 0.3% decrease from a year earlier. Note 1: Investments from the proper account of NIF Ventures and its consolidated subsidiaries. Note 2: Investments from the account of investment funds managed by NIF Ventures and its consolidated subsidiaries. 4 2,590 2,586 success fee Administrative fee Changes in the balance of loan credits 60,000 50,000 40,000 30,000 52,077 26,868 39,049 20,145 30, ,000 10, , , ,767 16, Operational loans Defective credits (net of allowance for doubtful accounts)

16 Management, sdiscu Financial Position Current assets decreased to 73,657 million, down 7.4% from the previous fiscal year. This was chiefly because operational investment securities fell to 46,683 million, a yearly reduction of 7.9% and operational loans plunged to 13,767 million, a decrease of 31.7% from a year earlier, though cash and time deposits soared sharply to 12,411 million, an increase of 151.7% from a year earlier. Non-current assets declined to 27,518 million, a 17.4% reduction from the previous fiscal year. This was mainly attributed to the decrease in investment securities to 7,968 million, a 26.0% decrease from a year earlier, and the fall in defective credits to 16,767 million, down 11.3% from the previous fiscal year (after deducting allowance of 13,111 million for doubtful accounts). Total liabilities grew to 80,718 million, a 2.2% increase from the previous year. This was primarily due to the increase in long-term borrowings to 17,671 million, up 38.9% from the previous year, aimed at securing stable long-term funds. Total shareholders' equity decreased to 20,457 million, a 39.6% decrease from the previous fiscal year. This was mainly because retained earnings declined due to the net loss and the valuation losses of investment securities. Consequently, the shareholders' equity ratio (shareholders' equity to total assets) stood at 20.2% at the end of March 2003, down from 30.0% at Shareholders' equity ratio % % % 2003 the end of March The management considers the improvement of the ratio to be one of the most important managerial issues. Cash Flows The state of each cash flow and the important factors were as follows. Cash flows from operating activities increased by 5,345 million, compared with an increase of 16,192 million for the previous fiscal year. This was primarily due to efforts to recover operational loans and defective credits. Cash flows from investing activities decreased by 372 million, compared with a decrease of 2,157 million for the previous fiscal year. This was primarily due to payments for purchases of investment securities. Cash flows from financing activities increased by 3,099 million, compared with a decrease of 13,835 million for the previous fiscal year. This was primarily due to proceeds from long-term borrowings. As a result, cash and cash equivalents increased by 8,049 million, compared with an increase of 242 million for the previous year. The closing balance totaled 11,161 million, compared with 3,112 million for the previous year. Basic policy on Profit sharing Because of nature of private equity investment in general and global investment of NIF, our performance is affected by the domestic and also overseas stock market conditions. Our basic policy however is to steadily distribute profits to our shareholders over the fiscal years and to build up a more sufficient level of retained earnings for our business to be further developed. As for this fiscal year, it is regrettable to report that we are in a position to propose no dividend at the coming general shareholders' meeting scheduled on June 27, 2003.

17 sion and Analysis Basic Approach and the Current State of Our Corporate Governance We are working on the improvement of shareholder value by enhancing corporate governance in order to swiftly and appropriately respond to the ever changing business climate, to achieve continual growth and to further consolidate the management foundation. NIF have been enhancing corporate governance and functions for audit and compliance. In June 2002 a lawyer was assigned as one of the auditors to enhance the audit functions especially concerning compliance issues. Primary Management Objectives We will improve our business operations, financial conditions and management system to become a comprehensive private equity house supported by two pillars: existing venture capital investment and buyout investment where we endeavor to optimally leverage our accumulated know-how. The following are the primary objectives of NIF Ventures and its consolidated subsidiaries. (1) Strengthening of Deal-finding capabilities In addition to deal-finding capacity for venture investment, NIF have been further developing network and know-how for buyout investment. Collaboration with universities and the industrial clusters in regions are now enhancing our deal-flow for venture investment. side. We will much more focus on customer-made investment funds targeted for individual need. (4) Reinforcement of overseas investment While any deterioration in the economy and financial markets in the United States and the world affects NIF Ventures in no small way, the importance of global business development has grown even more pronounced as globalization of economic and corporate activities progresses even further. We will bolster our strengths in our global structure through an overhaul of the overseas network we have built to date and implement structural improvements, while forging closer ties with leading local partners and expanding our network. (5) Strengthening of financial position The liquidation of assets including operational investment securities issued by the investees, possibility of whose expected exit is quite small and the acceleration of collection and disposal of loan claims are our priorities to make our financial position much more sound (2) Strengthening of hands-on capabilities As we explained above, we now put priority on investments in seeds and early-stage ventures and buyouts for restructures of corporations. Hands-on support is much more important and indispensable for success of these investments. We are making best efforts to create an organizational system and strengthen the capabilities of individuals for handson support. (3) Strengthening of investment fund business In Japan, we are now in a market where there are needs of private equity capital for ventures and buyouts to revitalize Japanese economy and also needs for high-return financial products on the other

18 CONSOLIDATED BALANCE SHEETS NIF Ventures Co., Ltd. and Consolidated Subsidiaries March 31, 2003 and 2002 (Note 1) Assets: Current assets Cash and time deposits (Note 3)... 12,411 4, ,425 Operational investment securities (Notes 4 and 6)... 41,206 48, ,383 Operational investment funds ,100 5,833 Operational loans... 13,767 20, ,725 Other current assets (Note 7)... 5,613 3,656 46,775 Less : Allowance for doubtful accounts... (40) (40) (333) Total current assets... 73,657 79, ,808 Property and equipment (Note 8)... 1,796 2,083 14,967 Intangible assets ,492 Investment securities (Notes 5 and 6)... 7,968 10,769 66,400 Defective credits (net of allowance of 13,111million (109,077 thousand) in 2003 and 10,279 million in 2002)... 16,767 18, ,725 Other investments and other assets (Note 9) ,404 6, , , ,125 See accompanying notes.

19 (Note 1) Liabilities: Current liabilities Short-term borrowings (Note 10)... 48,500 51, ,166 Long-term borrowings due within one year (Note 10)... 12,809 11, ,741 Income taxes payable (Note 13) Deferred tax liabilities (Note 13) , Accrued bonuses Accrued expenses and other liabilities... 1, ,792 Total current liabilities... 62,488 65, ,733 Long-term borrowings (Note 10)... 17,671 12, ,258 Retirement benefits (Note 11)... Other long-term liabilities ,034 1, Shareholders' equity (Note 15): Common stock: Authorized 1,056,000 shares Issued 289,000 shares... 11,267 11,267 93,891 Capital surplus... 13,914 13, ,950 Retained earnings (deficit)... (3,573) 6,371 (29,775) Net unrealized gain (loss) on securities, net of tax effect... (1,180) 2,242 (9,833) Foreign currency translation adjustment Total shareholders' equity... 20,457 33, , , , ,125

20 CONSOLIDATED STATEMENTS OF OPERATIONS NIF Ventures Co., Ltd. and Consolidated Subsidiaries Years ended March 31, 2003 and 2002 (Note 1) Net sales: Revenues from operational investment securities (Note 4)... 7,406 12,446 61,717 Investment management fees (Note 12)... 2,590 2,629 21,583 Interest income from loans... 1,127 1,586 9,391 Other ,142 Total net sales (Note 16)... 11,500 17,226 95,833 Cost of sales: Cost of operational investment securities (Note 4)... 9,815 8,016 81,792 Interest expenses for operational assets ,178 7,050 Other Total cost of sales... 10,744 9,349 89,533 Gross profit ,877 6,300 Selling, general and administrative expenses (Note 17)... 4,100 4,564 34,167 Operating profit (loss) (Note 16)... (3,344) 3,313 (27,867) Other income (expenses) (Note 18)... (6,246) (47) (52,050) Income (loss) before income taxes... (9,590) 3,266 (79,917) Income taxes (Note 13): Current Refunds of income taxes... (3) (54) (25) Deferred Net income (loss)... (9,635) 3,264 (80,292) Yen (Note 1) Per share data: Net income (loss) (Note 15)... Cash dividends paid... (33,339.75) 12, (277.83) 1,000 See accompanying notes.

21 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NIF Ventures Co., Ltd. and Consolidated Subsidiaries Years ended March 31, 2003 and 2002 Number of shares of common stock Common stock Capital surplus Retained earnings (deficit) Net unrealized gain (loss) on securities, net of tax effect Foreign currency translation adjustment Balance at March 31, ,400 8,292 10,309 3,322 2,827 (4) Net income... 3,264 Stock split (Note 15) ,600 Issuance of stock (Note 15)... 25,000 2,975 3,605 Cash dividends... (176) Directors' bonuses... (39) Net unrealized loss on securities, net of tax effect... (585) Foreign currency translation adjustment Balance at March 31, ,000 11,267 13,914 6,371 2, Net loss... (9,635) Cash dividends... Directors' bonuses... (289) (20) Net unrealized loss on securities, net of tax effect... (3,422) Foreign currency translation adjustment... (42) Balance at March 31, ,000 11,267 13,914 (3,573) (1,180) 29 (Note 1) Common stock Capital surplus Retained earnings (deficit) Net unrealized gain (loss) on securities, net of tax effect Foreign currency translation adjustment Balance at March 31, , ,950 53,092 18, Net loss... (80,292) Cash dividends... (2,408) Directors' bonuses... (167) Net unrealized loss on securities, net of tax effect... (28,516) Foreign currency translation adjustment... (350) Balance at March 31, , ,950 (29,775) (9,833) 242 See accompanying notes.

22 CONSOLIDATED STATEMENTS OF CASH FLOWS NIF Ventures Co., Ltd. and Consolidated Subsidiaries Years ended March 31, 2003 and 2002 (Note 1) Cash flows from operating activities: Income (loss) before income taxes... Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation... Decrease in allowance for doubtful accounts... Increase in allowance for possible investment losses... Decrease in accrued bonuses... Increase in retirement benefits... Decrease in multiemployers' pension plan... Interest and dividend income... Interest expenses... Equity in net gains on investments of a non-consolidated subsidiary and an affiliated company... Valuation losses of investment securities... Gain on sales of investment securities, net... Gain on disposal and sales of fixed assets, net... Valuation losses related to fixed assets... Decrease (increase) in operational investment securities... Decrease in operational loans and defective credits... Directors' bonuses paid... Interest and dividends received... Interest paid... Income taxes paid... Other, net... Total adjustments... Net cash provided by operating activities... (9,590) 134 3,555 (89) 95 (1,652) 1,028 (4) 3,968 (479) (11) 168 (1,467) 8,512 (20) 1,619 (1,010) (35) ,935 5,345 3, (11) 695 (24) 83 (448) (2,384) 1,373 (5) 406 (299) (27) ,585 (39) 2,401 (1,428) (106) (1,745) 12,926 16,192 (79,917) 1,117 29,625 (742) 791 (13,767) 8,567 (33) 33,067 (3,992) (92) 1,400 (12,225) 70,933 (167) 13,492 (8,416) (292) 5, ,458 44,541 Cash flows from investing activities: Payments for purchases of property and equipment... Proceeds from sales of property and equipment... Payments for purchases of investment securities... Proceeds from sales and maturity of investment securities... Other, net... Net cash used in investing activities... (24) (2,775) 2,494 (67) (372) (42) 38 (3,527) 1, (2,157) (200) (23,125) 20,783 (558) (3,100) Cash flows from financing activities: Decrease in short-term borrowings, net... Proceeds from long-term borrowings... Repayments of long-term borrowings... Cash dividends paid... Proceeds from issuance of stock (Note 15)... Net cash provided by (used in) financing activities... (3,300) 17,760 (11,072) (289) 3,099 (12,300) 1,000 (8,890) (176) 6,531 (13,835) (27,500) 148,000 (92,267) (2,408) 25,825 Effect of exchange rate changes on cash and cash equivalents (23) 42 (191) Net change in cash and cash equivalents... Cash and cash equivalents at beginning of year... Cash and cash equivalents at end of year... 8,049 3,112 11, ,870 3,112 67,075 25,933 93,008 See accompanying notes.

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NIF Ventures Co., Ltd. and Consolidated Subsidiaries March 31, 2003 and Basis of consolidated financial statements NIF Ventures Co., Ltd. (the "Company") is a consolidated subsidiary of Daiwa Securities Group Inc. As of March 31, 2003, Daiwa Securities Group Inc. holds 79.2% of the Company, directly and indirectly. The Company's core business is venture capital investments. The Company and its consolidated domestic subsidiaries maintain their official accounting records in Japanese yen and in accordance with the provisions set forth in the Japanese Commercial Code and accounting principles and practices generally accepted in Japan ("Japanese GAAP"). The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles and practices prevailing in the respective countries of domicile. Certain accounting principles and practices generally accepted in Japan are different from International Accounting Standards and standards in other countries in certain respects as to application and disclosure requirements. Accordingly, the accompanying financial statements are intended for use by those who are informed about Japanese accounting principles and practices. The accompanying financial statements have been restructured and translated into English (with some expanded descriptions and the inclusion of statements of shareholders' equity) from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Securities and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying financial statements. The translations of the Japanese yen amounts into U.S. dollars are included solely for the convenience of the reader, using the prevailing exchange rate at March 31, 2003, which was 120 to U.S. 1. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. The consolidated financial statements for the year ended March 31, 2002 have been reclassified to conform to the presentation for Significant accounting policies Consolidation The consolidated financial statements include the accounts of the Company and its five significant subsidiaries (two domestic subsidiaries and three overseas subsidiaries) which are controlled by the Company through substantial ownership of more than 50% of the voting rights or through ownership of high percentage of the voting rights and the existence of certain conditions evidencing control by the Company of the decision-making body of such companies. Investments in an unconsolidated subsidiary and an affiliated company over which the Company has the ability to exercise significant influence in operation and financial policies of the investees are accounted for by the equity method. Cash and cash equivalents Cash and cash equivalents include cash on hand, readily-available deposits, and short-term investments with original maturities of not exceeding three months, which are highly liquid and virtually risk-free with respect to change in value. Securities The Company and its consolidated domestic subsidiaries classify all the securities they hold (the operational investment securities and the investment securities) as available-for-sale securities, except for investments in subsidiaries and affiliated companies. The available-for-sale securities with market value are stated at market value on the balance sheet date, and net unrealized gain and loss on the securities are reported, net of applicable income taxes, as a separate component of the shareholders' equity. Realized gains and losses on sale of such securities are computed using moving-average cost

24 Securities that do not have market value are stated at moving-average cost. The operational investment securities represent shares and bonds which are expected to go public in the future and have been successful in going public. There are two methods of investing, direct method and indirect method. As for the direct method, the Company invests directly to the private companies. As for the indirect method, the Company invests through investment partnerships to the private companies. Allowance for possible investment losses of operational investment securities is provided in amounts determined by management, considering actual financial conditions of investee companies. Investments in the investment partnerships As for investments in the investment partnerships, their assets, liabilities, profits and losses are recorded in the Company's financial statements in proportion to the Company's share of the investment partnerships' financial statements. Investments in the investment partnerships whose financial statements are not available are included in "Operational investment funds" in current assets. Derivative financial instruments The Company uses the derivative financial instruments to manage its exposure to interest rate fluctuation risks on borrowings, and not for trading nor speculative purposes. The derivative transactions used by the Company qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items except for special hedge accounting method noted bellow. Deferred hedge accounting method is applied for derivative financial instruments, which are used as hedges and meet certain hedging criteria. Under this accounting method, unrealized gains or losses resulting from changes in fair value are deferred as liabilities or assets until the related gains or losses on the hedged items are recognized. Special hedge accounting method is applied for interest rate swap contracts, which are used as hedges and meet certain hedging criteria. Under this accounting method, net amount of interests on the swap contracts are added to or deducted from the interests. Property and equipment Property and equipment are stated at cost less accumulated depreciation. The Company and its consolidated domestic subsidiaries compute depreciation generally by the declining-balance method, while the straight-line method is applied to the lease assets and to the buildings (excluding associated equipment and facilities) acquired after April 1, The useful lives for depreciation are generally stipulated by Corporation Tax Law, while the useful lives of the lease assets are their lease period. Consolidated overseas subsidiaries use the straight-line method based on local accounting standards. Intangible assets Intangible assets are stated at cost less accumulated amortization, computed by the straight-line method. Allowance for doubtful accounts Allowance for doubtful accounts of the Company and its consolidated domestic subsidiaries are provided based on the historical deterioration rate for normal loans, and the allowance specifically assessed for defective credits. Consolidated overseas subsidiaries provide specifically assessed amounts. Bonuses The Company and its consolidated domestic subsidiaries follow the Japanese practice of paying bonuses to employees in June and December. Accrued employees' bonuses represent liabilities estimated as of the balance sheet date. Bonuses to directors, which are subject to approval at the shareholders' meeting, are accounted for as an appropriation of retained earnings. Retirement benefits The Company provides an unfunded retirement benefits plan to its employees in return for services rendered each year, where the amount to be contributed to the individual employees' account is defined rather than the amount of retirement benefits the employee is to receive. Under this unfunded plan, retirement benefits are accumulated

25 on an annual basis by contribution of the Company and earn a guaranteed hypothetical return at the rate of which the Company predetermines each year. The Company introduced defined contribution pension plan in December Income taxes Income taxes consist of corporate, enterprise and inhabitants taxes. The provision for income taxes is computed based on the pretax income of each of the Company and its consolidated subsidiaries with certain adjustments required for tax purposes. Deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial reporting and the tax bases of the assets and liabilities based upon enacted tax laws and rates. The Company recognizes deferred tax assets to the extent they are expected to be realized. Deferred tax assets and liabilities are reported as "deferred income taxes" in the accompanying consolidated balance sheets. Deferred tax expense or benefits are recognized in the consolidated statements of operations for the changes in deferred tax assets and liabilities between years. Interest expenses Interest expenses are divided into those associated with operational assets and the others, based on the averaged asset balances. Those associated with operational assets are included in "Cost of sales" and the others are included in "Other expenses". Translation of foreign currency The Company and its consolidated domestic subsidiaries translate assets and liabilities denominated in foreign currencies into yen at yearend exchange rate. Financial statements of overseas subsidiaries are translated into yen on the basis of the year-end rates for assets and liabilities except that retained earnings are translated at historical rates. Income and expenses are translated at the average rates for the years. The resulting differences are reported as translation adjustment in shareholders' equity. Treasury stock and reversal of statutory reserves Effective April 1, 2002, the Company adopted the new accounting standard for treasury stock and reversal of statutory reserves (Accounting Standards Board Statement No.1, "Accounting Standard for Treasury Stock and Reversal of Statutory Reserves", issued by the Accounting Standards Board of Japan on February 21, 2002). The adoption of this new accounting standard had no impact on net income. Per share data Net income per share is computed based on the weighted average number of shares, less treasury stock, outstanding during each year. In addition, although stock split of ratio 1 to 10 was performed on August 1, 2001, net income per share for 2002 was computed as it had been performed at April 1, Diluted net income is not presented since securities with dilutive effect have not been issued. Cash dividends per share are stated for the period to which they are attributable. Effective April 1, 2002, the Company adopted the new accounting standard for earnings per share and related guidance (Accounting Standards Board Statements No.2, "Accounting Standard for Earnings Per Share" and Financial Standards Implementation Guidance No.4, "Implementation Guidance for Accounting Standard for Earnings Per Share", issued by the Accounting Standards Board of Japan on September 25, 2002). The adoption of this new accounting standard had no impact on net income (loss) per share

26 3. Cash and cash equivalents Reconciliations of cash and time deposits shown in the consolidated balance sheets and cash and cash equivalents shown in the consolidated statements of cash flows as of March 31, 2003 and 2002 were as follows: Cash and time deposits... Add: Short-term loans receivables... Short-term highly liquid investments with maturities of not exceeding three months... Less: Share of cash and time deposits held by Investment partnerships... Cash and cash equivalents... 12,411 1, ,930 1 (2,251) (1,819) 11,161 3, ,425 8,333 8 (18,758) 93,008 Information of revenues from operational investment securities and the related cost is shown below: Revenues from operational investment securities: Proceeds from sales of securities.. Dividend and interest income... Total... Cost of operational investment securities: Cost of securities sold... Valuation loss of securities... Provision for possible investment losses... Total... 7, ,406 3,875 2,087 3,853 9,815 11, ,446 6, ,016 59,834 1,883 61,717 32,292 17,392 32,108 81, Investment securities 4. Operational investment securities Operational investment securities as of March 31, 2003 and 2002, consisted of the following: Stocks... Bonds... Other... Less: Allowance for possible investment losses... Total... 40,006 2,666 4,011 43,208 3,303 4,169 (5,477) (1,922) 41,206 48, ,383 22,217 33,425 (45,642) 343,383 Investment securities as of March 31, 2003 and 2002, consisted of the following: Stocks... Bonds... Other... Total... 6, ,042 7,968 Stocks of affiliated companies of 181 million (1,508 thousand) and 205 million as of March 31, 2003 and 2002, respectively, are included in the above table. Bonds of an affiliated company of 20 million (167 thousand) and 20 million as of March 31, 2003 and 2002, respectively, are included in the above table. 9, ,312 10,769 57, ,683 66,400

27 6. Market value information of securities Acquisition cost and market value of operational investment securities and investment securities with market value as of March 31, 2003 and 2002, consisted of the following: March 31, 2003: Operational investment securities: Stocks... Investment securities: Stocks... Bonds... Other... Total... March 31, 2002: Operational investment securities: Stocks... Investment securities: Stocks... Bonds... Other... Total... Acquisition cost 4,900 6, ,456 7,632 7,104 9, ,502 10,796 March 31, 2003: Operational investment securities: Stocks... 40,833 Investment securities: Stocks... Bonds... Other... Total... Acquisition cost 51, ,133 63,600 Unrealized Unrealized gains losses 350 4, (725) (471) (414) (885) (680) (1,563) (192) (1,755) Unrealized Unrealized gains losses 2,917 (6,042) 808 (3,925) 9 (3,450) 817 (7,375) Market value 4,525 5, ,042 6,845 10,985 8, ,312 9,575 Market value 37,708 48, ,683 57,042 Securities without market value as of March 31, 2003 and 2002, consisted of the following: Operational investment securities: Non-listed stocks (excluding over-the-counter stocks)... Non-listed domestic and foreign bonds... Other... Total... Investment securities: Non-listed stocks (excluding over-the-counter stocks)... Non-listed domestic and foreign bonds... Total... 35,481 2,666 4,011 42, ,223 3,303 4,169 39, Non-listed stocks of investment securities in the above table excluded the stocks of non-consolidated subsidiaries and affiliated companies amounting to 181 million (1,508 thousand) and 205 million as of March 31, 2003 and 2002, respectively. Proceeds from sales of operational investment securities and investment securities for the years ended March 31, 2003 and 2002, are shown below: Operational investment securities: Proceed from sales of securities... Gross realized gains... Gross realized losses... Investment securities: Proceed from sales of securities... Gross realized gains... Gross realized losses ,675 22,217 33, ,317 7, ,850 7,180 11,831 59,834 4,307 6,724 35,892 (1,002) (1,205) (8,350) 2, (10) 1, (5) 20,808 4,075 (83) 24.25

28 7. Other current assets Other current assets as of March 31, 2003 and 2002, consisted of the following: Money management fund... Short-term loans receivable... Others... Total... 4,014 1, ,613 2, ,656 33,450 8,333 4,992 46, Short-term and long-term borrowings Short-term borrowings from banks are mainly overdraft maturing within three months. The average annual interest rates applicable to the short-term borrowings as of March 31, 2003 and 2002 were 0.80% and 0.81%, respectively. The average annual interest rates applicable to the long-term borrowings as of March 31, 2003 and 2002 were 1.33% and 2.07%, respectively. Long-term borrowings as of March 31, 2003 and 2002, consisted of the following: 8. Property and equipment Property and equipment as of March 31, 2003 and 2002, consisted of the following: Cost: Land... Buildings and structures... Other... Less: Accumulated depreciation... Total... 1, ,121 3,087 (1,291) 1,796 1, ,973 4,100 (2,017) 2,083 11,225 5,158 9,342 25,725 (10,758) 14,967 Guaranteed by Daiwa Securities Group Inc.... Unsecured... Total... Less current portion... Long borrowing, less current portion... 30,480 30,480 3,600 20,191 23,791 (12,809) (11,072) 17,671 12,719 The aggregate annual maturities of long-term borrowings were as follows: 253, ,999 (106,741) 147, Other investments and other assets Other investments and other assets as of March 31, 2003 and 2002, consisted of the following: Year ending March Total... 12,809 7,782 9, , ,741 64,850 81, ,999 Investments in commodity funds.. Long-term guarantee deposits... Others... Less: Allowance for doubtful accounts... Total (118) (91) 1,404 1,892 4,391 1,433 (983) 6,733

29 11. Retirement benefits and pension plan The retirement benefits for employees as of March 31, 2003 and 2002, consisted of the following: 12. Investment management fees Investment management fees earned for the years ended March 31, 2003 and 2002, were as follows: Project benefits obligation... Less: plan assets... Retirement benefits (213) 156 1,925 1,925 Administrative fees... Success fees... Total... 2, ,590 2, ,629 21, ,583 Retirement benefits expenses for the years ended March 31, 2003 and 2002, were as follows: Service costs... Contribution to a welfare pension plan... Contribution to a defined contribution plan... Retirement benefits expenses , The retirement benefits for directors and statutory auditors of 133 million (1,109 thousand) and 113 million were included in "Retirement benefits" in the accompanying consolidated balance sheets as of March 31, 2003 and 2002, respectively. The Company was a member of an industry-wide non-contributory welfare pension plan administered by Securities Companies' Welfare Pension Fund. On September 29, 2001, the Company withdrew from this non-contributory welfare pension plan. The reversal of multiemployers' pension plan, which is a deduction of actual obligation on withdrawal from the provision for multiemployers' pension plan, was reported as other income in the consolidated statement of operations for the year ended March 31, 2002 (See Note 18).

30 13. Income taxes The statutory income tax rate in Japan arising out of the aggregation of corporate, enterprise and inhabitants taxes was approximately 42.1% for 2003 and The statutory income tax rate will be reduced for the years commencing on April 1, 2004 or later due to the revised local tax law. At March 31, 2003, the Company and consolidated domestic subsidiaries applied the reduced statutory income tax rate of 40.5% for calculating deferred tax assets and liabilities that are expected to be recovered or settled in the years commencing on April 1, 2004 or later. Details of deferred tax assets and liabilities as of March 31, 2003 and 2002, were as follows: Reconciliation of the difference between the statutory income tax rate and the effective tax rate reflected in the accompanying consolidated statement of operations for the year ended March 31, 2002, was as follows: Statutory tax rate... Valuation allowance for deferred income tax assets... Expenses permanently not deductible from taxable income... Differences in tax rates between the Company and its foreign consolidated subsidiaries... Other, net... Effective tax rate % (42.9) 0.8 (0.2) % Deferred tax assets: Net operating losses... Allowance for possible investment losses... Accrued bonuses... Allowance for doubtful accounts... Retirement benefits... Valuation losses of land... Other... Gross deferred tax assets... Less : valuation allowance... Total deferred tax assets... 7,694 2, , ,850 (11,846) 4 6, ,389 (8,382) 7 64,117 18, ,967 1,133 1, ,750 (98,717) 33 Reconciliation of the difference between the statutory income tax rate and the effective tax rare for 2003 is not presented since net loss is reported in the consolidated statement of operations. 14. Transactions with related parties Daiwa Securities Group Inc. guaranteed the Company's bank borrowings amounting to 3,600 millions at March 31, There was no such guarantee at March 31, Shareholders' equity Deferred tax liabilities: Net unrealized gain on securities... Other... Total deferred tax liabilities.. Net deferred tax liabilities , ,639 1, Under the Commercial Code of Japan (the "Code"), the entire amounts of the issue price of shares is required to be accounted for as capital, although a company may, by resolution of its Board of Directors, account for an amounts of not exceeding one-half of the issue price of the new shares as additional paidin capital, which is included in capital surplus. Effective October 1, 2001, the Code provides that an amount equal to at least 10% of cash dividends and other cash appropriations shall be appropriated and set aside as a legal earnings reserve until the total amount of legal earnings reserve and additional paidin capital equals 25% of common stock. The legal earnings reserve and additional paid-in capital may

31 be used to eliminate or reduce a deficit by resolution of the shareholders' meeting or may be capitalized by resolution of the Board of Directors. On condition that the total amount of legal earnings reserve and additional paid-in capital remains being equal to or exceeding 25% of common stock, they are available for distribution by the resolution of shareholders' meeting. Legal earnings reserve is included in retained earnings in the accompanying financial statements. Company's deficit. On the same day, the shareholders' meeting also approved to repurchase its common stocks up to 3,000 shares or 300 million (2,500 thousand) in order to implement flexible capital strategies. The maximum amount that the Company can distribute as dividends is calculated based on the non-consolidated financial statements of the Company in accordance with the Code. Stock split of ratio 1 to 10 was performed on August 1, 2001, and the number of shares of common stock increased by 237, On March 12, 2002, the Company issued 25,000 shares of common stock in the form of public offering when the Company's shares were registered for trading on JASDAQ, the Japanese over-thecounter market. Common stock and additional paidin capital increased by 2,975 million and 3,605 million, respectively. The shareholders' meeting of the Company held on June 27, 2002 approved a stock incentive plan. The plan provides for the issuance of up to 2,100 shares in the form of options to directors and employees. The stock purchase rights can be exercised at a price 308,000 per share in the period from June 28, 2004 to June 27, 2006, and total of 1,990 shares of common stock could be issued by the exercise of these rights at March 31, The exercise price of stock purchase rights would be adjusted, if the Company issues new shares at a price below the market price. The shareholders' meeting of the Company held on June 27, 2003 approved to reverse legal earnings reserve in the amounts of 22 million (183 thousand) and additional paid-in capital, which is included in capital surplus, in the amount of 3,989 million (33,242 thousand) in order to dispose the

32 16. Segment information Business segment information for the years ended March 31, 2003 and 2002, were as follows Investment Finance Total Elimination or corporate Consolidated Year ended March 31, 2003: Sales: Sales to outside customers... Inter-segment... Total... Operating expenses... Operating profit (loss)... At March 31, 2003: Assets... Depreciation... Capital expenditures... Year ended March 31, 2002: Sales: Sales to outside customers... Inter-segment... Total... Operating expenses... Operating profit... At March 31, 2002: Assets... Depreciation... Capital expenditures... 10,314 10,314 14,318 (4,004) 60, ,438 15,438 12,788 2,650 70, ,186 1, , ,788 1,788 1, , ,500 11,500 14,844 (3,344) 91, ,226 17,226 13,913 3, , ,422 2,513 11,500 11,500 14,844 (3,344) 101, ,226 17,226 13,913 3, , Year ended March 31, 2003: Sales: Sales to outside customers... Inter-segment... Total... Operating expenses... Operating profit (loss)... At March 31, 2003: Assets... Depreciation... Capital expenditures... Investment Finance Total Elimination or corporate 85,950 85, ,316 (33,366) 505, ,883 9,883 4,384 5, , ,833 95, ,700 (27,867) 764,608 1, ,517 Consolidated 95,833 95, ,700 (27,867) 843,125 1, Business segments are defined for internal management purposes. "Investment" represents investments in venture business of domestic and foreign companies, and establishment, operation and management of assets of investment partnerships etc. "Finance" represents loan, leasing and other financial business etc. Corporate assets, not identifiable to each segment, in "Elimination or corporate" column as of March 31, 2003 and 2002, amounted to 9,422 million (78,517 thousand) and 2,513, respectively, which mainly consisted of cash and cash deposits of the Company.

33 Since sales and assets in Japan exceeded 90% of total sales and assets of all geographic segments respectively for the years ended March 31, 2003 and 2002, geographic segment information is not presented. Overseas sales for the years ended March 31, 2003 and 2002, were as follows: Year ended March 31, 2003: Overseas sales... Total sales... % of total sales... Year ended March 31, 2002: Overseas sales... Total sales... % of total sales... Asia America Europe & other area Total % 2, % % % % % 1,418 11, % 3,325 17, % Year ended March 31, 2003: Overseas sales... Total sales... % of total sales... Asia America Europe & other area Total 2, % 4, % 4, % 11,816 95, % Selling, general and administrative expenses Major elements of selling, general and administrative expenses for the years ended March 31, 2003 and 2002, were as follows: Salaries and bonuses... Accrual of bonuses... Provision for retirement benefits of directors... Retirement benefits expenses... Provision for doubtful accounts... Commissions... Expenses related to investment partnerships... Rent expenses... Depreciation... Other... 1, ,215 4,100 1, ,372 4,564 11, ,025 2,967 3,942 2, ,124 34, Other income (expenses) Details of other income (expenses) for the years ended March 31, 2003 and 2002, were as follows Gain on sales of investment securities... Valuation losses of investment securities... Loss on disposal of defective credits... Reversal of multiemployers' pension plans (See Note 11)... Interest expenses... Interest income... Dividend income... Valuation losses related to fixed assets... Provision for doubtful accounts... Other, net (3,968) (182) (168) (2,859) 143 (6,246) 299 (406) (129) 197 (195) (39) (37) 80 (47) 4,075 (33,067) (1,517) 200 2,292 (1,400) (23,825) 1,192 (52,050)

34 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of NIF Ventures Co., Ltd. : We have audited the accompanying consolidated balance sheets of NIF Ventures Co., Ltd. and subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended, expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the 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 and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NIF Ventures Co., Ltd. and subsidiaries as of March 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in Japan as described in Note 1 to the consolidated financial statements. The consolidated financial statements as of and for the year ended March 31, 2003 have been translated into United States dollars solely for the convenience of the reader. We have recomputed the translation and, in our opinion, the consolidated financial statements expressed in Japanese yen have been translated into United States dollars on the basis set forth in Note 1 to the consolidated financial statements. Tokyo, Japan June 27, 2003

35 Board of Directors As of June 27, 2003 President & CEO Shin-ichi Yamamura 2003: Assumed current post, NIF Ventures Co., Ltd. 2002: Group Executive Officer, Daiwa Securities Group Inc. 2001: Deputy President, Daiwa Securities Co. Ltd. 1999: Senior Managing Director and CFO, Daiwa Securities Group Inc. 1997: Managing Director,. Daiwa Securities Co. Ltd. 1994: Director Deputy President Hisao Yasunari 2001: Assumed current post, NIF Ventures Co., Ltd. 2000: Senior Managing Director 1999: Senior Managing Director, Nippon Investment & Finance Co. Ltd. 1997: Managing Director, Daiwa Securities Co. Ltd. 1994: Director Deputy President Ryonosuke Miyoshi 2001: Assumed current post, NIF Ventures Co., Ltd. 2000: Senior Managing Director 1996: Senior Managing Director, Nippon Investment & Finance Co. Ltd. 1995: Managing Director 1991: Director, Daiwa Securities Co. Ltd Senior Managing Director Jun-ichi Wakita 2001: Assumed current post, NIF Ventures Co., Ltd. 2000: Managing Director 1999: Senior Managing Director, Daiwa Finance Co. Ltd. 1998: Managing Director Senior Managing Director Tetsuya Ikeda 2003: Assumed current post, NIF Ventures Co., Ltd. 1999: Executive Officer, Daiwa Securities Co. Ltd. 1988: Branch Manager, Jiyugaoka Branch Senior Managing Director Mamoru Ohtani 2003: Assumed current post, NIF Ventures Co., Ltd. 2001: Executive Officer, Daiwa Securities SMBC Co. Ltd. 1999: Executive Officer, Daiwa Securities SB Capital Markets Co. Ltd.