1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 19981999
Commission file number 1-6439
SONY KABUSHIKI KAISHA
(Exact name of registrantRegistrant as specified in its charter)
SONY CORPORATION
(Translation of registrant'sRegistrant's name into English)
JAPAN
(Jurisdiction of incorporation or organization)
7-35, KITASHINAGAWA 6-CHOME, SHINAGAWA-KU, TOKYO
141-0001, JAPAN
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange
on which registered
American Depositary Shares* New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
Common Stock** New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
* American Depositary Shares evidenced by American Depositary Receipts.Receipts
Each American Depositary Share represents one share of Common Stock.
** Par value 50 Japanese yen per share.share
Not for trading, but only in connection with the listing of
American Depositary Shares pursuant to the requirements of the
relevant exchanges.exchanges
Securities registered pursuant to Section 12(g) of the Act.
None
......................................................
(Title of Class)
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Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
6 1/8% Notes due March 4, 2003
......................................................None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report.
Outstanding as of
March 31, 19981999 March 30, 19981999
Title of Class (Tokyo Time) (New York Time)
............. ................ ................
Common Stock 407,195,271410,439,111
American Depositary Shares 17,390,50527,812,255
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 Item 18 X
.... ....
In this document, Sony Corporation is referred to as the "Company" and the
Company and its consolidated subsidiaries are
together referred to as "Sony". Also,In addition, sales and operating revenue is
referred to as "sales" in the narrative description except in Consolidated
Financial Statements.
The noon buying rate for yen in New York City as certified for customs
purposes by the Federal Reserve Bank of New York on August 31, 1998June 1, 1999 was 140.90120.75 yen
= U.S. 1 dollar.
As of March 31, 1998, the Company1999, Sony Corporation had 1,1421,041 consolidated
subsidiaries. It has applied the equity accounting method in respect to its 6165
affiliated companies.
Cautionary Statement With Respect to Forward-Looking Statements
Statements made in this annual report with respect to Sony's plans,
strategies and beliefs and other statements that are not historical facts are
forward-looking statements about the future performance of Sony which are based
on management's assumptions and belief in light of the information currently
available to it and involve risks and uncertainties. Potential risks and
uncertainties include, without limitation; general economic conditions in Sony's
markets, particularly levels of consumer spending; exchange rates, particularly
between the yen and theCAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
STATEMENTS MADE IN THIS ANNUAL REPORT WITH RESPECT TO SONY'S CURRENT
PLANS, ESTIMATES, STRATEGIES AND BELIEFS AND OTHER STATEMENTS THAT ARE NOT
HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS ABOUT THE FUTURE PERFORMANCE OF
SONY. THESE STATEMENTS ARE BASED ON MANAGEMENT'S ASSUMPTIONS AND BELIEFS IN
LIGHT OF THE INFORMATION CURRENTLY AVAILABLE TO IT AND THEREFORE YOU SHOULD NOT
PLACE UNDUE RELIANCE ON THEM. SONY CAUTIONS YOU THAT A NUMBER OF IMPORTANT
FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO (I)
GENERAL ECONOMIC CONDITIONS IN SONY'S MARKETS, PARTICULARLY LEVELS OF CONSUMER
SPENDING; (II) EXCHANGE RATES, PARTICULARLY BETWEEN THE YEN AND THE U.S. dollar, and other currencies in which Sony makes
significant sales or in which Sony's assets and liabilities are denominated; and
Sony's ability to continue to win acceptance of its products and services, which
are offered in highly competitive markets characterized by continual new product
introductions, rapid developments in technology (particularly in the Electronics
business)DOLLAR,
AND OTHER CURRENCIES IN WHICH SONY MAKES SIGNIFICANT SALES OR IN WHICH SONY'S
ASSETS AND LIABILITIES ARE DENOMINATED; AND (III) SONY'S ABILITY TO CONTINUE TO
DESIGN AND DEVELOP AND WIN ACCEPTANCE OF ITS PRODUCTS AND SERVICES, WHICH ARE
OFFERED IN HIGHLY COMPETITIVE MARKETS CHARACTERIZED BY CONTINUAL NEW PRODUCT
INTRODUCTIONS, RAPID DEVELOPMENTS IN TECHNOLOGY (PARTICULARLY IN THE ELECTRONICS
BUSINESS), and subjective and changing consumer preferences (particularly in the
Game, Music, and Picture businesses)AND SUBJECTIVE AND CHANGING CONSUMER PREFERENCES (PARTICULARLY IN THE
GAME, MUSIC AND PICTURES BUSINESSES).
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PART I
Item 1. Description of Business
General
The CompanySony Corporation was established in Japan in May 1946 as Tokyo Tsushin
Kogyo Kabushiki Kaisha. In January 1958, it changed its name to Sony Kabushiki
Kaisha (Sony Corporation("Sony Corporation" in English).
Sony is engaged in the development, design, manufacture, and sale of
various kinds of electronic equipment, instruments, and devices for consumer and
industrialprofessional markets. Sony's principal manufacturing facilities are located in
Japan, the U.S.,North America, Europe, and Asia, and its products are marketed by sales
subsidiaries and unaffiliated local distributors throughout the world. In
addition to internationalizing its production operations, Sony has been
promoting the transfer of research and development activities and management
functions overseas to bring its overseas operations in even closer contact with
local communities.
Sony develops, produces, manufactures, and markets home-use game
consoles and software, mainlyprincipally through Sony Computer Entertainment (SCE)("SCE").
Sony is engaged in the development, production, manufacture, and
distribution of recorded music, in all commercial formats and musical genres
worldwide, through Sony Music Entertainment Inc. (SMEI)("SMEI"), and, in Japan,
through Sony Music Entertainment (Japan) Inc. (SMEJ)("SMEJ").
Sony is also engaged in the development, production, manufacture,
marketing, distribution, and distributionbroadcasting of image-based software, including
film, video, television, and new entertainment technologies principally through
Sony Pictures Entertainment (SPE)("SPE").
Sony conducts insurance operations principally through Sony Life
Insurance Co., Ltd. ("Sony Life"), a Japanese life insurance subsidiary.
In addition, Sony conducts insuranceis engaged in leasing and financingcredit card businesses,
satellite distribution services including program supplying businesses,
internet-related businesses, development of location-based entertainment
complexes, and others.
New Group Architecture
Realigning and Strengthening the Electronics Business
Sony reorganized the internal company structure of the Electronics
business mainly in JapanApril 1999. The existing Electronics business was consolidated into
three main business units: the Home Network Company, the Personal IT Network
Company, and the Core Technology & Network Company, each of which has begunmanagement
authority. Separately, SCE was designated as another main business unit related
to participate inthe Electronics business.
Research and support functions have been transferred from the group
headquarters to the three Network Companies. Also, as appropriate, the Network
Companies may independently or jointly create new ventures. With these steps,
Sony aims to flexibly take advantage of new business activitiesopportunities in today's
rapidly changing digital network era.
As part of this realignment, Sony operates Digital Network Solutions
directly under the group headquarters in order to focus on building new
network-related businesses.
In order to enhance the profitability of the Electronics business, Sony
has continued its review of its cost structure. With regard to manufacturing,
Sony plans to consolidate its current 70
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manufacturing facilities into approximately 55 by the end of March 2003. With
regard to human resources, Sony intends to reduce the total group headcount by
approximately 10% by the end of March 2003, including digital
broadcastingnormal attrition.
Privatizing Three Sony Group Subsidiaries
Sony Corporation has agreed with Sony Music Entertainment (Japan) Inc.,
Sony Chemicals Corporation, and internet-related business mainlySony Precision Technology Inc. to make each of
these Sony group companies a 100% owned subsidiary of Sony Corporation, with
January 1, 2000 as a target date. Sony believes this action will enable it to
deepen cooperation among its businesses, maximize the merits of working
together, and implement group-wide strategies more quickly.
Sony plans to carry out these transactions through a share exchange
mechanism that will be permitted if certain proposed amendments to the
Commercial Code, which are to be considered during the 1999 ordinary session of
the Japanese Diet, are adopted. If these amendments are not adopted, Sony plans
to privatize the three companies under existing law. Sony estimates that the
integration of these companies will result in Japan.the issuance of approximately 33
million new shares of Sony Corporation common stock. Whichever method is used,
it will be necessary for the appropriate shareholder resolutions to be adopted
both by Sony Corporation and by each subsidiary.
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Products and Services
Sony has adopted Statement of Financial Accounting Standards No. 131,
commencing with the fiscal year ended March 31, 1998. As a result, financial
results will now beare reported using a newan operating segment configuration as described
below.
The prior year's results have also been reclassified, to
conform to the new presentation.
Operating segment configuration is as follows:
Previous New
........ .....
Electronics Primarily divided into "Electronics" and "Game"
Entertainment Primarily divided into "Music" and "Pictures"
Insurance and Financing "Insurance" separated, financing business moved to
newly created "Other"
Within the Electronics segment, the previous four product category
classifications, Audio Equipment, Video Equipment, Televisions, and Other
Products have been changed to thesales are reported using following five
product categories: "Audio", "Video", "Televisions", "Information and
communications", and "Electronic components and other".
The most significant of these changes include the removal
of game operations from Other Products to a new, independent segment entitled
Game. A new product category, Information and communications, includes computer
displays (formerly in Televisions). Also included in this new product category
are personal computers, computer peripherals, and telephones (all formerly in
Other
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Products). The new Electronic components and other product category includes
remaining products from the Other Products category such as semiconductors,
electronic components, and batteries.
The following table sets forth Sony's sales by the operating segments and
the new
product categories.
Year ended March 31
.....................................................
1996------------------------------------------------------------------
1997 1998 ............... ............... ...............1999
-------------------- ------------------- -------------------
(Millions of yen)
Electronics 3,283,234 3,930,292 4,377,346 (71.5)4,355,001
(69.4) (64.8) ............... ............... ...............(64.1)
-------------------- ------------------- -------------------
Audio 900,400 1,029,961 1,127,788 (19.6)1,072,621
(18.2) (16.7) (15.8)
Video 731,097 816,582 870,854 (15.9)969,129
(14.4) (12.9) (14.3)
Televisions 554,023 704,075 709,043 (12.1)702,620
(12.4) (10.5) (10.3)
Information and communications 540,719 764,512 894,810 (11.8)914,140
(13.5) (13.2) (13.5)
Electronic components and other 556,995 615,162 774,851 (12.1)696,491
(10.9) (11.5) ............... ............... ...............(10.2)
-------------------- ------------------- -------------------
Game 200,894 408,335 699,574 (4.4)760,071
(7.2) (10.4) ............... ............... ...............(11.2)
-------------------- ------------------- -------------------
Music 506,455 570,119 660,407 (11.0)718,878
(10.1) (9.8) ............... ............... ...............(10.6)
-------------------- ------------------- -------------------
Pictures 317,382 438,551 642,714 (6.9)540,109
(7.7) (9.5) ............... ............... ...............(7.9)
-------------------- ------------------- -------------------
Insurance 206,802 227,920 291,061 (4.5)339,368
(4.0) (4.3) ............... ............... ...............(5.0)
-------------------- ------------------- -------------------
Other 77,798 87,917 84,388 (1.7)81,192
(1.6) (1.2) ............... ............... ...............(1.2)
-------------------- ------------------- -------------------
Sales and operating revenue 4,592,565 5,663,134 6,755,490 ............... ............... ...............
............... ............... ...............
Figures in parentheses indicate percentage of sales and operating revenue.
The Electronics business is managed as a single operating segment by Sony's
management. However, Sony believes that the product category information in the
Electronics segment is useful to investors in understanding the sales
contributions of the products in this business segment. Operating income
information by product category is not available.
46,794,619
==================== =================== ===================
Figures in parentheses indicate percentage of sales and operating
revenue.
The Electronics business is managed as a single operating segment by
Sony's management. However, Sony believes that the product category
information in the Electronics segment is useful to investors in
understanding the sales contributions of the products in this business
segment. Operating income information by product category is not
available.
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Electronics
Audio:
Audio includes MiniDisc (MD)("MD") systems, CD players, headphone stereos,
personal component stereos, hi-fi components, radio-cassette tape recorders,
tape recorders, digital audio tape (DAT) recorders/players, IC recorders, radios, headphones, car stereos,audio,
professional-use audio equipment, audiotapes, and blankrecordable MDs.
Video:
Video includes 8mm, VHS,8mm/Digital 8-, DV-, and Consumer-Use Digital VCR
Specifications (DV format) videotape recorders (VTRs),VHS-format VTRs, DVD-Video players,
video CD
players, digital still cameras, broadcast- and industrial-useprofessional-use video
equipment, and videotapes.
Televisions:
Televisions includeincludes color TVs, Hi-Vision (Japanese high-definition
TV standard) TVs, projection TVs, flat display panels,
personal LCD monitors, car TVs, and professional-use monitors/projectors, and large color video display systems.projectors.
Information and communications:
Information and communications includeincludes computer displays, personal
computers, computer peripherals, satellite broadcasting reception systems,
internet terminals,cellular phones, telephones, and car navigation systems.systems, and video printers.
Electronic components and other:
Electronic components and other includeincludes semiconductors, LCDs,
electronic components, cathode ray tubes (CRTs)("CRTs"), optical pickups,
batteries, and factory
automation (FA)FA systems.
Game
SCE develops, designs, and sells PlayStation"PlayStation" game consoles and related
software, mainlyprincipally in Japan, the U.S., and Europe, and enters into licenses
towith third party software developers.
Music
SMEI and SMEJ produce recorded music through contracts with many top
artists worldwide in all musical genres. SMEI and SMEJ manufacture, market, and
distribute CDs, MDs, records,DVDs, and pre-recorded audio and video cassettes, and
produce and manufacture CD-ROMs.
SonyThe Music business has an extensive and geographically diversified CD
production capacity, with plants in the U.S., Austria, Japan, Brazil, Australia,
Canada, Hong Kong, and Mexico. 5CDs are produced for the Music business, the Game
business, and third parties.
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Pictures
Pictures groupbusiness global operations encompass motion picture production,
acquisition and distribution, television programming and syndication,
theatrical
exhibition,production, acquisition and distribution, home video acquisition and
distribution, development of new
entertainment products, servicestelevision broadcasting and technologies, and operationoperations of studio facilities.
SPE's motion picture arm, the Columbia TriStar Motion Picture Group,
includes SPE's principal motion picture production organization, Columbia
Pictures, as well as Sony Pictures Classics, Sony Pictures Releasing, and
Columbia TriStar Film Distributors International.
SPE's Columbia TriStar Television Group is principally comprised of
Columbia TriStar Television, Columbia TriStar Television Distribution, and
Columbia
TriStar International Television.Television, the Game Show Networks, and various
investments relating to television broadcasting.
SPE's home video operations are conducted through Columbia TriStar Home
Video.
SPE also manages two studio facilities, Sony Pictures Studios and The
Culver Studios, both of which are located at SPE's world headquarters in Culver
City, California.
Insurance
Insurance includes insurance-related underwriting business, primarily
individual life insurance business in Japan conducted through Sony Life
Insurance Co., Ltd. (Sony Life),Life.
In October 1998, Sony Corporation set up a Japanese lifebusiness planning company to
prepare for entering into individual automobile insurance subsidiary.business and plans to
start operation in October, 1999.
Other
Other business includesconsists of various operating activities, primarily
including leasing and credit card businesses through Sony Finance International,
Inc., a business focused on parts trading of raw materials and other products
mainlyservices within the Sony group through
Sony Trading International Corporation, customer credit and
leasing business through Sony Finance International, andsatellite distribution services
including program supplying businesses relating to
digital broadcasting and communication in Japan mainlyprincipally through Sony
Broadcast Media Co., Ltd., internet-related businesses in the U.S. through Sony
Online Entertainment Inc., and development of location-based entertainment
complexes.
Sales and Distribution
The following table shows Sony's sales in each of its major markets for
the periods indicated.
Year ended March 31
.........................................
1996-----------------------------------------------------------
1997 1998 ............ ............ ............1999
---------------- ----------------- ----------------
(Millions of yen)
Japan 1,379,804 1,590,820 1,843,149 (30.0)1,908,600
(28.1) (27.3) (28.1)
United States 1,259,926 1,639,334 2,101,907 (27.4)2,157,061
(29.0) (31.1) (31.8)
Europe 1,054,010 1,304,491 1,567,121 (23.0)1,666,714
(23.0) (23.2) (24.5)
Other Areas 898,825 1,128,489 1,243,313 (19.6)1,062,244
(19.9) (18.4) ............ ............ ............(15.6)
---------------- ----------------- ----------------
Sales and operating revenue 4,592,565 5,663,134 6,755,490 ............ ............ ............
............ ............ ............
Figures in parentheses indicate percentage of sales and operating revenue.
66,794,619
================ ================= ================
Figures in parentheses indicate percentage of sales and operating revenue.
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Electronics
Sony's electronic products are sold throughout the world under the
trademark "Sony", which has been registered in 210200 countries and territories.
In most cases, sales of Sony's electronic products are made to
subsidiaries of the CompanySony Corporation located in the countries and territories where
Sony's products are sold, and these subsidiaries sell to local distributors and
dealers. In some locations, the CompanySony sells products directly to local distributors.
Japan:
In April 1997, the Company established Sony Marketing (Japan)
Inc., by consolidating its consumer products marketing divisions, seven
domestic sales subsidiaries and a sales administrative subsidiary.
In April 1998, the Company transferred most of its broadcast- and
industrial-use electronic products marketing and sales divisions in Japan
to Sony Marketing (Japan) Inc.
Sony Marketing (Japan) Inc. markets Sony's consumer electronic products through retailers
in Japan, and also markets Sony's broadcast- and industrial-useprofessional-use products. For electronic
components, Sony has a sales subsidiary in Tokyo and sales offices which
sell products mainly to professionalwholesalers and industrial
users in Japan.manufacturers.
North America:
Sony Electronics Inc. markets Sony's electronicconsumer and non-consumer products for both
consumer-use and broadcast- and industrial-use
in the U.S. Sony Electronics Inc. has 1819 sales and distribution branches and
offices throughout the U.S.
In Canada, Sony markets its electronic products through Sony of Canada Ltd.
Europe:
In Europe, Sony's electronicconsumer products for both consumer-use and
broadcast- and industrial-use are marketed through 1415 sales
subsidiaries including Sony United Kingdom Limited, Sony Deutschland
G.m.b.H., and Sony France S.A. Sales of non-consumer products are made
through several divisions by product covering pan-Europe.
Other Areas:
In overseas areas other than North America and Europe, Sony's electronic products
are marketed through 2219 sales subsidiaries, including Sony Corporation of
Hong Kong Limited, Sony Gulf FZE in United Arab Emirates, and Sony Comercio
e Industria LtdaLtda. in Brazil. In areasregions where the
CompanySony has no subsidiary, it
markets its products through local distributors.
Game
SCE conducts the marketing and distribution of PlayStation game consoles
and related software. This business is conducted through Sony Computer
Entertainment Inc. in Japan, through SCE, in the
U.S. through Sony Computer Entertainment America Inc. ("SCEA")
in the U.S., and in Europe through Sony Computer Entertainment Europe Limited. ("SCEE") in Europe.
Music
SMEI and SMEJ market and distribute CDs, MDs, DVDs, LDs, records, and pre-recorded
audio and video cassettes.
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8software.
SMEI conducts thisand its affiliates conduct business in the U.S.countries other than Japan
under the "Columbia", "Epic", "550 Music", "Sony Classical", and other labels.
The Columbia House Company, a 50:50
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partnership between SMEI and a subsidiary of Time Warner Inc., is engaged in direct marketing of
music and home-video products in the U.S., Canada, and Canada.
SMEI's affiliates located outside the U.S. conduct thisMexico.
SMEJ conducts business in countriesJapan under the "Epic", "Ki/oon", "SMEJ
Associated", and other than the U.S. and Japan.labels.
Pictures
SPE, with its global operationsdoing business in 67over 100 countries, generally secures all rights
relating to the worldwide distribution of its internally produced motion
pictures, including rights for theatrical exhibition, home videocassette, DVD,
and
LDDVD distribution, pay and free television exhibition and other markets. SPE may
also acquire distribution rights to motion pictures produced by other companies,
and these rights may be limited to particular geographic regions or specific
forms of media. SPE uses its own distribution servicesservice business for the U.S.
theatrical release of its films and those acquired from and produced by others.
Outside the U.S., SPE generally distributes and markets its films
through one of its Columbia TristarTriStar Film Distributors International
subsidiaries. However, in certain countries, SPE has joint distribution
facilitiesarrangements with other studios or arrangements with independent local
distributors.
The worldwide home video distribution of motion pictures, television
programs, and other video products of SPE (and those acquired or licensed from
others) is handled through Columbia TriStar Home Video.Video except in certain
countries where SPE has joint distribution arrangements with other studios or
arrangements with independent local distributors.
SPE produces television programming and licenses it to U.S. network and
cable television or first run syndication for prime-time or daytime broadcast and, in certain instances, for
first-run syndication or directly to cable services.broadcast.
SPE also licenses rights to its library of television programming and motion
pictures to network affiliates and independent stations in the U.S. and to
international television stations and other broadcasters throughout the world.
In addition, SPE produces original language programming in key marketseight different languages around
the world in conjunction with local partners. SPE currently develops
original programminghas worldwide broadcasting
investments in eight languages and during the year launched themore than 25 international channels including AXN, branded
channel, devoted tochannels offering action/adventure programming in Asia.several countries in Asia,
Spain, and Japan; Sony Entertainment Television, channels in several countries
in Latin America and India providing U.S. movies and television programming; and
Telemundo, a U.S. network and station group providing programming for the U.S.
Hispanic market.
Insurance
Sony Life conducts life insurance business in Japan, using qualified
Life
PlannerLifeplanner financial consultants to serve customers. As of March 31, 1998,1999, Sony
Life employed approximately 3,7004,200 such consultants, of whom approximately 2,3003,000
possess the AFP (Affiliated Financial Planner) certification from the Japan
Association for Financial Planners. Sony Life maintains an extensive service
network including 94 Life Planner92 Lifeplanner branch offices, 2326 regional sales offices, and
1,4001,356 independent agencies at the end of March 1998.1999.
Overseas Operations
Sony has pursued a long-term strategy of actively expandedexpanding its overseas
production capabilities outside Japan following a general policy thatseeking
manufacture of products should be manufactured in the markets in which they are sold. During the fiscal year ended March 31, 1998, Sony set up
additional manufacturing facilities in China. As of March 31,
1998,1999, it operated 1219 manufacturing facilities in the U.S.,North America, 11 in Europe,
and 3525 in other areas outside Japan. Sony intends to further expand its overseas production toTo build a corporate structure less
susceptible to the impact of foreign exchange rate fluctuations. In additionfluctuations and to internationalizingreduce
inventory and cost, Sony continues to
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localize its manufacturing
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operations, Sony continued to promote the localization of R&D,overseas production, research and development, design, materials
and parts procurement, and management functions to bring its overseas operations
in even closer contact with local communities.management.
After-Sales Service
Sony provides repair and servicing functions in the countries where its
electronic products are sold. In large markets such as Japan, the U.S., and
Europe, Sony provides these services through its own service centers, authorized
independent service centers and authorized servicing dealers, and its
subsidiaries; other markets are mainlyprincipally serviced bythrough authorized
servicing dealers.
In line with industry practice, almost all of Sony's electronic products
sold in Japan carry a warranty for a period of generally one year from the date
of purchase for repairs, free of charge, for malfunctions occurring in the
course of ordinary use. In the case of broadcast- and industrial-useprofessional-use products,
Sony maintains support contracts with customers in addition to warranties.
Overseas warranties are generally provided for various periods of time depending
on the product and the country where it is marketed.
To further ensure customer satisfaction, Sony maintains customer
information centers in each market.its markets.
Competition
In each of its principal product lines, Sony encounters intense
competition throughout the world. Sony believes, however, that in the aggregate
it competes successfully and has a major position in all of the principal
product lines in which it is engaged, although the strength of its position
varies with products and markets.
In the Electronics business, Sony believes that its attractive product
planning, the high quality of its products, its record of innovative product
introductions and product improvements, and its extensive marketing and
servicing efforts are important factors in maintaining its competitive position.
The Game business is a historically volatile and highly dynamic industry
and its competitive position is affected by changing technology, limited
platform life cycles, hit-or-misspopularity of software titles, seasonality, consumer
spending and other economic trends. Sony's chief competitors in the field of
hardware market their own game consoles and software titles. In the software
business, development of hit titles is becoming increasingly challenging.
Success in the music entertainment business is dependent to a large
extent upon the artistic and creative abilities of employees and outside talent
and is subject to the vagaries of public taste. Although SMEI is one of the
largest recorded music companies in the world, its competitive position in the
future depends on its continuing ability to attract and develop talent that can
achieve a high degree of public acceptance. This position also depends on making
appropriate investments in new technologies for digitization and networking. In
addition, the recorded music business continues to be adversely affected by
counterfeiting, piracy, and parallel imports.
SPE faces intense competition from other major motion picture studios
and, to a lesser extent, from independent production companies, forto attract the
attention of the movie-going public worldwide. Competition in television
production, distribution, and syndication is also intense because available
broadcast time is limited and the audience is increasingly fragmented among
broadcast, cable, and other networks both in the U.S. and internationally.
In addition,Additionally, in supplying television programming, SPE faces significant
long-term competition in supplying television programming from U.S. network productions and ownership of their own television programs.productions.
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In the insurance business, as Japan begins the deregulation of the
insurance industry through the year 2001, the marketplace will likely become
increasingly product and price competitive with more newcomers entering the
business from other industries and from outside Japan. Although Sony Life has
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competitive strengths in products and marketing, it is impossibledifficult to precisely
predict the impact which deregulation of the insurance market will have on
business of Sony Life's
business.Life.
Research and Development
Sony actively carries out R&Dresearch and development activities at each of
its internal Electronics companiesCompanies to meet the diverse product-related needs of
its various businesses. However, strategic R&D relatingStrategic long-term research and development projects
including future network-related businesses are under the direct supervision of
the group headquarters. The long-term projects are assigned to Sony, particularly the development of new key
technologies, is delegated to eightfour corporate
laboratories -- thelaboratories:
- - Frontier Science Laboratories (Devices and Materials)
- - Information & Network Technologies Laboratories (Network Communication and
Computing)
- - Algorithm Research Center the Giga Byte(Picture Quality Improvement)
- - Digital Creatures Laboratory the Media Processing Laboratory, the IT
Laboratory, the Advanced Design & Production Laboratory, the EP Laboratories,
the Platform Software Development Center, the System LSI Design Center -- as
well as the D21 Laboratory and the Algorithm Research Center. As part of Sony's
R&D operations restructuring, the Platform Software Development Center was
established on February 1, 1998, the Giga Byte Laboratory and the System LSI
Design Center on June 1, 1998, and the EP Laboratories on July 1, 1998. These
facilities are located in Tokyo and Kanagawa Prefecture in Japan and are
directly controlled by corporate headquarters. The R&D areas include such fields
as electronic materials technologies, basic devices, semiconductor technologies,
software and hardware architectures for information and network products,
optical discs and magnetic recording technologies, signal processing
technologies, computer technologies, as well as long-term R&D projects.(Entertainment Robot)
In the U.S., Sony has supplementary research laboratories, which specialize in
R&Dresearch and development fields such as digital signal processing, DTV,
telecommunications, broadcasting systems, semiconductors, and display
technology. Sony also has additional development centers in the United Kingdom,
Germany, Belgium, France, India, and Singapore.
R&DResearch and development expenses were 257.3 billion yen in the fiscal year ended March 31,
1996; 282.6 billion yen in the fiscal
year ended March 31, 1997; and 318.0 billion yen in the fiscal year ended March 31,
1998.1998; and 375.3 billion yen in the fiscal year ended March 31, 1999.
Sony believes R&Dresearch and development activities are vital to the
growth of its long-term growth in
electronics.Electronics business. Through its R&D activities, Sony has recently
been developing:
- - "SuperHAVi (Home Audio CD,"Video interoperability), a specification for audiovisual
equipment to allow connections to a home network based on IEEE 1394. It is
being developed to provide interactive connection and operation among digital
audiovisual equipment from different manufacturers.
- - "i.LINK (IEEE1394) link layer LSI", a new LSI being developed to provide
robust protection for digital content transmitted between digital electronics
products across the i.LINK (IEEE1394) digital interface. Cryptographic IC is
embedded in the LSI for encryption and decryption of MPEG data streams and
transmission of other types of digital content across the i.LINK interface.
The chip also incorporates a number of functions used by digital products to
provide users with added convenience, such as the Program ID parser and
packet insertion functions necessary for delivering certain types of digital
broadcast content.
- - "MagicGate", "OpenMG", and "SuperMagicGate" copyright management technologies
for digital music content. MagicGate consists of two technologies for content
encryption and authentication that ensure that protected and encrypted
digitized music content is transferred only between compliant devices and
media. MagicGate requires an embedded chip in both the player and the storage
media. OpenMG employs a hardware module and special software to encrypt
11
12
digital music content stored on a hard disk drive or similar storage device.
Authentication technology is used to ensure that protected content in an
encrypted format is transmitted only to compliant devices and media.
SuperMagicGate is a secure electronic music distribution solution. It
includes copyright management, electronic distribution, content protection
technologies for distributing digital music content electronically over the
internet and other digital networks.
- - "Emotion Engine" and "Graphics Synthesizer" for use in the next generation music carrier based on Direct Stream
Digital (DSD)of
PlayStation. Emotion Engine is the 128-bit CPU which processes massive
volumes of multi-media data at the highest speeds currently available. It was
co-developed with Philips Electronics. N.V. This is
a new, high resolution digital encoding system that allows music recording
of unprecedented quality.
- - "AMInet (Advanced Multimedia Information Network)," a next-generation
Internet architecture which maintains compatibility with current internet
technology, for real-time transmission of continuous media and high-speed
bulk data. AMInet was co-developed with Nippon Telegraph and Telephoneby Toshiba Corporation and Keio University.
- - "HiFD (High Capacity Floppy Disk)," a new 3.5-inch floppy disk system with a
substantially more storage capacity thanSCE. The Graphics Synthesizer, the
current 3.5-inch floppy disk.
HiFD drives will also be able to read from and write to existing 3.5-inch
floppy disks (2DD/2HD). HiFD was co-developed with Fuji Photo Film Co., Ltd.
10
11fastest graphics processor currently available, has been developed by SCE.
Patents and Licenses
Sony has a number of Japanese and foreign patents in Japanrelating to its
products. Many of the patents owned by Sony are licensed to others, under
reasonable terms and other countries, and licenses
granted from other firms.conditions. Sony considersis licensed to use a number of its license agreements to
be important to its business. Sony has license agreements with RCA Thomson
Licensing Corporationpatents
owned by others, covering a wide range of products. Certain licenses are
important to Sony's business, and Sony considers its products, such as color
televisions, VTRs, and other related equipment. Sony hasoverall license agreements with
Lucent Technologies Inc. covering semiconductors and has cross license
agreements with Philips Electronics N.V. covering optical disc players and VTRs.
Sony also has license agreements with Matsushita Electric Industrial Co., Ltd.
and Victor Company of Japan Limited covering magnetic and optical recorder
products, Ampex Corporation covering video tape recorder related products, and
International Business Machines Corporation covering a wide range of information
processing products.position
beneficial to its operations.
Sources of Supply
Sony has been pursuing optimum procurement of raw materials, parts, and
components to be used in the production of its products on a global basis. These
items are purchased from various suppliers around the world. Generally, Sony
maintains multiple suppliers for every significant category of parts and
components.
Employee Relations
As of March 31, 1998,1999, Sony had approximately 173,000177,000 employees, of which
approximately 16%15% were members of labor unions. Approximately 69,00074,000 employees
were located in Japan and 104,000 overseas.103,000 outside Japan. Sony considers its labor
relations to be very good.
1112
1213
Item 2. Description of Property
Sony has a number of offices, plants and warehouses throughout the
world. Most of the buildings and land on which they are located are owned by
Sony, free from significant encumbrances.encumbrances (See Note 9 of Notes to Consolidated
Financial Statements).
The following table sets forth information as of March 31, 19981999 with
respect to plants for the Electronics business and game consoles for the Game
business with floor space of more than 500 thousand square feet for
electronic products:feet:
Approximate
Location floor space Principal products manufactured
.................................... ............ .................................
(square feet)
In Japan:
In Japan
Kanagawa (Atsugi Technology Center)(Sony Corporation) 3,229,000 Broadcast- and industrial-use video
equipment, and semiconductorsSemiconductors
Miyagi (Sendai Technology Center)(Sony Corporation) 1,122,000 Magnetic and optical recordingstorage media and
electronic components
Kagoshima (Sony Kokubu Corporation) 1,059,000 Semiconductors
Aichi (Sony Kohda Corporation) 928,000 VTRs and game consoles
Aichi (Sony Inazawa Corporation) 876,000 CRTs
Aichi (Sony Ichinomiya Corporation)Inc.) 831,000 Color TVs and computer displays and
professional-use monitors
Tochigi (Sony Chemicals Corporation) 739,000 Videotapes,Magnetic tapes, adhesives, and electronic
components and thermal transfer
ribbon
Nagasaki (Sony Nagasaki Corporation) 690,000 Semiconductors
Shizuoka (Sony Broadcast Products Corporation) 625,000 Broadcast- and industrial-useprofessional-use video Corporation) equipment,and
audio equipment and
computers
Chiba (Sony Kisarazu Corporation) 616,000 VTRsGame consoles and game consolesVTRs
Tochigi (Sony Tochigi Corporation) 611,000 Magnetic and optical recordingstorage media and
electronic componentsbatteries
Gifu (Sony Minokamo Corporation) 577,000 VTRs and game consoles
Fukushima (Sony Minokamo Corporation) 577,000 VTRsEnergytec Inc.) 567,000 Batteries
Aichi (Sony Mizunami Inc.) 512,000 CRTs
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1314
Approximate
Location floor space Principal products manufactured
.................................... ............ ................................
(square feet)
Overseas:
Overseas
Pittsburgh, Pennsylvania, U.S.A. 2,715,000 Rear-projection TVs/TVs and CRTs
(Sony Electronics Inc.)
San Diego, California, U.S.A. 2,208,0002,192,000 Computer displays and CRTs
(Sony Electronics Inc.)
Penang, Malaysia 1,069,000 Audio equipment, CD-ROM drive, and
(SONY ELECTRONICS (M) SDN. BHD.) floppy disk drive
Dothan, Alabama, U.S.A. 998,000 Video tapes and data1,003,000 Magnetic storage media
(Sony Magnetic Products Inc. of America)
San Antonio, Texas, U.S.A. 461,000 SemiconductorsTijuana, Mexico 831,000 Color TVs and computer displays
(Sony Electronics Inc.de Tijuana Este, S.A. de C.V.)
Bridgend, Wales, U.K. 742,000819,000 CRTs
(Sony United Kingdom Limited)
Jurong, Singapore 783,000 CRTs
(Sony Display Device (Singapore) Pte. Ltd.)
Nuevo Laredo, Mexico 771,000 Magnetic storage media
(Sony Nuevo Laredo, S.A. de C.V.)
Pencoed, Wales, U.K. 707,000 Color TVs and computer displays
(Sony United Kingdom Limited)
Barcelona, Spain 470,000524,000 Color TVs
and rear-projection TVs
(Sony Espana, S.A.)
Alsace, France 414,000 Audio equipment, VTRs, and cellular
(Sony France S.A.) phones
Nuevo Laredo, Mexico 786,000 Audio tapes and micro floppydisks
(Sony Magneticos de Mexico, S.A. de
C.V.)
Penang, Malaysia 782,000 Audio equipment
(SONY ELECTRONICS (M) SDN.BHD.)
Jurong, Singapore 775,000 CRTs and computer displays
(Sony Display Device (Singapore) Pte.
Ltd.)
Tijuana, Mexico 678,000 Color TVs and computer displays
(Sony de Tijuana Este, S.A. de C.V.)
Bekasi, Indonesia 502,000 Audio equipment
(P.T. SONY ELECTRONICS INDONESIA)
Bangi, Malaysia 464,000 VTRs and CD-ROM drives
(SONY VIDEO (M) SDN. BHD.)
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14
In addition to the above, Sony has a number of other plants for
electronic products throughout the world. The CompanySony owns R&Dresearch and development
facilities, and employee housing and recreation facilities, as well as theSony
Corporation's headquarters buildings in Tokyo, at whichJapan, where administrative
functions and product development activities are carried on.out. SCE leases its
corporate headquarters buildings located in Tokyo, where administrative
functions, product development and software production are carried out. SCEA and
SCEE lease their offices in the U.S. and Europe, respectively.
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15
The following table sets forth information as of March 31, 19981999 with
respect to plants for the Music business and software for the Game business with
floor space of more than 300500 thousand square feet for
software of the Music Group:feet:
Approximate
Location floor space Principal products manufactured
................................... ............ ................................
(square feet)
Shizuoka, Japan 537,000Terre Haute, Indiana, U.S.A. 825,000 CDs, MDs,CD-ROMs, and LDs
(Sony Music Entertainment (Japan)
Inc.)DVDs
(Digital Audio Disc Corporation)
Carrollton, Georgia, U.S.A. 673,000 CDs and audio and video cassettes
(Sony Music Entertainment Inc.)
Terre Haute, Indiana, U.S.A. 653,000 CDs, CD-ROMs, DVDs, MDs, and LDs
(Digital Audio Disc Corporation)
Pitman, New Jersey, U.S.A. 500,000570,000 CDs and CD-ROMs
(Sony Music Entertainment Inc.)
Springfield, Oregon, U.S.A. 336,000Shizuoka, Japan 537,000 CDs, and CD-ROMs ,and MDs
(Sony Music Entertainment (Japan) Inc.)
Haarlem, Netherlands 665,000 Records and audio cassettes
(Sony Music Entertainment (Holland) B.V.)
Salzburg, Austria 377,000 CDs, CD-ROMs, MDs, and LDs
(Sony DADC Austria AG)
In addition to the above, SMEI and its affiliates have several plants in
various parts of the world and lease their corporate headquarters located in New
York City. Most of SMEJ's offices, including leased premises, are mainly located in
Tokyo, Japan.
SPE's corporate offices and major motion picture and television
production facilities are headquartered in Culver City, California, where it
owns and operates two studio facilities, Sony Pictures Studios and The Culver
Studios. SPE also leases office spacespaces and motion picture and television support
facilities from affiliates of the CompanySony Corporation and other third parties. Its film
and videotape storage operations are located in Inwood, New York, where SPE also
leases space.
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15
Item 3. Legal Proceedings
In August 1998, the Securities and Exchange Commission issued a settled
cease-and-desist order which found that the CompanySony Corporation had violated certain
periodic reporting requirements of the federal securities laws by making
inadequate disclosure concerning (i) Sony Pictures' net losses prior to the
quarter ended September 30, 1994 and (ii) the impact of those losses on the
Company's consolidated results for the fiscal year ended March 31, 1994 and the
quarter ended June 30, 1994. The Order also found that a former director, who
was at the time the General Manager of the Company's Capital Markets & Investor
Relations Division, was a cause of the Company's violations.laws. The Order, to
which the Company and the former directorSony Corporation consented without admitting or denying the matters set
forth therein, requires (i) an independent auditor to examine and issue a
written opinion on the Company'sSony's MD&A presentation for the fiscal year ending March 31,
1999;1999 included in Sony Corporation's Annual Report and Annual Report on Form 20-F
for such year; (ii) the Company'sSony Corporation's Chief Financial Officer to ensure that
the Company'sSony's public financial disclosures comply with applicable requirements; and
(iii) compliance with applicable segment reporting requirements. In a
parallel civil action by the Commission, the Company, without admitting or
denying the allegations in the action, also consented to payment of a civil
penalty of 1 million U.S. dollars.
On or about July 23, 1996, SMEI was served with an antitrust civil
investigation demand from the Office of the Attorney General of the State of
Florida seeking the production of documents in connection with an investigation
to determine whether there "is, has been or may be" a "conspiracy to fix the
prices" of compact discs ("CDs") or conduct consisting of "unfair methods of
competition" or "unfair trade practices" in the sale and marketing of CDs. No
allegations of unlawful conduct have been made against SMEI. By letter dated
January 8, 1998, SMEI was
15
16
notified by the Office of the Attorney General of the State of Florida that
certain documents that SMEI had produced to its office were shared under a
confidentiality provision in the Florida statutes with the Office of the
Attorney General of the State of Illinois and the Office of the Attorney General
of the State of New York. To date, no action has been taken by the Attorneys
General of these states.
By letter dated April 11, 1997, the Federal Trade Commission ("FTC")
advised SMEI of the existence of a preliminary investigation to determine
whether minimum advertised pricing programs used by major record distributors
constitute an unfair method of competition in violation of Section 5 of the
Federal Trade Commission Act. SMEI received a subpoena dated September 19, 1997
for the production of documents in connection with that investigation.
On May 30, 1995, a purported class action was filed with the United
States District Court for the Central District of California, entitled Digital
Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and PolyGram Group Distribution,
Inc.et al., No.
95-3536. The plaintiff, representing a class of direct purchasers of recorded
music CDs, alleged that SMEI and other defendants violated the federal antitrust
laws by engaging in a conspiracy to fix the prices of CDs, and sought an
injunction and treble damages. On January 9, 1996, the defendants' motion to
dismiss the amended complaint was granted and the action was dismissed, with
prejudice. Plaintiff appealed the dismissal to the United States Court of
Appeals for the Ninth Circuit, No. 96-55264. On July 3, 1997, the United States
Court of Appeals for the Ninth Circuit reversed the dismissal of the amended
complaint and remanded the case to the District Court, holding that the amended
complaint was sufficient to meet the pleading requirements of the Federal Rules
of Civil Procedure and that the action should proceed. On October 29, 1997, the
District Court stayed proceedings in the action due to the filing on May 12,
1997 of a Chapter 7 Petition under the U.S. Bankruptcy Code by plaintiff. After
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16
further proceedings in the bankruptcy court on the part of the plaintiff, the
Court lifted the stay and restored the matter to the docket. On August 25, 1998,
SMEI answered the amended complaint, denying its material allegations, asserting
affirmative defenses and demanding judgment against the plaintiffs.
On September 30, 1997, a purported class action was commenced in the
United States District Court for the Central District of California entitled
Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music
Distribution, Inc., Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, Universal Music and Video Distribution, Bertelsmann Music Group,
Inc. and PolyGram Group Distribution, Inc., No. 97-7226. On October 16, 1997,
plaintiffs filed a first amended complaint. Plaintiffs, purporting to represent
a class of direct purchasers of CDs, allege that defendants violated the federal
and state antitrust laws by engaging in a conspiracy to fix the prices of CDs
and seek an injunction and treble damages. On December 22, 1997, SMEI answered
the amended complaint, denying its material allegations, asserting affirmative
defenses and demanding judgment against the plaintiffs. On October 21, 1997, an individual action was commenced in the United
States District Court for the Southern District of New York, entitled T. Obie,
Inc., d/b/a Chestnut Hill Company Disc v. EMI Music Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music and
Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97 Civ. 7764. The claims asserted are substantially the
same as those asserted in the Chandu Dani action. On January 16, 1998, SMEI
answered the complaint, denying its material allegations of the complaint,
asserting affirmative defenses and demanding judgment against plaintiffs.
On December 2, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Third
Street Jazz and Rock Holding Corporation v. EMI Music Distribution, Inc., Sony
Music Entertainment Inc., Warner Elektra Atlantic Corporation, Universal Music
and Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97-8864. The claims asserted are substantially the same
as those asserted in the Chandu Dani action reported above. On January 20, 1998,
SMEI answered the complaint, denying its material allegations, asserting
affirmative defenses and demanding judgment against plaintiffs.
On January 28, 1998, a purported class action was commenced in the United
States District Court for the Southern District of New York, entitled Nathan
Muchnick, Inc., v. Sony Music Entertainment, Inc., PolyGram Group Distribution,
Inc., Universal Music and Video Distribution, Warner Elektra Atlantic
Corporation and EMI Music Distribution, No. 98 Civ. 0612. The claims asserted
are substantially the same as those asserted in the Chandu Dani action reported
above. On February 23, 1998, SMEI answered the complaint, denying its
allegations, asserting affirmative defenses and demanding judgments against
plaintiffs.
In April 22, 1998, the
Judicial Panel on Multidistrict Litigation ("JPML")
directed that the Chandu Dani, Third Street Jazz, T. Obie and Nathan Muchnick
actions be coordinatedconsolidated for pretrial proceedingspurposes
this action with a number of other actions asserting essentially the same claims
filed in the federal district courts under the caption In Re Compact Disc
Antitrust Litigation, and assigned the coordinated case to the United StatesU.S. District
Court for the Central District of California. In(In August 1998, plaintiffs'
counsel asked the JPML to addthat the Digital action be added to the coordinated proceedings as
a "Tag along""tag-along" action.) The Court has expressed a preference that the parties
undertake discovery on an informal basis, and the parties are in the process of
negotiating appropriate discovery procedures.
16
17
On February 17, 1998, a purported class action was commenced in the
Circuit Court of Cocke County, Tennessee at Newport, entitled Ottinger &
Silvery, et al. v. EMI Music Distribution, Inc., Sony
16
17 Music Entertainment, Inc.,
Warner Elektra Atlantic Corporation, UNI Distribution Corporation, Bertelsmann
Music Group, Inc. and PolyGram Group Distribution, Inc. The action is brought on
behalf of persons who from January 29, 1993 to the present purchased CDs
indirectly from the defendants in Alabama, Arizona, California, the District
Court of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New
Mexico, North Carolina, North Dakota, South Dakota, Tennessee, West Virginia and
Wisconsin, and alleges that the defendants are engaged in a conspiracy to fix
the prices of CDs, in violation of antitrust, unfair trade practices and
consumer protection statutes of each of those jurisdictions. On May 11, 1998,
SMEI and all of the other defendants moved to dismiss the action.
On October 24, 1996, the Italian Competition and Market Commission (the
"ICMC") commenced an investigation against Warner Music Italia S.p.A., PolyGram
Italia S.r.l., EMI Music Italy S.p.A., BMG Ricordi S.p.A., Sony Music
Entertainment S.p.A., and the Italian Music Industry Federation regarding prices
of CDs sold in Italy by those companies. On October 9, 1997, the ICMC issued an
administrative decision concluding, in part, that those record companies had
agreed on a uniform commercial structure for CDs sold to dealers. The ICMC
imposed monetary sanctions on each of the record companies identified above,
including a penalty against Sony Music Entertainment S.p.A. in the amount of
1,495,952,000 Italian Lira. Each of the record companies has appealed the ICMC's
order to the Regional Administrative Court of Lazio, which denied the appeal.
The record companies are considering possible further steps.
In October 1993, 15 music performers or representatives of deceased
performers, on behalf of an alleged similarly-situated class, filed suit in the
United States District Court for the Northern District of Georgia against
approximately 50 record companies, including SMEI. (Samuel D. Moore, et al. v.
American Federation of Television and Radio Artists, et al., No. 93-Civ-2358).
Plaintiffs claimed that the recording companies under-reported and
under-contributed to the Fund, in violation of ERISA, in breach of contract and
fiduciary duty, through fraud and embezzlement, and in violation of RICO, and
that the American Federation of Television and Radio Artists ("AFTRA") (their
union), and the AFTRA Health and Retirement Fund (the "Fund") had breached their
fiduciary duties and acted in violation of ERISA in failing to enforce the
recording companies' obligations. Plaintiffs sought substantial, but
unquantified, monetary damages, treble damages, attorneys' fees and costs and
the imposition of a constructive trust over their master recordings. The Court
has dismissed all claims against AFTRA. The Court also consolidated with this
action a second, similar lawsuit, commenced by the same plaintiffs in the United
States District Court for the Southern District of New York. Through various
Orders during this litigation, the Court has granted the record company
defendants' motion to dismiss the ERISA claims but denied the defendants' motion
to dismiss state law claims for breach of contract and fraud and a motion for
summary judgement on the RICO claims. The Court has also declined to dismiss the
claims against the Fund and the Fund Trustees. On January 20, 1998, the Court
denied plaintiffs' motions for class certification of the remaining claims
against the record company defendants and against the Fund and Fund Trustees.
Accordingly, the case is now limited to the individual remaining claims of the
15 named plaintiffs. By Order dated June 22, 1998, the Court granted plaintiffs'
motion to certify its order denying class certification for appeal remains
pending.to the
Eleventh Circuit Court of Appeals, and granted plaintiffs' motion for entry of
judgement pursuant to Rule 54(b) in favor of the recording company defendants on
the ERISA claims. On October 6, 1998, the Eleventh Circuit accepted
interlocutory review of the District Court's Order denying class certification
and consolidated that appeal with the
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18
appeal of the dismissal of the plaintiffs' ERISA claims. Briefing is in process
in respect of these appeals.
In addition, the CompanySony Corporation and certain of its subsidiaries are
defendants in several ongoing and pending lawsuits. However, based upon the
information currently available to both the Company and its legal counsel,Sony, management of the
CompanySony believes that
damages from such lawsuits, if any, would not have a material effect on the Company'sSony's
consolidated financial position.
Item 4. Control of Registrant
(a) To the knowledge of the Company,Sony Corporation, it is not directly or indirectly
owned or controlled by any other corporation or by the Japanese government
or any foreign government.
(b) (1) To the knowledge of the Company,Sony Corporation, no person owns of record or
beneficially more than 10% of the outstanding Common Stock.
(2) The total number of shares of the Company'sSony Corporation's Common Stock
beneficially owned by the Directors, and Statutory Auditors, and Executive
Officers (See Item 10.) as of MarchMay 31, 1998 is1999 was as follows:
Number of Shares Percentage
Title of Class Identity of Person or Group Beneficially Owned Percentage
........... ....................... ................ of Class
-------------- --------------------------- ------------------ --------------
(in thousands) .........
Common Directors, Statutory Auditors, 1,375 0.3%
Stock and Statutory 1,570 0.4%
Stock AuditorsExecutive Officers
(c) As far as is known to the Company,Sony Corporation, there is no arrangement, the
operation of which may at a subsequent date result in a change in control
of the
Company.
17
18Sony Corporation.
Item 5. Nature of Trading Market
The primary markets for the Company'sSony Corporation's Common Stock are the Tokyo
Stock Exchange (the "TSE") in the form of Common Stock and the New York Stock
Exchange (the "NYSE") in the form of American Depositary Shares ("ADSs")
evidenced by American Depositary Receipts ("ADRs"). Each American Depositary ShareADS represents one
share of Common Stock.
The Company'sSony Corporation's Common Stock, par value 50 yen per share, has been
listed on the TSE since 1958, and is also listed on the four other stock
exchanges in Japan: Osaka, Nagoya, Fukuoka and Sapporo. In addition, the Company'sSony
Corporation's Common Stock is listed on the following stock exchanges outside
Japan: Pacific, Chicago, Toronto, London, Paris, Frankfurt, Dusseldorf,
Brussels, Vienna, and Swiss.
The Company'sSony Corporation's ADRs have been traded in the U.S. since 1961 and have
been listed on the NYSE since 1970. The Company'sSony Corporation's ADRs are issued and
exchanged by Morgan Guaranty Trust Company of New York, as Depositary.
At18
19
As of March 31, 1998,1999, there were 407,195,271410,439,111 shares of Common Stock
outstanding, of which 17,390,50527,812,255 shares were in the form of ADRs and 56,613,39345,926,720
shares were held of record in the form of Common Stock by residents in the U.S.
The number of registered ADR holders was 7,1397,328 and the number of registered
holders of shares of Common Stock in the U.S. was 315.303.
The following table sets forth for the periods indicated the reported
high and low sales prices of the Company'sSony Corporation's Common Stock on the TSE and the
reported high and low sales prices of American Depositary SharesADSs on the NYSE.
Tokyo Stock New York Stock
Exchange Price Exchange Price
Per Share of Per American
Common Stock Depositary Share
................. .......................
High Low High Low
..... .... ..... ....The fiscal year ended March 31, 1998
Fiscal1st quarter 10,100 yen 8,520 yen 88 7/8 dollars 69 1/2 dollars
2nd quarter 12,600 9,550 103 11/16 85 1/16
3rd quarter 12,200 9,320 98 7/16 74 1/2
4th quarter 12,700 10,400 97 3/16 82 5/16
The fiscal year ended March 31, 19971999
1st quarter 7,31012,040 yen 6,35010,430 yen 6689 5/816 dollars 59 dollars
2nd quarter 7,260 6,680 66 1/4 61 1/2
3rd quarter 7,700 6,720 67 7/8 58 7/8
4th quarter 9,180 7,250 74 1/4 63 3/8
Fiscal year ended March 31, 1998
1st quarter 10,100 yen 8,520 yen 88 7/8 dollars 6977 1/2 dollars
2nd quarter 12,600 9,550 103 11/16 85 1/13,490 8,760 97 66 15/16
3rd quarter 12,200 9,320 989,420 7,230 76 7/16 748 60 1/24
4th quarter 12,700 10,400 9711,930 7,290 100 3/16 82 5/164 65 1/2
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19
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
(a) Japanese Foreign Exchange Controls
Effective from April 1, 1998 the Foreign Exchange and Foreign Trade
Control Law was amended and the title of the statute was changed to the
Foreign Exchange and Foreign Trade Law. Under the amended Law all aspects of
regulations on foreign exchange and foreign trade transactions which were
subject to licensing or other approval or prior notification requirements
are, with minor exception relating to certain inward direct investment
(which is not generally applicable to the Company'sSony Corporation's shares), now
subject to the post facto reporting requirements. However, the Minister of
Finance has the power to impose a licensing requirement for certain
transactions in limited circumstances.
(b) Description of Common Stock
Set forth below is certain information relating to the Common Stock of
the Company,Sony Corporation, including brief summaries of certain provisions of the Company'sSony
Corporation's Articles of Incorporation and Shares Handling Regulations, as
currently in effect, and of the Commercial Code of Japan relating to a joint
stock company (Kabushiki Kaisha) and certain related legislation.
19
20
General
The presently authorized capital stock of the CompanySony Corporation is
1,350,000,000 shares, which may be issued with a par value or without a par
value. The Commercial Code requires that shares be in registered form. Under
the Commercial Code shares are transferable by delivery of share
certificates, but in order to assert shareholders' rights against the Company,Sony
Corporation, the transferee must have his name registered in the Company'sSony
Corporation's register of shareholders. All of the presently outstanding
shares of the CompanySony Corporation are of a par value of 50 yen per share. The
CompanySony
Corporation may, by a resolution of the Board of Directors, convert par
value shares into non-par value shares or vice versa. Shareholders are
required to file their names, addresses and seals with The Toyo Trust and
Banking Company, Limited, the transfer agent for the Company'sSony Corporation's Common
Stock, and shareholders not resident in Japan are required to file a mailing
address in Japan or appoint a resident proxy in Japan; these requirements do
not apply to the holders of ADRs.
The central clearing system of share certificates under the Law
Concerning Central Clearing of Share Certificates and Other Securities of
Japan applies to the shares of Common Stock of the Company.Sony Corporation. Pursuant to
this system a holder of shares of Common Stock is able to choose, at his
discretion, to participate in this system and all certificates of shares of
Common Stock elected to be putplaced into this system are deposited with the
central clearing system and all such shares are registered in the name of
the clearing house in the Company'sSony Corporation's register of shareholders. Each
participating shareholder is in turn registered in the register of
beneficial shareholders and treated in the same waymanner as shareholders
registered in the Company'sSony Corporation's register of shareholders.
Dividends
The Articles of Incorporation of the CompanySony Corporation provide that the
accounts shall be closed on March 31 of each year and that dividends, if
any, shall be paid to the shareholders of record as of the end of such day.
After the close of the fiscal period, the Board of Directors prepares, among
other things, a proposed allocation of profits for dividends and other
purposes; this proposal is submitted to the Statutory Auditors of the CompanySony
Corporation and to independent certified public accountants and then
submitted for approval to the 19
20
ordinary general meeting of shareholders,
which is normally held in June of each year. In addition to provisions for
dividends, if any, and for the legal reserve and other reserves, the
allocation of profits customarily includes a bonus to Directors and
Statutory Auditors. In addition to annual dividends, the Board of Directors
of the CompanySony Corporation may by its resolution declare a cash distribution pursuant
to Article 293-5 of the Commercial Code (an "interim dividend") to
shareholders who are registered in the Company'sSony Corporation's register of
shareholders at the
endSeptember 30 of each September 30,year, subject to the limitations
described below.
The Commercial Code provides that a company may not make any distribution
of profits by way of dividends or interim dividends for any fiscal yearperiod
unless it has set aside in its legal reserve an amount equal to at least
one-tenth of the amount paid by way of appropriation of retained earnings
for such fiscal period until the legal reserve is one-quarter of its stated
capital. Under the Commercial Code the CompanySony Corporation is permitted to
distribute profits by way of year-end or interim dividends out of the excess
of its net assets over the aggregate of (i) its stated capital, (ii) its
additional paid-in capital, (iii) its accumulated legal reserve, (iv) the
legal reserve to be set aside in respect of the fiscal period concerned, and
(v) the excess, if any, of unamortized expenses incurred in preparation for
commencement of business and in connection with research
20
21
and development expense over the aggregate of amounts referred to in (ii),
(iii) and (iv) above. If the CompanySony Corporation has on its balance sheet a number
of shares of its Common Stock which the CompanySony Corporation has acquired for the
purpose of transferring the same to its Directors and/or employees but such
shares are not yet
to be so transferred, the book value of such shares shall be
deducted from the amount available for payment of dividends. In the case of
interim dividends, the net assets are calculated by reference to the balance
sheet as at the last closing of the Company'sSony Corporation's accounts, but adjusted to
reflect any subsequent payment by way of appropriation of retained earnings
and transfer to legal reserve in respect thereof, provided that interim
dividends may not be paid where there is a risk that at the end of the
fiscal year there might not be any excess of net assets over the aggregate
of the amounts referred to in (i), (ii), (iii), (iv) and (v) above, and, in
addition to the deduction referred to in the immediately preceding sentence,
if the Company'sSony Corporation's shareholders have adopted a resolution for the Company'sSony
Corporation's purchase of shares of its Common Stock for the purpose of
transferring the same to its Directors and/or employees or for the purpose
of retiring the same with retained earnings, the total amount of purchase
price authorized by such resolution shall, so long as such resolution has
not expired, and whether or not such purchase has been effected, be deducted
from the amount available for interim dividends.
The Commercial Code as currently in effect does not provide for "stock
dividends". However, under the Code, the shareholders may by resolution
transfer any amount which is distributable as dividends to stated capital
and the Board of Directors may by resolution issue additional shares by way
of a stock split, up to the aggregate par value equal to the amount so
transferred; thus, the same effect as a stock dividend can be achieved.
In Japan the "ex-dividend" date and the record date for dividends precede
the date of determination of the amount of the dividend to be paid.
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21
Transfer of Additional Paid-in Capital and Legal Reserve to Stated Capital
and Stock Splits (Free Share Distributions)
When the CompanySony Corporation issues new shares of Common Stock, the entire
amount of the issue price of such new shares is required to be accounted for
as stated capital, although the Companyprovided that Sony Corporation may account for an amount
not exceeding one-half of such issue price as additional paid-in capital
(subject to the remainder being not less than the total par value of the new
shares being issued). The Board of Directors may transfer the whole or any
part of additional paid-in capital and legal reserve to stated capital and
grant to shareholders additional shares of Common Stock free of charge by
way of a stock split, without affecting the par value thereof, with
reference to the whole or any part of the amount of additional paid-in
capital and legal reserve so transferred to stated capital; such additional
shares may also be granted by reference to the amount representing the
portion of the issue price of shares of Common Stock in excess of the par
value thereof which has been accounted for as stated capital.
The Commercial Code permits the CompanySony Corporation to make a partially free
distribution to shareholders by way of a rights issue at a subscription
price per share which is less than the par value thereof if (a) the
difference between the subscription price and the par value does not exceed
the amount of the stated capital minus the aggregate par value of all
outstanding shares, divided by the number of new shares to be issued
pursuant to such rights issue, (b) the sum of the net assets of the CompanySony
Corporation (as appearing on the latest balance sheet) and the total
subscription price, divided by the number of the shares outstanding
immediately after the issue of the new shares, is at least 50 yen and (c)
the subscription rights are made transferable. In order to
21
22
satisfy the requirement mentioned in (a) above, the Board of Directors may
transfer the whole or any part of additional paid-in capital or legal
reserve to stated capital.
General Meeting of Shareholders
The ordinary general meeting of shareholders to settle accounts of the
CompanySony
Corporation for each fiscal period is normally held in June of each year in
Shinagawa-ku, Tokyo, Japan. In addition, the CompanySony Corporation may hold an
extraordinary general meeting of shareholders whenever necessary by giving at least two weeks'
advance notice to shareholders.
Notice of a shareholders' meeting setting forth the place, time and
purpose thereof, must be mailed to each shareholder having voting rights
(or, in the case of a non-resident shareholder, to his resident proxy or
mailing address in Japan) at least two weeks prior to the date set for the
meeting.
Any shareholder holding at least 300 units of shares or 1% of the total
number of outstanding shares for six months or more may propose a matter to
be considered at a general meeting of shareholders by submitting a written
request to a Representative Director at least six weeks prior to the date
set for such meeting.
Voting Rights
A shareholder is entitled to one vote per share subject to the
limitations on voting rights set forth in the following paragraph and
" "Unit"""Unit" Share System -- Voting-Voting rights of a holder of shares representing less
than one unit" below. Except as otherwise provided by law or by the Company'sSony
Corporation's Articles of Incorporation, a resolution can be adopted at a
general meeting of shareholders by a majority of the shares having voting
rights represented at the meeting. The Commercial Code and the Company'sSony
Corporation's Articles of Incorporation provide, however, that the quorum
for the election of Directors and Statutory Auditors shall 21
22
not be less than
one-third of the total number of outstanding shares having voting rights.
The Company'sSony Corporation's shareholders are not entitled to cumulative voting in the
election of Directors. A corporate shareholder, more than one-quarter of
whose outstanding shares are directly or indirectly owned by the Company,Sony
Corporation, may not exercise its voting rights in respect of the shares of
the Company. The
CompanySony Corporation. Sony Corporation has no voting rights with respect to its
own Common Stock. Shareholders may exercise their voting rights through
proxies provided that the proxies are also shareholders holding voting
rights. The Company'sSony Corporation's shareholders also may cast their votes in
writing.
The Commercial Code provides that in order to amend the Articles of
Incorporation and in certain other instances, including an increase in the
total number of shares authorized to be issued, a reduction of the stated
capital, the removal of a Director or Statutory Auditor, dissolution, merger
(with an
exception of the merger of a small company) or consolidation of a corporation,Sony Corporation requiring shareholders resolution, the
transfer of the whole or an important part of the business, the taking over
of the whole of the business of any other corporation, any offering of new
shares at a "specially favorable" price (or any offering of convertible
bonds or debentures with "specially favorable" conversion conditions or of
bonds or debentures with warrants or rights to subscribe for new shares with
"specially favorable" conditions) to persons other than shareholders or
granting to Directors and/or employees rights to subscribe for new shares if
the Articles of Incorporation so permits, the quorum shall be a majority of
the total number of shares having voting rights outstanding and the approval
of the holders of at least two-thirds of the shares having voting rights
represented at the meeting is required (the "special shareholders
resolution").
22
23
Subscription Rights
Holders of the Company'sSony Corporation's Common Stock have no pre-emptive rights
under its Articles of Incorporation. Authorized but unissued shares may be
issued at such times and upon such terms as the Board of Directors
determines, subject to the limitations as to the offering of new shares at a
"specially favorable" price mentioned above. The Board of Directors may,
however, determine that shareholders shall be given subscription rights
regarding a particular issue of new shares, in which case such rights must
be given on uniform terms to all shareholders as atof a record date of which
not less than two weeks' public notice must be given. Each of the
shareholders to whom such rights are given must also be given notice of the
expiry thereof at least two weeks prior to the date on which such rights
expire.
Rights to subscribe for new shares may be made generally transferable by
the Board of Directors. Whether the CompanySony Corporation will make subscription
rights generally transferable in future rights offerings will depend upon
the circumstances at the time of such offerings. If subscription rights are
not made generally transferable, transfers by a non-resident of Japan or a
corporation organized under the laws of a foreign country or whose principal
office is located in a foreign country will be enforceable against the CompanySony
Corporation and third parties only if the Company'sSony Corporation's prior written
consent to each such transfer is obtained. When such consent is necessary in
the future for the transfer of subscription rights, the CompanySony Corporation intends
to consent, on request, to all such transfers by such a non-resident or
foreign corporation.
The 1997 amendments to the Commercial Code permitpermits a company to provide in its articles of
incorporation that it may, by a special shareholders resolution, grant to
its directors and/or employees rights to subscribe for new shares if there
exists a justifiable reason. The CompanySony Corporation has provided such a provision
in its Articles of Incorporation, by amending them in June 1998, and, therefore, may, if there exists a
justifiable reason, by a special shareholders resolution (which is effective
for one year) grant to its Directors and/or employees rights to subscribe
for new shares (in aggregate (together with the number of shares issuable
upon exercise of all outstanding subscription rights which have been granted
to Directors
22
23 and/or employees, if any) not more than 10% of the total issued
and outstanding shares) to particular Directors and/or employees designated
by such resolution which rights may be made exercisable not more than ten
years from the resolution in accordance with the terms approved by the
resolution. Such special shareholders resolution cannot be taken if
shareholders have already adopted a resolution for repurchase by the CompanySony
Corporation of its shares for the purpose of transferring the same to its
Directors and/or employees by way of a stock option and any such stock
option is outstanding unexercised. No such special shareholders resolution
has yet been takenadopted by the Company'sSony Corporation's shareholders.
Dilution
In the future it is possible that market conditions and other factors
might make a rights offering to shareholders at par or substantially below
the market price of shares of Common Stock desirable. If the number of
shares offered in a rights offering is substantial in relation to the number
of shares outstanding and the market price exceeds the subscription price at
the time of the offering, a shareholder who does not exercise and is unable
otherwise to realize the full value of his subscription rights would suffer
economic dilution of his equity interest in the Company.Sony Corporation. If the rights
to subscribe for new shares are granted to the Company'sSony Corporation's Directors
and/or employees which rights are exercisable at a price below the market
price of the shares and the number of shares issuable upon such exercise is
substantial, existing shareholders' equity interest in the CompanySony Corporation will
be diluted.
23
24
Liquidation Rights
In the event of a liquidation of the Company,Sony Corporation, the assets remaining
after payment of all debts and liquidation expenses and taxes will be
distributed among the shareholders in proportion to the respective numbers
of shares held.
Liability to Further Calls or Assessments
All the Company'sSony Corporation's presently outstanding shares of Common Stock
including shares represented by the American Depository Shares are fully
paid and non-assessable.
Transfer Agent
The Toyo Trust and Banking Company, Limited is the transfer agent for
the
Company'sSony Corporation's Common Stock; as such transfer agent, it keeps the Company'sSony
Corporation's register of shareholders in its office at 10-11, Higashisuna
7-chome, Koto-ku, Tokyo, Japan, and makes transfer of record ownership upon
presentation of the certificates representing the transferred shares.
Record Date
March 31 is the record date for the Company'sSony Corporation's year-end dividends.
The shareholders who are registered as the holders of 100 shares or more in
the
Company'sSony Corporation's register of shareholders at the end of each March 31 are
also entitled to exercise shareholders' rights at the ordinary general
meeting of shareholders with respect to the fiscal period ending on such
March 31. September 30 is the record date for interim dividends. In
addition, the CompanySony Corporation may set a record date for determining the
shareholders entitled to other rights and for other purposes by giving at
least two weeks' public notice.
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24
The price of the shares generally goes ex-dividend or ex-rights on
Japanese stock exchanges on the third business day prior to a record date
(or if the record date is not a business day, the fourth business day prior
thereto), for the purpose of dividends or rights offerings.
Repurchase by the CompanySony Corporation of its Common Stock
Except as otherwise permitted by the Commercial Code and the Law of
Special Exception to the Commercial Code Concerning Retirement of Shares
enacted
in 1997 (the "Special Retirement Law") as set out below, the CompanySony Corporation or any of
its subsidiaries cannot acquire the Company'sSony Corporation's Common Stock except by
means of a reduction of capital in the manner provided in the Commercial
Code. The CompanySony Corporation may acquire, its Common Stock in response to a
shareholder's request for purchase of his shares representing less than one
unit. See " "Unit"""Unit" Share System -- Right of a holder of shares representing
less than one unit to require the CompanySony Corporation to purchase such shares"
below. Shares so purchased must be sold or otherwise transferred to a third
party within a reasonable period thereafter.
The 1994 and 1997 amendments toUnder the Commercial Code and the Special Retirement Law enable the Company toSony Corporation
may acquire its Common Stock for the following purposes, subject to the
authorization of shareholders at an ordinary general meeting (if(and if the
Articles of Incorporation provide that the shares may be purchased for the
purpose of retirement by resolution of the Board of Directors if the Board
deems it especially necessary to do so in view of general economic condition, the
business and financial
24
25
condition of the CompanySony Corporation and other factors, by the resolution of the
Board of Directors): (1) for the purpose of transferring the same to its
Directors and/or employees if there exists a justifiable reason; and (2) for
the purpose of retirement thereof with retained earnings. Acquisition by
the CompanySony Corporation of shares of its Common Stock for the above purposes is
subject to, among other things, the following restrictions: (a) the number
of shares to be acquired maydoes not exceed 10% of all issued and outstanding
shares (except in the case of purchase of shares for retirement pursuant to
shareholders' authorization); (b) the total amount of purchase price maydoes not exceed
the amount of the retained earnings available for dividend payment minus the
amount to be paid by way of appropriation of retained earnings for the
fiscal year and, if any amount of retained earnings is to be capitalized,
such amount (if the purchase is made pursuant to the resolution of the Board
of Directors as referred to in the parentheses above, one-half of such
permitted amount); and (c) acquisition shall be made through a stock
exchange transaction or by way of tender offer. No such acquisition pursuant
to a resolution of the Board of Directors may be made after the conclusion
of the ordinary general meeting of shareholders for the fiscal year ending
immediately after the Board resolution. The Company'sSony Corporation's shareholders have
not given an authorization for the acquisition of shares pursuant to (1)
above. In June 1997, the Company amended itsSony Corporation's Articles of Incorporation providing for the authority for the Company toprovide that Sony
Corporation may purchase shares of its Common Stock not exceeding 30,000,000
shares by resolution of the Board of Directors for the purpose of retirement
thereof with retained earnings. No Board resolution has been madeadopted for
this purpose.
The Special Retirement Law was amended in March 1998 enabling the CompanySony
Corporation to acquire its own shares for the purpose of retiring the same
with additional paid-in capital by resolution of the Board of Directors if
the Articles of Incorporation so provide and if the Board deems it especially necessary
to do so in view of general economic condition, the business and financial
condition of the CompanySony Corporation and other factors. OnIn June 26, 1998, the CompanySony
Corporation amended its Articles of Incorporation providing for the authority for the Company to provide that Sony
Corporation may purchase shares of its Common Stock not exceeding 30,000,000
shares with the total purchase price not exceeding 400 billion yen by
resolution of the Board of Directors for the purpose of retiring the same
with additional paid-in capital. The acquisition of shares under this
authorization is subject to the restriction that (x) the total amount of the
purchase price maydoes not exceed
24
25 the total amount of additional paid-in
capital and accumulated legal reserve minus the amount equal to one-fourth
of stated capital, and (y) if the aggregate of the amounts of (i) through
(v) referred to under "Dividends" above and the amount of interim dividend
distributed exceeds the net assets appearing on the balance sheets as at the
latest closing of the Company'sSony Corporation's accounts, no purchase of shares for
this purpose can be made. No Board resolution has been takenadopted for this
purpose.
"Unit" Share System
Pursuant to the Commercial Code the CompanySony Corporation has adopted 100 shares
as one unit of shares.
Transferability of shares representing less than one unit
Certificates for shares representing less than one unit may only be
issued in certain limited circumstances. Since the transfer of shares
normally requires delivery of the certificates therefor, fractions of a unit
for which no share certificates are issued are not transferable. Shares
representing less than one unit for which share certificates have been
issued continue to be transferable, but the transfer may be registered in
the Company'sSony Corporation's register of shareholders
25
26
only if the transferee is already a registered shareholder (whether in
respect of units or of shares representing less than one unit).
Because transfer of ADRs does not require changes in the ownership of the
underlying shares of Common Stock, holders of ADRs evidencing ADSs that
constitute less than one unit of Common Stock are not affected by such
restrictions in their ability to transfer such ADRs. However, because
transfers of less than one unit of the underlying shares of Common Stock are
normally prohibited under the unit share system, under the Deposit Agreement
relating to the ADRs, the right of ADR holders to surrender their ADRs and
withdraw the underlying shares of Common Stock for sale in Japan may only be
exercised as to whole units of Common Stock.
Right of a holder of shares representing less than one unit to require the
CompanySony
Corporation to purchase such shares
A holder of shares representing less than one unit may at any time
require the CompanySony Corporation to purchase such shares at their last reported sale
price on the Tokyo Stock Exchange on the day when such request is made or,
if no sale takes place on the Tokyo Stock Exchange on such day, the price at
which the first sale of the shares is effected on the Tokyo Stock Exchange
thereafter, less applicable brokerage commission. The usual
securities transfer tax is applicable to such transactions.commissions.
Other rights of a holder of shares representing less than one unit
A holder of shares representing less than one unit has the following
rights in respect of such shares: (i) the right to receive dividends
(including interim dividends), (ii) the right to receive shares and/or cash
by way of a stock split or upon consolidation or subdivision of shares or
upon a capital decrease or merger of the Company,Sony Corporation, (iii) the right to be
allotted subscription rights with respect to new shares, convertible bonds
and bonds with warrants to subscribe for shares when such rights are granted
to shareholders, (iv) the right to participate in the distribution of
surplus assets in the event of the liquidation of the Company,Sony Corporation, and (v)
the right to require the CompanySony Corporation to issue replacement share
certificates for lost, stolen or destroyed share certificates. All other
rights, including voting rights, cannot be exercised with respect to shares
representing less than one unit.
Voting rights of a holder of shares representing less than one unit
A holder of shares representing less than one unit cannot exercise any
voting rights with respect to such shares. In calculating the quorum for
various voting purposes, the aggregate number of shares representing less
than one unit will beis excluded from the number of outstanding shares. A holder of
shares representing one or more whole units will have one vote for each such
share, except as stated in "Voting Rights" above.
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26
Consolidation by operation of law of shares constituting one unit into one
share
The unit share system is intended to be an interim measure with a view
ultimately to achieverealize shares of a much higher denomination than at present.
On a date to be specified by separate legislation, the shares comprising one
unit will be deemed to be consolidated into one share. Presently it is not
known when the bill specifying such date will be submitted to the Japanese
parliament. If the consolidation takes place, the holder of any fractional
share constituting one-hundredth of one share or any integral multiple
thereof, which may result from such
26
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consideration, will be registered as the holder thereof in the register of
fractional shares and the holder of any fraction representing less than a
whole hundredth of one share will be entitled to receive a cash payment. A
registered holder of fractional shares may request that a company issue
certificates therefor, unless its articles of incorporation provide
otherwise, in which case such holder may request that Sony Corporation
purchase such fractional shares. Fractional shares will not carry voting
rights and, unless such company's articles of incorporation provide
otherwise, the entitlement thereof will be limited and will not include the
right to receive dividends.
A holder who owns ADRs evidencing less than 100 ADSs will indirectly own
less than a whole unit. Although, as discussed above, under the unit share
system holders of less than a unit have the right to require Sony
Corporation to purchase their shares, holders of ADRs evidencing ADSs that
represent other than integral multiples of whole units are unable to
withdraw the underlying shares of Common Stock representing less than one
unit and, therefore, are unable, as a practical matter, to exercise the
right to require Sony Corporation to purchase such underlying shares. As a
result, access to the Japanese markets by holders of ADRs through the
withdrawal mechanism will not be available for dispositions of shares in
lots of less than one unit. The unit share system does not affect the
transferability of ADSs, which may be transferred in lots of any size.
(c) Reporting of Substantial Shareholdings
The Securities and Exchange Law of Japan, as amended, requires any person
who has become, beneficially and solely or jointly, a holder of more than 5%
of the total issued shares of a company listed on any Japanese stock
exchange or whose shares are traded on the over-the-counter market in Japan
to file with the Minister of Finance within five business days a report
concerning such shareholdings.
A similar report must also be made in respect of any subsequent change of
1% or more in any such holding.holding with certain exceptions. For this purpose,
shares issuable to such person upon conversion of convertible securities or
exercise of share subscription warrants are taken into account in
determining both the number of shares held by such holder and the issuer's
total issued share capital. Copies of each such report must also be
furnished to the issuer of such shares and all Japanese stock exchanges on
which the shares are listed or (in the case of shares traded
over-the-counter) the Japan Securities Dealers Association.
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Item 7. Taxation
Generally, a non-resident of Japan or a non-Japanese corporation is
subject to Japanese withholding tax on dividends paid by a Japanese corporation.
Stock splits in themselves (whether for the purpose of making a free
distribution or dividend in shares), subject as set out below, are not subject
to Japanese income tax. However, a transfer of retained earnings or legal
reserve (but not additional paid-in capital) to stated capital is treated as a
dividend payment to shareholders for Japanese tax purposes and is, in general,
subject to Japanese income tax.
Under the Income Tax Convention between the U.S. and Japan (the
"Convention"), the maximum rate of Japanese withholding tax that may be imposed
on dividends paid to a U.S. resident or corporation not having a "permanent
establishment" (as defined therein) in Japan is generally 15%.
For purposes of the Convention and the U.S. Internal Revenue Code of
1986, as amended (the "Code"), U.S. holders of ADRs will be treated as the
owners of the Common Stock underlying the American Depositary SharesADSs evidenced by the ADRs. For
purpose of this discussion, a "U.S. holder" is a holder that (i) is a resident
of the United States for purposes of the Convention, (ii) does not maintain a
permanent establishment or fixed base in Japan to which ADRs or Common Stock are
attributable and through which the beneficial owner carries on or has carried on
business (or in the case of an individual, performs or has performed independent
personal services) and (iii) who is not otherwise ineligible for benefits under
the ConventionConvension with respect to income and gain derived in connection with the
ADRs or Common Stock.
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27
Japanese Taxation of Common Stock or ADRs
In the absence of an applicable tax treaty, convention or agreement
reducing the maximum rate of withholding tax, the rate of Japanese withholding
tax on dividends paid by Japanese corporation to non-residents of Japan or
non-Japanese corporation is 20%.
Gains derived by a non-resident of Japan or a non-Japanese corporation
from the sale of Common Stock or ADRs outside Japan, or from the sale of Common
Stock within Japan by a non-resident of Japan or by a non-Japanese corporation
not having a permanent establishment in Japan, are in general not subject to
Japanese income or corporation tax. Japanese inheritance or gift tax at
progressive rates may be payable by an individual who has acquired Common Stock
or ADRs as a legatee, heir or donee.
If the CompanySony Corporation purchases shares of its Common Stock by way of a
tender offer for the purpose of retirement with retained earnings as described
under "Item 6. Exchange Controls and Other Limitations Affecting Security
Holders (b) Description of Common Stock --- Repurchase by the CompanySony Corporation of its
Common Stock" and so retires such shares, the selling shareholders are deemed to
have received a dividend in an amount equal to the selling price less the
aggregate of the stated capital and the additional paid-in capital attributable
to the shares so sold, except that if such retirement is made on or before March
31, 1999,2001, no such dividend is deemed to have been received but the entire
profits realized by the selling shareholders from such sales are treated as
gains realized from the ordinary sales of the shares and is subject to income
tax or corporation tax, as appropriate. In addition, when shares acquired by
the CompanySony Corporation (whether by way of a tender offer or otherwise) for the purpose
of retirement with retained earnings are retired by the CompanySony Corporation with
retained earnings, the shareholders existing at the time of such retirement are
deemed to have received a dividend in an amount equal to the amount of the
stated capital attributable to the retired shares and calculated in proportion
to each shareholder's shares at the time of such retirement, except that if such
retirement is made on or before March 31, 1999,2001, no income
28
29
tax is payable with respect to such portion deemed as a dividend. If the CompanySony
Corporation purchases shares of its Common Stock for the purpose of retirement
with additional paid-in capital and so retires such shares, the entire profits
realized by the selling shareholders from such sales are treated as gains
realized from ordinary sales of the shares and is subject to income tax or
corporation tax, as appropriate. In this case, no taxable event is deemed to
accrue from such retirement to the shareholders existing at the time of
retirement.
United States Taxation of Common Stock or ADRs
Dividends received by an U.S. holder of ADRs or Common Stock will be
includable in income as ordinary income for U.S. federal income tax purposes to
the extent paid out of current or accumulated earnings and profits of the
CompanySony
Corporation as determined for U.S. federal income tax purposes.
Subject to limitations set out in the Code, a U.S. holder of ADRs or
Common Stock of the CompanySony Corporation will be entitled to a credit for Japanese tax
withheld in accordance with the Convention from dividends paid by the Company.Sony
Corporation. For purposes of the foreign tax credit limitation, dividends will
be foreign source income, but will constitute "passive" or "financial services"
income.
Dividends paid by the CompanySony Corporation to U.S. corporate holders of ADRs or
Common Stock will not be eligible for the dividends-received deduction.
2729
2830
Item 8. Selected Financial Data
Year ended March 31
...........................................................
1994---------------------------------------------------------------------------------------------
1995 1996 1997 1998 .......... .......... .......... .......... ..........1999
----------------- ----------------- ----------------- ----------------- -----------------
(Millions of yen except per share amounts and yen exchange rates)
FOR THE YEAR
FOR THE YEAR
Sales and operating revenue 3,744,285 3,990,583 4,592,565 5,663,134 6,755,490 6,794,619
revenue
Operating income (loss) 106,962 (166,640) 235,324 370,330 520,210 338,649
Income (loss) before income
taxes 102,162 (220,948) 138,159 312,429 453,749 368,128
before income taxes
Net income (loss) 15,298 (293,356) 54,252 139,460 222,068 179,004
Depreciation and
amortization* 242,458 226,984** 227,316 266,532 301,665 307,173
and amortization*
Capital expenditures 250,678 251,197 298,078 387,955 353,730
(additions to fixed
assets)
195,937 250,678 251,197 298,078 387,955
R&D expenses 229,877Research and development 239,164 257,326 282,569 318,044 .......................................................................................375,314
expenses
- -------------------------------------------------------------------------------------------------------------------------
Per share:
Net income (loss)
-Basic 41.0Basic (784.7) 145.1 367.7 557.7 -Diluted 41.0436.9
Diluted (784.7) 134.0 309.2 483.4 391.0
Cash dividends declared
Interim 25.00 25.00 25.00 25.00 25.00
(22.88cents) (24.88cents) (24.48cents) (21.93cents) (19.23cents) (20.26cents)
Year-end 25.00 25.00 25.00 30.00 35.00 (25.22cents)25.00
(29.40cents) (22.77cents) (26.15cents) (24.41cents) (-)
- -------------------------------------------------------------------------------------------------------------------------
AT YEAR-END
Net working capital 616,020 537,733 816,361 843,500 1,151,152 1,126,848
Long-term debt 983,712 906,486 1,203,592 1,099,765 1,104,420 1,037,460
Stockholders' equity 1,329,496 1,007,802 1,169,147 1,459,332 1,815,555 1,823,665
Stockholders' equity per
share 3,557.50 2,695.31 3,125.53 3,798.62 4,461.39 4,448.69
per share
Total assets 4,269,816 4,223,914 5,045,699 5,680,246 6,403,043 .......................................................................................6,299,053
- -------------------------------------------------------------------------------------------------------------------------
Number of shares outstanding in thousands:
At year-end 373,728 373,911 374,068 384,185 407,195 .......................................................................................410,439
- -------------------------------------------------------------------------------------------------------------------------
Yen exchange rates per U.S. dollar:
At year-end 102.40 86.85 107.00 123.72 133.20 118.43
Average 107.87 99.30 96.43 112.52 122.78 128.19
High 101.10 86.85 81.12 104.49 111.42 108.83
Low 114.20 105.38 107.29 124.54 133.99 147.14
* Including amortization of deferred insurance acquisition costs
** Excluding write-off of goodwill
2830
2931
Notes to Selected Financial Data:
1. Net income (loss) per share amounts were computed based on Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). All
prior-periodBasic net income (loss) per share amounts have been restated to
conform with FAS 128. FAS 128 requires presentation of basic and diluted net
income per share on the face of the income statement. Under FAS 128, basic
net income per share(EPS) is computed based on the average
number of shares of common stock outstanding during each period and diluted
net income per shareEPS 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 the issuance of common stock.
Refer2. Cash dividends per share for the year ended March 31, 1999 include a year-end
dividend of 25 yen, which is subject to Note 2approval of the ordinary general
meeting of shareholders to be held on June 29, 1999.
3. Cash dividends declared in U.S. dollars are based on the exchange rates at
each respective payment date.
4. Income before income taxes and 3 of Notes to
Consolidated Financial Statements.
2. Duringnet income figures for the fiscal year ended
March 31, 1996, the Company changed its method1999 include gains of accounting58.7 billion yen and 30.7 billion yen,
respectively, which resulted from a contribution of securities to an outside
trust for assessing the carrying values of intercompany foreign
currency commitments to comply with the Emerging Issues Task Force Issue No.
95-2. This did not have a material impact on results of operations for the
years ended March 31, 1996, 1997, and 1998.
3.employee retirement benefit purposes.
5. The consolidated results for the fiscal year ended March 31, 1995 reflect the
write-off of goodwill of 265 billion yen in the Pictures segment and losses
in the Pictures segment of approximately 50 billion yen arising from a
combination of unusual items, such as abandoning a large number of projects
in development and providing for settlement of outstanding lawsuits and
contract claims.
4. Certain amounts at year-end for the prior years have been reclassified to
conform to the 1998 presentation.
5. Cash dividends declared in U.S. dollars are based on the exchange rates at
each respective payment date.
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30
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of OperationOperations
LIQUIDITY AND CAPITAL RESOURCES
Debt Finance and Liquidity Management
One of the most important policies of Sony's financial strategypolicy is to strengthen consolidatedmaintain the strength of its balance sheet
while assuring adequate liquidity and financing for its operations. Among Sony's
principal objectives in fulfilling that policy are seeking to assure liquidity
by maintaining adequate liquid assets and, to avoid excessive use of its balance
sheet, committed facilities, assuring that long-term funding requirements are
financed with long-term financing and administering its financial structure while keeping an appropriate levelrequirements
on a regional basis.
It is a principal policy of liquidity on hand. AimingSony to strengthen financial structure, Sony has been
making efforts to redeem liabilities by utilizing cash and cash equivalents in
order to reduce the size of the balance sheet. In order to complement the
smaller liquidity resulting from making such efforts, Sony recently enhanced its
liquidity management by means of improving the committed credit facilities so
that it could eventually promote a credit-facility-oriented liquidity management
rather than a cash-based one.
Sony generally maintainskeep total liquidityliquid assets equal to at
least 80% of the sum of the amount of the largest expected monthly gross sales
forand the month inamount of the year in which gross sales arelargest expected to be greatest plus 80% ofmonthly debt redemption forduring the monthyear.
Liquid assets consist of cash and cash equivalents, time deposits, and
marketable securities. In addition to these, Sony also includes committed lines
as liquid assets because funds are available from such lines during the period
of the contracts. By utilizing committed lines, Sony intends to reduce excess
cash items, in the year in which
total redemption are highest. In order to maintainenhance the efficiency of its use of assets. Sony,
including its finance subsidiaries, has entered into contracts for committed
lines with banks in a stable leveltotal amount of liquidity,
the Company entered230.9 billion yen at March 31, 1999. As a
principal policy, Sony selects banks rated "C" or above in Moody's Bank
Financial Strength ratings for its contracts for committed lines, and enters
into contracts with banks rated "A" or "B" with respect to establish committed credit
facilitiesmore than 70% of the
total amount.
Sony's primary financial policy for debt financing is to match the
first timeduration of its funding requirements to the terms of its debt. Long-term debt
financing is utilized to meet basic funding
31
32
requirements, such as for investments in manufacturing facilities. Sony funds
its short-term requirements with a combination of short-term and long-term
financing. Sony uses long-term debt to fund a portion of its short-term
requirements because such funds are necessary on an ongoing basis. Sony's
long-term debt principally comprises notes including convertible bonds. Sony
issued 1.5 billion U.S. dollars of unsecured Notes in a global bond offering in
March 1998. In addition, Sony's finance subsidiary in the U.S. maintains a 3
billion U.S. dollar medium term note ("MTN") program and a 2 billion U.S. dollar
Euro MTN program. In addition, Sony's finance subsidiary in the United Kingdom
maintains a 1 billion U.S. dollar Euro MTN program. At March 31, 1999, the total
outstanding balance of MTNs was 172.7 billion yen. Sony maintains its flexible
financing ability in each market through these programs. In addition to the
above, SPE financed approximately 39.7 billion yen during the fiscal year ended
March 31, 1998.31,1999 in Germany for its film production in the form of a film financing
through a limited partnership associated with certain third party investors.
In addition,the U.S., Europe, and Asia, Sony has maintained committed commercial paper (CP) backup lines ofcarries out financing functions
regionally through its financialfinance subsidiaries in order to minimize interest
expenses and manage liquidity efficiently. Finance subsidiaries in the U.S. and
Europe in order to maintain an
adequate levelthe United Kingdom have U.S. commercial paper ("CP") programs of liquidity in6 billion U.S.
dollars and 1 billion U.S. dollars, respectively, and finance requirements for
operating funds through these programs. During the regions.
Sony selects banks on criteria in which banks rated "A" and "B" of
Moody's Bank Financial Strength ratings account for at least 70% of all
committed credit facilities and banks rated "C" for the remaining portion when
entering into backup and credit commitments. Sony conducts an annual review to
confirm that all banks continue to fulfill such rating conditions. In the fiscal
year, ending March 31, 1999, Sony has set credit facilities amounting topeak month-end
outstanding balances were approximately 330131.4 billion yen and apportionedapproximately 55.5
billion yen, respectively. In Japan, Sony Corporation centralizes cash
management functions of its subsidiaries, excluding Sony Life Insurance Co.,
Ltd. and listed subsidiaries, through inter-company loans and deposits, and
maintains 300 billion yen of Japanese CP issuance capacity. There was no CP
issuance during the facilities amongyear. Furthermore, in the Company
and its overseas subsidiaries in accordance with funding requirements of each
entity.
Also, to further enhance Sony's liquidity,U.S., Sony is currently arrangingset up a U. S. 900 million0.9 billion
U.S. dollar accounts receivable financing facility into enhance its short-term
financing capacity.
Sony's financial condition remains strong. Sony believes that its cash,
other liquid assets, free cash flows and access to capital markets, taken
together, provide adequate resources to fund ongoing operating requirements and
future capital expenditures related to the U.S. This
facility, whereby Sony securitizes its accounts receivables, enables Sony to
raise off-balance sheet funds.expansion of existing businesses and
development of new projects.
Assets, LiabilityLiabilities, and Stockholders' Equity
Total assets decreased by 104.0 billion yen, or 1.6%, to 6,299.1 billion
yen at March 31, 1998 were 6,403.0 billion1999. This was principally attributable to the appreciation of
the yen 12.7% more than
at the previous fiscal year-end. One reason for the increase was the yen's
depreciation at the end of the fiscal year compared with the previous fiscal
year-end, while investment assets and deferred insurance acquisition costs
increased as a result of net increases in life insurance-in-force. (It is
estimated that total assets would have increased by approximately 3% compared
with the previous fiscal year-end if the value of the yen had remained the same
at March 31, 1999 as at the previous fiscal year-end.)
Current assets decreased by 198.1 billion yen, or 6.1%, to 3,069.4
billion yen at March 31, 1999. Among current assets, liquid assets, comprising
cash and cash equivalents, time deposits, rose mostly due to higher earnings, and marketable securities increased.
Cash and cash equivalents increased as the Company raisedand marketable securities decreased because
Sony Corporation shifted its short-term investments.investments from marketable securities
to cash equivalents. Notes and accounts receivable, increased as sales grew with an
almost flat turnover ratiotrade decreased by 95.2
billion yen, or 7.7%, to 1,135.6 billion yen at March 31, 1999 principally due
to the appreciation of trade receivables during the year. While growthyen. Inventories decreased by 116.0 billion yen, or
11.7%, to 877.9 billion yen at March 31, 1999. Sony aggressively reduced
production volume in sales resultedthe second half of the fiscal year and further promoted
supply chain management. In addition, appreciation of the yen also impacted the
decrease in increases in inventories,inventories. However, the inventory turnover ratio to cost of sales
(based on the average of inventories at March 31, 19971998 and 1998)
improved by 0.22 months to1999) remained 2.42
months, resulting from effortswhich was the same level of the previous fiscal year.
32
33
Investments and advances increased by 130.3 billion yen, or 15.3%, to
shorten product
lead-times from manufacture980.7 billion yen at March 31, 1999. This was principally due to sale. Thean increase in
investmentsinvestment assets in the Insurance business and advances
wasthe deconsolidation of the
Pictures business' Theatrical exhibition group, Loews Theatres, due to higher investmentthe
merger of Loews Theatres with Cineplex Odeon Corporation creating Loews Cineplex
Entertainment Corporation ("Loews") during the fiscal year ended March 31, 1999.
As a result of the merger, Loews is now reported on the equity basis.
(Investment in Loews at March 31, 1999 was 30.7 billion yen.) In addition, Sony
invested 27.4 billion yen in General Instrument Corp. ("GI"), 15.1 billion yen
in Telemundo group ("Telemundo"), and 11.0 billion yen in S.T. Liquid Crystal
Display Corp. ("ST-LCD"). This increase was partially offset by the contribution
of marketable equity securities held by Sony Corporation to an employee
retirement benefit trust (refer to Note 8 of Notes to Consolidated Financial
Statements).
Tangible fixed assets decreased by 97.4 billion yen, or 7.2%, to 1,249.8
billion yen at Sony Life as insurance premium revenues
posted strong growth.March 31, 1999, due principally to the impact of the
deconsolidation of Loews Theatres in connection with the aforementioned merger
of the Theatrical exhibition group.
Total current and long-term liabilities decreased by 122.4 billion yen,
or 2.7%, to 4,339.3 billion yen at March 31, 1999. (It is estimated that total
liabilities would have increased 8.7% to 4,461.7 billion
yen.by approximately 0.1% compared with the
previous fiscal year-end if the value of the yen had remained the same as at the
previous fiscal year-end.) Among current liabilities, short-term borrowings and
debt declined sharply, mainlyprincipally due to the redemptionsredemption of medium-term notes (MTN) issueddebt by asubsidiaries
in Japan and the U.S.
subsidiary and maturing during the year. Repayment of MTN was refinanced through
the issuance of CP by the subsidiary. By the end of this fiscal year, most of
the outstanding CP was repaid using proceeds from the 1.5 billion U.S. dollar
Notes issued in March 1998.
30
31 Notes and accounts payable, trade and accounts payable, other and accrued
expenses increaseddeclined due principally
to the growtheffect of reductions in Sony's businesses.production. Accrued income and other taxes
decreased principally in line with Sony Corporation's decline in profit. Among
long-term liabilities, long-term debt increased only slightly despite the issuance of the
Notes because of the conversion of 146.5 billion yen of convertible bonds into
common stock during the year. As a result, total short- and long-term borrowings
and debt amounted to 1,303.8 billion yen, 8.7% less than the previous fiscal
year-end. The increase in accrued pension and severance costs resulted from a
reduction in the assumed discount rate used in developing projected benefit
obligations for Sony's Japanese plans, due to alarge decline in long-term interest
ratesdebt was principally
attributable to redemption of debt by subsidiaries in Japan forand the past few years, and from the minimum pension liability
recognized at March 31, 1998 (refer to Note 12 of Notes to Consolidated
Financial Statements). Future insurance policy benefits were higher because of
growth in insurance premium revenues at Sony Life.
Stockholders' equity increased 24.4% to 1,815.6 billion yen, mostly
because of higher earningsU.S. and the
conversion of convertible bonds.bonds of Sony Corporation. As a result, the total of
short-term borrowings, current portion of long-term debt, and long-term debt
declined by 137.7 billion yen, or 10.6%, to 1,166.2 billion yen at March 31,
1999. Accrued pension and severance costs decreased due to the aforementioned
contribution of marketable securities to an employee retirement benefit trust.
Future insurance policy benefits and other increased in line with net increases
in life insurance-in-force.
Stockholders' equity increased by 8.1 billion yen, or 0.4%, to 1,823.7
billion yen at March 31, 1999, mostly reflecting earnings. The ratio of
stockholders' equity to total assets increased by 2.7 percentage points, from 25.7%28.4% to 28.4%29.0%. Based on the
number of shares outstanding at March 31, 1998,1999, stockholders' equity per share
rosedeclined to 4,461.394,448.69 yen from 3,798.624,461.39 yen at the previous fiscal year-end.
In addition, the cumulativeForeign currency translation adjustmentadjustments at March 31, 1998 decreased1999 increased in absolute amount
as a reduction of stockholders' equity to 140.7284.4 billion yen from 181.2140.7 billion
yen at the previous fiscal year-end, mainlyprincipally due to the yen's depreciation.appreciation.
Cash Flows
There was a net decrease in cashCash and cash equivalents at end of the year
of 5.2increased by 168.9 billion yen, including the effect of exchange rate changes of 1.1or 39.9%, to
592.2 billion yen resulting in a balance of 423.3 billion yen at year-end.
During the year, net cash provided by operating activities decreased to
612.4 billion yen from the previous fiscal year, mainly due to an increase in
inventories, decreases in accrued income and other taxes and other factors.
While the balance of inventories rose, the inventory turnover ratio to cost of
sales decreased, as is discussed in the assets, liabilities and stockholders'
equity section. The decrease in accrued income and other taxes was mainly due to
an increase in this account in the previous year, due to higher earnings at the
Company and its subsidiaries in Japan and smaller interim tax payments. Larger
interim tax payments induring the fiscal year ended March 31, 1998 also contributed to1999, which includes
the decrease in accrued incomenegative effect of exchange rate changes on cash and other taxes. Notes and accounts payable and
receivable increased; however, as was the case with inventories, both figures
decreased as a percentagecash equivalents of
sales. Depreciation and amortization, including
amortization of goodwill and intangibles and deferred insurance acquisition
costs, rose 13.2% to 301.714.9 billion yen.
This amount is broken down into tangible
assets for approximately 260 billion yen, goodwill and intangibles for
approximately 20 billion yen, and deferred insurance acquisition costs for
approximately 20 billion yen.
During the year, netNet cash used in investingprovided by operating activities increased to 598.7
billion yen from the previous fiscal year, mainly due to higher payments for
purchases of fixed assets. Capital expenditures were up 26.8% to 378.1 billion
yen. Major components of the capital expenditures were approximately 70.0
billion yen in the semiconductor field, which was the largest amount, and
investments in such fields as displays and recording media. Induring the fiscal year endingended
March 31, 1999 while Sony plansincreased by 50.9 billion yen, or 8.3%, to maintain a high level of investment
in these business areas, total capital expenditures are expected to decrease.
Refer to the Major Agreements section for information on other investments and
loans.
During the year, net cash used in financing activities decreased
significantly to 17.8663.3 billion yen from
the previous fiscal year. This increase was principally due to a smalldecrease in
inventories in the Electronics business and a decrease in notes and accounts
receivable. This increase in net repaymentcash provided by operating activities was
partially offset by a decrease in notes and accounts payable and a decrease in
net income, which also included a 58.7 billion yen (pre-tax) non-cash item
representing the aforementioned gain on securities contribution to employee
retirement benefit trust. Depreciation and amortization increased
33
34
by 5.5 billion yen, or 1.8%, to 307.2 billion yen. This comprises depreciation
of short-term borrowings, reflectingfixed assets of 267.5 billion yen, amortization of intangible assets of 19.0
billion yen, and amortization of deferred insurance acquisition costs of 20.7
billion yen.
Net cash used in investing activities during the substantial
demandfiscal year ended March
31, 1999 decreased by 231.4 billion yen, or 38.7%, to 367.3 billion yen. This
decrease was principally attributable to a decrease in marketable securities of
Sony Corporation and time deposits, along with proceeds from the merger of Loews
Theatres with Cineplex Odeon Corporation.
Payments for fundspurchases of fixed assets during the year mentioned above, compared to a significant net
repayment of short-term borrowings in the previous fiscal year. In addition,
proceeds from issuance of
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32
debt, mainly of the Notes, increased from the previous fiscal year, while net
repayment of long-term debt also increased because of redemption, mainly of MTN
in the U.S.
Major Agreements
This section details major agreements having an effect on liquidity or
earnings during the year and expected in the fiscal years ending March 31, 1999
and thereafter.
In June 1997, the Company made an equity investment of approximately 5.0decreased by 9.7
billion yen, in Japan Sky Broadcasting Co.or 2.6%, Ltd. (JSkyB), a digital
communications satellite broadcaster. In May 1998, JSkyB and PerfecTV
Corporation completed their merger. As a result of this merger, the Company owns
11.375% of shares of the combined company, Japan Digital Broadcasting Services
Inc. Sony also invested a total of approximately 4.2to 368.4 billion yen. Capital expenditures (additions to
fixed assets) decreased 34.2 billion yen, in broadcast
programming companies relatingor 8.8%, to the digital communications satellite
broadcasting business during the year. In the fiscal year ending March 31, 1999,
Sony plans to make additional investments of approximately 3.9 billion yen in
other broadcast programming companies. These communications satellite related
businesses are currently in start-up phases. Sony is committed to such new
business areas, and is required to make additional investments in accordance
with its share of equity.
In October 1997, the Company and Toyoda Automatic Loom Works, Ltd.
jointly established S.T. Liquid Crystal Display Corp. for the purpose of
manufacturing next-generation LCD panels. During the year, Sony made an
investment in this firm of 4.0353.7 billion yen. In the
fiscal year ending March 31,
1999, Sony expects to make additional investments in this firmElectronics business, capital expenditures aggregated 252.4 billion yen,
principally in the amountareas of 11.0 billion yen.
In January 1998, Sony announced a plansemiconductors, displays, and recording media.
Capital expenditures for the Music business amounted to form a strategic alliance with
NextLevel Systems Inc. of the U.S. (now called General Instrument Corp.), to
jointly develop digital TV technologies, subject to definitive agreements. When
definitive agreements are reached, Sony plans to purchase 7.5 million shares of
General Instrument Corp. at a price of 25 U.S. dollars per share, resulting in a
total investment of approximately 187.5 million U.S. dollars.
In May 1998, Loews Theatres Exhibition Group ("Loews Theatres"), a unit
of SPE, and Cineplex Odeon Corporation, a Canadian theatre chain, combined and
created Loews Cineplex Entertainment Corporation. In conjunction with the
combination, Sony received approximately 53.645.2 billion yen,
principally for offices and plants in cash from the
repayment of all of the intercompany debt of Loews Theatres, which was
refinanced with third party debt, and receipt of a dividend. Sony plans to use
these funds to reduce its U.S. debt and meet internal funding requirements. As a
result of the combination, SPE and certain of its subsidiaries owned 51.1%
(representing 49.9% of the voting shares) of Loews Cineplex Entertainment
Corporation. After giving effect to the public offering of shares of common
stock of Loews Cineplex Entertainment Corporation in August 1998, SPE and
certain of its subsidiaries currently own 38.5% of Loews Cineplex Entertainment
Corporation. The new company has been deconsolidated and Sony accounts for it on
the equity basisJapan. Capital expenditures for the fiscal
year ending March 31, 1999. The revenues2000 are expected to amount to approximately 430 billion
yen. These expenditures include approximately 100 billion yen in connection with
the next generation game console and operating incomean aggregate of Loews Theatresapproximately 240 billion
yen in the Electronics business.
Increase in payments for investments and advances and increase in
proceeds from sales of investment securities and collection of advances are
principally attributable to an active rebalancing of the portfolio in the
Insurance business due to volatile bond market conditions in Japan during the
year. Payments for investments and advances include the aforementioned
investments in GI, Telemundo, and ST-LCD in the aggregated amount of 53.5
billion yen.
Net cash used in financing activities during the fiscal year ended March
31, 1999 increased by 94.5 billion yen, or 532%, to 112.2 billion yen at March
31,1999. The increase was principally attributable to the increase in redemption
of short-term debt and the decrease in long-term debt.
RESULTS OF OPERATIONS
(The fiscal year ended March 31, 1999 compared to the fiscal year ended March
31, 1998)
The general economic and operating environment further worsened toward
the end of the fiscal year ended March 31, 1999, reflecting factors which
included economic weakness in Asia excluding Japan ("Asia"), Russia and Eastern
Europe, and Latin America, as well as a rapid appreciation in the value of the
yen in the second half of the year. Under these circumstances, Sony's
consolidated sales and operating revenue ("sales") increased by only 0.6%, and
operating income decreased by 34.9%. The low growth rate of sales was primarily
attributable to declines in sales in the Electronics and Pictures businesses. On
the other hand, sales in the Game, Music, Insurance, and Other businesses
increased. The large decrease in operating income was primarily attributable to
a substantial decline in profitability in the Electronics business. Operating
income in the Electronics business declined sharply due to increases in cost of
sales and selling, general and administrative expenses as well as the decrease
in sales. Also, operating income in the Music and Insurance businesses
decreased, while the Other business has posted operating losses for the second
consecutive year. However, the Game business maintained positive momentum
principally outside Japan. In the Pictures business, operating income also
increased.
Impact of Foreign Exchange Fluctuations and Basic Countermeasures
During the year, sales outside Japan accounted for approximately 72% of
Sony's consolidated sales. Although the value of the yen against foreign
currencies began rising sharply in October 1998,
34
35
the average value of the yen depreciated 4.1%, 4.8%, and 5.8% against the U.S.
dollar, British pound, and German marks, respectively, during the year (i.e.,
127.0 yen, 207.7 yen, and 72.8 yen against the U.S. dollar, British pound, and
German marks, respectively). This decline in the average value of the yen
positively impacted the reported financial results translated into the yen. It
is estimated that sales and operating income would have declined by
approximately 2% and 49%, respectively, compared with the previous fiscal year
if the value of the yen had remained the same as in the previous fiscal year.
(Note that these estimates are obtained by applying the yen's average exchange
rate in the previous fiscal year to foreign currency-denominated sales, cost of
sales, and selling, general and administrative expenses of the fiscal year.
Constant currency basis comparisons discussed in the Results by Business Segment
below are also calculated in the same way as above.) However, the high
volatility of the yen exchange rate made it difficult to manage global
procurement of materials, manufacturing, and sales activities as planned, and
adversely affected Sony's business results, particularly for the second half of
the fiscal year.
Sony employs foreign exchange forward contracts and foreign currency
option contracts to hedge against foreign exchange risks that arise from its
export and import transactions. Furthermore, particularly in the Electronics
business, to minimize the adverse effects of foreign exchange fluctuations on
its financial results and to reduce inventory and cost, Sony seeks, when
appropriate, to localize material and parts procurement, design, and
manufacturing operations outside Japan.
Sales
During the year, sales rose by 39.1 billion yen, or 0.6%, to 6,794.6
billion yen compared with the previous fiscal year.
Cost of Sales and Selling, General and Administrative Expenses (Excluding the
Insurance Business)
During the year, cost of sales rose by 14.8 billion yen, or 0.3%, to
4,633.8 billion yen and the ratio of cost of sales to consolidated sales
increased from 71.5% to 71.8%, primarily due to increases in research and
development, personnel, and depreciation and amortization expenses. These
increases were partially offset by decreases in expenses resulting from lower
production volume. Research and development expenses increased by 57.3 billion
yen, or 18.0%, to 375.3 billion yen, principally for technologies related to the
next generation game console, semiconductors, broadcast-use equipment, and
digital networks, and rose from 4.9% to 5.8% as a percentage of sales.
Selling, general and administrative expenses increased by 155.3 billion
yen, or 11.5%, to 1,500.9 billion yen, and rose from 20.8% to 23.3% as a
percentage of sales. This was primarily due to increases in advertising,
personnel, and service expenses.
Operating Income
Operating income during the year declined by 181.6 billion yen, or 34.9%,
to 338.6 billion yen. Operating margin decreased from 7.7% to 5.0%.
Other Income and Expenses
Other income increased by 68.9 billion yen, or 82.1%, to 152.9 billion
yen, while other expenses decreased by 27.0 billion yen, or 17.9%, to 123.4
billion yen.
35
36
The large increase in other income principally represents a 58.7 billion
yen gain on securities contribution to employee retirement benefit trust. Sony
Corporation contributed marketable equity securities to an outside trust for
employee retirement benefit purposes and realized the gain. In addition, Sony
recorded a 5.2 billion yen gain resulting from the merger of the Theatrical
exhibition group in the Pictures business with Cineplex Odeon Corporation.
Interest and dividends income also increased by 2.3 billion yen, or 11.1%, to
23.3 billion yen, principally because of an increase in the average outstanding
balances of cash and time deposits and marketable securities at subsidiaries
principally outside Japan.
To hedge risks from exchange rate fluctuations, Sony primarily employs
foreign exchange forward contracts and foreign currency option contracts.
Foreign exchange gain, net, decreased by 7.2 billion yen, or 71.3%, to 2.9
billion yen, as subsidiaries principally in Asia recorded foreign exchange
losses while Sony Corporation and certain subsidiaries in Japan recorded foreign
exchange gains.
The decrease in other expenses is principally due to the decrease in
interest expenses. Interest expenses decreased by 14.2 billion yen, or 22.8%, to
48.3 billion yen, due principally to a decline in the average outstanding
balance of debt in the U.S. As a result, the balance of interest and dividends
income, less interest expense, improved by 16.6 billion yen and net interest
expense came to 25.0 billion yen.
Income before Income Taxes
Income before income taxes during the year declined by 85.6 billion yen,
or 18.9%, to 368.1 billion yen.
Income Taxes
Income taxes decreased by 37.9 billion yen, or 17.6%, to 177.0 billion
yen, while the percentage of income taxes to income before income taxes (the
effective tax rate) rose from 47.4% to 48.1%. The recalculation of deferred tax
liabilities to reflect a reduction in the Japanese corporate statutory income
tax rate effective April 1, 1999 caused a tax benefit of 13.4 billion yen, which
had the effect of lowering the effective tax rate by 3.6 percentage points.
However, the effective tax rate increased compared to the previous year due
primarily to losses at certain electronics and music subsidiaries for which
there was no tax benefit.
Deferred tax assets are recognized on operating loss carryforwards for
tax purposes since these losses may reduce future taxable income. However, a
valuation allowance is established against those deferred tax assets that are
not expected to be realized because sufficient taxable income is not expected to
be generated before those loss carryforwards expire. Sony has recognized a
valuation allowance for deferred tax assets principally relating to operating
loss carryforwards of consolidated subsidiaries in the U.S.
Net Income
Net income fell by 43.1 billion yen, or 19.4%, to 179.0 billion yen. As a
percentage of sales, net income decreased from 3.3% to 2.6%, and the return on
stockholders' equity (using the average of such amounts at March 31, 1998 and at
March 31, 1999) decreased from 13.6% to 9.8%. Net income includes 30.7 billion
yen (net of tax) for the aforementioned gain on securities contribution to
employee retirement benefit trust which was recorded in other income.
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Basic net income per share was 436.9 yen compared to 557.7 yen in the
previous fiscal year, and diluted net income per share was 391.0 yen compared to
483.4 yen in the previous fiscal year.
Results by Business Segment
The following discussion is based on segment information. Sales in each
business segment include intersegment transactions. In the Electronics business,
sales and operating revenue by product category represent sales to customers,
which do not include intersegment transactions (Refer to Note 18 of Notes to
Consolidated Financial Statements).
Electronics
During the year, sales in the Electronics business declined by 21.7
billion yen, or 0.5%, to 4,668.4 billion yen. Operating income also declined by
184.7 billion yen, or 58.7%, to 129.9 billion yen (down approximately 3% and
78%, respectively, on a constant currency basis), and operating margin was 2.8%,
down from 6.7%.
The lower sales were primarily attributable to intensified price
competition in many product categories and lower sales due to weak economic
conditions in Asia, Russia and Eastern Europe, and Latin America. By area, sales
increased in Japan and slightly increased in the U.S. and in Western Europe,
while sales sharply declined in Asia, Russia and Eastern Europe, and Latin
America.
The large decline in operating income was principally attributable to
sluggish sales and increases in cost of sales and selling, general and
administrative expenses. In cost of sales, research and development expenses,
principally for technologies related to semiconductors, broadcast-use equipment,
and digital networks, personnel expenses, and depreciation of production
equipment of semiconductors increased. In selling, general and administrative
expenses, personnel, advertising, and service expenses increased. These cost
increases had a substantial negative impact on profitability in the Electronics
business. In addition, aggressive reductions in production in the second half of
the year for the purpose of inventory reductions further deteriorated gross
profit margins. By product category, a large profit in home-use camcorders was
offset by significant losses in cellular phones, computer displays, and
semiconductors.
Aiming at reducing inventories and costs, Sony reorganized facilities in
North America (Mexico) and in Eastern Europe (Slovakia and Hungary) and
integrated certain facilities in Asia (Malaysia and Indonesia) during the year.
Performance by Product Category
In the "Audio" category, sales decreased by 55.2 billion yen, or 4.9%
(down approximately 7% on a constant currency basis), to 1,072.6 billion
yen. Lower sales principally reflected a steep decline in sales of home
stereos and radio-cassette tape recorders in Asia, Russia and Eastern
Europe, and Latin America. Sales of compact cassette headphone stereos
decreased worldwide, particularly in Asia. Also, intensified price
competition in the U.S. and Western Europe hurt sales. However, sales of MD
headphone stereos increased primarily in Japan and Western Europe.
In the "Video" category, sales increased by 98.3 billion yen, or
11.3% (up approximately 8% on a constant currency basis), to 969.1 billion
yen. Home-use camcorders, digital still cameras, and DVD-Video players in
the U.S. and in Western Europe were responsible for much
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of this growth. Strong sales of home-use camcorders particularly contributed
to profitability. During the year, digital models attained approximately 60%
(compared to approximately 56% in the previous year) of Sony's unit sales of
camcorders in Japan and this ratio is also growing on a worldwide basis. In
home-use VHS video decks, sales were weak principally in the U.S., Russia
and Eastern Europe, and Latin America. In broadcast- and professional-use
video equipment, sales increased only slightly, primarily due to the
diversification of competitors in line with digitization and intensified
price competition. Reflecting increased demands of broadcasters for digital
equipment, sales of digital systems, including video servers equipped with
hard disk drives and news editing terminals, increased principally in the
U.S. and Western Europe. However, a significant sales decline in analog
video systems and an increase in research and development expenses due to
the aforementioned digitization reduced profitability in this product area.
In the "Televisions" category, sales decreased by 6.4 billion yen, or
0.9% (down approximately 3% on a constant currency basis), to 702.6 billion
yen. Sales of color TVs declined substantially in Asia, Russia and Eastern
Europe, and Latin America. However, the Wega series of color TVs, which
incorporates flat surface CRTs, performed extremely well in Japan and the
U.S. partially due to an expansion of its lineups during the year, and also
contributed to earnings. Sales of large-screen rear projection TVs also
increased in the U.S. and Western Europe. The Wega series reached
approximately 45% (compared to approximately 20% in the previous year) of
Sony's unit sales of color TVs in Japan. This ratio is expected to grow
worldwide as Sony has established production capabilities for high
value-added flat surface CRTs in Japan, the U.S., Western Europe, and Asia.
In the "Information and communications" category, sales increased by
19.3 billion yen, or 2.2% (down approximately 1% on a constant currency
basis), to 914.1 billion yen. The slow growth was primarily attributable to
a decline in sales of computer displays and cellular phones. In the computer
display business, sales and operating income substantially decreased,
principally in the U.S., due to severe industry-wide price competition
resulting from pricing pressures from manufacturers in Asia, an oversupply
of product, and weak demand. In the cellular phones business, sales and
operating income decreased in Europe and Japan principally due to
intensified price competition and a delay in new product introductions.
Sales and operating income in the U.S. were negatively impacted by the sales
decline and an increase in service expenses, resulting primarily from
quality issues of certain types of cellular phones including the impact of
correcting power emission levels. The combined impact of the computer
display and cellular phone businesses adversely affected the overall results
of the Electronics business. In the PC business, sales in the U.S. decreased
because notebook PC OEM sales, which recorded strong sales in the previous
fiscal year, ceased and because of intensified price competition in desktop
PCs. However, overall PC sales increased primarily due to much higher sales
of both notebook and desktop VAIO PCs in Japan. In terms of earnings, the
positive contribution from notebook PCs in the second half of the year was
overshadowed by the overall negative impact of desktop PCs. In computer
peripherals, CD-RW drives, which permit repeated recordings of massive data,
recorded strong sales growth in the U.S. and Western Europe, while sales of
CD-ROM drives declined.
Sony is promoting the development of next generation flat displays.
Sony is co-developing large flat-panel displays using plasma-addressed
liquid crystal (PALC) technologies based on an agreement entered into in
July 1997 with Philips Electronics N.V. in the Netherlands and Sharp
Corporation. In October 1998, Sony entered into an agreement with Candescent
Technologies Inc.
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in the U.S. to jointly develop high-voltage Field Emission Displays (FED)
for next generation flat-panel computer displays. In addition, Sony made a
further capital infusion during the year in ST-LCD. ST-LCD was jointly
established between Sony and Toyoda Automatic Loom Works, Ltd. in order to
manufacture the next generation of LCD panels, and started manufacturing
such LCD panels in April 1999.
In the "Electronic components and other" category, sales decreased by
78.4 billion yen, or 10.1% (down approximately 15% on a constant currency
basis), to 696.5 billion yen. The significant decline in sales is
principally due to weak sales of semiconductors and electronic components
including CRTs for computer displays. Semiconductor sales declined,
principally in Asia, due to a decision to shrink the memory business, which
had low profit margins, and to weak sales of signal processing LSI devices
for video CD players and other applications. Financial performance worsened
because the reduced sales heightened the impact of depreciation of
production equipment. Sales and operating income of CRTs for computer
displays also deteriorated, principally in Europe, due to increased price
competition and weak demand. Sales of lithium-ion batteries rose due to
growing demand for notebook PCs, while profitability deteriorated due to
such factors as downward pressure on market prices.
As a strategy for next generation semiconductors, Sony started
cooperative work with Fujitsu Limited in developing and manufacturing 0.18
micron meter generation system LSI under an agreement made in June 1998.
Game
The Game business continued to achieve overall favorable results both in
PlayStation game consoles and software. Sales increased by 61.3 billion yen, or
8.5% (up approximately 7% on a constant currency basis), to 783.8 billion yen.
In Japan, despite strong sales of software, total sales declined by 52.7
billion yen, or 16.5%, from the previous fiscal year due to slowing sales of
game consoles as a result of such factors as the high penetration ratio of game
consoles among Japanese households. On the other hand, in the U.S. and Europe,
sales increased by 100.9 billion yen, or 27.7% (up approximately 26% on a
constant currency basis), as aggressive pricing strategies and increases in
software titles resulted in further demand for game consoles and software.
Worldwide production shipments of game consoles were 21.60 million units
for the year compared with 19.37 million units in the previous fiscal year,
resulting in cumulative shipments of 54.42 million units as of March 31, 1999.
With respect to software, worldwide production shipments (including both Sony
and third parties under Sony licenses) were 194 million units for the year
compared with 138 million units in the previous fiscal year, resulting in
cumulative shipments of 430 million units as of March 31, 1999.
Operating income increased by 19.6 billion yen, or 16.7% (up
approximately 11% on a constant currency basis), to 136.5 billion yen. Operating
margin rose from 16.2% to 17.4%. Advertising expenses increased due to
aggressive advertising and promotion aiming for further expansion of sales. In
addition, research and development expenses increased by 10.0 billion yen, or
250%, to 14.0 billion yen, principally for the development of the next
generation of game console. However, despite these cost increases, a substantial
increase in profit was achieved because of sales expansion in the U.S. and
Europe.
For future business development, Sony Computer Entertainment ("SCE") has
substantially completed its co-development with Toshiba Corporation of new
technology, comprising the 128 bit CPU dubbed the "Emotion Engine". In order to
process graphic information at maximum speeds, its
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data bus, cache memory, and all registers are 128 bit and are integrated on a
single chip of LSI. SCE and Toshiba Corporation agreed upon establishment of a
joint venture company to produce the Emotion Engine. Also, SCE has developed a
Graphics Synthesizer incorporating a massive parallel rendering engine. SCE
plans capital expenditures totaling approximately 120 billion yen in the next
two years to permit volume production of these new technologies.
Music
During the year, the Music business excluding Japan achieved record
results in terms of sales, operating income, market share, and chart share,
despite weak performance in the Brazilian market. Despite a flattening in
worldwide growth for the music industry, sales in the Music business increased
by 65.6 billion yen, or 9.4% (up approximately 7% on a constant currency basis),
to 760.3 billion yen.
Sales in Japan were virtually flat compared with the previous fiscal year
despite the delayed release of several major Japanese artists' albums until the
fiscal year ending March 31, 2000. Sales in Brazil were negatively impacted by
declining economic conditions and the currency devaluation.
Operating income decreased by 15.9 billion yen, or 29.5% (down
approximately 30% on a constant currency basis), to 38.1 billion yen. Operating
margins decreased from 7.8% to 5.0%. The significant decline in operating income
was primarily attributable to the Music business in Japan as a result of
increased advertising and promotion costs associated with establishing new
labels and artists in Japan. Current year results outside Japan benefited from
successful releases by global and local artists as well as increased license
fees from a new direct marketing arrangement. These positive results outside
Japan were partially offset by lower results in Brazil and increased costs
associated with advancing Music's online initiatives. Increased production and
improved operating efficiencies in compact disc manufacturing plants, which
supply disks for the Game business and for third parties in addition to the
Music business, also contributed to earnings.
Pictures
In the Pictures business, sales decreased by 103.0 billion yen, or 16.0%
(down approximately 19% on a constant currency basis), to 540.2 billion yen,
while operating income increased by 1.8 billion yen, or 5.1% (virtually flat
compared to the previous year on a constant currency basis), to 37.4 billion
yen. Operating margin rose from 5.5% to 6.9%.
The decline in sales is primarily due to the deconsolidation of the
Theatrical exhibition group, the inclusion of thirteen months of activity in the
previous fiscal year due to a change in the Pictures business fiscal year and
less successful theatrical releases by comparison with the previous year's
strong Motion Picture group results. The reduction in highly successful
theatrical releases also resulted in a reduction in home video sales as fewer
current year pictures were released as sell-through titles compared to the
previous year. These results were partially offset by increased sales from the
Television group.
During the first quarter of this fiscal year, Sony merged its Theatrical
exhibition group, Loews Theatres, with Cineplex Odeon Corporation in Canada to
create one of the world's largest theatrical exhibition companies, Loews
Cineplex Entertainment Corporation ("Loews"). Subsequent to the merger, Loews
completed a public offering of its common stock. After these transactions,
Sony's ownership in Loews is 39.5%. As a result of these transactions, Sony no
longer consolidates the results of Loews; Loews results are now reported on the
equity basis. The previous year's results include sales and operating income of
56.3 billion yen and 2.5 billion yen, respectively.respectively, for the Theatrical
exhibition group. After adjusting the previous year for the deconsolidation of
the
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Theatrical exhibition group, sales decreased by 46.7 billion yen, or
approximately 8%, and operating income increased by 4.3 billion yen, or
approximately 13%. In addition,connection with the Loews merger and the subsequent public
offering, Sony received proceeds of 53.0 billion yen and recorded a gain of approximately 4.85.2
billion yen, which is recorded in other income.
For comparative purposes, if the impact of the Theatrical exhibition
group's revenue and the thirteenth month of activity are removed from the
reported figures, sales for the Pictures business were essentially flat compared
to the previous year.
Despite the decline in sales, operating income benefited from steady
profit contributions from the Television group, higher profits on home video
acquisitions and a reduction in losses in the Digital Studio group's special
effects studio operations, partially offset by lower profits from the Motion
Picture group and losses on strategic investments in the Television group. The
positive results from the Television group reflected significant profit
contributions from off-network syndication, game shows and soap operas. These
favorable results for the Television group were partially offset by losses on
strategic investments, including Telemundo, a U.S. based Spanish language
television network and stations group, and certain international cable channel
investments. During the year, Sony invested 15.1 billion yen in Telemundo,
resulting in a 50% interest in the Telemundo Network group and a 24.9% interest
in the Telemundo Stations group. Profit for the Motion Picture group decreased
as a result of fewer break-through hits in the release slate. Profit margins
were hurt by the release of certain films, which generated significant revenues
but had a negative effect on operating income.
Insurance
In the Insurance business, despite the sluggish insurance market in
Japan, revenue increased by 48.3 billion yen, or 16.6%, to 339.4 billion yen.
Operating income, however, decreased by 2.3 billion yen, or 11.2%, to 18.0
billion yen. Operating margin decreased from 7.0% to 5.3%.
The revenue increase was due to significant net increases in individual
and group insurance-in-force of Sony Life Insurance Co., Ltd. ("Sony Life") in
Japan resulting from strong sales of traditional insurance products such as
term-life insurance and whole-life insurance as well as medical insurance.
The decrease in operating income was principally the result of lower
returns on fixed income investments in Japan, where extremely low interest rates
have prevailed, while Sony Life conservatively managed its investment assets
principally through government and corporate bonds.
For future business development, Sony Insurance Planning Inc. was
established in October 1998 in order to start direct sales of individual
automobile insurance in Japan. Sony Insurance Planning Inc. is currently
applying for a license and setting up operational infrastructure to start its
business in the fall of 1999.
Condensed Insurance Business Balance Sheet
The Insurance business is included on a consolidated basis in Sony's
consolidated financial statements. The following schedule shows unaudited
condensed balance sheets for the Insurance business and for Sony with the
Insurance business' financial position reflected on the combinationequity basis.
(Although inter-business balances between Insurance business and businesses
other than Insurance business are not eliminated in the first quarterrespective balance
sheets, such amounts are not material.) While this presentation differs from
that provided under U.S. GAAP used in Sony's consolidated financial
statements, because the Insurance business is different in nature from
Sony's Electronics, Game, Music, and Pictures businesses, management
believes that this type of
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comparative presentation helps the understanding and analysis of Sony's
consolidated balance sheet.
Sony with
Insurance business Insurance business
on the equity basis
----------------------------- ----------------------------
Yen in million Yen in million
----------------------------- ----------------------------
March 31 March 31
----------------------------- ----------------------------
1998 1999 1998 1999
-------------- -------------- -------------- ------------
ASSETS
Cash and time deposits 76,135 114,695 454,290 501,819
Marketable securities 51,942 62,112 117,267 55,745
Other current assets 9,400 10,000 2,558,561 2,326,837
Investments and advances 573,858 720,020 276,604 260,716
Investments in insurance business -- -- 115,032 133,546
Deferred insurance acquisition costs 163,120 199,868 -- --
Other long-term assets 24,561 22,310 2,098,535 2,027,909
--------- --------- --------- ---------
899,016 1,129,005 5,620,289 5,306,572
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future insurance policy benefits and other 713,970 913,937 -- --
Other liabilities and minority interest 69,766 81,226 3,804,734 3,482,907
--------- --------- --------- ---------
Total liabilities and minority interest 783,736 995,163 3,804,734 3,482,907
Stockholders' equity 115,280 133,842 1,815,555 1,823,665
--------- --------- --------- ---------
899,016 1,129,005 5,620,289 5,306,572
========= ========= ========= =========
Other
The Other business consists of various operating activities, primarily
including leasing and credit card businesses, a business focused on parts
trading services within the Sony group, satellite distribution services
including program supplying businesses in Japan, internet-related businesses in
the U.S., and development of location-based entertainment complexes. Sales in
Other business grew by 39.1 billion yen, or 15.8%, to 287.3 billion yen but
Other businesses continued to post an operating loss.
The sales increase was due principally to the new consolidation of
certain subsidiaries, and a sales increase in a financial subsidiary in Japan
whose major business is leasing and credit cards. Approximately 70 percent of
sales in Other business reflected intersegment transactions in the fiscal year
ended March 31, 1999.
Operating losses were incurred in the start-up of long-term strategic
businesses, including satellite distribution services in Japan, internet-related
businesses in the U.S., and location-based entertainment complex businesses.
Development of location-based entertainment complexes is in progress in
San Francisco, Berlin, and Tokyo. In San Francisco, an entertainment complex
including stores and theatres will open in June 30, 1998.
A1999. The budget for this
project was approximately 13.8 billion yen. In Berlin, Germany, a building
complex to house Sony's European headquarters, rental office space, stores,
residences, a movie and broadcasting museum with educational facilities, and
entertainment space
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is currently under construction in Berlin,
Germany.construction. The structure is located in Potsdam Platz on a site that Sony purchased
from the City of Berlin. The developer of the building complexPotsdamer Platz.
This project is being carried out by a partnership controlled and operated by
Sony, Tishman Speyer Properties, Inc. ofin the U.S., and Kajima Corporation ofin
Japan. Completion is scheduled for 2000. The budget for this project is
approximately 1.5 billion German marks. Of this amount,marks, of which approximately 1.0 billion
German marks will be procuredhas been arranged by the partnership in the form of non-recourse
project financing. In addition, Sony is constructing an entertainment complex
which includes storescontributed the land and theatres
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on a site19.8 billion yen in San Francisco, U.S.A. Completion is scheduled for 1999. The budget
for this project is approximately 85 million U.S. dollars.cash in the
form of preferred equity in the partnership. Sony also plans to construct a
similar entertainment complex in Tokyo, Japan, with completion scheduled forin the
spring of 2000. Currently, the estimatedFor this project, Sony will lease commercial space from Battery
Town 21 Co., Ltd. The budget for this project is approximately 12.013.0 billion yen.
STRATEGIES AND OUTLOOK
THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS ABOUT THE FUTURE
PERFORMANCE OF SONY AND SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENT ON
THAT SUBJECT, WHICH APPEARS ON PAGE 2 AND APPLIES TO THIS ENTIRE DOCUMENT.
Sony's management is endeavoring to develop the most appropriate plans
for its businesses, considering the current general economic and operating
environment and available information. The following is a summary of certain of
Sony's current basic strategies and outlook for its fiscal year ending March 31,
2000.
It is expected that difficult business and economic circumstances will
continue, including economic difficulties in Russia and Eastern Europe and in
Latin America, further appreciation in the value of the yen, and increasing
price competition. In June 1998,these circumstances, Sony entered into an agreement with Fujitsu Limitedseeks to jointly develop and manufacture next-generation semiconductor devices.
Manufacturing is scheduledhold the decrease in
its sales to begin duringa minimum for the fiscal year ending March 31, 2000 compared with
that for the fiscal year ended March 31, 1999. However, earnings are expected to
decline substantially.
Digitization is accelerating in the business of audiovisual equipment,
where Sony has maintained its 'core competence'. Accordingly, competition is
intensifying because, in addition to current competitors, many others with new
technologies are participating in the market. In order to achieve growth in
these circumstances, Sony believes the key factors are to maintain its brand
value in the market and to accelerate the pace of changes within Sony. In terms
of maintaining brand value, Sony intends to enhance research and development
activities and streamline manufacturing systems, with the goal of enhancing the
value of products and expanding market share. In terms of acceleration of
changes, Sony's management has reorganized its group structure so as to enhance
prompt decision-making. At the same time, while delegating increased authority
to its newly formed business units, Sony is strengthening its governance
necessary for its group management.
On March 9, 1999, Sony Corporation announced changes in its group
structure to prepare Sony for a network-centric era. Effective April 1, 1999,
the existing Electronics business was consolidated into three main business
units. Separately, Sony Computer Entertainment ("SCE"), which is responsible for
the Game business, was designated as another main business unit related to the
Electronics business.
As a part of this reorganization, Sony Corporation also intends, subject
to stockholders' approvals, to take 100% ownership of three listed subsidiaries,
Sony Music Entertainment (Japan) Inc. ("SMEJ"), Sony Chemicals Corporation
("SCC"), and Sony Precision Technology Inc. ("SPT"), with a target date of
January 1, 2000. It is contemplated that each one share of SMEJ, SCC, and SPT
owned by minority shareholders will be exchanged for 0.835, 0.565, and 0.203
share of Sony
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Corporation, respectively. (Any of the aforementioned exchange ratios may be
amended upon mutual deliberation between Sony Corporation and the relevant
subsidiary if any material change occurs in respect of conditions based upon
which the relevant ratio is determined.) As a result, approximately 33 million
shares of Sony Corporation would be issued and the total capital (common stock
and additional paid-in capital) would increase by approximately 348 billion yen.
The excess of the amount over the book value of the subsidiaries' net equity
will be recorded as tangible and intangible fixed assets (including goodwill)
and amortized as an expense over the useful lives of these assets.
In the Electronics business, given the economic and business difficulties
described above, and although Sony will endeavor to minimize any sales decline,
profitability is expected to decline substantially for the fiscal year ending
March 31, 2000. This outlook principally reflects deterioration of gross profit
margins in line with reductions in production, particularly in the first half of
the fiscal year ending March 31, 2000, intensifying price competition, and
necessary investments relating to digitization, networking, and expansion of
Sony's alliance strategy for necessary new technology. During this process of
digitization, Sony intends to maintain high research and development expenses.
Sony understands the life cycle of audiovisual products is becoming shorter in
line with rapid technology changes; for this reason, Sony considers it important
to accelerate the speed of its own changes in this transitional period of
technology. To this end, Sony intends to increase research and development
expenses and seek strategic alliances when necessary. Furthermore, Sony intends
to accelerate the streamlining of its manufacturing facilities and supply chain
management.
In the Game business, Sony seeks to promote integration with the
Electronics business. Sony has achieved a leading position in the game market.
However, because the market for existing game consoles is becoming saturated,
Sony is aiming at further business development by introducing the next
generation game console. An introduction of the next generation game console
with an improved graphic rendering feature is targeted in Japan prior to the end
of the fiscal year ending March 31, 2000. The corresponding depreciation in
connection with capital expenditures for the Emotion Engine and the Graphics
Synthesizer for the new game console will begin to be recorded prior to their
introduction. This depreciation is expected to have a slight negative impact on
Sony's profitability for the fiscal year ending March 31, 2000.
In the Music business, competition is expected to intensify as music
industry sales are estimatedexpected to slow down from the levels of recent years. This
industry slowdown reflects the impact of such factors as the saturation of the
CD market, sluggishness in certain geographic markets, especially in Brazil, an
increase in worldwide piracy within the industry and changing demographics.
Under such circumstances, overall sales for the Music business are expected to
decrease slightly. Sony intends to meet these challenges by creating new growth
drivers such as the development of new artists and the creation of digital
distribution channels through the internet. A turnaround for the Music business
in Japan due to cost reductions, principally lower advertising expenses, is
expected to improve earnings. This earnings improvement, however, is expected to
be offset partially by increased costs for the overall Music business associated
with further advancing online and other new technology initiatives.
In the Pictures business, the Motion Picture group expects to deliver a
well-balanced film portfolio on a consistent, long-term basis and to expand
local language film production in Europe and Asia. However, the comparatively
lower theatrical results from the previous year release slate
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are expected to reduce sales from the home video and pay television markets
resulting in lower total approximately 28.0 billion
yen.
On August 12, 1998, SPE, together with certain partners, completedsales for the acquisition of Telemundo Group, Inc. (Telemundo), one of two Spanish-language
television broadcast companies currently operatedMotion Picture group in the United States. Throughfiscal year
ending March 31, 2000. This decline in sales is expected to be partially offset
by sales growth in the Television group. Due to a serieslarge slate of transactions, SPE now owns 50%film production
for the fiscal years ending March 31, 2000 and 2001, the Pictures business is
expected to have significant financing requirements. These financing
requirements are expected to be met through funding within the Sony group.
In October 1998, the Accounting Standards Executive Committee ("AcSEC")
of the American Institute of Certified Public Accountants issued an exposure
draft of a newly formed company holding
Telemundo's networkproposed Statement of Position, "Accounting by Producers and
Distributors of Films" ("Exposure Draft") which, if adopted as issued, would
significantly change the current accounting for the motion picture and
television business. The Exposure Draft proposes, among many changes, that
theatrical advertising expense be amortized over a significantly shorter period,
that advertising expenses for other markets be expensed as incurred and that
revenue from television syndication contracts be recognized over the contract
period rather than upon initial availability of the product to the licensee. The
transition from Sony's current accounting practices to those required by the
Exposure Draft would result in a cumulative charge to Sony's results of
operations in the period of adoption, although there would be no cash flow
impact. Comments on the Exposure Draft are being reviewed by AcSEC and 24.95%the
Financial Accounting Standards Board. Depending on the nature, scope, and merits
of an entity holding Telemundo's
station operations,the comment letters, the Exposure Draft may be modified in part or in its
entirety. Accordingly, the impact to Sony is not currently known, as it may vary
significantly depending on the final Statement of Position as well as the exact
date it becomes effective. For illustrative purposes, if the Exposure Draft were
implemented as issued without change, as of March 31, 1999, the cumulative
non-cash charge would be approximately 950 million U.S. dollars. The date of
issuance of the final Statement of Position has not yet been determined;
however, as currently drafted, the earliest required implementation date for
Sony would be April 1, 2000.
In the Insurance business, the life insurance business in Japan faces
increasing competition due to deregulation and a continuation of the difficult
environment for managing assets. However, Sony believes that its life insurance
business in Japan has been well-positioned in the market through a strong sales
force represented by approximately 4,200 Lifeplanners. Sony expects to incur
start-up expenses for its planned automobile insurance business in Japan, which
is scheduled to commence in October 1999.
In the Other business, operating losses are expected to continue due to
start-up expenses at such long-term strategic businesses as satellite
distribution services including seven full-power UHF stations. SPE's initial
capital investment totaled approximately 15.1 billion yen.program supplying businesses in Japan, and
location-based entertainment complexes in San Francisco, Berlin, and Tokyo.
RESULTS OF OPERATIONS
(The fiscal year ended March 31, 1998 compared to the fiscal year ended March
31, 1997)
Sales
and Operating Revenue
During the fiscal year ended March 31, 1998, Sony's consolidated sales
and operating revenue (herein referred to as "sales")
increased in all business segments. Along with the yen's depreciation, this
resulted in a 1,092.4 billion yen, or 19.3%, increase in sales compared with the
previous fiscal year to 6,755.5 billion yen and the second consecutive fiscal
year of record sales and earnings.
45
46
Impact of Foreign Exchange TrendsFluctuations and Basic Countermeasures
During the year, overseas (outside Japan) sales accounted for
approximately 73% of Sony's consolidated sales. During the year, the yen
depreciated approximately 8% against the U.S. dollar and 11% against the British
pound, but appreciated approximately 5% against the German mark, each in terms
of average rates, compared with the previous fiscal year. It is estimated that
sales and operating income would have been lower by approximately 291 billion
yen and 110 billion yen, respectively, than the reported figures if the average
value of the yen had remained the same as in the previous fiscal year. Note that
these estimates are obtained by simply applying the yen's average exchange rate
in the prior fiscal year to foreign currency denominated sales, cost of sales,
and selling, general and administrative expenses of the year under review.
Therefore, the estimate does not take into account the effect of foreign
exchange fluctuations on prices of products and production and sales costs in
each region of the world. Constant currency growth rates discussed in the
Results by Business Segment are also calculated as above.
To minimize the adverse effects of foreign exchange fluctuations on its
financial results and to reduce inventory and cost, Sony promotes the
localization of material and parts procurement, design, and manufacturing
operations outside Japan. During the year, Sony expanded manufacturing
operations mainlyprincipally in North America and Eastern Europe. Overseas activities
represented approximately 50% of total manufacturing output in Sony's
Electronics business. Sony employs foreign exchange forward contracts and
foreign currency option contracts to hedge against foreign exchange risks that
arise from the export and import transactions of the Company and its
consolidated subsidiaries.Sony. In addition, interest
rate and currency swap agreements are used in connection with certain foreign
currency denominated borrowings and debt.
33
34
Impact of the Asian Currency Turmoil and Weak Local Markets
During the year, Asia accounted for approximately 13% of sales in Sony's
Electronics business, while comprising approximately 25% of manufacturing. About
63% of this manufacturing output in Asia was exported for sale outside the
region.
Currency and economic turmoil occurred in Asia during the second half of
1997. The overall impact of this situation was positive for Sony's earnings
during the year, mainlyprincipally due to a decline in costs in Asia, a major
manufacturing base for Sony. However the decline in Asian currencies is expected
to lead to aggressive price-cutting from competing companies with Asian
production bases, making it difficult for Sony to continue to benefit from the
cost reductions brought about by weakened Asian currencies.
Sony's Electronics sales in Asia including China, Australia and New
Zealand in the fiscal year ended March 31, 1998 increased by 2% from the prior
year. During the year, sales results in Asian countries were mixed. Sony's sales
in Thailand were negatively impacted by the currency and economic turmoil.
Sony's sales in Hong Kong declined due to poor economic conditions. However,
Sony's sales in Indonesia and Malaysia increased, compared with the previous
year.
Impact of Sluggish Market Conditions in Brazil
Sales in Brazil experienced a significant decline mainlyprincipally due to
lower sales of color TVs and audio equipment because of a worsening economic
environment and bankruptcies of dealers.
46
47
Cost of Sales and Selling, General and Administrative Expenses (Excluding the
Insurance Business)
During the year, cost of sales rose by 688.9 billion yen, or 17.5%, to
4,619.0 billion yen, mainlyprincipally due to higher sales. However, the ratio of cost
of sales to consolidated sales improved 0.8 percentage point, to 71.5%. This
improvement was attributable to the sales growth, continuous cost reduction
efforts, the yen's depreciation against the U.S. dollar, and a reduction in
manufacturing costs due to falling Asian currencies in the second half of the
fiscal year; thisyear. This ratio was, however, adversely affected by reductions in sales
prices due to intense competition worldwide. Research and development expenses
charged to cost of sales increased by 35.5 billion yen, or 12.6%, to 318.0
billion yen, mainlyprincipally due to increases in the semiconductor business,
information and communication business, and Game business, but declined by 0.3
percentage point as a percentage of sales, to 4.9%.
Research and development expenses for
the fiscal year ending March 31, 1999 are expected to exceed those of the year
under review, mainly due to higher expenses in business areas such as
broadcast-use equipment and digital network related equipment as well as the
semiconductor business.
Selling, general and administrative expenses rose by 191.7 billion yen,
or 16.6%, to 1,345.6 billion yen, mainlyprincipally due to sales growth as well as
increases in personnel expenses and advertising costs in the Game business, but
improved 0.4 percentage point as a percentage of sales, to 20.8%.
Figures in the above two paragraphs do not include the Insurance segment
revenue and expenses.
34
35
Operating Income
Operating income during the year grew by 149.9 billion yen, or 40.5%, to
520.2 billion yen. Despite an increased operating loss in the Other segment,
higher operating income in the Electronics, Music, Pictures, and Insurance
segments, and particularly strong results in the Game segment, contributed to
overall growth. Sales and operating income in the Game segment reached
approximately 10% and 22%, respectively, of Sony's consolidated sales and
operating income before elimination of intersegment transactions. As a
percentage of sales, operating income improved by 1.2 percentage points, to
7.7%.
Other Income and Expenses
Other income decreased by 8.7 billion yen, or 9.4%, to 84.0 billion yen,
while other expenses remained at 150.4 billion yen about the same as that in the
previous fiscal year. The decline in other income is primarily due to a decrease
in the foreign exchange gain, net, compared with the previous fiscal year.
Foreign exchange gains and losses mainlyprincipally arise from the difference between
the value of foreign currency denominated exports and imports when converted
into various currencies using prevailing exchange rates and the value at
settlement of these exports and imports. The rates used for settlement are
primarily based on foreign exchange forward contracts and foreign currency
option contracts that Sony employs to hedge risks from exchange rate
fluctuations. Among other income and expenses, interest and dividends increased,
mainlyprincipally because of an increase in cash and time deposits and higher
investment returns at overseas subsidiaries. Interest expense decreased,
mainlyprincipally due to lower outstanding debt at overseas subsidiaries. As a result,
the balance of interest and dividend income less interest expense improved by
9.9 billion yen to net interest expense of 41.5 billion yen.
Income Beforebefore Income Taxes
Income before income taxes during the year rose by 141.3 billion yen, or
45.2%, to 453.7 billion yen.
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48
Income Taxes
Income taxes as a percentage of income before income taxes (the effective
tax rate) declined 5.0 percentage points, to 47.4%. The decline in the effective
tax rate is mainlyprincipally attributable to a reduction in the loss incurred by
subsidiaries for which there was no tax benefit. Due to the reduction of the
Japanese statutory income tax rate, effective April 1, 1998, the new statutory
tax rate has been used in calculating the future expected tax effects of
temporary differences. The effect of the enacted change in tax rate, which
resulted in a reduction of income tax expenses, was insignificant (refer to Note
13 of Notes to Consolidated Financial Statements).insignificant.
The valuation allowance mainlyprincipally relates to deferred tax assets of
consolidated subsidiaries in the U.S. with operating loss carryforwards for tax
purposes. Sony believes there is little likelihood that such deferred tax assets
will be realized.
Net Income
Net income increased by 82.6 billion yen, or 59.2%, to 222.1 billion yen.
Basic net income per share was 557.7 yen and diluted net income per share was
483.4 yen. Net income represented 3.3% of sales, up 0.8 percentage point, and
the return on average stockholders' equity increased 3.0 percentage points, to
13.6%.
35
36
Results by Business Segment
The following discussion is based on segment information (referinformation. Sales in each
business segment include intersegment transactions. In the Electronics business,
sales and operating revenue by product category represent sales to customers,
which do not include intersegment transactions (Refer to Note 18 of Notes to
Consolidated Financial Statements).
Electronics
During the year, despite weak markets in Brazil and Asia, including
China, many successful products and the yen's depreciation helped to increase
Electronics sales by 558.5 billion yen, or 13.5% (up approximately 10% on a
constant currency basis), to 4,690.1 billion yen. Operating income increased by
75.2 billion yen, or 31.4%, to 314.5 billion yen, and as a percentage of sales
improved by 0.9 percentage point to 6.7%. Operating income was aided by the
yen's depreciation against the U.S. dollar and the decrease in manufacturing
costs due to the decline in the value of Asian currencies as well as sales
growth and the benefits of cost cutting. However, late in the fiscal year, the
business environment in Electronics became more difficult due to deterioration
in the semiconductor business and slowing sales in Southeast Asia. Sales in
Japan, where Sony had attained steady growth despite sluggish market conditions,
also slowed toward the end of the fiscal year.
Breaking down Electronics sales to customersPerformance by productProduct Category
In the "Audio" category, "Audio"
products sales grew by 97.8 billion yen, or 9.5%, to
1,127.8 billion yen due to sales expansion of MiniDiscMD systems. However lower
growth in sales of car audio products and a decline in sales of Walkman
headphone stereos partially offset growth in this category.
Sales also48
49
In the "Video" category, sales expanded by 54.3 billion yen, or 6.6%,
to 870.9 billion yen in the "Video" category, as demand grew for home-use digital camcorders and the
Digital Mavica still camera.
AlthoughIn the highly successful
Wega series of color TVs in Japan, which incorporate flat-surface cathode ray
tubes, contributed to sales in "Televisions", the category, overall sales increased by only 5.0
billion yen, or 0.7%, to 709.0 billion yen due to sluggishness in Brazil and
Asia, including China. SalesAlthough, highly successful Wega series of color TVs
in Japan, which incorporate flat-surface cathode ray tubes, contributed to
sales.
In the "Information and communications" category, sales increased by
130.3 billion yen, or 17.0%, to 894.8 billion yen boosted by the popularity
of new VAIO notebook PCs in Japan and expansion of digital cellular phone
sales in Japan, the U.S., and Europe. However, a slowing of computer display
sales caused by weakness in PC markets partially offset growth in the
category.
In the "Electronic components and other" category, sales grew by
159.7 billion yen, or 26.0%, to 774.9 billion yen primarily due to higher
sales in electronic components such as optical pickups, more than offsetting
declining demand for memory chips.
Game
The Game business posted extremely strong results due to the popularity
of PlayStation game consoles and software worldwide. Sales increased by 303.3
billion yen, or 72.3% (up approximately 64% on a constant currency basis), to
722.6 billion yen. Operating income more than doubled from the previous fiscal
year, reaching 116.9 billion yen and rose by 2.6 percentage points, to 16.2% of
sales. In addition to strong growth in console sales outside Japan, sales of
software, which has a high profit margin, rose as a percentage of sales in the
Game business along with the growing number of consoles in use. During the year,
worldwide production shipments of PlayStation game consoles increased to 19.37
million units compared with 9.2 million units in the previous fiscal year. As of
March 31, 1998, cumulative production shipments to markets worldwide have
reached 32.82 million consoles and 236 million software units.
Music
Sony's Music business continued to post strong results as revenue
increased by 102.6 billion yen, or 17.3% (up approximately 11% on a constant
currency basis), to 694.7 billion yen. Operating income 36
37
increased by 8.9 billion
yen, or 19.6%, to 54.1 billion yen. As a percentage of sales, operating income
improved by 0.2 percentage point, to 7.8%. The Music group performed strongly
throughout most territories around the world. Global bestsellers, combined with
local artist successes worldwide, contributed to the year's results, more than
offsetting lower results from direct marketing operations in the U.S.
Pictures
Sony's Pictures business recorded strong results. Revenue increased by
204.6 billion yen, or 46.7% (up approximately 35% on a constant currency basis),
to 643.2 billion yen. Sales increased significantly over the prior year,
benefiting from record motion picture box office revenue and strong sell-
throughsell-through
video sales as well as the inclusion of 13 months of activity from March 1, 1997
to March 31, 1998 due to a change in the Pictures group fiscal year. In
television operations, the group benefited from continued strong performance
from its game shows and daytime programs as
49
50
well as network and syndication revenue. Operating income was up by 6.6 billion
yen, or 22.9% to 35.5 billion yen, but declined 1.1 percentage points, to 5.5%
of sales. This was mainlyprincipally due to the start-up losses on new international
television ventures and losses due to the underutilization of its special
effects studio.
Insurance
The expansion of Sony's life insurance business in Japan led to growth in
insurance revenue during the year. Insurance revenue increased by 63.1 billion
yen, or 27.7%, to 291.1 billion yen. Operating income grew by 1.2 billion yen,
or 6.4%, to 20.3 billion yen but declined 1.4 percentage points, to 7.0% of
sales. The lower operating margin was primarily due to an increase in
amortization of deferred insurance acquisition costs and higher expenses such as
benefit payments at Sony Life. Expenses related to the acquisition of new
policies and other expenses that fluctuate in relation to such acquisitions are
accounted for as deferred insurance acquisition costs and amortized over the
premium-paying period of the insurance policies (refer to Notes 2 and 10 of
Notes to Consolidated Financial Statements).policies. The amortization of deferred
insurance acquisition costs increased by 6.0 billion yen, or 37.7%, to 21.8
billion yen.
In July 1997, Sony Life received a capital infusion from the Company,Sony
Corporation, increasing its capital by 28.0 billion yen to 50.0 billion yen.
This action was taken to ensure the ability to further preserve and enhance Sony
Life's soundness and to ensure the ability to adapt to changes in the operating
environment caused by Japan's Big Bang of financial deregulation.
Furthermore,
taking advantage of growing opportunities created by deregulation, Sony is
evaluating the benefits of entering property and casualty insurance business in
Japan. Focusing on automobile insurance, Sony is aiming to enter this business
in the second half of the fiscal year ending March 31, 2000.
Other
The Other segmentbusiness consists of various operating activities, primarily
including customer financing, leasing broadcasting, networking, and other businesses.credit card businesses, a business focused on parts
trading services within the Sony group, satellite distribution services
including program supplying businesses in Japan, internet-related businesses in
the U.S., and development of location-based entertainment complexes. Sales in
the Other segmentbusiness grew by 7.9 billion yen, or 3.3%, to 248.2 billion yen and
the operating loss increased to 10.3 billion yen from the prior year's operating
loss of 1.4 billion yen. This increase in the operating loss was due to higher
costs incurred in the start-up of new businesses including location
basedlocation-based
entertainment complex businesses, satellite distribution services and
internet-related businesses.
37
38
Outlook
The following outlook is based on current business conditions and
management's outlook and on the assumption that the average yen-dollar exchange
rate for the remainder of the fiscal year ending March 31, 1999, will be around
135 yen. It is anticipated that any favorable impact on operating income of a
depreciation of the yen from this assumption against various currencies in terms
of average rates would be very limited, mainly due to severe price competition
in the electronics business. While sales are expected to increase, Sony
estimates that earnings will be lower and recognizes that recent instability in
global financial markets, especially currency and stock markets, caused by Asian
currency turmoil since last year followed by the recent currency devaluation in
Russia, has been increasing uncertainty regarding Sony's sales and earnings
outlook. As for cash flows during the fiscal year ending March 31, 1999, net
cash provided by operating activities is anticipated to decrease, due to lower
earnings and larger increase of accounts receivable than that of accounts
payable resulting from reducing inventory as well as growing sales, while
depreciation and amortization is projected to be higher in the fiscal year
ending March 31, 1999. Cash used in investing activities is expected to decrease
from the previous year mainly through maintaining lower level of capital
expenditures and is to be covered by the net cash provided by operating
activities.
In the Electronics segment, while sales in areas such as Brazil, Russia,
and Asia are forecast to be sluggish due to no foreseeable improvement in the
market conditions in these areas during the period, sales are expected to
increase overall, due to sales growth in Japan, and
Western Europe and the yen's
depreciation. However, intense price competition in broadcast- and
professional-use equipment, computer displays and cellular phones, as well as a
lack of improvement in semiconductor markets, will make it difficultinternet-related businesses in the fiscal year ending March 31,U.S.
EURO
On January 1, 1999, the introduction of the Euro in eleven countries
created a single-currency market (the EMU) in much of Western Europe. For a
transitional period from January 1, 1999 through January 1, 2002, the former
national currencies of the EMU member states will also remain legal tender.
Most of Sony's subsidiaries were fully prepared to maintainhandle Euro
transactions with third parties from January 1, 1999. However, ongoing system
implementation projects delayed full Euro compliance in some countries. The
temporary alternative procedures that have been put in place to address this
situation have not generated and are not expected to generate an increase in
administrative costs in the levelfuture. Very few customers have so far requested
transactions in Euro; therefore, at this time there has been no direct impact on
product pricing in Europe directly attributable to the introduction of earnings generatedthe Euro.
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51
Regarding transactions within Sony, the majority of these have been
switched to the Euro from the former national currencies of the EMU countries
since April 1, 1999. In addition, the reporting of Sony subsidiaries in the EMU
zone and of European consolidated financial statements have been made in Euro
since April 1, 1999. The switch to the Euro has resulted in a reduction in
foreign exchange commissions and hedging costs.
Several revisions to the information systems of Sony subsidiaries in
Europe were carried out in the fiscal year ended March 31, 1998.
In1999, in order to
accommodate the Game segment, despite sales growthdifferent types of Euro transactions and reporting. These
revisions have not generated a material adverse effect on consolidated
operations and financial results.
While additional investments to accounting information systems for the
Euro will be required in the U.S. and Europe as well
assubsidiaries operating in EMU countries, the yen's depreciation, lower sales in Japan and an increase in next
generation PlayStation-related R&D expenses are forecast to cause a slight
profit decline.
Inimpact
is not material.
THE YEAR 2000 ISSUE
Sony's Year 2000 Project
Sony recognizes the Music segment, despite continuing sluggishness in worldwide CD
sales, growth outside Japan is expected to continue. While efforts in Japan are
underway to develop new and established artists, the operating environment in
that market remains challenging.
In the Pictures segment, while earnings from "Godzilla" are less than
expected, contributions from carryover releases, other current year releases,
and the television business lead to a projection of relatively flat profit for
the fiscal year.
The insurance segment is expected to post another year of solid growth
despite challenges posed by rising competition due to deregulation of financial
services in Japan.
In the Other segment, new business areas such as satellite broadcasting
remain in start-up stages and cannot be expected to contribute to profit.
In this business environment, Sony is continuing to work toward improving
its business results by efforts such as strengthening the competitiveness of its
products, carefully selecting investments, imposing more rigorous inventory
control, and raising the efficiency and effectiveness of operations through
enhancement of its supply chain management systems mainly in the Electronics
business.
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39
(The fiscal year ended March 31, 1997 compared to the fiscal year ended March
31, 1996)
Sales and Operating Revenue
During the fiscal year ended March 31, 1997, sales growth across all
businesses except the Other segment as well as the yen's depreciation led to a
1,070.6 billion yen, or 23.3%, increase in sales to 5,663.1 billion yen.
Impact of Foreign Exchange Trends
During the year, overseas (outside Japan) sales accounted for
approximately 72% of Sony's consolidated sales. During the year, the yen
depreciated approximately 15% against the U.S. dollar, 7% against the German
mark, and 16% against the British pound, each in terms of average rates,
compared with the previous fiscal year. It is estimated that sales and operating
income would have been lower by approximately 520 billion yen and 150 billion
yen, respectively, than the reported figures if the average valueimportance of the yen had
remained the same as in the previous fiscal year. Note that these estimates are
obtained by simply applying the yen's average exchange rate in the prior fiscal
year to foreign currency denominated sales, cost of sales, and selling, general
and administrative expenses of the year under review. Therefore, the estimate
does not take into account the effect of foreign exchange fluctuations on prices
of products and production and sales costs in each region of the world. Constant
currency growth rates discussed in the Results by Business Segment are also
calculated as above.
Cost of Sales and Selling, General and Administrative Expenses
During the year, cost of sales rose by 713.3 billion yen, or 22.2%, to
3,930.1 billion yen, mainly due to higher sales. However, the ratio of cost of
sales to consolidated sales improved 1.1 percentage points, to 72.3%. This
improvement was mostly attributable to a significant depreciation of the yen. In
some cases, this depreciation enabled Sony to lower effective sales prices to
preserve and increase its competitive edge, leading to higher sales and market
shares. Nevertheless, continuous efforts to cut costs resulted in a decline in
the cost of sales ratio. Research and development expenses charged to cost of
sales increased by 25.2 billion yen, or 9.8%, to 282.6 billion yen, mainly due
to increases in the information and communication business and semiconductor
business, but declined by 0.7 percentage point as a percentage of sales, to
5.2%.
Selling, general and administrative expenses increased 216.0 billion yen,
or 23.0%, to 1,153.9 billion yen, mainly due to sales growth as well as
increases in personnel expenses and advertising costs in the Electronics
business and Game business, but improved 0.2 percentage point as a percentage of
sales, to 21.2%.
Figures in the above two paragraphs do not include the Insurance segment
revenue and expenses.
Operating Income
Operating income during the year increased by 135.0 billion yen, or
57.4%, to 370.3 billion yen. The Game segment began making a substantial
contribution to operating income, and operating income was higher in the
Electronics, Music, Pictures, and Insurance segments as well. Sales and
operating income in the Game segment reached approximately 7% and 15%,
respectively, of Sony's consolidated sales and operating income before
elimination of intersegment transactions. As a percentage of sales, operating
income improved by 1.4 percentage points, to 6.5%.
39
40
Other Income and Expenses
Other income increased by 26.9 billion yen, or 40.9%, to 92.6 billion
yen, while other expenses decreased by 12.4 billion yen, or 7.6%, to 150.5
billion yen. These changes are primarily attributable to the foreign exchange
gain, net, posted during the year, following a substantial foreign exchange
loss, net, in the prior fiscal year. During the year, the exchange rates of the
yen at settlement of foreign currency denominated sales were about the same as
prevailing exchange rates at the date of the sales. However, yen exchange rates
for settlement of imports were higher than prevailing rates at the date of the
purchase, resulting in a foreign exchange gain. Among other income and expenses,
the balance of interest and dividend income less interest expense resulted in
net interest payments of 51.5 billion yen. This is 2.4 billion yen more than in
the previous year, mainly because of the yen's depreciation.
Income Before Income Taxes
Income before income taxes during the year rose by 174.3 billion yen, or
126.1%, to 312.4 billion yen.
Income Taxes
Income taxes as a percentage of income before income taxes (the effective
tax rate) declined 3.5 percentage points, to 52.4%. Both consolidated income
before income taxes and loss at subsidiaries, that have no tax benefit because
they were in a loss carryforward position, increased this year. Since increase
in consolidated income before income taxes was larger than increase in loss at
subsidiaries, the effective tax rate declined.
Net Income
Net income increased by 85.2 billion yen, or 157.1%, to 139.5 billion
yen. Basic net income per share was 367.7 yen and diluted net income per share
was 309.2 yen. Net income represented 2.5% of sales, up 1.3 percentage points,
and the return on average stockholders' equity increased 5.6 percentage points,
to 10.6%.
Results by Business Segment
The following discussion is based on segment information (refer to Note
18 of Notes to Consolidated Financial Statements).
Electronics
During the year, growth in all product categories and the yen's
depreciation lifted Electronics sales by 666.2 billion yen, or 19.2% (up
approximately 8% on a constant currency basis), to 4,131.6 billion yen.
Operating income increased by 46.0 billion yen, or 23.8%, to 239.3 billion yen,
and as a percentage of sales improved by 0.2 percentage point to 5.8%. A higher
gross profit due to sales growth, the benefits of cost cutting, and the yen's
depreciation were major contributors.
Breaking down Electronics sales to customers by product category, "Audio"
products sales increased by 129.6 billion yen, or 14.4%, to 1,030.0 billion yen
because of higher sales of MiniDisc systems and car audio products. Sales rose
by 85.5 billion yen, or 11.7%, to 816.6 billion yen in the "Video" category, as
demand grew for home-use camcorders. In "Televisions", sales increased in Japan,
the U.S. and Europe, but were lower in China and Russia. The result was an
increase of 150.1 billion yen, or 27.1%, to 704.1 billion yen. Although sales of
CD-ROM drives decreased, sales of computer displays
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41
rose worldwide and sales of digital cellular phones were up in Japan, the U.S.
and Europe. This caused sales in the "Information and communications" category
to increase by 223.8 billion yen, or 41.4%, to 764.5 billion yen. In the
"Electronic components and other" category, sales were up by 58.2 billion yen,
or 10.4%, to 615.2 billion yen as growth in sales of lithium-ion batteries
offset weakness in memory chips and optical pickups.
Game
Sales in the Game business more than doubled (up approximately 94% on a
constant currency basis) to 419.3 billion yen. Operating income was 57.0 billion
yen, compared with an operating loss of 8.9 billion yen in the previous fiscal
year. Sales growth of game consoles was strong in Japan as well as the U.S. and
Europe. There was also a substantial increase in software, which has a high
profit margin, as a percentage of sales in the Game business. During the year,
worldwide production shipments of PlayStation game consoles were 9.2 million
units.
Music
Strong overseas results raised Music business revenue by 74.2 billion
yen, or 14.3% (up approximately 4% on a constant currency basis), to 592.1
billion yen. Operating income grew by 5.1 billion yen, or 12.7%, to 45.2 billion
yen. As a percentage of sales, operating income decreased by 0.1 percentage
point, to 7.6%. This decrease mainly reflects restructuring steps taken at SMEJ.
SMEJ revised its policy for releasing new titles and reduced the number of new
releases, causing earnings to fall.
Pictures
Despite disappointing box office results from certain releases, results
in the Pictures business were supported by growth in sell-through video sales,
television operations, and licensing agreements involving SPE's filmed
entertainment library. As a result, revenue rose by 121.0 billion yen, or 38.1%
(up approximately 20% on a constant currency basis), to 438.6 billion yen.
Operating income increased by 5.1 billion yen, or 21.2%, to 28.9 billion yen,
but decreased by 0.9 percentage point to 6.6% as a percentage of sales.
Insurance
The expansion of Sony's life insurance business in Japan caused insurance
revenue to increase by 21.0 billion yen, or 10.2%, to 227.9 billion yen.
Operating income surged 12.0 billion yen, or 168.4%, to 19.1 billion yen and
rose 5.0 percentage points, to 8.4% of sales. The improvement in the operating
margin mainly reflects a decrease in the addition to liability for future
insurance policy benefitsYear 2000 issue in relation to
the prior fiscal year when there was a
large increase in single premium life insurance policies, which require a
greater ratio of liability for future insurance policy benefits.
Other
Sales in the Other segment decreased by 33.6 billion yen, or 12.3%, to
240.4 billion yenbusiness continuity risks and the operating loss declined to 1.4 billion yen from the
prior year's operating loss of 6.1 billion yen. The prior year's loss was mostly
caused by the termination of a 16-bit game software business at an U.S.
subsidiary.
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42
The Year 2000 Issue
Until recently, computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, such programs may
be unable to distinguish properly between the year 1900customer service, and the year 2000.
Sony has initiated a
comprehensive corporate-wide project to implement a smooth transition into the
year 2000. The project is coordinated and supervised by the Corporate Year 2000
for all internalOffice, which is principally composed of corporate staff from Sony's information
systems department and customer service department and reports directly to Sony
products. InCorporation's Chief Financial Officer with respect to corporate risk management.
The Corporate Year 2000 Office also reports the status of the project to Sony
Corporation's Executive Committee and Board of Directors.
State of readiness
Customer Products;
By the end of October 1997, Sony completed anits initial identification
and assessment project in respect of the potential impact of the Year 2000
issue on Sony'sits products byand since then has continued its identification and
assessment activities with respect to its products. By the end of May 1998,
Sony established a structure to enable it to address this issue around the
world. With plans continuing on schedule, Sony expects to
complete remediation of the Year 2000 issue for major internal information
systems by December 1998, although no assurance can be given of timely
completion of this project. Sony is also taking steps intended to ensure that customers around the
world will be able to depend on Sony products in and after the year 2000. In
the broadcast- and professional-use product field, Sony continues to work
with its customers to address the Year 2000 issue, and expects completion by
the end of MarchSeptember 1999.
Sony's Year 2000 policy and compliance, and countermeasures for Year
2000 problems found in certain models of Sony products as well as contact
points for customers' inquiries, are available through the Sony Year 2000
Web site at www.world.sony.com/year2000/index.html.
Information Systems and Manufacturing;
As of the end of January 1999, although no assurance can be givenSony had completed approximately 90%
of timely completion of this project.
The external cost to modify allits estimated total remediation for major internal information systems
for
compliance with the Year 2000 issue is estimatedand engineering and production systems, and expects to be approximately 9.2 billion
yen, of which approximately 2.1 billion yen was expensed as incurredfully complete such
remediation by the end of October 1999. Sony considers that integrated tests
are needed for the fiscal year ended March 31, 1998. Additionally, while extremely difficultmajor systems in Japan and the U.S., and plans to
estimate precisely,complete them by the cost to replace certain internal information systems,
including hardware equipment, relating toend of September 1999 in Japan and by the Year 2000 issue is estimated to be
approximately 13 billion yen. This cost includes other elements such as
enhancementend of functionality of current systems. The external cost associated
withJune
1999 in the Year 2000 issue for all Sony products is currently expected to be
minimal. Sony expects total external cost of Year 2000 compliance would not have
a material adverse effect on consolidated operations and financial results.U.S.
51
52
For major software and hardware which comprise Sony's information systems
and major non-IT systems such as production equipment which contain
microcontrollers, Sony has taken steps to assess the level of risk by
acquiring information from external vendors and, where necessary, asking for
written reports to confirm the status of compliance measures for the Year
2000 issue. Sony is also addressingAs for the information systems ofprovided by external vendors,
bySony has been obtaining confirmations from external service suppliers and is
conducting tests are conducted where necessary.
However, givenSony is also addressing the reliance onYear 2000 readiness of major parts and
raw material suppliers by confirming the readiness of not only their
information systems but also their management, production, and other
facilities and activities. Sony is also checking the status of ordering
systems connected to major suppliers, sales distributors, and dealers by
electronic data interchange.
Facilities and Infrastructure;
Sony is addressing the Year 2000 readiness of control units of plants
and buildings, such as clean room facilities, telephone exchanges, networks,
and 24-hour working facilities, by obtaining confirmations and maintenance
instructions from certain third party service providers. In addition, Sony
is confirming the Year 2000 readiness of third party service providers such
as companies which transport products distributed by Sony.
Costs
The external cost to modify software programs for internal information
systems for compliance with the Year 2000 issue is estimated to be approximately
8.4 billion yen, of which approximately 5.3 billion yen was expensed as it
relatesincurred
by the end of the fiscal year ended March 31, 1999. Additionally, while
extremely difficult to their compliance programsestimate precisely, the cost to replace certain internal
information systems, including hardware, relating to the Year 2000 issue is
estimated to be approximately 12.2 billion yen, of which approximately 8.6
billion yen was expensed as incurred by the end of the fiscal year ended March
31, 1999. This cost includes other elements such as enhancement of functionality
of current systems. The cost to Sony for services performed by third parties
associated with the Year 2000 issue for Sony products is currently expected to
be approximately 0.6 billion yen. The Year 2000 external cost relating to
manufacturing and facility equipment is not separately tracked and such cost is
principally included in the general expenses with respect to each facility. Due
to the difficulty of determining potential
errorsprecise tracking, Sony also generally does not separately
track its internal costs, which are principally related payroll costs, incurred
for the Year 2000 project.
Sony does not expect its total cost for replacement, modification, and
third party services related to its current program of Year 2000 compliance to
have a material adverse effect on consolidated operations or financial results.
Risks
The Year 2000 issue could have an adverse effect on Sony's operations due
to the partfollowing factors.
Customer Products;
Customers' inquiries for Year 2000 issues of externalproducts may increase
near the end of calendar year 1999 beyond Sony's projections. Sony's sales
and service suppliers, no assurance candivision may not be givenable
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53
to manage the inquiries sufficiently during that period. Sony is not able
to assure that its products do not contain undetected Year 2000 problems.
Information Systems and Manufacturing;
Errors in programs and data in Sony's internal information systems
ormay occur. Software such as operating systems purchased from third party
vendors may also fail to function properly.
Because Sony obtains information from major suppliers of parts and
raw materials, and such information relies on compliance programs of third
parties, and it is difficult for Sony to estimate potential non-compliance
of such suppliers, Sony is not able to assure that manufacturing operations
will not be affected by mistakes,failures of suppliers to comply with Year 2000
requirements.
Facilities and Infrastructure;
Although cessation or interruption of utilities, such as water and
power supply, due to Year 2000 problems would adversely affect Sony's
operations, Sony has no control over such events and is unable to determine
the likelihood of a negative impact on its performance at this time.
Communication networks may be affected if
any, of third parties or third party failuresvendors such as
network service carriers fail to complete thebe Year 2000 project
on a timely basis.
The costcompliant. Logistics of Sony's
global operations may be affected if vendors, customers, freight forwarders,
shipping companies, and other similar parties fail to remedy their systems.
Sony also recognizes the possibility of environmental disruption related to
its facilities, especially those dealing with chemical materials. Year 2000
projectproblems in banking, transportation, and the date on which Sony believes
it will complete the necessary modifications are based oncustoms services could also
adversely affect Sony's estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of resources, third party modification plans and
other factors. Sony presently believes that the Year 2000 issue will not pose
significant operational problems for its internal information systems and
products. However, ifoperations.
Contingency Plans
If the anticipated modifications and conversions are not completed on a
timely basis, or if the systems of other companiesthird parties on which Sony's systems and
operations rely are not convertedmade compliant on a timely basis, the Year 2000 issue
could have an adverse effect on Sony's operations.
Sony recognizes the importance of readiness for potential worst case
scenarios. As a result,To minimize both internal and external risks, Sony is workingin the process
of making contingency plans, including the establishment of emergency action
plans and escalation procedures for each area of operation, including customer
services, information systems, manufacturing, and facility management.
ADDITIONAL YEAR 2000 CAUTIONARY STATEMENT
SONY HAS MADE THE AFOREMENTIONED STATEMENTS CONSIDERING VARIOUS RISK
FACTORS. HOWEVER, MANY FACTORS MAY CAUSE SONY'S ACTUAL EXPERIENCE TO DIFFER
MATERIALLY FROM THOSE STATED ABOVE. THIS IS BECAUSE THE YEAR 2000 ISSUE INCLUDES
MANY UNCONTROLLABLE FACTORS, SUCH AS INTERRELATION OF MANY THIRD PARTIES. WHILE
SONY OPERATES AS A GLOBAL COMPANY IN MANY DIFFERENT COUNTRIES, THE YEAR 2000
PROBLEM MAY NOT BE ADDRESSED CONSISTENTLY IN ALL LOCATIONS, INCLUDING BY THIRD
PARTIES, AND SONY MAY NOT BE ABLE TO RELY ON THE SAME APPROACHES IN ALL AREAS.
AS A RESULT, THERE MAY BE UNFORESEEN PROBLEMS IN DIFFERENT PARTS OF THE WORLD.
ALL OF THESE FACTORS MAKE IT IMPOSSIBLE FOR SONY TO ENSURE THAT IT WILL BE ABLE
TO RESOLVE ALL YEAR 2000 PROBLEMS IN A TIMELY MANNER TO AVOID MATERIALLY ADVERSE
EFFECTS ON ITS OPERATIONS OR BUSINESS OR EXPOSURE TO THIRD PARTY LIABILITY.
53
54
COMPLIANCE WITH STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard, which is effective for
fiscal years beginning after June 15, 1999, requires all derivatives to identify scenarios requiring
contingency plans; however,be
recognized in the balance sheet as either assets or liabilities and measured at
fair value. To implement this standard, all hedging relationships must be
reassessed. Sony is now in the process of assessing the impact that this
standard will have on Sony's results of operations and consolidated financial
position.
54
55
Report of Independent Accountants
---------------------------------
To the Board of Directors of
Sony Corporation (Sony Kabushiki Kaisha)
We have examined Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") of Sony Corporation and its consolidated
subsidiaries (collectively as "Sony") taken as a whole, included in Item 9. of
Sony's Form 20-F for the year ended March 31, 1999. Management is responsible
for the preparation of Sony's MD&A pursuant to date no such plansthe rules and regulations adopted
by the Securities and Exchange Commission. Our responsibility is to express an
opinion on the presentation based on our examination. We have audited, in
accordance with generally accepted auditing standards in the United States of
America, the consolidated financial statements of Sony as of March 31, 1998 and
1999, and for each of the years in the three-year period ended March 31, 1999,
and in our report dated April 26, 1999, we expressed an unqualified opinion on
those consolidated financial statements.
Our examination of MD&A was made in accordance with attestation standards
established by the American Institute of Certified Public Accountants and,
accordingly, included examining, on a test basis, evidence supporting the
historical amounts and disclosures in the presentation. An examination also
includes assessing the significant determinations made by management as to the
relevancy of information to be included and the estimates and assumptions that
affect reported information. We believe that our examination provides a
reasonable basis for our opinion.
The preparation of MD&A requires management to interpret the criteria, make
determinations as to the relevancy of information to be included, and make
estimates and assumptions that affect reported information. MD&A includes
information regarding the estimated future impact of transactions and events
that have occurred or are expected to occur, expected sources of liquidity and
capital resources, operating trends, commitments, and uncertainties. Actual
results in the future may differ materially from management's present assessment
of this information because events and circumstances frequently do not occur as
expected.
In our opinion, Sony's presentation of MD&A includes, in all material respects,
the required elements of the rules and regulations adopted by the Securities and
Exchange Commission; the historical financial amounts included therein have been
established.
42
43
Euro
The Januaryaccurately derived, in all material respects, from Sony's consolidated financial
statements; and the underlying information, determinations, estimates, and
assumptions of Sony provide a reasonable basis for the disclosures contained
therein.
/s/ Price Waterhouse
- --------------------
(Signature)
Price Waterhouse
Tokyo, Japan
June 1, 1999
scheduled adoption of the Euro will create a
single-currency market in much of Europe. For a transition period from January
1, 1999 to January 1, 2002, the existing local currencies are anticipated to
remain legal tender as denominations of the Euro.
In March 1998, Sony completed a project to identify and assess the
potential impact of the adoption of the Euro on its operations. Sony is making
preparations to handle Euro invoices for transactions with third parties from
January 1999. Sony intends to take action in marketing areas as necessary to
deal with these ongoing changes. Regarding transactions within the Sony Group,
preparations are under way to enable all such transactions to be switched to the
Euro from the local currencies of EMU countries in April 1999, although no
assurance can be given that such transactions will be switched to the Euro by
such time. This will eliminate the need for foreign exchange commissions and
hedging expenses. Sony estimates that this will result in an annual cost saving
in Europe of approximately 20 million German marks.
Due to the preparation for adoption of the Euro, Sony will need to
conduct a certain number of revisions to its information systems. Such revisions
have started and are proceeding on schedule to the anticipated completion date
of December 1998 for systems related to transactions with the third parties and
March 1999 for systems related to transactions within the Sony Group,
respectively. Sony expects the cost of such revisions would not have a material
adverse effect on consolidated operations and financial results. However, no
assurance can be given that such revisions will be completed on a timely basis.
No policy change is expected on foreign exchange hedging for trades
between Europe and other regions as well as funding in Europe even after the
adoption of the Euro.55
56
Item 9A. Quantitative and Qualitative Disclosures Aboutabout Market Risk
The financial instruments including financial assets and liabilities that
Sony holds in the normal course of business are continuously exposed to
fluctuations in markets, such as currency exchange rates, interest rates, and
market prices of investments. In applyingseeking to apply a consistent risk management
strategy in order to removemanage potential adverse effects caused by market
fluctuations in the cash flow value of these financial instruments, Sony hedges
the market risk of these financial assets and liabilities by using derivative
financial instruments which include foreign exchange forward contracts, foreign
currency option contracts, interest rate swap agreements, and interest rate and
currency swap agreements. Sony utilizes foreign exchange forward contracts and
foreign currency option contracts primarily to fix the value of cash flow
resulting from accounts receivable and payable and future transactions
denominated in foreign currencies in relation to the core currencies (Japanese
yen, U.S. dollars, and German
marks)Euros) of Sony's major operating units. Interest rate
swap agreements and interest rate and currency swap agreements are used to
diversify funding methods and lower funding costs. Sony's basic policy is to use
fixed interest rates when procuring funds for investments having a long-term
recovery period and variable interest rates for funding requirements of a
short-term nature, such as working capital. The above swaps are utilized to
enable Sony to choose between fixed and variable interest rates depending on how
the funds are to be used, as well as to hedge foreign exchange risks that result
when assets denominated in one currency are funded by liabilities denominated in
a different currency. Sony uses these derivative financial instruments solely
for risk hedging purposes as described above, and no derivative transactions are
held or used for trading purposes. In addition, bond option contracts are used
as an integral part of short-term investing activities in order to fix the
yields from bonds held by Sony Life towithin certain ranges. Note that amongAmong the market
risks described above, no specific hedging activities are taken againstundertaken in respect
of the price
43
44 fluctuations of equity securities held by Sony as marketable
securities (refer to Notes 2 and 11 of Notes to Consolidated Financial
Statements).
Sony measures the effect of market fluctuations on the value of financial
instruments and derivatives by using Value-at-Risk (herein referred to as "VaR")
analysis. In order to comply with Item 9A disclosure requirements, Sony uses VaR
which measures aanalysis to measure the potential maximum amount of loss in fair value resulting
from adverse market fluctuations, for a selected period of time and at a
selected level of confidence. Sony uses the variance/co-variance model in
calculation of VaR. The calculation includes financial instruments such as cash
and cash equivalents, time deposits, marketable securities, non-lease short- and
long-term borrowings and debt, investments and advances and derivatives, held by
the Company and consolidated subsidiaries.Sony. Sony calculatescalculated VaR for one day from the portfolio of financial
instruments and derivatives as of June 30, 1998, September 30, 1998, December
31, 1998, and March 31, 1998,1999, at a confidence level of 95%.
Based on this assumption, the following table shows Sony's consolidated
VaR at March 31, 1998 is
calculated to be 6.9 billion yen, which indicatesas of such dates. These figures indicate the potential maximum loss in fair
value as predicted by the VaR analysis resulting from market fluctuations in one
day at a 95% confidence level. By item, theThe VaR of currency exchange rate risk
is calculated to be 7.2
billion yen which mainlyprincipally consists of risks arising from the volatility of the exchange rates
between the yen and the U.S. dollarsdollar in which a relatively large amount of
financial assets and liabilities and derivative transactions is maintained. VaR
of interest rate risk and stock price risk are calculated to be 3.4 billion yen
and 3.3 billion yen, respectively. The
net VaR for Sony's entire portfolio is smaller than the simple aggregate of VaR
for each component of market risk. This is due to the fact that market risk
factors such as currency exchange rates, interest rates, and stock prices are
not completely independent, thus have the
effectas a result of offsettingwhich a portion of overall measured
potential profits and losses.
The calculatedlosses are offset.
Calculated VaR does not include the effect of accounts receivable and
payable and anticipated transactions denominated in foreign currencies as of
March 31, 1998, that are
the object of Sony's derivative hedging.
56
57
Therefore, the above amount offollowing VaR doesamounts do not reflect the full effect of the
hedging activities related to all of the underlying exposures andexposures. Sony expects that
the actual risk would be less than the disclosed VaR if those accounts
receivable and payable and anticipated transactions are taken into account in
the calculation. The disclosed VaR amountamounts simply represents the calculated
potential maximum loss on the following dayspecified date and by no means indicatesdoes not necessarily indicate
an estimate of actual or future loss.
44
45
COMPLIANCE WITH STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Effective for the fiscal year ended March 31, 1998, Sony adopted
Statement of Financial Accounting Standards No. 131 (FAS 131). This resulted in
the reporting of business results based on new operating segments (refer to Note
18 of Notes to Consolidated Financial Statements). Segment information as well
as certain items in the consolidated statements of income in prior fiscal years
have been reclassified to conform to the presentation for the fiscal year ended
March 31, 1998.
Sony also adopted FAS 128 during the fiscal year ended March 31, 1998.
FAS 128 requires presentation of basic and diluted net income per share on the
face of the statements of income (refer to Notes 2 and 3 of Notes to
Consolidated Financial Statements). Net income per share amounts in prior fiscal
years have been restated to conform with FAS 128.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income".
This standard requires additional disclosures in the financial statements for
periods beginning after December 15, 1997, and will have no effect on Sony's
financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP, which is effective
for financial statements for fiscal years beginning after December 15, 1998,
provides guidance on accounting for the costs of computer software developed or
obtained solely to meet the company's internal needs. Sony adopted the SOP in
the first quarter of the year ending March 31, 1999. At this stage, it is not
possible to estimate the impact of adoption on Sony's financial statements for
the full fiscal year ending March 31,1999, although the effect of this change on
the first quarter results was not material.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard, which is effective for
fiscal years beginning after June 15, 1999, requires all derivatives to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. To implement this standard, all hedging
relationship must be reassessed. At this stage, it is not possible to estimate
the impact of adoption on Sony's financial position or results of operations.
45
46
(unit: billion yen)
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
------------- ------------- ------------- -------------
Net VaR 5.9 9.2 5.4 3.3
VaR of currency exchange rate risk 8.6 10.2 6.9 5.9
VaR of interest rate risk 3.7 4.3 7.3 4.5
VaR of stock price risk 3.5 3.9 0.5 0.9
Item 10. Directors and Statutory AuditorsOfficers of Registrant
On June 27, 1997, the Company altered the composition of its Board of
Directors and at the same time introduced a new system of executive officers.
While the Company has been selecting appropriate and qualified persons mainly
from the management of Sony as candidates for directorship, the Company intends
to increase the number of outside Directors in order to reinforce the Board's
supervisory function on the conduct of business. The number of Directors was
reduced so that more active discussion may be conducted among Directors. Under
the new system of executive officers, the executive officers appointed by the
Board of Directors execute their respective assigned duties upon the delegation
of power and authority by the Representative Directors, who have unlimited
statutory authority and power to represent and act on behalf of the Company in
all respects, and assist the relevant Representative Directors in their
respective areas of responsibility. This new system was introduced with a view
to strengthening the executive function of officers headed by the Representative
Directors who are in charge of business operations in line with the basic
policies set by the Board of Directors and under the supervision of the Board of
Directors.
On May 7, 1998, President Nobuyuki Idei became Co-Chief Executive Officer
(Co-CEO). In his role as Co-CEO, President Idei shares with Chairman and CEO
Norio Ohga the responsibility for overseeing management operations of the
Company.
Set forth below are the names of the Company'sSony Corporation's Directors and
Statutory Auditors as of July 1, 1998.May 31, 1999.
Director or
Statutory Auditor
Directors and Statutory Auditors since
............................ ...............-------------------------------- -----------------
Chairman and Representative Director, Chief Executive Officer (CEO)
Norio Ohga 19641972
President and Representative Director, Co-Chief Executive
OfficerCo- CEO
Nobuyuki Idei 1989
Executive Deputy Presidents and Representative Directors
Minoru Morio Chief Technology Officer 1988
Kozo Ohsone Chief Production Officer 1987
Yoshiyuki Kaneda Executive Representative, Western Japan 1986
Tamotsu Iba Chief Financial Officer (CFO) 1992
ExecutiveSenior Managing Director
Akiyoshi Kawashima Network business and regional strategy 1998
Directors
Peter G. Peterson 1991
Kenichi Suematsu 1997
Standing Statutory Auditors
Nobuo Kanoi 1996
Akihisa Ohnishi 1993
Yoshisuke Mohri 1994
46
47
Statutory Auditor
Kazuaki Morita 1995
(a)57
58
Set forth below are the names of Sony Corporation's Executive Officers
as of May 31, 1999.
Executive Officer
Executive Officers since
------------------ -----------------
Corporate Executive Vice Presidents
Suehiro Nakamura President and Chief Operating Officer (COO), 1997
Core Technology & Network Company
Kenichi Oyama Accounting and Finance 1997
Teruhisa Tokunaka Deputy CFO 1999
Corporate Senior Vice Presidents
Masayoshi Morimoto Corporate Human Resources, 1997
Employee Relations & General Affairs,
Capital Market & Investor Relations, and
Corporate Communications
Shizuo Takashino President and COO, Home Network Company 1997
Mario Tokoro Corporate Laboratories 1997
Kunitake Ando President and COO, Personal IT Network Company 1997
Corporate Vice Presidents
Sunobu Horigome President and COO, Digital Network Solutions 1998
Kenichiro Yonezawa Legal and Intellectual Property 1998
Group Executive Officer
Ken Kutaragi President and Representative Director, 1998
Sony Computer Entertainment Inc.
All of the aforementioned persons, with the exception of Mr. Peter G.
Peterson, Chairman of The Blackstone Group, Mr. Kenichi Suematsu, AdvisorCounsellor of
The Sakura Bank, Limited, and Mr. Kazuaki Morita, Chairman of Morita and Co.,
are engaged full-time in the affairs of Sony.
All Directors and Statutory Auditors shall be elected by the general
meeting of shareholders. In general, the term of office of Directors shall
expire at the conclusion of the ordinary general meeting of shareholders held
with respect to the last closing of accounts within one year after their
assumption of office, and the term of office of Statutory Auditors shall expire
at the conclusion of the ordinary general meeting of shareholders held with
respect to the last closing of accounts within three years after their
assumption of office; however, they may serve any number of consecutive terms.
From among the Directors, the Board of Directors shall elect one or more
Representative Directors. Each of the Representative Directors has the statutory
authority
individually to represent the CompanySony Corporation in the conduct of its affairs. The
"Executive Officers" indicated here are the Corporate Executive Officers and the
Group Executive Officer designated by the Board of Directors of Sony
Corporation, who, together with certain members of the Board, comprise the
Management Committee, which formulates business strategies and makes managerial
decisions for Sony under the supervision of the Board of Directors.
The Statutory Auditors of the CompanySony Corporation are not required to be and
are not certified public accountants. However, at least one of the Statutory
Auditors should be a person who has not been a director, general manager or
employee of the CompanySony Corporation or any of its subsidiaries during the
58
59
five-year period immediately prior to his election as a Statutory Auditor. The
Statutory Auditors may not at the same time be Directors, managers or employees
of the Company.Sony Corporation. Each Statutory Auditor has the statutory duty to examine
the financial statements and business reports to be submitted by the Board of
Directors at the general meeting of shareholders and also to supervise the
administration by the Directors of the Company'sSony Corporation's affairs. They are entitled
to participate in meetings of the Board of Directors but are not entitled to
vote.
Under the Law concerning Special Measures to the Commercial Code with
respect to Audit, the Board of Statutory Auditors has a statutory duty to
prepare and submit its audit report to the Board of Directors each year. A
Statutory Auditor may note his opinion in the audit report if his opinionit is different
from the opinion of the Board of Statutory Auditors expressed in the audit
report. The Board of Statutory Auditors is empowered to establish audit
principles, the method of examination by Statutory Auditors of the Company'sSony
Corporation's affairs and financial position and other matters concerning the
performance of the Statutory Auditors' duties.
There is not any arrangement or understanding between a Director or a
Statutory Auditor and any other person pursuant to which he was selected as a
Director or a Statutory Auditor.
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48
Item 11. RemunerationCompensation of Directors and Statutory AuditorsOfficers
(a) The aggregate amount of remuneration including bonuses paid by Sony to all
Directors and Statutory Auditors of the Company as a group (April to June
1997; 45 persons, July 1997 to March 1998; 14 persons) who served during
the fiscal year ended March 31, 1999 to all Directors, Statutory Auditors,
and Executive Officers of Sony Corporation who served during the year, as a
group (April to June 1998; 18 persons, July 1998 was approximately 1,710to March 1999; 17
persons), totaled 1,546 million yen. In addition, in connection with Sony's
incentive compensation arrangements, the value of warrants which represent
the right to subscribe for the share of Sony Corporation, granted to
aforementioned Directors and Executive Officers as part of their
remuneration during the year, totaled 344 million yen at the time of grant
by Sony Corporation.
(b) The aggregate amount accrued for lump-sum severance indemnities by Sony
during the fiscal year ended March 31, 1999 for all Directors, Statutory
Auditors, and Executive Officers of Sony Corporation who served during the
Companyyear, as a group, totaled 123391 million yen. (See Note 12 of Notes to
Consolidated Financial Statements.)
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60
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
As of AugustMay 31, 1998, the Company had granted1999, the following outstanding
Warrantswarrants to purchase shares of Common
Stocks previously issued by Sony Corporation to certain Directors, Corporate
Executive Officers, and executive
officersGroup Executive Officers as part of their compensation.remuneration
were outstanding:
(a) Total amount of
issueshares to be called Total warrant value Total amount of the shares Purchase price Warrant Value Initial Issue Priceper
for at the time of at the time to be called for share as of May
grant* of grant as of May 31, 1999** 31, 1999*** Exercise Period
(a) ....................... ............. ............... ..............
per Share*
.........period
----------------------- ------------------- -------------------------- ------------------ -----------------
Number of
284,819 shares, of 110 million yen 5,330 yenwith 42,722 shares, with October 1,
1995 to
Common Stock having an August 31, 1999a total issue price of 1 billion
yen
Number of shares of 200 million yen 7,022 yen October 1, 1996 to
Common Stock having an August 15, 2000a total issue price of 7,022 yen 1996 to August
2 billion yen Number of0.3 billion yen 15, 2000
296,912 shares, with 296,912 shares, with November 2,
a total issue price of 315 million yen 11,788 yen November 2, 1998
Common Stock having an to October 12,a total issue price of 11,788 yen 1998 to October
3.5 billion yen 3.5 billion yen 12, 2001
yen
Number of319,310 shares, with 319,310 shares, with September 1,
a total issue price of 640 million yen 12,527 yen September 1, 1999 to
Common Stock having an August 16, 2004a total issue price of 12,527 yen 1999 to August
4 billion yen 4 billion yen 16, 2004
* SubjectNumber of shares is estimated by using purchase price at the time of grant.
** Number of shares is estimated by using purchase price as of May 31, 1999.
*** Purchase price per share is subject to antidilution adjustmentanti-dilution adjustment.
(b) As of August 31, 1998, the totalThe aggregate amount of Common Stock called forto be issued upon exercise of Warrantsall such
warrants held by Directors and executive officers is 2.5Executive Officers as of May 31, 1999, as a
group, was 340,751 shares, with a total issue price of 4.1 billion yen, or 403,171 shares.
48
49yen.
Item 13. Interest of Management in Certain Transactions
(a) None of the information which the CompanySony Corporation is required by Japanese law
or stock exchange requirements to disclose to its shareholders or otherwise
make public with respect to the interest of management in certain
transactions relates to any material transaction required to be disclosed
by this item.
(b) None.None
PART II
Item 14. Description of Securities to be Registered
Not applicable.applicable
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61
PART III
Item 15. Defaults Upon Senior Securities
None.None
Item 16. Changes in Securities, and Changes in Security for Registered Securities
None.and Use of Proceeds
None
PART IV
Item 17. Financial Statements
Not applicable.applicable
Item 18. Financial Statements
See Financial Statements.
49
50
Item 19. Financial Statements and Exhibits
(a) Financial Statements
See accompanying index to Consolidated Financial Statements.
(b) Exhibits
(1) ArticlesMemorandum of Incorporation, as amendedUnderstanding concerning Sony group reorganization, dated
March 9, 1999, between Sony Corporation and Sony Music Entertainment
(Japan) Inc. (English translation)
(2) Regulations of the Board of Directors, as amended
(English translation)
(3) Certificate of English translations
50translation summary)
61
5162
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SONY CORPORATION
......................---------------------------
(Registrant)
BY /s/ TAMOTSU IBA
............................Tamotsu Iba
---------------------------
(Signature)
Tamotsu Iba
Executive Deputy President
and C.F.O.Representative Director,
Chief Financial Officer
Date September 14, 1998
...........................
51June 16, 1999
62
5263
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
MARCH 31, 19981999
--------------
5364
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Report of independent accountants F- 2
Consolidated balance sheets at March 31, 1997 and 1998 F- 3
Consolidated statements of income and retained earnings for
the years ended March 31, 1996, 1997 and 1998 F- 5
Consolidated statements of cash flows for the years ended
March 31, 1996, 1997 and 1998 F- 6
Notes to consolidated financial statements F- 8
Financial statement schedule
for the years ended March 31, 1996, 1997 and 1998
II -- Valuation and qualifying accounts F-46
------------------------------------------
Page
----------
Report of independent accountants F - 2
Consolidated balance sheets at March 31, 1998 and 1999 F - 3
Consolidated statements of income
for the years ended March 31, 1997, 1998 and 1999 F - 5
Consolidated statements of cash flows
for the years ended March 31, 1997, 1998 and 1999 F - 6
Consolidated statements of changes in stockholders' equity
for the years ended March 31, 1997, 1998 and 1999 F - 8
Notes to consolidated financial statements F - 9
Financial statement schedule
for the years ended March 31, 1997, 1998 and 1999
II - Valuation and qualifying accounts F - 48
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
Financial statements of majority-owned subsidiaries of the registrant not
consolidated and of 50% or less owned persons accounted for by the equity method
have been omitted because the registrant's proportionate share of the income
from continuing operations before income taxes, and total assets of each such
company is less than 20% of the respective consolidated amounts, and the
investment in and advances to each company is less than 20% of consolidated
total assets.
F-1
5465
Report of Independent Accountants
---------------------------------
To the Stockholders and Board of Directors of
Sony Corporation (Sony Kabushiki Kaisha)
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Sony
Corporation and its consolidated subsidiaries at March 31, 19971998 and 1998,1999, and
the results of their operations and their cash flows for each of the three years
in the period ended March 31, 1998,1999, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE
- ------------------------------------
Price Waterhouse
May 7, 1998- --------------------
(Signature)
Price Waterhouse
Tokyo, Japan
April 26, 1999
F-2
5566
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
Yen in millions
--------------------------------------------------
March 31
--------------------------
1997------------------------
1998 ----------- -----------1999
---------- ----------
Current assets:
Cash and cash equivalents 428,518 423,286 592,210
Time deposits 52,518 107,139 24,304
Marketable securities 120,094 169,209 117,857
Notes and accounts receivable, trade 1,066,314 1,230,799 1,135,598
Allowance for doubtful accounts and sales returns (93,732) (114,911) (122,015)
Inventories 869,800 993,927 877,898
Deferred income taxes 111,756 121,189 102,588
Prepaid expenses and other current assets 240,099 336,839 ----------- -----------340,953
--------- ---------
Total current assets 2,795,367 3,267,477 ----------- -----------3,069,393
--------- ---------
Noncurrent inventories--film 242,727inventories film 249,066 - --------------------------------- ----------- -----------244,537
--------- ---------
Investments and advances:
- -----------------------------
Affiliated companies 52,547 65,912 116,786
Securities investments and other 734,332 784,550 ----------- -----------
786,879863,950
--------- ---------
850,462 ----------- -----------980,736
--------- ---------
Property, plant and equipment:
- -----------------------------------
Land 179,011 184,427 191,434
Buildings 818,084 864,324 781,876
Machinery and equipment 1,805,851 1,947,454 1,952,276
Construction in progress 72,661 95,799 ----------- -----------
2,875,60776,736
--------- ---------
3,092,004 Less--Accumulated3,002,322
Less Accumulated depreciation 1,636,696 1,744,877 ----------- -----------
1,238,9111,752,571
--------- ---------
1,347,127 ----------- -----------1,249,751
--------- ---------
Other assets:
- --------------
Intangibles, 112,080net 124,817 123,272
Goodwill, 161,840net 160,491 139,888
Deferred insurance acquisition costs 148,032 163,120 199,868
Other 194,410 240,483 ----------- -----------
616,362291,608
--------- ---------
688,911 ----------- -----------
5,680,246754,636
--------- ---------
6,403,043 =========== ===========6,299,053
========== ==========
The accompanying notes are an integral part of these statements.
F-3
5667
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Yen in millions
-------------------------------------------------
March 31
--------------------------
1997-----------------------
1998 ----------- -----------1999
--------- ---------
Current liabilities:
Short-termShort term borrowings 117,801 114,617 40,877
Current portion of long-termlong term debt 210,315 84,794 87,825
Notes and accounts payable, trade 653,826 768,152 722,690
Accounts payable, other and accrued expenses 537,726 676,547 670,631
Accrued income and other taxes 169,480 157,123 107,031
Other 262,719 315,092 ----------- -----------313,491
--------- ---------
Total current liabilities 1,951,867 2,116,325 ----------- -----------
Long-term1,942,545
--------- ---------
Long term liabilities:
Long-termLong term debt 1,099,765 1,104,420 1,037,460
Accrued pension and severance costs 146,289 186,871 129,115
Deferred income taxes 173,951 147,116 120,822
Future insurance policy benefits and other 579,263 713,970 913,937
Other 154,912 193,000 ----------- -----------
2,154,180195,382
--------- ---------
2,345,377 ----------- -----------2,396,716
--------- ---------
Minority interest in consolidated subsidiaries 114,867 125,786 - --------------------------------------------------- ----------- -----------136,127
--------- ---------
Stockholders' equity:
Common stock, 50 yen par value--value-
Authorized: 1,350,000,000 shares
Issued: 1997 -- 384,185,043 shares 332,037Issued and outstanding: 1998 --- 407,195,271 shares 406,196
1999 - 410,439,111 shares 416,373
Additional paid-in capital 474,033 548,422 Legal reserve 35,831 38,885559,236
Retained earnings 731,470 926,198965,083 1,123,591
Accumulated other comprehensive income-
Unrealized gaingains on securities 67,278 45,173 23,483
Minimum pension liability adjustment -- (5,714) Cumulative(8,999)
Foreign currency translation adjustment (181,221)adjustments (140,725) (284,380)
--------- ---------
(101,266) (269,896)
--------- ---------
Treasury stock, at cost
(1997--11,150(1998 - 246,714 shares, 1998--246,7141999 - 506,175 shares) (96) (2,880) ----------- -----------
1,459,332(5,639)
--------- ---------
1,815,555 ----------- -----------1,823,665
--------- ---------
Commitments and contingent liabilities
- --------------------------------------------
5,680,246 6,403,043 =========== ===========6,299,053
========== ==========
The accompanying notes are an integral part of these statements.
F-4
5768
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS---------------------------------
Yen in millions
---------------------------------------------------------------------------------------------
Year ended March 31
-----------------------------------------
1996----------------------------------------------------
1997 1998 ----------- ----------- -----------1999
--------- --------- ---------
Sales and operating revenue:
Net sales 4,339,411 5,383,911 6,424,805 6,415,418
Insurance revenue 207,691 227,920 291,061 339,368
Other operating revenue 45,463 51,303 39,624 ----------- ----------- -----------
4,592,56539,833
--------- --------- ---------
5,663,134 6,755,490 ----------- ----------- -----------6,794,619
--------- --------- ---------
Costs and expenses:
Cost of sales 3,216,806 3,930,107 4,618,961 4,633,787
Selling, general and administrative 937,910 1,153,876 1,345,584 1,500,863
Insurance expenses 202,525 208,821 270,735 ----------- ----------- -----------
4,357,241321,320
--------- --------- ---------
5,292,804 6,235,280 ----------- ----------- -----------6,455,970
--------- --------- ---------
Operating income 235,324 370,330 520,210 ----------- ----------- -----------338,649
--------- --------- ---------
Other income:
Interest and dividends 18,053 19,406 20,976 23,313
Foreign exchange gain, net -- 18,085 10,094 2,895
Gain on securities contribution to employee
retirement benefit trust -- -- 58,698
Other 47,702 55,152 52,893 ----------- ----------- -----------
65,75567,999
--------- --------- ---------
92,643 83,963 ----------- ----------- -----------152,905
--------- --------- ---------
Other expenses:
Interest 67,095 70,892 62,524 Foreign exchange loss, net 25,580 -- --48,275
Other 70,245 79,652 87,900 ----------- ----------- -----------
162,92075,151
--------- --------- ---------
150,544 150,424 ----------- ----------- -----------123,426
--------- --------- ---------
Income before income taxes 138,159 312,429 453,749 ----------- ----------- -----------368,128
--------- --------- ---------
Income taxestaxes:
Current 72,088 169,060 210,113 158,386
Deferred 5,070 (5,490) 4,755 ----------- ----------- -----------
77,15818,587
--------- --------- ---------
163,570 214,868 ----------- ----------- -----------176,973
--------- --------- ---------
Income before minority interest 61,001 148,859 238,881 191,155
Minority interest in consolidated subsidiaries 6,749 9,399 16,813 ----------- ----------- -----------12,151
--------- --------- ---------
Net income 54,252 139,460 222,068 Retained earnings:
Balance, beginning of year 585,553 617,343 731,470
Common stock issue costs, net of tax (2) -- --
Cash dividends (18,700) (20,882) (24,286)
Transfer to legal reserve (3,760) (4,451) (3,054)
----------- ----------- -----------
Balance, end of year 617,343 731,470 926,198
=========== =========== ===========
179,004
========== ========== ==========
Yen
-----------------------------------------
------------------------------------------------------
Per share data:
Net income - Basic 145.1 367.7 557.7 436.9
- Diluted 134.0 309.2 483.4 391.0
Cash dividends 50.0 55.0 60.0 50.0
The accompanying notes are an integral part of these statements.
F-5
5869
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Yen in millions
---------------------------------------------------------------------------------
Year ended March 31
-------------------------------------
1996--------------------------------------------
1997 1998 ---------- --------- ----------1999
------- ------- -------
Cash flows from operating activities:
Net income 54,252 139,460 222,068 179,004
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization, including amortization of
deferred insurance acquisition costs 227,316 266,532 301,665 307,173
Accrual for pension and severance costs, less payments 9,604 19,521 40,367 25,817
Loss on disposal of fixed assets 9,429 13,411 22,678 15,079
Gain on securities contribution to
employee retirement benefit trust -- -- (58,698)
Deferred income taxes 5,070 (5,490) 4,755 18,587
Changes in assets and liabilities:
Increase(Increase) decrease in notes and accounts receivable (150,158) (65,905) (113,050) 38,942
(Increase) decrease in inventories (69,157) 41,825 (96,138) 70,693
Increase in other current assets (32,117) (2,906) (69,198)film inventories (37,565) (7,194) (27,103)
Increase (decrease) in notes and accounts payable (4,169) 66,099 109,785 (24,063)
Increase (decrease) in accrued income and other taxes (6,064) 89,887 (28,775) Increase in other current liabilities 54,438 73,786 155,401(30,125)
Increase in future insurance policy benefits and other 174,223 131,947 134,707 199,967
Increase in deferred insurance acquisition costs (42,798) (51,067) (39,553) (57,417)
Changes in other current assets and liabilities, net 70,880 86,203 55,286
Other 4,308 6,035 (32,362)
---------- --------- ----------43,600 (25,168) (49,875)
------- ------- -------
Net cash provided by operating activities 234,177 723,135 612,350 ========== ========= ==========663,267
======= ======= =======
(Continued on following page)page.)
The accompanying notes are an integral part of these statements.
F-6
5970
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Yen in millions
-----------------------------------------------------------------------------------
Year ended March 31
--------------------------------------
1996---------------------------------------------
1997 1998 ---------- ---------- ----------1999
------- ------- -------
Cash flows from investing activities:
Payments for purchases of fixed assets (250,157) (298,187) (378,053) (368,355)
Proceeds from sales of fixed assets 22,823 14,940 22,413 28,783
Payments for investments and advances (490,330) (450,399) (463,239) (741,053)
Proceeds from sales of investment securities and
collections of advances 313,769 316,787 323,443 530,097
Proceeds from merger of Loews Theatres
exhibition business -- -- 53,007
Payments for purchases of marketable securities (54,964) (128,929) (95,163) (121,483)
Proceeds from sales of marketable securities 101,913 46,105 46,730 Increase171,868
(Increase) decrease in time deposits (12,359) (18,361) (54,831) 79,876
Other (1,694) 46 -- ---------- ---------- ------------
------- ------- -------
Net cash used in investing activities (370,999) (517,998) (598,700) ---------- ---------- ----------(367,260)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-termlong term debt 381,239 171,698 342,101 54,208
Payments of long-termlong term debt (87,500) (209,383) (332,154) (69,889)
Decrease in short-termshort term borrowings (145,527) (192,034) (2,345) (71,601)
Dividends paid (18,772) (18,657) (21,582) (24,501)
Other 1,037 881 (3,790) ---------- ---------- ----------(445)
------- ------- -------
Net cash provided by (used in)used in financing activities 130,477 (247,495) (17,770) ---------- ---------- ----------(112,228)
------- ------- -------
Effect of exchange rate changes on
cash and cash equivalents (9,871) 11,537 (1,112) ---------- ---------- ----------(14,855)
------- ------- -------
Net decreaseincrease (decrease) in cash and cash equivalents (16,216) (30,821) (5,232) 168,924
Cash and cash equivalents at beginning of year 475,555 459,339 428,518 ---------- ---------- ----------423,286
------- ------- -------
Cash and cash equivalents at end of year 459,339 428,518 423,286 ========== ========== ==========592,210
======== ======== ========
Supplemental data:
Cash paid during the year for-
Income taxes 87,723 239,054 191,378
======== ======== ========
Interest 68,004 64,102 49,096
======== ======== ========
The accompanying notes are an integral part of these statements.
F-7
6071
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Yen in millions
--------------------------------------------------------------------------------
Accumulated
Additional other Treasury
Common paid-in Retained comprehensive stock, at
stock capital earnings income cost Total
------- ---------- --------- ------------- ------------- -----------
Balance at March 31, 1996 299,885 441,735 648,723 (221,170) (26) 1,169,147
Exercise of stock purchase warrants 336 336 672
Conversion of convertible bonds 31,816 31,762 63,578
Common stock warrants 200 200
Comprehensive income:
Net income 139,460 139,460
Other comprehensive income, net of tax-
Unrealized gains on securities:
Unrealized holding gains arising
during the period (14,055) (14,055)
Foreign currency translation
adjustments 121,282 121,282
----------
Total comprehensive income 246,687
----------
Dividends declared (20,882) (20,882)
Purchase of treasury stock (3,156) (3,156)
Reissuance of treasury stock 3,086 3,086
------- ------- ------- -------- ------ ----------
Balance at March 31, 1997 332,037 474,033 767,301 (113,943) (96) 1,459,332
Exercise of stock purchase warrants 861 860 1,721
Conversion of convertible bonds 73,298 73,214 146,512
Common stock warrants 315 315
Comprehensive income:
Net income 222,068 222,068
Other comprehensive income, net of tax-
Unrealized gains on securities:
Unrealized holding gains arising
during the period (22,105) (22,105)
Minimum pension liability adjustment (5,714) (5,714)
Foreign currency translation adjustments 40,496 40,496
----------
Total comprehensive income 234,745
----------
Dividends declared (24,286) (24,286)
Purchase of treasury stock (7,948) (7,948)
Reissuance of treasury stock 5,164 5,164
------- ------- ------- -------- ------ ----------
Balance at March 31, 1998 406,196 548,422 965,083 (101,266) (2,880) 1,815,555
Exercise of stock purchase warrants 81 80 161
Conversion of convertible bonds 10,096 10,094 20,190
Common stock warrants 640 640
Comprehensive income:
Net income 179,004 179,004
Other comprehensive income, net of tax-
Unrealized gains on securities:
Unrealized holding gains arising
during the period 9,009 9,009
Less: Reclassification adjustment
for gains included in net income (30,699) (30,699)
Minimum pension liability adjustment (3,285) (3,285)
Foreign currency translation adjustments (143,655) (143,655)
----------
Total comprehensive income 10,374
----------
Dividends declared (20,496) (20,496)
Purchase of treasury stock (4,084) (4,084)
Reissuance of treasury stock 1,325 1,325
------- ------- --------- -------- ------ ----------
Balance at March 31, 1999 416,373 559,236 1,123,591 (269,896) (5,639) 1,823,665
======= ======= ========= ======== ====== ==========
The accompanying notes are an integral part of these statements.
F-8
72
SONY CORPORATION
----------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Nature of operations:
The companySony Corporation and consolidated subsidiaries (hereinafter collectively
referred to as "Sony") is engaged in the development, design, manufacture, and
sale of various kinds of electronic equipment, instruments, and devices for
consumer and industrial markets. The company'sSony's principal manufacturing facilities are
located in Japan, the United States, Europe, and Asia, and its products are
marketed by sales subsidiaries and unaffiliated local distributors throughout
the world. The
companySony also develops, produces, manufactures, and markets home-use game
consoles and software. The companySony is engaged in the development, production,
manufacture, and distribution of recorded music, in all commercial formats and
musical genres. The companySony is also engaged in the development, production,
manufacture, marketing, distribution and marketingbroadcasting of image-based software,
including film, video, and television. Further, the companySony conducts insurance
operations principally through a Japanese stock life insurance subsidiary. In
addition to the above, the companySony is engaged in customer financingleasing and leasing business and has begun
to participatecredit card businesses,
satellite distribution services including program supplying businesses in new business activities including digital broadcasting,
information and communications,Japan,
internet-related businesses, development of location-based entertainment
complexes, and others.
2. Summary of significant accounting policies:
The parent companySony Corporation and its subsidiaries in Japan maintain their records and
prepare their financial statements in accordance with accounting principles
generally accepted in Japan while its foreign subsidiaries maintain their
records and prepare their financial statements in conformity with accounting
principles generally accepted in the countries of their domicile.domiciles. Certain
adjustments and reclassifications, including those relating to the tax effects
of temporary differences, capitalization of stock purchase warrants, deferral of
insurance acquisition costs and the accrual of certain expenses, and the accounting
for foreign currency translation, have been
incorporated in the accompanying consolidated financial statements to conform
with accounting principles generally accepted in the United States of America
(U.S. GAAP). These adjustments were not recorded in the statutory books of
account.
F-8F-9
6173
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant accounting policies are as follows:
Basis of consolidation and accounting for
investments in affiliated companies -
The consolidated financial statements include the accounts of the parent companySony Corporation
and those of its majority-owned subsidiary companies. All intercompany
transactions and accounts are eliminated. Investments in 20% to 50% owned
companies are stated at cost plusplus/minus equity in undistributed earnings;earnings/losses;
consolidated net income includes the company'sSony's equity in current earnings/losses of
such companies, after elimination of unrealized intercompany profits.
On occasion, a subsidiary or affiliated company accounted for by the equity
method may issue its shares to third parties as either a public offering or upon
conversion of convertible debt to common stock at amounts per share in excess of
or less than the company'sSony's average per share carrying value. With respect to such
transactions, the resulting gains or losses arising from the change in interest
are recorded in income for the year the change in interest transaction occurs.
The excess of the cost over the underlying net equity of investments in
subsidiaries and affiliated companies accounted for on an equity basis is
allocated to identifiable assets based on fair values at the date of
acquisition. The unassigned residual value of the excess of the cost over the
underlying net equity is recognized as goodwill.
Translation of foreign currencies -
All asset and liability accounts of foreign subsidiaries and affiliates are
translated into Japanese yen at appropriate year-end current rates and all
income and expense accounts are translated at rates that approximate those rates
prevailing at the time of the transactions. The resulting translation
adjustments are accumulated as a component of stockholders' equity.accumulated other comprehensive
income.
F-10
74
Foreign currency receivables and payables are translated at appropriate year-end
current rates and the resulting translation gains or losses are taken into
income currently.
F-9
62
Revenue recognition -
Revenues from electronics, game and music sales are recognized when products are
shipped to customers.
Motion picture revenue is recognized beginning on the date of theatrical
exhibition. Revenue from television licensing agreements is recognized when the
motion picture or television series first becomes available for telecast.
Revenue from home videocassette sales is generally recognized on the date of
shipment.
Insurance premiums are reported as revenue when due from policyholders. Benefits
and expenses are associated with earned insurance premiums so as to result in
the recognition of profits over the life of the contracts. This association is
accomplished through a provision for liabilities for future benefits and
amortization of acquisition costs.
Cash and cash equivalents -
Cash and cash equivalents include all highly liquid investments, generally with
original maturities of three months or less, that are readily convertible to
known amounts of cash and are so near maturity that they present insignificant
risk of changes in value because of changes in interest rates.
Marketable securities -
Marketable securities consist of debt and equity securities. Debt securities and
equity securities designated as available-for-sale, whose fair values are
readily determinable, are carried at fair value with unrealized gains or losses
included as a component of stockholders' equity,accumulated other comprehensive income, net of
applicable taxes. Debt and equity securities classified as trading securities
are carried at fair value with unrealized gains or losses included in income.
Debt securities that are expected to be held-to-maturity are carried at
amortized cost. Individual securities classified as either available-for-sale or
held-to-maturity are reduced to net realizable value by a charge to income for
other than temporary declines in fair value. Realized gains and losses are
determined on the average cost method and are reflected in income.
F-11
75
Inventories -
Inventories in electronics, game and music are valued at cost, not in excess of
market, cost being determined on the "average cost" basis except for the cost of
finished products carried by certain subsidiary companies which is determined on
the "first-in, first-out" basis.
F-10
63
Film costs include production, print, certain advertising costs and allocated
overhead. Film costs are amortized in the proportion that revenue for a period
relates to management's estimate of ultimate revenues.
Unamortized film costs are compared with estimated net realizable value on an
individual film basis and write-downs are recorded when indicated. Film costs
for motion pictures and television programs that are expected to be amortized
against revenues from primary markets are classified as current assets. Primary
markets for motion pictures include theatrical, home videocassette and pay
television. Primary markets for television programs include network and
first-run syndication. All other film costs are classified as noncurrent.
Property, plant and equipment and depreciation -
Property, plant and equipment is stated at cost. Depreciation of property, plant
and equipment is computed on the declining-balance method for the parent companySony Corporation
and Japanese subsidiaries and on the straight-line method for foreign subsidiary
companies at rates based on estimated useful lives of the assets according to
general class, type of construction and use. Significant renewals and additions
are capitalized at cost. Maintenance and repairs, and minor renewals and
betterments are charged to income as incurred.
Intangibles and goodwill -
Intangibles, which mainly consist of artist contracts and music catalogs, are
being amortized on a straight-line basis principally over 16 years and 21 years,
respectively.
Goodwill recognized in acquisitions accounted for as purchases is being
amortized on a straight-line basis principally over a 40-year period.
Deferred insurance acquisition costs -
Costs that vary with and are primarily related to acquiring new insurance
policies are deferred and are being amortized mainly over the premium-paying
period of the related insurance policies using assumptions consistent with those
used in computing policy reserves.
F-12
76
Future insurance policy benefits -
Future insurance policy benefits are computed based on actuarial assumptions.
F-11
64
Accounting for the impairment of long-lived assets -
The company'sSony's long-lived assets, including goodwill and identifiable intangibles, held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. When the
sum of expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized,
based on the fair value of the asset. The fair value of goodwill is determined
using a discounted cash flows analysis.
Income taxes -
The provision for income taxes is computed based on the pretax income included
in the consolidated statements of income. 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.
Derivative financial instruments -
Derivative financial instruments, which include foreign exchange forward
contracts, foreign currency option contracts, interest rate swap agreements, and
interest rate and currency swap agreements, are used in the company'sSony's risk management
of foreign currency and interest rate risk exposures of its financial assets and
liabilities.
Foreign exchange forward contracts:
Foreign exchange forward contracts are used to limit exposure to losses,
resulting from changes in foreign currency exchange rates, on accounts
receivable and payable and anticipated transactions denominated in foreign
currencies. Foreign exchange forward contracts which are designated and
effective as hedges of such currency exchange rate risk on existing assets
and liabilities are marked to market and included as an offset to foreign
exchange gains/losses recorded on the existing assets and liabilities.
Such contracts on anticipated transactions, including contracts used to
hedge intercompany foreign currency commitments which do not qualify as
firm commitments, are marked to market with changes in value recognized in
foreign exchange gains/losses.
F-12F-13
6577
Foreign currency option contracts:
The companySony enters into purchased foreign currency option contracts to limit
exposure to losses, resulting from changes in foreign currency exchange
rates, on accounts receivable and anticipated transactions denominated in
foreign currencies. The companySony also enters into written foreign currency option
contracts, of which the majority are part of range forward contracts
corresponding to the purchased foreign currency option contracts. The
carrying values of all foreign currency option contracts are marked to
market with changes in value recognized in foreign exchange gains/losses.
Interest rate swap agreements and interest rate
and currency swap agreements:
The companySony enters into interest rate swap agreements or interest rate and
currency swap agreements in order to lower funding costs, to diversify
sources of funding and to limit the company'sSony's exposure to loss in relation to
underlying debt instruments resulting from adverse fluctuations in
interest rates or foreign currency exchange rates. The related interest
differentials paid or received under the interest rate swap agreements and
under the interest rate and currency swap agreements are recognized over
the terms of the agreements in interest expense. Currency swap portions of
the interest rate and currency swap agreements which are designated and
effective as hedges of exposure to losses resulting from changes in
foreign currency exchange rates on underlying debt denominated in foreign
currency are marked to market and included as an offset to foreign
exchange gains/losses on the underlying debt.
After an underlying hedged transaction is settled or ceases to exist, all
changes in fair value of related derivatives which have not been settled are
recognized in foreign exchange gains/losses.
F-13
66
Net income per share -
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No.128 (FAS 128), "Earnings per
Share" (EPS), which replaces the presentation of primary earningsBasic net income per share with
a presentation of basic EPS and also requires dual presentation of basic and
diluted EPS with an appropriate reconciliation of both computations. Basic EPS(EPS) is computed based on the average number of
shares of common stock outstanding during each period and 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 the issuance
of common stock. Net income per
shareEPS is appropriately adjusted for any free distributions of
common stock.
FAS
128 was effective for both interim and annual periods ending after December 15,
1997. All prior-period EPS data presented have been restated to conform with FAS
128.F-14
78
Free distribution of common stock -
On occasion, the companySony Corporation may make a free distribution of common stock which
is accounted for either by a transfer of the applicable par value from
additional paid-in capital to the common stock account or with no entry if free
shares are distributed from the portion of previously issued shares accounted
for as excess of par value in the common stock account. Under the Japanese
Commercial Code, a stock dividend can be effected by an appropriation of
retained earnings to the common stock account by resolution of the general
stockholders' meeting, followed by a free share distribution with respect to the
amount appropriated by resolution of the Board of Directors' Meeting.
Common stock issue costs -
Common stock issue costs are directly charged to retained earnings, net of tax,
in the accompanying consolidated financial statements as the Japanese Commercial
Code prohibits charging such stock issue costs to capital accounts which is the
prevailing practice in the United States of America.
Recent pronouncementsComprehensive income -
Comprehensive income:
In June 1997, the FASB issued FASSony adopted Statement of Financial Accounting Standards (FAS) No. 130,
"Reporting Comprehensive Income".
This standard requires additional disclosures in the financial statements
for periods beginning after December 15, 1997,quarter ended June 30, 1998.
Comprehensive income is defined in this standard as total change in
stockholders' equity excluding capital transactions. Sony's comprehensive income
comprises net income plus other comprehensive income representing changes in
foreign currency translation adjustments, unrealized gains/losses on securities
and will have no effect on
the company's financial position or results of operations.
F-14
67
Internal-use software:
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This SOP, which
is effective for financial statements for fiscal years beginning after
December 15, 1998, provides guidance on accounting for the costs of
computer software developed or obtained solelyminimum pension liability adjustment. Sony has elected to meet the company's
internal needs. The company intends early adoption of the SOPdisclose
comprehensive income and its components in the first
quarterstatement of the year ending March 31, 1999. At this stage, it is not
possible to estimate the impact of adoption on the company's financial
statements for the year ending March 31, 1999.changes in
stockholders' equity.
Recent pronouncements -
Derivative instruments and hedging activities (unaudited):activities:
In June 1998, the FASBFinancial Accounting Standards Board issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This
standard, which is effective for fiscal years beginning after June 15,
1999, requires all derivatives to be recognized in the statement of
financial position as either assets or liabilities and measured at fair
value. To implement this standard, all hedging relationshiprelationships must be
reassessed. At this stage, itSony is not possible
to estimatenow in the process of assessing the impact of adoptionthat this
standard will have on the company's financial position orSony's results of operations.operations and consolidated
financial position.
F-15
79
Reclassifications -
Certain reclassifications of the financial statements and related footnote
amounts infor the years ended March
31, 19961997 and 19971998 have been made to conform to the presentation infor the year
ended March 31, 1998.
F-15
681999.
3. Reconciliation of the differences between basic and diluted net income
per share (EPS):
Reconciliation of the differences between basic and diluted EPS for the years
ended March 31, 1996, 1997, 1998 and 19981999 is as follows:
Yen in Thousands of
millions of shares Yen
--------- ----------- --------------- ------------ -----
Weighted-
Net average
Incomeincome shares EPS
--------- ----------- --------------- ------------ -----
For the year ended March 31, 19961997:
Basic EPS Net income available to common stockholders 54,252 373,999 145.1
--------- --------- -------
Effect of Dilutive Securities
Warrants 15
Convertible bonds 2,305 47,976
--------- ---------
Diluted EPS
Net income for computation 56,557 421,990 134.0
========= ========= =======
For the year ended March 31, 1997
Basic EPS-
Net income available to common stockholders 139,460 379,230 367.7
--------- --------- ------- ------- -----
Effect of Dilutive Securities -
Warrants 69
Convertible bonds 2,455 79,729
--------- ---------------- -------
Diluted EPS -
Net income for computation 141,915 459,028 309.2
========= ========= ======= ======= =====
For the year ended March 31, 19981998:
Basic EPS -
Net income available to common stockholders 222,068 398,181 557.7
--------- --------- ------- ------- -----
Effect of Dilutive Securities -
Warrants 51
Convertible bonds 2,271 65,890
--------- ---------------- -------
Diluted EPS -
Net income for computation 224,339 464,122 483.4
========= ========= ======= ======= =====
For the year ended March 31, 1999:
Basic EPS -
Net income available to common stockholders 179,004 409,753 436.9
------- ------- -----
Effect of Dilutive Securities -
Warrants 30
Convertible bonds 2,361 54,047
------- -------
Diluted EPS -
Net income for computation 181,365 463,830 391.0
======= ======= =====
F-16
80
4. Accumulated amortization of intangibles and goodwill:
Accumulated amortization of intangibles and goodwill amounted to 188,943218,225 million
yen and 218,225211,248 million yen at March 31, 19971998 and 1999, respectively.
5. Proceeds from merger of Loews Theatres exhibition business:
During the quarter ended June 30, 1998, respectively.
F-16
69
5. Cash flow information:
Cash payments duringSony merged its Loews Theatres
exhibition business with Cineplex Odeon Corporation to create Loews Cineplex
Entertainment Corporation ("Loews"). Subsequent to the year -
Cash payments for income taxes were 88,565 million yen, 87,723merger, Loews completed a
public offering of its common stock. After these transactions, Sony's ownership
in Loews is 39.5%. As a result of these transactions, Sony no longer
consolidates the results of Loews; Loews' results are now reported on an equity
basis. In connection with the Loews merger and the subsequent public offering,
Sony received proceeds of 53,007 million yen and 239,054recorded a gain of 5,181
million yen, for the years ended March 31, 1996, 1997 and 1998,
respectively;which is reflected in these respective years, cash payments for interest were 69,882
million yen, 68,004 million yen and 64,102 million yen.
Noncash investing and financing activitiesother income - Capital lease obligations of 9,563 million yen, 4,824 million yen and 4,406
million yen were incurred during the years ended March 31, 1996, 1997 and 1998,
respectively.
Conversions of convertible debt into common stock and additional paid-in capital
were 680 million yen, 63,578 million yen and 146,512 million yen for the years
ended March 31, 1996, 1997 and 1998, respectively.other.
6. Inventories:
Inventories comprise the following:
Yen in millions
----------------------------------------------
March 31
----------------------
1997------------------------
1998 --------- ---------1999
------- -------
Current:
Finished products 527,418 630,613 525,548
Work in process 119,406 110,035 101,754
Raw materials, purchased components
and supplies 127,366 134,392 133,629
Film --- released 73,767 104,585 --110,740
- in process 21,843 14,302 --------- ---------
869,8006,227
------- -------
993,927 ========= =========877,898
======= =======
Noncurrent:
Film --- released 143,003 172,515 --159,877
- in process 99,724 76,551 --------- ---------
242,72784,660
------- -------
249,066 ========= =========244,537
======= =======
F-17
7081
7. Account balances and transactions with affiliated companies:
Account balances and transactions with affiliated companies are presented below:
Yen in millions
-------------------------------------------
March 31
-------------------
1997------------------------
1998 -------- -------1999
----- ------
Accounts receivable, trade 13,232 9,425 ======== =======14,744
===== ======
Accounts payable, trade 89 945 ======== =======132
===== ======
Yen in millions
-----------------------------------------------------------------------------
Year ended March 31
---------------------------------
1996--------------------------------------------
1997 1998 --------- -------- --------1999
------ ------ ------
Sales 123,623 96,183 27,419 ========= ======== ========25,885
====== ====== ======
Purchases 2,647 733 3,199 ========= ======== ========1,932
====== ====== ======
Dividends from affiliated companies accounted for by the equity method for the
years ended March 31, 1996, 1997, 1998 and 19981999 were 6,639 million yen, 3,071 million yen, and 1,074 million
yen and 5,017 million yen, respectively.
F-18
71
8. Marketable securities and securities investments:investments and other:
Marketable securities and securities investments and other include debt and
equity securities of which the aggregate fair value, gross unrealized gains and
losses and cost pertaining to available-for-sale securities are as follows:
Yen in millions
-------------------------------------------------------------------------------------------------------
March 31, 1997--------------------------------------------------------------------------------------------------
March 31, 1998 -------------------------------------------------- --------------------------------------------------March 31, 1999
---------------------------------------------- ----------------------------------------------
Gross Gross Gross Gross
unrealized unrealized Fair unrealized unrealized Fair
Cost gains losses value Cost gains losses value
-------- ------------ ------------ --------- --------- ------------ ------------ --------------- ---------- ---------- ------- ------- ---------- ---------- -------
Available-for-sale
Debt securities 531,968 22,001 1,338 552,631 613,905 27,146 2,135 638,916 746,005 36,632 12,187 770,450
Equity securities 49,512 124,682 2,364 171,830 60,049 65,486 4,220 121,315 -------- --------57,712 13,774 3,156 68,330
------- --------- --------- -------------- ----- ------- --------------- ------ ------ -------
Total 581,480 146,683 3,702 724,461 673,954 92,632 6,355 760,231 ======== ========803,717 50,406 15,343 838,780
======= ========= ========= ============== ===== ======= =============== ====== ====== =======
F-18
82
Marketable securities and securities investments and other as of March 31, 19971998
and 19981999 include short-term investments in money market fundsmonetary trusts and long-term
advances to third parties of 65,776131,662 million yen and 131,662101,618 million yen,
respectively.
At March 31, 1998,1999, debt securities mainly consist of Japanese government and
municipal bonds and corporate debt securities due within 1 to 15 years.
During the years ended March 31, 1996, 1997 and 1998, the net unrealized gains
on available-for-sale securities included in the separate component of
stockholders' equity, net of applicable taxes, increased by 16,361 million yen,
decreased by 14,055 million yen and decreased by 22,105 million yen,
respectively.
Proceeds from sales of available-for-sale securities were 397,774 million yen,
347,790 million yen,
359,815 million yen and 359,815621,045 million yen for the years ended March 31, 1996,
1997,
1998 and 1998,1999, respectively. On those sales, gross realized gains computed on
the average cost basis were 14,605 million yen, 19,174 million yen, 18,028 million yen and 18,0289,475
million yen and gross realized losses were 7,734 million yen, 9,877 million yen, and 13,793 million yen
and 3,554 million yen, respectively.
In December 1998, Sony Corporation 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 of these securities at the time of contribution was 81,413 million yen.
Upon contribution of these available-for-sale securities, the net unrealized
gain was realized and was disclosed as "gain on securities contribution to
employee retirement benefit trust" on the statement of income. Since the
unrealized gain, net of tax, had already been recorded as accumulated other
comprehensive income, the contribution itself did not impact the amount of
comprehensive income.
The net change in unrealized gain or loss on trading securities that has been
included in earnings during the years ended March 31, 1996, 1997, 1998 and 19981999 was
insignificant.
F-19
72
In the ordinary course of business, the companySony maintains long-term investment
securities, included in securities investments and other, issued by a number of
nonpublic companies. The aggregate carrying amounts of the investments in
nonpublic companies were 62,34660,527 million yen and 60,52741,203 million yen at March 31,
19971998 and 1998,1999, respectively. The corresponding fair values at those dates were
not computed as such estimation was not readily determinable.
F-19
83
9. Short-term borrowings and long-term debt:
Short-term borrowings at March 31, 1998 comprise the following:
Yen in millions
----------------------------
March 31
--------------------
1998 1999
------- ------
Loans, principally from banks, with weighted-average
interest ranging from
0.77% to 12.00%rates of 3.99% and 2.34% per annum at
March 31, 1998 and 1999, respectively 112,636 40,877
Commercial paper with interest of 6.15% per annum 1,981 --
------- ------
114,617 40,877
======= ======
As at March 31, 1998, the company had unused lines of credit amounting to
1,310,206 million yen of which 404,529 million yen related to commercial paper
programs and 151,987 million yen related to medium term notes. Under these
programs, the company is authorized to obtain short-term financing at prevailing
interest rates for periods not in excess of 360 days.
F-20
7384
Long-term debt at March 31, 1998 comprises the following:
Yen in millions
-----------------------------------
March 31
------------------------
1998 1999
--------- ---------
Unsecured loans, representing obligations principally to banks, duebanks:
Due 1998 to 2017 with interest ranging from 1.0% to 9.25% per annum 83,158
Due 1999 to 2017 with interest ranging from 1.0% to 6.25% per annum 60,385
Secured loans, representing obligations principally to banks, duebanks:
Due 1999 to 2003 with interest ranging from 3.0% to 10.13% per annum 4,148
Due 1999 to 2012 with interest ranging from 3.22% to 10.13% per annum 29,501
Medium-term notes of consolidated subsidiaries duesubsidiaries:
Due 1998 to 2006 with interest ranging from 3.41% to 8.04% per annum 231,419
Due 1999 to 2006 with interest ranging from 2.87% to 8.04% per annum 172,698
Unsecured 2.0% convertible bonds due 2000, convertible currently
at 4,159.9 yen for one common share, redeemable before due date 342 330
Unsecured 0.15% convertible bonds due 2001, convertible currently
at 6,519 yen for one common share, redeemable before due date 105,882 89,762
Unsecured 1.5% convertible bonds due 2002, convertible currently
at 4,387.9 yen for one common share, redeemable before due date 772 700
Unsecured 1.4% convertible bonds due 2003, convertible currently
at 5,415.5 yen for one common share, redeemable before due date 17,428 13,627
Unsecured 1.4% convertible bonds due 2005, convertible currently
at 7,990.9 yen for one common share, redeemable before due date 297,772 297,586
Unsecured 0.1% bonds, due 1999 with detachable warrants 1,000 1,000
Unsecured 0.1% bonds, due 2000 with detachable warrants 2,000 2,000
Unsecured 0.1% bonds, due 2001 with detachable warrants 3,500 3,500
Unsecured 0.03% bonds, due 2004 with detachable warrants,
net of unamortized discount - 3,671
Unsecured 6.875% bonds due 2000, net of unamortized premium 50,149 50,066
Unsecured 4.4% bonds due 2001 80,000 80,000
Unsecured 6.125% U.S. dollar notes due 2003, net of unamortized discount 193,022 193,104
Unsecured 1.95% bondsnotes of a consolidated subsidiary, due 1998 15,000 -
Unsecured 2.55% notes of a consolidated subsidiary, due 2000 5,000 5,000
Unsecured 5.01% yen/U.S. dollar dual currency notes of a consolidated
subsidiary, due 2000 25,362 23,356
Unsecured 2.0% bonds of a consolidated subsidiary, due 2001 15,000 15,000
Unsecured 1.35% bonds of a consolidated subsidiary, due 2001 - 15,000
Unsecured 2.5% bonds of a consolidated subsidiary, due 2003 15,000 15,000
Unsecured 2.0% bonds of a consolidated subsidiary, due 2005 - 15,000
Unsecured fixed coupon U.S. dollar notes linked to the Yen/U.S. dollar
rate of a consolidated subsidiary, due 2001 859 784
Secured 3.8% bonds of a consolidated subsidiary, due 2001,
redeemable before due date 3,000 3,000
Long-term capital lease obligations,obligations:
Due 1998 to 2006 with interest ranging from 1.15% to 16.28% per annum due 199826,863
Due 1999 to 2006 26,8632009 with interest ranging from 1.18% to 11.67% per annum 21,568
Guarantee deposits received 12,538 -----------13,647
--------- ---------
1,189,214 1,125,285
Less --- Portion due within one year 84,794 -----------87,825
--------- ---------
1,104,420 ===========1,037,460
========= =========
F-21
7485
On September 1, 1995, the companySony Corporation issued 1 billion yen of 0.1% bonds, with
500 detachable 500 warrants. One warrant, which became exercisable from October 1,
1995, entitles the holder to subscribe 2 million yen for shares of common stock
of the companySony Corporation at 5,330 yen per share (subject to adjustment in certain
circumstances). Upon issuance of the bonds, the companySony Corporation bought all of these
warrants and distributed such instruments at fair market value to the then
directors of the companySony Corporation as a part of their directors' remuneration. At March 31, 1998, 41All warrants were outstanding and will expire on August 31, 1999.have
been exercised.
On August 16, 1996, the companySony Corporation issued 2 billion yen of 0.1% bonds, with
1,000 detachable 1,000 warrants. One warrant, which became exercisable from October 1,
1996, entitles the holder to subscribe 2 million yen for shares of common stock
of the companySony Corporation at 7,022 yen per share (subject to adjustment in certain
circumstances). Upon issuance of the bonds, the companySony Corporation bought all of these
warrants and distributed such instruments at fair market value to the then
directors and selected employees of the companySony Corporation as a part of their
remuneration or salary. At March 31, 1998, 2621999, 222 warrants were outstanding and
will expire on August 15, 2000.
On October 13, 1997, the companySony Corporation issued 3.5 billion yen of 0.1% bonds, with
1,750 detachable 1,750 warrants. One warrant, which will bebecame exercisable from November
2, 1998, entitles the holder to subscribe 2 million yen for shares of common
stock of the companySony Corporation at 11,788 yen per share (subject to adjustment in
certain circumstances). Upon issuance of the bonds, the companySony Corporation bought all
of these warrants and distributed such instruments at fair market value to the
then directors and selected employees of the companySony Corporation as a part of their
remuneration or salary. At March 31, 1998,1999, all warrants were outstanding and
will expire on October 12, 2001.
On August 17, 1998, Sony Corporation issued 4 billion yen of 0.03% bonds, with
2,000 detachable warrants. One warrant, which will be exercisable from September
1, 1999, entitles the holder to subscribe 2 million yen for shares of common
stock of Sony Corporation at 12,527 yen per share (subject to adjustment in
certain circumstances). Upon issuance of the bonds, Sony Corporation bought all
of these warrants and distributed such instruments at fair market value to the
then directors and selected employees of Sony Corporation as a part of their
remuneration or salary. At March 31, 1999, all warrants were outstanding and
will expire on August 16, 2004.
On March 4, 1998, the companySony Corporation issued unsecured 1.5 billion U.S. dollar
Notes due 2003 denominated in U.S. dollars with an interest rate of 6.125%. The Notes are redeemable before
the due date. By entering into several interest rate and currency swap
agreements and interest rate swap agreements, Sony has effectively converted the
cash stream for these Notes into yen with fixed interest rates of 1.287% to
1.515% per annum for 150,000 million yen principled amount and LIBOR plus
0.06997% per annum for 43,425 million yen principled amount as of March 31,
1999.
F-22
86
At March 31, 1998, 57,369 thousand shares of common stock would be issued upon
conversion or exercise of all convertible debentures and warrants outstanding.
At March 31, 1998,1999, property, plant and equipment with a book value of 5,1918,293
million yen iswas mortgaged as security for loans and bonds issued by consolidated
subsidiaries.
F-22
75
Aggregate amounts of annual maturities of long-term debt during the next five
years are as follows:
Year ending Yen in
March 31 Yen in millions
----------- ----------------------- --------
1999 84,794
2000 101,05387,825
2001 245,517224,394
2002 154,486165,147
2003 224,114224,283
2004 47,045
At March 31, 1999, Sony had unused lines of credit amounting to 2,101,709
million yen of which 1,163,850 million yen related to commercial paper programs
and 598, 458 million yen related to medium term notes. Under these programs,
Sony is authorized to obtain short-term financing at prevailing interest rates
for periods not in excess of 360 days.
The basic agreements with certain banks in Japan include provisions that
collateral (including sums on deposit with such banks) or guarantors will be
furnished upon the banks' request and that any collateral furnished, pursuant to
such agreements or otherwise, will be applicable to all present or future
indebtedness to such banks.
10. Insurance-related operations:
The company'sSony's stock life insurance subsidiary maintains accounting records as noted in
Note 2 in accordance with the accounting principles and practices prescribed by
the Japanese Ministry of Finance (the "MOF"), which vary in some respects from
U.S. GAAP. Those differences are mainly: that insurance acquisition costs are
charged to income when incurred in Japan whereas in the U.S. those costs are
deferred and amortized generally over the premium-paying period of the insurance
policies, that future policy benefits calculated locally under the authorization
of the MOF are comprehensively adjusted to a net level premium method with
certain adjustments of actuarial assumptions for the U.S. GAAP purposes and that
deferred income taxes are not recognized under local accounting practices. For
purposes of preparing the consolidated financial statements, appropriate
adjustments have been made to reflect such items in accordance with U.S. GAAP.
F-23
87
The amounts of statutory net equity of the subsidiary as of March 31, 19971998 and
19981999 were 12,62540,625 million yen and 40,62540,626 million yen, respectively.
F-23
76
Deferred insurance acquisition costs -
Insurance acquisition costs to be deferred, such as commission expenses, medical
examination and inspection report fees, etc., vary with and are primarily
related to acquiring new insurance policies and are amortized mainly over the
premium-paying period of the related insurance policies using assumptions
consistent with those used in computing policy reserves. Amortization charged to
income for the years ended March 31, 1996, 1997, 1998 and 19981999 amounted to 9,694
million yen, 15,855
million yen, 21,838 million yen and 21,83820,669 million yen, respectively.
Future insurance policy benefits -
Liabilities for future policy benefits are established in amounts adequate to
meet the estimated future obligations of policies in force. These liabilities
are computed by the net level premium method based upon estimates as to future
investment yield, mortality and withdrawals. Future policy benefits are computed
using interest rates ranging from approximately 2.75%2.5% to 6.25%5.5%, generally graded
down after 10 to 20 years. Mortality, morbidity and withdrawal assumptions for
all policies are based on either the life insurance subsidiary's own experience
or various actuarial tables. At March 31, 19971998 and 1998,1999, future insurance policy
benefits amounted to 528,204673,473 million yen and 673,473865,814 million yen, respectively.
11. Financial instruments:
The companySony has certain financial instruments including financial assets and
liabilities and off-balance-sheet financial instruments incurred in the normal
course of business. In applying a consistent risk management strategy, the
companySony
manages the exposure to market rate movements of its financial assets and
liabilities through the use of derivative financial instruments which include
foreign exchange forward contracts, foreign currency option contracts, interest
rate swap agreements and interest rate and currency swap agreements designated
as hedges. These instruments are executed with creditworthy financial
institutions, and virtually all foreign currency contracts are denominated in
U.S. dollars, German markseuros and other currencies of major countries. Although the
companySony may
be exposed to losses in the event of nonperformance by counterparties or
interest and currency rate movements, it does not anticipate significant losses
due to the nature of its counterparties or the hedging arrangements.
F-24
88
Following are explanatory notes regarding the financial assets and liabilities
and off-balance-sheet financial instruments.
F-24
77
Cash and cash equivalents and time deposits
and notes and accounts receivable, trade -
In the normal course of business, substantially all cash and cash equivalents
and time deposits and notes and accounts receivable, trade, are highly liquid and are carried at amounts which approximate fair value.
Notes and accounts payable, trade -
In the normal course of business, substantially all notes and accounts payable,
trade, are to be paid currently and their carrying amounts approximate
fair value.
Short-term borrowings and long-term debt -
The fair values of short-term borrowings and total long-term debt, including the
current portion, were estimated based on either the market value or the
discounted amounts of future cash flows using the company'sSony's current incremental
borrowing rates for similar liabilities.
Derivative financial instruments -
The companySony utilizes foreign exchange forward contracts and foreign currency option
contracts primarily to fix the cash flow value resulting from accounts
receivable and payable and future transactions denominated in foreign currencies
in relation to the core currencies (Japanese yen, U.S. dollars and German
marks)euros) of
the company'sSony's major operating units. Foreign exchange forward contracts, the majority
of which mature within three months, are used to hedge this risk which is
substantially associated with accounts receivable and payable and anticipated
transactions denominated in foreign currencies. The contracted amounts
outstanding at March 31, 19971998 and 19981999 were 756,294733,020 million yen and 733,020718,474
million yen, respectively. The fair values of these contracts were estimated
based on market quotations.
The companySony has entered into interest rate swap agreements and interest rate and
currency swap agreements which mature from 19981999 to 2006 to reduce its exposure
to losses resulting from adverse fluctuations in interest rates or foreign
currency exchange rates on underlying debt instruments. At March 31, 19971998 and
1998,1999, the aggregate notional principal amounts of the interest rate swap
agreements were 176,70591,235 million yen and 91,235210,085 million yen, respectively, and
those of the interest rate and currency swap agreements were 300,269430,297 million yen
and 430,297390,734 million yen, respectively. The fair values of such agreements were
estimated based on the discounted amounts of net future cash flows.
F-25
78
The company89
Sony has entered into purchased foreign currency option contracts in the
notional principal amounts of 196,990233,184 million yen and 233,184414,896 million yen at
March 31, 19971998 and 1998,1999, respectively. The majority of these contracts expire
within three months of the balance sheet dates. The companySony has also entered into
written foreign currency option contracts in the notional principal amounts of
185,621279,406 million yen and 279,406344,890 million yen at March 31, 19971998 and 1998,1999,
respectively. The majority of these contracts are part of range forward contract
arrangements and expire in the same month with the corresponding purchased
foreign currency option contracts described above. The fair values of such
foreign currency options were estimated based on values quoted by brokers.
A consolidatedSony's stock life insurance subsidiary has entered into written government bond
option contracts as an integral part of short-term investing activities in order
to fix the yields from bonds on hand to certain ranges. All of these contracts
expire within two months of the balance sheet date and their notional principal
amounts were 204,945181,509 million yen and 181,509108,700 million yen at March 31, 19971998 and
1998,1999, respectively. For accounting purposes, those transactions do not qualify
for hedge accounting. Accordingly, those written bond option contracts were
marked to market. The fair values of such written bond option contracts were
estimated based on market quotations. The average fair value and the net
gain/loss from those written bond option contracts during the years ended March
31, 1997, 1998 and 1999 were insignificant.
F-26
7990
The estimated fair values of the company'sSony's financial instruments, excluding debt
and equity securities, both on and off the
balance sheets excluding notes and accounts receivable, trade and notes and
accounts payable, trade that are carried at amounts which approximate fair value
and excluding debt and equity securities disclosed in Note 8, are summarized as
follows:
Yen in millions
----------------------------------------------------------
Carrying Estimated
amount fair value
----------- ------------------------ -------------
At March 31, 1997
- ---------------------
Cash and cash equivalents 428,518 428,518
Time deposits 52,518 52,518
Notes and accounts receivable, trade 1,066,314 1,066,314
Short-term borrowings (117,801) (117,801)
Notes and accounts payable, trade (653,826) (653,826)
Long-term debt including the current portion (1,310,080) (1,248,046)
Forward exchange contracts 997 2,464
Interest rate and currency swap agreements -- (27,740)
Option contracts purchased 724 724
Option contracts written (1,035) (1,035)
Bond option contracts written (1,026) (1,026)
At March 31, 1998
- ---------------------
Cash and cash equivalents 423,286 423,286
Time deposits 107,139 107,139
Notes and accounts receivable, trade 1,230,799 1,230,799
Short-term borrowings (114,617) (114,617)
Notes and accounts payable, trade (768,152) (768,152)
Long-term debt including the current portion (1,189,214) (1,191,367)
Forward exchange contracts (471) (1,682)
Interest rate and currency swap agreements --- (24,757)
Option contracts purchased 2,461 2,461
Option contracts written (2,548) (2,548)
Bond option contracts written (909) (909)
At March 31, 1999
Cash and cash equivalents 592,210 592,210
Time deposits 24,304 24,304
Short-term borrowings (40,877) (40,877)
Long-term debt including the current portion (1,125,285) (1,351,358)
Forward exchange contracts (516) (4,423)
Interest rate swap agreements (549) (1,025)
Interest rate and currency swap agreements - (21,470)
Option contracts purchased 3,252 3,252
Option contracts written (4,226) (4,226)
Bond option contracts written (909) (909)(436) (436)
F-27
91
12. Pension and severance plans:
Upon terminating employment, employees of the parent companySony Corporation and subsidiaries in
Japan are entitled, under most circumstances, to lump-sum indemnities or pension
payments as described below. For employees voluntarily retiring, under normal
circumstances, minimum payment is an amount based on current rates of pay and
lengths of service. In calculating the minimum payment for employees
involuntarily retiring, including employees retiring due to meeting mandatory
retirement age requirements, the companySony may grant additional benefits. With respect to
directors' resignations, lump-sum severance indemnities are calculated using a
similar formula and are normally paid subject to the approval of the company'sSony's
stockholders.
F-27
80
The parent companySony Corporation and most subsidiaries in Japan have contributory funded defined
benefit pension plans, which are pursuant to the Japanese Welfare Pension
Insurance Law. The contributory pension plans cover a portion of the
governmental welfare pension program, under which the contributions are made by
the companies and their employees, and an additional portion representing the
substituted noncontributory pension plans. Under the contributory pension plans,
the defined benefits representing the noncontributory portion of the plans, in
general, cover 60% of the indemnities under the existing regulations to
employees. The remaining indemnities are covered by severance payments by the
companies. The pension benefits are determined based on years of service and the
compensation amounts, as stipulated in the aforementioned regulations, are
payable at the option of the retiring employee in a lump-sum amount or on a
monthly pension. Contributions to the plans are funded through several financial
institutions in accordance with the applicable laws and regulations.
Most foreign subsidiaries have defined benefit pension plans or severance
indemnity plans which substantially cover all of their employees, under which
the cost of benefits is currently funded or accrued. Benefits awarded under
these plans are based primarily on current rate of pay and lengths of service.
NetF-28
92
The components of net pension and severance costs for the years ended March 31,
1997, 1998 and the related pension plans' funded status
including the employees' contributory portion and rate assumptions are shown
below:1999 were as follows:
Japanese plans:
Yen in millions
----------------------------------------------------------------------
Year ended March 31
------------------------------------
1996----------------------------------
1997 1998 --------- ---------- ---------1999
------ ------ ------
Net pension and severance cost (credit):
Service cost -- benefits earned during the year 29,276 32,772 39,43628,699 35,318 41,743
Interest cost on projected benefit obligation 11,090 11,959 13,303 Actual14,020
Expected return on plan assets (9,545) (14,373) (7,843)(6,336) (7,978) (9,618)
Amortization of net transition asset (375) (375) (375)
Recognized actuarial loss 5,406 6,369 8,032
Amortization of prior service cost 985 1,178 1,234
------ ------ ------
Net amortization and deferral 7,245 14,053 7,037
--------- ---------- ---------
Actuarial net pension and severanceperiodic benefit cost for the year 38,066 44,411 51,933
Employee contributions (4,098) (4,073) (4,118)
--------- ---------- ---------
Net pension and severance cost for the year 33,968 40,338 47,815 ========= ========== =========55,036
====== ====== ======
F-28
81
Foreign plans:
Yen in millions
------------------------------------------------------------------
Year ended March 31
--------------------------------
1996----------------------------------
1997 1998 --------1999
------ ------ ------
Service cost 15,988 15,625 15,842
Interest cost 4,108 4,911 5,333
Expected return on plan assets (3,095) (3,900) (4,475)
Amortization of net transition asset (110) (122) (122)
Recognized actuarial loss 178 308 342
Amortization of prior service cost -- (70) (274)
------ ------ ------
Net periodic benefit cost 17,069 16,752 16,646
====== ====== ======
F-29
93
The changes in benefit obligation and plan assets, funded status, composition of
amounts recognized in the consolidated balance sheet and assumptions used were
as follows:
Japanese plans Foreign plans
----------------------- -----------------------
Yen in millions Yen in millions
----------------------- -----------------------
March 31 March 31
----------------------- -----------------------
1998 1999 1998 1999
------- ------- -------- --------
Net pension and severance cost (credit):
Change in benefit obligation:
Benefit obligation at beginning of year 393,448 476,068 74,673 85,159
Service cost -- benefits earned during the year 10,790 15,98835,318 41,743 15,625 15,842
Interest cost on projected benefit13,303 14,020 4,911 5,333
Plan participants' contributions 4,118 4,273 144 176
Amendments -- -- (1,971) (1,079)
Actuarial loss 47,679 45,933 2,636 8,060
Foreign currency exchange rate changes -- -- 4,859 (9,322)
Benefits paid (17,798) (19,176) (15,718) (11,199)
------- ------- ------- -------
Benefit obligation 3,197 4,108 4,911at end of year 476,068 562,861 85,159 92,970
------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 204,491 236,966 43,837 54,597
Actual return on plan assets (4,122) (3,897) (6,149)
Net amortization and deferral 1,860 870 2,365
-------- -------- --------
Net pension and severance cost for the year 11,725 17,069 16,752
======== ======== ========
Pension plans' funded status:
Japanese plans7,843 27,845 7,016 7,005
Foreign plans
--------------------- ------------------------
Yen in millions Yen in millions
--------------------- ------------------------
March 31 March 31
--------------------- ------------------------
1997 1998 1997 1998
--------- --------- ----------- ----------
Actuarial presentcurrency exchange rate changes -- -- 3,164 (6,223)
Employer contribution 25,667 106,738 3,993 8,274
Plan participants' contributions 4,118 4,273 144 176
Benefits paid (5,153) (6,501) (3,557) (3,532)
------- ------- ------- -------
Fair value of obligations -
Vested benefit 268,719 327,802 50,325 57,119
Nonvested benefit 53,311 61,508 4,060 5,850
--------- --------- ----------- ----------
Accumulated benefit obligation 322,030 389,310 54,385 62,969
Additional benefits related to projected salary
increase 71,418 86,758 20,288 22,190
--------- --------- ----------- ----------
Projected benefit obligation 393,448 476,068 74,673 85,159
Planplan assets at fair value 204,491end of year 236,966 43,837369,321 54,597 --------- --------- ----------- ----------
Excess of projected benefit obligation over plan
assets 188,95760,297
------- ------- ------- -------
Funded status 239,102 30,836193,540 30,562 32,673
Unrecognized netactuarial loss (59,740) (91,343) (4,805)(102,739) (4,617) (8,983)
Unrecognized net transition asset 3,104 2,729 1,4532,354 492 263
Unrecognized prior service cost (12,807) (12,496) --(12,805) 2,651 Adjustment required to recognize minimum pension
liability -- 20,692 -- --
--------- --------- ----------- ----------2,847
------- ------- ------- -------
Net pension liabilityamount recognized 137,992 80,350 29,088 26,800
======= ======= ======= =======
Amounts recognized in the consolidated balance
sheet 119,514consist of:
Accrued pension and severance costs 158,684 27,484106,343 29,088 ========= ========= =========== ==========26,800
Intangibles (9,767) (10,451) -- --
Accumulated other comprehensive income (10,925) (15,542) -- --
------- ------- ------- -------
Net amount recognized 137,992 80,350 29,088 26,800
======= ======= ======= =======
Assumptions used in developing the pension
obligation as of March 31:
Discount rate 3.5% 3.0% 6.5 - 9.0% 6.5 - 8.0%
Long-term rate2.7% 6.5-8.0% 4.4-7.3%
Expected return on plan assets 4.0% 4.0% 6.5-9.8% 6.9-9.8%
Rate of salarycompensation increase 3.0% 3.0% 2.5 - 8.5% 2.5 - 8.5%
Long-term rate of return on funded assets 3.7% 4.0% 7.0 - 10.0% 6.5 - 9.8%2.5-8.5% 2.8-8.5%
F-30
94
As required under FAS 87 "Employers' Accounting for Pensions", the assumptions
are reviewed in accordance with changes in circumstances. Such changes in
assumptions are the primary reason for the fluctuation in the projected benefit
obligation and unrecognized net gains and losses.
F-29
82actuarial loss.
Under FAS 87, the companySony has recorded a pension liability to cover the amount of the
projected benefit obligation in excess of plan assets, considering unrealized
items and the minimum pension liability. The minimum pension liability which
the companySony has recognized on substantially all of the Japanese plans represents the
excess of accumulated benefitsbenefit obligation over plan assets and accrued pension
cost.and severance costs. A corresponding amount was recognized as an intangible
asset to the extent of unrecognized prior service cost, and the balance was
recorded as a separate reductioncomponent of stockholders'
equity,accumulated other comprehensive income, net of tax.
The accumulated benefit obligation of the Japanese plans was 389,310 million yen
and 461,815 million yen as of March 31, 1998 and 1999, respectively.
As discussed in Note 8, Sony Corporation contributed certain marketable equity
securities to an employee retirement benefit trust. The securities held in this
trust are qualified as plan assets are invested primarily in interest bearing securities and listed
equity securities.under U.S. GAAP.
13. Income taxes:
Income before income taxes and income tax expense comprise the following:
Yen in millions
----------------------------------------------------------------------
Year ended March 31
---------------------------------
1996-------------------------------------
1997 1998 --------- --------- ---------1999
------- ------- -------
Income before income taxes:
Parent companySony Corporation and domestic subsidiaries 78,154in Japan 226,847 293,520 195,903
Foreign subsidiaries 60,005 85,582 160,229 --------- --------- ---------
138,159172,225
------- ------- -------
312,429 453,749 ========= ========= =========368,128
======= ======= =======
Income taxes --- Current:
Parent companySony Corporation and domestic subsidiaries 40,488in Japan 125,028 145,890 85,970
Foreign subsidiaries* 31,600subsidiaries 44,032 64,223 --------- --------- ---------
72,08872,416
------- ------- -------
169,060 210,113 ========= ========= =========158,386
======= ======= =======
Income taxes --- Deferred:
Parent companySony Corporation and domestic subsidiaries 6,543in Japan (6,543) 7,221 16,433
Foreign subsidiaries* (1,473)subsidiaries 1,053 (2,466) --------- --------- ---------
5,0702,154
------- ------- -------
(5,490) 4,755 ========= ========= =========18,587
======= ======= =======
- ---------------
* Includes taxes provided on undistributed earnings of foreign
subsidiaries.
The companyF-31
95
Sony is subject to a number of different income taxes which, in the aggregate,
indicate a statutory rate in Japan of approximately 51%. for the years ended
March 31, 1997 and 1998, and approximately 48% for the year ended March 31,
1999, respectively. Due to a
changethe changes in Japanese income tax regulations, effective April 1, 1998, the
statutory rate was reduced from 51% to approximately 48% effective April 1, 1998 and such amount has beenwas
further reduced from 48% to 42% effective April 1, 1999. The respective newly
enacted rates were used in calculating the future expected tax effects of
temporary differences.differences as of March 31, 1998 and 1999. The effect of the enacted change in
the tax rate on the balance of deferred tax assets and liabilities was
insignificant.
F-30
83insignificant as of March 31, 1998 and reduced the net deferred tax liability
and income tax expense by approximately 13,400 million yen as of March 31, 1999.
Reconciliation of the differences between the statutory tax rate and the
effective income tax rate is as follows:
Year ended March 31
-----------------------------
1996----------------------------
1997 1998 ------- ------- -------1999
---- ---- ----
Statutory tax rate 51.0% 51.0% 51.0%48.0%
Increase (reduction) in taxes resulting from:
Income tax credit (2.8) (2.8) (2.4) Current operating(1.3)
Valuation allowance recognized on current losses of
subsidiaries 7.9 5.2 1.9 5.5
Changes in Japanese income tax rates -- (0.9) (3.6)
Decrease in deferred tax liabilities on undistributed
earnings of foreign subsidiaries (2.4) (2.7) (2.9)
Other (0.2) (1.0) (3.1)
------- ------- -------1.4 0.5 2.4
---- ---- ----
Effective income tax rate 55.9% 52.4% 47.4% ======= ======= =======48.1%
==== ==== ====
F-32
96
The significant components of deferred tax assets and liabilities are as
follows:
Yen in millions
---------------------------------------------
March 31
----------------------
1997-----------------------
1998 --------- ---------1999
-------- --------
Deferred tax assets:
Operating loss carryforwards for tax purposes 75,536 79,761 70,120
Accrued pension and severance costs 45,418 54,487 61,123
Warranty reserve and accrued expenses 46,187 52,445 57,085
Inventory --- intercompany profits and write-down 44,416 38,915 39,469
Future insurance policy benefits 34,580 38,686 37,393
Accrued enterprise taxes 12,952 18,276bonus 17,881 17,565
Other accrued employees' compensation 14,465 12,336
Other 74,173 77,232
--------- ---------89,963 90,309
-------- --------
Gross deferred tax assets 347,727 372,138 373,064
Less: Valuation allowance (122,258) (125,908) --------- ---------(122,656)
-------- --------
Total deferred tax assets 225,469 246,230 --------- ---------250,408
-------- --------
Deferred tax liabilities:
Insurance acquisition costs (67,858) (72,352)
Undistributed earnings of foreign subsidiaries (68,928) (77,833) Insurance acquisition costs (67,004) (67,858)
Unrealized gain(55,106)
Gain on securities (72,741)contribution to employee retirement
benefit trust -- (24,712)
Depreciation (13,264) (11,265)
Unrealized gains on securities (41,185) Depreciation (17,041) (13,264)(11,243)
Other (39,133) (45,773) --------- ---------(59,858)
-------- --------
Gross deferred tax liabilities (264,847) (245,913) --------- ---------(234,536)
-------- --------
Net deferred tax assets (liabilities) (39,378) 317 ========= =========15,872
======== ========
F-31
84
The valuation allowance mainly relates to deferred tax assets of consolidated
subsidiaries with operating loss carryforwards for tax purposes that are not
expected to be realized. The net changes in the total valuation allowance for
the years ended March 31, 1996, 1997 and 1998 were increases of 28,174 million
yen, 3,902 million yen and
3,650 million yen, respectively.respectively, and for the year ended March 31, 1999 was a
decrease of 3,252 million yen.
Net deferred tax assets (liabilities) are included in the consolidated balance sheets as
follows:
Yen in millions
-------------------------------------------------
March 31
--------------------------
1997-----------------------
1998 ----------- -----------1999
-------- --------
Current assets --- Deferred income taxes 111,756 121,189 102,588
Other assets --- Other 27,158 30,523 39,483
Current liabilities --- Other (4,341) (4,279) (5,377)
Long-term liabilities --- Deferred income taxes (173,951) (147,116) ----------- -----------(120,822)
-------- --------
Net deferred tax assets (liabilities) (39,378) 317 =========== ===========15,872
======== ========
F-33
97
At March 31, 1998,1999, no deferred income taxes have been provided on undistributed
earnings of foreign subsidiaries not expected to be remitted in the foreseeable
future totaling 295,778337,056 million yen, and on the gain of 61,544 million yen on a
subsidiary's sale of stock of 61,544 million yen arising from the issuance of common stock of Sony
Music Entertainment (Japan) Inc. in a public offering to third parties in
November 1991, as the companySony does not anticipate any significant tax consequences on
possible future disposition of its remaining investment based on its tax
planning strategies. The unrecognized deferred tax liabilities as of March 31,
19981999 for such temporary differences amounted to 109,82786,902 million yen.
Operating loss carryforwards for tax purposes of consolidated subsidiaries at
March 31, 19981999 amounted to approximately 235,319204,041 million yen and are available
as an offset against future taxable income of such subsidiaries. These
carryforwards expire at various dates primarily up to 1513 years. Realization is
dependent on such subsidiaries generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets, less valuation allowance, will be realized. The amount of such net
deferred tax assets considered realizable, however, could be reducedchanged in the near
term if estimates of future taxable income during the carryforward period are
reduced.
F-32
85changed.
14. Stockholders' equity:
Changes in each captionthe number of stockholders' equity, except for retained earnings,shares issued and outstanding during the years ended
March 31, 1997, 1998 and 1999 have resulted from the following:
Yen in millions
-----------------------------------
Year endedNumber of
shares
-----------
Balance at March 31, -----------------------------------
1996 1997 1998
--------- --------- ---------
Common stock:
Balance at beginning of year 299,589 299,885 332,037374,067,706
Exercise of stock purchase warrants -- 336 861117,838
Conversion of convertible debt 296 31,816 73,298
--------- --------- ---------bonds 9,999,499
-----------
Balance at end of year 299,885 332,037 406,196
========= ========= =========
Additional paid-in capital:
Balance at beginning of year 441,241 441,735 474,033
Exercise of stock purchase warrants -- 336 860
Conversion of convertible debt 384 31,762 73,214
Common stock warrants 110 200 315
--------- --------- ---------
Balance at end of year 441,735 474,033 548,422
========= ========= =========
Legal reserve:
Balance at beginning of year 27,620 31,380 35,831
Transfer from retained earnings 3,760 4,451 3,054
--------- --------- ---------
Balance at end of year 31,380 35,831 38,885
========= ========= =========
Unrealized gain on securities:
Balance at beginning of year 64,972 81,333 67,278
Net charge during the year 16,361 (14,055) (22,105)
--------- --------- ---------
Balance at end of year 81,333 67,278 45,173
========= ========= =========
Minimum pension liability adjustment:
Balance at beginning of year -- -- --
Valuation adjustment, net of related income taxes -- -- (5,714)
--------- --------- ---------
Balance at end of year -- -- (5,714)
========= ========= =========
Cumulative translation adjustment:
Balance at beginning of year (411,167) (302,503) (181,221)
Aggregate translation adjustment for the year 114,461 127,705 35,985
Income taxes for the year allocated to translation
adjustment (5,797) (6,423) 4,511
--------- --------- ---------
Balance at end of year (302,503) (181,221) (140,725)
========= ========= =========
F-33
86
Yen in millions
-----------------------------------
Year ended March 31, -----------------------------------
1996 1997 1998
--------- --------- ---------
Treasury stock, at cost:
Balance at beginning of year (6) (26) (96)
Purchase of treasury stock (955) (3,156) (7,948)
Reissuance of treasury stock 935 3,086 5,164
--------- --------- ---------
Balance at end of year (26) (96) (2,880)
========= ========= =========
Number of shares
-----------------------------------------------
Year ended March 31
-----------------------------------------------
1996 1997 1998
------------- ------------- -------------
Common stock:
Balance at beginning of year 373,911,490 374,067,706 384,185,043
Exercise of stock purchase warrants -- 117,838 264,562
Conversion of convertible debt 156,216 9,999,499bonds 22,745,666
------------- ------------- ------------------------
Balance at endMarch 31, 1998 407,195,271
Exercise of year 374,067,706 384,185,043 407,195,271
============= ============= =============stock purchase warrants 26,774
Conversion of convertible bonds 3,217,066
-----------
Balance at March 31, 1999 410,439,111
===========
F-34
98
At March 31, 1999, 54,445 thousand shares of common stock would be issued upon
conversion or exercise of all convertible debentures and warrants outstanding.
Shares of common stock that would be issued upon integration of three listed
subsidiaries are described in Note 17.
On November 20, 1991, the companySony Corporation made a free share distribution of
33,908,621 shares for which no accounting entry is required in Japan. Had the
distribution been accounted for in the manner adopted by companies in the United
States of America, 201,078 million yen would have been transferred from retained
earnings to the appropriate capital accounts.
Conversions of convertible debtbonds into common stock are accounted for in
accordance with the provisions of the Japanese Commercial Code by crediting
approximately one-half of the conversion proceeds to the common stock account
and the remainder to the additional paid-in capital account.
The Japanese Commercial Code provides that an amount equal to at least 10% of
cash dividends and other distributions from retained earnings paid by the parent
company and its Japanese subsidiaries be appropriated as a legal reserve. The
amounts of statutory retained earnings of the parent companySony Corporation available for the
payments of dividends to stockholders as of March 31, 19971998 and 19981999 were 507,253555,643
million yen and 555,643610,133 million yen, respectively. These amounts include cash
dividends for the six-month periods ended March 31, 1997 and 1998, respectively,
which have been incorporated in the accompanying consolidated financial
statements.
F-34
87 The appropriations of
retained earnings for the year ended March 31, 1998,1999, which have been
incorporated in the accompanying consolidated financial statements, will be
proposed for approval at the general stockholders' meeting to be held on June
26, 199829, 1999 and will be recorded in the statutory books of account, in accordance
with the Japanese Commercial Code, after stockholders' approval. The above
statutory amounts available for dividend include cash dividends for the
six-month periods ended March 31, 1998 and 1999, respectively, which have been
incorporated in the accompanying consolidated financial statements.
Retained earnings include Sony's equity in undistributed earnings of 20% to 50%
owned companies accounted for by the equity method in the amount of 18,566
million yen and 20,159 million yen at March 31, 1998 and 1999, respectively.
The ordinary general meeting of stockholders held on June 27, 1997 authorized
the company,Sony Corporation, pursuant to the Japanese regulations, to acquire and retire up
to a total not exceeding 30 million yen outstanding shares of its common stock with
its profit, on and after June 28, 1997, whenever deemed necessary by the Board
of Directors in view of general economic conditions, the company'sSony's business performance
and financial condition and other factors. At March 31, 1998,1999, no common stock
had been acquired under this authorization.
On May 7, 1998, the company's BoardF-35
99
The ordinary general meeting of Directors resolved the following
proposals to be approved by the general stockholders' meeting to bestockholders held on June 26, 1998. The proposals resolve1998 approved that
(a) in addition to the shares discussed in the preceding paragraph, on and after
June 27, 1998, the companySony Corporation may, by a resolution of the Board of Directors,
acquire and retire up to a total not exceeding 30 million yen outstanding shares of
its common stock with its additional paid-in capital at prices in total not
exceeding 400 billion yen and (b) the companySony Corporation may grant share subscription
rights to directors and/or employees pursuant to the Japanese regulations. In February 1998, the company adopted a cashAt
March 31, 1999, no common stock appreciationhad been acquired nor had any share subscription
rights plan (the
"SARs") as an incentive plan for selected employees. Under the terms of the
plan, the SARs may be exercised during the period from 1999 until 2004. No
compensation expense was recognized for the SARs inbeen granted under this approval.
During the year ended March 31, 1998, Sony adopted stock appreciation rights
(SAR) plans in Japan and Europe as incentive plans for selected employees. Sony
also adopted an SAR plan in the company'sUnited States during the year ended March 31,
1999. Under the terms of the plans, the employees can receive cash equal to the
amount that the market price of Sony Corporation's common stock price did not exceedexceeds the
strike price of the SARs.
Retained earnings atSAR. The SAR vest ratably over a period of three years, and
are generally exercisable up to six years from the date of grant. Sony holds
treasury stock for the SAR plan in Japan to minimize cash flow exposure
associated with the SAR. The status of the SAR plans is summarized as follows:
Yen
----------------
Number of Weighted-average
shares exercise price
--------- ----------------
Outstanding as of March 31, 1997 -- --
Granted 242,200 12,211
Exercised -- --
Expired or forfeited -- --
---------
Outstanding as of March 31, 1998 242,200 12,211
Granted 862,925 10,467
Exercised -- --
Expired or forfeited (9,750) 10,550
---------
Outstanding as of March 31, 1999 1,095,375 10,852
=========
F-36
100
None of these shares was exercisable as of March 31, 1999. At March 31, 1999 the
weighted-average remaining contractual life of SAR outstanding was 5.1 years and
the range of exercise prices was 7,263 yen to 12,285 yen per share. In
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations, SAR compensation
expense is measured as the excess of the quoted market price of Sony
Corporation's common stock over the SAR strike price. Sony uses various
strategies to minimize the compensation expense associated with the SAR in the
United States and Europe. Gains and losses relating to those strategies are
recognized as SAR compensation expense. For the years ended March 31, 1998 include parent company and
its consolidated
subsidiaries' equity in undistributed earnings1999, Sony recognized 0 million yen and 886 million yen of 20% to 50% owned companies
accountedSAR compensation
expense, respectively.
Other comprehensive income for by the equity method in the amount of 18,566 million yen.
F-35years ended March 31, 1997, 1998 and 1999,
was as follows:
Yen in millions
---------------------------------------
Pre-tax Tax Net-of-tax
amount expense amount
-------- ------- ----------
For the year ended March 31, 1997:
Unrealized gains on securities -
Unrealized holding gains arising during the period (23,735) 9,680 (14,055)
Foreign currency translation adjustments 127,705 (6,423) 121,282
-------- ------ --------
Other comprehensive income 103,970 3,257 107,227
======== ====== ========
For the year ended March 31, 1998:
Unrealized gains on securities -
Unrealized holding gains arising during the period (56,704) 34,599 (22,105)
Minimum pension liability adjustment (10,925) 5,211 (5,714)
Foreign currency translation adjustments 35,985 4,511 40,496
-------- ------ --------
Other comprehensive income (31,644) 44,321 12,677
======== ====== ========
For the year ended March 31, 1999:
Unrealized gains on securities -
Unrealized holding gains arising during the period 7,484 1,525 9,009
Less: Reclassification adjustment for gains included
in net income (58,698) 27,999 (30,699)
Minimum pension liability adjustment (4,617) 1,332 (3,285)
Foreign currency translation adjustments (151,971) 8,316 (143,655)
-------- ------ --------
Other comprehensive income (207,802) 39,172 (168,630)
======== ====== ========
F-37
88101
15. Research and development expenses and advertising costs:
Research and development expenses -
Research and development expenses charged to cost of sales for the years ended
March 31, 1996, 1997, 1998 and 19981999 were 257,326 million yen, 282,569 million yen, 318,044 million yen and
318,044375,314 million yen, respectively.
Advertising costs -
Advertising costs included in selling, general and administrative expenses for
the years ended March 31, 1996, 1997, 1998 and 19981999 were 159,821 million yen, 216,579 million yen, 268,985
million yen and 268,985315,310 million yen, respectively.
16. Leased assets:
The companySony leases certain plant facilities, office space, warehouses, employees'
residential facilities and other assets.
An analysis of leased assets under capital leases is as follows:
Yen in millions
-----------------------------------------------
March 31
-----------------------------------------------
Class of property 1997 1998 - ------------------------- -------- --------1999
----------------- ------- -------
Land 2,538 2,501 2,277
Buildings 24,623 21,682 19,616
Machinery and equipment 9,682 10,103 8,581
Accumulated amortization (13,022) (12,243) -------- --------
23,821(11,730)
------- -------
22,043 ======== ========18,744
======= =======
F-36F-38
89102
The following is a schedule by year of the future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of March 31, 1998:1999:
Yen in
millions
--------
Year ending March 31:
1999 6,675
2000 5,4495,071
2001 4,4594,403
2002 4,4313,958
2003 4,1983,846
2004 2,103
Later years 9,378
--------7,627
------
Total minimum lease payments 34,59027,008
Less --- Amount representing interest 7,727
--------5,440
------
Present value of net minimum lease payments 26,86321,568
Less --- Current obligations 5,135
--------4,136
------
Long-term capital lease obligations 21,728
========17,432
======
Rental expenses under operating leases for the years ended March 31, 1996, 1997, 1998
and 19981999 were 81,385 million yen, 86,570 million yen, 87,564 million yen and 87,56498,925 million yen,
respectively. The minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year at
March 31, 19981999 are as follows:
Yen in
millions
--------
Year ending March 31:
1999 44,269
2000 42,41646,647
2001 35,11940,549
2002 28,57532,545
2003 24,00025,688
2004 20,248
Later years 158,396
---------90,773
-------
Total minimum future rentals 332,775
=========256,450
=======
F-39
103
17. Commitments and contingent liabilities:
Commitments outstanding at March 31, 19981999 for the purchase of property, plant
and equipment and other assets approximated 54,47434,305 million yen.
F-37
90
Contingent liabilities for guarantees given in the ordinary course of business
and for employee loans amounted to 123,065130,795 million yen at March 31, 1998.
The company has entered into agreements with financial institutions whereby the
company can sell specifically identified accounts receivable and future
receivables with limited recourse. For the years ended March 31, 1996, 1997 and
1998, the company did not sell any specifically identified accounts receivable
or future receivables. As of March 31, 1997 and 1998, the outstanding balance of
all receivables sold with limited recourse amounted to 868 million yen and 0
million yen, respectively.
The company has also entered into agreements with financial institutions whereby
the company can sell up to 125,400 million yen of undivided interests in a pool
of eligible receivables with limited recourse. The maximum pool of eligible
receivables sold outstanding at any one time during the years ended March 31,
1996, 1997 and 1998 amounted to 71,868 million yen, 0 million yen and 0 million
yen, respectively. As of March 31, 1997 and 1998, there were no outstanding
balances of receivables sold.
Under the terms of each of the receivable sale agreements, the company has
retained substantially the same risk of credit loss as if the receivables had
not been sold. The company has fully reserved for these potential credit losses.
The company pays fees which approximate the purchasers' costs of issuing
commercial paper and are included in other expense.1999.
Certain subsidiaries in the music business have entered into long-term contracts
with recording artists and companies for the production and/or distribution of
prerecorded music and videos. These contracts cover various periods mainly
through March 31, 2001.2002. As of March 31, 1998,1999, these subsidiaries were committed
to make payments under such long-term contracts of 24,21147,168 million yen.
The parent companySony Corporation and certain of its subsidiaries are defendants in several
pending lawsuits. However, based upon the information currently available to
both the companySony and its legal counsel, management of the companySony believes that damages from
such lawsuits, if any, would not have a material effect on the
company'sSony's consolidated
financial statements.
F-38Integration of three listed subsidiaries -
On March 9, 1999, Sony Corporation and three listed subsidiaries, Sony Music
Entertainment (Japan) Inc. ("SMEJ"), Sony Chemicals Corporation ("SCC") and Sony
Precision Technology Inc. ("SPT") agreed that each of such three subsidiaries
should become a wholly-owned subsidiary of Sony Corporation on or about January
1, 2000.
Sony Corporation currently owns approximately 70% of each subsidiary's common
stock. Sony Corporation plans to carry out the integration of these subsidiaries
by utilizing the exchange procedures included in the Law amending the Commercial
Code and other laws which are expected to be deliberated at the ordinary session
of the Diet in 1999. However, if the exchange offer procedures are judged to be
impractical taking into account the effective date of the amended Commercial
Code and status of the related amendment to other laws and regulations, an
alternative method, which is legal under the laws and regulations of Japan
currently in effect, may be selected. Any method will require approval at
stockholders' meetings of each company.
F-40
91104
The agreed share exchange ratios are 1 share of SMEJ for 0.835 share of Sony
Corporation, 1 share of SCC for 0.565 share of Sony Corporation, 1 share of SPT
for 0.203 share of Sony Corporation. As a result, approximately 33 million
shares of Sony Corporation would be issued and the total capital (common stock
and additional paid-in capital) would increase by approximately 348 billion yen.
The stock price for a reasonable period before and after the acquisitions were
agreed and announced will be used to calculate the increase in total capital
based on U.S. GAAP.
Any of the above exchange ratios may be amended upon mutual deliberation between
Sony Corporation and the relevant subsidiary if a material change occurs in
respect of conditions based upon which the relevant ratio is determined. In this
case, the stock price for a reasonable period before and after the amendment was
made will be used for the new calculation of the total capital increase.
18. Business segment information:
Effective for the year ended March 31, 1998, the companySony adopted FAS 131, "Disclosures
about Segments of an Enterprise and Related Information" which requires
disclosure of financial and descriptive information about the company'sSony's reportable
operating segments. The operating segments reported below are the segments of
the companySony for which separate financial information is available and for which
operating profit/loss amounts are evaluated regularly by executive management in
deciding how to allocate resources and in assessing performance.
The operating segment information reported below differs from the industry
segment information previously disclosed under FAS 14, "Financial Reporting for
Segments of a Business Enterprise" in that the Game business was previously
included in the Electronics segment the Music and Pictures businesses were
previously combined in the Entertainment segment, and the company's financing
operations, which were previously in the Insurance and financing segment, are
now included as part of the Other segment below. The operating segment
information, as well as geographic data, for previous years have been
reclassified to conform to the segment presentation for the year ended March 31,
1998.
The Electronics segmentdesigns, develops, designs, manufactures and distributes
audiovisual equipment, instruments and devices throughout the world. The Game
segment designs, develops designs and sells PlayStation game consoles and related
software mainly in Japan, the United States and Europe, and licenses to the third
party software developers. The Music segment is mainly engaged worldwide in the
development, production, manufacture, and distribution of recorded music, in all
commercial formats and musical genres. The Pictures segment develops, produces
and manufactures image-based software, including film, video, and television
mainly in the United States, and markets, distributes and broadcasts in their marketing worldwide.the
worldwide market. The Insurance segment represents insurance-related
underwriting business, primarily individual life insurance business in the
Japanese market. The Other segment consists of other various operating activities,
primarily including customer
financingleasing and leasingcredit card businesses, a business focused on
parts trading services within the Sony group, satellite distribution services
including program supplying businesses in Japan, internet-related businesses in
the United States, and media-communication network businesses
relating to broadcasting and information technology. The company'sdevelopment of location-based entertainment complexes.
Sony's products and services are generally unique to a single operating segment.
F-39F-41
92105
Business segments -
Sales and operating revenue:
Yen in millions
------------------------------------------------------------------------------------
Year ended March 31
-----------------------------------------
1996-------------------------------------------
1997 1998 ----------- ----------- -----------1999
--------- --------- ---------
Sales and operating revenue:
Electronics -
Customers 3,283,234 3,930,292 4,377,346 4,355,001
Intersegment 182,222 201,339 312,764 ----------- ----------- -----------313,448
--------- --------- ---------
Total 3,465,456 4,131,631 4,690,110 4,668,449
Game -
Customers 200,894 408,335 699,574 760,071
Intersegment 3,017 10,943 22,977 ----------- ----------- -----------23,751
--------- --------- ---------
Total 203,911 419,278 722,551 783,822
Music -
Customers 506,455 570,119 660,407 718,878
Intersegment 11,380 21,961 34,307 ----------- ----------- -----------41,394
--------- --------- ---------
Total 517,835 592,080 694,714 760,272
Pictures -
Customers 317,382 438,551 642,714 540,109
Intersegment 198 3 450 ----------- ----------- -----------59
--------- --------- ---------
Total 317,580 438,554 643,164 540,168
Insurance -
Customers 206,802 227,920 291,061 339,368
Intersegment 101 14 7 ----------- ----------- -----------1
--------- --------- ---------
Total 206,903 227,934 291,068 339,369
Other -
Customers 77,798 87,917 84,388 81,192
Intersegment 196,177 152,457 163,841 ----------- ----------- -----------206,137
--------- --------- ---------
Total 273,975 240,374 248,229 287,329
Elimination (393,095) (386,717) (534,346) ----------- ----------- -----------(584,790)
--------- --------- ---------
Consolidated total 4,592,565 5,663,134 6,755,490 =========== =========== ===========6,794,619
========= ========= =========
F-40
Yen in millions
-------------------------------------------
Year ended March 31
-------------------------------------------
1997 1998 1999
--------- --------- ---------
Equity earnings (losses) included
in sales and operating revenue:
Electronics (322) (2,738) (1,253)
Music 5,755 2,026 1,581
Pictures 152 (1,469) (5,584)
Other (704) (3,333) (4,307)
--------- --------- ---------
Total 4,881 (5,514) (9,563)
========= ========= =========
F-42
93106
Segment profit or loss:
Yen in millions
-------------------------------------------------------------------------------
Year ended March 31
-----------------------------------------
1996--------------------------------------
1997 1998 ----------- ----------- -----------1999
-------- -------- --------
Operating income (loss):
Electronics 193,331 239,312 314,538 129,853
Game (8,938) 57,045 116,936 136,500
Music 40,129 45,216 54,084 38,147
Pictures 23,862 28,925 35,544 37,370
Insurance 7,116 19,099 20,326 18,048
Other (6,078) (1,422) (10,292) ----------- ----------- -----------(8,845)
-------- -------- --------
Total 249,422 388,175 531,136 351,073
Elimination 5,188 3,390 10,749 10,313
Unallocated amounts:
Corporate expenses (19,286) (21,235) (21,675) ----------- ----------- -----------(22,737)
-------- -------- --------
Consolidated operating income 235,324 370,330 520,210 338,649
Other income 65,755 92,643 83,963 152,905
Other expenses (162,920) (150,544) (150,424) ----------- ----------- -----------(123,426)
-------- -------- --------
Consolidated income before income taxes 138,159 312,429 453,749 =========== =========== ===========368,128
======== ======== ========
Assets:
Yen in millions
--------------------------------------------------------------------------------
March 31
-----------------------------------------
1996---------------------------------------
1997 1998 ----------- ----------- -----------1999
--------- --------- ----------
Total assets:
Electronics 2,798,818 3,014,756 3,253,990 3,058,355
Game 75,964 128,056 197,605 188,796
Music 594,949 714,792 835,939 755,765
Pictures 635,284 796,942 915,545 836,134
Insurance 563,784 716,843 899,016 1,129,005
Other 318,128 275,824 309,150 ----------- ----------- -----------388,497
--------- --------- ---------
Total 4,986,927 5,647,213 6,411,245 6,356,552
Elimination (227,635) (204,006) (221,112) (215,732)
Corporate assets 286,407 237,039 212,910 ----------- ----------- -----------158,233
--------- --------- ---------
Consolidated total 5,045,699 5,680,246 6,403,043 =========== =========== ===========6,299,053
========= ========= =========
F-41F-43
94107
Other significant items:
Yen in millions
--------------------------------------------------------------------
Year ended March 31
-----------------------------------
1996---------------------------------
1997 1998 --------- --------- ---------1999
------- ------- -------
Depreciation and amortization:
Electronics 162,592 187,960 197,449 218,608
Game 2,198 3,738 12,536 3,895
Music 22,323 28,707 30,933 34,523
Pictures 10,613 13,286 16,668 11,329
Insurance, including deferred insurance
acquisition costs 9,880 15,870 22,410 21,085
Other 16,683 14,141 17,539 --------- --------- ---------15,402
------- ------- -------
Total 224,289 263,702 297,535 304,842
Corporate 3,027 2,830 4,130 --------- --------- ---------2,331
------- ------- -------
Consolidated total 227,316 266,532 301,665 ========= ========= =========307,173
======= ======= =======
Capital expenditures for segment assets:
Electronics 185,638 226,696 301,197 252,363
Game 4,776 5,757 17,114 3,941
Music 25,842 31,807 28,361 45,222
Pictures 15,658 15,194 13,477 10,747
Insurance 1,484 176 633 836
Other 15,645 16,502 24,102 36,574
------- ------- -------
Total 296,132 384,884 349,683
Corporate 1,946 3,071 4,047
------- ------- -------
Consolidated total 298,078 387,955 353,730
======= ======= =======
The capital expenditures in the above table represent the additions to fixed
assets of each segment.
The following table is a breakdown of Electronics sales and operating revenue to
external customers by product category. The Electronics business is managed as a
single operating segment by Sony's management.
F-44
108
Yen in millions
---------------------------------------
Year ended March 31
---------------------------------------
1997 1998 1999
--------- --------- ---------
Audio 1,029,961 1,127,788 1,072,621
Video 816,582 870,854 969,129
Televisions 704,075 709,043 702,620
Information and Communications 764,512 894,810 914,140
Electronic components and other 615,162 774,851 696,491
--------- --------- ---------
Total 249,043 296,132 384,884
Corporate 2,154 1,946 3,071
--------- --------- ---------
Consolidated total 251,197 298,078 387,9553,930,292 4,377,346 4,355,001
========= ========= =========
Equity earnings for the years ended March 31, 1996, 1997 and 1998, which were
included in sales and operating revenue for the years then ended, were not
material.
F-42
95
Geographic information -
Sales and operating revenue which are attributed to countries based on location
of customers and long-lived assets for the years ended March 31, 1996, 1997, 1998 and
19981999 are as follows:
Yen in millions
--------------------------------------------------------------------------------
Year ended March 31
-----------------------------------------
1996---------------------------------------
1997 1998 ----------- ----------- -----------1999
--------- --------- ---------
Sales and operating revenue:
Japan 1,379,804 1,590,820 1,843,149 1,908,600
U.S.A. 1,259,926 1,639,334 2,101,907 2,157,061
Europe 1,054,010 1,304,491 1,567,121 1,666,714
Other 898,825 1,128,489 1,243,313 ----------- ----------- -----------1,062,244
--------- --------- ---------
Total 4,592,565 5,663,134 6,755,490 =========== =========== ===========6,794,619
========= ========= =========
Yen in millions
--------------------------------------------------------------------------------
March 31
-----------------------------------------
1996---------------------------------------
1997 1998 ----------- ----------- -----------1999
--------- --------- ---------
Long-lived assets:
Japan 701,413 730,075 843,800 903,345
U.S.A. 694,733 824,439 845,887 703,208
Europe 147,339 174,524 192,695 181,621
Other 166,842 194,683 209,984 ----------- ----------- -----------143,006
--------- --------- ---------
Total 1,710,327 1,923,721 2,092,366 =========== =========== ===========1,931,180
========= ========= =========
There are not any individually material countries with respect to the sales and
operating revenue and long-lived assets included in the Europe and Other areas.
F-45
109
Transfers between reportable business or geographic segments are made at
arms-length prices. Operating income is sales and operating revenue less costs
and operating expenses. Unallocated corporate assets consist primarily of cash
and cash equivalents and marketable securities maintained for general corporate
purposes.
There has been no sales and operating revenue with a single major external
customer for the years ended March 31, 1996, 1997, 1998 and 1998.
F-431999.
F-46
96110
The following information is sales and operating revenue and operating income
which show those recognized by geographic origin for the years ended March 31,
1996, 1997, 1998 and 1998.1999. In addition to the disclosure requirements under FAS 131,
the companySony discloses this information as the supplemental information in light of the
disclosure requirement of the Japanese Securities and Exchange Law, which a
Japanese public company is subject to.
Yen in millions
--------------------------------------------------------------------------------------
Year ended March 31
------------------------------------------
1996--------------------------------------------
1997 1998 ------------ ------------ ------------1999
---------- ---------- ----------
Sales and operating revenue:
Japan -
Customers 1,768,132 2,048,406 2,361,734 2,336,463
Intersegment 1,275,251 1,386,422 1,697,655 ------------ ------------ ------------1,822,282
---------- ---------- ----------
Total 3,043,383 3,434,828 4,059,389 4,158,745
U.S.A. -
Customers 1,250,712 1,672,173 2,156,173 2,232,490
Intersegment 113,121 126,637 153,603 ------------ ------------ ------------140,239
---------- ---------- ----------
Total 1,363,833 1,798,810 2,309,776 2,372,729
Europe -
Customers 886,468 1,100,958 1,338,232 1,480,181
Intersegment 30,299 42,381 62,506 ------------ ------------ ------------65,466
---------- ---------- ----------
Total 916,767 1,143,339 1,400,738 1,545,647
Other -
Customers 687,253 841,597 899,351 745,485
Intersegment 509,120 603,518 715,156 ------------ ------------ ------------724,240
---------- ---------- ----------
Total 1,196,373 1,445,115 1,614,507 1,469,725
Elimination (1,927,791) (2,158,958) (2,628,920) ------------ ------------ ------------(2,752,227)
---------- ---------- ----------
Consolidated 4,592,565total 5,663,134 6,755,490 ============ ============ ============6,794,619
========== ========== ==========
Operating income:
Japan 147,582 259,376 348,458 U.S.A 32,372206,162
U.S.A. 30,928 75,820 78,583
Europe 48,621 70,597 74,064 81,185
Other 55,772 69,858 69,490 47,683
Corporate and elimination (49,023) (60,429) (47,622) ------------ ------------ ------------(74,964)
---------- ---------- ----------
Consolidated 235,324total 370,330 520,210 ============ ============ ============338,649
========== ========== ==========
F-44F-47
97
19. Events (unaudited) subsequent to the date
of the report of independent accountants:
In May 1998, Loews Theatres Exhibition Group (Loews Theatres), a unit of Sony
Pictures Entertainment (SPE), and Cineplex Odeon Corporation, a Canadian theatre
chain, combined and created Loews Cineplex Entertainment Corporation. In
conjunction with the combination, the company received approximately 53.6
billion yen in cash from the repayment of all of the intercompany debt of Loews
Theatres, which was refinanced with third party debt, and receipt of a dividend.
As a result of the combination, SPE and certain of its subsidiaries owned 51.1%
(representing 49.9% of the voting shares) of Loews Cineplex Entertainment
Corporation. After giving effect to the public offering of shares of common
stock of Loews Cineplex Entertainment Corporation in August 1998, SPE and
certain of its subsidiaries currently own 38.5% of Loews Cineplex Entertainment
Corporation. The new company has been deconsolidated and the company accounts
for it on the equity basis for the fiscal year ending March 31, 1999. The
revenues and operating income of Loews Theatres for the fiscal year ended March
31, 1998 were approximately 56.3 billion yen and 2.5 billion yen, respectively.
In addition, the company recorded a gain of approximately 4.8 billion yen on the
combination in the first quarter ended June 30, 1998.
On August 12, 1998, SPE, together with certain partners, completed the
acquisition of Telemundo Group, Inc. (Telemundo), one of two Spanish-language
television broadcast companies currently operated in the United States. Through
a series of transactions, SPE now owns 50% of a newly formed company holding
Telemundo's network operations and 24.95% of an entity holding Telemundo's
station operations, including seven full-power UHF stations. SPE's initial
capital investment totaled approximately 15.1 billion yen.
F-45
98111
SCHEDULE II
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Yen in millions
-----------------------------------------------------------------------------------------------------------------------------------------
Additions
charged
Balance at charged to costs Balance at
beginning of costs and Deductions Other at end of of
period expenses (Note 1) (Note 2) period
------------ ----------- ------------ ---------- --------------------- -------- ----------
Year ended March 31, 1996:
Allowance for doubtful
accounts and sales returns 48,185 25,556 (14,136) 9,158 68,763
========= ======== ======== ======== =========
Year ended March 31, 1997:
Allowance for doubtful accounts
and sales returns 68,763 42,285 (28,570) 11,254 93,732
================ ======= ======== ======== ======== ================ =======
Year ended March 31, 1998:
Allowance for doubtful accounts
and sales returns 93,732 70,836 (55,855) 6,198 114,911
================ ======= ======== ======= =======
Year ended March 31, 1999:
Allowance for doubtful accounts
and sales returns 114,911 82,813 (65,510) (10,199) 122,015
======= ======= ======== ======== ================ =======
Notes: 1. Amounts written off.
2. Translation adjustment.
Balance at Balance at
beginning of Other at end of of
period Additions Deductions (Note 1) period
------------ ----------- --------------------- ---------- ------------------- ----------
Year ended March 31, 1996:
Valuation allowance
- Deferred tax assets 90,182 22,532 (9,942) 15,584 118,356
========= ======== ======== ======== =========
Year ended March 31, 1997:
Valuation allowance
- Deferred tax assets 118,356 7,802 (19,974) 16,074 122,258
========= ======== ======== ======== ================ ====== ======= ======= =======
Year ended March 31, 1998:
Valuation allowance
- Deferred tax assets 122,258 13,102 (15,032) 5,580 125,908
========= ======== ======== ======== ================ ====== ======= ======= =======
Year ended March 31, 1999:
Valuation allowance
- Deferred tax assets 125,908 20,847 (13,921) (10,178) 122,656
======= ====== ======= ======= =======
Note: 1. Translation adjustment.
F-46F-48
99
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
1 Articles of Incorporation, as amended (English translation)
2 Regulations of the Board of Directors, as amended (English
translation)
3 Certificate of English translations
112
(Translation Summary)
MEMORANDUM OF UNDERSTANDING
CONCERNING SONY GROUP REORGANIZATION
Dated March 9, 1999, between Sony Corporation ("Sony") and Sony Music
Entertainment (Japan) Inc. ("SMEJ")
Basic Plan. The parties plan to cause SMEJ to become a wholly-owned subsidiary
of Sony through one of the plans below, and intend at this time to use Plan A,
unless there is a significant delay in the amendment of the Commercial Code.
Plan A: If the Commercial Code is amended in a timely manner to so allow, Sony
plans to become the 100% parent company of SMEJ by means of a share exchange by
about January 1, 2000.
If the parties adopt plan A:
- - The exchange date will be January 1, 2000, or such other date as may be
confirmed by the parties;
- - The exchange ratio will be Sony at 1 and SMEJ at 0.835 (0.835 Sony share
will be exchanged for one SMEJ share), or other ratio agreed by the parties;
and
- - The details of the exchange will be described in a share exchange agreement
which will be authorized and approved by a general shareholders' meeting of
each party.
Plan B: SMEJ plans to incorporate a new wholly-owned subsidiary, transfer to it
the whole or a material part of its business and then be acquired by, and
merged into, Sony and dissolved by about January 1, 2000.
If the parties adopt plan B:
- - Sony will be the surviving corporation in the merger;
- - The date of the merger will be January 1, 2000, or such other date as may be
confirmed by the parties ;
- - The merger ratio will be Sony at 1 and SMEJ at 0.835 (0.835 Sony share will
be issued for one SMEJ share), or other merger ratio agreed by the parties;
and
- - The details of the merger will be described in a merger agreement which will
be authorized and approved by a general shareholders' meeting of each party.
Consultation. Each party agrees to consult with the other in good faith
regarding the reorganization.