FINANCIAL SECTIONCONTENTSFINANCIAL REVIEW ......................................................................................
CONSOLIDATED FINANCIAL STATEMENTS .................................................
CONSOLIDATED BALANCE SHEETS ......................................................
CONSOLIDATED STATEMENTS OF INCOME .........................................
CONSOLIDATED STATEMENTS OF CHANGESIN SHAREHOLDERS’ EQUITY...............................................................
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .........................
INDEPENDENT AUDITORS’ REPORT ............................................................
SUMMARY OF SELECTED FINANCIAL DATA ...............................................
COMMON STOCK DATA..............................................................................

21

22
26
26
28
29
30
31
51
52
53

FINANCIAL REVIEW

real estate sales business and other businesses
with high cost-of-sales ratios, and of valuation losses
on inventories.
Selling, general and administrative expenses
edged up 4.2%, or ¥4.8 billion, to ¥120.0 billion. Owing
to cost-cuttings efforts, however, these expenses
accounted for 23.0% of revenue and other income,down 0.3 percentage point.
Flagging conditions in the Japanese stock market underscored an ¥11.5 billion loss on other-thantemporary impairment of investment securities, up
28.2%, or ¥2.5 billion. Owing to an increase in bankloans for the acquisition of a real estate leasing firmat the end of the previous period and purchase oftreasury stock, interest expenses climbed 133.6%,or ¥2.1 billion, to ¥3.7 billion. Other expenses jumped
38.9%, or ¥4.2 billion, to ¥15.1 billion, primarily
owing to the recognition of impairment losses oflong-lived assets and loss on disposal of security
equipment.

Operating Results
Overview
In the fiscal year ended March 31, 2003, SECOM
and its consolidated subsidiaries (collectively “theCompany”) took decisive steps to enhance theiroperations—which encompass security services,
medical services, insurance services, information services, GIS services, education services, real estate
sales and real estate leasing—by improving services
and expanding marketing, system construction andproduct development.
Owing to these and other efforts, consolidated
revenue and other income rose 5.5%, or ¥27.2 billion,to ¥520.7 billion. This was attributable to solid resultsin all operating segments. Nonetheless, net income
declined 11.2%, or ¥3.8 billion, to ¥30.3 billion, owing
to the absence of a gain on sale of securities, net,
recorded in the previous period.
Revenue and Other Income
Revenue and other income amounted to ¥520.7
billion, an increase of 5.5%, or ¥27.2 billion, owing
to increased sales in all operating segments. Net
sales advanced 6.2%, or ¥29.7 billion, to ¥512.7 billion. This increase reflected higher sales in the security services segment, which focuses on centralized
security systems; expansion of the medical services
segment to include home medical services and leasing of real estate for medical institutions; and contributions from a real estate leasing subsidiary acquiredin the previous fiscal year. Interest and other amounted
to ¥8.0 billion, up 6.1%, or ¥464 million.

Income
The aforementioned increase in the cost-of-sales
ratio, higher loss on other-than-temporary impairmentof investment securities and absence of a ¥3.0 billion
gain on sales of securities, net—present in the preceding period—pushed income before income taxes
down 18.4%, or ¥11.9 billion, to ¥52.9 billion. Income
taxes declined 20.3%, or ¥6.1 billion, to ¥24.0 billion,
representing 45.5% of income before income taxes,
down from 46.6%. Net income slipped 11.2%, or¥3.8 billion, to ¥30.3 billion, and accounted for 5.8%of consolidated revenue and other income, downfrom 6.9%. Basic net income per share was ¥132.87,
down from ¥146.19, while diluted net income pershare was also ¥132.87, down from ¥146.11. Cashdividends of ¥40.00 per share were approved at thegeneral shareholders’ meeting held on June 27, 2003.

Costs and Expenses
Costs and expenses rose 9.1%, or ¥39.1 billion,to ¥467.9 billion. This increase is due to a higher costof sales, a consequence of a rise in revenue, andincreases in loss on other-than-temporary impairmentof investment securities and interest.
Cost of sales advanced 8.7%, or ¥25.4 billion,to ¥317.5 billion, and represented 61.9% of net
sales, up from 60.5% the preceding term. This rise
was largely a consequence of higher sales in the

Segment Information
For detailed segment information, please see Note 28of the accompanying Notes to Consolidated Financial
Statements.

22Ltd., which manages senior citizens’ residences.
Both of these companies became consolidated
subsidiaries in the preceding period. Income before
income taxes was ¥1.8 billion for the segment, up
from a loss before income taxes of ¥698 million in
the preceding period.
The insurance services segment recorded
revenue and other income of ¥31.2 billion, up 1.6%,
or ¥491 million. Despite this improvement, the segment posted a loss before income taxes of ¥9.2 billion, compared with income before income taxes of¥304 million in the previous period, reflecting a loss
on other-than-temporary impairment of investment
assets, particularly investment securities.
The information and communication related
and other services segment, which encompasses
information-related services, GIS services, real estate
sales and real estate leasing, reported revenue andother income of ¥116.0 billion, a rise of 7.9%, or¥8.5 billion. This increase largely reflected the inclusion of the full-year results of consolidated subsidiary
Arai & Co.’s real estate leasing operations as wellas brisk sales of condominiums. The segment’s loss
before income taxes mushroomed to ¥2.0 billion, from¥130 million, however, owing to a loss on other-thantemporary impairment of investment securities.

Revenue and other income in the security
services segment amounted to ¥357.0 billion, an
increase of 3.6%, or ¥12.4 billion. Excluding intersegment transactions, segment revenue and otherincome totaled ¥355.7 billion, equivalent to 68.3% of
total revenue and other income, down from 69.3% in
the preceding period. Commercial security and home
security services generated ¥254.9 billion of thistotal, up 4.3%, or ¥10.4 billion. Large-scale proprietary systems accounted for ¥3.5 billion, an increaseof 0.7%, or ¥23 million. Static guard services
contributed ¥35.9 billion, up 5.3%, or ¥1.8 billion.
Armored car services represented ¥17.3 billion, rising
1.5%, or ¥260 million. Merchandise and other generated ¥44.1 billion, advancing 2.3%, or ¥1.0 billion.
Income before income taxes in the security services
segment decreased 3.5%, or ¥2.9 billion, to ¥80.1
billion, equivalent to 22.4% of segment revenue andother income, compared with 24.1% in the previous
period, owing to valuation losses on inventories anda loss on disposal of security equipment.
Revenue and other income in the medical services segment climbed 47.2%, or ¥6.4 billion, to¥20.1 billion. This rise was primarily attributable tofirm results in the home medical services businessand contributions from the medical services
operations of Arai & Co. and Ryomay Royal Life Co.,

Cash Dividends Paid
per Share

Basic Net Income
per Share(In yen)(In yen)
250

50

200

40

150

30

100

20

50

10
0

0

99 00 01 02 03

99 00 01 02 03

23

¥100.8 billion.
Total liabilities edged up 2.9%, or ¥21.4 billion,to ¥757.3 billion. Total current liabilities rose 16.0%,
or ¥39.2 billion, to ¥284.5 billion, as bank loans
increased 82.4%, or ¥56.0 billion, to ¥124.0 billion,
a consequence of new loans undertaken to fund purchases of treasury stock and the conversion of longterm debt into short-term bank loans. Accrued income
taxes fell 53.0%, or ¥12.2 billion, to ¥10.8 billion.
Long-term debt declined 22.8%, or ¥30.3 billion,to ¥102.8 billion, also owing to the conversion of
long-term debt into short-term bank loans and repayments of long-term debt. Investment deposits bypolicyholders totaled ¥231.1 billion and accounted for
20.0% of total liabilities and shareholders’ equity.
Total shareholders’ equity decreased 7.2%,
or ¥28.8 billion, to ¥372.5 billion. This decrease wasprimarily attributable to the purchase of treasury
stock, which boosted common stock in treasury,at cost, ¥44.1 billion, to ¥44.3 billion. As a consequence, the equity ratio was 32.2%, down from
34.4% a year earlier.

Financial Position
Total assets of the Company as of March 31, 2003,
amounted to ¥1,158.1 billion, down 0.7%, or ¥8.0
billion, from the previous fiscal year-end.
Total current assets fell 7.9%, or ¥37.1 billion, to¥431.0 billion, as cash and cash equivalents declined
14.8%, or ¥31.2 billion, to ¥179.2 billion, and inventories fell 25.1%, or ¥14.0 billion, to ¥41.8 billion. The
decline in inventories was attributable to a rush of
condominium sales in March 2003, which resulted ina decline in real estate inventories. Short-term investments soared 77.8%, or ¥9.8 billion, to ¥22.5 billion,
as an increase in held-to-maturity debt securities due
within one year resulted in their shift to current
assets, from investments and long-term receivables.
The decline in total current assets, coupled with anincrease in total current liabilities, pushed the current
ratio down to 1.5 times, from 1.9 times a year earlier.
Investments and long-term receivables rose
21.5%, or ¥45.7 billion, to ¥258.4 billion. This
increase reflected a restructuring of our investment
portfolio, which resulted in an increase in the weightof investment securities and long-term receivables.
Property, plant and equipment, less accumulated
depreciation, amounted to ¥368.0 billion, down 5.5%,or ¥21.3 billion, owing to the sale of real estate forlease. Other assets rose 4.8%, or ¥4.7 billion, to

Shareholders’Equity per Share

Cash Flows
The Company remains committed to maintaining
sufficient liquidity to ensure flexibility in its operations
and guarantee a solid financial foundation. Accordingly,

Total Assets

Depreciation andAmortization(In billions of yen)

(In yen)(In billions of yen)

2,000

1,250

60

1,600

1,000

48

1,200

750

36

800

500

24

400

250

12

0

0

0
99 00 01 02 03

99 00 01 02 03

24

99 00 01 02 03

Company’s investment portfolio was also reflectedin proceeds from sales of investment securities of¥16.5 billion, while proceeds from sales of property,
plant and equipment amounted to ¥25.5 billion.
The decrease in net cash used in investing activities
during the period was attributable to the decline in net
cash provided by operating activities.
Net cash used in financing activities amounted
to ¥41.4 billion, compared with ¥38.6 billion provided
by financing activities in the previous period. This
total reflected a ¥44.1 billion increase in treasury
stock, net, and dividends paid of ¥9.3 billion. Repayments of long-term debt amounted to ¥53.8 billion,
while proceeds from long-term debt totaled ¥10.8
billion. Increase in bank loans totaled ¥56.8 billion.
Proceeds from long-term debt, repayments of longterm debt and increase in bank loans provided net
proceeds of ¥13.7 billion, compared with ¥47.5 billion
in the preceding period.
As a consequence of the Company’s operating,investing and financing activities during the period
under review, cash and cash equivalents at end ofyear amounted to ¥179.2 billion, down ¥31.2 billion
from ¥210.5 billion a year earlier.

wherever possible, the Company finances strategic
investments with cash generated by its operating
activities.
In the period under review, net cash provided byoperating activities amounted to ¥95.2 billion, adecrease from ¥174.8 billion in the previous period.
This total, which included net income of ¥30.3 billion
and depreciation and amortization of ¥52.1 billion,
represented a decline of ¥79.6 billion from the previous period. The primary factor behind the decrease in
net cash provided by operating activities was a sharp
decline in increase in investment deposits by policyholders, to ¥4.7 billion, from ¥96.2 billion, as hardmarket conditions, including low interest rates,
prompted the Company to suspend sales of funded
personal accident insurance policies.
Net cash used in investing activities totaled¥84.7 billion, down ¥63.3 billion from ¥148.0 billion
in the preceding period. Principal components ofthis total included payments for purchases of investment securities of ¥80.2 billion, owing to a restructuring of the Company’s investment portfolio, andpayments for purchases of property, plant and equipment of ¥50.2 billion, mainly reflecting outlays forsecurity equipment and control stations necessitatedby an increase in the number of security system
subscribers. The aforementioned restructuring of theCapital Expenditures

Cash Flows(In billions of yen)

(In billions of yen)

150

200

120

100

90
0
60
–100

30

–200

0

01

99 00 01 02 03

02

Cash flows fromoperating activities
Cash flows frominvesting activities
Cash flows fromfinancing activities
25

03

CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSSECOM CO., LTD. and Subsidiaries
March 31, 2003 and 2002ASSETS

In millions of yen

Translation into thousandsof U.S. dollars (Note 3)

March 31

March 31

2002

2003

¥0,179,228 ¥0,210,477
4,432
4,880
45,25140,75022,463
12,63547,02849,132
21,32921,22641,801
55,824
46,796
51,912(1,558)(1,522)2,921
2,762
12,851
11,2018,420
8,764
430,962
468,041$(1,493,567
36,933377,092
187,192
391,900
177,742
348,342
389,967(12,983)
24,342
107,092
70,164
3,591,350

2003

Current assets:
Cash and cash equivalents (Note 6)........................................................................
Time deposits ...........................................................................................................
Cash deposits (Note 7) .............................................................................................
Short-term investments (Note 8).............................................................................
Notes and accounts receivable, trade ....................................................................
Due from subscribers ..............................................................................................
Inventories (Notes 9 and 13)....................................................................................
Short-term receivables ............................................................................................
Allowance for doubtful accounts ............................................................................
Deferred insurance acquisition cost (Note 14) .......................................................
Deferred income taxes (Note 17).............................................................................
Other current assets .................................................................................................
Total current assets ...........................................................................................

Investments and long-term receivables:
Investment securities (Note 8).................................................................................
Investments in affiliated companies (Note 10).......................................................
Long-term receivables .............................................................................................
Lease deposits ..........................................................................................................
Other investments ....................................................................................................
Allowance for doubtful accounts ............................................................................

Property, plant and equipment (Notes 11, 13, 20 and 21):Land ...........................................................................................................................
Buildings and improvements ..................................................................................
Security equipment and control stations ...............................................................
Machinery, equipment and automobiles................................................................
Construction in progress..........................................................................................
Accumulated depreciation .......................................................................................

Other assets:
Deferred charges (Note 2 (8)) ..................................................................................
Goodwill (Notes 5 and 12) .......................................................................................
Intangibles and other (Note 12)...............................................................................
Deferred income taxes (Note 17).............................................................................
Total assets ........................................................................................................
The accompanying notes are an integral part of these statements.

26

152,406
34,94245,516
11,746
19,599(5,836)258,373

122,247
34,94330,105
11,707
18,979(5,296)
212,685

1,270,050
291,183
379,300
97,883
163,325(48,633)
2,153,108

157,230
167,303
198,651
53,921
3,456
580,561(212,587)
367,974

155,624
157,097
183,998
55,04031,167582,926(193,651)
389,275

1,310,250
1,394,192
1,655,425
449,342
28,8004,838,009(1,771,559)
3,066,450

38,374
12,491
22,95826,950100,773¥1,158,082

38,187
10,836
21,87325,216
96,112¥1,166,113

319,784
104,092
191,316
224,584
839,776$(9,650,684

In millions of yen

Translation into thousandsof U.S. dollars (Note 3)

March 31

March 31

2003

2002

2003

Current liabilities:
Bank loans (Notes 7 and 13) ....................................................................................
Current portion of long-term debt (Notes 13 and 20)............................................
Notes and accounts payable, trade.........................................................................
Other payables..........................................................................................................
Deposits received (Note 7).......................................................................................
Deferred revenue ......................................................................................................
Accrued income taxes ..............................................................................................
Accrued payrolls .......................................................................................................
Other current liabilities.............................................................................................
Total current liabilities ......................................................................................

¥0,124,048
20,507
15,554
19,86928,83839,067
10,813
15,200
10,582
284,478¥0,068,003
32,703
16,401
20,33722,74437,19623,003
14,946
9,961
245,294$1,033,733
170,892
129,617
165,575
240,317
325,558
90,108
126,667
88,1832,370,650

Long-term debt (Notes 13 and 20) ..............................................................................
Guarantee deposits received.......................................................................................
Accrued pension and severance costs (Note 15).......................................................
Deferred revenue..........................................................................................................
Unearned premiums and other insurance liabilities (Note 14) ................................
Investment deposits by policyholders (Note 14) .......................................................
Deferred income taxes (Note 17) ................................................................................
Other liabilities .............................................................................................................
Total liabilities....................................................................................................

102,767
36,75841,704
18,71937,410231,1091,613
2,721
757,279

133,047
33,63536,622
18,461
37,268226,4072,813
2,298
735,845856,392
306,316
347,533
155,992
311,750
1,925,908
13,442
22,675
6,310,658

Minority interest in subsidiaries ................................................................................

28,28528,942

235,708

66,36979,987
9,672
300,529

66,36079,9799,663
279,593553,075
666,558
80,6002,504,409(2,758)42(26,115)(10,921)(39,752)(4,481)
43(23,109)(6,581)(34,128)(22,983)350(217,625)(91,008)(331,266)

Common stock in treasury, at cost (Note 18);
8,200,245 shares in 2003 and 22,512 shares in 2002..........................................
(44,287)(141)
Total shareholders’ equity ................................................................................
372,518
401,326
Total liabilities and shareholders’ equity ........................................................ ¥1,158,082 ¥1,166,113(369,058)
3,104,318$9,650,684

LIABILITIES AND SHAREHOLDERS’ EQUITY

Commitments and contingent liabilities (Note 24)
Shareholders’ equity:
Common stock (Notes 18 and 25):
Authorized 900,000,000 shares in 2003 and 2002;
issued 233,281,133 shares in 2003 and 233,274,769 shares in 2002...............
Additional paid-in capital (Notes 18 and 25) ..........................................................
Legal reserve (Note 18) ............................................................................................
Retained earnings (Note 18) ....................................................................................
Accumulated other comprehensive income (loss):
Unrealized losses on securities (Note 8) .............................................................
Unrealized gains on derivative instruments (Note 23) ......................................
Minimum pension liabilities adjustments (Note 15) ..........................................
Foreign currency translation adjustments ..........................................................

27

CONSOLIDATED STATEMENTS OF INCOME
SECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2003
2003

In millions of yen

Translation into thousandsof U.S. dollars (Note 3)

Years ended March 31

Year ended March 31

2002

2001

2003

¥483,014
2,967¥433,817
2,569$4,272,783
—

—
7,545
493,526

21,366
10,541
468,293—
66,742
4,339,525

317,457
119,999

292,092
115,158

260,720
107,1412,645,475
999,992

11,546
3,729
15,140467,871

9,004
1,596
10,903428,753

1,851
1,925
14,112385,749

96,21731,075
126,166
3,898,925

52,87264,77382,544

440,600

27,877(3,829)24,04837,096(6,913)30,18330,011
5,740
35,751

232,308(31,908)
200,400

Income before minority interest in subsidiaries, equity
in net income of affiliated companies and cumulative
effect of accounting change ..................................................

28,824

34,59046,793

240,200

Minority interest in subsidiaries ...........................................................

(950)(1,862)(408)(7,917)

Equity in net income of affiliated companies .....................................

1,244

1,354

1,310

10,367

Income before cumulative effect of accounting change.......

29,11834,082

47,695

242,650

Cumulative effect of accounting change, net of tax(Notes 2 (10) and 2 (13)) .......................................................................

1,157

—

(3,699)

9,642

Net income................................................................................

¥030,275¥034,082¥043,996$0,252,292

In yenTranslation into
U.S. dollars (Note 3)

Years ended March 31

Year ended March 31

Revenue and other income:Net sales .............................................................................................. ¥512,734
Gain on sale of securities, net (Notes 8 and 26) ...............................
—
Gain on securities contribution to employee retirement benefit
trust (Note 8)......................................................................................
—
Interest and other (Note 16) ...............................................................
8,009
520,743
Costs and expenses:
Cost of sales ........................................................................................
Selling, general and administrative (Notes 2 (15) and 19) ..............
Loss on other-than-temporary impairment of investment
securities............................................................................................
Interest .................................................................................................
Other (Notes 8 and 11)........................................................................

Income before income taxes ...................................................
Income taxes (Note 17):
Current .................................................................................................
Deferred ...............................................................................................

Per share data (Note 4):
Income before cumulative effect of accounting change—
Basic .................................................................................................
Diluted ..............................................................................................
Cumulative effect of accounting change—
Basic .................................................................................................
Diluted ..............................................................................................
Net income—Basic .................................................................................................
Diluted ..............................................................................................
The accompanying notes are an integral part of these statements.

28

2003

2002

2001

2003

¥127.79¥127.79¥146.19¥146.11¥204.63¥204.46

$1.07
$1.07

¥005.08¥005.08¥¥——(¥015.87)(¥015.85)

$0.04
$0.04

¥132.87¥132.87¥146.19¥146.11¥188.76¥188.61

$1.11
$1.11

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYSECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2003
Balance, March 31, 2000 ..................................................................
Comprehensive income:Net income ....................................................................................
Other comprehensive income (loss), net of tax (Note 18):
Unrealized losses on securities—
Unrealized holding gains or losses arising during the period ...
Less: Reclassification adjustment for gains or losses
included in net income ................................................
Minimum pension liabilities adjustments ..................................
Foreign currency translation adjustments .................................
Total comprehensive income.........................................................
Cash dividends ...................................................................................
Transfer to legal reserve.....................................................................
Conversion of convertible bonds........................................................
Purchase of treasury stock.................................................................
Reissuance of treasury stock .............................................................
Balance, March 31, 2001 ..................................................................
Comprehensive income:Net income ....................................................................................
Other comprehensive income (loss), net of tax (Note 18):
Unrealized losses on securities—
Unrealized holding gains or losses arising during the period ...
Less: Reclassification adjustment for gains or losses
included in net income ................................................
Unrealized gains on derivative instruments—
Unrealized holding gains or losses arising during the period..
Less: Reclassification adjustment for gains or losses
included in net income ................................................
Minimum pension liabilities adjustments ..................................
Foreign currency translation adjustments .................................
Total comprehensive income.........................................................
Cash dividends ...................................................................................
Transfer to legal reserve.....................................................................
Conversion of convertible bonds........................................................
Purchase of treasury stock.................................................................
Reissuance of treasury stock .............................................................
Balance, March 31, 2002 .................................................................
Comprehensive income:Net income ....................................................................................
Other comprehensive income (loss), net of tax (Note 18):
Unrealized losses on securities—
Unrealized holding gains or losses arising during the period ...
Less: Reclassification adjustment for gains or losses
included in net income ................................................
Unrealized gains on derivative instruments—
Unrealized holding gains or losses arising during the period..
Less: Reclassification adjustment for gains or losses
included in net income ................................................
Minimum pension liabilities adjustments ..................................
Foreign currency translation adjustments .................................
Total comprehensive income.........................................................
Cash dividends ...................................................................................
Transfer to legal reserve.....................................................................
Conversion of convertible bonds........................................................
Purchase of treasury stock.................................................................
Balance, March 31, 2003 .................................................................

In millions of yen
Accumulated
Commonother comstockprehensive
Retainedin treasury
earnings income (loss) stock, at cost

Number ofsharesissuedCommonstock

Additional
paid-in
capitalLegalreserve

233,075,442¥66,097¥79,713¥7,587¥222,238(¥01,787)(¥00,042)¥373,806

—

—

—

—

43,996——43,996

Total

—

—

—

—

—

(6,496)—(6,496)

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

(13,105)(16,345)
4,670

—
—
—

—
—
24,302——233,099,744

—
—
30
—
—
66,127——30—
279,745

—
1,031
—
—
—
8,618

(9,323)(1,031)———
255,880—————(33,063)

—
—
—
(801)
840
(3)

(13,105)(16,345)
4,670
12,720(9,323)
—
60
(801)
842
377,304

—

—

—

—

34,082——

34,082

—

—

—

—

—

(6,082)—(6,082)

—

—

—

—

—

3,930

—

3,930

—

—

—

—

—

135

—

135

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

(92)
(5,999)
7,043

—
—
—

—
—
175,025——
233,274,769

—
—
233
—
—
66,360——234—
079,979

—
1,045
—
—
—
9,663

(9,324)(1,045)———279,593—————(34,128)

—
—
—
(264)
126
(141)

(92)
(5,999)7,043
33,017(9,324)
—
467
(264)
126
401,326

—

—

—

—

30,275——30,275

—

—

—

—

—

(4,315)—(4,315)

—

—

—

—

—

6,038

—

6,038

—

—

—

—

—

105

—

105

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

(106)
(3,006)(4,340)

—
—
—

—
—
6,364
—
233,281,133——
9—¥66,369——8—¥79,987—
9——¥9,672(9,330)(9)——¥300,529————(¥39,752)———(44,146)(¥44,287)(106)(3,006)(4,340)24,651(9,330)—17(44,146)¥372,518

Translation into thousands of U.S. dollars (Note 3)

Commonstock

Balance, March 31, 2002 ......................................................................................... $553,000
Comprehensive income:Net income............................................................................................................
—
Other comprehensive income (loss), net of tax (Note 18):
Unrealized losses on securities—
Unrealized holding gains or losses arising during the period........................
—
Less: Reclassification adjustment for gains or losses
included in net income .......................................................................
—
Unrealized gains on derivative instruments—
Unrealized holding gains or losses arising during the period........................
—
Less: Reclassification adjustment for gains or losses
included in net income .......................................................................
—
Minimum pension liabilities adjustments..........................................................
—
Foreign currency translation adjustments.........................................................
—
Total comprehensive income ................................................................................
Cash dividends ..........................................................................................................
—
Transfer to legal reserve ............................................................................................
—
Conversion of convertible bonds ...............................................................................
75
Purchase of treasury stock ........................................................................................
—
Balance, March 31, 2003 ......................................................................................... $553,075
The accompanying notes are an integral part of these statements.
29

Additional
paid-in
capitalLegalreserve

Accumulated
Commonother comstockprehensive
Retainedin treasury
earnings income (loss) stock, at cost

Total

$666,492 $80,525$2,329,942——

252,292——

252,292———(35,958)—(35,958)———

50,317—50,317

—

—

—

875

—

875

—
—
—

—
—
—

—
—
—

(883)
(25,050)(36,167)

—
—
—

—
—
—
75
66
—
—
—
$666,558 $80,600($284,400) ($001,175) $3,344,384(883)(25,050)(36,167)
205,426(77,750)——(77,750)
(75)
—
—
—
—
—
—
141
—
—
(367,883)(367,883)$2,504,409 ($331,266) ($369,058) $3,104,318

CONSOLIDATED STATEMENTS OF CASH FLOWSSECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2003

Cash flows from operating activities:
Net income.......................................................................................................................
Adjustments to reconcile net income to net cash provided
by operating activities—
Depreciation and amortization, including amortization of deferred charges ........
Accrual for pension and severance costs, less payments .......................................
Deferred income taxes................................................................................................
Net loss on sales and disposal of property, plant and equipment .........................
Impairment loss on property, plant and equipment (Note 11)................................
(Gain) loss on sales of investment securities ...........................................................
Gain on securities contribution to employee retirement benefit trust (Note 8).....
Gain on sales of subsidiaries’ shares (Note 26)........................................................
Loss on other-than-temporary impairment of investment securities.....................
Equity in net income of affiliated companies ...........................................................
Minority interest in subsidiaries ................................................................................
Cumulative effect of accounting change, net of tax (Notes 2 (10) and 2 (13)) .......
Changes in assets and liabilities, net of effects from acquisitions and disposals:(Increase) decrease in cash deposits .....................................................................
(Increase) decrease in receivables and due from subscribers, net of allowances(Increase) decrease in inventories .........................................................................
(Increase) decrease in other current assets ..........................................................
Increase in deferred charges ..................................................................................
Decrease in payables ..............................................................................................
Increase (decrease) in deposits received ..............................................................
Increase in deferred revenue .................................................................................
Increase (decrease) in accrued income taxes .......................................................
Increase in guarantee deposits received...............................................................
Increase in other current liabilities ........................................................................
Increase in unearned premiums and other insurance liabilities ........................
Increase in investment deposits by policyholders ...............................................
Other, net .................................................................................................................

In millions of yen

Translation into thousandsof U.S. dollars (Note 3)

Years ended March 31

Year ended March 31

2003

2002

2001

2003

¥030,275¥(034,082¥(043,996$0,252,292

52,067
188(3,829)
2,778
3,012
507
—
(330)
11,546(1,244)950(1,157)49,891
3,736(6,913)
1,448—(2,095)
—
(872)
9,004
(1,354)
1,862—

45,020
4,190
5,740
1,941
—
(1,998)(21,366)
(571)
1,851
(1,310)408
3,699

433,892
1,567(31,908)
23,15025,1004,225—(2,750)96,217(10,367)
7,917(9,642)(4,502)
1,483
10,073(1,586)(13,668)
(869)
4,771
2,129
(12,375)
3,588
1,700
142
4,702
4,895

(4,152)(6,727)(5,533)(3,017)(14,295)(1,015)
6,708
1,737
5,145
6,012
853
3,184
96,221929

895(2,010)4,027
6,305(13,881)(24,279)(3,503)
3,788
4,249
2,588
1,713
8,201
54,084(155)(37,516)
12,35883,942(13,217)(113,900)(7,242)39,75817,742(103,125)
29,90014,167
1,183
39,18340,791

Net cash provided by operating activities..........................................................

95,246

174,839

123,622793,717

Cash flows from investing activities:
Decrease in time deposits ..............................................................................................
Proceeds from sales of property, plant and equipment ..............................................
Payments for purchases of property, plant and equipment ........................................
Proceeds from sales of investment securities ..............................................................
Payments for purchases of investment securities........................................................
(Increase) decrease in short-term investments ............................................................
Proceeds from sales of subsidiaries’ shares (Note 26) ................................................
Payments for purchases of subsidiaries’ shares, net of cash acquired (Note 5) .......
Acquisition of Mac Corporation, net of cash acquired.................................................
Increase in short-term receivables, net .........................................................................
Payments for long-term receivables..............................................................................
Proceeds from long-term receivables ...........................................................................
Increase in other assets ..................................................................................................
Other, net .........................................................................................................................

430
25,512(50,171)
16,492(80,170)
10,29290(18)—(3,362)(10,910)
12,147(3,772)(1,278)

7,950
3,693
(144,229)
10,149(22,602)15,459
2,654
1,270
—
(10,301)(8,346)
1,654(5,371)
—

3,976
1,543
(95,441)
5,663(16,802)(2,478)2,088(2,410)(3,203)(9,522)(3,561)
10,689(6,768)—

3,583
212,600(418,092)
137,433(668,083)
85,767750(150)—(28,016)(90,917)
101,225(31,433)(10,650)

Net cash used in investing activities ..................................................................

(84,718)(148,020)(116,226)(705,983)

Cash flows from financing activities:
Proceeds from long-term debt .......................................................................................
Repayments of long-term debt ......................................................................................
Increase (decrease) in bank loans ..................................................................................
Proceeds from minority shareholders ...........................................................................
Dividends paid .................................................................................................................
(Increase) decrease in treasury stock, net (Note 18) ....................................................
Other, net .........................................................................................................................

10,803(53,817)56,753135(9,330)(44,146)(1,754)

69,773(15,948)(6,284)
1,137(9,324)
(138)
(585)

31,770(16,202)(4,516)21(9,323)39(530)

90,025(448,475)
472,941
1,125(77,750)(367,883)(14,617)(344,634)

Net cash provided by (used in) financing activities ..........................................

(41,356)

38,631

1,259

Effect of exchange rate changes on cash and cash equivalents ....................................

(421)

525

239

(3,508)Net increase (decrease) in cash and cash equivalents ...................................................
Cash and cash equivalents at beginning of year .............................................................

(31,249)
210,477

65,975
144,502

8,894
135,608(260,408)
1,753,975

Cash and cash equivalents at end of year .......................................................................

¥179,228¥(210,477¥(144,502$1,493,567

The accompanying notes are an integral part of these statements.

30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2003

1. Nature of Operations
The parent company and its subsidiaries (collectively “theCompany”) are engaged in security services, medical services, non-life insurance services, information and communication related services and other services. The Company’s
principal business activities are security services including
on-line centralized security services for commercial and residential premises, as well as large-scale proprietary security
services, static guard services, armored car services formoney collection and deposit, and the development,
manufacturing and sale of various security equipment.
The Company is focusing on its “Social System Industry”,
a network of integrated systems and services centered on thefields of security, medical care, non-life insurance, and information and communication related services, targeted at theneeds of people and business. To develop this Social System
Industry concept, the Company has been diversifying the operation of its services covering: home and other medical services;non-life insurance services; information and communication
services, including cyber security services, software development and system integration activities; Geographic Information
System services using aerial surveying technology; school
education systems; development and sale of real estate; leaseof real estate and other services. Moreover, the Company iscurrently expanding its business into broadband services using
cable television networks through its affiliated companies.

The excess of cost over underlying identifiable net assets at
acquisition dates of investments in subsidiaries and affiliatedcompanies is recorded as goodwill.
On occasion, a consolidated subsidiary or affiliated company accounted for using the equity method may issue its
shares to third parties as either a public or private offeringor upon conversion of convertible bonds to common stockat amounts per share in excess of or less than the Company’s
average per share carrying value. With respect to such transactions, where the sale of such shares is not a part of abroader corporate reorganization contemplated or plannedby the Company, the resulting gains or losses arising fromthe change in ownership interest are recorded in income forthe year the transaction occurs.

2. Significant Accounting Policies
The parent company and its Japanese subsidiaries maintain their records and prepare their statutory financial statements in accordance with accounting principles generally
accepted in Japan. Certain adjustments and reclassifications
have been incorporated in the accompanying financial statements to conform with accounting principles generally
accepted in the United States of America. These adjustments
were not recorded in the statutory books of account.
The preparation of financial statements in conformity withaccounting principles generally accepted in the United Statesof America requires management to make estimates andassumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amountsof revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant accounting policies followed in the preparationof the accompanying consolidated financial statements are
summarized below:(3) Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all highly liquid investments purchased withinitial maturities of three months or less to be cash equivalents.

(1) Basis of Consolidation and Investments in AffiliatedCompanies
The consolidated financial statements include the accountsof the parent company and those of its majority owned subsidiary companies. All intercompany transactions andaccounts have been eliminated in consolidation.
Investments in 20 to 50 percent owned companies, in which
the ability to exercise significant influence exists, are accounted
under the equity method. Consolidated income includes
the Company’s current equity in the net income of affiliatedcompanies, after elimination of intercompany profits.

(5) Inventories
Inventories, consisting of security-related products, realestate, and information and other related products, are stated
at lower of cost or net realizable value. Cost is determined, inthe case of real estate, based on a specific identification
method and, in the case of other inventories, using themoving-average method.

(2) Foreign Currency Translation
All asset and liability accounts of foreign subsidiaries andaffiliates are translated into Japanese yen at appropriate yearend current rates and all income and expense accounts aretranslated at average rates of exchange during the year.
The resulting translation adjustments are accumulated andreported as part of other comprehensive income (loss).
Foreign currency receivables and payables of the Company
are translated into yen at the rate in effect at the balance
sheet date and the resulting translation gains and losses are
credited or charged to income for the year.

(4) Investments in Debt and Equity Securities
The Company classifies investments in debt and equity
securities as “available-for-sale” or “held-to-maturity”. The
Company has no securities classified as “trading”. Marketable debt and equity securities which are classified as“available-for-sale” are recorded at fair value. Unrealized
gains and losses on securities classified as “available-forsale” are reported as part of other comprehensive income(loss), net of tax. Debt securities that are expected to be“held-to-maturity” are reported at amortized cost. Other
investments in non-public companies are recorded at cost
net of other-than-temporary impairment.
Realized gains or losses on the sale of investments are
based on the moving-average cost method and are credited
or charged to income.

31

(6) Deferred Insurance Acquisition Costs
Costs that vary with and are primarily related to acquiring
new insurance policies are deferred and are being amortizedprincipally over the premium-paying period of the related
insurance policies applying a percentage relationship of cost
incurred to premiums from contracts issued to applicable
unearned premiums throughout the period of the contract.

SFAS No. 144 on April 1, 2002. The adoption of SFAS No. 144
did not have a material effect on the Company’s consolidated
financial position and results of operations.
The Company periodically reviews the carrying amountof its long-lived assets held and used, other than goodwill
and intangible assets with indefinite lives, and assets to bedisposed of, whenever events or changes in circumstancesindicated that the carrying amount may not be recoverable.
Long-lived assets to be held and used are reviewed for
impairment by comparing the carrying amount of the assets
with their estimated future undiscounted cash flows. If it isdetermined that an impairment loss has occurred, the loss
would be recognized during the period. The impairment loss
would be calculated as the difference between the asset carrying amount and the fair value. Long-lived assets that are
to be disposed of other than by sale are considered held andused until they are disposed of. Long-lived assets that are
to be disposed of by sale are reported at the lower of theircarrying amount or fair value less cost to sell. Reductions incarrying amount are recognized in the period in which thelong-lived assets are classified as held for sale.

(7) Property, Plant and Equipment and Depreciation
Property, plant and equipment, including significant betterments, are carried at cost. When assets are retired or otherwise disposed of, the cost and related depreciation are
cleared from the respective accounts and the net difference,less any amounts realized on disposition, is reflected inincome. Depreciation is computed primarily using thedeclining-balance method at rates based on the estimateduseful lives of the assets. Assets leased to others under operating leases are primarily depreciated using the straight-line
method over the estimated useful lives. Depreciation expense
was ¥34,735 million ($289,458 thousand), ¥32,084 million and¥28,582 million for the years ended March 31, 2003, 2002 and2001, respectively. Maintenance, repairs and renewals arecharged to income as incurred.
The estimated useful lives of depreciable assets are
as follows:
Buildings
22 to 50 years
Security equipment and control stations
5 years
Machinery, equipment and automobiles 3 to 15 years(10) Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (“SFAS”)
No. 141, “Business Combinations”, and SFAS No. 142,
“Goodwill and Other Intangible Assets”. SFAS No. 141
requires that the purchase method of accounting be used forall business combinations completed after June 30, 2001.
SFAS No. 141 also specifies the types of acquired intangible
assets that are required to be recognized and reported separately from goodwill and those acquired intangible assetsthat are required to be included in goodwill. SFAS No. 142
requires that goodwill no longer be amortized. SFAS No. 142
requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to beamortized over their estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”. Any
recognized intangible asset determined to have an indefinite
useful life is not to be amortized, but instead reviewed for
impairment in accordance with SFAS No. 142 until its life isdetermined to no longer be indefinite.
The Company adopted the provisions of SFAS No. 141 andNo. 142 on April 1, 2002, with the exception of the immediate
requirement to use the purchase method of accounting for all
future business combinations completed after June 30, 2001.
SFAS No. 141 required the Company to evaluate its existingintangible assets and goodwill and to make any necessary
reclassifications in order to conform with the new separation
requirements at the date of adoption. Upon adoption of SFAS
No. 142, the Company reassessed the useful lives and residual values of all intangible assets and made necessary amortization period adjustments. In connection with the transitional
impairment evaluation, SFAS No. 142 required an assessmentof goodwill impairment as of April 1, 2002. To accomplish
this, the Company was required to (1) identify its reporting
units, (2) determine the carrying value of each reporting unit
by assigning the assets and liabilities, including the existing
goodwill and intangible assets to those reporting units, and(3) determine the fair value of each reporting unit. To the(8) Deferred Charges
Deferred charges primarily consist of costs related to installation services of security equipment. The installation costs aredeferred and amortized using the straight-line method overthe contractual period of security services after completion of
the installation. Amortization was ¥13,197 million ($109,975
thousand), ¥12,490 million and ¥11,566 million for the years
ended March 31, 2003, 2002 and 2001, respectively. Previously,
the installation costs had been capitalized as property, plantand equipment and depreciated using the straight-line method
over the contractual period. The related reclassifications ofpreviously reported amounts have been made to conformwith current classifications.
(9) Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of LongLived Assets”, which superseded both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of”, and the accounting and reporting
provisions of Accounting Principles Board (“APB”) Opinion
No. 30, “Reporting the Results of Operations—Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions”, for the disposal of a segment of a business(as previously defined in that Opinion). SFAS No. 144 retains
the fundamental provisions in SFAS No. 121 for recognizing
and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while
also resolving significant implementation issues associatedwith SFAS No. 121. The Company adopted the provisions of32

extent the carrying amount of a reporting unit exceeded thefair value of the reporting unit, the Company compared theimplied fair values of the reporting units’ goodwill. The
implied fair values of goodwill were determined by allocating
the fair values of the reporting units to all of the assets(recognized and unrecognized) and liabilities of the reporting
units in a manner similar to a purchase price allocation, in
accordance with SFAS No. 141. The residual fair value after
this allocation was the implied fair values of the reporting
units’ goodwill.
On April 1, 2002, as a result of the adoption of SFAS
No. 141, the Company recorded a transition gain, as a cumulative effect of accounting change, due to the write-off ofunamortized deferred credits of ¥1,157 million (¥9,642 thousand) which existed at March 31, 2002. The Company recognized an impairment loss amounting to ¥161 million ($1,342
thousand) in the year ended March 31, 2003 since the carrying amounts of goodwill exceeded their implied fair values.

charge of ¥3,699 million, net of tax, representing the effect of
adoption of SAB No. 101. The charge has been reflected as acumulative effect of accounting change in the accompanying
consolidated statements of income. The accounting change
did not have a material effect on the Company’s consolidated
statement of income for the year ended March 31, 2001.
Revenue from security services is recognized over the contractual period or, in the case of specific services, when suchservices are performed. Subscribers are generally requested
to prepay a portion of service charges which are credited todeferred revenue and taken into income ratably over thecovered service period.
Merchandise and software sales are recognized when persuasive evidence of an arrangement including title transfer exists,
delivery has occurred, the sales price is fixed or determinable,
and collectibility is probable, and in the case of installations,when such installations are completed.
Revenue from long-term contracts for Geographic Information System services is recognized under the percentage-ofcompletion method.
Property and casualty insurance premiums are earned
ratably over the terms of the related insurance contracts.
Unearned premiums are earned ratably over the terms of theunexpired portion of premiums written.

(11) Unearned Premiums and Other Insurance Liabilities
Unearned premiums are related to unexpired periods of
insurance contracts and are earned on a pro-rata basis over
the remaining contract period. Other insurance liabilities consist principally of liabilities for unpaid claims and adjustment
expenses, which are estimates of payments to be made onreported claims, and incurred but not reported claims, which
are computed based on past experience for unpaid losses.

(14) Research and Development
Research and development costs are charged to income
as incurred.

(12) Income Taxes
The provision for income taxes is computed based on thepretax income included in the consolidated statements ofincome. The asset and liability approach is used to recognize
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Valuation
allowances are recorded to reduce deferred tax assets when it
is more likely than not that a tax benefit will not be realized.
The effect on deferred tax assets and liabilities of a change intax rates is recognized in income in the period that includes
the enactment date.

(15) Advertising Costs
Advertising costs are charged to income as incurred, except
for the costs related to insurance policies. Advertising costs
for acquiring new insurance policies are deferred and amortized as part of insurance acquisition costs. Advertisingexpenses included in selling, general and administrative
expenses for the years ended March 31, 2003, 2002 and 2001
were ¥5,315 million ($44,292 thousand), ¥5,602 million and¥4,885 million, respectively.
(16) Derivative Financial Instruments
Effective on April 1, 2001, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” andSFAS No. 138, “Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No. 133”. Both standards establish accounting andreporting standards for derivative instruments and for hedging
activities, and require that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure
those instruments at fair value. The cumulative effect adjustment upon the adoption of SFAS No. 133 and No. 138, net ofthe related income tax effect, resulted in an increase to othercomprehensive income of ¥129 million.
The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value
regardless of the purpose or intent for holding them. Changes
in the fair value of derivative financial instruments are either
recognized periodically in income or in shareholders’ equity
as a component of other comprehensive income (loss)
depending on whether the derivative financial instruments
qualify for hedge accounting, and if so, whether they qualify(13) Revenue Recognition
During the year ended March 31, 2001, the Company
adopted Staff Accounting Bulletin (“SAB”) No. 101, “Revenue
Recognition in Financial Statements” issued by the UnitedStates of America Securities and Exchange Commission
retroactively to April 1, 2000. As a result, the Company haschanged its method of accounting for revenues from installation services of security equipment. Effective April 1, 2000,
revenues from installation services of security equipment arerecognized over the contractual period of security services
after completion of the installation. The related installation
costs are also deferred and amortized over the contractual
period. Previously, installation revenues for security equipment were recognized when the Company had substantiallycompleted all of its obligations pursuant to the terms of theinstallation services contract. The Company viewed its obligation under the installation services contract to be substantiallycompleted when installation services of security equipment
were completed and recognized revenues at that time.
At April 1, 2000, the Company recorded a one-time non-cash33

as a fair value hedge or a cash flow hedge. Changes in the fairvalues of derivative financial instruments accounted for as afair value hedge are recorded in income along with the portion of the change in the fair value of the hedged item that
relates to the hedged risk. Changes in the fair value of derivative financial instruments accounted for as a cash flow hedge,
to the extent it is effective as a hedge, are recorded in othercomprehensive income (loss), net of tax. Changes in the fairvalue of derivative financial instruments not qualifying as ahedge are reported in income.
The Company meets the documentation requirements asprescribed by SFAS No. 133 and No. 138, which include theirrisk management objective and strategy for undertaking various hedge transactions. In addition, formal assessment ismade at the hedge’s inception and periodically on an on-goingbasis, as to whether the derivatives used in hedging activities
are highly effective in off-setting changes in fair values orcash flow of hedged items. Hedge accounting is discontinued
for ineffective hedges, if any. Discontinued hedges are recognizedin current income.
Prior to adoption of SFAS No. 133 and No. 138, the Company
used derivative financial instruments to limit its exposure toloss in relation to underlying debt instruments resulting fromadverse fluctuation in interest rates or to provide higher interest income to the Company. The related interest differentials
paid or received under these agreements were recognized over
the terms of the agreements in interest expense.

(19) Recent Pronouncements
In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 applies to legal obligations associatedwith the retirement of long-lived assets that result from theacquisition, construction, development and (or) the normal
operation of long-lived assets, except for certain obligationsof lessees. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fairvalue can be made. The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived
asset and subsequently allocated to expense over the asset’s
useful life. The Company adopted the provisions of SFAS No.
143 on April 1, 2003. The adoption of SFAS No. 143 did nothave a material effect on the Company’s consolidated financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting
for Costs Associated with Exit or Disposal Activities”. SFAS
No. 146 addresses financial accounting and reporting forcosts associated with exit or disposal activities and supersedes Emerging Issues Task Force Issue (“EITF”) No. 94-3,“Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)”. SFAS No. 146 requiresthat a liability be recognized for those costs only when theliability is incurred, that is, when it meets the definition of aliability in the Statements of Financial Accounting Concepts
No. 6, “Elements of Financial Statements”. SFAS No. 146 alsoestablishes fair value as the objective for initial measurementof liabilities related to exit or disposal activities. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of
SFAS No. 146 did not have a material effect on the Company’s
consolidated financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation(“FIN”) No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, an interpretation of FASB statement No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34”. FIN No. 45 requires that a liability be recorded in
the guarantor’s balance sheet upon issuance of a guarantee.
In addition, FIN No.45 requires disclosures about the guarantees that an entity has issued. The Company adopted therecognition provisions of FIN No. 45 prospectively to guarantees issued after December 31, 2002. The disclosure provisions of FIN No. 45 are effective for consolidated financial
statements at March 31, 2003. The adoption of FIN No. 45
did not have a material effect on the Company’s consolidated
financial position and results of operations.
In January 2003, the FASB issued FIN No. 46, ‘‘Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51.’’ FIN No. 46 addresses the consolidation and disclosures by business enterprise of a variable interest entity(“VIE”) as defined in the Interpretation. FIN No. 46 requiresthat the primary beneficiary, an enterprise that holds a majority of variable interests in the VIE, consolidate the VIE and an
enterprise that holds significant variable interests but is not(17) Earnings Per Share
Basic Earnings per Share (“EPS”) is computed based on the
average number of shares of common stock outstanding forthe period. Diluted EPS assumes the dilution that could occur
if securities or other contracts to issue common stock were
exercised or converted into common stock, or resulted in theissuance of common stock.
(18) Free Distribution of Common StockA corporation in Japan may make free distributions of its
common stock to shareholders at the discretion of its Boardof Directors. Free share distributions are accounted for eitherby (i) a transfer from additional paid-in capital to the common
stock account, or (ii) no entry if free shares are distributed
from the portion of previously issued shares in the common
stock account. Under the Japanese Commercial Code, stock
dividends are effected by an appropriation of retained earnings to the common stock account by a resolution of theshareholders and an issuance of additional shares by wayof a stock split with respect to the amount appropriated byresolution of the Board of Directors.
A corporation in the United States of America issuingshares, comparable to less than 25 percent free share distributions, would be required to account for them as stock dividends and the fair value of the shares would be transferredfrom retained earnings to the appropriate capital accounts.
Such transfers, however, would have no effect on total
shareholders’ equity (Note 25).
Free distributions of common stock are included in the EPS
calculation in accordance with accounting principles generally
accepted in the United States of America.

34

the primary beneficiary disclose the information about the VIE.
FIN No. 46 is effective immediately for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired
prior to February 1, 2003, FIN No. 46 is applicable no later thanthe beginning of the first interim or annual reporting period
beginning after June 15, 2003 (effective for the Company the
beginning of the year ending March 31, 2005). The Company
did not enter into any new arrangements with VIEs during theperiod from February 1, 2003 through March 31, 2003.
The Company provides loans and guarantees to organizations managing hospitals and related institutions. Certain
organizations are considered as VIEs under FIN No. 46, andthe Company holds a majority of or significant variable interests in the VIEs. Total assets held by the VIEs at March 31,
2003 were ¥34,869 million ($290,575 thousand). The Company’s maximum exposure to loss would be ¥26,150 million($217,917 thousand). In relation to these VIEs, the Company iscurrently in the process of evaluating the effects of the adoption of FIN No. 46 on the Company’s consolidated financial
position and results of operations.
The Company also provides loans and guarantees to realestate investment companies. Certain investment companies
are considered as VIEs under FIN No. 46. As the Company
has been consolidating these companies, the adoption of
FIN No. 46 will have no material effect on the Company’s
consolidated financial position and results of operations.
In January 2003, the Emerging Issues Task Force reacheda final consensus on EITF No. 03-2, “Accounting for theTransfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities”. EITF No. 03-2
addresses accounting for a transfer to the Japanese government of a substitutional portion of an Employees’ Pension
Fund (“EPF”) plan which is a defined benefit pension planestablished under the Japanese Welfare Pension Insurance
Law. EITF No. 03-2 requires employers to account for theentire separation process of a substitutional portion from anentire plan (including a corporate portion) upon completionof the transfer to the government of the substitutional portionof the benefit obligation and related plan assets as the culmination of a series of steps in a single settlement transaction.
Under this approach, the difference between the fair value ofthe obligation and the assets required to be transferred to
the government should be accounted for and separately disclosed as a subsidy. In April 2002, following the enactmentof the Japanese Welfare Pension Insurance Law, the parent
company and certain of its Japanese subsidiaries obtained
approval from Japan’s Ministry of Health, Labour and Welfare
for exemption from the future benefit obligation with respect
to the substitutional portion of the EPF plan. The Company
will recognize the relevant gain or loss in accordance with
EITF No. 03-2 when the past benefit obligation and related
plan assets are transferred to the government. The effect of
the completion of the transaction has not yet been determined because the benefit obligation and the related plan
assets to be transferred may change significantly.

3. U.S. Dollar Amounts
U.S. dollar amounts have been included in these financial
statements solely for the convenience of the reader. Thesetranslations should not be construed as representing thatthe yen amounts actually represent, or have been or could be
converted into U.S. dollars. The translations of yen into U.S.
dollars have been made at the rate of ¥120=US$1, the rate
prevailing on the Tokyo Foreign Exchange Market on
March 31, 2003.
4. Reconciliation of the Differences between Basicand Diluted Net Income Per Share (“EPS”)
Reconciliation of the differences between basic and diluted
EPS for the years ended March 31, 2003, 2002 and 2001 is
as follows:
In millionsof yenThousandsof shares

Income before
cumulative
effect ofaccountingchangeWeightedaverage shares

For the year ended
March 31, 2003:
Basic EPS—
Income before cumulative
effect of accounting change.. ¥29,118
Effect of dilutive securities—
Convertible bonds ...................
0
Diluted EPS—
Income before cumulative effectof accounting change fordiluted EPS computation ...... ¥29,118
For the year ended March 31, 2002:
Basic EPS—
Income before cumulative
effect of accounting change ... ¥34,082
Effect of dilutive securities—
Convertible bonds.....................
3
Diluted EPS—
Income before cumulative effectof accounting change fordiluted EPS computation........ ¥34,085
For the year ended March 31, 2001:
Basic EPS—
Income before cumulative
effect of accounting change ... ¥47,695
Effect of dilutive securities—
Convertible bonds.....................
5
Diluted EPS—
Income before cumulative effectof accounting change fordiluted EPS computation........ ¥47,700(20) Reclassifications
Certain reclassifications of previously reported amounts
have been made to conform with current classifications.

35

In yenIn U.S.
dollars

EPS

227,849 ¥127.79 $1.07
9227,858 ¥127.79 $1.07

233,138 ¥146.19
150

233,288 ¥146.11

233,081 ¥204.63
211

233,292 ¥204.46

5. Acquisitions
In December 2000, the parent company acquired all issued
shares of Mac Corporation, which engages in sales and maintenance services for medical equipment, for an aggregate
amount of ¥3,980 million.
In August 2001, the parent company acquired all issued
shares of Yoshikikaku Co., Ltd., which engages in sales andlease services for medical facilities and equipment, for an
aggregate amount of ¥3,457 million. The estimated fair valuesof the assets acquired and liabilities assumed at the date ofacquisition are as follows:

6. Cash and Cash Equivalents
Cash and cash equivalents at March 31, 2003 and 2002 werecomprised as follows:

Cash ..........................................
Time deposits...........................
Call loan....................................
Investment securities ..............

¥1,088
7,154
743
8,985
1,430
2,295
1,803
5,528
¥3,457

March 31

March 31

2002

2003

¥106,949 ¥115,947
28,33935,84330,00040,00013,94018,687¥179,228 ¥210,477$0,891,242
236,158
250,000
116,167$1,493,567

Investment securities include marketable bonds of theJapanese government and deposits with financial institutions,most of which are held for safekeeping in the name of therelevant company by financial institutions such as banks andsecurities companies. These agreements mature within threemonths and the carrying values approximate market. The
Company has never experienced any losses through defaultof the financial institutions and does not anticipate any
default on agreements outstanding.

In March 2002, the parent company acquired all issued sharesof Arai & Co., Ltd., which engages in sales and leasing servicesof real estate, for an aggregate amount of ¥1,500 million. The
estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition are as follows:

7. Cash Deposits
The Company operates cash collection and deposit services
for financial institutions relating to cash dispensers locatedoutside of financial institution facilities. Cash deposit balances,mostly in cash dispensers, of ¥45,251 million ($377,092 thousand) and ¥40,750 million at March 31, 2003 and 2002, respectively, are segregated from cash and cash equivalents and are
restricted as to use by the Company. The Company funds
most of the necessary cash through bank overdrafts anddeposits from the related financial institutions. Bank loans anddeposits received include ¥17,203 million ($143,358 thousand)and ¥26,738 million ($222,817 thousand), respectively, atMarch 31, 2003, and ¥15,234 million and ¥20,560 million,
respectively, at March 31, 2002, relating to this operation. As
part of its fee arrangement for such services, the Company isreimbursed for the interest cost of the related overdrafts.

In millions of yen

Current assets.........................................................
Property, plant and equipment .............................
Goodwill..................................................................
Other........................................................................
Total assets acquired .........................................
Current liabilities ....................................................
Long-term debt.......................................................
Other........................................................................
Total liabilities assumed ....................................
Minority interest in subsidiaries ...........................
Net assets acquired ............................................

In thousands of
U.S. dollars

2003

In millions of yen

Current assets.........................................................
Investments and long-term receivables ...............
Other........................................................................
Total assets acquired .........................................
Current liabilities ....................................................
Long-term debt.......................................................
Other........................................................................
Total liabilities assumed ....................................
Net assets acquired ............................................

In millions of yen¥07,282
41,762
2,743
13,17264,95923,49434,0085,944
63,446
13¥01,500

8. Short-Term Investments and Investment Securities
Short-term investments (current) and investment securities(non-current) include debt and equity securities. The related
aggregate fair value, gross unrealized gains, gross unrealized
losses and cost pertaining to “available-for-sale” and “heldto-maturity” investments at March 31, 2003 and 2002 wereas follows:

The acquisitions referred to above have been accounted forunder the purchase method of accounting, and the identifiable
assets and liabilities of the acquired companies have beenrecorded at their fair value at the date of acquisition. The resultsof their operations have been included in the consolidated
statements of income since the date of acquisition of the majority of outstanding shares. The difference between the purchaseprice and the value assigned to the underlying net assets
acquired is included in goodwill and amounted to ¥12,491 million ($104,092 thousand) and ¥10,782 million at March 31, 2003
and 2002, respectively.
The consolidated pro forma information that would show theresults of the Company’s consolidated operations for the years
ended March 31, 2002 and 2001 has not been disclosed basedon materiality considerations.

In millions of yen
March 31, 2003
Gross unrealized

36

Cost

Gains

LossesFair value

Available-for-sale:
Equity securities ...
Debt securities ......
Total .........................

¥051,251
87,946¥139,197¥1,592
1,243¥2,835¥4,180475¥4,655¥048,663
88,714¥137,377

Held-to-maturity:
Debt securities ......

¥014,251¥ 0,010¥0,042¥014,219

In millions of yen

In thousands of U.S. dollars

March 31, 2002

March 31, 2003

Gross unrealized
Cost

Gains

Available-for-saleLossesFair value

Available-for-sale:
Equity securities ...
Debt securities ......
Total .........................

¥059,311
50,345¥109,656¥3,444714¥4,158¥8,038894¥8,932¥054,717
50,165¥104,882

Held-to-maturity:
Debt securities ......

¥017,500¥¥0,090¥017,410—

Held-to-maturity

Cost

Fair value

Cost

Fair value

Due within 1 year .........$102,142
Due after 1 year
through 5 years .......... 566,350
Due after 5 years
through 10 years ........ 35,700
Due after 10 years ....... 28,691..................................$732,883$099,692$087,500$087,584

574,167

28,75928,40836,06629,358$739,283—
2,500$118,759—
2,500$118,492

In thousands of U.S. dollars
March 31, 2003

During the years ended March 31, 2003, 2002 and 2001,
the net unrealized losses on “available-for-sale” securities
included as part of other comprehensive income (loss), netof tax, decreased by ¥1,723 million ($14,359 thousand), andincreased by ¥2,152 million and ¥19,601 million, respectively.
Proceeds from the sale of “available-for-sale” securities forthe years ended March 31, 2003, 2002 and 2001 were ¥8,228
million ($68,567 thousand), ¥5,126 million and ¥3,749 million,
respectively. On those sales, the gross realized gains andgross realized losses, using a specifically identified movingaverage cost basis, for the years ended March 31, 2003, 2002
and 2001 were as follows:

Gross unrealized
LossesFair value

Available-for-sale:
Equity securities..... $0,427,092
Debt securities .......
732,883
Total........................... $1,159,975$13,267 $34,834
10,358
3,958$23,625 $38,792$0,405,525
739,283$1,144,808

Held-to-maturity:
Debt securities ....... $0,118,759$00,083 $00,350$0,118,492

Cost

Gains

At March 31, 2003, debt securities principally consisted ofshort-term investments in monetary trusts, Japanese government bonds, corporate bonds, U.S. treasury securities andU.S. Government Agency Bonds.
In September 2000, the parent company contributed certain
marketable equity securities, not including those of its subsidiaries and affiliated companies, to an employee retirement
benefit trust, with no cash proceeds thereon. The fair value ofthese securities at the time of contribution was ¥21,550 million.
Upon contribution of these securities, net unrealized gains
amounting to ¥21,366 million were realized and included in
the consolidated statement of income for the year ended
March 31, 2001.
The cost and fair value of “available-for-sale” and ”held-tomaturity” debt securities by contractual maturity at March 31,
2003 are as follows:

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2003

2002

2001

2003

Gross realized gains..... ¥0,759
Gross realized losses ... 1,266¥2,556470¥1,491
255$06,325
10,550

The Company maintains long-term investment securities,
included as investment securities, issued by a number of
non-public companies. The aggregate carrying amount of theinvestments in non-public companies, at cost net of otherthan-temporary impairment, was ¥23,241 million ($193,675
thousand) and ¥12,500 million at March 31, 2003 and 2002,
respectively. The corresponding fair value at that date was
not computed as such estimation was not practicable.

In millions of yen
March 31, 2003
Available-for-sale

9. Inventories
Inventories principally consist of operational equipment
and certain merchandise, including security-related products,
software and real estate for sale.
Inventories at March 31, 2003 and 2002 comprised thefollowing:

Held-to-maturity

Cost

Fair value

Cost

Fair value

Due within 1 year ......... ¥12,257
Due after 1 year
through 5 years .......... 67,962
Due after 5 years
through 10 years ........
4,284
Due after 10 years .......
3,443.................................. ¥87,946¥11,963¥10,500¥10,510

68,900

3,451

3,409

4,328
3,523
¥88,714—300¥14,251—300¥14,219

37

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2003

2002

2003

Security-related products .......... ¥07,504
Real estate................................... 28,662
Information and other-related
products ....................................
5,635¥41,801¥10,493
39,154$062,534
238,850

6,177¥55,824

46,958$348,342

A summary of transactions and balances with the affiliatedcompanies accounted for using the equity method is presented
below:

Work in process real estate inventories at March 31, 2003
and 2002, amounting to ¥20,931 million ($174,425 thousand)and ¥35,682 million, respectively, are included in real estate.
10. Investments in Affiliated Companies
The Company has investments in affiliated companies thatare accounted for under the equity method. The principal
investments are Nohmi Bosai Ltd., a 28.6 percent owned
affiliate, which is Japan’s largest manufacturer of fire alarms
and listed on the First Section of the Tokyo Stock Exchange;
Taiwan Secom Co., Ltd., a 27.6 percent owned affiliate, which
is listed on the Taiwan Stock Exchange; S1 Corporation,
a 25.6 percent owned affiliate, which is listed on the Korea
Stock Exchange; Japan Image Communications Co., Ltd.,a 30.6 percent owned affiliate; and Japan Cablenet Holdings
Limited, a 23.0 percent owned affiliate.
Summarized financial information regarding the affiliatedcompanies accounted for under the equity method was asfollows:
In thousands ofIn millions of yen

U.S. dollars

March 31

March 31

2002

2003

Current assets ..........................
Non-current assets ..................

¥102,363 ¥106,123
139,396 129,402$0,853,025
1,161,633

2003

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

¥241,759 ¥235,525$2,014,658

Current liabilities......................
Non-current liabilities..............
Shareholders’ equity ...............

¥063,570 ¥058,303
64,45859,985
113,731 117,237$0,529,750
537,150
947,758

Total liabilities andshareholders’ equity ..........

¥241,759 ¥235,525$2,014,658

Year ended
March 31

2001

2003

Net sales................... ¥178,397 ¥158,770 ¥150,005$1,486,642

Gross profit .............. ¥055,179 ¥045,621 ¥042,441$0,459,825

Net income............... ¥006,996 ¥007,384 ¥004,318$0,058,300

2003

2002

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2003

2002

2001

2003

Sales .......................... ¥01,862¥1,595¥1,637$15,517

Purchases .................. ¥10,061¥9,704¥9,764$83,842

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2003

2002

2003

Notes and accounts
receivable, trade......................... ¥00,606¥0,940$05,050

Loan receivables .......................... ¥00,987¥0,268$08,225

Notes and accounts payable....... ¥02,672¥2,901$22,267

Guarantees for bank loans .......... ¥10,101¥8,765$84,175

11. Long-Lived Assets
The Company recognized impairment losses on property,
plant and equipment of ¥3,012 million ($25,100 thousand) for
the year ended March 31, 2003, which were included in otherexpenses in the accompanying consolidated statements ofincome. The impaired assets included the properties held byreal estate investment companies as part of investment assetsof the insurance service segment. Fair value was determinedbased on appraisal value.

In thousands ofIn millions of yen
U.S. dollars
Years ended
March 31

In millions of yen

12. Goodwill and Other Intangible Assets
The components of acquired intangible assets excluding
goodwill at March 31, 2003 and April 1, 2002 were as follows:
In millions of yen
March 31, 2003
Gross
carrying
amountDividends received from affiliated companies for the years
ended March 31, 2003, 2002 and 2001 were ¥924 million($7,700 thousand), ¥655 million and ¥419 million, respectively.
Among the affiliated companies accounted for using theequity method, the stocks of three companies carried atequity of ¥22,457 million ($187,142 thousand) and ¥22,302
million at March 31, 2003 and 2002, respectively, had aquoted market value of ¥33,884 million ($282,367 thousand)and ¥40,643 million at March 31, 2003 and 2002, respectively.
The unamortized amounts of goodwill were ¥729 million($6,075 thousand) and ¥415 million at March 31, 2003 and2002, respectively. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible Assets”, this equity-method goodwill is nolonger amortized, but is being analyzed for impairment. Prior
to the adoption of SFAS No. 142, goodwill was amortized ona straight-line basis over periods not exceeding 10 years.

Accumulated
amortization

Net
carrying
amountAmortized intangible assets:
Software..................................... ¥022,065
Other...........................................
5,560
Total ............................................... ¥027,625(¥06,311) ¥015,754(2,959)2,601(¥09,270) ¥018,355

Unamortized intangible assets ... ¥004,603¥—¥004,603

In millions of yen
April 1, 2002
Gross
carrying
amount38

Accumulated
amortization

Net
carrying
amountAmortized intangible assets:
Software..................................... ¥019,029
Other...........................................
6,445
Total ............................................... ¥025,474(¥03,980) ¥015,049(4,174)2,271(¥08,154) ¥017,320

Unamortized intangible assets ... ¥004,553¥—¥004,553

Reconciliations of reported income before cumulative effectof accounting change and net income and basic and diluted
Earnings per Share (“EPS”) to the amounts adjusted for the
exclusion of goodwill amortization for the years ended March
31, 2002 and 2001 were as follows:

In thousands of U.S. dollars
March 31, 2003
Gross
carrying
amountAccumulated
amortization

Amortized intangible assets:
Software..................................... $183,875
Other...........................................
46,333
Total ............................................... $230,208

Net
carrying
amountIn millions of yen($52,592) $131,283(24,658)
21,675($77,250) $152,958

Unamortized intangible assets ... $038,358$—

Years ended
March 31
2002

$038,358

Aggregate amortization expense for the year ended March
31, 2003, was ¥4,134 million ($34,450 thousand).
The estimated aggregate amortization expense for intangible
assets for the next five years is as follows:
Years ending March 31

In millions of yen

In thousands of
U.S. dollars¥4,650
4,385
3,820
2,929
1,360

$38,750
36,542
31,833
24,408
11,333

2004 ....................................................
2005 ....................................................
2006 ....................................................
2007 ....................................................
2008 ....................................................

Reported net income ............................................ ¥34,082 ¥43,996
Addback: Goodwill amortization .........................
2,197
1,897
Adjusted net income ............................................ ¥36,279 ¥45,893
Per share data:
In yenYears ended
March 31
2002

The changes in the carrying amount of goodwill by businesssegment for the year ended March 31, 2003 were as follows:

Security
services

April 1, 2002 ...........
Goodwill acquired
during the year.....
Impairment
losses ....................
Translation
adjustment ...........
March 31, 2003.......

Medical Insurance
services services

Total¥1,239¥5,063¥—¥5,637¥11,939

—

—

—

708

708

—

(161)

—

—

(161)

5
¥1,244—¥4,902—¥——¥6,345

5¥12,491

Reported diluted EPS........................................ ¥146.11 ¥204.46
Addback: Goodwill amortization .....................
9.42
8.13
Adjusted diluted EPS ........................................ ¥155.53 ¥212.59
Net income:
Reported basic EPS........................................... ¥146.19 ¥188.76
Addback: Goodwill amortization .....................
9.42
8.14
Adjusted basic EPS ........................................... ¥155.61 ¥196.90
Reported diluted EPS........................................ ¥146.11 ¥188.61
Addback: Goodwill amortization .....................
9.42
8.13
Adjusted diluted EPS ........................................ ¥155.53 ¥196.74

In thousands of U.S. dollars

Security
services

Information
andcommunication
related andother services

Total

$—

$46,975$099,492

—

5,900

5,900

—

—

(1,342)—$——$52,875

42$104,092

Medical Insurance
services services

April 1, 2002 ........... $10,325 $42,192
Goodwill acquired
during the year.....
——
Impairment
losses ....................
— (1,342)
Translation
adjustment ...........
42—
March 31, 2003....... $10,367 $40,850

2001

Income before cumulative
effect of accounting change:
Reported basic EPS........................................... ¥146.19 ¥204.63
Addback: Goodwill amortization .....................
9.42
8.14
Adjusted basic EPS ........................................... ¥155.61 ¥212.77

In millions of yen
Information
andcommunication
related andother services

2001

Reported income before cumulative
effect of accounting change ............................... ¥34,082 ¥47,695
Addback: Goodwill amortization .........................
2,197
1,897
Adjusted income before cumulative
effect of accounting change ............................... ¥36,279 ¥49,592

13. Bank Loans and Long-Term Debt
Bank loans of ¥124,048 million ($1,033,733 thousand) and¥68,003 million at March 31, 2003 and 2002, respectively, aregenerally comprised of 30 to 365 day notes. Their interest
rates ranged from 0.49 to 1.88 percent at March 31, 2003 andfrom 0.4 to 2.41 percent at March 31, 2002. Substantially allof these loans are with banks. The Company has entered into
basic agreements with these banks that state that, with respect
to all present or future loans with such banks, collateral (including sums on deposit with such banks) or guarantors shall be
provided immediately upon request. Further, any collateral
furnished pursuant to such agreements or otherwise will beapplicable to all indebtedness to such banks. The Company
has never been requested to submit such additional security.

39

Long-term debt at March 31, 2003 and 2002 comprised thefollowing:
In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2002

2003

2003

Loans, principally from banks
due 2003 to 2016 with interest
rates ranging from 0.00 to 6.60%
in 2003 and 2002:
Secured .......................................... ¥053,032 ¥061,565
Unsecured ..................................... 27,343
57,237
1.60% unsecured convertible
bonds due 2002, convertible
currently at ¥2,667.8 ($22.23) for
one common share, redeemablebefore due date...............................
—
33
1.60% unsecured convertible
bonds due 2004, convertible
currently at ¥2,372.4 ($19.77) for
one common share, redeemablebefore due date...............................
18
18
2.05% unsecured notes due 2003 ...
—
5,000
0.53% unsecured bonds due 2006.. 30,000
30,0000.46% unsecured bonds due 2007..
1,500—
1.80% secured bonds due 2004 ......
200
200
1.21% secured bonds due 2006 ......
300
300
Obligations under capital leases,
due 2003 to 2026 (Note 20)............ 10,881
11,397
123,274 165,750
Less:
Portion due within one year .......... 20,507
32,703¥102,767 ¥133,047

14. Insurance-Related Operations
Secom General Insurance Co., Ltd. (“Secom Insurance”),
a subsidiary of the parent company, maintains accounting
records as noted in Note 2 in accordance with the accounting
principles and practices generally accepted in Japan, whichvary in some respects from accounting principles generally
accepted in the United States of America. Those differences
are principally, (a) that insurance acquisition costs arecharged to income when incurred in Japan whereas in the
United States of America those costs are deferred and amortized generally over the premium-paying period of the insurance policies, (b) that liabilities related to incurred but notreported claims are computed based on related regulations inJapan whereas in the United States of America those liabilities are computed based on past experience for unreported
losses, and (c) that unearned premiums are calculated basedon the documents authorized by the Supervisory Authorities
in Japan whereas in the United States of America unearned
premiums are reflected based on the lapse and surrender
over the contract period.
In addition, under certain property and casualty insurance
contracts with a refund clause and long-term insurance policies that provide refunds at maturity, such as personal injury
and fire, the policyholder receives a refund if premiums havebeen fully paid unless a substantial settlement (as definedin the policy) has occurred. The Company has provided forsuch refundable amounts by classifying a portion of the net
premiums written, together with interest thereon, as investment deposits by policyholders. Contract and policy terms are
principally five years.
For purposes of preparing the consolidated financial statements, appropriate adjustments have been made to reflect
such items in accordance with accounting principles generally
accepted in the United States of America.
The amounts of net equity of Secom Insurance at March 31,
2003 and 2002 were ¥15,902 million ($132,517 thousand) and¥19,653 million, respectively.

$0,441,934
227,858—150—
250,000
12,5001,667
2,500
90,675
1,027,284
170,892$0,856,392

Property, plant and equipment with a carrying amount of¥72,804 million ($606,700 thousand), inventories with a carrying amount of ¥24,097 million ($200,808 thousand), investment securities with a carrying amount of ¥695 million ($5,792
thousand), time deposits of ¥192 million ($1,600 thousand) andintangibles and other with a carrying amount of ¥1,616 million($13,467 thousand) were pledged as collateral for short-termand long-term debt at March 31, 2003.
The Company has no compensating balance arrangementswith any lending bank. However, as is the customary practicein Japan, the Company had time deposits aggregating ¥1,228
million ($10,233 thousand) with such banks at March 31, 2003.
The aggregate annual maturities on long-term debt after March
31, 2003 are as follows:
Years ending March 31

2004.....................................................
2005.....................................................
2006.....................................................
2007.....................................................
2008.....................................................
Later years ..........................................

In millions of yen

In thousands of
U.S. dollars¥020,507
16,34928,92743,543
3,215
10,733¥123,274$0,170,892
136,242
241,058
362,858
26,79289,442$1,027,284

15. Pension and Severance Costs
Employees of the parent company and its Japanese subsidiaries whose services are terminated are, under mostcircumstances, entitled to lump-sum severance indemnities or
eligible for pension benefits. Lump-sum severance indemnities
are provided to employees with three to 10 service years andare determined based on current basic rates of pay, length ofservice and conditions under which the termination occurs.
The parent company and certain of its Japanese subsidiaries
maintain an Employees’ Pension Fund (“EPF”) plan which isa defined benefit pension established under the Japanese
Welfare Pension Insurance Law, covering substantially all of
their employees. The EPF plan is composed of the substitutional portion and the corporate portion. The pension benefits
for the substitutional portion are determined based on standard remuneration scheduled by the Japanese Welfare
Pension Insurance Law and the length of participation. The
pension benefits of the corporate portion are determined basedon current basic rates of pay, length of service and conditions
under which the termination occurs. The EPF plan is funded40

in conformity with the funding requirements of the Japanese
Welfare Pension Insurance Law.
To supplement the EPF plan, the parent company andits major Japanese subsidiaries act as trustees for noncontributory defined benefit pension plans which cover substantially all of the eligible employees having 10 years ormore of service. The benefits are in the form of lump-sumand (or) pension payments and are determined by formulabased upon length of service and age at time of termination.
The Company contributes amounts required to maintain sufficient plan assets to provide for accrued benefits, subject tolimitations on deductibility imposed by Japanese income
tax laws.
In March 2002, the parent company and certain of its
Japanese subsidiaries integrated and amended three pension plans as described above, comprised of a lump-sum
payment plan, the corporate portion of the EPF plan and a
non-contributory defined benefit pension plan, to a cash balance pension plan, effective April 1, 2002. Under the cash balance pension plan, each participant has an account which iscredited annually based on the current rate of pay and market-related interest rate. With this plan amendment, the benefit obligation decreased and the resulting prior service benefit
is amortized based on the remaining service period.
In April 2002, following the enactment of changes to theJapanese Welfare Pension Insurance Law, the parent company and certain of its Japanese subsidiaries obtained
approval from Japan’s Ministry of Health, Labour and Welfare
for exemption from the future benefit obligation with respect
to the substitutional portion of the EPF plan. The Company
will recognize the relevant gain or loss in accordance with
the Emerging Issues Task Force No. 03-2, “Accounting for theTransfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities,” when the pastbenefit obligation and related plan assets are transferred to
the government.
In March 2003, the parent company and certain of its
Japanese subsidiaries decided to transfer the 20 percent
portion of their cash balance pension plan for the eligible
employees having three years or more of service to a defined
contribution pension plan and amend the calculation methodof a market-related interest rate for the remaining 80 percent
portion, effective April 1, 2003. With this plan amendment, thebenefit obligation decreased and the resulting prior service
benefit is amortized based on the remaining service period.

Net pension and severance costs under Statement of
Financial Accounting Standards (“SFAS”) No. 87, “Employers’
Accounting for Pensions”, for the years ended March 31, 2003,
2002 and 2001 were as follows:

2003

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2002

2001

Net pension andseverance costs (credit):
Service cost.................... ¥(4,200 ¥08,032 ¥(6,898
Interest cost.................... 3,449
3,930 3,755
Expected return onplan assets ................... (2,749) (3,488) (3,962)
Amortization oftransition assets...........
(46)
(46)
(46)
Amortization of priorservice benefit.............. (1,172)
(85)
(37)
Recognized actuarialloss................................ 3,336
1,872
606
Net periodic benefit cost... ¥(7,018 ¥10,215 ¥(7,214

2003$(35,000
28,742(22,908)(384)(9,767)27,800$(58,483

The changes in benefit obligation and plan assets, funded
status and composition of amount recognized in the consolidatedbalance sheets were as follows:
In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2002

2003

2003

Change in benefit obligation:
Benefit obligation
at beginning of year ............... ¥137,867 ¥131,087 $ 1,148,892
Service cost...............................
4,200
8,032
35,000Interest cost ..............................
3,449
3,930
28,742
Plan participants’contributions...........................
7
1,612
58
Actuarial loss ............................
554
12,482
4,616
Amendments ............................
(6,786) (15,671)(56,550)
Benefits paid .............................
(3,803)(3,698)(31,692)
Acquisition ................................
—
93—
Benefit obligation
at end of year.......................... 135,488 137,867
1,129,066
Change in plan assets:
Fair value of plan assets
at beginning of year ...............
88,24995,719735,408
Actual return on plan assets....
(8,521) (11,876)(71,008)
Employer contribution .............
6,414
5,880
53,450Plan participants’contributions...........................
7
1,612
58
Benefits paid .............................
(3,432)(3,086)(28,600)
Fair value of plan assets
at end of year..........................
82,717
88,249689,308
Funded status................................
52,771
49,618439,758
Unrecognized actuarial loss ........ (79,511) (71,023)(662,592)
Unrecognized transition assets...
89
135
742
Unrecognized prior service
benefit ..........................................
22,425
16,852
186,875
Net amount recognized .............. (¥004,226) (¥004,418) ($ 0,035,217)41

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 312003

16. Exchange Gains and Losses
Interest and other revenue for the years ended March 31,
2003, 2002 and 2001 includes net exchange gains of ¥389
million ($3,242 thousand), ¥321 million and ¥313 million,
respectively.

2003

2002

Amounts recognized in the
consolidated balance sheets
consist of:
Accrued pension andseverance costs ...................... ¥41,704 ¥36,622
Accumulated othercomprehensive income(loss) ........................................ (45,930) (41,040)
Net amount recognized .............. (¥04,226) (¥ 4,418)

17. Income Taxes
Total income taxes for the years ended March 31, 2003,
2002 and 2001 were allocated as follows:$347,533(382,750)($035,217)

March 31

Discount rate.......................................
Expected long-term rate of
return on plan assets........................
Long-term rate of salary increase .....

2003

2002

2001

2.5%

2.5%

3.0%

3.0%
2.7%

3.0%
4.0%
2.7% 2.2–3.5%

The plan assets consist principally of corporate equity
securities, government securities and corporate debt securities.
The provisions of SFAS No. 87 require recognition in thebalance sheet of a minimum pension liability and related
intangible assets for pension plans with an accumulated benefit obligation in excess of plan assets. The minimum pension
liability which exceeded the unrecognized prior service cost
was recorded as a component of accumulated other comprehensive income (loss), net of tax, of ¥26,115 million ($217,625
thousand) and ¥23,109 million at March 31, 2003 and 2002,
respectively.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan withaccumulated benefit obligation in excess of plan assets were¥135,488 million ($1,129,066 thousand), ¥123,916 million($1,032,633 thousand) and ¥82,717 million ($689,308 thousand),
respectively, at March 31, 2003, and ¥137,867 million, ¥124,127
million and ¥88,249 million, respectively, at March 31, 2002.
Most overseas subsidiaries have various retirement plans,
which are primarily defined contribution plans, covering
substantially all of their employees. The funding policy forthe defined contribution plans is to annually contribute an
amount equal to a certain percentage of the participants’annual salaries. The contributions to the defined contribution
pension plans for the years ended March 31, 2003, 2002 and2001 were ¥22 million ($183 thousand), ¥20 million and¥19 million, respectively.

42

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2003

Income .......................... ¥24,048 ¥30,183 ¥ 35,751
Cumulative effect ofaccounting change ....
——
(3,528)
Shareholders’ equity—
accumulated othercomprehensive
income (loss):
Unrealized losses
on securities ...........
439(1,273) (13,419)
Unrealized gains
on derivative
instruments ............
6
24—
Minimum pension
liabilities
adjustments............
(1,379) (3,633) (11,788)
Foreign currencytranslation
adjustments............
(279)
—
—
¥22,835 ¥25,301 ¥ 07,016$200,4002003

The assumptions used in computing the information above
are as follows:

In millions of yen

2002

—

3,658
50
(11,492)(2,325)$190,291

The Company is subject to a number of different income
taxes which, in the aggregate, indicate a statutory tax ratein Japan of approximately 41.9 percent for the years ended
March 31, 2003, 2002 and 2001.
Amendments to Japanese tax regulations were enacted on
March 24, 2003. As a result of this amendment, the statutory
tax rate was reduced from approximately 41.9 percent to40.6 percent effective from April 1, 2004. Deferred tax assets
and liabilities expected to be settled or realized on or after
April 1, 2004 were calculated at the rate of approximately
40.6 percent.
Reconciliations of the differences between income taxes
computed at statutory tax rates and consolidated income tax
expense were as follows:

The significant components of deferred tax assets andliabilities at March 31, 2003 and 2002 were as follows:

2003

Year ended
March 31

2001

2003

2002

Income taxes
computed at statutory
tax rate of 41.9% ....... ¥22,153 ¥27,140 ¥34,586
Increase (decrease)resulting from:
Unrecognized tax
benefits fromsubsidiaries in loss
positions .................
2,537
2,081
1,305
Reversal ofvaluation
allowance due
to utilization ofoperating loss
carryforwards.........
(1,545)(670) (2,504)
Amortization of
non-deductible
goodwill..................
—
763
699
Other, net..................
903
869
1,665
Consolidated
income taxes ...... ¥24,048 ¥30,183 ¥35,751

In thousands of
U.S. dollars
March 31

2002

2003

2003

Deferred tax assets:
Loss carryforwards ................. ¥(23,019 ¥(22,062
Accrued pension andseverance costs ..................... 17,081
17,611
Deferred revenue .................... 11,880
11,850Adjustment of book value atthe date of acquisition—
Land and buildings .............
9,432
10,245
Other assets.........................
2,593
2,676
Accrued bonus ........................
3,116
2,453
Investment securities..............
2,650
805
Allowance for doubtful
accounts.................................
2,399
1,627
Vacation accrual ......................
1,953
1,873
Property, plant andequipment ............................
1,897—
Enterprise and state income
taxes .......................................
916
2,020
Other ........................................
7,855
7,136
Gross deferred tax assets... 84,791
80,358Less: Valuation allowance .. (21,889) (21,256)
Total deferred tax assets .... 62,902
59,102
Deferred tax liabilities:
Deferred installation costs ..... (8,076)(8,052)Adjustment of book value atthe date of acquisition—
Land and buildings ............. (6,589)(7,012)Other investments............... (2,523)(2,603)Long-term receivables ........ (1,955)(2,021)
Capitalization of property
acquisition tax ....................... (1,592)(1,540)
Unearned premiums andother insurance liabilities ..... (1,454)(1,291)Other ........................................ (2,525)(2,979)Gross deferred tax
liabilities............................. (24,714) (25,498)
Net deferred tax assets ...... ¥(38,188 ¥(33,604

In thousands ofIn millions of yen
U.S. dollars
Years ended
March 31

In millions of yen
March 31

$184,608

21,142(12,875)—
7,525$200,400

43$(191,825
142,342
99,00078,60021,60825,96722,08319,992
16,27515,808
7,633
65,458706,591(182,408)
524,183(67,300)(54,908)(21,025)(16,292)(13,267)(12,117)(21,040)(205,949)$(318,234

The transaction for repurchase of treasury stock included
a portion with related parties, Yugen Kaisha Iida Kosan andYugen Kaisha Toda Zenken, which are asset managementcompanies with a majority of voting interests held by the parent company’s directors and their immediate families. The
amounts purchased from these related parties, Yugen Kaisha
Iida Kosan and Yugen Kaisha Toda Zenken, were ¥25,530
million ($212,750 thousand) and ¥16,512 million ($137,600
thousand), respectively.

The valuation allowance principally relates to deferred tax
assets of the subsidiaries with operating loss carryforwards,
for tax purposes, that are not expected to be realized. The netchange in the total valuation allowance for the years ended
March 31, 2003 and 2002 was an increase of ¥633 million ($5,275
thousand) and ¥1,296 million, respectively.
In assessing the realizability of deferred tax assets, theCompany management considers whether it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. The Company management considered the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies
in making this assessment. Based upon the level of historicaltaxable income and projections for future taxable income
over the periods in which the deferred tax assets are
deductible, the Company management believes it is more
likely than not that the Company will realize the benefits ofthese deductible differences, net of the existing valuation
allowance at March 31, 2003 and 2002.
No deferred income taxes have been provided on undistributed earnings of overseas subsidiaries totaling ¥2,852
million ($23,767 thousand) at March 31, 2003 because they
are not expected to be remitted in the foreseeable future.
At March 31, 2003, tax loss carryforwards of domestic subsidiaries amounted to ¥49,193 million ($409,942 thousand)and are available for offsetting against future taxable earningsof such subsidiaries for up to five years, as follows:
Expires in the years ending March 31

2004 ......................................................
2005 ......................................................
2006 ......................................................
2007 ......................................................
2008 ......................................................

In millions of yen

In thousands of
U.S. dollars¥32,758
2,068
3,010
3,584
7,773
¥49,193$272,983
17,23325,08329,86764,776$409,942(2) Retained Earnings
The Japanese Commercial Code, amended effective
October 1, 2001, provides that an amount equal to at least 10
percent of cash dividends and other distributions fromretained earnings paid in cash by the parent company and its
Japanese subsidiaries be appropriated as a legal reserve until
an aggregate amount of additional paid-in capital and legal
reserve equals 25 percent of the common stock account.
The Japanese Commercial Code requires that dividends
at year-end, which the Board of Directors resolved to declarecustomarily in the first month following year-end, be approvedat the general shareholders’ meeting to be held within threemonths after the end of the accounting period.
Subsequent to March 31, 2003, the parent company’s Boardof Directors declared an annual cash dividend of ¥9,003 million ($75,025 thousand) to shareholders of record on March
31, 2003. The dividend declared is subject to approval at thegeneral shareholders’ meeting scheduled for June 27, 2003.
Dividends are recorded in the period they are declared.
(3) Accumulated Other Comprehensive Income (Loss)
An analysis of the changes in accumulated other comprehensive income (loss) for the years ended March 31, 2003,
2002 and 2001 is as follows:
In millions of yen
Pre-tax
amountTax(expense)or benefit

Net-of-tax
amount

For the year ended March 31, 2003:
Unrealized losses on securities—
Unrealized holding gains or losses
arising during the period ........... (¥07,053) ¥02,738 (¥04,315)
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income .........................
9,215(3,177)
6,038
Unrealized gains on derivative
instruments—
Unrealized holding gains or losses
arising during the year ...............
177
(72)
105
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income .........................
(172)
66
(106)
Minimum pension
liabilities adjustments .................... (4,385)
1,379(3,006)
Foreign currencytranslation adjustments ................. (4,619)
279(4,340)
Other comprehensive
income (loss) ........................... (¥06,837) ¥01,213 (¥05,624)

The tax loss carryforwards of overseas subsidiaries at
March 31, 2003 amounted to ¥5,398 million ($44,983 thousand), a part of which will begin to expire in the year ending
March 31, 2004.
18. Shareholders’ Equity(1) Treasury StockOn August 13, 2002, the parent company repurchased its
own stock, in accordance with the resolution approved by
the shareholders’ meeting held on June 27, 2002. The shares
repurchased were 8,000,000 shares at ¥5,420 ($45.17) per
share for an aggregate amount of ¥43,360 million ($361,333
thousand). The purchase price per share was determinedbased on the closing price on the Tokyo Stock Exchange on
August 12, 2002.

44

In millions of yen
Pre-tax
amountTax(expense)or benefit

In thousands of U.S. dollars

Net-of-tax
amountPre-tax
amount

For the year ended March 31, 2002:
Unrealized losses on securities—
Unrealized holding gains or losses
arising during the period ........... (¥09,379) ¥03,297 (¥06,082)
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income .........................
5,954(2,024)
3,930
Unrealized gains on derivative
instruments—
Unrealized holding gains or losses
arising during the year ...............
209
(74)
135
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income .........................
(142)
50
(92)
Minimum pension
liabilities adjustments .................... (9,632)
3,633(5,999)Foreign currencytranslation adjustments .................
7,043
—
7,043
Other comprehensive
income (loss) ........................... (¥05,947) ¥04,882 (¥01,065)

Tax(expense)or benefit

Net-of-tax
amount

For the year ended March 31, 2003:
Unrealized losses on securities—
Unrealized holding gains or losses
arising during the period ........... ($58,775) $22,817 ($35,958)
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income ......................... 76,792 (26,475) 50,317
Unrealized gains on derivative
instruments—
Unrealized holding gains or losses
1,475
(600)
875
arising during the year ...............
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income ......................... (1,433)
550
(883)
Minimum pension
liabilities adjustments .................... (36,542) 11,492 (25,050)
Foreign currencytranslation adjustments ................. (38,492)
2,325 (36,167)
Other comprehensive
income (loss) ........................... ($56,975) $10,109 ($46,866)

For the year ended March 31, 2001:
Unrealized losses on securities—
Unrealized holding gains or losses
arising during the period ........... (¥10,490) ¥03,994 (¥06,496)
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income ......................... (22,530)
9,425 (13,105)
Minimum pension
liabilities adjustments .................... (28,133) 11,788 (16,345)
Foreign currencytranslation adjustments .................
4,670
—
4,670
Other comprehensive
income (loss) ........................... (¥56,483) ¥25,207 (¥31,276)

19. Research and Development Expenses
Research and development expenses included in selling,
general and administrative expenses for the years ended
March 31, 2003, 2002 and 2001 were ¥5,003 million ($41,692
thousand), ¥5,121 million and ¥3,921 million, respectively.
20. Leased Assets—Lessee
The Company leases certain office space, employee residential facilities, computer and transportation equipment.
Some leased buildings and computer and transportationequipment are held under capital leases. Other leases areclassified as operating leases.
On April 23, 1996, the Company entered into a long-termlease agreement for a building and land in Mitaka, Tokyo. The
lease agreement extends for 30 years beginning May 1, 1996.
For financial reporting purposes, the portion of the lease
relating to the building has been classified as a capital lease;accordingly, an asset of approximately ¥5,086 million($42,383 thousand) has been recorded in the building andimprovements account. The portion of the lease relating to
the land has been classified as an operating lease. The future
minimum lease payments for the site at March 31, 2003 were
¥7,557 million ($62,975 thousand).

45

The future minimum lease payments required underoperating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31,
2003 are as follows:

A summary of leased assets under capital leases at March
31, 2003 and 2002 is as follows:
In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2003

2002

2003

Buildings and improvements..... ¥05,185
Machinery, equipment
and automobiles ....................... 11,888
Intangibles and other..................
123
Accumulated depreciation ......... (7,076)¥10,120¥05,185$(43,208

12,04979(6,606)¥10,707

99,067
1,025(58,967)$(84,333

Years ending March 31

2004 ............................................................
2005 ............................................................
2006 ............................................................
2007 ............................................................
2008 ............................................................
Later years..................................................
Total future minimum lease payments ...

In millions of yen

2004..........................................................
2005..........................................................
2006..........................................................
2007..........................................................
2008..........................................................
Later years ...............................................
Total minimum lease payments ............
Less: Amount representing interest ......
Present value of net minimum lease
payments (Note 13) ..............................
Less: Current obligations .......................
Long-term capital lease obligations ......

In thousands of
U.S. dollars¥02,916
2,212
1,556
879
606
6,621
14,7903,909$024,300
18,433
12,967
7,325
5,050
55,175
123,250
32,575

10,881
2,535¥08,346

90,675
21,125$069,550¥01,778
1,723
1,693
1,677
1,671
22,911¥31,453

In thousands of
U.S. dollars$014,817
14,358
14,108
13,975
13,925
190,925$262,108

21. Property on Operating Leases—Lessor
The Company’s leasing operations consist principally ofleasing of certain office space and related properties. The
properties on operating leases are primarily held by realestate investment companies as part of investment assets of
the insurance services segment and by Arai & Co.,Ltd., whichis engaged in leasing services of real estate.
A summary of investment in property on operating leases andproperty held for lease at March 31, 2003 and 2002 is as follows:

Depreciation expenses under capital leases for the years
ended March 31, 2003, 2002 and 2001 were ¥2,991 million($24,925 thousand), ¥3,195 million and ¥2,890 million,
respectively.
The following is a schedule by year of future minimum
lease payments under capital leases together with the present
value of the net minimum lease payments at March 31, 2003:
Years ending March 31

In millions of yen

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2003

2002

2003

Land ............................................. ¥105,052 ¥102,655
Buildings and improvements..... 86,540
80,835Construction in progress............
1,271
26,137
Intangibles and other..................
1,681
1,680
Accumulated depreciation ......... (10,712) (9,263)¥183,832 ¥202,044$0,875,433
721,167
10,592
14,008(89,267)$1,531,933

The future minimum rentals on non-cancelable operatingleases at March 31, 2003 are as follows:

Rental expenses under operating leases for the years ended
March 31, 2003, 2002 and 2001 were ¥15,182 million ($126,517
thousand), ¥12,961 million and ¥12,151 million, respectively.
A significant portion of such rentals relates to cancelable
short-term leases for office space and employee residential
facilities, many of which are renewed upon expiration.
On December 8, 2000, the Company entered into a leaseagreement for a building and land in Shibuya, Tokyo. The
lease agreement extends for 20 years beginning December 8,
2000. For financial reporting purposes, the lease has beenclassified as an operating lease. Based on the agreement,
annual lease payments for the site are approximately ¥1,339
million ($11,158 thousand) over a 20-year period.

Years ending March 31

In millions of yen

2004 ............................................................
2005 ............................................................
2006 ............................................................
2007 ............................................................
2008 ............................................................
Later years..................................................
Total future minimum rentals ..................

46¥08,694
2,830
1,287
746
651
12,035¥26,243

In thousands of
U.S. dollars$072,450
23,583
10,7256,217
5,425
100,292$218,692

22. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments in cases for which
it is practicable.

In thousands of U.S. dollars
March 31
2003
Carrying
amount(1) Cash and Cash Equivalents; Time Deposits; Cash
Deposits; Notes and Accounts Receivable, Trade; Due fromSubscribers; Short-Term Receivables; Bank Loans; Notes
and Accounts Payable, Trade; Other Payables; Deposits
Received; and Accrued Payrolls
The carrying amounts approximate fair value because of
the short maturities of such instruments.

Estimated
fair value

Non-derivatives:
Liabilities—
Long-term debt including current
portion ................................................. $1,027,284 $1,030,233
Investment deposits
by policyholders ................................. $1,925,908 $2,050,475
Derivatives:
Assets—Interest rate swaps ............................... $0,000,008 $0,000,008
Liabilities—
Interest rate swaps ............................... $0,007,675 $0,007,675(2) Long-Term Receivables
The fair values of long-term receivables are based on the present value of future cash flows through estimated maturity, discounted using estimated market discount rates. The carrying
amount of long-term receivables approximates fair value.

Limitation:
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instruments. These estimates are subjective innature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.

(3) Long-Term Debt Including Current Portion
The fair value of long-term debt including the current
portion was estimated based on the discounted amounts offuture cash flows using the Company’s current incremental
borrowing rates for similar liabilities. As long-term interest
rates have not fluctuated significantly in recent years inJapan, the carrying amounts of obligations under capitallease approximate estimated fair value.

23. Derivative Financial Instruments(1) Risk Management Policy
The Company utilizes derivative financial instruments in thenormal course of business to reduce exposure to fluctuationsin interest and foreign currency rates. The Company assesses
interest rate risk and foreign currency exchange risk by continually monitoring changes in these exposures and by evaluating hedging opportunities. The Company does not hold or
issue derivative financial instruments for trading purposes.
The Company is also exposed to credit-related losses in theevent of non-perfomance by counterparties to derivative
financial instruments, but it is not expected that any counterparties will fail to meet their obligations, because most of thecounterparties are internationally recognized financial institutions and contracts are diversified into a number of major
financial institutions.

(4) Investment Deposits by Policyholders
The fair values of investment deposits by policyholders are
estimated by discounting future cash flows using the interest
rates currently being offered for similar contracts.
(5) Interest Rate Swap Agreements
The fair values of interest rate swaps are estimated byobtaining quotes from financial institutions.
The carrying amounts and estimated fair values of thefinancial instruments excluding debt and equity securities
which are disclosed in Note 8 at March 31, 2003 and 2002 are
as follows:
In millions of yen
March 31
2003
Carrying
amountEstimated
fair value(2) Interest Rate Risk Management
The Company’s exposure to the market risk of changes ininterest rates relates primarily to its debt obligations. The
Company principally enters into interest rate swap agreements to manage fluctuations in cash flows resulting fromchanges in interest rates. Interest rate swaps are used tochange floating rates on debt obligations to fixed rates byentering into receive-floating, pay-fixed interest rate swaps
under which the Company receives floating interest rate
proceeds and make fixed interest rate payments, thereby
creating fixed-rate debt.

2002
Carrying
amountEstimated
fair value

Non-derivatives:
Liabilities—
Long-term debt
including current
portion ...................... ¥123,274 ¥123,628 ¥165,750 ¥165,840
Investment deposits
by policyholders ...... ¥231,109 ¥246,057 ¥226,407 ¥243,916
Derivatives:
Assets—Interest rate swaps .... ¥000,001 ¥000,001 ¥000,163 ¥000,163
Liabilities—
Interest rate swaps .... ¥000,921 ¥000,921 ¥001,127 ¥001,127

47

(3) Cash Flow Hedge
The Company designates interest rate swap agreements as
cash flow hedges for variability of cash flows originated fromfloating rate borrowings. The interest rate swap agreements
mature at various dates through 2008. The effective portion ofchanges in fair values of derivative instruments designated as
cash flow hedges of these debt obligations are reported inother comprehensive income (loss). These amounts arereclassified into current income in the same period as hedged
items affect current income. The ineffective portion of changes
in fair values are reported in income immediately. The sum of
the amount of the hedge ineffectiveness and net gain or loss
excluded from the assessment of hedge effectiveness is notmaterial for the years ended March 31, 2003 and 2002.
Approximately ¥8 million ($67 thousand) of net derivative
gains included in other comprehensive income (loss), net oftax at March 31, 2003, will be reclassified into current income
within 12 months from that date. At March 31, 2003 and 2002,
the notional principal amounts of interest rate swap agreements designated as cash flow hedges were ¥36,093 million($300,775 thousand) and ¥43,683 million, respectively.

26. Gain on Sale of Subsidiaries’ Shares
On April 28, 2000, The Westec Security Group, Inc.
(“Westec”), a wholly owned subsidiary in the United States ofAmerica, sold all of the outstanding shares of Westec Business
Security, Inc. to ADT Security Services, Inc. for an aggregate
sales price of ¥1,016 million in cash. The sale resulted in a gainof ¥571 million.
On February 19, 2002, Secom Joshinetsu Co., Ltd. (“Secom
Joshinetsu”), a 62.0 percent owned subsidiary, completed an
initial public offering on the Second Section of the Tokyo Stock
Exchange. In conjunction with the offering, the parent company sold 1,000,000 outstanding shares of Secom Joshinetsu
for a sale price of ¥2,162 million. Through a secondary offering, Secom Joshinetsu issued an additional 500,000 shares for
total proceeds of ¥1,081 million. As a result of these transactions, the parent company’s ownership in Secom Joshinetsu
declined to 52.1 percent. The resulting pre-tax gains on
the sale of subsidiary shares and new issuance of Secom
Joshinetsu’s shares of ¥700 million and ¥160 million, respectively, are recognized in the consolidated statement of income
for the year ended March 31, 2002. In the consolidated statement of cash flows for the year ended March 31, 2002, thegain on sale of subsidiary shares is excluded from cash flows
from operating activities and the related cash proceeds areclassified in cash flows from investing activities. The cash
proceeds from the new issuance by Secom Joshinetsu tominority shareholders are classified in cash flows fromfinancing activities.

(4) Non-Hedge Derivative Instuments
The parent company and its two subsidiaries entered into
interest rate swap agreements whereby they pay a LIBORbased floating rate of interest and receive a long-term based
floating swap rate. The Company believes that the long-termbased floating swap rate will provide higher interest income to
the Company compared to the LIBOR-based floating rate. Thisswap agreement is designed to replace LIBOR-based interest
income with long-term swap rate interest income for theinvestment securities. Changes in fair value of non-hedging
derivative financial instruments are reported in income.

27. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:

24. Commitments and Contingent Liabilities
Commitments outstanding at March 31, 2003 for thepurchase of property, plant and equipment approximated¥2,384 million ($19,867 thousand).
The Company provides guarantees to third parties withrespect to bank loans extended to its affiliated companies andother entities. Such guarantees are provided to enhance thecredit standing of the affiliated companies and other entities.
For each guarantee provided, the Company would have toperform under guarantee, if the affiliated companies andother entities default on a payment within the guaranteed
period of one to 14 years. The maximum amount of undiscounted payments the Company would have to make in theevent of default amounts to ¥27,218 million ($226,817 thousand) at March 31, 2003. No amount has been accrued for theCompany’s obligations under its guaranty arrangement at
March 31, 2003.

Years ended
March 31

Year ended
March 31

2001

2003

$029,392

Income taxes .................. ¥40,263 ¥31,952 ¥25,762$335,525

Non-cash investing andfinancing activities:
Conversion of
convertible bond............ ¥00,017 ¥00,467 ¥00,060$000,142

Additions to obligations
under capital leases ..... ¥02,739 ¥03,959 ¥02,654$022,825

Acquisition—
Fair value of assets
acquired...................... ¥Cash paid for capitalstock............................
Minority interestin subsidiaries............
Net liabilities
assumed .................. ¥48

In thousands of
U.S. dollars

Cash paid during theyear for:
Interest ............................ ¥03,527 ¥01,568 ¥01,996

2003

25. Free Share Distributions of Less than 25 Percent
The method of accounting for the Company’s less than
25 percent free share distributions is described in Note 2.
Had the Company accounted for such free share distributions
made during the period from 1974 to 1990 in the mannerused by companies in the United States of America, ¥98,388
million ($819,900 thousand) would have been transferredfrom retained earnings to the appropriate capital accounts.
However, there would be no effect on total shareholders’ equity.

In millions of yen

2002— ¥73,944 ¥07,550

$

—

—

(4,957)(3,980)

—

—

(13)

—

—

— ¥68,974 ¥03,570$—

28. Segment Information
The Company has applied Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of anEnterprise and Related Information”, which requires disclosure of financial and descriptive information about theCompany’s reportable operating segments. The operating
segments reported below are the segments of the Company
for which separate financial information is available and forwhich operating profit/loss amounts are evaluated regularly
by executive management in deciding how to allocate
resources and assess performance.
The Company has four reportable business segments:
security services, medical services, insurance services, andinformation and communication related and other services.
The security services segment provides various types of security services by utilizing the Company’s unique security systems
and manufactures and sells security equipment. The medical
services segment provides intravenous solutions to patients at
home, home-based nursing care services, medical data transmission services by utilizing the Company’s network and leasing of real estate for medical institutions. The insurance
services segment represents non-life insurance-related underwriting business in the Japanese market. The information andcommunication related and other services segment represents
the Company’s network business, aerial surveying and mapping services, Geographic Information System services anddevelopment and sales of real estate as well as leasing of realestate. The Company develops real estate, principally condominiums, for consumers, to promote a network of integrated
communication systems to create synergies with home security
services. These communication services are considered asubset or an integrated part of the real estate package.
Revenue and other income by segment includes interest
income and other revenue reasonably allocated to thesegments. Corporate revenue includes interest income,investment income, net exchange gains and dividend income
from companies unaffiliated with the parent company orWestec, a wholly owned subsidiary as a holding company in
the United States of America. Corporate expenses include
general and administrative expenses and net exchange lossesof these two companies.
Intersegment sales are priced on a basis intended toapproximate amounts charged to unaffiliated customers.
Identifiable assets are those assets used exclusively in theoperations of each segment or which are allocated when used
jointly. Corporate assets, which are held by the above two companies for general and administrative facilities, consist principallyof cash and cash equivalents, short-term investments, investment
securities, land, buildings, machinery and equipment.

Information by business and geographic segments for theyears ended March 31, 2003, 2002 and 2001 is as follows:(1) Business Segment Information

2003

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2003

2002

Revenue and otherincome:Security services—
Customers .................. ¥355,702 ¥342,169 ¥316,139
Intersegment ..............
1,321
2,448
1,285
357,023 344,617 317,424
Medical services—
Customers .................. 19,951
13,507
6,347Intersegment ..............
171
166
147
20,122
13,673
6,494
Insurance services—23,303Customers .................. 29,144
28,759Intersegment ..............
2,026
1,920
2,030
31,17030,67925,333
Information andcommunication
related and otherservices—
Customers .................. 112,994 103,315
92,552
Intersegment ..............
2,995
4,213
5,715
115,989 107,528
98,267
Total ............................... 524,304 496,497 447,518(6,513) (8,747) (9,177)
Eliminations ..................
Corporate items ............
2,952
5,776
29,952
Consolidated revenue
and other income ....... ¥520,743 ¥493,526 ¥468,293
Income (loss) before
income taxes:
Security services........... ¥080,108 ¥082,984 ¥077,389
1,810(698) (1,522)
Medical services ...........
(9,181)304(1,629)Insurance services ........
Information andcommunication
related and otherservices ........................
(1,998)(130)366
Total ............................... 70,739
82,46074,604
Corporate items
and eliminations ......... (14,138) (16,091)
9,865Interest expense ...........
(3,729) (1,596) (1,925)
Consolidated income
before income taxes... ¥052,872 ¥064,773 ¥082,544

49$2,964,183
11,0082,975,191
166,258
1,425
167,683
242,867
16,883259,750

941,617
24,958966,575
4,369,200(54,275)
24,600$4,339,525$0,667,567
15,082(76,508)(16,650)
589,491(117,816)(31,075)$0,440,600

2003

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2001

2003

2002

Assets:Security services ... ¥0,396,850 ¥0,408,657 ¥369,582
Medical services....
67,214
61,615
11,241
Insuranceservices .................
319,750
352,454 213,438
Information andcommunication
related and otherservices .................
209,954
179,383 137,362
Total.........................
993,768 1,002,109 731,623
Corporate items.....
129,372
129,061 118,292
Investments in andloans to affiliatedcompanies............
34,942
34,94332,419Total assets ............ ¥1,158,082 ¥1,166,113 ¥882,334

2003$3,307,083
560,1172,664,583

Years ended
March 31

Year ended
March 31

Depreciation andamortization:
Security services ...... ¥44,014 ¥042,106 ¥39,005
Medical services .......
953
1,301
546
Insurance services....
2,305
1,253
626
Information andcommunication
related and otherservices ...................
4,200
4,234
4,039
Total...........................
51,472
48,894
44,216
Corporate items........
595
997
804
Total depreciation
and amortization .... ¥52,067 ¥049,891 ¥45,020
Capital expenditures:
Security services ...... ¥29,586 ¥037,152 ¥33,681
Medical services .......
5,115
2,717
376
Insurance services....
12,899 104,398
58,247
Information andcommunication
related and otherservices ...................
4,726
2,928
3,634
Total...........................
52,326 147,195
95,938
Corporate items........
612
13
2,769
Total capital
expenditures ........... ¥52,938 ¥147,208 ¥98,707

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2002

2001

Electronic security
services:
Commercial
security andhome security........ ¥254,931 ¥244,494 ¥230,763
Large-scale
proprietarysystems ..................
3,461
3,438
3,647
Other security
services:
Static guard
services ..................
35,90834,10732,204
Armored car
services ..................
17,261
17,001
15,109Merchandise andother...........................
44,141
43,12934,416
Total security
services ...................... ¥355,702 ¥342,169 ¥316,139

291,183$9,650,684
In thousands of
U.S. dollars

2001

2003

1,749,617
8,281,400
1,078,101

In millions of yen

2002

The following table is a breakdown of security services revenue to external customers by service category. The security
services business is managed as a single operating segmentby the Company’s management.

2003$366,783
7,942
19,2082003$2,124,425
28,842299,233
143,842
367,841$2,964,183(2) Geographic Segment Information
Revenue and other income attributed to countries based on
location of customers and long-lived assets for the years
ended March 31, 2003, 2002 and 2001 was as follows:

35,000428,933
4,959$246,550
42,625
107,492

39,383436,050
5,100

The capital expenditures in the above table represent theadditions to property, plant and equipment of each segment.
The Company has no single customer that accounts formore than 10 percent of total revenue.

Years ended
March 31

Year ended
March 31

2001

2003

$4,221,283
118,242$4,339,525

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2001

2003

Long-lived assets:
Japan........................ ¥445,632 ¥463,144 ¥302,366
Other ........................
5,528
6,384
6,421
Total ......................... ¥451,160 ¥469,528 ¥308,787$3,713,600
46,067$3,759,667

2003$441,150

In thousands of
U.S. dollars

Revenue and otherincome:Japan........................ ¥506,554 ¥480,165 ¥455,623
Other ........................
14,18913,361
12,670Total ......................... ¥520,743 ¥493,526 ¥468,293

2003$433,892

In millions of yen

2002

2002

There are no individually material countries with respect tothe revenue and other income and long-lived assets included
in other areas.

50

INDEPENDENT AUDITORS’ REPORTThe Board of Directors and Shareholders
SECOM CO., LTD.:

We have audited the accompanying consolidated balance sheets of SECOM CO., LTD. and subsidiaries as of March 31, 2003 and2002, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years
in the three-year period ended March 31, 2003, all 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 the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements arefree 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 financial position of SECOM CO., LTD. and subsidiaries as of March 31, 2003 and 2002, and the results of their operations and their cash flows
for each of the years in the three-year period ended March 31, 2003, in conformity with accounting principles generally acceptedin the United States of America.
As discussed in Note 2 of the notes to the consolidated financial statements, SECOM CO., LTD. and subsidiaries changed their
method of accounting for goodwill and other intangible assets in the year ended March 31, 2003, and their method of revenue
recognition in the year ended March 31, 2001.
The accompanying 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 forthin Note 3 of the notes to the consolidated financial statements.

Tokyo, JapanMay 16, 2003

51