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..............................................................................

20
24
24
26
27
28
29
47
48
49

SECOM CO., LTD. Annual Report 2002

19

FINANCIAL REVIEW

Operating Results
Overview
In the fiscal year ended March 31, 2002, SECOM andits subsidiaries (collectively “the Company”) pressed
forward with efforts to enhance their security services as well as their operations in all fields of medical services, insurance, information systems, GIS
services, education services and real estate development by expanding marketing, system construction
and product development.
Reflecting these efforts, we recorded solid
results in all operating segments. As a consequence,
consolidated revenue and other income rose 5.4%
from the previous period, to ¥493.5 billion. Net
income fell 22.5%, to ¥34.1 billion, owing to theabsence of a gain on securities contribution toemployee retirement benefit trust, which was ¥21.4
billion in the previous period. Effective from theperiod under review, the Company consolidated realestate investment companies to which it had
extended loans. The Company has restated its consolidated financial statements for prior periods toreflect this change. (See Note 2 of the accompanying
notes to consolidated financial statements.)
Revenue and Other Income
Revenue and other income amounted to ¥493.5 billion, up 5.4%, or ¥25.2 billion. This was attributable
to increased sales in all business segments, including
brisk sales in the security services segment and higher
sales of condominiums in the real estate development area, and was despite the aforementioned
absence of a gain on securities contribution to employment retirement benefit trust. Net sales advanced
11.3%, or ¥49.2 billion, to ¥483.0 billion. Gain onsale of securities, net, totaled ¥3.0 billion, whileinterest and other amounted to ¥7.5 billion.
Costs and Expenses
Higher revenue and other income increased costs
and expenses 11.1%, or ¥43.0 billion, to ¥428.8 billion. Cost of sales climbed 12.0%, or ¥31.4 billion, to¥292.1 billion. This increase was attributable to theincrease in condominium sales, which pushed up

20

SECOM CO., LTD. Annual Report 2002

the cost of real estate; and to the higher cost of merchandise, a consequence of higher sales of safetyrelated and medical equipment. Cost of sales was
equivalent to 60.5% of net sales, edging up from
60.1% in the previous period.
Selling, general and administrative expenses
climbed 7.5%, or ¥8.0 billion, to ¥115.2 billion, andaccounted for 23.3% of revenue and other income,up from 22.9% in the previous period. This increasereflected higher personnel costs and an increase inresearch and development expenses. Other expenses
climbed 24.7%, or ¥3.9 billion, to ¥19.9 billion,
owing mainly to the effect of losses on other-thantemporary impairment of investment securities.
IncomeOwing to the aforementioned absence of ¥21.4 billion generated by a gain on securities contribution
to employee retirement benefit trust in the previous
period, income before income taxes fell 21.5%, or¥17.8 billion, to ¥64.8 billion. Income taxes fell
15.6%, or ¥5.6 billion, to ¥30.2 billion, but accounted
for 46.6% of income before income taxes, up from
43.3% in the previous period. Net income declined
22.5%, or ¥9.9 billion, to ¥34.1 billion. Basic net
income per share was ¥146.19, down from ¥188.76,
while diluted net income per share was ¥146.11,
compared with ¥188.61. Cash dividends of ¥40 wereapproved at the general shareholders’ meeting heldon June 27, 2002.
Segment Information
For detailed segment information, see Note 26 of
the accompanying notes to consolidated financial
statements.
Revenue and other income in the security services segment totaled ¥344.6 billion, up 8.6%, or¥27.2 billion. Excluding intersegment transactions,security services segment revenue and other income
amounted to ¥342.1 billion, equivalent to 69.3% of
total revenue and other income, up from 67.5% in
the previous period. Commercial security and home
security accounted for ¥244.5 billion of this total,
up 6.0%, or ¥13.7 billion; large-scale proprietarysystems represented ¥3.4 billion, a decrease of 5.7%,
or ¥209 million; static guard services produced revenue and other income of ¥34.1 billion, an increase of
5.9%, or ¥1.9 billion; armored car services generated¥17.0 billion, up 12.5%, or ¥1.9 billion; and merchandise and other contributed ¥43.1 billion, up 25.3%, or¥8.7 billion. Income before income taxes in the security services segment advanced 7.2%, or ¥5.6 billion,to ¥83.0 billion. Nonetheless, income before income
taxes as a percentage of segment revenue and otherincome edged down to 24.1%, from 24.4%, owing to
the considerable increase in sales of merchandise andother accompanying a higher cost percentage than incommercial security and home security.
Revenue and other income in the medical services segment soared 2.1 times, or ¥7.2 billion, to¥13.7 billion. This rise reflected the inclusion of a fullyear of results of recently acquired medical instruments and supplies firm Mac Corporation, comparedwith only six months of results included in the previous period, as well as an increase in sales promptedby the expansion of our network of visiting nurse stations. Although the segment once again recorded aloss before income taxes, it shrank to ¥698 million,
from ¥1.5 billion in the previous period, parallelingthe rise in revenue and other income.
The insurance services segment generated revenue and other income of ¥30.7 billion, rising 21.1%,
or ¥5.3 billion, as subsidiary Secom General Insurance
recorded a substantial increase in policies sold.

Segment income before income taxes was ¥304 million, accompanying the increase in revenue andother income, compared with a loss before income
taxes of ¥1.6 billion in the previous period.
In the information and communication related
and other services segment, which encompasses
information-related and GIS services as well as realestate development, revenue and other income
amounted to ¥107.5 billion, up 9.4%, or ¥9.3 billion.
This climb was largely attributable to brisk sales ofcondominiums. Nevertheless, the segment recordeda loss before income taxes of ¥130 million, comparedwith income before income taxes of ¥366 million
in the previous period, largely as a consequence of
higher losses on other-than-temporary impairmentof investment securities.

Financial Position
Total assets of the Company amounted to ¥1,166.1
billion as of March 31, 2002, an increase of 32.2%,
or ¥283.8 billion, from the previous fiscal year-end.
This increase was primarily the consequence ofan increase in policies sold by Secom General
Insurance, prompting a rise in investment assets,
and the acquisition in March 2002 of Arai & Co.,
Ltd., which has real estate for lease services.
Total current assets climbed 25.8%, or ¥95.9
billion, to ¥468.0 billion, spurred by an increase in
cash and cash equivalents of 45.7%, or ¥66.0 billion,to ¥210.5 billion, and a 2.3 times, or ¥29.2 billion,

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
98 99 00 01 02

98 99 00 01 02

SECOM CO., LTD. Annual Report 200221

rise in short-term loans and receivables, to ¥51.9
billion, which reflected increases in loans to medical
institutions and the current portion of long-term
receivables of Secom General Insurance. Reflecting
the increase in current assets, the current ratio rose
to 1.9 times, from 1.7 times at the end of the previous fiscal year.
Investments and long-term receivables
advanced 7.4%, or ¥14.6 billion, to ¥212.7 billion,
owing to increases in investments and long-term
receivables in the medical services segment.
Property, plant and equipment, less accumulated
depreciation, rose 57.9%, or ¥155.3 billion, to ¥423.7
billion. Land soared 87.6%, or ¥72.7 billion, to ¥155.6
billion. Buildings and improvements climbed 87.8%,
or ¥73.4 billion, to ¥157.1 billion. Security equipment and control stations increased 9.8%, or ¥26.2
billion, to ¥294.5 billion. The increases in land andbuildings and improvements were largely attributable
to the acquisition of Arai & Co., and the purchase ofproperties on operating leases through real estate
investment companies.
Other assets advanced 40.9%, or ¥17.9 billion, to¥61.7 billion. This increase was primarily a consequence of an increase in deferred income taxes, whichreflected increases in minimum pension liability andunrealized losses on securities.
Total liabilities climbed 53.7%, or ¥257.1 billion, to ¥735.8 billion. Current portion of long-term
debt climbed nearly 2.3 times, or ¥18.2 billion, to¥32.7 billion, owing largely to the acquisition of Arai

& Co. As a consequence, total current liabilities rose
12.2%, or ¥26.7 billion, to ¥245.3 billion. Long-term
debt soared 3.7 times, or ¥97.0 billion, to ¥133.0
billion, spurred by the issuance of ¥30.0 billion inbonds of SECOM, the acquisition of Arai & Co., andan increase in loans of real estate investment companies for the purchase of real estate. Paralleling the
aforementioned increase in insurance policies sold,investment deposits by policyholders soared 73.9%,
or ¥96.2 billion, to ¥226.4 billion. Accrued pension
and severance costs increased 71.6%, or ¥15.3 billion, to ¥36.6 billion, owing to the increase in the
aforementioned minimum pension liability. This
increase in minimum pension liability resulted froman increase in accrued pension liabilities, which followed a change in the discount rate, and a decline in
the fair value of plan assets, attributable to the harshmarket conditions. Guarantee deposits received
totaled ¥33.6 billion, up 67.6%, or ¥13.6 billion,
owing to the acquisition of Arai & Co., and thereceipt of guarantee deposits from Ryomei Royal Life
Co., Ltd., a newly consolidated subsidiary which
manages a nursing home for senior citizens and wasformerly accounted for under the equity method.
Total shareholders’ equity rose 6.4%, or ¥24.0
billion, to ¥401.3 billion, bolstered by an increase inretained earnings of 9.3%, or ¥23.7 billion, to ¥279.6
billion. Higher liabilities, primarily attributable to theincrease in investment deposits by insurance policyholders and in long-term debt, pushed the equity
ratio down to 34.4%, from 42.8% a year earlier.

Total Assets

Shareholders’Equity per Share

Depreciation andAmortization(In billions of yen)

(In yen)
1,250

50

1,600

1,000

40

1,200

750

30

800

500

20

400

250

10

0

0
98 99 00 01 02

22(In billions of yen)

2,000

SECOM CO., LTD. Annual Report 2002

0
98 99 00 01 02

98 99 00 01 02

Cash Flows
SECOM remains committed to maintaining sufficientliquidity to ensure flexibility in its operations andguarantee a solid financial foundation. Accordingly, tothe best of our ability we finance strategic investmentswith cash generated by our operating activities.
Net cash provided by operating activities
amounted to ¥189.9 billion in the period underreview, an increase of ¥51.7 billion, from ¥138.2 billion in the previous period. This change primarilyreflected a ¥96.2 billion increase in investment
deposits by policyholders, up from a ¥54.1 billion
increase in the previous period. Depreciation andamortization was ¥49.9 billion, up from ¥45.0 billion.
Net cash used in investing activities totaled¥163.0 billion, an increase of ¥32.2 billion, from¥130.8 billion in the previous period. This change
was primarily a consequence of a ¥49.2 billion
increase in payments for purchases of property,
plant and equipment, to ¥159.2 billion, from ¥110.0
billion in the previous period. These funds wereapplied primarily to the purchase of security equipment and control stations, necessitated by an increasein subscribers to our commercial and home security
systems, and to the purchase of rental real estate as
an investment asset.
Net cash provided by financing activities totaled¥38.6 billion, up ¥37.3 billion, from ¥1.3 billion.
Proceeds from long-term debt, including bonds
issued during the period, totaled ¥69.8 billion, while
repayments of long-term debt amounted to ¥15.9 bil-lion and decrease in bank loans totaled ¥6.3 billion,
resulting in net proceeds from long-term debt andbank loans of ¥47.5 billion, compared with ¥11.1 billion in the previous period. Dividends paid amounted
to ¥9.3 billion.
As a consequence of our operating, investing
and financing activities during the period underreview, cash and cash equivalents at end of year
amounted to ¥210.5 billion, up ¥66.0 billion, from¥144.5 billion a year earlier.

Subsequent Events
On April 23, 2002, following the enactment ofJapan’s new Welfare Pension Insurance Law, SECOM
and certain of its subsidiaries obtained approval from
the Ministry of Health, Labour and Welfare for
exemption from future benefit obligation withrespect to the portion of the Employees Pension
Funds that SECOM and certain of its subsidiaries
operate on behalf of the Japanese government.
In accordance with a proposal approved at its
general meeting of shareholders on June 27, 2002,
on August 13, 2002, SECOM repurchased 8.0 million
shares of its common stock for ¥43.4 billion.

Capital Investment

Cash Flows(In billions of yen)

(In billions of yen)

200

200

160

100

120
0
80
-100

40
0

-200
98 99 00 01 02

00

01

02

Cash flows fromoperating activities
Cash flows frominvestment activities
Cash flows fromfinancing activities
SECOM CO., LTD. Annual Report 2002

23

CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSSECOM CO., LTD. and Subsidiaries
March 31, 2002 and 2001

ASSETS
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 (Note 9) ..................................................................................................
Short-term receivables ............................................................................................
Allowance for doubtful accounts ............................................................................
Deferred insurance acquisition cost (Note 12) .......................................................
Deferred income taxes (Note 15).............................................................................
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, 18 and 19):
Land ...........................................................................................................................
Buildings and improvements ..................................................................................
Security equipment and control stations ...............................................................
Machinery, equipment and automobiles................................................................
Construction in progress..........................................................................................
Accumulated depreciation .......................................................................................

Other assets:
Telephone and telegraph utility rights....................................................................
Deferred income taxes (Note 15).............................................................................
Goodwill (Note 5)......................................................................................................
Intangibles and other ...............................................................................................
Total assets ........................................................................................................
The accompanying notes are an integral part of these statements.

24

SECOM CO., LTD. Annual Report 2002

In millions of yen

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

March 31

March 31

2001

2002

¥0,210,477 ¥(144,502
4,880
12,46040,75036,597
12,63521,99349,132
48,917
21,226
16,951
55,82449,71551,912
22,731(1,522)(1,096)
2,762
2,044
11,226
7,379
8,739
9,929
468,041
372,122$(1,582,534
36,692306,391
95,000369,413
159,594
419,729
390,316(11,444)
20,767
84,40665,7073,519,105

2002

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

119,438
32,34927,761
11,631
14,481(7,567)
198,093

919,150
262,729
226,353
88,023
142,699(39,819)
1,599,135

155,624
157,097294,533
55,04031,167
693,461(269,809)
423,652

82,97083,648268,332
50,615
18,623504,188(235,884)
268,304

1,170,105
1,181,181
2,214,534
413,835
234,338
5,213,993(2,028,639)
3,185,354

3,560
3,681
29,026
16,388
10,836
10,16918,313
13,577
61,73543,815¥1,166,113 ¥(882,334

26,767218,240
81,474
137,692
464,173$(8,767,767

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:
Bank loans (Notes 7 and 11) ....................................................................................
Current portion of long-term debt (Notes 11 and 18)............................................
Notes and accounts payable, trade.........................................................................
Other payables..........................................................................................................
Deposits received (Note 7).......................................................................................
Deferred revenue (Note 2 (12)) ................................................................................
Accrued income taxes ..............................................................................................
Accrued payrolls .......................................................................................................
Other current liabilities.............................................................................................
Total current liabilities ......................................................................................

In millions of yen

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

March 31

March 31

2001

2002

¥0,068,003 ¥072,527
32,703
14,471
16,401
15,855
20,337
19,28722,744
17,10337,196
36,662
23,003
18,264
14,946
14,264
9,961
10,146245,294
218,579$0,511,301
245,887
123,316
152,910
171,007279,669
172,955
112,376
74,895
1,844,316

2002

Long-term debt (Notes 11 and 18) ..............................................................................
Guarantee deposits received.......................................................................................
Accrued pension and severance costs (Note 13).......................................................
Deferred revenue (Note 2 (12))....................................................................................
Unearned premiums and other insurance liabilities (Note 12) ................................
Investment deposits by policyholders (Note 12) .......................................................
Deferred income taxes (Note 15) ................................................................................
Other liabilities .............................................................................................................
Total liabilities....................................................................................................

133,047
33,63536,622
18,461
37,268226,4072,813
2,298
735,845

36,03520,066
21,34017,20634,085130,187645
641
478,784

1,000,353
252,895
275,353
138,805
280,211
1,702,308
21,15017,2785,532,669

Minority shareholders’ interest in subsidiaries ........................................................

28,942

26,246217,609

66,36079,9799,663
279,593

66,12779,7458,618
255,880

498,948
601,346
72,654
2,102,203(4,481)
43(23,109)(6,581)(34,128)(2,329)—(17,110)(13,624)(33,063)(33,692)
323(173,752)(49,481)(256,602)(141)
401,326(3)
377,304(1,060)3,017,489¥1,166,113 ¥882,334$8,767,767

Shareholders’ equity:
Common stock (Notes 16 and 23):
Authorized 900,000,000 shares in 2002 and 2001;
issued 233,274,769 shares in 2002 and 233,099,744 shares in 2001...............
Additional paid-in capital (Notes 16 and 23) ..........................................................
Legal reserve (Note 16) ............................................................................................
Retained earnings (Note 16) ....................................................................................
Accumulated other comprehensive income (loss):
Unrealized losses on securities (Note 8) .............................................................
Unrealized gains on derivative instruments (Note 21) ......................................
Minimum pension liabilities adjustments (Note 13) ..........................................
Foreign currency translation adjustments ..........................................................
Common stock in treasury, at cost;
22,512 shares in 2002 and 510 shares in 2001....................................................
Total shareholders’ equity ................................................................................
Commitments and contingent liabilities (Note 22)
Total liabilities and shareholders’ equity ........................................................

SECOM CO., LTD. Annual Report 2002

25

CONSOLIDATED STATEMENTS OF INCOME
SECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2002
2002

In millions of yen

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

Years ended March 31

Year ended March 31

2001

2000

2002

¥433,817
2,569¥398,205
5,454$3,631,684
22,30821,366
10,541
468,293—
8,765
412,424—
56,7303,710,722

292,092
115,158
1,596
19,907428,753

260,720
107,141
1,925
15,963385,749

230,936
99,137
1,231
8,431
339,735

2,196,180
865,850
12,000149,677
3,223,707

64,77382,544

72,689487,015

37,096(6,913)30,18330,011
5,740
35,751

27,396(4,707)
22,689278,917(51,977)
226,940

Income before minority interest, equity in net income ofaffiliated companies and cumulative effect of accountingchange.....................................................................................

34,59046,79350,000260,075

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

(1,862)(408)(3,805)(14,000)

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

1,354

1,310

1,131

10,181

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

34,082

47,69547,326

256,256

Cumulative effect of accounting change, net of tax (Note 2 (12)) .....

—(3,699)——Net income................................................................................

¥034,082¥043,996¥047,326$0,256,256

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

Years ended March 31

Year ended March 31

Revenue and other income:Net sales .............................................................................................. ¥483,014
2,967
Gain on sale of securities, net (Notes 8 and 24) ...............................
Gain on securities contribution to employee retirement benefit—
trust (Notes 8 and 13) .......................................................................
Interest and other (Note 14) ...............................................................
7,545
493,526
Costs and expenses:
Cost of sales ........................................................................................
Selling, general and administrative (Notes 2 (14) and 17) ..............
Interest .................................................................................................
Other (Note 14)....................................................................................

Income before income taxes ...................................................
Income taxes (Note 15):
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.

26

SECOM CO., LTD. Annual Report 2002

2002

2001

2000

2002

¥146.19¥146.11¥204.63¥204.46¥203.22¥203.06

$1.10
$1.10

¥
¥

—
—

(¥015.87)(¥015.85)¥((((((—¥((((((—$ —$ —¥146.19¥146.11¥188.76¥188.61¥203.22¥203.06

$1.10
$1.10

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYSECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2002
Balance, March 31, 1999 ..................................................................
Comprehensive income:Net income ....................................................................................
Other comprehensive income (loss), net of tax (Note 16):
Unrealized gains on securities:
Unrealized holding gains or losses arising during the period..
Less: Reclassification adjustment for gains or losses
Less: 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........................................................
Stock split (Note 16) ...........................................................................
Purchase of treasury stock.................................................................
Reissuance of treasury stock .............................................................
Balance, March 31, 2000 ..................................................................
Comprehensive income:Net income ....................................................................................
Other comprehensive income (loss), net of tax (Note 16):
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 16):
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 .................................................................

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

Number ofsharesissuedCommonstock

Additional
paid-in
capitalLegalreserve

116,392,109¥65,710¥79,318¥6,677¥183,968(¥08,407)(¥0,119)¥327,147

—

—

—

—

47,326——47,326

—

—

—

—

—

4,879

—

4,879

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

(675)
8,054
(5,638)—————273,686
116,409,647——
233,075,442

—
—
387
—
—
—
66,097

—
—
387
—
—
8
79,713

—
910
—
—
—
—
7,587

(8,146)
(910)
—
—
—
—
222,238

—
—
—
—
—
—
(1,787)————(4,945)
5,022
(42)

(675)
8,054
(5,638)53,946(8,146)—774—(4,945)
5,030
373,806

—

—

—

—

43,996——43,996

—

—

—

—

—

(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

Total

—

—

—

—

—

(6,082)—(6,082)

—

—

—

—

—

3,930

—

3,930

—

—

—

—

—

135

—

135

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

(92)
(5,999)
7,043

—
—
—

—
—
175,025——
233,274,769

—
—
233
—
—
¥66,360

—
—
234
—
0
¥79,979

—
1,045
—
—
—
¥9,663(9,324)(1,045)———¥279,593—————(¥34,128)

—
—
—
(264)
126
(¥0,141)(92)(5,999)7,043
33,017(9,324)
—
467
(264)
126
¥401,326

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

Commonstock

Balance, March 31, 2001 ......................................................................................... $497,195
Comprehensive income:............................................................................................
Net income............................................................................................................
—
Other comprehensive income (loss), net of tax (Note 16):
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 ...............................................................................
1,753
Purchase of treasury stock ........................................................................................
—
Reissuance of treasury stock ....................................................................................
—
Balance, March 31, 2002 ......................................................................................... $498,948

Additional
paid-in
capitalLegalreserve

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

Total

$599,587 $64,797$1,923,910($248,594)($0,023) $2,836,872——

256,256——

256,256———(45,730)—(45,730)———

29,549—29,549

—

—

—

1,015

—

1,015

—
—
—

—
—
—

—
—
—

(692)
(45,105)
52,955

—
—
—

—
—
—
7,857
1,759
—
—
—
0
—
$601,346 $72,654(70,106)—(7,857)
—
—
—
—
—
—
—
$2,102,203 ($256,602)(692)(45,105)
52,955248,248—(70,106)
—
—
—
3,512
(1,985)(1,985)948
948($1,060) $3,017,489

The accompanying notes are an integral part of these statements.
SECOM CO., LTD. Annual Report 2002

27

CONSOLIDATED STATEMENTS OF CASH FLOWSSECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2002
2002

In millions of yen

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

Years ended March 31

Year ended March 31

2001

Cash flows from operating activities:
Net income....................................................................................................................... ¥(034,082 ¥(043,996
Adjustments to reconcile net income to net cash provided
by operating activities—
49,89145,020Depreciation and amortization...................................................................................
3,736
4,190
Accrual for pension and severance costs, less payments .......................................
(6,913)
5,740
Deferred income taxes................................................................................................
2,166
2,599
Net loss on sales and disposal of property, plant and equipment .........................
(2,095)(1,998)Gain on sales of investment securities......................................................................
—(21,366)
Gain on securities contribution to employee retirement benefit trust (Note 8).....
(872)
(571)
Gain on sales of subsidiaries’ shares (Note 24)........................................................
——
Gain on sales of shares of Secom Techno Service Co., Ltd. ...................................
9,004
1,851
Loss on other-than-temporary impairment of investment securities.....................
(1,354)(1,310)Equity in net income of affiliated companies ...........................................................
1,862
408
Minority interest in subsidiaries ................................................................................
—
3,699
Cumulative effect of accounting change, net of tax (Note 2 (12))...........................
Changes in assets and liabilities, net of effects from acquisitions and disposals:(4,152)895(Increase) decrease in cash deposits ....................................................................
(6,727)(2,010)
Increase in receivables and due from subscribers, net of allowances ...............
(5,533)
4,027(Increase) decrease in inventories .........................................................................
(3,017)
6,305(Increase) decrease in other current assets ..........................................................
(1,015)(24,279)
Increase (decrease) in payables .............................................................................
6,708(3,503)
Increase (decrease) in deposits received ..............................................................
1,737
3,788
Increase in deferred revenue .................................................................................
5,145
4,249
Increase (decrease) in accrued income taxes .......................................................
6,012
2,588
Increase in guarantee deposits received from subscribers .................................
853
1,713
Increase in other current liabilities ........................................................................
3,184
8,201
Increase (decrease) in unearned premiums and other insurance liabilities .....
96,22154,084
Increase in investment deposits by policyholders ...............................................
929
Other, net .................................................................................................................
(155)

2000

2002

¥047,326$(0,256,256

34,255525(4,707)
2,116(1,163)——(4,291)
1,711(1,131)
3,805—

375,120
28,090(51,977)
16,286(15,752)—(6,556)—
67,699(10,181)
14,000—

6,352(23,406)(26,350)(1,112)
27,115(8,232)871(3,445)985
3,079(4,226)
18,571(71)(31,218)(50,579)(41,602)(22,684)(7,632)50,436
13,06038,68445,203
6,414
23,940723,466
6,986

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

189,852

138,161

68,577

1,427,459

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 24) ................................................
Proceeds from sales of shares of Secom Techno Service Co., Ltd. ............................
Payments for purchases of subsidiaries’ shares, net of cash acquired (Note 5) .......
Acquisition of Mac Corporation, net of cash acquired.................................................
Acquisition of Pasco 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 .........................................................................................................................

7,950
3,693
(159,242)
10,149(22,602)15,459
2,654
—
1,270
—
—
(10,301)(8,346)
1,654(5,371)
—

3,976
1,543
(109,980)
5,663(16,802)(2,478)2,088—(2,410)(3,203)—(9,522)(3,561)
10,689(6,768)
—

1,619
1,607
(50,146)
2,419(1,908)(26,855)
—
4,512
(825)
—
(9,494)(779)(7,278)
11,715(3,434)
197

59,774
27,767(1,197,308)
76,308(169,940)
116,233
19,955—
9,549——(77,451)(62,752)
12,436(40,383)—

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

(163,033)(130,765)(78,650)(1,225,812)

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

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

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

5,064
(4,480)17,1605,451(8,147)
77—524,609(119,910)(47,248)
8,549(70,106)(1,037)(4,398)290,459

Net cash provided by financing activities ..........................................................

38,631

1,259

15,125

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

525

239

(630)

3,947

Net increase in cash and cash equivalents ......................................................................
Cash and cash equivalents at beginning of year .............................................................

65,975
144,502

8,894
135,608

4,422
131,186

496,053
1,086,481

Cash and cash equivalents at end of year ....................................................................... ¥(210,477¥(144,502¥135,608$1,582,534

The accompanying notes are an integral part of these statements.

28

SECOM CO., LTD. Annual Report 2002

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOM CO., LTD. and Subsidiaries
Three years ended March 31, 2002

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 theoperation of its services covering: home and other medical
services; non-life insurance services; information and communication services, including cyber security services, softwaredevelopment and system integration activities; Geographic
Information System services using aerial surveying technology; school education systems; development, sale and leaseof real estate and other services. Moreover, the Company iscurrently expanding its business into broadband services
using cable television networks through its affiliated companies.
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:

Insurance Co., Ltd. (“Secom Insurance”), a subsidiary of
the parent company, and to which the substantive risks andrewards of the assets rested. The Company decided to consolidate these entities in accordance with Emerging Issues Task
Force (“EITF”) Topic No. D-14, “Transactions involving SpecialPurpose Entities”. EITF Topic No. D-14 addresses accounting
standards for consolidation of special-purpose entities.
The effect of the change in the reporting entity on income
and related per share amounts as previously reported in the
consolidated financial statements for the years ended March
31, 2001 and 2000 is as follows:
In millions of yen
March 31
2001

2000

Income before cumulative effect ofaccounting change as previously reported.......... ¥47,817 ¥47,432
Effect of a change in the reporting entity...............
(122)
(106)
Income before cumulative effect ofaccounting change as restated.............................. 47,695
47,326
Cumulative effect of accounting change aspreviously reported................................................. (3,699)—
Net income as restated............................................. ¥43,996 ¥47,326
In yenMarch 31
2001

2000

Earnings per share—Basic:
Income before cumulative effect ofaccounting change as previously reported....... ¥205.15 ¥203.67
Effect of a change in the reporting entity ............
(0.52)(0.45)
Income before cumulative effect ofaccounting change as restated ............................. 204.63
203.22
Cumulative effect of accounting change aspreviously reported .............................................. (15.87)—
Net income as restated .......................................... ¥188.76 ¥203.22
Earnings per share—Diluted:
Income before cumulative effect ofaccounting change as previously reported....... ¥204.99 ¥203.52
Effect of a change in the reporting entity ............
(0.53)(0.46)
Income before cumulative effect ofaccounting change as restated ........................... 204.46
203.06
Cumulative effect of accounting change aspreviously reported .............................................. (15.85)—
Net income as restated .......................................... ¥188.61 ¥203.06(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.
During the year ended March 31, 2002, the Company
changed its reporting entity for specific entities. The consolidated financial statements of all prior periods presented havebeen restated as a result. The change in the reporting entity
was due to the gradual increase in the materiality of realestate investment companies sponsored by Secom General

SECOM CO., LTD. Annual Report 2002

29

The effect of the change in the reporting entity on financial
position as previously reported in the consolidated financial
statements as of March 31, 2001 is as follows:
In millions of yen
March 31, 2001
Financial
Effect of aposition as change in thepreviously
reportingreported
entityFinancial
position as
restated

Current assets ................................ ¥387,333
Investments andlong-term receivables .................. 238,772
Property, plant and equipment ..... 198,353
Other assets....................................
43,746
Total assets ................................. ¥868,204(¥ 15,211) ¥372,122

Current liabilities ............................ ¥218,366
Long-term debt...............................
24,065
Other ............................................... 221,943
Total liabilities ............................ 464,374
Minority shareholders’interest in subsidiaries ................
26,298
Shareholders’ equity ..................... 377,532
Total liabilities andshareholders’ equity ................ ¥868,204¥(40,679) 198,093
69,951 268,304
69
43,815¥ 14,130 ¥882,334
213 ¥218,579
11,97036,0352,227 224,170
14,410 478,784
(52)
(228)

26,246377,304(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.
(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.

¥ 14,130 ¥882,334

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 theCompany’s current equity in the net income of affiliatedcompanies, after elimination of intercompany profits.
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 subsidiary or affiliated company accounted
for using the equity method may issue its shares to third parties either in a public offering or upon conversion of convertible debt to common stock at amounts per share in excess ofor less than the Company’s average per share carrying value.
With respect to such transactions, the resulting income orlosses arising from the change in ownership interest arerecorded in income for the year the transaction occurs. With
respect to the sale of shares of a subsidiary, the resulting
income is recognized to the extent that the sale of shares is
not a part of a broader corporate reorganization contemplated
or planned by the Company.

(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.
(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 the declining-balance method at rates based on the estimated useful
lives of the assets. Assets leased to others under operatingleases are primarily depreciated using the straight-line
method over the estimated useful lives. Depreciation expense
was ¥44,574 million ($335,143 thousand), ¥40,148 million and¥31,240 million for the years ended March 31, 2002, 2001 and
2000, 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(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.

(8) Telephone and Telegraph Utility Rights
These rights are shown at the net amount of their original
cost less amortization thereof using the straight-line method
over a period of 20 years.

(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.

(9) Intangibles and Other
Intangibles, which principally consist of internal-use software,
are amortized on a straight-line basis over their useful lives
which are principally five years. The Company’s long-lived

30

SECOM CO., LTD. Annual Report 2002

assets, including goodwill and identifiable intangibles, arereviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of the assets
may not be recoverable.
(10) 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.

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

(11) 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.

(14) 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, 2002, 2001 and 2000
were ¥5,602 million ($42,120 thousand), ¥4,885 million and¥4,263 million, respectively.

(12) 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 capitalized 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-cash
charge of ¥3,699 million ($27,812 thousand), net of tax, representing the effect of adoption of SAB No. 101. The charge has
been reflected as a cumulative 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. The Company has not disclosed pro
forma financial information for prior years as if SAB No. 101
had been applied retroactively due to immateriality.
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,(15) 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 ($970 thousand).
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
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

SECOM CO., LTD. Annual Report 200231

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 SAFS 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.
(16) 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.
(17) 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 23).
Free distributions of common stock are included in the EPS
calculation in accordance with accounting principles generally
accepted in the United States of America.
(18) Recent Pronouncements
In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141, “Business Combinations”, andSFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS
No. 141 requires that the purchase method of accounting beused for all business combinations completed after June 30,
2001. SAFS No. 141 also specified the types of acquired intangible assets that are required to be recognized and reported
separately from goodwill and those acquired intangible
assets that 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 atleast annually. Intangible assets with finite lives will continue tobe amortized 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

32

SECOM CO., LTD. Annual Report 2002

life will not be amortized, but instead reviewed for impairment
in accordance with the Statement until its life is determined 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.
However, any goodwill and intangible assets with an indefinite useful life that is acquired in a business combination
completed after June 30, 2001, have not been amortized.
Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were amortized throughMarch 31, 2002.
SFAS No. 141 requires 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 is required to reassess the useful lives
and residual value of all intangible assets and make anynecessary amortization period adjustments by June 30, 2002.
In connection with the transitional impairment evaluation,
SFAS No. 142 will require to perform an assessment of
whether there is an indication that goodwill is impaired as ofApril 1, 2002. To accomplish this, the Company must (1) identify its reporting units, (2) determine the carrying value ofeach reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets to thosereporting units, and (3) determine the fair value of eachreporting unit. This first step of the transitional assessment isrequired to be completed by September 30, 2002. If the carrying value of any reporting unit exceeds its fair value, thendetailed fair values for each of the assigned assets (excluding
goodwill) and liabilities will be determined to calculate theamount of goodwill impairment, if any. This second step isrequired to be completed as soon as possible, but no later
than March 31, 2003. Any transitional impairment loss resulting from the adoption will be recognized as the effect of achange in accounting principle in the consolidated statements
of income.
On April 1, 2002, as a result of the adoption of SFAS No. 141,
the Company recorded a transition gain, as an effect of achange in accounting principle, due to the write-off of unamortized deferred credits of approximately ¥1,157 million (¥8,699
thousand) which existed at March 31, 2002. The deferred credits
related to an excess over cost arising from business combinations completed before July 1, 2001. The Company does notexpect the adoption of SFAS No. 142 to have a material effecton the Company’s consolidated financial position and results ofoperations.
In June 2001, the FASB issued SFAS No. 143, “Accounting
for Asset Retirement Obligations”. SFAS No. 143 applies tolegal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or) the normal operation of long-lived assets,
except for certain obligations of 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 fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocatedto expense over the asset’s useful life. The Company is required
to adopt the provisions of SFAS No. 143 on April 1, 2003. The

effect on the Company’s consolidated financial statements ofadopting SFAS No. 143 has not been determined.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,
which supersedes 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 APB Opinion No. 30, “Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segmentof a Business, and Extraordinary, Unused and Infrequently
Occurring Events and Transactions”, for the disposal of asegment 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 onlong-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. The Company
adopted the provisions of SFAS No. 144 on April 1, 2002. The
Company does not expect the adoption of SFAS No. 144
to have a material effect on the Company’s consolidated
financial position and results of operations.
(19) Reclassifications
Certain reclassifications of previously reported amounts
have been made to conform with current classifications.
3. U.S. Dollar Amounts
U.S. dollar amounts have been included in these financial
statements solely for 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 ¥133=US$1, the rate prevailing on the Tokyo Foreign Exchange Market on March 29,
2002.
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, 2002, 2001 and 2000 is asfollows:
In millionsof yenThousandsof shares

Income before
cumulative
effect ofaccountingchangeWeightedaverage shares

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

In yenIn U.S.
dollars

In millionsof yenThousandsof shares

In yenIncome before
cumulative
effect ofaccountingchangeWeightedaverage shares

EPS

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
For the year ended March 31, 2000:
Basic EPS—
Income before cumulative effectof accounting change......................... ¥47,326
Effect of dilutive securities—
Convertible bonds ................................
9
Diluted EPS—
Income before cumulative effectof accounting change fordiluted EPS computation ................... ¥47,335

150

211

233,292 ¥204.46

232,883 ¥203.22
220

233,103 ¥203.06

5. Acquisitions
In August 1999, the parent company subscribed to purchasenew shares issued by Pasco Corporation (“Pasco”), which operates an aerial surveying and mapping business and Geographic
Information System services in Japan, for an aggregate amountof ¥15,000 million ($112,782 thousand). As a result, the parent
company owns 70.0 percent of the outstanding shares of Pasco
at March 31, 2002.
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 ($29,925 thousand).
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 ($25,992 thousand). The
estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition are as follows:
In millions In thousands ofof yenU.S. dollars

EPS

233,138 ¥146.19 $1.10

233,081 ¥204.63

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

¥1,088
7,154
743
8,985
1,430
2,295
1,803
5,528
¥3,457$08,180
53,7905,586
67,556
10,752
17,256
13,556
41,564$25,992

233,288 ¥146.11 $1.10

SECOM CO., LTD. Annual Report 2002

33

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($11,278 thousand). The estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition are as
follows:
In millions In thousands ofof yenU.S. dollars

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

¥07,282
41,762
2,743
13,17264,95923,49434,0085,944
63,446
13¥01,500$054,752
314,000
20,624
99,038488,414
176,647
255,699
44,692
477,03898$011,278

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 ¥10,782 million ($81,068 thousand) and ¥10,127 million at March 31, 2002
and 2001, respectively. Goodwill acquired in business combinations completed after June 30, 2001 has not been amortized,
while business combinations completed before July 1, 2001
continued to be amortized through March 31, 2002.
The consolidated pro forma information that would show theresults of the Company’s consolidated operations for the years
ended March 31, 2002, 2001 and 2000 has not been disclosed
based on materiality considerations. The effort to provide
comparative pro forma financial information would not becommensurate with the benefits derived from such information.
6. Cash and Cash Equivalents
Cash and cash equivalents at March 31, 2002 and 2001 werecomprised as follows:
In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2001

2002

¥115,947 ¥067,596
35,843
21,94440,00035,69018,687
19,272¥210,477 ¥144,502$0,871,782
269,496
300,752
140,504$1,582,534

2002

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

34

SECOM CO., LTD. Annual Report 2002

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.
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 ¥40,750 million ($306,391 thousand) and ¥36,597 million at March 31, 2002 and 2001, 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 ¥15,234 million ($114,541 thousand)and ¥20,560 million ($154,586 thousand), respectively, atMarch 31, 2002, and ¥20,157 million and ¥15,529 million,
respectively, at March 31, 2001, relating to this operation. As
part of its fee arrangement for such services, the Company isreimbursed for the interest cost of the related overdrafts.
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, 2002 and 2001 wereas follows:
In millions of yen
March 31, 2002
Gross unrealized
Cost

Gains

LossesFair 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—

In millions of yen
March 31, 2001
Gross unrealized
Cost

Available-for-sale:
Equity securities ...
Debt securities ......
Total .........................
Held-to-maturity:
Debt securities ......

Gains

LossesFair value¥063,883
54,168¥118,051¥8,950 ¥10,643
568
933¥9,518 ¥11,576¥062,190
53,803¥115,993¥020,000¥0,223 ¥¥020,223—

In thousands of U.S. dollars
March 31, 2002
Gross unrealized
Cost

Available-for-sale:
Equity securities..... $445,947
Debt securities .......
378,534
Total........................... $824,481
Held-to-maturity:
Debt securities ....... $131,579

Gains

Losses$25,895 $60,436
5,368
6,722
$31,263 $67,158$— $00,677

Fair value

million, respectively. On those sales, the gross realized gains
and gross realized losses, using a specifically identified moving-average cost basis, for the years ended March 31, 2002,
2001 and 2000 were as follows:
In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31$411,406
377,180$788,586

2002

2001

2000

2002

$130,902

Gross realized gains..... ¥2,556
Gross realized losses ...
470¥1,491
255¥6,993
239$19,2183,534

At March 31, 2002, 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 ($162,030 thousand). Upon contribution of these securities, net unrealized gains amounting to ¥21,366 million($160,647 thousand) 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,
2002 are as follows:
In millions of yen

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 ¥12,500 million ($93,985
thousand) and ¥5,438 million at March 31, 2002 and 2001,
respectively. The corresponding fair value at that date was
not computed as such estimation was not practicable.
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, 2002 and 2001 comprise as follows:
In millions of yen

In thousands of
U.S. dollars

March 31

March 31

Held-to-maturity

2002

2001

2002

Fair value

Security-related products .......... ¥10,493
Real estate................................... 39,154
Information and other-related
6,177
products ....................................
¥55,824¥07,672
36,222$078,895
294,391

5,821¥49,715

46,443$419,729

March 31, 2002
Available-for-sale
Cost

Fair value

Due within 1 year ......... ¥11,982
Due after 1 year
through 5 years .......... 34,617
Due after 5 years
through 10 years ........
618
Due after 10 years .......
3,128.................................. ¥50,345¥11,755¥034,572

12,50012,410

644
—
3,194
5,000
¥50,165 ¥17,500—
5,000¥17,410

Cost

—

¥

—

In thousands of U.S. dollars
March 31, 2002
Available-for-sale
Cost

Due within 1 year .........$090,090
Due after 1 year
through 5 years .......... 260,278
Due after 5 years
through 10 years ........
4,647
Due after 10 years ....... 23,519..................................$378,534

Held-to-maturity

Fair value

Cost$088,383 $—

259,940

Fair value$—

93,98593,308

4,842—
24,01537,594$377,180 $131,579—
37,594$130,902

During the years ended March 31, 2002 and 2001, the net
unrealized losses on “available-for-sale” securities included
as part of other comprehensive income (loss), net of tax,
increased by ¥2,152 million ($16,181 thousand) and ¥19,601
million, respectively.
Proceeds from the sale of “available-for-sale” securities forthe years ended March 31, 2002, 2001 and 2000 were ¥5,126
million ($38,541 thousand), ¥3,749 million and ¥17,561

Work in process real estate inventories at March 31, 2002
and 2001, amounting to ¥35,682 million ($268,286 thousand)and ¥33,731 million, respectively, are included in real estate.
10. Investments in Affiliated Companies
The Company has investments in affiliates that are accounted
for under the equity method. The principal investments are
Nohmi Bosai Ltd., a 28.6 percent owned affiliate, which isJapan’s largest manufacturer of fire alarms and listed on theFirst Section of the Tokyo Stock Exchange; Taiwan SecomCo., Ltd., a 27.6 percent owned affiliate, which is listed on the
Taiwan Stock Exchange; S1 Corporation, a 24.7 percent
owned affiliate, which is listed on the Korea Stock Exchange;
Japan Image Communications Co., Ltd., a 29.8 percent owned
affiliate; and Japan Cablenet Holdings Limited, a 23.0 percent
owned affiliate.

SECOM CO., LTD. Annual Report 2002

35

Summarized financial information regarding the affiliatedcompanies accounted for under the equity method was
as follows:

In thousands ofIn millions of yen
U.S. dollars

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2002

2001

2002

Notes and accounts
receivable, trade......................... ¥0,940¥0,860$07,068

March 31

March 31

2001

2002

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

¥106,123 ¥112,313
129,402 103,998$0,797,917
972,948

Loan receivables .......................... ¥0,268¥0,119$02,015

Notes and accounts payable....... ¥2,901¥2,931$21,812

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

¥235,525 ¥216,311$1,770,865

Guarantees for bank loans .......... ¥8,765¥9,406$65,902

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

¥058,303 ¥065,492
35,96459,985
117,237 114,855$0,438,369
451,015881,481

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

¥235,525 ¥216,311$1,770,865

2002

In thousands ofIn millions of yen
U.S. dollars
Years ended
March 31
2000

2002

Net sales................... ¥158,770 ¥150,005 ¥163,882$1,193,759

Gross profit .............. ¥045,621 ¥042,441 ¥042,617$0,343,015

Net income............... ¥007,384 ¥004,318 ¥005,641$0,055,519

2002

2001

Year ended
March 31

Dividends received from affiliated companies for the years
ended March 31, 2002, 2001 and 2000 were ¥655 million($4,925 thousand), ¥419 million and ¥371 million, respectively.
Among the affiliated companies accounted for using theequity method, the stocks of three companies carried atequity of ¥22,302 million ($167,684 thousand) and ¥19,372
million at March 31, 2002 and 2001, respectively, had aquoted market value of ¥40,643 million ($305,586 thousand)and ¥28,397 million at March 31, 2002 and 2001, respectively.
The unamortized amounts of goodwill were included in the
carrying amount of investments in affiliated companies underthe equity method. The unamortized amount of goodwill,¥415 million ($3,120 thousand) and ¥187 million at March 31,
2002 and 2001, respectively, is being amortized on a straightline basis over periods not exceeding 10 years.
A summary of transactions and balances with theaffiliated companies accounted for using the equity method
is presented below:
In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2002

2001

2000

2002

Sales ..........................

¥1,595¥1,637¥1,748$11,992

Purchases ..................

¥9,704¥9,764¥6,984$72,96236

SECOM CO., LTD. Annual Report 2002

11. Bank Loans and Long-Term Debt
Bank loans of ¥68,003 million ($511,301 thousand) at March
31, 2002 are represented generally by 30 to 365 day notes
with interest rates ranging from 0.4 to 2.41 percent per annum.
Substantially all of these loans are with banks. The Company
has entered into basic agreements with these banks thatstate that, with respect to all present or future loans with suchbanks, 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 be applicable to all indebtedness to suchbanks. The Company has never been requested to submit
such additional security.
Long-term debt at March 31, 2002 and 2001 was comprisedof the following:
In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2001

2002

2002

Loans, principally from banks
due 2002 to 2020 with interest
rates ranging from 0.00 to 6.60%:
Secured .......................................... ¥061,565 ¥12,587
Unsecured ..................................... 57,237 17,128
1.60% unsecured convertible
bonds due 2002, convertible
currently at ¥2,667.8 ($20.06) for
one common share, redeemablebefore due date...............................
33
500
1.60% unsecured convertible
bonds due 2004, convertible
currently at ¥2,372.4 ($17.84) for
one common share, redeemablebefore due date...............................
18
18
1.85% unsecured notes due 2002 ...
—5,000
2.05% unsecured notes due 2003 ...
5,000
5,000
0.53% unsecured bonds due 2006.. 30,000—
1.80% secured bonds due 2004 ......
200—
1.21% secured bonds due 2006 ......
300—
Obligations under capital leases,
due 2002 to 2026 (Note 18)............ 11,397 10,273
165,750 50,506
Less:
Portion due within one year .......... 32,703 14,471¥133,047 ¥36,035$ 462,895
430,353248

135—
37,594
225,564
1,504
2,255
85,692
1,246,240
245,887$1,000,353

Property, plant and equipment with a carrying amount of¥45,544 million ($342,436 thousand), inventories with a carrying amount of ¥34,973 million ($262,955 thousand), investment securities with a carrying amount of ¥695 million ($5,226
thousand), time deposits of ¥112 million ($842 thousand) andintangibles and other with a carrying amount of ¥1,616 million($12,150 thousand) were pledged as collateral for short-termand long-term debt at March 31, 2002.
The Company has no compensating balance arrangementswith any lending bank. However, as is the customary practicein Japan, the Company had time deposits aggregating ¥1,423
million ($10,699 thousand) with such banks at March 31, 2002.
The convertible bonds can be converted into common
stock at any time by the bondholders. Under the terms ofeach subscription and underwriting agreement for convertible bonds, the conversion price of convertible bonds issubject to adjustment in certain instances, such as for stock
dividends, stock split or free distributions of common stock,
and an acceleration clause may be invoked if the Company
experiences ordinary losses (as defined in each agreement)
for three consecutive years.
Under the terms of the agreement for the 1.60 percent convertible bonds due 2002, the cumulative amount of cash dividends may not exceed ¥3,500 million ($26,316 thousand) plus
the aggregate amount of ordinary income after income taxes(as defined in the agreement) of the Company, beginningwith the fiscal year ended November 30, 1987.
An acceleration clause and limitation of cash dividends will
not be applied if the Company provides collateral which isaccepted by the trustees.
Under the terms of the agreements for the 1.60 percent
convertible bonds due 2002, a sinking fund payment is required.
The aggregate annual maturities and sinking fund requirements on long-term debt after March 31, 2002 are as follows:
Years ending March 31

2003.....................................................
2004.....................................................
2005.....................................................
2006.....................................................
2007.....................................................
Later years ..........................................

In millions of yen

In thousands of
U.S. dollars¥032,703
30,696
15,396
13,112
63,037
10,806¥165,750$0,245,887
230,797
115,759
98,587473,962
81,248$1,246,240

12. Insurance-Related Operations
Secom Insurance maintains accounting records as notedin Note 2 in accordance with the accounting principles andpractices prescribed by the Supervisory Authorities in Japan,
which vary 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,
2002 and 2001 were ¥19,653 million ($147,767 thousand) and¥21,146 million, respectively.
13. 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 for employees with three to 10 service years andare determined by reference to current basic rates of pay, lengthof service and conditions under which the termination occurs.
The parent company and certain of its Japanese subsidiaries
maintain a contributory defined benefit welfare pension plan,
covering substantially all of their employees. The pension
benefits thereunder are determined by reference to current
basic rates of pay, length of service and conditions underwhich the termination occurs. The welfare pension plan isfunded in conformity with the funding requirements of theJapanese Welfare Pension Insurance Law.
To supplement the above welfare pension plan, the parent
company and its major Japanese subsidiaries act as trustees
for non-contributory defined benefit pension plans which
cover substantially all of the eligible employees having 10
years or more of service. The benefits are in the form of
lump-sum and/or pension payments and are determinedby formula based upon length of service and age at time oftermination. The Company contributes amounts required
to maintain sufficient plan assets to provide for accrued
benefits, subject to limitations on deductibility imposed by
Japanese income tax laws.
In March 2002, the parent company and certain of its subsidiaries integrated and amended three pension plans as
described above comprised of lump-sum payment plan, welfare pension plan and non-contributory defined benefit pension plan to a cash balance pension plan, effective April 1,
2002. Under the cash balance pension plans, each participant
has an account which is credited annually based on the current rate of pay and market-related interest rate. With thisplan amendment, the benefit obligation decreased and priorservice benefit is amortized based on the remaining service
period.

SECOM CO., LTD. Annual Report 2002

37

Net pension and severance costs under Statement of
Financial Accounting Standards (“SFAS”) No. 87, “Employers’
Accounting for Pensions”, for the years ended March 31,
2002, 2001 and 2000 were as follows:

2002

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2000

2002

Net pension andseverance costs (credit):
Service cost ..................... ¥08,032 ¥(6,898 ¥(5,638Interest cost..................... 3,930 3,755 3,390
Expected return onplan assets..................... (3,488) (3,962) (2,712)
Amortization of(46)
transition assets............
(46)
(46)
Amortization of prior
105
service cost (benefit) ....
(85)
(37)
Recognized actuarial
804
loss................................. 1,872
606
Net periodic benefit cost.... ¥10,215 ¥(7,214 ¥(7,179$(60,391
29,549(26,225)(346)

14,075$(76,805

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

Year ended
March 31

2001

2002

2002

Funded status................................
49,61835,368Unrecognized actuarial loss ........ (71,023) (45,048)
Unrecognized transition assets...
135
181
Unrecognized prior service
benefit ..........................................
16,852
1,266
Net amount recognized .............. (¥ 4,418) (¥ 8,233)

38

SECOM CO., LTD. Annual Report 2002

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2002

Amounts recognized in the
consolidated balance sheets
consist of:
Accrued pension andseverance costs ...................... ¥ 36,622 ¥21,340
Intangible assets.......................
—(124)
Accumulated othercomprehensive income(loss) ........................................ (41,040) (29,449)
Net amount recognized .............. (¥ 4,418) (¥ 8,233)$0275,353
—

2002

($

$ ,985,617
60,391
29,54912,12093,850(117,827)(27,805)699
1,036,594

719,692(89,294)
44,211
12,120(23,203)
663,526
373,068(534,008)
1,015

($

126,707
33,218)(308,571)
33,218)The assumptions used in computing the information above
are as follows:(639)

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

Change in benefit obligation:
Benefit obligation
at beginning of year ............... ¥131,087 ¥109,529
Service cost...............................
8,032
6,898
Interest cost ..............................
3,930
3,755
Plan participants’contributions...........................
1,612
1,266
Actuarial loss ............................
12,482
14,427
Amendments ............................ (15,671)(2,049)Benefits paid .............................
(3,698)(2,739)Acquisition ................................
93—
Benefit obligation
at end of year.......................... 137,867 131,087
Change in plan assets:
Fair value of plan assets
at beginning of year ...............
95,71986,948Actual return on plan assets.... (11,876) (16,179)
Employer contribution .............
5,880
25,938Plan participants’contributions...........................
1,612
1,266
Benefits paid .............................
(3,086)(2,254)
Fair value of plan assets
at end of year..........................
88,24995,719In millions of yen

March 31

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

2002

2001

2000

2.5%

3.0%

3.5%

3.0%
4.0%
5.0%
2.7% 2.2–3.5% 2.7–2.8%

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 a minimum pension liability and related intangible asset 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 ¥23,109 million ($173,752
thousand) and ¥17,110 million at March 31, 2002 and 2001,
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¥137,867 million ($1,036,594 thousand), ¥124,127 million($933,286 thousand) and ¥88,249 million ($663,526 thousand),
respectively, at March 31, 2002, and ¥131,087 million, ¥114,622
million and ¥95,719 million, respectively, at March 31, 2001.
As discussed in Note 8, in September 2000, the parent
company contributed certain marketable equity securities toan employee retirement benefit trust, which is included inplan assets.
Most subsidiaries outside Japan have various retirement
plans, which are primarily defined contribution plans, covering
substantially all of their employees. The funding policy for thedefined contribution plans is to annually contribute an amountequal to a certain percent of the participants’ annual salaries.
The contributions to the defined contribution pension plans forthe years ended March 31, 2002, 2001 and 2000 were ¥20 million ($150 thousand), ¥19 million and ¥25 million, respectively.
14. Exchange Gains and Losses
Interest and other revenue for the years ended March 31,
2002 and 2001 include net exchange gains of ¥321 million($2,414 thousand) and ¥313 million, respectively. Other
expenses for the year ended March 31, 2000 include net
exchange losses of ¥631 million.

The significant components of deferred tax assets andliabilities at March 31, 2002 and 2001 were as follows:

15. Income Taxes
Total income taxes for the years ended March 31, 2002,
2001 and 2000 were allocated as follows:
In thousands ofIn millions of yen
U.S. dollars
Years ended
March 31
2000

2002

Income .......................... ¥ 30,183 ¥ 35,751 ¥22,689
Cumulative effect ofaccounting change ....
—
(3,528)—
Shareholders’ equity—
accumulated othercomprehensive
income (loss):
Unrealized gains(losses) on
securities ................
(1,273) (13,419)
3,070
Unrealized gains
on derivative
instruments ............
24——
Minimum pension
liabilities
adjustments............
(3,633) (11,788)
5,809¥ 25,301 ¥ 07,016 ¥31,568$ 226,940

2002

2001

Year ended
March 31—

(9,571)
180(27,316)$ 190,233

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, 2002, 2001 and 2000.
Reconciliations of the differences between income taxes
computed at statutory tax rates and consolidated income tax
expense were as follows:

2002

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2000

Income taxes
computed at statutory
tax rate of 41.9% ....... ¥27,140 ¥34,586 ¥30,457
Increase (decrease)resulting from:
Unrecognized tax
benefits fromsubsidiaries in loss
positions .................
2,081
1,305
1,412
Reversal ofvaluation
allowance due
to utilization ofoperating loss
carryforwards.........
(670) (2,504) (8,689)
Amortization of
non-deductible
goodwill..................
763
699
118
Other, net..................
869
1,665
(609)
Consolidated
income taxes ...... ¥30,183 ¥35,751 ¥22,689

2002$204,060

15,647

In millions of yen
March 31

In thousands of
U.S. dollars
March 31

2001

2002

2002

Deferred tax assets:
Loss carryforwards ................. ¥(22,062 ¥(21,522
Accrued pension andseverance costs ..................... 17,611
17,327
Deferred revenue .................... 11,850
11,076
Adjustment of book value atthe date of acquisition—
Land and buildings ............. 10,245
1,291
Other assets.........................
—
2,676
Intercompany profit ................
3,961
3,835
Accrued bonus ........................
1,728
2,453
Enterprise and state income
taxes .......................................
1,575
2,020
Vacation accrual ......................
1,594
1,873
Allowance for doubtful
accounts.................................
1,209
1,627
Insurance reserve....................
1,300
701
Research and development
expenses ................................
1,213
694
Other ........................................
2,820
6,546
Gross deferred tax assets... 84,193
66,616
Less: Valuation allowance .. (21,256) (19,960)
Total deferred tax assets .... 62,937
46,656
Deferred tax liabilities:
Deferred installation costs ..... (8,052)(7,404)
Adjustment of book value atthe date of acquisition—
Land and buildings ............. (7,012)—
Other investments............... (2,603)—
Long-term receivables ........ (2,021)—
Capitalization of property
acquisition tax ....................... (1,540)(461)
Unearned premiums andother insurance liabilities ..... (1,291)(1,235)
Unrealized gains on
securities................................
(2,621)(700)
Gain on securities
contribution to employee
retirement benefit trust ........
(8,952)—
Reversal of securities
devaluation ............................
(1,558)—Other ........................................ (2,279)(1,303)Gross deferred tax
liabilities............................. (25,498) (23,534)
Net deferred tax assets ...... ¥(37,439 ¥(23,122$(165,879
132,41489,09877,03020,12028,83518,443
15,18814,083
12,233
5,271
5,218
49,218633,030(159,819)
473,211(60,541)(52,722)(19,572)(15,196)—(11,579)(9,707)(5,263)——(17,135)(191,715)$(281,496(5,038)5,737
6,534$226,940

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, 2002 and 2001 was an increase of ¥1,296 million($9,744 thousand) and ¥51 million, respectively.

SECOM CO., LTD. Annual Report 2002

39

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, 2002 and 2001.
No deferred income taxes have been provided on undistributed earnings of overseas subsidiaries totaling ¥3,387
million ($25,466 thousand) at March 31, 2002 because they
are not expected to be remitted in the foreseeable future.
At March 31, 2002, tax loss carryforwards of domestic subsidiaries amounted to ¥47,105 million ($354,173 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

In millions of yen

In thousands of
U.S. dollars¥01,999
34,217
2,338
3,285
5,266
¥47,105$015,030
257,271
17,57924,69939,594$354,1732003 ......................................................
2004 ......................................................
2005 ......................................................
2006 ......................................................
2007 ......................................................

The tax loss carryforwards of overseas subsidiaries at March
31, 2002 amounted to ¥6,235 million ($46,880 thousand), apart of which will begin to expire in the year ending March 31,
2003.
16. Shareholders’ Equity(1) Stock Split
On September 14, 1999, the Board of Directors approved
a two-for-one stock split on the Company’s common stock,which was distributed on November 19, 1999, to shareholdersof record on September 30, 1999. The number of shares issued
was 116,409,647. There was no increase in the common stock
account because the new shares were distributed from the portion of previously issued shares accounted for as excess ofpar value in the common stock account in accordance with
the Japanese Commercial Code.
(2) Retained Earnings
The Japanese Commercial Code provided that an amountequal to at least 10 percent of cash dividends and other distributions from retained earnings paid in cash by the parent
company and its Japanese subsidiaries be appropriated asa legal reserve until such reserve equals 25 percent of thecommon stock account. The Japanese Commercial Code,amended effective October 1, 2001, provides that an amountequal to at least 10 percent of cash dividends and other distributions from retained earnings paid in cash by the parent
company and its Japanese subsidiaries be appropriated as a

40

SECOM CO., LTD. Annual Report 2002

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 accounting period.
Subsequent to March 31, 2002, the parent company’s Boardof Directors declared an annual cash dividend of ¥9,330 million ($70,150 thousand) to shareholders of record on March
31, 2002. The dividend declared is subject to approval at thegeneral shareholders’ meeting scheduled for June 27, 2002.
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, 2002,
2001 and 2000 is as follows:
In millions of yen
Pre-tax
amountTax(expense)or benefit

Net-of-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)
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)

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

Net-of-tax
amount

For the year ended March 31, 2000:
Unrealized gains on securities—
Unrealized holding gains or losses
arising during the period ........... ¥08,436 (¥03,557) ¥04,879
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income ......................... (1,162)
487
(675)
Minimum pension
liabilities adjustments .................... 13,863(5,809)8,054
Foreign currencytranslation adjustments ................. (5,638)—(5,638)Other comprehensive
income (loss) ........................... ¥15,499 (¥08,879) ¥06,620

In thousands of U.S. dollars
Pre-tax
amountTax(expense)or benefit

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($38,241 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, 2002 were
¥7,885 million ($59,286 thousand).
A summary of leased assets under capital leases at March
31, 2002 and 2001 is as follows:
In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2002

2001

2002

Buildings and improvements..... ¥05,185
Machinery, equipment
and automobiles ....................... 12,04979Intangibles and other..................
Accumulated depreciation ......... (6,606)¥10,707¥05,086$(38,985

11,718172(7,308)¥09,668

90,594594(49,669)$(80,504

Net-of-tax
amount

For the year ended March 31, 2002:
Unrealized losses on securities—
Unrealized holding gains or losses
arising during the period ........... ($70,519) $24,789 ($45,730)
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income ......................... 44,767 (15,218) 29,549
Unrealized gains on derivative
instruments—
Unrealized holding gains or losses
arising during the year ...............
1,571
(556)
1,015
Less: Reclassification
Less: adjustment for gains or
Less: losses included in
Less: net income ......................... (1,068)
376
(692)
Minimum pension
liabilities adjustments .................... (72,421) 27,316 (45,105)
Foreign currencytranslation adjustments ................. 52,955—
52,955
Other comprehensive
income (loss) ........................... ($44,715) $36,707 ($08,008)

17. Research and Development Expenses
Research and development expenses included in selling,
general and administrative expenses for the years ended
March 31, 2002, 2001 and 2000 were ¥5,121 million ($38,504
thousand), ¥3,921 million and ¥4,003 million, respectively.
18. Leased Assets—Lessee
The Company leases certain office space, employee residential facilities, computer and transportation equipment.
Some leased buildings, computer and transportation equipment are held under capital leases. Other leases are classified
as operating leases.
On April 23, 1996, the Company entered into a long-termlease agreement for a building and land in Mitaka, Tokyo. The

Depreciation expenses under capital leases for the years ended
March 31, 2002, 2001 and 2000 were ¥3,195 million ($24,023
thousand), ¥2,890 million and ¥2,527 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, 2002:
Years ending March 31

In millions of yen

2003..........................................................
2004..........................................................
2005..........................................................
2006..........................................................
2007..........................................................
Later years ...............................................
Total minimum lease payments ............
Less: Amount representing interest ......
Present value of net minimum lease
payments (Note 11) ..............................
Less: Current obligations .......................
Long-term capital lease obligations ......

In thousands of
U.S. dollars¥03,008
2,289
1,637
1,105
619
6,965
15,6234,226$022,617
17,211
12,3088,308
4,654
52,368117,466
31,774

11,3972,599¥08,798

85,692
19,541$066,151

Rental expenses under operating leases for the years ended
March 31, 2002, 2001 and 2000 were ¥12,961 million ($97,451
thousand), ¥12,151 million and ¥12,534 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 ($10,068 thousand) over a 20-year period.

SECOM CO., LTD. Annual Report 2002

41

The future minimum lease payments required underoperating leases that have initial or remaining non-cancelable lease terms in excess of one year at March 31, 2002
are as follows:
Years ending March 31

In millions of yen

2003 ............................................................
2004 ............................................................
2005 ............................................................
2006 ............................................................
2007 ............................................................
Later years..................................................
Total future minimum lease payments ...

¥01,798
1,739
1,685
1,669
1,667
24,577¥33,135

In thousands of
U.S. dollars$013,519
13,075
12,66912,54912,534
184,789$249,135

19. Property on Operating Leases—Lessor
The Company’s leasing operations consist principally of theleasing of certain office space and related properties. The
properties on operating leases are mainly held by real estate
investment companies as part of investment assets of theinsurance services segment and by Arai & Co.,Ltd., which isengaged in sales and leasing services of real estate.
A summary of investment in property on operating leases andproperty held for lease at March 31, 2002 and 2001 is as follows:(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.
(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.
(4) Interest Rate Swap Agreements
The fair value 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, 2002 and 2001 are
as follows:
In millions of yen
March 31

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2001

2002

Land ............................................. ¥102,655 ¥34,637
80,835 13,845
Buildings and improvements.....
26,137 16,191
Construction in progress............
1,680
65
Intangibles and other..................
(9,263)(317)
Accumulated depreciation .........
¥202,044 ¥64,421

2002$0,771,842
607,782
196,519
12,632(69,647)$1,519,128

The future minimum rentals on non-cancelable operatingleases at March 31, 2002 are as follows:
Years ending March 31

In millions of yen

2003 ............................................................
2004 ............................................................
2005 ............................................................
2006 ............................................................
2007 ............................................................
Later years..................................................
Total future minimum rentals ..................

¥09,071
3,589
1,317
1,022
501
11,442¥26,942In thousands of
U.S. dollars$068,203
26,985
9,902
7,684
3,767
86,030$202,571

20. 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.
(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; Deposits Received; andAccrued Payrolls
The carrying amounts approximate fair value because of
the short maturities of such instruments.

42

SECOM CO., LTD. Annual Report 2002

Carrying
amount2002

2001

Estimated
fair value

Carrying Estimatedamount fair value

Non-derivatives:
Liabilities—
Long-term debt
including current
portion ....................... ¥165,750 ¥165,840 ¥50,506 ¥50,548
Derivatives:
Assets—Interest rate swaps...... ¥000,163 ¥000,163 ¥00,042 ¥00,260
Liabilities—
Interest rate swaps...... ¥001,127 ¥001,127 ¥00,038 ¥00,038
In thousands of U.S. dollars
March 31
2002
Carrying
amountEstimated
fair value

Non-derivatives:
Derivatives—
Long-term debt including current
portion ................................................. $1,246,240 $1,246,917
Derivatives:
Assets—Interest rate swaps ............................... $0,001,226 $0,001,226
Liabilities—
Interest rate swaps ............................... $0,008,474 $0,008,474

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.

21. Derivative Financial Instruments(1) Risk Management Policy
The Company is party to derivative financial instruments
which are used in the normal course of business to reduce
exposure to fluctuations in interest and foreign currency
rates. The Company assesses interest rate risk and foreign
currency exchange risk by continually monitoring changes inthese exposures and by evaluating hedging opportunities. The
Company does not hold or issue derivative financial instruments for trading purposes. The Company is also exposed tocredit-related losses in the event of non-perfomance by counterparties to derivative financial instruments, but it is notexpected that any counterparties will fail to meet their obligations, because most of the counterparties are internationallyrecognized financial institutions and contracts are diversified
into a number of major financial institutions.
(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.
(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. Changes in fair valuesof derivative instruments designated as cash flow hedges ofthese debt obligations are reported in other comprehensive
income (loss). These amounts are reclassified into current
income in the same period as hedged items affect current
income. Adoption of Statement of Financial AccountingStandards No. 133 and No. 138 resulted in an increase ofother comprehensive income of ¥129 million ($970 thousand)at April 1, 2001. Of that amount, ¥92 million ($692 thousand)of net income was reclassified from other comprehensive
income into current income for the year ended March 31,
2002 as net gains or losses relating to the hedged items
affected current income. Approximately ¥43 million ($323
thousand) of net derivative income included in other comprehensive income, net of tax at March 31, 2002, will be reclassified into current income within 12 months from that date. At
March 31, 2002 and 2001, the notional principal amounts ofinterest rate swap agreements were ¥43,683 million ($328,444
thousand) and ¥10,000 million, respectively.
(4) Non-Hedge Derivative Instuments
The parent company and its three 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.
This swap agreement is designed to replace LIBOR-based

interest income with long-term swap rate interest income
for the investment securities. Changes in fair value of nonhedging derivative financial instruments are reported inincome.
22. Commitments and Contingent Liabilities
Commitments outstanding at March 31, 2002 for thepurchase of property, plant and equipment approximated¥17,407 million ($130,880 thousand).
Contingent liabilities at March 31, 2002 for guarantees givenin the ordinary course of business amounted to approximately¥26,767 million ($201,256 thousand).
23. 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 ($739,759 thousand) would have been transferredfrom retained earnings to the appropriate capital accounts.
However, there would be no effect on total shareholders’ equity.
24. Gain on Sale of Subsidiaries’ Shares
On October 15, 1999, Secom Techno Service Co., Ltd.
(“Secom Techno”), a 98.3 percent owned subsidiary, completed an initial public offering on the Second Section of theTokyo Stock Exchange. In conjunction with the offering, theparent company sold 2,000,000 outstanding shares of Secom
Techno for a sales price of ¥4,512 million ($33,925 thousand).
Through a secondary offering, Secom Techno issued an additional 2,000,000 shares for total proceeds of ¥4,512 million($33,925 thousand). As a result of these transactions, the parent
company’s ownership in Secom Techno declined to 67.8 percent. The resulting pretax gain on the sale of subsidiary sharesand new issuance of Secom Techno’s shares of ¥2,313 million($17,391 thousand) and ¥1,978 million ($14,872 thousand),
respectively, are recognized in the consolidated statement ofincome for the year ended March 31, 2000. In the consolidated
statement of cash flows for the year ended March 31, 2000,
the gain on sale of subsidiary shares is excluded from cash
flows from operating activities and the related cash proceeds
are classified in the cash flows from investing activities. The
cash proceeds from the new issuance by Secom Techno tominority shareholders are classified in the cash flows fromfinancing activities.
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 ($7,639 thousand) in cash. The
sale resulted in a gain of ¥571 million ($4,293 thousand).
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 sales price of ¥2,162 million ($16,256 thousand). Througha secondary offering, Secom Joshinetsu issued an additional
500,000 shares for total proceeds of ¥1,081 million ($8,128 thousand). As a result of these transactions, the parent company’s

SECOM CO., LTD. Annual Report 200243

ownership in Secom Joshinetsu declined to 52.1 percent. The
resulting pretax gains on the sale of subsidiary shares and newissuance of Secom Joshinetsu’s shares of ¥700 million ($5,263
thousand) and ¥160 million ($1,203 thousand), respectively,
are recognized in the consolidated statement of income for theyear ended March 31, 2002. In the consolidated statement ofcash flows for the year ended March 31, 2002, the gain onsale of subsidiary shares is excluded from cash flows fromoperating activities and the related cash proceeds are classified in the cash flows from investing activities. The cash
proceeds from the new issuance by Secom Joshinetsu tominority shareholders are classified in the cash flows fromfinancing activities.
25. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:

2002

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2000

2002

Cash paid during theyear for:
Interest ............................ ¥01,568 ¥01,996 ¥ 01,511

2001$011,789

Income taxes .................. ¥31,952 ¥25,762 ¥ 30,841$240,241

Non-cash investing andfinancing activities:
Conversion of
convertible bond tocommon stock andadditional paid-in
capital............................ ¥00,467 ¥00,060 ¥ 00,774$003,512

Additions to obligations
under capital leases ..... ¥03,959 ¥02,654 ¥ 03,344$029,767

Acquisition—
Fair value of assets
acquired...................... ¥73,944 ¥07,550 ¥ 48,579
Cash paid for capitalstock............................ (4,957) (3,980) (15,000)
Minority shareholders’interest........................
(13)—(4,541)
Net liabilities
assumed .................. ¥68,974 ¥03,570 ¥29,038$555,970(37,270)(98)$518,602

26. 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.

44

SECOM CO., LTD. Annual Report 2002

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 and medical datatransmission services by utilizing the Company’s network.
The insurance services segment represents non-life insurancerelated underwriting business in the Japanese market. The
information and communication related and other services
segment represents the Company’s network business, aerial
surveying and mapping services, and Geographic Information
System services as well as development, sale and lease of realestate services. 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
a sub-set 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, amortization of deferredassets and net exchange losses of 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, 2002, 2001 and 2000 is as follows:(1) Business Segment Information

2002

2002

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2000

Revenue and otherincome:Security services—
Customers .................. ¥342,169 ¥316,139 ¥295,834
Intersegment ..............
2,448
1,285
3,305
344,617 317,424 299,139
Medical services—
6,347
1,326
Customers .................. 13,507
Intersegment ..............
166
147
140
13,673
6,494
1,466
Insurance services—23,30330,462Customers .................. 28,759
Intersegment ..............
1,920
2,030
2,250
30,67925,33332,712
Information andcommunication
related and otherservices—
92,552
72,684
Customers .................. 103,315
Intersegment ..............
4,213
5,715
1,821
107,528
98,26774,505
Total ............................... 496,497 447,518 407,822(8,747) (9,177) (7,516)
Eliminations ..................
Corporate items ............
5,776
29,952
12,118
Consolidated revenue
and other income ....... ¥493,526 ¥468,293 ¥412,424
Income (loss) before
income taxes:
Security services........... ¥082,984 ¥077,389 ¥076,073
Medical services ...........
(698) (1,522)(566)
Insurance services........
304(1,629)4,339
Information andcommunication
related and otherservices ........................
(130)
366
2,137
Total ............................... 82,460
74,604
81,983
Corporate items
and eliminations ......... (16,091)
9,865(8,063)
Interest expense ...........
(1,596) (1,925) (1,231)
Consolidated income
before income taxes... ¥064,773 ¥082,544 ¥072,689

2002$2,572,699
18,4062,591,105
101,557
1,248
102,8052002$3,710,722$0,623,940(5,248)
2,286

(978)
620,000(120,985)(12,000)$0,487,015

In thousands of
U.S. dollars

March 31

March 31

2000

2002

2001

Assets:Security services ..... ¥0,408,657 ¥369,582 ¥322,681
Medical services......
61,615
11,241
2,061
Insurance services...
352,454 213,438 144,963
Information andcommunication
related and otherservices...................
179,383 137,362 154,045
Total .......................... 1,002,109 731,623 623,750
Corporate items.......
129,061 118,292 133,522
Investments in andloans to affiliatedcompanies..............
34,94332,41924,950Total assets .............. ¥1,166,113 ¥882,334 ¥782,222

216,233
14,436230,669

776,804
31,677
808,481
3,733,060(65,767)
43,429In millions of yen$3,072,609
463,271
2,650,030

1,348,744
7,534,654
970,384
262,729$8,767,767

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2002

2000

Depreciation andamortization:
Security services ...... ¥042,106 ¥39,005 ¥31,361
546
Medical services .......
1,301
94
626
Insurance services....
1,253
(602)
Information andcommunication
related and other4,039
services ...................
4,234
3,234
44,216
Total...........................
48,89434,087804
Corporate items........
997
168
Total depreciation
and amortization .... ¥049,891 ¥45,020 ¥34,255
Capital expenditures:
Security services ...... ¥052,165 ¥48,220 ¥36,459
376
Medical services .......
2,717
132
58,247
Insurance services.... 104,398
12,885
Information andcommunication
related and other
3,634
services ...................
2,928
3,449
Total........................... 162,208 110,477
52,9252,769
Corporate items........
13
983
Total capital
expenditures ........... ¥162,221 ¥113,246 ¥53,908$0,316,586
9,782
9,421

31,835
367,624
7,496$0,375,120$0,392,218
20,429784,947

22,015
1,219,609
98$1,219,707

SECOM CO., LTD. Annual Report 2002

45

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.
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.

2002

In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2001

2000

Electronic security
services:
Commercial
security andhome security........ ¥244,494 ¥230,763 ¥221,765
Large-scale
proprietary
3,438
systems ..................
3,647
3,773
Other security
services:
Static guard
34,107
services ..................
32,204
31,663
Armored car
17,001
services ..................
15,10913,540
Merchandise and43,129other34,41625,093
Total security
services ...................... ¥342,169 ¥316,139 ¥295,834

2002$1,838,301
25,850256,443
127,827
324,278$2,572,699(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, 2002, 2001 and 2000 was as follows:
In millions of yen

In thousands of
U.S. dollars

Years ended
March 31

Year ended
March 31

2000

2002

Revenue and otherincome:Japan........................ ¥480,165 ¥455,623 ¥398,865
12,67013,361Others.......................
13,559Total ......................... ¥493,526 ¥468,293 ¥412,424$3,610,263
100,459$3,710,722

In millions of yen

In thousands of
U.S. dollars

March 31

March 31

2000

2002

Long-lived assets:
Japan........................ ¥463,144 ¥302,366 ¥204,234
6,384
Others.......................
6,421
6,670
Total ......................... ¥469,528 ¥308,787 ¥210,904$3,482,286
48,000$3,530,286

2002

2002

2001

2001

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

46

SECOM CO., LTD. Annual Report 2002

27. Subsequent EventOn April 23, 2002, following the enactment of the Welfare
Pension Insurance Law in Japan, the parent company and certain of its subsidiaries obtained approval from Japan’s Ministryof Health, Labour and Welfare for exemption from the future
benefit obligation with respect to the portion of the Employees
Pension Funds that the parent company and certain of its subsidiaries operate on behalf of the Japanese government.
On 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 ($40.75) per
share for an aggregate amount of ¥43,360 million ($326,015
thousand).

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, 2002 and2001, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years thenended, 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 audit. The accompanying consolidated financial statements of Secom Co., Ltd. and subsidiaries for the year ended March 31, 2000, were audited byother auditors whose report dated May 15, 2000, expressed an unqualified opinion on those statements, before the restatement
described in Note 2 (1) to the consolidated financial statements.
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 for the years ended March 31, 2002 and 2001 referred to above present
fairly, in all material respects, the financial position of Secom Co., Ltd. and subsidiaries as of March 31, 2002 and 2001, and theresults of their operations and their cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 (1) to the consolidated financial statements, the Company changed its reporting entity in the year ended
March 31, 2002. The consolidated financial statements of all periods presented have been restated.
As discussed in Note 2 (12) to the consolidated financial statements, the Company changed its method of revenue recognitionin the year ended March 31, 2001.
We also audited the adjustments described in Note 2 (1) to the consolidated financial statements that were applied to restate
the consolidated financial statements for the year ended March 31, 2000. In our opinion, such adjustments are appropriate andhave been properly applied.
The accompanying consolidated financial statements as of and for the year ended March 31, 2002 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 yen have been translated into United States dollars on the basis set forth in Note 3
to the consolidated financial statements.

Tokyo, JapanMay 16, 2002, except as to the last paragraph of Note 27 to the consolidated financial statements, which is as of August 13, 2002.

SECOM CO., LTD. Annual Report 2002

47