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) 1 2 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. Yes X No .... ....
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). 2 3 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 3 4 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. 4 5 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 3 4 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. 5 56 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. 6 67 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. 7 78 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. 7 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 8 9 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 9 10 localize its manufacturing 8 9 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. 10 11 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 9 10 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
1213 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.)
13 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. 14 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. 14 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 15 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 17 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
18 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. 20 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. 23 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. 25 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 27 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. 27 28 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. 26 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. 29 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 31 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. 36 37 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 37 38 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. 38 39 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 39 40 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 40 41 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 41 42 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 42 43 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 32 33 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 43 44 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 44 45 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. 47 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. 50 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. 38 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 40 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. 41 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 52 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. 47 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.) 59 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 60 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.