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Management Information

Business and Other Risks

This page outlines business and other risks the SECOM Group (SECOM Co., Ltd., and its consolidated subsidiaries) recognizes as having the potential to significantly influence the decisions of investors. Information is also included on other matters that, while not explicitly considered risks, could have a material bearing on investment decisions, in line with the Group’s commitment to active disclosure. The Group assesses the likelihood of issues arising in connection with these risks, based upon which it strives to take appropriate measures to avoid such issues arising and timely countermeasures in the event they do.

Forward-looking statements herein are based on information available to SECOM as of March 31, 2011.

Credit Risks

The SECOM Group is exposed to a variety of credit-related risks arising from investing and financing activities, which primarily involve clients in Japan. The Group periodically reviews the status of pertinent receivables, assessing and determining the amount of necessary provisions. However, should the financial condition of a client deteriorate, the Group may be forced to increase the amount of its allowance for doubtful accounts. This situation has the potential to adversely affect the Group’s operating results and/or financial position.

Regarding contracts for security or leasing services, in the event an unforeseen development that negatively impacts a counterparty during the contract period, there is a risk the Group will be unable to recover its initial investment or other receivables, resulting in a loss. However, because the Group’s contracts are not limited to a few specific major customers, this risk is diversified.

Investment Risks

The SECOM Group holds a variety of securities—including stocks—that are vulnerable to fluctuations in price. Accordingly, declines in the prices of such securities may result in impairment losses, which have the potential to adversely affect the Group’s operating results and/or financial position.

The Group evaluates potential investments and makes pertinent decisions using a comprehensive decision-making process designed to preclude investments in securities that offer marginal investment efficiency and the holding of which offers few benefits.

Risks Related to Real Estate Prices

The SECOM Group holds a variety of real estate for its real estate development and sales and real estate leasing businesses. Real estate prices are vulnerable to the risk of decline owing to, among others, macroeconomic conditions. Fluctuations in real estate prices have the potential to adversely affect the Group’s operating results and/or financial position.

The Group takes into account a variety of factors, including  advantageous opportunities and the timing of purchases or sales of real estate, and uses the results thereof to make decisions regarding the purchase, holding and sale of real estate assets.

Interest Rate Risks

The SECOM Group raises the bulk of the funds it requires through loans from financial institutions and the issue of bonds. Accordingly, the Company is vulnerable to the risk of interest rate fluctuations, which have the potential to adversely affect the Group’s operating results and/or financial position.

In addition to taking steps to minimize its interest rate burden, the Group enters into interest rate swap agreements for certain funding transactions to manage changes in cash flows resulting from interest rate fluctuations. The Group uses interest rate swaps whereby it receives floating interest rate proceeds and makes fixed interest rate payments, to transform floating rates on debt obligations to fixed rates, thereby effectively creating fixed-rate debt.

Retirement Benefit Obligations

In the event of a decline in the market value of plan assets owing to a fall in yields on managed plan assets, or of changes to the actuarial assumptions on which projected retirement benefit obligations are based, the SECOM Group may incur unrecognized actuarial losses, which have the potential to adversely affect the Group’s operating results and/or financial position.

To reduce the risk of unrecognized actuarial losses in the future, the Group has implemented  a transfer to the Japanese Government of the substitutional portion of employee pension fund liabilities and has adopted a defined contribution pension plan and a cash balance plan (the latter plan is calculated by the amount equal to a certain percentage of the employee’s annual income over their period of service, plus interest calculated by the 3-year average yield for 10-year government bonds).

Risks Related to the Medical Services Business

The SECOM Group’s medical services business encompasses home medical services, the operation of residences for seniors, sales of medical equipment and the leasing of real estate to medical institutions. The Group also provides loans and guarantees to medical institutions. Should changes to Japan’s health care system—including the reduction of compensation paid for medical diagnosis—result in an increasingly harsh operating environment, the Group’s medical services business—and/or the medical institutions that are its customers—may experience a deterioration of operating results. Such a situation has the potential to adversely affect the Group’s operating results and/or financial position.

The SECOM Group strives to effectively control these risks by responding flexibly and swiftly to changes in the operating environment, as well as by continuously monitoring the operations of medical institutions and providing support for efforts by such institutions to improve management capabilities.

Risks Related to Liquidity and Large-Scale Disasters in the Insurance Services Business

The SECOM Group’s insurance services business focuses on the underwriting of non-life insurance policies, including deposit-type policies. Contract and policy terms for deposit-type policies—which provide refunds at maturity or upon cancellation—are principally five years. In the event of a delay in the collection of funds for the payment of premiums due to market volatility, or of an unforeseen significant outlay of funds owing to the payment of large claims or the cancellation of a large number of contracts, liquidity may be hampered and the Group may unexpectedly find it necessary to free up working capital. Such a situation has the potential to adversely affect the Group’s operating results and/or financial position.

In investing premiums collected, the Group gives due consideration to the various risks to which it is exposed in this business and chooses investment options suited to different maturities, maintaining sufficient liquidity.

In the event of an earthquake, typhoon or other natural disaster, or of a fire or other major accident, the Group’s insurance services business may experience a deterioration of its operating results or financial condition.

The Group strives to effectively control insurance underwriting risks by adhering to established underwriting standards and by continuously verifying loss ratios. The Group also manages large-scale disaster risk and market aggregation risk by securing reinsurance cover.

Risks Related to the Intensification of Competition

Due to an increase in the number of new market entrants in the SECOM Group’s business domains, there is the risk that sales prices will decline and that the Group’s market shares will shrink. Also, owing to the adoption of price cutting strategies by competitors, combined with pressure from customers for sales price reductions, there is the risk that the Group will be drawn into pricing wars for its principal products and services, and that the intensification of competition will adversely affect the Group’s operating results and/or financial position.

However, new market entrants into its principal business domain, security services, face significant barriers—notably the need for substantial initial capital and other investments and the difficulty in acquiring the necessary know-how. In response to the risk of a decline in profitability as a result of increasingly intense pricing competition, the Group is striving to provide better, more carefully tailored services, thereby precluding the need to lower its prices, and to ensure effective cost control, thereby securing profitability.

Changes to Laws and Regulations

The nature of the SECOM Group’s businesses, which focus on providing products and services that deliver security and peace of mind, means the Group is subject to a variety of rigorous and complex laws and regulations. In the event of changes to any of these laws or regulations, the Group must take prompt steps to ensure compliance. It is possible that this will result in a significant cost burden and that this will adversely affect the Group’s operating results and/or financial position.

The Group strives to closely monitor laws and regulations and appropriately and in a timely manner respond in the event of changes, thereby precluding risks associated with changes to any of these laws and regulations.

Major Natural Disasters or Accidents

In the event of a major natural disaster or accident, such as a large-scale earthquake or blackout, there is the risk that the Group’s network and other aspects of its infrastructure will cease to function, impeding its ability to provide security and other services. There is also the risk that security equipment at subscribers’ premises, regarded as Company assets, will be damaged by such disaster or accident, and that the Group will be liable for repairing and/or replacing said equipment. There is also the risk that the Group’s ability to provide security and other services will be impeded by a mass outbreak of an infectious disease affecting employees. Accordingly, major natural disasters or accidents and mass outbreaks of infectious diseases have the ability to adversely affect the Group’s operating results and/or financial position.

The Group has taken a variety of steps to ensure it is well prepared for such occurrences. These include utilizing its extensive know-how to create a Group manual, stockpiling emergency supplies, establishing a flexible response framework and conducting drills.

Management of Customer Information

The SECOM Group handles a significant amount of customer information, including information pertaining to security services contracts, and recognizes ensuring the confidentiality of such information as a key imperative. In the unlikely event an unforeseen event results in customer information being leaked, the Group may lose public trust and/or be forced to pay damages. Both of these situations have the ability to adversely affect the Group’s operating results and/or financial position.

As an organization that focuses on providing products and services that deliver security and peace of mind, particularly in the area of security services, the SECOM Group has established a rigorous system for managing customer information. In line with its internal information security policy, the Group strives to prevent information leaks resulting from unlawful network access, as well as from internal problems, by setting strict limits on the number of individuals authorized to access the system and through such measures as stringent employee training and the use of firewalls. The Group has also established internal standards for handling personal information and a manual for responding to inquiries regarding personal information, among others.