2005
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. |
** | No par value per share. |
Outstanding as of | |||||||||||
March 31, 2005 | March 30, 2005 | ||||||||||
Title of Class | (Tokyo Time) | (New York Time) | |||||||||
Common Stock | |||||||||||
Subsidiary Tracking Stock | 3,072,000 | ||||||||||
American Depositary Shares |
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EX-1.1 ARTICLES OF INCORPORATION | ||||||||
EX-1.2 REGULATIONS OF THE BOARD OF DIRECTORS | ||||||||
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EX-13 CERTIFICATIONS REQUIRED BY 18 U.S.C. SECTION 1350 | ||||||||
EX-15.1 CONSENT OF CHUOAOYAMA PRICEWATERHOUSECOOPERS |
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Item 1. Identity of Directors, Senior Management and Advisers
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 3. | Key Information |
Year Ended March 31 | ||||||||||||||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||||||||||
(Yen in millions, Yen per share amounts) | ||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||
Sales and operating revenue | 6,686,661 | 7,314,824 | 7,578,258 | 7,473,633 | 7,496,391 | |||||||||||||||||
Operating income | 223,204 | 225,346 | 134,631 | 185,440 | 98,902 | |||||||||||||||||
Income before income taxes | 264,310 | 265,868 | 92,775 | 247,621 | 144,067 | |||||||||||||||||
Income taxes | 94,644 | 115,534 | 65,211 | 80,831 | 52,774 | |||||||||||||||||
Income before cumulative effect of accounting changes | 121,835 | 121,227 | 9,332 | 115,519 | 90,628 | |||||||||||||||||
Net income | 121,835 | 16,754 | 15,310 | 115,519 | 88,511 | |||||||||||||||||
Per Share Data of Common Stock*: | ||||||||||||||||||||||
Income before cumulative effect of accounting changes | ||||||||||||||||||||||
— Basic | 144.58 | 132.64 | 10.21 | 125.74 | 98.26 | |||||||||||||||||
— Diluted | 131.70 | 124.36 | 10.18 | 118.21 | 93.00 | |||||||||||||||||
Net income | ||||||||||||||||||||||
— Basic | 144.58 | 18.33 | 16.72 | 125.74 | 95.97 | |||||||||||||||||
— Diluted | 131.70 | 19.28 | 16.67 | 118.21 | 90.88 | |||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||
Interim | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 | |||||||||||||||||
(12.01 cents | ) | (11.15 cents | ) | (10.07 cents | ) | (10.50 cents | ) | (11.37 cents | ) | |||||||||||||
Year-end | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 | |||||||||||||||||
(11.58 cents | ) | (10.01 cents | ) | (9.78 cents | ) | (10.53 cents | ) | (11.26 cents | ) | |||||||||||||
Depreciation and amortization**: | 306,505 | 348,268 | 354,135 | 351,925 | 366,269 | |||||||||||||||||
Capital expenditures (additions to fixed assets): | 435,887 | 465,209 | 326,734 | 261,241 | 378,264 | |||||||||||||||||
Research and development costs: | 394,479 | 416,708 | 433,214 | 443,128 | 514,483 |
Fiscal Year Ended March 31 | ||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||||
(Yen in millions, Yen per share amounts) | ||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||
Sales and operating revenue | 7,314,824 | 7,578,258 | 7,473,633 | 7,496,391 | 7,159,616 | |||||||||||||||||
Operating income | 225,346 | 134,631 | 185,440 | 98,902 | 113,919 | |||||||||||||||||
Income before income taxes | 265,868 | 92,775 | 247,621 | 144,067 | 157,207 | |||||||||||||||||
Income taxes | 115,534 | 65,211 | 80,831 | 52,774 | 16,004 | |||||||||||||||||
Income before cumulative effect of accounting changes | 121,227 | 9,332 | 115,519 | 90,628 | 168,551 | |||||||||||||||||
Net income | 16,754 | 15,310 | 115,519 | 88,511 | 163,838 | |||||||||||||||||
Data per Share of Common Stock: | ||||||||||||||||||||||
Income before cumulative effect of accounting changes | ||||||||||||||||||||||
— Basic | 132.64 | 10.21 | 125.74 | 98.26 | 180.96 | |||||||||||||||||
— Diluted | 124.36 | 10.18 | 118.21 | 89.03 | 162.59 | |||||||||||||||||
Net income | ||||||||||||||||||||||
— Basic | 18.33 | 16.72 | 125.74 | 95.97 | 175.90 | |||||||||||||||||
— Diluted | 19.28 | 16.67 | 118.21 | 87.00 | 158.07 | |||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||
Interim | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 | |||||||||||||||||
(11.15 cents | ) | (10.07 cents | ) | (10.50 cents | ) | (11.37 cents | ) | (12.12 cents | ) | |||||||||||||
Fiscal year-end | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 | |||||||||||||||||
(10.01 cents | ) | (9.78 cents | ) | (10.53 cents | ) | (11.26 cents | ) | (11.29 cents | ) | |||||||||||||
Depreciation and amortization* | 348,268 | 354,135 | 351,925 | 366,269 | 372,865 | |||||||||||||||||
Capital expenditures (additions to fixed assets) | 465,209 | 326,734 | 261,241 | 378,264 | 356,818 | |||||||||||||||||
Research and development costs | 416,708 | 433,214 | 443,128 | 514,483 | 502,008 | |||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||
Net working capital | 830,734 | 778,716 | 719,166 | 381,140 | 746,803 | |||||||||||||||||
Long-term debt | 843,687 | 838,617 | 807,439 | 777,649 | 678,992 | |||||||||||||||||
Stockholders’ equity | 2,315,453 | 2,370,410 | 2,280,895 | 2,378,002 | 2,870,338 | |||||||||||||||||
Total assets | 7,827,966 | 8,185,795 | 8,370,545 | 9,090,662 | 9,499,100 | |||||||||||||||||
Number of shares issued at fiscal year-end (thousands of shares of common stock) | 919,617 | 919,744 | 922,385 | 926,418 | 997,211 | |||||||||||||||||
Stockholders’ equity per share of common stock | 2,521.19 | 2,570.31 | 2,466.81 | 2,563.67 | 2,872.21 |
* | Depreciation and amortization includes amortization expenses for intangible assets and for deferred insurance acquisition costs. |
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Year Ended March 31 | |||||||||||||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | |||||||||||||||||
(Yen in millions, Yen per share amounts) | |||||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||||
Net working capital | 861,674 | 830,734 | 778,716 | 719,166 | 381,140 | ||||||||||||||||
Long-term debt | 813,828 | 843,687 | 838,617 | 807,439 | 777,649 | ||||||||||||||||
Stockholders’ equity | 2,182,906 | 2,315,453 | 2,370,410 | 2,280,895 | 2,378,002 | ||||||||||||||||
Total assets | 6,807,197 | 7,827,966 | 8,185,795 | 8,370,545 | 9,090,662 | ||||||||||||||||
Number of shares issued at year-end (thousands of shares of common stock) | 453,639 | 919,617 | 919,744 | 922,385 | 926,418 | ||||||||||||||||
Stockholders’ equity per share of common stock*: | 2,409.36 | 2,521.19 | 2,570.31 | 2,466.81 | 2,563.67 |
Average* | High | Low | Period-End | |||||||||||||||
(Yen) | ||||||||||||||||||
Yen Exchange Rates per U.S. Dollar: | ||||||||||||||||||
Fiscal year ended March 31 | ||||||||||||||||||
2001 | 111.65 | 104.19 | 125.54 | 125.54 | ||||||||||||||
2002 | 125.64 | 115.89 | 134.77 | 132.70 | ||||||||||||||
2003 | 121.10 | 115.71 | 133.40 | 118.07 | ||||||||||||||
2004 | 113.07 | 120.55 | 104.18 | 104.18 | ||||||||||||||
2005 | 107.49 | 114.30 | 102.26 | 107.22 | ||||||||||||||
2004 | ||||||||||||||||||
December | 105.59 | 102.56 | 102.68 | |||||||||||||||
2005 | ||||||||||||||||||
January | 104.93 | 102.26 | 103.55 | |||||||||||||||
February | 105.84 | 103.70 | 104.25 | |||||||||||||||
March | 107.49 | 103.87 | 107.22 | |||||||||||||||
April | 108.67 | 104.64 | 104.64 | |||||||||||||||
May | 108.17 | 104.41 | 107.97 | |||||||||||||||
June (through June 20) | 109.58 | 106.64 | 109.42 |
Average*** | High | Low | Period-End | |||||||||||||||
(Yen) | ||||||||||||||||||
Yen Exchange Rates per U.S. Dollar: | ||||||||||||||||||
Year ended March 31 | ||||||||||||||||||
2000 | 110.02 | 101.53 | 124.45 | 102.73 | ||||||||||||||
2001 | 111.65 | 104.19 | 125.54 | 125.54 | ||||||||||||||
2002 | 125.64 | 115.89 | 134.77 | 132.70 | ||||||||||||||
2003 | 121.10 | 115.71 | 133.40 | 118.07 | ||||||||||||||
2004 | 113.07 | 120.55 | 104.18 | 104.18 | ||||||||||||||
2003 | ||||||||||||||||||
December | 109.6 | 106.9 | 107.1 | |||||||||||||||
2004 | ||||||||||||||||||
January | 107.2 | 105.5 | 105.8 | |||||||||||||||
February | 109.6 | 105.4 | 109.3 | |||||||||||||||
March | 112.1 | 104.2 | 104.2 | |||||||||||||||
April | 110.4 | 103.7 | 110.4 | |||||||||||||||
May | 114.3 | 108.5 | 110.2 | |||||||||||||||
June (through June 21) | 111.3 | 108.6 | 108.6 |
* | |
The average yen exchange rates represent average noon buying rates on the last business day of each month during the respective period. |
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1. | In July 2003, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by 5,156 million yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized 4,713 million yen of loss (net of income taxes of 2,675 million yen) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” on the consolidated balance sheet, were excluded from the category of separate accounts under SOP 03-1. Accordingly, assets previously treated as separate account assets are now treated within general account assets. |
2. | In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” In accordance with Statement of Financial Accounting Standards (“FAS”) No. 128, “Earnings Per Share,” Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential shares of common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that have not met the conditions to exercise the associated stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of shares of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise such rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended |
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December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of its income before cumulative effect of an accounting change and its net income for the fiscal year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those before the adoption of EITF Issue No. 04-8. | |
3. | In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of |
4. | |
On April 1, 2001, Sony adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” | |
In July 2001, the FASB issued FAS No. 142, “Goodwill and Other Intangible | |
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Sony’s Electronics and Game segments produce consumer products that compete against products sold by an increasing number of competitors on the basis of factors including price. In order to produce products that appeal to changing and increasingly diverse consumer preferences, and to overcome the fact that a relatively high percentage of consumers already possess products similar to those that Sony offers, Sony’s Electronics and Game segments must develop superior technology, anticipate consumer tastes and rapidly develop attractive products. In the Electronics segment, in the face ofSony faces increasingly intense pricing pressure from Korean and Chinese competitors in a
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Sony’s consolidated statements of income are prepared from the local currency-denominated financial results of each of Sony Corporation’s subsidiaries around the world which are translated into yen at the average market rate during each financial period. Sony’s consolidated balance sheets are prepared using local currency-denominated assets and liabilities and stockholders’ equity of each of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market rate at the end of each financial period. A large proportion of Sony’s consolidated financial results, assets liabilities and stockholders’ equityliabilities is accounted for in currencies other than the Japanese yen. For example, only 29.629.3 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, 20042005 were originally recorded in Japan. Accordingly, Sony’s consolidated results, assets liabilities and stockholders’ equityliabilities in Sony’s businesses that operate internationally, principally in its Electronics, Game, Music and Pictures segments, may be materially affected by changes in the exchange rates of foreign currencies when translating into Japanese yen. In the fiscal yearsyear ended March 31, 2001 and 2003,2005, for example, Sony’s consolidated operating income prepared on the basis of Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”) in yen increased from the preceding fiscal year by 1.0 percent and 37.7 percent, respectively;15.2 percent; however, if Sony’s consolidated operating income had been prepared on a local currency basis, it would have increased by 48 percent and decreased 5 percent26 percent. (Refer to “Operating Results” in those two fiscal years, respectively (refer to Operating Results in Item“Item 5.Operating and Financial Review and ProspectsProspects.”). Operating results on a local currency basis described herein reflect sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to local currency-denominated monthly sales, cost of sales, and selling, general and administrative expenses in the current fiscal year. Foreign exchange fluctuations may have a negative impact on Sony’s results in the future, especially if the yen strengthens significantly against the U.S. dollar or euro.
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Moreover, through the implementation of Transformation 60 (see below), Sony plans to continue to expend significant sums on research and development and semiconductor fabrication equipment. Recent examples of such expenditures include an investment for research and development intoinvestment in 65 nanometer semiconductor process technology along with IBM Corporation and Toshiba Corporation and an investment in a joint venture with Samsung Electronics Co., Ltd. (“Samsung”) to produce 7th generation amorphous thin film transistor (“TFT”) LCD panels. Sony may not be able to recover these investments, in part or in full, and its mid-term profitability could be adversely affected as a result. (Refer to “Trend Information” in “Item 5.Operating and Financial Review and Prospects.”)
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In Sony’s Music andsegment, at SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), as well as in the Pictures segments, technological developments havesegment, the development of digital technology has created new risks with respect to Sony’s ability to protect its intellectual property.copyrights. Advances in technology that enable the transfer and downloading of digital musicaudio and AVvisual files from the Internet without authorization from the owners of rights to such content have threatenedthreaten the conventional copyright-based business model by making it easier to create and redistribute unauthorized musicaudio and AVvisual files. Such unauthorized distribution has adversely affected sales and operating results within the Music segment, as well as in Sony’s investment in SONY BMG, and threatens to adversely affect sales and operating income in the Pictures segment. These technological advances include new digital devices such as hard disk drive video and audio recorders, CD and DVD recorders and peer-to-peer digital distribution services. As a result, Sony has incurred and will continue to incur expenses to develop new services for the authorized digital distribution of music, movies and television programs and to combat unauthorized digital distribution of its intellectual property.copyrighted content. These initiatives will increase Sony’s near-term expenses and may not achieve their intended result.
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Sony’s Music segment and Sony’s investment in SONY BMG are dependent on establishing new artists, and Sony’s Music and Pictures segments, as well as Sony’s investment in SONY BMG, are subject to increasing prices for talent.Therefore, ifIf the Music segment isand SONY BMG are unable to find and establish new talented artists, this segment’s sales, and operating income and equity in net income (loss) of affiliated companies may be adversely affected. In addition, with respect to both the Music and Pictures segments, as well as SONY BMG, Sony has experienced and may continue to experience significant increases in talent-related spending.Sony’s Pictures segment is subject to labor interruption.
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unpredictable increases in insurance claims andrapid shifts in customer demand from more profitable protection-orientated products such as life guaranteesterm insurance to less profitable savings-oriented products such as annuities.endowment insurance, as well as a risk of unpredictable increases in insurance claims. This segment also may incur valuation losses if the value of securities purchased for investment purposes decreases. In addition, if it fails to conduct ALMAsset Liability Management (“ALM”) in a prudent and foresightfulprescient manner to pursue an optimal combination of possible risks and expected returns on investment assets and underwriting risks on insurance policy benefits, Sony’s Financial Services segment may not be able to keep providing competitive products and services to customers on a long-term basis. Sony’s Financial ServicesSony Life Insurance Co., Ltd. (“Sony Life”), which constitutes the largest portion of this segment, is also subject to mandatory contributed reserves for the Life Insurance Policyholders Protection Corporation of Japan (“PPC”). The PPC was established in 1998 to provide financial, the organization that provides support to insolvent life insurance companies, and all life insurers in Japan, includingcompanies. Sony Life Insurance Co., Ltd. (“Sony Life”), are members ofLife’s estimated required contribution based on the PPC and are subject to assessmentassessments made by the PPC based on their respective shareis incorporated in other expenses within Sony Life’s statements of insurance industry premiumsincome and policy reserves. Since some life insurers have become insolvent since 1998, the PPC’s financial resources have already been reduced because it has had to provide financial support to those companies.long-term liabilities in its balance sheets in Japan. If there are further bankruptcies of life insurers, solvent life insurers including Sony Life may be required to contribute additional financial resources.Life’s estimated required future contribution based onLife, such as Sony Bank Inc., there is a risk of recording valuation losses if the assessments made by the PPCvalue of securities purchased for investment purposes decreases, or if there is incorporateda failure to conduct ALM in other expensesa prudent and prescient manner.Sony Life’s statements of income and long-term liabilities inimplementing its balance sheets.broadband network strategy.Sony may not be successful in implementing its broadband network strategy.
Sony believes that the utilization of broadband networks to facilitate the integration of hardware and content is essential to differentiating itself in the marketplace. Sony also believes that this strategy will
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The composition of Sony increasingly relies on alliances,during the last several years has reflected a shift towards the establishment of joint ventures and strategic alliances in order to supplement or replace functions that were previously performed by divisions of Sony Corporation or wholly owned subsidiaries, to mitigate the burden of substantial investments includingand to achieve operating efficiencies through cooperation with other companies.
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Sony’s |
Sony headquarters, some of Sony’s major data centers and many of Sony’s most advanced device manufacturing facilities, including those for semiconductors, are located in Japan, where the possibility of disaster or damage from earthquake is generally higher than in other parts of the world. In addition, Sony’s offices and facilities, including those used for research and development, material procurement, manufacturing, logistics, sales and services are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected events. Furthermore,If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt Sony’s operations, delay production, shipments and revenue, and result in large expenses to repair or replace these facilities or offices.
12
Sony products, such as software (including software for mobile phone handsets) and electronic devices including semiconductors, are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur, and as demand increases for digital equipment. At the same time product quality and liability issues present greater risks. In the first half of the fiscal year ended March 31, 2002, Sony recalled products in the mobile phone handset business for quality reasons, which resulted in increased after-sales service expenses of 18.6 billion yen. Sony’s efforts to manage the rapid advancements in technologies and increased demand, as well as to control product quality, may not be successful, and if they are not, Sony may incur expenses such as thosein connection with, for example, product recalls, service and lawsuits, and Sony’s brand image and reputation for qualityas a producer of high-quality products may suffer.
Sony recognizes an unfunded pension obligation (in an amount equal to (i) its Projected Benefit Obligation (“PBO”) less (ii) the fair value of plan assets and accrued pension and severance costs) as a pension cost in a systematic and gradual manner over employees’ average remaining service periods as required under FAS No. 87, “Employers’ Accounting for Pensions”. Any decrease of pension asset value due to low returnreturns from investments or increase ofincreases in PBO due to a lower discount rate may increase unfunded pension obligations, resulting in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense. Refer to Note 1314 of Notes to Consolidated Financial Statements for more information regarding Sony’s pension and severance plans. Also refer to “Critical Accounting Policies” in “Item 5.Operating and Financial Review and Prospects”.
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In addition, manyIncreased reliance on external suppliers may increase financial, reputational and other risks to Sony.
With the increasing necessity of pursuing quick business development and high operating efficiency with limited managerial resources, Sony increasingly procures from third-party suppliers components such as plasma panels and(including LCD panels for televisions,televisions), and technologies such(such as wireless technologies for mobile handsets and operating software for Sony’s PCs and for personal digital assistants.PCs). In addition, it consigns to external suppliers extensive activities including procurement, manufacturing, logistics, sales and other services. Reliance on outside sources increases the chanceschance that Sony will be unable to prevent products from
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Sony is subject to environmental and occupational health and safety regulations relating to matters such as reductions or prohibitions in the use of harmful substances, comprehensive compliance and risk management practices in manufacturing activities and products, decreases in the level of standby power of certain products, protection of natural resources and remediation as a result of certain manufacturing operations and the recycling of products, batteries and packaging materials. The European Parliament and the Council of the European Union have published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. These directives will require electronics producers after August 2005 to bear the cost of collection, treatment, recovery and safe disposal of future products from end-users and to ensure after June 2006 that new electrical and electronic equipment does not contain specified hazardous substances. While the cost of these directives to Sony cannot be determined before regulations are adopted in individual member states, it may be substantial. In the event it is determined that Sony has not complied in a material way with certain environmental laws and regulations, Sony may incur remediation costcosts or sustain injury to its brand image. Sony’s activities also may be limited if Sony is unable to comply with such regulations, which could adversely affect Sony’s results.
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However, international
Sony’s businesses face a broad range of competitors, from large international companies to an increasing number of relatively small, rapidly growing,American Depositary Share holders have fewer rights than shareholders and highly specialized organizations. Sony has a portfolio of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Sony may not fund or invest in certain of its businessesbe able to the same degree that its competitors do, and these companies may have greater financial, technical, and marketing resources available to them than the businesses of Sony against which they compete.enforce judgments based on U.S. securities laws.
The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining Sony’s accounting books and records and exercising appraisal rights are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of the shares underlying the ADSs,American Depositary Shares (“ADSs”), only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying ADSs in accordance with the instructions of ADS holders and will pay the dividends and distributions collected from Sony. However, ADS holders will not be able to bring a derivative action, examine Sony’s accounting books and records, or exercise appraisal rights through the depositary.
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Item 4. Information on the Company
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2002, 2003, 2004 and 2004,2005, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 326.7 billion yen, 261.2 billion yen, and 378.3 billion yen and 356.8 billion yen, respectively. RegardingSony’s capital expenditures are expected to be 410 billion yen during the fiscal year ending March 31, 2006. For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5.Operating and Financial Review and Prospects”. Sony invested 175approximately 150 billion yen in the semiconductor business during the fiscal year ended March 31, 2004. 1902005. Sony plans to invest 160 billion yen will be invested in the semiconductor business in the fiscal year ending March 31, 2005.2006. To finance capital expenditures for the development and manufacturing of semiconductors such as Cell, a highly-advanced processor that will be embedded in a broad range of next-generation digital consumer electronics products, and key devices, including display devices, Sony raised 250 billion yen through the issuance of euro yen zero coupon convertible bonds in December 2003. Refer to “Property, Plant and Equipment” below for a geographic distribution of these investments.
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Business Overviewwithin the “Semiconductor” category in the Electronics segment. The results for the same period of the prior fiscal years have not been restated as such comparable figures cannot be practically obtained given that the semiconductor manufacturing operation was not operated as a separate line of business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and Organizational Structure
manufacturing equipment originally developed or designed for the Game business within Sony as a whole.
Main Product | Previous Product Category | New Product Category | ||||
“Audio” or “Video” or “Televisions” | ||||||
“Televisions” |
Fiscal Year Ended March 31 | |||||||||||||||||||||||||
2003 | 2004 | 2005 | |||||||||||||||||||||||
(Yen in millions) | |||||||||||||||||||||||||
Electronics | |||||||||||||||||||||||||
Audio | 784,114 | (10.5 | ) | 675,496 | (9.0 | ) | 571,864 | (8.0 | ) | ||||||||||||||||
Video | 828,308 | (11.1 | ) | 949,261 | (12.7 | ) | 1,034,736 | (14.5 | ) | ||||||||||||||||
Televisions | 981,655 | (13.1 | ) | 925,501 | (12.3 | ) | 957,122 | (13.4 | ) | ||||||||||||||||
Information and Communications | 836,724 | (11.2 | ) | 834,757 | (11.1 | ) | 778,374 | (10.9 | ) | ||||||||||||||||
Semiconductors | 204,710 | (2.7 | ) | 253,237 | (3.4 | ) | 246,314 | (3.4 | ) | ||||||||||||||||
Components | 527,782 | (7.1 | ) | 623,799 | (8.3 | ) | 619,477 | (8.6 | ) | ||||||||||||||||
Other | 460,888 | (6.2 | ) | 576,217 | (7.7 | ) | 578,349 | (8.1 | ) | ||||||||||||||||
Segment Total | 4,624,181 | (61.9 | ) | 4,838,268 | (64.5 | ) | 4,786,236 | (66.9 | ) | ||||||||||||||||
Game | 936,274 | (12.5 | ) | 753,732 | (10.1 | ) | 702,524 | (9.8 | ) | ||||||||||||||||
Music | 433,147 | (5.8 | ) | 409,487 | (5.5 | ) | 216,779 | (3.0 | ) | ||||||||||||||||
Pictures | 802,770 | (10.7 | ) | 756,370 | (10.1 | ) | 733,677 | (10.2 | ) | ||||||||||||||||
Financial Services | 509,398 | (6.8 | ) | 565,752 | (7.5 | ) | 537,715 | (7.5 | ) | ||||||||||||||||
Other | 167,863 | (2.3 | ) | 172,782 | (2.3 | ) | 182,685 | (2.6 | ) | ||||||||||||||||
Sales and operating revenue | 7,473,633 | (100.0 | ) | 7,496,391 | (100.0 | ) | 7,159,616 | (100.0 | ) | ||||||||||||||||
17
In the Game segment, Sony develops, produces, manufactures, markets, distributes, licenses and publishes home-use entertainment hardware and related software. This business is principally conducted through SCEI in Japan. Sony Computer Entertainment America Inc. (“SCEA”) in the U.S. and Sony Computer Entertainment Europe Ltd. (“SCEE”) in Europe are both wholly-owned subsidiaries of SCEI.
In the Music segment, Sony is engaged in the development, production, manufacture, marketing and distribution of recorded music and music videos in a variety of commercial and electronic formats and across all musical genres, for the world outside of Japan through SMEI and in Japan through SMEJ.
In the Pictures segment, Sony is engaged in the development, production, marketing, distribution, and broadcasting of image-based software, including film, video, television, and new digital entertainment technologies, principally through SPE.
In the Financial Services segment, Sony conducts insurance operations primarily through Sony Life, a Japanese life insurance subsidiary, and Sony Assurance Inc. (“Sony Assurance”), a Japanese non-life insurance subsidiary. Sony is engaged in a leasing and credit financing business in Japan through Sony Finance International Inc. (“Sony Finance”). Sony also conducts an Internet-based banking business in Japan through Sony Bank Inc. (“Sony Bank”), which is an 80 percent directly owned subsidiary of SFH. On April 1, 2004, Sony established SFH by separating a part of Sony Corporation. SFH, which is a
17
In the Other segment, Sony is engaged in an in-house oriented information system service business in Japan, an advertising agency business in Japan, an Internet-related service business mainly in Japan, and an Integrated Circuit (“IC”) card business in Japan.
At the beginning of the fiscal year ended March 31, 2004, Sony partly realigned its business segment configuration. In the Other segment, expenses incurred in connection with the creation of a network platform business have been transferred out of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. In the Music segment, certain non-core businesses of SMEJ such as media, animation, character and cosmetics, were transferred to the newly-established Sony Culture Entertainment, Inc. (“SCU”) and SCU was classified in the Other segment. In accordance with these realignments, results for the previous fiscal years have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004.
At the beginning of the fiscal year ended March 31, 2004, Sony partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous years have been reclassified. The primary changes are as follows:
18
The following table sets forth Sony’s sales and operating revenue by operating segments and product categories. Figures in parentheses indicate percentage of sales and operating revenue.
Year Ended March 31 | |||||||||||||
2002 | 2003 | 2004 | |||||||||||
(Yen in millions) | |||||||||||||
Electronics | |||||||||||||
Audio | 747,469 | 682,517 | 623,582 | ||||||||||
(9.9 | ) | (9.1 | ) | (8.3 | ) | ||||||||
Video | 847,311 | 851,064 | 948,111 | ||||||||||
(11.2 | ) | (11.4 | ) | (12.6 | ) | ||||||||
Televisions | 984,290 | 950,166 | 917,207 | ||||||||||
(13.0 | ) | (12.7 | ) | (12.2 | ) | ||||||||
Information and Communications | 998,773 | 836,724 | 834,757 | ||||||||||
(13.2 | ) | (11.2 | ) | (11.1 | ) | ||||||||
Semiconductors | 182,276 | 204,710 | 253,237 | ||||||||||
(2.4 | ) | (2.7 | ) | (3.4 | ) | ||||||||
Components | 511,579 | 527,782 | 623,799 | ||||||||||
(6.8 | ) | (7.1 | ) | (8.3 | ) | ||||||||
Other | 500,852 | 490,350 | 557,707 | ||||||||||
(6.6 | ) | (6.6 | ) | (7.4 | ) | ||||||||
Segment Total | 4,772,550 | 4,543,313 | 4,758,400 | ||||||||||
(63.0 | ) | (60.8 | ) | (63.5 | ) | ||||||||
Game | 986,529 | 936,274 | 753,732 | ||||||||||
(13.0 | ) | (12.5 | ) | (10.1 | ) | ||||||||
Music | 541,418 | 512,908 | 487,457 | ||||||||||
(7.1 | ) | (6.9 | ) | (6.5 | ) | ||||||||
Pictures | 635,841 | 802,770 | 756,370 | ||||||||||
(8.4 | ) | (10.7 | ) | (10.1 | ) | ||||||||
Financial Services | 480,190 | 509,398 | 565,752 | ||||||||||
(6.3 | ) | (6.8 | ) | (7.5 | ) | ||||||||
Other | 161,730 | 168,970 | 174,680 | ||||||||||
(2.1 | ) | (2.3 | ) | (2.3 | ) | ||||||||
Sales and operating revenue | 7,578,258 | 7,473,633 | 7,496,391 | ||||||||||
Notes:
Sony manages the Electronics segment as a single operating segment. 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.
In the third quarter beginning October 1, 2003, regarding Sony Life, the recognition method of insurance premiums received on certain products was changed from being recorded as revenues to being offset against the related provision for future insurance policy benefits, reducing revenue in the Financial Services segment in the fiscal year ended March 31, 2004, by 30.8 billion yen. This change did not have a material effect on operating income.
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“Audio” includes home audio, portable audio, car audio and car navigation systems. |
“Video” includes video cameras, digital still cameras, video decks, and DVD-Video players/ |
“Televisions” includes televisions incorporating cathode ray tubes (“CRTs”), projection televisions, plasma televisions, liquid crystal displays (“LCDs”) televisions, computer displays, and CRTs. |
“Information and Communications” includes PCs, printer systems, personal digital assistants, and | |
“Semiconductors” includes LCDs, charge coupled devices (“CCDs”) and other semiconductors. |
“Components” includes optical pickups, batteries, audio/video/data recording media, and data recording systems. |
“Other” includes | |
18
SMEI, through its ownership of SONY BMG, a 50 percent owned joint venture with Bertelsmann AG (the financial results of which impact Sony’s equity in net income (loss) of affiliated companies), and SMEJ produce recorded music and music videos through contracts with many artists worldwide in all musical genres. SMEISMEJ also produces, manufactures, markets and SMEJ produce, manufacture, market and distributedistributes CDs, MDs, DVDs, UMDs, Super Audio CDs, and pre-recorded audio and video cassettes and produceproduces and manufacturemanufactures CD-ROMs and DVD-ROMs.
20
The Music segment has an extensive
Global operations in the Pictures segment encompass motion picture production, acquisition and distribution; television production, acquisition and distribution; home entertainment production, acquisition and distribution; television broadcasting; digital production and online distribution and broadband services;distribution; and operation of studio facilities.
In conjunction with the acquisition of MGM in April 2005 by SCA and its equity partners, SPE entered into agreements to co-finance and produce new motion pictures with MGM and to distribute MGM’s existing film and television content through SPE’s global distribution channels.
Sales & Marketing.
19
TheIn the Financial Services segment, includeson April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company composed of Sony Life, which underwritesSony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) with the aim of integrating various financial services including savings and loans, and offering individual customers high value-added products and high-quality services.policies,operations primarily for individualthrough Sony Life, a Japanese life insurance products in Japan,company, and sellsSony Assurance, a Japanese non-life insurance products providedcompany, both wholly owned by SFH. Sony Assurance; Sony Assurance, which conducts an individual automobile and medical insurance business in Japan; Sony Bank, which conductsalso operates an Internet-based banking business including personal loans, mortgage loans, investment trusts, and deposits, for individual customers in Japan; andJapan through Sony Finance,Bank, which conductsis an 84.2 percent directly owned subsidiary of SFH. Sony is also engaged in a leasing and credit financing business in Japan focusing on a new credit card business for Internet shopping, utilizing a non-contact IC card technology developed by Sony.through Sony Finance International Inc. (“Sony Finance”).Other
21
revenue.revenue for which the particular market accounts.
Year Ended March 31 | ||||||||||||||||||||||||||||||||||||||
Fiscal Year Ended March 31 | ||||||||||||||||||||||||||||||||||||||
2002 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||
2003 | 2004 | 2005 | ||||||||||||||||||||||||||||||||||||
(Yen in millions) | (Yen in millions) | |||||||||||||||||||||||||||||||||||||
Japan | Japan | 2,248,115 | 2,093,880 | 2,220,747 | Japan | 2,093,880 | (28.0 | ) | 2,220,747 | (29.6 | ) | 2,100,793 | (29.3 | ) | ||||||||||||||||||||||||
(29.7 | ) | (28.0 | ) | (29.6 | ) | |||||||||||||||||||||||||||||||||
United States | United States | 2,461,523 | 2,403,946 | 2,121,110 | United States | 2,403,946 | (32.2 | ) | 2,121,110 | (28.3 | ) | 1,977,310 | (27.6 | ) | ||||||||||||||||||||||||
(32.5 | ) | (32.2 | ) | (28.3 | ) | |||||||||||||||||||||||||||||||||
Europe | Europe | 1,609,111 | 1,665,976 | 1,765,053 | Europe | 1,665,976 | (22.3 | ) | 1,765,053 | (23.6 | ) | 1,612,536 | (22.6 | ) | ||||||||||||||||||||||||
(21.2 | ) | (22.3 | ) | (23.6 | ) | |||||||||||||||||||||||||||||||||
Other Areas | Other Areas | 1,259,509 | 1,309,831 | 1,389,481 | Other Areas | 1,309,831 | (17.5 | ) | 1,389,481 | (18.5 | ) | 1,468,977 | (20.5 | ) | ||||||||||||||||||||||||
(16.6 | ) | (17.5 | ) | (18.5 | ) | |||||||||||||||||||||||||||||||||
Sales and operating revenue | 7,473,633 | (100.0 | ) | 7,496,391 | (100.0 | ) | 7,159,616 | (100.0 | ) | |||||||||||||||||||||||||||||
Sales and operating revenue | 7,578,258 | 7,473,633 | 7,496,391 | |||||||||||||||||||||||||||||||||||
Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services. For electronic components, Sony sells products directly to wholesalers and manufacturers. |
20
Sony markets its electronics products and services through Sony Electronics Inc. and other wholly-owned subsidiaries in the U.S. |
In Europe, Sony’s consumer electronics products and services are marketed through sales subsidiaries including Sony United Kingdom Limited, Sony Deutschland G.m.b.H., and Sony France S.A. Sales of |
In overseas areas other than the U.S. and Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony Corporation of Hong Kong Limited, Sony Gulf |
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FZE in the United Arab Emirates, Sony Electrónicos de México, S.A. de C.V., Sony of Canada Ltd., and Sony Australia Limited. |
SMEISMEJ produces, manufactures, markets, and SMEJ produce, manufacture, market, and distributedistributes CDs, MDs, DVDs, Super Audio CDs, and pre-recorded audio and video software.
SMEJ conducts business in Japan under “Sony Records”, “Epic Records”, “Ki/oon Records”, “SMEJ Associated Records”, “Defstar Records”, and other labels.affiliates conductmusic publishing business in countries other than Japan primarily under“Columbia the Sony/ ATV Music Publishing name.Group”“, “Epic Records”,“Epic Records Group” “Arista Records”,“Sony Classical”,“Legacy Recordings” “RCA Records” and other labels.SMEJ conducts business in Japan under“Sony Records”,“Epic Records”,“Ki/oon Records”,“SMEJ Associated Records”,“Defstar Records”, and other labels.SMEISONY BMG as well as other major and independent labels and independent artists.Pictures
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Sony Bank has conducted banking operations since June 2001 in Japan, and provides its services via the Internet 24 hours a day, 365 days a year as a general rule. By using the MONEYKit tool, account holders can invest and manage assets according to their life plans over the Internet.
Sony has pursued a long-term strategySources of actively expanding its production capabilities in each region following a general policy of seeking to manufacture its products in the markets in which they are sold. As of March 31, 2004, Sony operated 18 manufacturing facilities in Japan, five in the U.S., seven in Europe, and 17 in non-Japan Asia and other geographic areas (“Other Areas”) in the Electronics segment. In addition, Sony operated two CD manufacturing facilities in Japan, two in the U.S., one in Europe, and eight in Other Areas in the Music segment.
In order to be less susceptible to the impact of foreign exchange rate fluctuations and to reduce inventory and cost, Sony seeks to localize its overseas production, research and development, design, materials and parts procurement, and management.
Sony pursues procurement of raw materials, parts and components to be used in the production of its products on a global basis on the most favorable terms that it can achieve. These items are purchased from various suppliers around the world. Generally, Sony maintains multiple suppliers for most significant categories of parts and components.
2422
PlayStation 2PS2 hardware, are substantially dependent upon certain patents licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp., which cover These patents relate to technologies essential to DVD specification. Sony considers its overall license position beneficial to its operations. While Sony believes that its various proprietary intellectual property rights are important to its success, it believes that neither its business as a whole nor any business segment is materially dependent on any particular patent or license, or any particular group of patents or licenses, except as set forth above.Competition
InformationInformation.””.talent thatartists who can achieve a high degree of public acceptance. In terms of music distribution, it is important to make appropriate investments in new technologies for secure, high-quality and secure music distribution, while maintaining customer convenience.
23
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Public Management, HomeInternal Affairs Posts and Telecommunications.Communications. An increasing number of countries have enacted or are contemplating enactment of personal information protection related laws and regulations. In Japan, comprehensive laws and regulations covering the private sector entered into force as of April 1, 2005. Under these laws, various obligations are imposed upon enterprises handling more than a certain amount of personal information, and possible administrative actions including fines and other penalties, may be imposed for compliance failures. Sony is also subject to environmental and occupational health and safety regulations in the jurisdictions in which it operates, particularly those in which it has manufacturing, research, or similar operations in its Electronics and Game businesses.segments. Refer to “Risk Factors” in “Item 3.Key InformationInformation”.”.
In October 2001, SCEE temporarily halted shipments of PS one game consoles destined for the European market after Dutch authorities determined levels of cadmium were above the limits allowed under Dutch regulations. PS one shipments were resumed after confirming that there was no health risk to users during use and Sony worked closely with Dutch authorities to replace non-compliant components to meet their standards. Sony further addressed this issue in PS one game consoles by initiating its own program to inspect all Sony products and thereby discovered a limited number of other occurrences of potentially harmful substances. In order to prevent problems occurring with cadmium and similar chemical substances in the future, Sony initiated a comprehensive program that included revisions to specific Sony policies and standards such as its “Management Regulations for the Environment-related Substances to be Controlled which are included in Parts and Materials”, and tightening its management and control systems including the “Green Partner Environmental Quality Approval Program”, which identifies specific requirements applicable to Sony’s suppliers. On a consolidated basis, Sony recorded a total of approximately 10 billion yen in expenses, including costs of rework and other, investments in equipment, costs of revising and managing policies and programs including the above mentioned policy and program, for the two fiscal years ended March 31, 2002 and March 31, 2003.
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Country of | (As of March 31, 2005) | |||||||
Name of company | incorporation | Percentage owned | ||||||
Sony EMCS Corporation | Japan | 100.0 | ||||||
Sony Semiconductor Kyushu Corporation | Japan | 100.0 | ||||||
Sony Marketing (Japan) Inc. | Japan | 100.0 | ||||||
Sony Computer Entertainment Inc. | Japan | 100.0 | ||||||
Sony Music Entertainment (Japan) Inc. | Japan | 100.0 | ||||||
Sony Financial Holdings, Inc. | Japan | 100.0 | ||||||
Sony Life Insurance Co., Ltd. | Japan | 100.0 | ||||||
Sony Americas Holding Inc. | U.S.A. | 100.0 | ||||||
Sony Corporation of America | U.S.A. | 100.0 | ||||||
Sony Electronics Inc. | U.S.A. | 100.0 | ||||||
Digital Audio Disc Corporation | U.S.A. | 100.0 | ||||||
Sony Computer Entertainment America Inc. | U.S.A. | 100.0 | ||||||
Sony Pictures Entertainment Inc. | U.S.A. | 100.0 | ||||||
Sony Europe Holding B.V. | Holland | 100.0 | ||||||
Sony Europe G.m.b.H. | Germany | 100.0 | ||||||
Sony Computer Entertainment Europe Ltd. | U.K. | 100.0 | ||||||
Sony Global Treasury Services Plc. | U.K. | 100.0 | ||||||
Sony Holding (Asia) B.V. | Holland | 100.0 | ||||||
Sony Electronics Asia Pacific Pte. Ltd. | Singapore | 100.0 |
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Approximate | |||||||
Location | floor space | ||||||
Principal products manufactured | |||||||
(square feet) | |||||||
In Japan: | |||||||
Nagasaki (Sony Semiconductor Kyushu Corporation | |||||||
— Nagasaki TEC and SCEI) | 2,232,000 | Semiconductors | |||||
Kokubu, Kagoshima (Sony Semiconductor Kyushu Corporation | |||||||
— Kokubu TEC) | Semiconductors | ||||||
Kumamoto (Sony Semiconductor Kyushu Corporation | |||||||
— Kumamoto TEC) | 980,000 | Semiconductors | |||||
Kohda, Aichi (Sony EMCS Corporation — Kohda TEC) | 953,000 | Video cameras, digital still cameras, Memory Sticks, and printers | |||||
Inazawa, Aichi (Sony EMCS Corporation — Inazawa TEC) | |||||||
Ichinomiya, Aichi (Sony EMCS Corporation — Ichinomiya TEC) | 833,000 | ||||||
Kanuma, Tochigi (Sony Chemicals Corporation) | Magnetic | ||||||
Tochigi, Tochigi (Sony | 609,000 | Magnetic tapes, adhesives, and | |||||
Kisarazu, Chiba (Sony EMCS Corporation — Kisarazu TEC) | 601,000 | DVD Recorders | |||||
Koriyama, Fukushima (Sony | Batteries | ||||||
Kosai, Shizuoka (Sony EMCS Corporation — Kosai TEC) | Broadcast- and professional-use video equipment | ||||||
Minokamo, Gifu (Sony EMCS Corporation — Minokamo TEC) | Video cameras, digital still cameras, |
2726
Approximate | |||||||
Location | floor space | ||||||
Principal products manufactured | |||||||
(square feet) | |||||||
Pittsburgh, Pennsylvania, U.S.A. (Sony Electronics Inc.) | 2,820,000 | ||||||
San Diego, California, U.S.A. (Sony Electronics Inc.) | 1,249,000 | CRTs | |||||
Wuxi, China (Sony Electronics (Wuxi) Co., Ltd. and Sony (China) Ltd.) | 1,160,000 | Batteries, televisions, PCs, and digital still cameras | |||||
Penang, Malaysia (Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC) | 988,000 | Audio equipment and data storage systems | |||||
Tijuana, Mexico (Sony de Tijuana Este, S.A. de C.V.) | 935,000 | and audio equipment | |||||
Jurong, Singapore (Sony | 838,000 | CRTs | |||||
Dothan, Alabama, U.S.A. (Sony | 809,000 | Magnetic tape products and polarized film for LCD | |||||
Bangi, Malaysia (Sony EMCS (Malaysia) Sdn. Bhd.��— KL TEC) | 797,000 | CRT televisions, rear projection televisions, TV tuners, DVD players, and | |||||
Bridgend, Wales, U.K. (Sony Manufacturing Company U.K.) | 752,000 | CRTs and TV components | |||||
Pencoed, Wales, U.K. (Sony Manufacturing Company U.K.) | 707,000 | and professional-use displays | |||||
( | 655,000 | ||||||
Nuevo Laredo, Mexico (Sony Electronics Inc.) | 608,000 | Magnetic storage media and batteries | |||||
(Sony Music Entertainment Inc.) | 568,000 | CDs, CD-ROMs, DVDs, and DVD-ROMs | |||||
Viladecavallas, Spain (Sony Espana, S.A.) | 566,000 | ||||||
Huizou, China (Sony Precision Devices (Huizou) Co., Ltd.) | 526,000 | Optical pickups and DVD players |
27
Although doing so will not require expansion of the floor space at the Nagasaki facility owned by Sony Semiconductor Kyushu Corporation and SCEI, Sony plans to increase its semiconductor manufacturing capacity at this facility. This capacity increase constitutes a portion of Sony’s 120 billion yen planned investment during the fiscal year ending March 31, 2005, in semiconductor fabrication
28
The following table sets forth information as of March 31, 2004 with respect to principal plants for the manufacturing of software for the Music, Pictures and Game segments with floor space of more than 500,000 square feet:
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 from Sony Corporation of America (“SCA”). Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.
Europe.
Item 5. | Operating and Financial Review and Prospects |
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29
Fiscal Year Ended | ||||||||||||
March 31 | ||||||||||||
2004 | 2005 | Percent change | ||||||||||
(Yen in billions) | ||||||||||||
Sales and operating revenue | 7,496.4 | 7,159.6 | -4.5 | % | ||||||||
Operating income | 98.9 | 113.9 | +15.2 | |||||||||
Income before income taxes | 144.1 | 157.2 | +9.1 | |||||||||
Equity in net income of affiliated companies | 1.7 | 29.0 | +1,594.2 | |||||||||
Net income | 88.5 | 163.8 | +85.1 |
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Business Segment Information |
Fiscal Year Ended | |||||||||||||
March 31 | |||||||||||||
2004 | 2005 | Percent change | |||||||||||
(Yen in billions) | |||||||||||||
Sales and operating revenue | |||||||||||||
Electronics | 5,042.3 | 5,021.6 | -0.4 | % | |||||||||
Game | 780.2 | 729.8 | -6.5 | ||||||||||
Music | 440.3 | 249.1 | -43.4 | ||||||||||
Pictures | 756.4 | 733.7 | -3.0 | ||||||||||
Financial Services | 593.5 | 560.6 | -5.6 | ||||||||||
Other | 268.3 | 254.4 | -5.2 | ||||||||||
Elimination | (384.7 | ) | (389.6 | ) | — | ||||||||
Consolidated | 7,496.4 | 7,159.6 | -4.5 | ||||||||||
Fiscal Year Ended | |||||||||||||
March 31 | |||||||||||||
2004 | 2005 | Percent change | |||||||||||
(Yen in billions) | |||||||||||||
Operating income (loss) | |||||||||||||
Electronics | (6.8 | ) | (34.3 | ) | — | ||||||||
Game | 67.6 | 43.2 | -36.1 | % | |||||||||
Music | (6.0 | ) | 8.8 | — | |||||||||
Pictures | 35.2 | 63.9 | +81.4 | ||||||||||
Financial Services | 55.2 | 55.5 | +0.6 | ||||||||||
Other | (12.1 | ) | (4.1 | ) | — | ||||||||
Total | 133.1 | 133.0 | -0.1 | ||||||||||
Elimination and unallocated corporate expenses | (34.2 | ) | (19.0 | ) | — | ||||||||
Consolidated | 98.9 | 113.9 | +15.2 | ||||||||||
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36
Fiscal Year Ended | |||||||||||||
March 31 | |||||||||||||
Cumulative as of | |||||||||||||
2004 | 2005 | March 31, 2005 | |||||||||||
(Million units) | |||||||||||||
Total Production Shipments of Hardware* | |||||||||||||
PlayStation + PS one | 3.31 | 2.77 | 102.49 | ||||||||||
PlayStation 2 | 20.10 | 16.17 | 87.47 | ||||||||||
PlayStation Portable | 2.97 | 2.97 | |||||||||||
Total Production Shipments of Software*/** | |||||||||||||
PlayStation | 32.00 | 10.00 | 959.00 | ||||||||||
PlayStation 2 | 222.00 | 252.00 | 824.00 | ||||||||||
PlayStation Portable | 5.70 | 5.70 |
* | Production shipments of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers. |
** | Including those both from Sony and third parties under Sony licenses. |
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38
39
Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Financial Services | |||||||||
Financial service revenue | 593,544 | 560,557 | |||||||
Financial service expenses | 538,383 | 505,067 | |||||||
Operating income | 55,161 | 55,490 | |||||||
Other income (expenses), net | 1,958 | 10,204 | |||||||
Income before income taxes | 57,119 | 65,694 | |||||||
Income taxes and other | 22,975 | 25,698 | |||||||
Income before cumulative effect of an accounting change | 34,144 | 39,996 | |||||||
Cumulative effect of an accounting change | — | (4,713 | ) | ||||||
Net income | 34,144 | 35,283 | |||||||
Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Sony without Financial Services | |||||||||
Net sales and operating revenue | 6,939,964 | 6,632,728 | |||||||
Costs and expenses | 6,896,377 | 6,575,354 | |||||||
Operating income | 43,587 | 57,374 | |||||||
Other income (expenses), net | 52,746 | 40,639 | |||||||
Income before income taxes | 96,333 | 98,013 | |||||||
Income taxes and other | 30,916 | (37,043 | ) | ||||||
Income before cumulative effect of an accounting change | 65,417 | 135,056 | |||||||
Cumulative effect of an accounting change | (2,117 | ) | — | ||||||
Net income | 63,300 | 135,056 | |||||||
40
Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Consolidated | |||||||||
Financial service revenue | 565,752 | 537,715 | |||||||
Net sales and operating revenue | 6,930,639 | 6,621,901 | |||||||
7,496,391 | 7,159,616 | ||||||||
Costs and expenses | 7,397,489 | 7,045,697 | |||||||
Operating income | 98,902 | 113,919 | |||||||
Other income (expenses), net | 45,165 | 43,288 | |||||||
Income before income taxes | 144,067 | 157,207 | |||||||
Income taxes and other | 53,439 | (11,344 | ) | ||||||
Income before cumulative effect of an accounting change | 90,628 | 168,551 | |||||||
Cumulative effect of an accounting change | (2,117 | ) | (4,713 | ) | |||||
Net income | 88,511 | 163,838 | |||||||
41
42
Item 5. Operating and Financial Review and Prospects
OPERATING RESULTS
29
HedgingHedging”” below), Sony’s sales for the fiscal year ended March 31, 2004 increased approximately 3 percent, and operating income decreased approximately 47 percent compared with the previous fiscal year. For more detailed information about restructuring, please refer to Note 16 of Notes to the Consolidated Financial Statements. In addition, refer to “Trend Information” below for more information on planned restructuring efforts.168.1 billion yen,restructuring costs incurred, Sony recorded 133.4 billion yen inof personnel related costs. This expense was incurred because 9,000 people, mainly in Japan, the U.S. and Western Europe, left the company primarily through early retirement programs. Of the 9,000 people, 5,000 were people who left the company in Japan.Electronics
43
years ended March 31, 2003 and 2004, respectively, were recorded in the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment but reclassified to the Electronics segment. See Note 24 of Notes to the Consolidated Financial Statements for more information on this reclassification.
30
Due
44
The table below summarizes major restructuring activities for which charges of over 5 billion yen were recorded during the fiscal year ended March 31, 2004.
31
Operating Performance
Year Ended | ||||||||||||||||||||||||
March 31 | Fiscal Year Ended | |||||||||||||||||||||||
March 31 | ||||||||||||||||||||||||
2003 | 2004 | Percent change | ||||||||||||||||||||||
2003 | 2004 | Percent change | ||||||||||||||||||||||
(Yen in billions) | (Yen in billions) | |||||||||||||||||||||||
Sales and operating revenue | 7,473.6 | 7,496.4 | +0.3 | % | 7,473.6 | 7,496.4 | +0.3 | % | ||||||||||||||||
Operating income | 185.4 | 98.9 | -46.7 | 185.4 | 98.9 | -46.7 | ||||||||||||||||||
Income before income taxes | 247.6 | 144.1 | -41.8 | 247.6 | 144.1 | -41.8 | ||||||||||||||||||
Equity in net income of affiliated companies | (44.7 | ) | 1.7 | — | ||||||||||||||||||||
Net income | 115.5 | 88.5 | -23.4 | 115.5 | 88.5 | -23.4 |
(“Cost of Sales and Selling, General and Administrative Expenses
45
32
Operating income for the fiscal year ended March 31, 2004 decreased by 86.5 billion yen, or 46.7 percent, to 98.9 billion yen compared with the previous fiscal year. Operating income margin decreased from 2.5 percent to 1.3 percent. The Electronics segment recorded an operating loss mainly due to an increase in restructuring charges. On the other hand, the business segments that contributed the most to operating income, in descending order by amount of financial impact, were the Game and Financial Services segments.
46
33
Income before income taxes for the fiscal year ended March 31, 2004 decreased 103.6 billion yen, or 41.8 percent, to 144.1 billion yen compared with the previous fiscal year. As mentioned above, operating income and the net amount of other income and other expenses decreased compared with the previous fiscal year.
Income taxes for the fiscal year ended March 31, 2004 decreased by 28.1 billion yen, or 34.7 percent, to 52.8 billion yen, as a result of the decrease in income before income taxes. Income taxes decreased 91.6 billion yen, or 51.2 percent, to 87.2 billion yen, while deferred income tax expense decreased by 63.6 billion yen, or 64.9 percent, to 34.4 billion yen. The effective tax rate for the fiscal year was 36.6 percent, lower than the statutory rate in Japan due to a decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries and because U.S. income was taxed at a lower rate due to utilization of tax loss and foreign tax credit carryforwards. However, this rate was higher than the effective tax rate of 32.6 percent in the prior fiscal year, which benefited from a reversal in valuation allowances on deferred tax assets by Aiwa Co., Ltd. and its subsidiaries (“Aiwa”).
Equity in net income of affiliated companies during the fiscal year ended March 31, 2004 was 1.7 billion yen, an improvement over the 44.7 billion yen in losses recorded in the previous fiscal year. Equity in net income of Sony Ericsson, Mobile Communications (“Sony Ericsson”), a joint venture focused on mobile phone handsets, was 6.4 billion yen, an improvement from the 20.8 billion yen in losses recorded in the previous fiscal year. This improvement was due to strong demand for Sony Ericsson’s products, particularly in the Global System for Mobile Communications (“GSM”) and Japanese markets, and due to improvements in operating efficiencies at the company. Moreover, S.T. Liquid Crystal Display Corporation (“ST-LCD”), an LCD joint venture in Japan, recorded a profit compared with a loss in the previous fiscal year. Partially offsetting these improvements were equity in net losses of some other affiliated companies such as Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan.Japan during the fiscal year ended March 31, 2004. The equity in net loss related to Crosswave for the fiscal year ended March 31, 2004 was 1.4 billion yen.
47
34
The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 2324 of Notes to Consolidated Financial Statements.
Fiscal Year Ended | ||||||||||||||||||||||||||
Year Ended | March 31 | |||||||||||||||||||||||||
March 31 | ||||||||||||||||||||||||||
2003 | 2004 | Percent change | ||||||||||||||||||||||||
2003 | 2004 | Percent change | ||||||||||||||||||||||||
(Yen in billions) | ||||||||||||||||||||||||||
(Yen in billions) | ||||||||||||||||||||||||||
Sales and Operating revenue | ||||||||||||||||||||||||||
Electronics | 4,940.5 | 4,897.4 | -0.9 | % | ||||||||||||||||||||||
Sales and operating revenue | Sales and operating revenue | |||||||||||||||||||||||||
Game | 955.0 | 780.2 | -18.3 | Electronics | 5,096.0 | 5,042.3 | -1.1 | % | ||||||||||||||||||
Music | 597.5 | 559.9 | -6.3 | Game | 955.0 | 780.2 | -18.3 | |||||||||||||||||||
Pictures | 802.8 | 756.4 | -5.8 | Music | 466.3 | 440.3 | -5.6 | |||||||||||||||||||
Financial Services | 537.3 | 593.5 | +10.5 | Pictures | 802.8 | 756.4 | -5.8 | |||||||||||||||||||
Other | 306.3 | 330.4 | +7.9 | Financial Services | 537.3 | 593.5 | +10.5 | |||||||||||||||||||
Other | 261.1 | 268.3 | +2.7 | |||||||||||||||||||||||
Elimination | (665.7 | ) | (421.4 | ) | — | Elimination | (644.9 | ) | (384.7 | ) | — | |||||||||||||||
Consolidated | Consolidated | 7,473.6 | 7,496.4 | +0.3 | Consolidated | 7,473.6 | 7,496.4 | +0.3 | ||||||||||||||||||
3548
Year Ended | ||||||||||||||||||||||||||
March 31 | Fiscal Year Ended | |||||||||||||||||||||||||
March 31 | ||||||||||||||||||||||||||
2003 | 2004 | Percent change | ||||||||||||||||||||||||
2003 | 2004 | Percent change | ||||||||||||||||||||||||
(Yen in billions) | (Yen in billions) | |||||||||||||||||||||||||
Operating income (loss) | Operating income (loss) | Operating income (loss) | ||||||||||||||||||||||||
Electronics | 41.4 | (35.3 | ) | — | Electronics | 65.9 | (6.8 | ) | — | |||||||||||||||||
Game | 112.7 | 67.6 | -40.0 | % | Game | 112.7 | 67.6 | -40.0 | % | |||||||||||||||||
Music | (7.9 | ) | 19.0 | — | Music | (28.3 | ) | (6.0 | ) | — | ||||||||||||||||
Pictures | 59.0 | 35.2 | -40.3 | Pictures | 59.0 | 35.2 | -40.3 | |||||||||||||||||||
Financial Services | 22.8 | 55.2 | +142.4 | Financial Services | 22.8 | 55.2 | +142.4 | |||||||||||||||||||
Other | (25.0 | ) | (10.0 | ) | — | Other | (28.3 | ) | (12.1 | ) | — | |||||||||||||||
Elimination and unallocated corporate expenses | (18.3 | ) | (34.2 | ) | — | |||||||||||||||||||||
Elimination and unallocated corporate expenses | (17.5 | ) | (32.7 | ) | — | |||||||||||||||||||||
Consolidated | Consolidated | 185.4 | 98.9 | -46.7 | Consolidated | 185.4 | 98.9 | -46.7 | ||||||||||||||||||
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36
Also, sales of Aiwa products decreased in all regions.
50
37
the yen.
51
38
Year Ended | |||||||||||||
March 31 | |||||||||||||
Cumulative as of | |||||||||||||
2003 | 2004 | March 31, 2004 | |||||||||||
(Million units) | |||||||||||||
Total Production Shipments of Hardware | |||||||||||||
PlayStation + PS one | 6.78 | 3.31 | 99.72 | ||||||||||
PlayStation 2 | 22.52 | 20.10 | 71.30 | ||||||||||
Total Production Shipments of Software* | |||||||||||||
PlayStation | 61.00 | 32.00 | 949.00 | ||||||||||
PlayStation 2 | 189.90 | 222.00 | 572.00 |
Fiscal Year Ended | |||||||||||||
March 31 | |||||||||||||
Cumulative as of | |||||||||||||
2003 | 2004 | March 31, 2004 | |||||||||||
(Million units) | |||||||||||||
Total Production Shipments of Hardware* | |||||||||||||
PlayStation + PS one | 6.78 | 3.31 | 99.72 | ||||||||||
PlayStation 2 | 22.52 | 20.10 | 71.30 | ||||||||||
Total Production Shipments of Software*/** | |||||||||||||
PlayStation | 61.00 | 32.00 | 949.00 | ||||||||||
PlayStation 2 | 189.90 | 222.00 | 572.00 |
52
** | Including those both from Sony and third parties under Sony licenses. |
39
On a local currency basis, sales in the Music segment were flat while the Music segment recorded operating income as compared to an operating loss in the previous fiscal year.
The increase in profitability resulted in operating income at SMEI, compared to an operating loss recorded in the previous fiscal year.
40
In December 2003, Sony and Bertelsmann AG announced that they had signed a binding agreement to combine their recorded music businesses in a joint venture. The newly formed company, which will be known as Sony BMG, will be 50% owned by each parent company. It will not include SMEI’s music publishing, physical distribution and disc manufacturing business or SMEJ. The merger is subject to regulatory approvals in the U.S. and the European Union.
53
41
54
At
Sony Bank, Inc. (“Sony Bank”), which started business in June 2001, recorded a loss, as was also the case in the previous fiscal year, but the amount of loss decreased.
42
All other segments | ||||||||||||||||||||||||||||||||||||||||||||||||
All other segments | excluding | |||||||||||||||||||||||||||||||||||||||||||||||
excluding | Financial Services | Financial Services | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||
Financial Services | Financial Services | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||
Year Ended March 31 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||||
Fiscal Year Ended March 31 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||||
(Yen in millions) | (Yen in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Financial Services revenue | 537,276 | 593,544 | — | — | 509,398 | 565,752 | 537,276 | 593,544 | — | — | 509,398 | 565,752 | ||||||||||||||||||||||||||||||||||||
Net sales and operating revenue | — | — | 6,974,980 | 6,939,964 | 6,964,235 | 6,930,639 | — | — | 6,974,980 | 6,939,964 | 6,964,235 | 6,930,639 | ||||||||||||||||||||||||||||||||||||
537,276 | 593,544 | 6,974,980 | 6,939,964 | 7,473,633 | 7,496,391 | 537,276 | 593,544 | 6,974,980 | 6,939,964 | 7,473,633 | 7,496,391 | |||||||||||||||||||||||||||||||||||||
Costs and expenses | 514,518 | 538,383 | 6,811,292 | 6,896,377 | 7,288,193 | 7,397,489 | 514,518 | 538,383 | 6,811,292 | 6,896,377 | 7,288,193 | 7,397,489 | ||||||||||||||||||||||||||||||||||||
Operating income | 22,758 | 55,161 | 163,688 | 43,587 | 185,440 | 98,902 | 22,758 | 55,161 | 163,688 | 43,587 | 185,440 | 98,902 | ||||||||||||||||||||||||||||||||||||
Other income (expenses), net | (1,282 | ) | 1,958 | 67,846 | 52,746 | 62,181 | 45,165 | |||||||||||||||||||||||||||||||||||||||||
Other income (expenses) net | (1,282 | ) | 1,958 | 67,846 | 52,746 | 62,181 | 45,165 | |||||||||||||||||||||||||||||||||||||||||
Income before income taxes | 21,476 | 57,119 | 231,534 | 96,333 | 247,621 | 144,067 | 21,476 | 57,119 | 231,534 | 96,333 | 247,621 | 144,067 | ||||||||||||||||||||||||||||||||||||
Income taxes and other | 13,071 | 22,975 | 120,089 | 30,916 | 132,102 | 53,439 | 13,071 | 22,975 | 120,089 | 30,916 | 132,102 | 53,439 | ||||||||||||||||||||||||||||||||||||
Cumulative effect of accounting changes | — | — | — | (2,117 | ) | — | (2,117 | ) | — | — | — | (2,117 | ) | — | (2,117 | ) | ||||||||||||||||||||||||||||||||
Net income | 8,405 | 34,144 | 111,445 | 63,300 | 115,519 | 88,511 | 8,405 | 34,144 | 111,445 | 63,300 | 115,519 | 88,511 | ||||||||||||||||||||||||||||||||||||
55
43
56
Operating Results for the Fiscal Year Ended March 31, 2003 compared with the Fiscal Year Ended March 31, 2002Assets, Liabilities and Stockholders’ Equity
Although the global economy showed some signs of growth in the fiscal year ended March 31, 2003, military action in Iraq contributed to increased economic uncertainty in the second half of the year, particularly in the U.S., and the year ended without any indications of a sustained recovery. In Japan, in addition to stagnant consumer demand and an increase in unemployment, declines in the stock market contributed to the unfavorable economic climate.
44
Under such difficult market conditions and reflecting the impact of the translation of financial results into yen in accordance with U.S. GAAP, the currency in which Sony’s financial statements are prepared, Sony’s sales for the fiscal year ended March 31, 2003 decreased 1.4 percent compared with the previous fiscal year. This decrease was principally due to industry-wide declines in personal consumption in the Electronics segment, and also increased price competition in certain markets, including the PC, DVD-Video player and home-use video camera markets. However, operating income increased 37.7 percent compared with the previous fiscal year due to the beneficial effect of the depreciation of the yen against the euro, as well as increased profitability of the Electronics segment, resulting from restructuring initiatives in previous fiscal years, of the Game segment, due to increased software sales and decreased production costs, and of the Pictures segment, due to strong worldwide performance of certain releases in the fiscal year ended March 31, 2003.
On a local currency basis (regarding references to results of operations expressed on a local currency basis, refer to“Foreign Exchange Fluctuations and Risk Hedging” below), Sony’s sales for the fiscal year ended March 31, 2003 decreased approximately 2 percent and operating income decreased approximately 5 percent compared with the previous fiscal year.
Restructuring
Restructuring charges for the fiscal year ended March 31, 2003 amounted to 106.3 billion yen, compared to 107.0 billion yen in the previous fiscal year. The primary restructuring activities were in the Electronics and Music segments.
Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2003, were 72.5 billion yen, compared to 86.9 billion yen in the previous fiscal year, but exceeded the 60.0 billion yen total that was estimated at the beginning of the year.
In the year ended March 31, 2003, a decision was made to reduce production capacity of CRT computer display manufacturing facilities in Japan and Southeast Asia, in response to market contraction resulting from the demand shift from CRT computer displays to flat panel displays such as LCDs. Although the worldwide market for CRT computer displays in the fiscal year ended March 31, 2002 was approximately 96.0 million units, in the fiscal year ended March 31, 2003 it had fallen to approximately 81.0 million units. In order to restore the profitability of the CRT computer display business, which, due to the decrease in demand, had been suffering from low utilization ratios at manufacturing facilities, higher ratios of fixed costs to sales and lower operating income margins, Sony decided to close under-utilized manufacturing facilities. The resulting charges totaled 6.9 billion yen, of which 1.3 billion yen was recorded in cost of sales, 1.7 billion yen was recorded in selling, general and administrative expenses, and 4.0 billion yen was recorded in loss on sale, disposal or impairment of assets, net.
The restructuring program implemented in the previous fiscal year was accelerated at Aiwa in response to a continued decline in operating performance, caused by further declines in the worldwide market for audio products, which form the majority of Aiwa’s sales. After further reductions in personnel and reductions in the number of unprofitable product lines which resulted in the closure of all of Aiwa’s manufacturing facilities, Aiwa’s operations were integrated with those of Sony. (Aiwa became a wholly-owned subsidiary of Sony Corporation in October 2002, and merged into Sony Corporation on December 1, 2002.) Charges resulting from the restructuring of Aiwa totaled 23.0 billion yen, of which 13.8 billion yen was recorded in cost of sales, 5.7 billion yen in selling, general and administrative expenses, and 3.5 billion yen in loss on sale, disposal or impairment of assets, net.
In the fourth quarter of the fiscal year ended March 31, 2003, Sony decided to close a semiconductor plant in the U.S. that produced semiconductor wafers for both internal use and the original equipment manufacturer (OEM) market. This closure was both a response to a significant decline in the business conditions of the semiconductor industry in the U.S., and the result of a shift in Sony’s semiconductor strategy. Sony’s semiconductor manufacturing for internal use is moving toward an emphasis on high-end,
45
In addition to these restructuring activities, Sony has continued to reduce headcount through the implementation of several early retirement programs in Japan to further reduce costs in the Electronics segment. The resulting charges totaled 10.9 billion yen, compared to 12.3 billion yen in the previous fiscal year. These charges were recorded in selling, general and administrative expenses.
In response to the continued contraction of the worldwide music market due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences brought on by increased competition from other entertainment sectors, Sony has been actively repositioning the Music segment for the future by looking to create a more effective and profitable business model. As a result, the Music segment has undertaken a worldwide restructuring program since the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide. Under this worldwide restructuring program, SMEI incurred restructuring charges of 22.4 billion yen for the fiscal year ended March 31, 2003, compared to 8.6 billion yen in the previous fiscal year. This exceeded the estimate made in January 2003, as certain restructuring initiatives originally expected to be undertaken in the fiscal year ended March 31, 2004 were accelerated as a result of a management change and the continued decline in the worldwide music market. Of the 22.4 billion yen in total charges at SMEI, 19.1 billion yen was recorded in selling, general and administrative expense and 3.3 billion yen was recorded in loss on sale, disposal or impairment of assets, net.
Restructuring activities included the further consolidation of operations through the shutdown of a CD and cassette manufacturing and distribution center in Holland, the shutdown of a CD manufacturing facility in the U.S. (announced on April 2, 2003, although the decision to shut down the facility was made during the fiscal year ended March 31, 2003) as well as further staff reductions to consolidate various support functions across labels and operating units. These restructuring activities resulted in the termination of over 1,400 jobs during the fiscal year ended March 31, 2003, of which approximately 600 were in the U.S.
Total restructuring charges in the Music segment, including SMEJ, were 23.9 billion yen.
46
The table below summarizes major restructuring activities for which charges of over 5 billion yen were recorded during the fiscal year ended March 31, 2003.
Operating Performance
Year Ended | ||||||||||||
March 31 | ||||||||||||
2002 | 2003 | Percent change | ||||||||||
(Yen in billions) | ||||||||||||
Sales and operating revenue | 7,578.3 | 7,473.6 | -1.4 | % | ||||||||
Operating income | 134.6 | 185.4 | +37.7 | |||||||||
Income before income taxes | 92.8 | 247.6 | +166.9 | |||||||||
Net income | 15.3 | 115.5 | +654.5 |
Sales for the fiscal year ended March 31, 2003 decreased by 104.6 billion yen, or 1.4 percent, to 7,473.6 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under“Operating Performance by Business Segment” below.
(“Sales” in this analysis of the ratio of selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes Financial Service revenue. This is because Financial Service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysis of cost of sales, including research and development costs, to sales, only “net sales” are used. This is because cost of
47
Cost of sales for the fiscal year ended March 31, 2003 decreased by 260.2 billion yen, or 5.0 percent, to 4,979.4 billion yen compared with the previous fiscal year, and decreased from 74.2 percent to 72.0 percent as a percentage of sales. Year on year, the cost of sales ratio decreased from 80.5 percent to 78.8 percent in the Electronics segment, 74.7 percent to 70.2 percent in the Game segment, 64.0 percent to 61.5 percent in the Music segment, and 62.0 percent to 58.2 percent in the Pictures segment. The cost of sales ratio in the Electronics segment improved due to the effects of prior restructuring and other cost reduction measures, and the cost of sales ratio in the Game segment improved due to reductions in PlayStation 2 hardware production costs. These improvements occurred despite declining sales in the Electronics and Game segments. The cost of sales ratio in the Pictures segment improved due to increased revenue resulting from the strong worldwide performance, both theatrically and in home entertainment, of releases in the fiscal year ended March 31, 2003.
Although the cost of sales ratio decreased year on year, assisted by the positive effect of the appreciation of the euro against the yen on sales, the cost of sales ratio in the fourth quarter of the fiscal year ended March 31, 2003 increased due to declining sales and temporary reductions in production volume for the purpose of lowering inventory to target levels at the end of the fourth quarter. These production adjustments were carried out primarily in March 2003, mainly in the Electronics segment. Research and development costs (included in cost of sales) for the fiscal year ended March 31, 2003 increased by 9.9 billion yen, or 2.3 percent, to 443.1 billion yen compared with the previous fiscal year, with much of this increase in the Game segment. The ratio of research and development costs to sales increased from 6.1 percent to 6.4 percent.
Selling, general and administrative expenses for the fiscal year ended March 31, 2003 increased by 86.5 billion yen, or 5.1 percent, to 1,782.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased from 23.9 percent in the previous fiscal year to 25.6 percent. Year on year, the ratio of selling, general and administrative expenses to sales increased from 18.9 percent to 20.3 percent in the Electronics segment, from 16.7 percent to 18.0 percent in the Game segment, from 32.7 percent to 39.8 percent in the Music segment, and from 32.8 percent to 34.4 percent in the Pictures segment.
Advertising and promotion expenses increased 40.8 billion yen mainly due to increased expenses in the Pictures segment, which contributed to increased box office and home entertainment revenue. Increased competition and the continued reduction in the time interval between theatrical and home entertainment release has resulted in a trend towards larger initial advertising expenditures. Personnel related costs increased 30.5 billion yen compared with the previous fiscal year, and have increased over each of the last three years. A major factor in this increase is the recording of increased severance related expenses, as Sony accelerates its restructuring activities. Severance-related charges in the fiscal year ended March 31, 2003 increased by 14.6 billion yen, or 23.3 percent, mainly in the Electronics and Music segments, to reach a total of 77.4 billion yen. Royalty expenses increased 16.9 billion yen.
The increase in selling, general and administrative expenses was partially offset by a 33.9 billion yen decrease in after-sales service expenses in the fiscal year ended March 31, 2003, caused mainly by the absence of non-recurring expenses recorded during the previous fiscal year due to mobile phone-related quality issues. The increase in selling, general and administrative expenses was also offset by a decrease of 10.0 billion yen in loss on the sale, disposal or impairment of assets, net. This was due to a 19.0 billion yen decrease in such losses in the Electronics segment, offset by a 6.4 billion yen increase in such losses in the Other segment.
The ratio of selling, general and administrative expenses to sales in the fourth quarter was 32.5 percent, an increase from 26.6 percent in the fourth quarter of the previous fiscal year. This was due to an increase in selling, general and administrative expenses and a decrease in sales compared with the
48
Operating income for the fiscal year ended March 31, 2003 increased by 50.8 billion yen, or 37.7 percent, to 185.4 billion yen compared with the previous fiscal year. Operating income margin increased from 1.8 percent to 2.5 percent. The segments making the most significant contributions to the year on year increase in operating income were the Electronics segment, the Game segment and the Pictures segment, in descending order of financial impact.
In the consolidated results for the fiscal year ended March 31, 2003, other income increased by 61.2 billion yen, or 63.5 percent, to 157.5 billion yen, while other expenses decreased by 42.8 billion yen, or 31.0 percent, to 95.3 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 62.2 billion yen compared to net other expense of 41.9 billion yen in the previous fiscal year.
The increase in other income was primarily due to the recording of a 72.6 billion yen gain on sales of securities investments and other, net, for the year ended March 31, 2003. This was mostly due to a 66.5 billion yen gain on the sale, in April 2002, of Sony’s equity interest in Telemundo, a U.S. based Spanish language television network and station group that was accounted for under the equity method. In addition, Sony deferred an approximate 6.0 billion yen gain on this sale due to provisions in the sale agreement that required a partial refund of the purchase price for certain losses or claims as defined in the agreement. The right of the acquirer to claim such refunds expired in April 2003 without any such claim being made. Therefore, Sony recorded an additional gain of 6.0 billion yen in April 2003. Gains were also recorded on the sale of the equity interest in Sony Tektronix Inc., which develops, manufactures and sells electronic measuring instruments and related devices, and Columbia House Company (“CHC”), a direct marketer of music and videos. Other income was positively impacted by a net foreign exchange gain of 1.9 billion yen recorded during the year, compared with a net foreign exchange loss of 31.7 billion yen recorded in the previous fiscal year. The net foreign exchange gain recorded during the year was primarily due to gains incurred on foreign exchange forward contracts and foreign currency option contracts, which Sony employs to hedge the risk from exchange rate fluctuations, while the foreign exchange losses recorded during the previous fiscal year were due to losses incurred on such contracts due to the rapid depreciation of the yen between December 2001 and March 2002. Compared to the previous fiscal year, interest and dividends received decreased from 16.0 billion yen in the previous fiscal year to 14.4 billion yen, primarily due to lower interest earned from investments.
The decrease in other expenses was primarily due to the absence of the net foreign exchange loss recorded in the previous fiscal year as noted above. Interest expense also decreased by 9.1 billion yen, or 25.0 percent, to 27.3 billion yen, primarily due to lower average balances of short-term borrowings and lower interest rates. As a result, the amount of income from interest and dividends less interest expense improved to a net expense of 12.9 billion yen, compared with a net expense of 20.4 billion yen in the previous fiscal year. Partially offsetting the decrease in other expenses was an increase of 4.7 billion yen, or 25.7 percent, to 23.2 billion yen, in losses on the devaluation of securities investments, including securities issued by companies in the U.S. and Europe with which Sony has strategic relationships for the purpose of developing and marketing new technologies. Such companies include Canal+ Technologies, a developer of middleware and conditional access technologies for digital broadcasting, TIVO Inc., a marketer of digital video recorders, and Transmeta Corporation, a chip manufacturer.
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Income before income taxes for the fiscal year ended March 31, 2003 increased by 154.8 billion yen, or 166.9 percent, to 247.6 billion yen compared with the previous fiscal year. Significant contributors to the year on year increase in income before income taxes, in descending order of significance, were the increase in operating income, the increase in gains on sales of securities investments and other, net, and the absence of the foreign exchange loss recorded in the previous fiscal year.
Income taxes for the fiscal year ended March 31, 2003 increased by 15.6 billion yen, or 24.0 percent, to 80.8 billion yen. The increase in income tax was principally due to the increase in income before income taxes described above, although this increase was partially offset by a tax benefit of 51.9 billion yen recorded due to the reversal of valuation allowances on deferred tax assets held by Aiwa as these assets became recoverable as a result of Sony’s decision to merge with Aiwa.
The ratio of income taxes to income before income taxes (the effective tax rate) decreased from 70.3 percent in the previous fiscal year to 32.6 percent.
During the fiscal year ended March 31, 2003, equity in net losses of affiliated companies increased from 34.5 billion yen in the previous fiscal year to 44.7 billion yen. Sony Ericsson, a joint venture focused on mobile phone handsets recorded a 20.8 billion yen loss. In addition, equity affiliates recording losses included ST-LCD, an LCD joint venture in Japan, Crosswave, a data communications carrier offering customers broadband networks and network services in Japan, and BE-ST Bellevuestrasse Development GmbH & Co. First Real Estate KG, Berlin, a real estate business in Germany. Regarding the significant losses at Sony Ericsson, no year on year comparison is available because Sony Ericsson was established in October 2001. However, the loss of 10.7 billion yen recorded due to Sony Ericsson in the second half of the fiscal year ended March 31, 2003 was greater than the 7.4 billion yen loss recorded in the second half of the fiscal year ended March 31, 2002. This increase in losses was due to the following factors: decreased sales in the fourth quarter ended March 31, 2003, compared to the fourth quarter ended March 31, 2002, due to increased pricing pressure; increased expenses due to the phase-in of new products in the GSM and Japanese markets; and the recording of an operating loss in the fourth quarter ended March 31, 2003 compared to income in the fourth quarter ended March 31, 2002, which benefited from the successful introduction of two high-end models in the Japanese and European markets. In the fourth quarter ended March 31, 2003, Sony and Telefonaktiebolaget LM Ericsson each invested an additional 150 million euro in Sony Ericsson to strengthen its financial position (refer to “Electronics”, above).
In the first quarter of the fiscal year ended March 31, 2003, SPE and other non-Sony investors sold Telemundo to NBC, a media company owned by the General Electric Company. In the same quarter, SMEI and AOL Time Warner Inc.’s Warner Music Group each sold the majority of their holding in CHC to Blackstone Capital Partners, an affiliate of The Blackstone Group, an investment bank. The Chairman of the Blackstone Group was a director of Sony Corporation until June 2002.
In the fiscal year ended March 31, 2003, minority interest in the income of consolidated subsidiaries, which is excluded from income before income taxes, was 6.6 billion yen, compared to a 16.2 billion yen minority interest in the loss of consolidated subsidiaries recorded in the previous fiscal year. This change was principally due to the reversal of valuation allowances on deferred tax assets held by Aiwa and because Sony no longer recorded a minority interest in Aiwa’s losses as Sony took Aiwa private in October 2002.
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Net income for the fiscal year ended March 31, 2003 increased by 100.2 billion yen, or 654.5 percent, to 115.5 billion yen compared with the previous fiscal year. As a percentage of sales, net income increased from 0.2 percent to 1.5 percent. The most significant contribution to the year on year increase in net income was the increase in income before income taxes. However the effect of the minority interest in the income of consolidated subsidiaries, the absolute increase in income taxes, and the increase in losses in equity of affiliated companies caused net income to be 132.1 billion yen less than income before income taxes, compared to a difference of 77.5 billion yen in the previous fiscal year.
The return on stockholders’ equity increased from 0.7 percent to 5.0 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2003.)
Basic net income per share was 125.74 yen compared with 16.72 yen in the previous fiscal year, and diluted net income per share was 118.21 yen compared with 16.67 yen in the previous fiscal year. Refer to Notes 2 and 20 of Notes to Consolidated Financial Statements.
The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 23 of Notes to Consolidated Financial Statements.
Year Ended | |||||||||||||
March 31 | |||||||||||||
2002 | 2003 | Percent change | |||||||||||
(Yen in billions) | |||||||||||||
Sales and Operating revenue | |||||||||||||
Electronics | 5,286.2 | 4,940.5 | -6.5 | % | |||||||||
Game | 1,003.7 | 955.0 | -4.9 | ||||||||||
Music | 600.1 | 597.5 | -0.4 | ||||||||||
Pictures | 635.8 | 802.8 | +26.3 | ||||||||||
Financial Services | 509.1 | 537.3 | +5.5 | ||||||||||
Other | 261.5 | 306.3 | +17.1 | ||||||||||
Elimination | (718.1 | ) | (665.7 | ) | — | ||||||||
Consolidated | 7,578.3 | 7,473.6 | -1.4 | ||||||||||
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Year Ended | |||||||||||||
March 31 | |||||||||||||
2002 | 2003 | Percent change | |||||||||||
(Yen in billions) | |||||||||||||
Operating income (loss) | |||||||||||||
Electronics | (1.2 | ) | 41.4 | — | |||||||||
Game | 82.9 | 112.7 | +35.9 | % | |||||||||
Music | 22.1 | (7.9 | ) | — | |||||||||
Pictures | 31.3 | 59.0 | +88.6 | ||||||||||
Financial Services | 21.8 | 22.8 | +4.3 | ||||||||||
Other | (18.2 | ) | (25.0 | ) | — | ||||||||
Elimination and unallocated corporate expenses | (4.1 | ) | (17.5 | ) | — | ||||||||
Consolidated | 134.6 | 185.4 | +37.7 | ||||||||||
Commencing with the first quarter ended June 30, 2003, Sony partly realigned its business segment configuration. Expenses incurred in connection with the creation of a network platform business were transferred out of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. In accordance with this realignment, results of the fiscal years ended March 31, 2002 and 2003 have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004.
The above reclassification also reflects the effect of Sony’s realignment of its business segment configuration and Electronics segment product category configuration from the first quarter ended June 30, 2002. From the first quarter ended June 30, 2002, sales of businesses devoted to the creation of a network platform business and of businesses devoted to the development of network and content technology and services have been included in the “Other” segment. In addition to SCN, which was originally contained in the “Other” segment, these businesses include an in-house oriented information system service business and an IC card business formerly contained in the “Other” category of the Electronics segment.
Electronics
Sales for the fiscal year ended March 31, 2003 decreased by 345.7 billion yen, or 6.5 percent, to 4,940.5 billion yen compared with the previous fiscal year. Operating income of 41.4 billion yen was recorded compared to an operating loss of 1.2 billion yen in the previous fiscal year. The year on year decrease in sales was due to the continued industry-wide effects of falling consumption in markets for certain products in the Electronics segment, increased price competition worldwide, and the impact of business withdrawals and rationalization of product lines (refer to Note 16 of Notes to Consolidated Financial Statements).
Regarding sales to outside customers by geographic area, sales decreased by 12 percent in the U.S. and by 9 percent in Japan, but sales increased by 2 percent in Europe and Other Areas, respectively. Sales decreased in the U.S. over a wide range of products including, in descending order of financial impact, PCs, computer displays, Aiwa products, CRT televisions, DVD-Video players, home-use video cameras, home audio and CD-R/ RW drives. Sales in the U.S. were also negatively impacted by Sony’s withdrawal from the home telephone business in 2001. Products with increased sales in the U.S. included personal digital assistants, projection televisions and digital still cameras. In Japan, overall demand decreased substantially, with PCs, Aiwa products, home-use video cameras and CRT televisions showing year on year sales declines; however, sales of semiconductors increased. In Europe, sales of PCs, digital still cameras and digital home-use video cameras showed strong sales growth, while sales of Aiwa products and computer displays decreased. Sales in Europe were also positively impacted by the strength of the euro against the yen in the second half of the year. In Other Areas, sales of digital still cameras, home-use video cameras and PCs increased while sales of Aiwa products and broadcast- and professional-use products decreased. The transfer of Sony’s mobile phone business to Sony Ericsson, an affiliate accounted
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The sales decrease during the fiscal year ended March 31, 2003, accelerated in the fourth quarter, as sales decreased by 227.0 billion yen, or 18.1 percent, to 1,025.3 billion yen compared to the fourth quarter of the previous fiscal year. This was principally due to declines in sales, in descending order of financial impact, of PCs, CRT televisions, Aiwa products, computer displays, home-use video cameras and home audio.
Sales and operating revenue by product category discussed below represent sales to customers, which do not include intersegment transactions. Refer to Note 23 of Notes to Consolidated Financial Statements.
“Audio” sales decreased by 65.0 billion yen, or 8.7 percent, to 682.5 billion yen. Sales of home audio declined in all geographic areas, although sales of home theater systems increased principally in Europe and the U.S. Regarding headphone stereos, MD format sales increased due to rapid market growth particularly in the U.S. However, CD format headphone stereos sales decreased overall due to the contraction of the U.S. market, although such sales rose strongly in Europe aided by continued market expansion and the depreciation of the yen against the euro. Sales of both formats declined in Japan. Overall sales for the cassette format decreased due to the continued contraction of the market in all areas. Worldwide shipments of MD format headphone stereos increased by approximately 370,000 units to approximately 3.32 million units. Worldwide shipments of CD format headphone stereos increased by approximately 250,000 units to approximately 10.72 million units. Sales of home telephones declined because of Sony’s withdrawal from the home telephone business in the U.S. and Japan in the previous fiscal year.
“Video” sales increased by 3.8 billion yen, or 0.4 percent, to 851.1 billion yen. The increase was principally due to higher sales of digital still cameras in all areas and digital home-use video cameras in Other Areas, particularly Asia, and Europe. Worldwide shipments of digital still cameras increased by approximately 2.2 million units to approximately 5.6 million units. Worldwide shipments of home-use video cameras, both analog and digital, increased by approximately 350,000 units to approximately 5.75 million units. However, analog home-use video camera sales decreased due to lower demand, particularly in the U.S. Overall sales of home-use video cameras decreased in Japan and the U.S. due to increased price competition. DVD-Video player sales decreased primarily in the U.S. where pricing pressure was severe, although the market expanded. Sales from set-top boxes decreased due to a decline in unit sales in the U.S. and Europe.
“Televisions” sales decreased by 34.1 billion yen, or 3.5 percent, to 950.2 billion yen. One factor leading to the decrease was a substantial decline in CRT television sales in the U.S. and Japan, as a result of market contraction, although sales in Europe increased partly due to the appreciation of the euro against the yen. Worldwide shipments of CRT televisions were approximately 10 million units, almost flat compared with the previous fiscal year. Another factor causing the decrease was a decline in sales of CRT computer displays in the U.S., Europe and Japan, resulting from the shift in demand towards flat panel computer displays. A third factor was a decrease in the sales of CRTs, reflecting the decline in the market for CRT televisions and CRT computer displays. Offsetting these decreases were higher sales of large-screen projection televisions, particularly in the U.S., and plasma and LCD flat panel televisions.
“Information and Communications” sales decreased by 162.0 billion yen, or 16.2 percent, to 836.7 billion yen. The decrease was primarily due to lower sales of PCs and broadcast- and professional-use products. Further, since October 2001, when Sony began recording mobile phone handset sales as sales to Sony Ericsson in “Other”, no sales of mobile phone handsets have been recorded under “Information and Communications”. Sales of PCs decreased in Japan and the U.S. due to increased price competition.
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“Semiconductors” sales increased by 22.4 billion yen, or 12.3 percent, to 204.7 billion yen. The increase was primarily due to a significant increase in sales of CCDs, particularly in Japan and Other Areas, reflecting higher demand for digital still cameras, and a significant increase in sales of bipolar integrated circuits for CD-R/ RW and DVD drives, particularly in Japan. Partially offsetting the above increase was a decrease in sales revenue from high temperature LCDs in all geographic areas due to pricing pressure.
“Components” sales increased by 16.2 billion yen, or 3.2 percent, to 527.8 billion yen. The increase was primarily due to significant increases in sales of DVD drives, Memory Stick and batteries. DVD drive sales increased as the strong performance of Sony branded products, particularly in the U.S., allowed Sony to avoid unit price reductions. Memory Stick sales increased due to continued demand for digital still cameras, with worldwide shipments of Memory Stick increasing by approximately 8 million units to approximately 19 million units. At the end of the fiscal year ended March 31, 2003, Sony’s cumulative shipments of Memory Stick had reached 39 million units. Regarding batteries, the growing market for lithium-ion batteries led to strong revenue growth despite declines in the average selling price. On the other hand, sales of CD-R/ RW drives decreased due to severe price competition.
“Other” sales decreased by 10.5 billion yen, or 2.1 percent, to 490.4 billion yen, primarily due to lower sales of Aiwa products in all geographic areas. This decrease was partially offset by the sales of mobile phone handsets which were transferred from “Information and Communications” to “Other” in October 2001, as a result of their becoming sales to Sony Ericsson.
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2003 decreased by 368.5 billion yen, or 8.7 percent to 3,869.2 billion yen compared with the previous fiscal year. This decrease was due to the effects of restructuring carried out in the previous fiscal year in CRTs and other products, the increased profitability as a result of increased sales in semiconductors, batteries and other products, and the favorable impact of the appreciation of the euro against the yen. A majority of goods sold in Europe are imported from other regions; therefore an appreciation of the euro causes increased sales without a corresponding increase in the cost of sales. Research and development costs were 380.3 billion yen, almost flat year on year. The cost of sales ratio decreased from 80.5 percent to 78.8 percent.
Selling, general and administrative expenses decreased by 0.8 billion yen, or 0.1 percent to 1,000.8 billion yen compared with the previous fiscal year. After-sales service expenses decreased by 36.5 billion yen, partially because of the absence of mobile phone-related after-sales service expenses recorded in the previous fiscal year. Royalty expenses increased 16.9 billion yen. The ratio of selling, general and administrative expenses to sales increased from 18.9 percent to 20.3 percent due to the decrease in sales.
Loss on sale, disposal or impairment of assets, net also decreased, by 19.0 billion yen, primarily because of a decrease in restructuring charges related to reductions in CRT computer display manufacturing capacity, mainly in the U.S. In the fiscal year ended March 31, 2003, due to CRT computer display related restructuring in Japan and South-East Asia, a restructuring charge of 4.0 billion yen was recorded in loss on sale, disposal or impairment of assets, net.
Regarding profit performance by product compared with the previous fiscal year, the largest gains in operating income were recorded in CRTs, portable audio, batteries, CRT televisions, recording media and digital still cameras. Increased demand for semiconductors resulted in a substantial decrease in the size of losses. On the other hand, losses increased in PCs and Aiwa products. Restructuring carried out in the previous fiscal year also led to improved profitability in several component businesses, including CRTs and recording media, as a result of the reduction of fixed costs and the concentration of resources toward
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Partially offsetting the increase in profitability were losses recorded in PCs, where sales declined due to increased competition from lower priced products. Large operating losses were also recorded by Aiwa in almost all geographic areas as a result of reduced sales because of a decline in the competitiveness of Aiwa’s mainstay products such as audio, restructuring charges including costs of headcount reductions, inventory write-downs brought about by the elimination of product lines, and the sale and disposal of production facilities. Sony Corporation absorbed Aiwa by merger on December 1, 2002.
In the past Sony has recorded losses in the fourth quarter, due to a seasonal decline in demand for electronics products. However, the loss in the fourth quarter of the fiscal year ended March 31, 2003 increased substantially due to, in descending order of financial impact, a decline in sales, an increase in selling, general and administrative expenses associated with an increase in patent-related and other expenses, and a deterioration in the cost of sales ratio due to reductions in production undertaken to lower inventory to target levels and pricing pressure. Fourth quarter operating losses in the Electronics segment totaled 116.1 billion yen compared with an operating loss of 51.3 billion yen in the same quarter of the previous fiscal year. Significant losses were recorded by products including Aiwa products, semiconductors, digital still cameras and home audio. An approximate 5.9 billion yen restructuring charge for the closure of a semiconductor plant in the U.S. impacted the loss in the semiconductor business.
Regarding the geographic breakdown of total annual production in the Electronics segment (including the assembly of PlayStation 2 for the Game segment), and the final destination of such production, half of total production was in Japan, including production of digital still cameras, semiconductors, personal digital assistants, components (including batteries and Memory Stick), and plasma televisions. Approximately 55 percent of production in Japan was destined for other regions. Asia, here excluding Japan and China, accounted for more than 15 percent of total production, more than 60 percent of which was destined for Japan, the U.S. and Europe. China accounted for less than 10 percent of total production, more than 70 percent of which was destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining quarter of total production, most of which was sold in the area where it was produced.
Results in the Electronics segment, on a yen basis, were positively impacted overall by the appreciation of the euro against the yen, although this impact was partially offset by the negative impact of the depreciation of the U.S. dollar against the yen. On a local currency basis, sales for the fiscal year ended March 31, 2003 decreased by approximately 7 percent compared with the previous fiscal year and operating income was recorded where an operating loss had been recorded in the previous fiscal year.
Due to the negative impact of the depreciation of the U.S. dollar against the yen, year on year increases in sales of products in the U.S. were generally smaller, and decreases generally larger, when stated in yen than when stated on a local currency basis. However, no products which recorded a sales increase on a local currency basis recorded a sales decrease on a yen basis.
Sales in Europe were positively affected by currency fluctuations, in particular the appreciation of the euro against the yen. Year on year increases in sales of products in Europe were generally larger, and decreases generally smaller, when stated in yen than when stated on a local currency basis. Regarding significant differences between results on a yen basis and results on a local currency basis, CRT televisions and home-use video cameras recorded an increase in sales on a yen basis but a decrease in sales on a local
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The net effect of currency fluctuations on product sales in Other Areas was negative. Sales increases were generally smaller, and decreases larger, when stated in yen than when stated on a local currency basis. Regarding significant differences between results on a yen basis and results on a local currency basis, sales of CRT televisions were flat year on year on a local currency basis but showed a slight decrease on a yen basis. Sales trends for other products were not significantly different on a local currency basis or a yen basis.
Game
Sales for the fiscal year ended March 31, 2003 decreased by 48.7 billion yen, or 4.9 percent, to 955.0 billion yen compared with the previous fiscal year. Operating income increased by 29.7 billion yen, or 35.9 percent, to 112.7 billion yen compared with the previous fiscal year, and the operating income margin increased from 8.3 percent to 11.8 percent.
Sales in the Game segment were positively impacted by the yen’s depreciation against the euro. On a local currency basis, sales for the fiscal year ended March 31, 2003 decreased approximately 7 percent and operating income increased 12 percent compared with the previous fiscal year.
Regarding sales by geographic area, sales decreased in Japan and the U.S. but increased in Europe. In Japan, hardware sales declined due to lower unit sales of PlayStation 2 hardware, brought on by a stagnation of the game industry, and a price reduction of PlayStation 2 hardware. Software sales decreased slightly due to lower unit sales of software published by SCE. As a result overall sales in Japan decreased. In the U.S., unit sales of PlayStation 2 hardware increased mainly due to strategic price reductions. Despite an increase in unit sales, hardware sales decreased due to the negative impact of the price reductions exceeding the positive impact of the increase in unit sales. Software sales increased due to an increase in unit sales brought on by an expansion of the software market as a result of the increase in hardware unit sales. As the decrease in hardware sales exceeded the increase in software sales, overall sales in the U.S. decreased. In Europe the market penetration of PlayStation 2 hardware continued to expand as hardware unit sales increased mainly in Western Europe, primarily due to a strategic price reduction of PlayStation 2 hardware. As a result, software sales increased and overall sales in Europe increased. The depreciation of the yen against the euro also had a positive impact on sales in Europe.
Total worldwide production shipments of hardware and software were as follows:
Year Ended | |||||||||||||
March 31 | |||||||||||||
Cumulative as of | |||||||||||||
2002 | 2003 | March 31, 2003 | |||||||||||
(Million units) | |||||||||||||
Total Production Shipments of Hardware | |||||||||||||
PlayStation + PS one | 7.40 | 6.78 | 96.41 | ||||||||||
PlayStation 2 | 18.07 | 22.52 | 51.20 | ||||||||||
Total Production Shipments of Software* | |||||||||||||
PlayStation | 91.00 | 61.00 | 917.00 | ||||||||||
PlayStation 2 | 121.80 | 189.90 | 350.00 |
In terms of total software unit sales, PlayStation 2 titles represented 76 percent of the software unit sales for the fiscal year ended March 31, 2003, an increase from 57 percent of software unit sales recorded in the previous fiscal year.
In terms of profitability, operating income increased as compared with the previous fiscal year. This increase was due to an improvement in profitability of the hardware business as a result of a reduction in
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Music
Sales for the fiscal year ended March 31, 2003 decreased by 2.5 billion yen, or 0.4 percent, to 597.5 billion yen compared with the previous fiscal year. Compared to operating income of 22.1 billion yen in the previous fiscal year, an operating loss of 7.9 billion yen was recorded.
On a local currency basis, sales in the Music segment increased by 1 percent while the Music segment incurred an operating loss as compared to operating income in the previous fiscal year.
Sales at SMEI increased approximately 6 percent on a U.S. dollar basis (refer to “Foreign Exchange Fluctuations and Risk Hedging” below). In terms of profitability, SMEI incurred an operating loss in the current year as compared to operating income in the previous fiscal year. The increase in sales was primarily due to an increase in sales of DVD software, manufactured in the Music segment, to the Pictures and Game segments. Sales to the Pictures segment increased as a result of the greater popularity of DVD media in the home entertainment market and sales to the Game segment increased due to higher unit sales of PlayStation 2 software titles, which are packaged on DVDs. Partially offsetting the increase in sales at SMEI was a decline in album sales in many regions worldwide. Album sales at SMEI have been declining due to the continued contraction of the global market for music. Industry-wide album unit sales in the U.S. decreased for 19 consecutive months up to and including March 2003. Such sales in the fiscal year ended March 31, 2003 were 10 percent lower than in the previous fiscal year. This contraction trend has been caused by slow economic growth, the saturation of the CD market, the effects of digital piracy and other illegal duplication, parallel imports, pricing pressures and a diversification of customer preferences brought on by increased competition from other entertainment sectors.
The decline in profitability resulting in an operating loss at SMEI primarily resulted from a 120 million U.S. dollar year on year increase in restructuring charges undertaken to reduce costs in response to the downward trend of the market. The total cost of restructuring for the fiscal year ended March 31, 2003 was 190 million U.S. dollars, or 22.4 billion yen (refer to “Restructuring” above for details) net of a reversal of an expense of 30.8 million U.S. dollars accrued in previous fiscal years as a result of reduced compensation expense. The second largest factor leading to the operating loss was a decrease in gross profit brought about by the decrease in album sales. A third factor leading to operating loss was an increase in talent-related expenses, primarily because the continued decline in album sales led to an increase in impairments of capitalized advances paid to artists. Partially offsetting the decline in operating profitability, in descending order of magnitude, were a decrease in advertising and promotion expenses, savings realized from previously implemented restructuring initiatives and higher income generated by the increase in DVD software manufacturing activity. Although restructuring charges increased significantly compared with the previous fiscal year, the decrease in advertising and promotion expenses and savings realized from previously implemented restructuring initiatives caused a decrease in selling, general and administrative expenses for the year and an improvement in the ratio of selling, general and administrative expenses to sales.
Regarding the results of SMEJ, sales decreased by 10 percent and operating income decreased 59 percent year on year. Sales decreased due to the continued contraction of the music industry. The decrease in operating income resulted from the decrease in sales and, to a lesser extent, an increase in severance-related expenses incurred from restructuring. Restructuring activity at SMEJ during the fiscal year centered on headcount reductions.
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On a yen basis, 76 percent of the Music segment’s sales were generated by SMEI while 24 percent were generated by SMEJ.
Pictures
Sales for the fiscal year ended March 31, 2003 increased by 167.0 billion yen, or 26.3 percent, to 802.8 billion yen compared with the previous fiscal year. Operating income increased by 27.7 billion yen, or 88.6 percent, to 59.0 billion yen and the operating income margin increased from 4.9 percent to 7.3 percent. The results in the Pictures segment consist of the results of SPE.
On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 30 percent and operating income increased approximately 92 percent. The increase in sales was due to the strong worldwide performance, both theatrically and in home entertainment, of fiscal year releases includingSpider-Man, the highest grossing film in SPE’s history,Men in Black II, xXx andMr. Deeds. The increased worldwide popularity of DVDs also contributed to the higher home entertainment revenues. As a result of these factors, sales for the release slate for the fiscal year ended March 31, 2003 increased 1.6 billion U.S. dollars compared with the previous fiscal year’s slate. Operating income for the segment increased significantly due to the higher theatrical and home entertainment revenues from the fiscal year release slate, partially offset by the aggregate disappointing performance of several films includingI SpyandStuart Little 2, resulting in an increase of 221 million U.S. dollars in profit from the fiscal year release slate, the benefit of restructuring initiatives undertaken in the previous fiscal year, resulting in an increase of 52 million U.S. dollars, and, less significantly, increased operating income in the television business due to higher revenues from the game show,Wheel of Fortune. The primary benefit of the restructuring undertaken in the previous fiscal year was a reduction in losses recorded on the production of new network television shows and pilots. Losses declined because the number of new shows and pilots was reduced and because production expenses per new show and pilot were reduced. Operating income for the segment was also higher because the 67 million U.S. dollar, or 8.5 billion yen, restructuring charge recorded in the previous fiscal year was not recorded during the fiscal year (refer to “Restructuring” for details). Partially offsetting the increase in operating income was an additional provision of 66 million U.S. dollars, an increase of 26 million U.S. dollars over the previous fiscal year, with respect to previously recorded revenue from KirchMedia, an insolvent licensee in Germany of SPE’s feature film and television product, and related adjustments to ultimate film income.
As of March 31, 2003, unrecognized license fee revenue at SPE was approximately 1.3 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product. The license fee revenue will be recognized in the year that the product is available for broadcast.
Financial Services
Financial Services revenue for the fiscal year ended March 31, 2003 increased by 28.2 billion yen, or 5.5 percent, to 537.3 billion yen compared with the previous fiscal year. Operating income increased by 0.9 billion yen, or 4.3 percent, to 22.8 billion yen and the operating income margin decreased from 4.3 percent to 4.2 percent.
At Sony Life, revenue increased by 19.5 billion yen, or 4.4 percent, to 466.6 billion yen and operating income increased by 1.8 billion yen, or 6.4 percent, to 29.6 billion yen compared with the previous fiscal year. Insurance revenue increased as insurance-in-force from individual life insurance products increased due to the maintenance of a lower than industry average rate of contract cancellation, despite a decrease in new insurance sales brought about by a decrease in disposable family incomes due to continued weak economic conditions. The increase in revenue also resulted from an improvement in the valuation gains and losses from investments in the general account which occurred because loss recorded due to the devaluation of Argentine government bonds held in that account decreased significantly compared with the previous fiscal year. On the other hand, the increase in Sony Life’s revenue was partially offset by a deterioration of valuation gains and losses from investments in the separate account, which resulted from
58
At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force reflecting greater customer awareness of the benefit of flexible insurance policies which take into account mileage driven. Regarding profit performance, an operating loss was recorded in the fiscal year ended March 31, 2003, as was the case in each of the previous three fiscal years. The loss was recorded because essential investments necessary for the expansion of the business put pressure on profitability. These investments were for advertising and for computer systems necessary to develop new products and establish customer claims service centers. However, an increase in insurance revenue and a decrease in the expense ratio (the ratio of operating expenses to premiums) and the loss ratio (the ratio of insurance payouts to premiums) caused losses to decrease.
At Sony Finance, revenue decreased slightly due to a decrease in rent revenue despite an increase in leasing revenue. In terms of profitability, a loss was recorded, compared with an operating income in the previous fiscal year, due to an increase in operating expenses in connection with the issuance of credit cards that utilize contact-free IC card technology.
Sony Bank, which started business in June 2001, recorded a loss, as was also recorded in the previous fiscal year, primarily due to start-up expenses.
The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
59
Reflecting the realignment of the business segment configuration, results for fiscal year ended March 31, 2002, and 2003 have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004.
All other segments | ||||||||||||||||||||||||
excluding | ||||||||||||||||||||||||
Financial Services | Financial Services | Consolidated | ||||||||||||||||||||||
Year Ended March 31 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | ||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||
Financial Services revenue | 509,122 | 537,276 | — | — | 480,190 | 509,398 | ||||||||||||||||||
Net sales and operating revenue | — | — | 7,105,491 | 6,974,980 | 7,098,068 | 6,964,235 | ||||||||||||||||||
509,122 | 537,276 | 7,105,491 | 6,974,980 | 7,578,258 | 7,473,633 | |||||||||||||||||||
Costs and expenses | 487,300 | 514,518 | 6,992,254 | 6,811,292 | 7,443,627 | 7,288,193 | ||||||||||||||||||
Operating income | 21,822 | 22,758 | 113,237 | 163,688 | 134,631 | 185,440 | ||||||||||||||||||
Other income (expenses), net | (1,833 | ) | (1,282 | ) | (40,451 | ) | 67,846 | (41,856 | ) | 62,181 | ||||||||||||||
Income before income taxes | 19,989 | 21,476 | 72,786 | 231,534 | 92,775 | 247,621 | ||||||||||||||||||
Income taxes and other | 11,477 | 13,071 | 72,799 | 120,089 | 83,443 | 132,102 | ||||||||||||||||||
Cumulative effect of accounting changes | 4,305 | — | 1,673 | — | 5,978 | — | ||||||||||||||||||
Net income | 12,817 | 8,405 | 1,660 | 111,445 | 15,310 | 115,519 | ||||||||||||||||||
Other
Reflecting the realignment of the business segment configuration, results for fiscal year ended March 31, 2002, and 2003 have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004. Based on that reclassification, sales of the Other segment in the fiscal year ended March 31, 2003 were comprised mainly of an in-house oriented information system service business, an advertising agency business in Japan, and SCN, an Internet-related service business subsidiary operating mainly in Japan.
Sales for the fiscal year increased by 44.8 billion yen, or 17.1 percent, to 306.3 billion yen, compared with the previous fiscal year. Of total sales, 55 percent were sales to outside customers. In terms of profit performance, operating losses for the segment increased from 18.2 billion yen to 25.0 billion yen.
During the fiscal year, intersegment sales increased primarily due to an increase in sales at the advertising agency business in Japan due to its taking over the media buying for all Sony Group companies in Japan, and at the in-house oriented information system service business, in addition to an increase in sales at SCN. Regarding profit performance, the segment recorded a loss primarily due to expenses associated with the development of network and content technology and services, intended to facilitate new businesses in the broadband age, and the advertising agency business in Japan. In comparison with the previous fiscal year, segment losses increased primarily due to an increase in the aforementioned expenses and the write-off of professional-use video software in the professional-use video software business due to a discontinuation of that business. Operating losses for the Other segment increased despite the fact that operating income was recorded at SCN, as compared to an operating loss in the previous fiscal year. SCN recorded operating income due to an increase in sales resulting from a rise in broadband subscribers and a reduction in costs associated with communication line usage.
During the fiscal year ended March 31, 2003, the average value of the yen was 120.9 yen against the U.S. dollar, and 119.5 yen against the euro, which was 2.6 percent higher against the U.S. dollar and 8.8 percent lower against the euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency basis described in “Overview” and “Operating Performance” show
60
Sony’s consolidated results are subject to foreign currency fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
In 2001, SGTS was established in London for the purpose of providing integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In particular SGTS hedges the majority of the exposures of major currency pairs such as U.S. dollar against Japanese yen, euro against Japanese yen and euro against U.S. dollar, on average three months before the actual transactions take place. In the case of emerging market currencies, such as Brazil, with high inflation and high interest rates, the majority of the projected exposures are hedged one month before the actual transactions take place due to cost effectiveness considerations. Sony enters into foreign exchange transactions with financial institutions only for hedging purposes and does not undertake speculative transactions.
To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 2003 were 1,139.3 billion yen, 484.5 billion yen and 238.8 billion yen, respectively.
(Regarding Assets and Liabilities refer also to “Increase in Assets and Liabilities as a Result of Consolidation of Variable Interest Entities” below.)
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Total assets on March 31, 20042005 increased by 720.1408.4 billion yen, or 8.64.5 percent, to 9,090.79,499.1 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 20042005 in all segments excluding the Financial Services segment increaseddecreased by 235.032.9 billion yen, or 4.00.5 percent, to 6,060.86,027.9 billion yen and total assets on March 31, 20042005 in the Financial Services segment increased by 577.9410.5 billion yen, or 19.911.8 percent, to 3,475.03,885.5 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 20042005 in all segments excluding the Financial Services segment would have increaseddecreased by approximately 92 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 20042005 as it was on March 31, 2003.2004.
a real estate complex in Berlin, Germany.
(Also see “Investments” below.)
57
amorphous TFT LCD panels.
62
insurance premiums at Sony Life, and an increase in housing loans due to a campaign carried out at Sony Bank.
Capital expenditures in the Music segment decreased by 8.90.8 billion yen, or 40.920.7 percent, to 12.92.9 billion yen, and decreased in the Pictures segment by 1.10.2 billion yen, or 15.83.4 percent to 6.05.8 billion yen, and decreased in the Other segment by 5.34.0 billion yen, or 34.339.3 percent, to 10.16.1 billion yen.
Deferred tax assets on March 31, 2004 decreased by 124.9 billion yen, or 38.1 percent, to 203.2 billion yen compared with the previous fiscal year-end. The decrease was due to the offset between deferred tax assets and liabilities recorded at each of the companies within the Sony Group, as a result of the adoption of consolidated tax filing in Japan.58
Total current and long-term liabilities on March 31, 2004 increased2005 decreased by 622.284.9 billion yen, or 10.31.3 percent, to 6,689.86,604.9 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 20042005 in all segments excluding the Financial Services segment increaseddecreased by 189.6489.5 billion yen, or 5.212.7 percent, to 3,855.93,366.4 billion yen. Total current and long-term liabilities on March 31, 2004, in the Financial Services segment on March 31, 2005 increased by 515.4365.5 billion yen, or 19.911.8 percent, to 3,099.83,465.3 billion yen, compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 20042005 in all segments excluding the Financial Services segment would have increaseddecreased by approximately 1014 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 20042005 as it was on March 31, of the previous fiscal year.2004.
63
year ending March 31, 2006. (Refer to Note 11 of Notes to Consolidated Financial Statements.)
Game segment.
Long-term debt on March 31, 20042005 in all segments excluding the Financial Services segment decreased 27.7147.9 billion yen, or 3.4%,19.1 percent, to 775.2627.4 billion yen. This was mainlyprimarily the result of the reclassification of long-term debt to current liabilities, including 119.0 billion yen of bonds redeemable during the fiscal year ending March 31, 2006 and a decrease in accrued pension and severance costs of 20.2 billion yen, or 5.6 percent, to 338.0 billion yen, primarily due to the shift to current liabilitiesreform of 287.8 billion yen (as of March 31, 2004)Sony’s employee retirement pension plan in outstanding convertible bonds, due for redemption on March 31, 2005, and despite the issuance of the 250.0 billion yen in euro yen convertible bonds (bonds with stock acquisition rights).
Japan.
59
Total interest-bearing debt on March 31, 2004 increased2005 decreased by 286.5343.4 billion yen, or 29.727.4 percent, to 1,252.7909.3 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt on March 31, 20042005 in all segments excluding the Financial Services segment increaseddecreased by 255.4353.6 billion yen, or 27.529.8 percent, to 1,185.0831.4 billion yen.
Sony adopted FIN 46 on July 1, 2003. As a result, Sony’s assets and liabilities increased as non-cash transactions, which resulted in no cash flows, by 95.3 billion yen and 98.0 billion yen, respectively. Cash
64
Sony leases the headquarters of its U.S. subsidiary from a VIE. Upon consolidation of the VIE, assets and liabilities increased by 25.3 billion yen and 27.0 billion yen, respectively. Sony has the option to purchase the building at any time for 26.9 billion yen during the lease term which expires in December 2008. The debt held by the VIE is unsecured. At the end of the lease term, Sony has agreed to either renew the lease, purchase the building or remarket it to a third party on behalf of the owner.
A subsidiary in the Pictures business entered into a joint venture agreement with a VIE for the purpose of funding the acquisition of certain international film rights. Upon consolidation of the VIE, assets and liabilities increased by 10.2 billion yen and 10.6 billion yen, respectively. Under the agreement, the subsidiary’s 1.2 billion yen equity investment is the last equity to be repaid.
Sony has utilized a VIE to erect and operate a multi-use real estate complex in Berlin, Germany, which was accounted for under the equity method by Sony until June 30, 2003. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 61.3 billion yen and 60.3 billion yen, respectively. These liabilities include a 57.3 billion yen syndicated bank loan which matures in November 2004. The syndicated bank loan is secured by the multi-use real estate complex.
Regarding further information on transactions with VIEs please refer to Notes 21 and 22 of Notes to Consolidated Financial Statements.
Stockholders’ equity on March 31, 20042005 increased by 97.1492.3 billion yen, or 4.320.7 percent, to 2,378.02,870.3 billion yen compared with the previous fiscal year-end. As noted above, of 300.0 billion yen of convertible bonds due on March 31, 2005, 5.0 billion yen were redeemed on the maturity date with 282.8 billion yen of the 287.8 billion yen balance outstanding at the start of the fiscal year being converted into common stock, and, therefore, incorporated into stockholders’ equity and additional paid-in capital. Retained earnings increased 65.3139.0 billion yen compared with the previous fiscal year-end, and other comprehensive income (net of tax) was 64.3 billion yen. This was primarily due to comprehensive income of 74.2 billion yen arising from foreign currency translation adjustments in current fiscal year due to the amountdevaluation of deductions recordedthe yen, partially offset by the recording of a change in accumulated other comprehensive income decreased 22.0 billion yen. Accumulated other comprehensive income improved because, although foreign currency translation adjustments (deduction from accumulated other comprehensive income) increased 127.9of 7.3 billion yen year on year, due to the appreciation of the yen, minimum pension liability adjustments (deductionarising from accumulated other comprehensive income) decreased 93.4 billion yen, due to an increase in pension assets resulting from the rise in value of equity investment in Japan, and unrealized gains on securities increased 52.3 billion yen compared within the previouscurrent fiscal year-end.year. The ratio of stockholders’ equity to total assets decreased 1.0increased 4.0 percent from 27.226.2 percent to 26.230.2 percent.
65
The following schedule shows an unaudited condensed balance sheet for the Financial Services segment and all other segments excluding Financial Services as well as the condensed consolidated balance sheet. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
All other Segments | |||||||||||||||||||||||||
excluding | |||||||||||||||||||||||||
Financial Services | Financial Services | Consolidated | |||||||||||||||||||||||
As at March 31 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | |||||||||||||||||||
(Yen in millions) | |||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||
Current assets | 684,945 | 699,698 | 2,503,940 | 2,692,436 | 3,154,214 | 3,363,355 | |||||||||||||||||||
Cash and cash equivalents | 274,543 | 256,316 | 438,515 | 592,895 | 713,058 | 849,211 | |||||||||||||||||||
Marketable securities | 236,621 | 270,676 | 4,899 | 4,072 | 241,520 | 274,748 | |||||||||||||||||||
Notes and accounts receivable, trade | 68,188 | 72,273 | 943,073 | 943,590 | 1,007,395 | 1,011,189 | |||||||||||||||||||
Other | 105,593 | 100,433 | 1,117,453 | 1,151,879 | 1,192,241 | 1,228,207 | |||||||||||||||||||
Film costs | — | — | 287,778 | 256,740 | 287,778 | 256,740 | |||||||||||||||||||
Investments and advances | 1,731,415 | 2,274,510 | 383,004 | 358,629 | 1,994,123 | 2,512,950 | |||||||||||||||||||
Investments in Financial Services, at cost | — | — | 166,905 | 176,905 | — | — | |||||||||||||||||||
Property, plant and equipment | 45,990 | 40,833 | 1,232,359 | 1,324,211 | 1,278,350 | 1,365,044 | |||||||||||||||||||
Other assets | 434,769 | 459,998 | 1,251,810 | 1,251,901 | 1,656,080 | 1,592,573 | |||||||||||||||||||
Deferred insurance acquisition costs | 327,869 | 349,194 | — | — | 327,869 | 349,194 | |||||||||||||||||||
Other | 106,900 | 110,804 | 1,251,810 | 1,251,901 | 1,328,211 | 1,243,379 | |||||||||||||||||||
2,897,119 | 3,475,039 | 5,825,796 | 6,060,822 | 8,370,545 | 9,090,662 | ||||||||||||||||||||
6660
All other Segments | |||||||||||||||||||||||||
excluding | |||||||||||||||||||||||||
Financial Services | Financial Services | Consolidated | |||||||||||||||||||||||
As at March 31 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | |||||||||||||||||||
(Yen in millions) | |||||||||||||||||||||||||
Liabilities and stockholders’ equity | |||||||||||||||||||||||||
Current liabilities | 415,877 | 648,803 | 2,065,854 | 2,373,550 | 2,435,048 | 2,982,215 | |||||||||||||||||||
Short-term borrowings | 72,753 | 86,748 | 126,687 | 409,766 | 158,745 | 475,017 | |||||||||||||||||||
Notes and accounts payable, trade | 5,417 | 7,847 | 693,589 | 773,221 | 697,385 | 778,773 | |||||||||||||||||||
Deposits from customers in the banking business | 248,721 | 378,851 | — | — | 248,721 | 378,851 | |||||||||||||||||||
Other | 88,986 | 175,357 | 1,245,578 | 1,190,563 | 1,330,197 | 1,349,574 | |||||||||||||||||||
Long-term liabilities | 2,168,476 | 2,450,969 | 1,600,484 | 1,482,378 | 3,632,580 | 3,707,587 | |||||||||||||||||||
Long-term debt | 140,908 | 135,811 | 802,911 | 775,233 | 807,439 | 777,649 | |||||||||||||||||||
Accrued pension and severance costs | 8,737 | 10,183 | 487,437 | 358,199 | 496,174 | 368,382 | |||||||||||||||||||
Future insurance policy benefits and other | 1,914,410 | 2,178,626 | — | — | 1,914,410 | 2,178,626 | |||||||||||||||||||
Other | 104,421 | 126,349 | 310,136 | 348,946 | 414,557 | 382,930 | |||||||||||||||||||
Minority interest in consolidated subsidiaries | — | — | 16,288 | 17,554 | 22,022 | 22,858 | |||||||||||||||||||
Stockholders’ equity | 312,766 | 375,267 | 2,143,170 | 2,187,340 | 2,280,895 | 2,378,002 | |||||||||||||||||||
2,897,119 | 3,475,039 | 5,825,796 | 6,060,822 | 8,370,545 | 9,090,662 | ||||||||||||||||||||
Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
ASSETS | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | 256,316 | 259,371 | |||||||
Marketable securities | 270,676 | 456,130 | |||||||
Notes and accounts receivable, trade | 72,273 | 77,023 | |||||||
Other | 100,433 | 197,667 | |||||||
699,698 | 990,191 | ||||||||
Investments and advances | 2,274,510 | 2,378,966 | |||||||
Property, plant and equipment | 40,833 | 38,551 | |||||||
Other assets: | |||||||||
Deferred insurance acquisition costs | 349,194 | 374,805 | |||||||
Other | 110,804 | 103,004 | |||||||
459,998 | 477,809 | ||||||||
3,475,039 | 3,885,517 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
Current liabilities: | |||||||||
Short-term borrowings | 86,748 | 45,358 | |||||||
Notes and accounts payable, trade | 7,847 | 7,099 | |||||||
Deposits from customers in the banking business | 378,851 | 546,718 | |||||||
Other | 175,357 | 109,438 | |||||||
648,803 | 708,613 | ||||||||
Long-term liabilities: | |||||||||
Long-term debt | 135,811 | 135,750 | |||||||
Accrued pension and severance costs | 10,183 | 14,362 | |||||||
Future insurance policy benefits and other | 2,178,626 | 2,464,295 | |||||||
Other | 126,349 | 142,272 | |||||||
2,450,969 | 2,756,679 | ||||||||
Minority interest in consolidated subsidiaries | — | 5,476 | |||||||
Stockholders’ equity | 375,267 | 414,749 | |||||||
3,475,039 | 3,885,517 | ||||||||
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Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions,) | |||||||||
ASSETS | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | 592,895 | 519,732 | |||||||
Marketable securities | 4,072 | 4,072 | |||||||
Notes and accounts receivable, trade | 943,590 | 952,692 | |||||||
Other | 1,151,879 | 1,116,353 | |||||||
2,692,436 | 2,592,849 | ||||||||
Film costs | 256,740 | 278,961 | |||||||
Investments and advances | 358,629 | 445,446 | |||||||
Investments in Financial Services, at cost | 176,905 | 187,400 | |||||||
Property, plant and equipment | 1,324,211 | 1,333,848 | |||||||
Other assets | 1,251,901 | 1,189,398 | |||||||
6,060,822 | 6,027,902 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
Current liabilities: | |||||||||
Short-term borrowings | 409,766 | 204,027 | |||||||
Notes and accounts payable, trade | 773,221 | 801,252 | |||||||
Other | 1,190,563 | 1,132,201 | |||||||
2,373,550 | 2,137,480 | ||||||||
Long-term liabilities: | |||||||||
Long-term debt | 775,233 | 627,367 | |||||||
Accrued pension and severance costs | 358,199 | 338,040 | |||||||
Other | 348,946 | 263,520 | |||||||
1,482,378 | 1,228,927 | ||||||||
Minority interest in consolidated subsidiaries | 17,554 | 18,471 | |||||||
Stockholders’ equity | 2,187,340 | 2,643,024 | |||||||
6,060,822 | 6,027,902 | ||||||||
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Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
ASSETS | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | 849,211 | 779,103 | |||||||
Marketable securities | 274,748 | 460,202 | |||||||
Notes and accounts receivable, trade | 1,011,189 | 1,025,362 | |||||||
Other | 1,228,207 | 1,291,504 | |||||||
3,363,355 | 3,556,171 | ||||||||
Film costs | 256,740 | 278,961 | |||||||
Investments and advances | 2,512,950 | 2,745,689 | |||||||
Property, plant and equipment | 1,365,044 | 1,372,399 | |||||||
Other assets: | |||||||||
Deferred insurance acquisition costs | 349,194 | 374,805 | |||||||
Other | 1,243,379 | 1,171,075 | |||||||
1,592,573 | 1,545,880 | ||||||||
9,090,662 | 9,499,100 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
Current liabilities: | |||||||||
Short-term borrowings | 475,017 | 230,266 | |||||||
Notes and accounts payable, trade | 778,773 | 806,044 | |||||||
Deposits from customers in the banking business | 378,851 | 546,718 | |||||||
Other | 1,349,574 | 1,226,340 | |||||||
2,982,215 | 2,809,368 | ||||||||
Long-term liabilities: | |||||||||
Long-term debt | 777,649 | 678,992 | |||||||
Accrued pension and severance costs | 368,382 | 352,402 | |||||||
Future insurance policy benefits and other | 2,178,626 | 2,464,295 | |||||||
Other | 382,930 | 299,858 | |||||||
3,707,587 | 3,795,547 | ||||||||
Minority interest in consolidated subsidiaries | 22,858 | 23,847 | |||||||
Stockholders’ equity | 2,378,002 | 2,870,338 | |||||||
9,090,662 | 9,499,100 | ||||||||
Investments |
63
67
March 31, 2004 | |||||||||||||||||||
Unrealized | Unrealized | Fair Market | |||||||||||||||||
Cost | gain | Loss | Value | ||||||||||||||||
Yen in Millions | |||||||||||||||||||
Financial Services Business: | |||||||||||||||||||
Available for sale | |||||||||||||||||||
Debt securities | |||||||||||||||||||
Sony Life | 1,581,723 | 54,645 | 1,828 | 1,634,540 | |||||||||||||||
Other | 348,443 | 971 | 232 | 349,182 | |||||||||||||||
Equity securities | |||||||||||||||||||
Sony Life | 33,694 | 16,398 | 149 | 49,943 | |||||||||||||||
Other | 2,384 | 4,365 | 0 | 6,749 | |||||||||||||||
Held to maturity | |||||||||||||||||||
Debt securities | |||||||||||||||||||
Sony Life | — | — | — | — | |||||||||||||||
Other | 26,437 | 381 | 28 | 26,790 | |||||||||||||||
Total Financial Services | 1,992,681 | 76,760 | 2,237 | 2,067,204 | |||||||||||||||
Non-Financial Services: | |||||||||||||||||||
Available for sale securities | 58,946 | 42,768 | 1,749 | 99,965 | |||||||||||||||
Held to maturity securities | 2 | — | — | 2 | |||||||||||||||
Total Non-Financial Services | 58,948 | 42,768 | 1,749 | 99,967 | |||||||||||||||
Consolidated | 2,051,629 | 119,528 | 3,986 | 2,167,171 | |||||||||||||||
Fiscal Year Ended March 31, 2005 | ||||||||||||||||||||
Cost | Unrealized gain | Unrealized Loss | Fair Market Value | |||||||||||||||||
(Yen in millions) | ||||||||||||||||||||
Financial Services | ||||||||||||||||||||
Available for sale | ||||||||||||||||||||
Debt securities | ||||||||||||||||||||
Sony Life | 1,769,693 | 56,988 | (2,130 | ) | 1,824,551 | |||||||||||||||
Other | 315,101 | 1,096 | (281 | ) | 315,916 | |||||||||||||||
Equity securities | ||||||||||||||||||||
Sony Life | 42,256 | 22,735 | (278 | ) | 64,713 | |||||||||||||||
Other | 9,469 | 5,172 | (12 | ) | 14,629 | |||||||||||||||
Held to maturity | ||||||||||||||||||||
Debt securities | ||||||||||||||||||||
Sony Life | — | — | — | — | ||||||||||||||||
Other | 27,414 | 530 | (13 | ) | 27,931 | |||||||||||||||
Total Financial Services | 2,163,933 | 86,521 | (2,714 | ) | 2,247,740 | |||||||||||||||
Non-Financial Services: | ||||||||||||||||||||
Available for sale securities | 61,212 | 21,520 | (577 | ) | 82,155 | |||||||||||||||
Held to maturity securities | 17 | — | — | 17 | ||||||||||||||||
Total Non-Financial Services | 61,229 | 21,520 | (577 | ) | 82,172 | |||||||||||||||
Consolidated | 2,225,162 | 108,041 | (3,291 | ) | 2,329,912 | |||||||||||||||
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2005.
• Within 1 year: | ||
• 1 to 5 years: | ||
• 5 to 10 years: |
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is not readily determinable. If the value is estimated to have declined and such decline is judged to be other than temporary, impairment of the investment is recognized and the carrying value is reduced to its fair value.
2003.
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current portfolio.
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have any corporate loan exposure.
Payments Due by Period | |||||||||||||||||||||
Less than | 1 to | 3 to | After | ||||||||||||||||||
Total | 1 Year | 3 Years | 5 Years | 5 Years | |||||||||||||||||
(Yen in millions) | |||||||||||||||||||||
Contractual Obligations and Major Commitments: | |||||||||||||||||||||
Long-term debt (Note 10) | |||||||||||||||||||||
Capital lease obligations (Notes 7 and 10) | 42,689 | 12,667 | 13,109 | 10,923 | 5,990 | ||||||||||||||||
Other long-term debt (Note 10) | 1,118,717 | 371,090 | 316,103 | 299,984 | 131,540 | ||||||||||||||||
Minimum rental payments required under operating leases (Note 7) | 187,379 | 42,649 | 58,725 | 29,498 | 56,507 | ||||||||||||||||
Purchase commitments for property, plant and equipment and other assets (Note 22) | 20,796 | 20,331 | 462 | 3 | — | ||||||||||||||||
Expected payments regarding contracts with recording artists and other (Note 22) | 39,073 | 19,470 | 14,759 | 3,708 | 1,136 | ||||||||||||||||
Expected cost for the production or purchase of films and television programming or certain rights (Note 22) | 95,232 | 39,672 | 55,560 | — | — | ||||||||||||||||
Commitment under the joint venture agreement with Samsung Electronics Co., Ltd. (Note 22) | 96,285 | 96,285 | — | — | — |
Payments Due by Period | |||||||||||||||||||||
Less than | 1 to | 3 to | After | ||||||||||||||||||
Total | 1 Year | 3 Year | 5 Year | 5 Year | |||||||||||||||||
(Yen in millions) | |||||||||||||||||||||
Contractual Obligations and Major Commitments:* | |||||||||||||||||||||
Long-term debt (Note 11) | |||||||||||||||||||||
Capital lease obligations (Notes 8 and 11) | 40,301 | 11,713 | 17,435 | 6,655 | 4,498 | ||||||||||||||||
Other long-term debt (Note 11) | 805,561 | 155,157 | 192,741 | 278,684 | 178,979 | ||||||||||||||||
Minimum rental payments required under operating leases (Note 8) | 169,951 | 38,182 | 53,561 | 24,556 | 53,652 | ||||||||||||||||
Purchase commitments for property, plant and equipment and other assets (Note 23) | 83,683 | 67,698 | 15,973 | 12 | — | ||||||||||||||||
Expected cost for the production or purchase of films and television programming or certain rights (Note 23) | 82,080 | 45,651 | 36,429 | — | — |
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Certain subsidiaries in the Music segment have entered into long-term contracts with recording artists and companies for the production and/or distribution of pre-recorded music and videos. As of March 31, 2004, the total amount of expected payments regarding these long-term contracts was 39.1 billion yen.
On March 8, 2004, Sony Corporation signed an agreement with Samsung Electronics Co., Ltd. (“Samsung”) to establish a joint venture, named S-LCD Corporation. As of March 31, 2004, under the joint venture agreement, Sony is committed to fund a total of 96.3 billion yen.
In December 2003, Sony and Bertelsmann AG signed a binding agreement to combine their recorded music businesses in a joint venture. The newly formed company, which will be known as Sony BMG, will
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In order to fulfill its commitments, Sony will use cash generated by its operating activities, use netintra-group loans and borrowings from subsidiaries with excess cash within the Sony Groupfunds to subsidiaries that are short of funds through groupits finance subsidiaries such as SGTS, and raise funds from the global capital markets and from banks when necessary.
Total Amounts of | ||||||
Contingent Liabilities | ||||||
(Yen in millions) | ||||||
Contingent Liabilities: (Notes | ||||||
Loan guarantees to related parties | ||||||
Other | ||||||
Total contingent liabilities | ||||||
During
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Also, in connection with Sony’s utilization of joint venture and alliances to achieve certain strategic objectives, Sony has recently entered into several joint ventures and made certain strategic investments which include SONY BMG, S-LCD and MGM. Sony has reviewed these investments and determined that both SONY BMG and S-LCD are not VIEs while MGM is a VIE. However, MGM will not be consolidated as Sony is not the primary beneficiary of this VIE. Accordingly, Sony has accounted for these investments under the equity method.
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Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Financial Services | |||||||||
Net cash provided by operating activities | 241,627 | 168,078 | |||||||
Net cash used in investing activities | (401,550 | ) | (421,384 | ) | |||||
Net cash provided by financing activities | 141,696 | 256,361 | |||||||
Net increase (decrease) in cash and cash equivalents | (18,227 | ) | 3,055 | ||||||
Cash and cash equivalents at beginning of the fiscal year | 274,543 | 256,316 | |||||||
Cash and cash equivalents at end of the fiscal year | 256,316 | 259,371 | |||||||
Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Sony without Financial Services | |||||||||
Net cash provided by operating activities | 401,090 | 485,439 | |||||||
Net cash used in investing activities | (352,496 | ) | (472,119 | ) | |||||
Net cash provided by (used in) financing activities | 153,759 | (95,373 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (47,973 | ) | 8,890 | ||||||
Net increase (decrease) in cash and cash equivalents | 154,380 | (73,163 | ) | ||||||
Cash and cash equivalents at beginning of the fiscal year | 438,515 | 592,895 | |||||||
Cash and cash equivalents at end of the fiscal year | 592,895 | 519,732 | |||||||
Fiscal Year Ended | |||||||||
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Consolidated | |||||||||
Net cash provided by operating activities | 632,635 | 646,997 | |||||||
Net cash used in investing activities | (761,792 | ) | (931,172 | ) | |||||
Net cash provided by financing activities | 313,283 | 205,177 | |||||||
Effect of exchange rate changes on cash and cash equivalents | (47,973 | ) | 8,890 | ||||||
Net increase (decrease) in cash and cash equivalents | 136,153 | (70,108 | ) | ||||||
Cash and cash equivalents at beginning of the fiscal year | 713,058 | 849,211 | |||||||
Cash and cash equivalents at end of the fiscal year | 849,211 | 779,103 | |||||||
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70
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Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)
The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
All other segments | ||||||||||||||||||||||||
excluding | ||||||||||||||||||||||||
Financial Services | Financial Services | Consolidated | ||||||||||||||||||||||
Year Ended March 31 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | ||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||
Net cash provided by operating activities | 314,764 | 241,627 | 544,051 | 401,090 | 853,788 | 632,635 | ||||||||||||||||||
Net cash used in investing activities | (516,663 | ) | (401,550 | ) | (185,883 | ) | (352,496 | ) | (706,425 | ) | (761,792 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 149,207 | 141,696 | (251,247 | ) | 153,759 | 93,134 | 313,283 | |||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 24,971 | (47,973 | ) | 24,971 | (47,973 | ) | ||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (52,692 | ) | (18,227 | ) | 81,950 | 154,380 | 29,258 | 136,153 | ||||||||||||||||
Cash and cash equivalents at beginning of the fiscal year | 327,235 | 274,543 | 356,565 | 438,515 | 683,800 | 713,058 | ||||||||||||||||||
Cash and cash equivalents at end of the fiscal year | 274,543 | 256,316 | 438,515 | 592,895 | 713,058 | 849,211 | ||||||||||||||||||
Cash Flows
During the fiscal year ended March 31, 2003, Sony generated 853.8 billion yen of net cash from operating activities, an improvement of 116.2 billion yen, or 15.8 percent compared with the previous fiscal year.
All segments excluding the Financial Services segment generated 542.8 billion yen of net cash from operating activities. The primary reasons for the positive cash flow were the contribution to profit by the
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The Financial Services segment generated 316.0 billion yen of net cash from operating activities. While cash declined primarily as a result of an increase in deferred insurance acquisition costs, an increase in future insurance policy benefits and other as a result of an increase in insurance-in-force resulted in cash generated from operating activities exceeding expenditures. Compared with the previous fiscal year, cash generated from operating activities in the Financial Services segment improved by 14.3 billion yen, or 4.8 percent.
During the fiscal year, 706.4 billion yen in cash was used in investing activities (a decrease of 60.7 billion yen, or 7.9 percent compared with the previous fiscal year).
In all segments excluding the Financial Services segment, 185.2 billion yen in cash was used in investing activities. During the fiscal year, cash was used to purchase fixed assets mainly in the Electronics segment. Cash proceeds of 135.8 billion yen were generated from sales of securities investments, maturities of marketable securities and collections of advances, including 88.4 billion yen from the sale of Telemundo. Compared with the previous fiscal year, cash used in investing activities decreased by 183.8 billion yen, or 49.8 percent. As a result of a reduction in capital expenditures mainly in the Electronics segment, cash used to purchase fixed assets decreased compared with the previous fiscal year.
In the Financial Services segment, 517.4 billion yen in cash was used in investing activities (an increase of 115.5 billion yen, or 28.7 percent compared with the previous fiscal year). The use of cash derived primarily from the fact that investments and advances of 1,026.4 billion yen exceeded sales of securities investments, maturities of marketable securities and collections of advances of 542.5 billion yen, reflecting an increase in assets under management in the Financial Services segment.
As a result of these factors, the difference between cash generated from operating activities and cash used in investing activities was a positive 147.4 billion yen for the fiscal year, an improvement of 176.9 billion yen compared with the previous fiscal year (in the previous fiscal year, net cash flow was a negative 29.5 billion yen). In terms of net cash flow from all segments excluding the Financial Services segment, net cash flow was a positive 357.7 billion yen for the fiscal year, an improvement of 290.6 billion yen, or 433.0 percent, compared with the previous fiscal year. Net cash flow from the Financial Services segment was a negative 201.4 billion yen, a deterioration of 101.2 billion yen compared with the previous fiscal year.
During the fiscal year ended March 31, 2003, 93.1 billion yen of net cash was used in financing activities compared to 85.0 billion yen of net cash provided by financing activities in the previous year. 22.9 billion yen in cash was used for the payment of dividends.
In all segments excluding the Financial Services segment, 251.1 billion yen of net cash was used in financing activities compared to 31.6 billion yen of cash used in financing activities in the previous year. Cash was used during the fiscal year for repayments of long-term debt including 1.5 billion U.S. dollars of U.S. dollar notes redeemed on March 4, 2003. These repayments caused cash used in financing activities to exceed cash provided by financing activities.
In the Financial Services segment, 149.1 billion yen of net cash was provided by financing activities compared to 120.3 billion yen of net cash provided by financing activities. This was due to a 142.2 billion yen, or 133.6 percent, increase in deposits from customers in the banking business.
Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased 29.3 billion yen, or 4.3 percent, to
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The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
All other segments | ||||||||||||||||||||||||||||||||||||||||||||||||
All other segments | excluding | |||||||||||||||||||||||||||||||||||||||||||||||
excluding | Financial Services | Financial Services | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||
Financial Services | Financial Services | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||
Year Ended March 31 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | ||||||||||||||||||||||||||||||||||||||||||
Fiscal Year Ended March 31 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||||
(Yen in millions) | (Yen in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Net cash provided by operating activities | 301,625 | 315,968 | 436,059 | 542,848 | 737,596 | 853,788 | 314,764 | 241,627 | 544,051 | 401,090 | 853,788 | 632,635 | ||||||||||||||||||||||||||||||||||||
Net cash used in investing activities | (401,866 | ) | (517,383 | ) | (368,951 | ) | (185,163 | ) | (767,117 | ) | (706,425 | ) | (516,663 | ) | (401,550 | ) | (185,883 | ) | (352,496 | ) | (706,425 | ) | (761,792 | ) | ||||||||||||||||||||||||
Net cash provided by (used in) financing activities | 120,255 | 149,086 | (31,603 | ) | (251,128 | ) | 85,040 | (93,134 | ) | 149,207 | 141,696 | (251,247 | ) | 153,759 | (93,134 | ) | 313,283 | |||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 3 | (5 | ) | 21,033 | (24,965 | ) | 21,036 | (24,971 | ) | (24,971 | ) | (47,973 | ) | (24,971 | ) | (47,973 | ) | |||||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 20,017 | (52,334 | ) | 56,538 | 81,592 | 76,555 | 29,258 | (52,692 | ) | (18,227 | ) | 81,950 | 154,380 | 29,258 | 136,153 | |||||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of the fiscal year | 307,245 | 327,262 | 300,000 | 356,538 | 607,245 | 683,800 | 327,235 | 274,543 | 356,565 | 438,515 | 683,800 | 713,058 | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents at end of the fiscal year | 327,262 | 274,928 | 356,538 | 438,130 | 683,800 | 713,058 | 274,543 | 256,316 | 438,515 | 592,895 | 713,058 | 849,211 | ||||||||||||||||||||||||||||||||||||
Sony’s mid-term fund requirements are expected
In regards to the funding requirements that arise from this business strategy, working capital needs, repayment of existing debt, payment of dividend and all its other capital needs, Sony believes that it can maintain sufficient liquidity and financial flexibility through operating cash flowflows and cash and cash equivalents, its ability to procure necessary funds from the financial and capital markets, its commitment lines with banks, and other means.
7572
2005.
Regarding MTNs,2005.
Onneeds daily and monthly. The cash balance on March 31, 2004,2005, was 523.8 billion yen. A short-term shortage in the cash balance is financed by the issuance of CP. However, Sony controls the outstanding CP amount through internal limits as part of its short-term debt risk management strategy. In the fiscal year ended March 31, 2005, there was no outstanding CP amount.
In general, thereobligation in the event of a downgrade in Sony’s credit ratings. However, a downgrade in Sony’s credit ratings could increase the cost of borrowings. There are no restrictions on how Sony’s borrowings can be used except that some borrowings may not be used to acquire securities listed on a U.S. exchange or traded over-the-counter in U.S., and use of such borrowingborrowings must comply with the rules and regulations issued by authorities such as the Board of Governors of the Federal Reserve Board. In addition, there are no financial covenants that would cause an acceleration
In order to facilitate access to global capital markets, Sony obtains credit ratings from two rating agencies, Moody’s and Standard and Poor’s Rating Services (“S&P”). In addition, Sony maintains a
76
Sony’s current debt ratings (long-term/ short-term) are: Moody’s: A1 (outlook: negative)/ P-1; S&P: A+ (outlook: negative)/ A-1; and R&I: AA/a-1+.
On June 25, 2003, Moody’s downgraded Sony’s long-term debt rating from Aa3 to A1 (outlook: negative). R&I downgraded Sony’s long-term debt rating from AA+ to AA on June 16, 2003. These actions reflected the concerns of the two agencies that Sony may take longer than initially expected to regain its previous level of profit and cash flow under the severe competition, particularly in the electronics business, and deflationary pressures. Sony’s short-term debt rating from Moody’s and R&I has been unaffected.
Despite the downgrading of Sony’s long-term debt rating by Moody’s and R&I, Sony believes that its access to the global capital markets will remain sufficient for its financing needs going forward, and that it will retain its ability to issue CP to meet its working capital needs.
Sony seeksmanagement’s top priorities to maintain a stable and appropriate credit rating in order to ensure financial flexibility for liquidity and capital management, and to continue to maintain adequate access to sufficient funding resources in the financial and capital markets.
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Moody’s | S&P | R&I | ||||
Long-term debt | A1 (Outlook: Negative) | A (Outlook: Negative) | AA | |||
Short-term debt | P-1 | A-1 | a-1+ |
For instance, Sony Life’s cash inflows come mainly from policyholders’ insurance premiums and Sony Life keeps sufficient liquidity in the form of investments primarily in various securities. Sony Bank, on the other hand, uses its cash inflows, which come mainly from customers’ deposits in local or foreign currencies, in order to offer housing loans to individuals or to make bond investments, and establish a necessary level of liquidity for the smooth settlement of transactions.
Aiming to advance corporate value creation management, Sony uses EVA®*, which reflects cost of capital, as one of its internal evaluation measures. The fiscal year ended March 31, 2004 marked the fourth year Sony has used EVA®. EVA® is used in the Electronics, Game, Music, and Pictures segments for various internal evaluation measures such as setting, monitoring and evaluating financial performance targets. EVA® is also linked to compensation. As a result, recognition of return on invested capital and cost of capital has spread further within each business unit and proactive efforts have been made to
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Furthermore, in accordance with the strengtheningproducts as part of research and development atactivities within the network companies,Network Companies and business
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forging new future markets. In addition, twoSony operates three independent research laboratories,laboratories; Sony Computer Science Laboratories, Inc. (fundamental(focusing on fundamental research and user interface research) and; Sony-Kihara Research Center, Inc. (three-dimensional(focusing on three-dimensional computer graphics and image processing technologies), are conducting; and Sony Intelligence Dynamics Laboratories, Inc.
the transfer of Sony Computer Entertainment’s semiconductor manufacturing operations from the Game segment to the Electronics segment. However, the stringent selection of research and development activities resulted in a small increase in research and development expenses within the Electronics segment. Research and development expenses in the Game segment remained high due to the research and development associated with PlayStation Portable and PLAYSTATION 3.
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Research and development costs for the fiscal year ended March 31, 2002 increased 16.5 billion yen, or 4.0 percent, to 433.2 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (excluding the Financial Services segment) was 6.1 percent, almost flat compared with the previous fiscal year. The bulk of research and development costs were incurred in the Electronics and Game segments; expenses in the Electronics segment increased 2.5 billion yen, or 0.7 percent, to 383.4 billion yen, and expenses in the Game segment increased 14.0 billion yen, or 40.9 percent, to 48.2 billion yen. In the Electronics segment, approximately 64 percent of expenses were for the development of new product prototypes while the remaining approximately 36 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, and displays. The increase in expenses in the Game segment centered on next-generation semiconductor architecture and network-related technologies for hardware.
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Issues Facing |
Compared with the previous fiscal year, the global business environment in which Sony operates has improved, with macroeconomic indicators showing signs of recovery and personal consumption beginningManagement’s Response to increase. These improvements have done little to dissipate the challenges facing Sony, however, as competitionthose Issues
In the fiscal year ended March 31, 2004, the first year of Transformation 60, Sony recorded 168.1 billion yen in consolidated restructuring charges, 514.5 billion yen in consolidated research and development costs and 175 billion yen in semiconductor capital expenditures (total of Electronics and Game segments).
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segment.
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In the Game segment, PlayStation 2PS2 has a high share of the global game console market, and the PlayStation 2PS2 business, particularly the PlayStation 2PS2 software business, remains in its harvest stage. However, production shipment units of PlayStation 2PS2 hardware are expected to decrease in the fiscal year ending March 31, 2005.2006. In order to ensure future growth in the Game segment, Sony is investing, as described above, in the research and development of cutting-edge microprocessors and other LSIs that will be used in the next generation computer entertainment system.system, PLAYSTATION 3. Furthermore, Sony is working to develop a new market through its planned introduction in the fiscal year ending March 31, 2005, of PlayStation Portable, (“PSP”), a new handheld video game system on which a variety of content can be enjoyed. PlayStation Portable was introduced in Japan and U.S. in December 2004 and March 2005, respectively and will be introduced in Europe in September 2005.
InWithin the Music segment,music industry, album sales over the past several years have decreased due to the worldwide contraction of the global music industry brought on by piracy and competition from other entertainment sectors. AlthoughOne way Sony experienced improvement in a number of key retail markets during the fiscal year ended March 31, 2004, it continued to record declining sales on a global basis. In an effort to maintain profitability, Sony is continuing to implement restructuring initiatives designed to reduce fixed costs at a rate equal to or above the rate of the decline in sales. Sony is also working to combat digital piracy and
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In the Pictures segment, Sony faces intense competition, rising advertising and promotion expenses and a growing trend toward digital piracy. To meet these challenges, Sony is working to distribute a diversified portfolio of motion pictures and capitalize on the expanding DVD home entertainment market, which is becoming a more significant source of revenues and profits. Additionally,One of the ways that Sony is working to differentiate itselfdistribute a diversified portfolio of motion pictures and capitalize on the expanding DVD home entertainment market is through its participation in the marketplaceacquisition of MGM. In conjunction with the transaction, SPE entered into agreements to co-finance and produce new motion pictures with MGM and to proactively address risks of digital piracy, Sony Pictures Digital is developing broadband network strategies to facilitatedistribute MGM’s existing film and television content in, among other markets, the integration between Sony’s hardware and content products and create protected revenue-generating alternatives.DVD home entertainment market.
In the Financial Services segment, the value of assets accumulated by the businesses in the segment has grown continuously over the past several fiscal years, resulting in a large portion (approximately 40 percent) of Sony’s total assets being accounted for by the Financial Services segment. To strengthen asset management and risk management in parallel with this growing asset value, enhance disclosure of business details, and offer customers integrated financial services tailored to their individual needs, in April 2004 Sony established Sony Financial Holdings Inc. in April 2004. This, a holding company is comprised of Sony Life, Sony Assurance and Sony Bank, and will serve to increasewith the aim of both increasing the synergies between these businesses.businesses and targeting an initial public offering during the fiscal year ending March 31, 2007.
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2005.
In April 2004, a settlement was reached2005.
81
substitutional portion of Sony’s Employee Pension Fund) is as follows:
Sales are expected to increase primarily due to an increase in the sales of products such as digital still cameras, flat panel televisions and DVD recorders are expectedLCD rear projection televisions. With regard to continue to increase, resulting inoperating performance, although an anticipated increase in overall sales of the segment, despite an expected decrease in sales of CRT televisions. Operating incomeimprovement is expected to increase due to the increase in sales and the benefit ofa reduction in fixed costs relating to restructuring activities undertaken inimplemented during the previous fiscal year, despite an anticipateda decline in unit prices, appreciation of the yen against the U.S. dollar and an expectedeuro and increase in researchboth depreciation and development costs.
software. Although From the fiscal year ending March 31, 2005,amortization and research and development costs associated with process technologies, including those technologies usedare also anticipated. An improvement in operating performance is expected, reflecting the Game segment, which were previously recordedabovementioned factors, as well as an anticipated reduction in the restructuring charges. segment, will be recorded in the Electronics segment,integration of the semiconductor businesses in the Electronicscontribution from both PlayStation Portable hardware and Game segments.Gamesoftware production shipmentsPS2 and PlayStation Portable are expected to remain unchanged year on year, production shipments of PS one and PlayStation 2 hardware are expectedcontribute to decrease compared with the previous year, resulting in a decrease in sales for the segment. Although a portion ofoperating income, increased research and development costs will be recordedprimarily for PLAYSTATION 3 are expected to leave operating income relatively unchanged.
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Sales are expected to decrease due to an anticipated continued contraction of the market for music and a reduction in the unit price of DVDs in the manufacturing division. However, due to factors such as the benefits of restructuring activities already carried out, operating income is expected to increase.
Sales are expected to decrease due to the absence of the significant television revenues in the fiscal year ended March 31, 2004. However, operating income2005, in whichSpider-Man 2 was a substantial contributor.
Although an increase in insurance-in-force is expectedrevenue from insurance premiums at Sony Life, a small decrease in insurance revenue is expected due to a change, at Sony Life, in the recognition method of insurance premiums received on certain products from being recorded as revenue to being offset against the related provision for future insurance policy benefits. A decrease in operating income is also expected because valuation gains from marketable securities are not included indue to the forecast.conservative estimation of insurance claim payments.
In the fiscal year ending March 31, 2005,2006, capital expenditures (additions to fixed assets) are expected to be 410 billion yen, an increase of 815 percent compared with the previous year. More thanfiscal year ended March 31, 2005. Approximately 90 percent of the amount is expected to be spent in the Electronics and Game segments.segment. Of this amount, capital expenditures on semiconductors (in the Electronics and Game segments) during the fiscal year are expected to amount to 190160 billion yen (actual amount in the fiscal year ended March 31, 20042005 was 175 billion yen). Of the capital expenditures on semiconductors, 120 billion yen is expected to be spent for the installation of semiconductor production equipment designed for next generation broadband microprocessors (actual amount in the fiscal year ended March 31, 2004 was 69150 billion yen). For an explanation regarding fund procurement, refer to “Liquidity and Capital Resources” above.
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In the fiscal year ending March 31, 2005,2006, expenses for depreciation and amortization, which includes the amortization of intangible assets and the amortization of deferred insurance acquisition costs, are expected to be 370390 billion yen, an increase of 15 percent compared with the previous year. Althoughfiscal year ended March 31, 2005. Both expenses for the amortization of deferred insurance acquisition costs in the Financial Services segment are expected to decrease, totaland expenses for depreciation and amortization in the Electronics and Game segmentssegment are expected to increase.
Sony expects research and development costs (total of expenses for the development of new product prototypes and expenses for the development of mid-to long-term new technologies) for the fiscal year ending March 31, 20052006 to be 550520 billion yen, a 74 percent increase compared with the fiscal year ended March 31, 2004.2005. Research and development costs associated with process technologies, including those technologies used in the Game segment, which were previously recorded in the Game segment, will be recorded in the Electronics segment from the fiscal year ending March 31, 2005, due to the integration of the semiconductor businesses infor both the Electronics and Game segments. As a result, research and development costs in the Electronics segmentsegments are expected to increase more than 10 percent compared with the 429.4 billion yen recorded in the previous year. On the other hand, in the Game segment, overall research and development costs are expected to decrease by only 10 percent compared to the 83.4 billion yen recorded in the previous year. The relatively small decrease is due to the fact that, although research and development costs associated with process technologies will decrease, research and development costs associated with next generation semiconductor design, new platforms such as the PSP and software are expected to increase.
79
83
Impairment of long-lived assets
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84
loss has been recognized.
81
85
2006.
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Pre-Tax | Pension | Equity | ||||||||||
Change in Assumption | PBO | Expense | (Net of Tax) | |||||||||
(Yen in billions) | ||||||||||||
25 basis point increase/decrease in discount rate | -/+ | 45.0 | -/+ | 3.0 | +/ | |||||||
25 basis point increase/decrease in expected return on assets | — | -/+ | 1.3 | +/ |
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As of March 31, 2004, the U.S. subsidiaries of Sony had a valuation allowance of 81.0 billion yen against deferred tax assets for federal and certain state taxes. Since the U.S. subsidiaries did not have a sufficient history of taxable income at this time to conclude that it is more likely than not that the tax benefit from these deferred tax assets would be realized, a valuation allowance was established. Management believes this lack of sufficient earnings history, when evaluated in connection with relevant qualitative factors and uncertainties concerning the U.S. subsidiaries’ businesses and industries, provided substantial negative evidence, which outweighs any positive evidence, regarding the eventual realizability of the tax benefit of the deferred tax assets as of March 31, 2004. However, under recent conditions, management considers that it is possible that the U.S. subsidiaries’ future results may yield sufficient positive evidence to support the conclusion that it is more likely than not that the U.S. subsidiaries could realize the tax benefit of these deferred tax assets and that such a conclusion may be reached as early as during the fiscal year ending March 31, 2005. If this is the case, subject to review of relevant qualitative factors and uncertainties, Sony may reverse part or all of the valuation allowance that would be recognized into income as a reduction to tax expense.
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Long-term liabilities
For a summary of Sony’s significant accounting policies, including the critical accounting policies discussed above, please see Note 2 of Notes to the Consolidated Financial Statements.
In DecemberJuly 2003, the FASB revisedAccounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by 5.2 billion yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony recorded a 4.7 billion yen charge (net of income taxes of 2.7 billion yen) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” in the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets.
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In November 2003,December 2004, the Emerging Issues Task ForceFASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“EITF”FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative use of the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”) reached a consensusNo. 25, “Accounting for Stock Issued to Employees.” With limited exceptions, FAS No. 123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony has accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and has disclosed the net effect on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairmentnet income and Its Applicationnet income per share allocated to Certain Investments”. EITF Issue No. 03-01 establishes additional disclosure requirements for each categorythe common stock if Sony had applied the fair value recognition provisions of FAS No. 115 investments123 to stock-based compensation as described in a loss position. In March 2004,Consolidated Financial Statements Note 2(2) Significant accounting policies — Stock-based compensation. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption encouraged during the EITF also reached a consensus onfiscal years beginning after the additional accounting guidancedate this statement is issued. The options for other-than-temporary impairments and its applicationtransition methods prescribed in FAS No. 123(R) include either the modified prospective or the modified retrospective methods. Sony intends to debt and equity investments. In accordanceadopt the modified prospective method of transition, which
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In November 2002,2004, the FASB issued EITF IssueFAS No. 00-21, “Accounting151, “Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4.” This statement requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. This statement shall be effective for Revenue Arrangementsfiscal years beginning after June 15, 2005, with Multiple Deliverables”. EITF Issue No. 00-21 provides guidance on when and how to account for arrangements that involveearly adoption encouraged during the delivery or performance of multiple products, services and/or rights to use assets. Sony adopted EITF Issue No. 00-21 on July 1, 2003.fiscal years beginning after the date this statement is issued. The adoption of EITF IssueFAS No. 00-21 did151 is not expected to have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2004.position.
In April 2003,December 2004, the FASB issued FAS No. 149, “Amendment153, “Exchanges of Statement 133 on Derivative Instruments and Hedging Activities”.Nonmonetary Assets, an amendment of APB Opinion No. 29.” This statement amends and clarifies financial accounting and reportingrequires that exchanges of productive assets be accounted for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities under FAS No. 133. Sony adopted FAS No. 149 on July 1, 2003. The adoption of FAS No. 149 did not have an impact on Sony’s results of operations and financial position.
On April 1, 2003, Sony adopted FAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated withat fair value unless fair value cannot be reasonably determined or the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of FAS No. 143 did not have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2004.
In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS No. 150 establishes standards for how certain financial instruments with characteristics of both liabilities and equity shall be classified and measured. Sony adopted FAS No. 150 during the first quarter of the year ended March 31, 2004. The adoption of FAS No. 150 did not have an impact on Sony’s results of operations and financial position for the year ended March 31, 2004.
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RECENT PRONOUNCEMENTS
In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate accounts”. SOP 03-1 provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts.transaction lacks commercial substance. This statement shall be effective for nonmonetary asset exchanges occurring in the fiscal yearsperiods beginning after DecemberJune 15, 2003.2005, with early adoption during the fiscal periods beginning after the date this statement is issued encouraged. Sony is currently evaluating the impact of adopting this guidance.new pronouncement.
Item 6. Directors, Senior Management and Employees
Item 6. | Directors, Senior Management and Employees |
Nobuyuki Idei | |||
Date of Birth: November 22, 1937 | |||
Director (Member of the Board) Since: 1989 | |||
Corporate Executive Officer Since: 2003 | |||
Current Positions: Chairman and Group Chief Executive Officer, Representative Corporate Executive Officer | |||
Prior Positions: | |||
2000 | Chairman and Chief Executive Officer, Representative Director, Sony Corporation | ||
1999 | President and Representative Director, Chief Executive Officer, Sony Corporation | ||
1995 | President and Representative Director, Chief Operating Officer, Sony Corporation | ||
1990 | Senior General Manager, Advertising & Marketing Communication Strategy Group, Sony Corporation | ||
1989 | Director, Sony Corporation | ||
1988 | Senior General Manager, Home Video Group, Sony Corporation | ||
1960 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: | |||
Director of Nestlé S.A., Switzerland |
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Kunitake Ando | |||
Date of Birth: January 1, 1942 | |||
Director (Member of the Board) Since: 2000 (and from 1994 through 1997) | |||
Corporate Executive Officer Since: 2003 | |||
Current Positions: | President and Global Hub President, Representative Corporate Executive Officer, Officer in charge of Personal Solutions Business Group |
Prior Positions: | |||
2003 | President and Group Chief Operating Officer, Representative Corporate Executive Officer, Sony Corporation | ||
2000 | President and Chief Operating Officer, Representative Director, Sony Corporation | ||
1999 | President and Chief Operating Officer, Personal IT Network Company, Sony Corporation | ||
1998 | Corporate Senior Vice President, Sony Corporation | ||
1997 | Corporate Vice President (resigns as Director), Sony Corporation | ||
1994 | Director, Sony Corporation | ||
1990 | President and Chief Operating Officer, Sony Engineering and Manufacturing of America | ||
1985 | Deputy President, Sony Prudential Life Insurance Co., Ltd. | ||
1969 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None | |||
Teruo Masaki | |||
Date of Birth: August 7, 1943 | |||
Director (Member of the Board) Since: 1999 | |||
Corporate Executive Officer Since: 2003 | |||
Current Positions: Executive Deputy President and Group General Counsel | |||
Prior Positions: | |||
2000 | Corporate Senior Executive Vice President, Director, Sony Corporation | ||
1999 | Senior Managing Director, Sony Corporation | ||
1997 | Executive Vice President, Sony Corporation of America | ||
1991 | Deputy Senior General Manager, Legal and Intellectual Property Group, Sony Corporation | ||
1971 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None |
Sir Howard Stringer | ||
Date of Birth: February 19, 1942 | ||
Director (Member of the Board) Since: 1999 | ||
Corporate Executive Officer Since: 2003 | ||
Current Positions: | Vice Chairman and Sony Group Americas Representative, Chief Operating Officer in charge of Game Business Group and Entertainment Business Group, charge of Connect Company, Sony Corporation Chairman and Chief Executive Officer, Sony Corporation of America Chairman, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation) |
Prior Positions: | |||
1999 | Director, Sony Corporation | ||
1997 | President, Sony Corporation of America | ||
1995 | Chairman and Chief Executive Officer, TELE-TV, U.S.A. | ||
1988 | President, CBS Broadcast Group, CBS Inc., U.S.A. | ||
1986 | President, CBS News, U.S.A. | ||
Principal Business Activities Outside Sony: | |||
Director of InterContinental Hotels Group |
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Ken Kutaragi | |||
Date of Birth: August 2, 1950 | |||
Director (Member of the Board) Since: 2000 | |||
Current Positions: | Group Executive Officer, Sony Computer Entertainment Inc. |
Prior Positions: | |||
2004 | Chief Operating Officer in charge of Game Business Group and Home Electronics Network Company | ||
2003 | Executive Deputy President, Corporate Executive Officer and Chief Operating Officer in charge of Home Network Company, Game Business Group, Broadband Network Company, NC President, Semiconductor Solutions Network Company, | ||
2000 | Director, Sony Corporation | ||
1999 | Executive President, Sony Computer Entertainment Inc. | ||
1991 | Manager, PS Project, Video Disc Player Group, Sony Corporation | ||
1975 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None |
Teruhisa Tokunaka | ||
Date of Birth: August 9, 1945 | ||
Director (Member of the Board) Since: 1999 | ||
Current Positions: | Group Executive Officer, Sony Corporation President, Representative Director, Sony Financial Holdings Inc. |
Prior Positions: | |||
2003 | Group Chief Strategy Officer, Representative Corporate Executive Officer, Officer in charge of Network Application & Content Service Sector, Personal Solutions Business Group, Sony Corporation | ||
2000 | Executive Deputy President and Chief Financial Officer, Representative Director, Sony Corporation | ||
1999 | Senior Managing Director and Chief Financial Officer, Sony Corporation | ||
1995 | President, Sony Computer Entertainment Inc. | ||
1989 | Deputy Senior General Manager, Corporate Strategy Group, Sony Corporation | ||
1969 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None | |||
Göran Lindahl | |||
Date of Birth: April 28, 1945 | |||
Director (Member of the Board) Since: 2001 | |||
Prior Positions: | |||
2003 | Corporate Executive Officer, Sony Group Europe Representative, Chairman of Sony Group in Europe | ||
2001 | Director, Sony Corporation | ||
1999 | Director, Telefonaktiebolaget LM Ericsson, | ||
1997 | President and Chief Executive Officer, Asea Brown Boveri Ltd., Switzerland | ||
1985 | President, ASEA Transmission AB, Sweden | ||
1983 | President, ASEA Transformers AB, Sweden | ||
Principal Business Activities Outside Sony: | |||
Director, Anglo American Plc, U.K. |
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Akihisa Ohnishi | |||
Date of Birth: March 10, 1937 | |||
Director (Member of the Board) Since: 2003 (and from 1989 through 1993) | |||
Prior Positions: | |||
1993 | Standing Statutory Auditor, Sony Corporation | ||
1989 | Senior General Manager, Corporate Planning Group, Sony Corporation (concurrent with prior position) | ||
1989 | Director, Sony Corporation | ||
1988 | General Manager, Accounting Division, Sony Corporation | ||
1977 | Managing Director, Hispano Sony S.A. | ||
1961 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None | |||
Iwao Nakatani | |||
Date of Birth: January 22, 1942 | |||
Outside Director (Member of the Board) Since: 1999 | |||
Current Position: Chairman of the Board | |||
Prior Positions: | |||
1999 | Professor, School of Management and Information Sciences, Tama University | ||
1991 | Professor, Faculty of Commerce, Hitotsubashi University | ||
1984 | Professor, Faculty of Economics, Osaka University | ||
1973 | Lecturer and Researcher, Faculty of Economics, Harvard University | ||
Principal Business Activities Outside Sony: | |||
President, Tama University | |||
Director of Research, UFJ Institute Ltd. | |||
Director, JSAT Corporation | |||
Director, ASKUL Corporation | |||
Akishige Okada | |||
Date of Birth: April 9, 1938 | |||
Outside Director (Member of the Board) Since: 2002 | |||
Current Position: Chairman of the Compensation Committee | |||
Prior Positions: | |||
1997 | President, The Sakura Bank, Ltd. | ||
1996 | Senior Managing Director, The Sakura Bank, Ltd. | ||
1995 | Managing Director, The Sakura Bank, Ltd. | ||
1991 | Director, The Mitsui Taiyo Kobe Bank, Ltd. | ||
Principal Business Activities Outside Sony: | |||
Chairman of the Board (Representative Director), Sumitomo Mitsui Financial Group, Inc. | |||
Chairman of the Board (Representative Director), Sumitomo Mitsui Banking Corporation | |||
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Hirobumi Kawano | |||
Date of Birth: January 1, 1946 | |||
Outside Director (Member of the Board) Since: 2003 | |||
Current Position: Vice Chairman of the Board | |||
Prior Positions: | |||
1999 | Director-General, Agency for Natural Resources and Energy, Ministry of International Trade and Industry (“MITI”) (later renamed the Ministry of Economy, Trade and Industry (METI)) | ||
1998 | Director-General, Basic Industries Bureau, MITI | ||
1996 | Director-General, Machinery and Information Industries Policy, Machinery and Information Industries Bureau, MITI | ||
1995 | Director-General, Petroleum Department, Agency of Natural Resources and Energy, MITI | ||
1993 | Director, General Coordination Division, Minister’s Secretariat, MITI | ||
1992 | Director, General Industrial Machinery Division, Machinery and Information Industries Bureau, MITI | ||
1989 | Director, Americas-Oceania Division, International Trade Policy Bureau, MITI | ||
1969 | Entered MITI | ||
Principal Business Activities Outside Sony: | |||
Yotaro Kobayashi | |||
Date of Birth: April 25, 1933 | |||
Outside Director (Member of the Board) Since: 2003 | |||
Current Position: Chairman of the Nominating Committee | |||
Prior Positions: | |||
1996 | Director, ABB Ltd., Switzerland | ||
1978 | President and Chief Executive Officer, Fuji Xerox Co., Ltd. | ||
Principal Business Activities Outside Sony: | |||
Chairman of the Board, Fuji Xerox Co., Ltd. | |||
Director, Callaway Golf Company | |||
Director, Nippon Telegraph and Telephone Corporation | |||
Carlos Ghosn | |||
Date of Birth: March 9, 1954 | |||
Outside Director (Member of the Board) Since: 2003 | |||
Prior Positions: | |||
1990 | Chairman, President and Chief Executive Officer, Michelin North America Inc. | ||
1985 | Chief Operating Officer, Michelin — Brazil | ||
Principal Business Activities Outside Sony: | |||
President and Chief Executive Officer, Nissan Motor Co., Ltd. | |||
Director, Alcoa Inc., U.S.A. | |||
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Sakie T. Fukushima | |||
Date of Birth: September 10, 1949 | |||
Outside Director (Member of the Board) Since: 2003 | |||
Prior | |||
2000 | Managing Director, Korn/Ferry International — Japan | ||
Principal Business Activities Outside Sony: | |||
Member, Board of Directors, Korn/ Ferry International, U.S.A. | |||
Director, Kao Corporation | |||
Advisory Board Member, All Nippon Airways Co., Ltd. | |||
Yoshihiko Miyauchi | |||
Date of Birth: September 13, 1935 | |||
Outside Director (Member of the Board) Since: 2003 | |||
Prior Positions: | |||
2000 | Representative Director, Chairman and Chief Executive Officer, ORIX Corporation | ||
1980 | Representative Director, President, ORIX Corporation | ||
Principal Business Activities Outside Sony: | |||
Director, Representative Executive Officer, Chairman and | |||
Group Chief Executive Officer, ORIX Corporation | |||
Director, Aozora Bank Ltd. | |||
Director, Fuji Xerox Co., Ltd. | |||
Director, | |||
Director, Daikyo Incorporated | |||
Yoshiaki Yamauchi | |||
Date of Birth: June 30, 1937 | |||
Outside Director (Member of the Board) Since: 2003 | |||
Current Position: Chairman of the Audit Committee | |||
Prior Positions: | |||
1999 | Director, Sumitomo Banking Corporation | ||
1993 | Executive Director, Asahi & Co. | ||
1991 | President, Inoue Saito Eiwa Audit Corporation | ||
1986 | President, Eiwa Audit Corporation | ||
Country Managing Partner — Japan, Arthur Andersen & Co. | |||
Principal Business Activities Outside Sony: | |||
Deputy President, ARI Research Institute | |||
Statutory Auditor, Stanley Electric Co., Ltd. | |||
Director, Amana Corporation | |||
Statutory Auditor, Seiko Watch Corporation | |||
Director, Sumitomo Mitsui Financial Group, Inc. |
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Ryoji Chubachi | |||
Date of Birth: September 4, 1947 | |||
Corporate Executive Officer Since: 2004 | |||
Current Positions: Executive Deputy President, Electronics Chief Executive Officer | |||
Prior Positions: | |||
2004 | Chief Operating Officer in charge of Micro Systems Network Company (MSNC) and Engineering, Manufacturing and Customer Services (“EMCS”), President, Production Strategy Group, Sony Corporation | ||
2003 | Executive Vice President, Executive Officer, NC President, MSNC, Sony Corporation | ||
2002 | NC President, Core Technology & Network Company (“CNC”), Sony Corporation | ||
2002 | Corporate Senior Vice President, Sony Corporation | ||
1999 | Corporate Vice President, President, Recording Media Company, CNC, Senior Vice President, CNC, Sony Corporation | ||
1977 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None |
Katsumi Ihara | ||
Date of Birth: September 24, 1950 | ||
Corporate Executive Officer Since: 2004 | ||
Current Positions: | Executive Deputy President, Group Chief Strategy Officer and Group Chief Financial Officer, NC President, Home Electronics Network Company |
Prior Positions: | |||
2001 | Group Executive Officer, Sony Corporation President, Sony Ericsson Mobile Communications AB | ||
2000 | Corporate Senior Vice President, NC President, Personal IT Network Company, Sony Corporation | ||
1997 | Corporate Vice President, Sony Corporation | ||
1996 | President, Home A&V Products Company, Sony Corporation | ||
1981 | Entered Sony Corporation | ||
1973 | Entered Mitsui Knowledge Industry Co., Ltd. | ||
Principal Business Activities Outside Sony: None |
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Sir Peter Bonfield | |||
Date of Birth: June 3, 1946 | |||
Current Position: Member of the Advisory Board | |||
Prior Positions: | |||
1996 | Chief Executive Officer, British Telecom plc | ||
1986 | Chairman, ICL plc | ||
1984 | Managing Director, ICL plc | ||
Principal Business Activities Outside Sony: | |||
Member of the Board, AstraZeneca plc | |||
Member of Audit Committee of the Board, Telefonaktiebolaget LM Ericsson | |||
Member of the Board, Mentor Graphics Inc. | |||
Member of the Board and Chairman of Audit Committee, Taiwan Semiconductor Manufacturing Company Ltd. | |||
Fueo Sumita | |||
Date of Birth: May 24, 1938 | |||
Prior Positions: | |||
2002 | Executive Vice President, Kawada Corp. | ||
2001 | Vice Chairman, Ernst & Young ShinNihon | ||
2000 | Deputy Director, Ohta-Showa Century Audit Corp. | ||
1999 | Chairman, Century Audit Corp. | ||
1985 | Deputy General Manager, Corporate Accounting Dept., Hitachi, Ltd. | ||
Principal Business Activities Outside Sony: | |||
Chief of Sumita Accounting Office |
Corporate Executive Officers93
Shizuo Takashino | |||
Date of Birth: September 2, 1943 | |||
Corporate Executive Officer Since: | |||
Current Positions: | Executive Deputy President Design & Engineering Group, Sony China Limited, Chief Operating Officer in charge of Audio Visual Network Company, Professional Solutions Network Company |
Prior Positions: | |||
2000 | |||
1999 | Senior Executive Vice President, NC President, Home Network Company, Sony Corporation | ||
1997 | Corporate Senior Vice President, (resigned as Director), Sony Corporation | ||
1996 | President, Personal A&V Products Company, Sony Corporation | ||
1995 | Executive Vice President, Consumer A&V Products Company, Sony Corporation | ||
1995 | Director, Sony Corporation | ||
1990 | Senior General Manager, General Audio Group, Sony Corporation | ||
1962 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None | |||
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Keiji Kimura | |||
Date of Birth: April 4, 1952 | |||
Corporate Executive Officer Since: 2004 | |||
Current Positions: | Senior Executive Vice President, NC President, Communications Network Company, Officer in charge of Connect Company |
Prior Positions: | |||
2003 | Senior Vice President, Executive Officer, Sony Corporation | ||
2002 | Corporate Senior Vice President, Sony Corporation | ||
2001 | NC President, Mobile Network Company, Sony Corporation | ||
2000 | Corporate Vice President, Sony Corporation | ||
NC President, Information Technology Company, Personal Network Company, Sony Corporation | |||
1977 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None | |||
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Fujio Nishida | |||||
Date of Birth: November 26, 1948 | |||||
Corporate Executive Officer Since: 2004 | |||||
Current Positions: | Executive Vice President, President, Global Marketing Group, Deputy President, Information Technology & Communications Network Company, Deputy President, Personal Audio Visual Network Company, Officer in charge of Marketing and Corporate Communications |
Prior Positions: | |||
2003 | Senior Vice President and Electronics Chief Marketing Officer, Executive Officer, Sony Corporation | ||
2000 | Group Executive Officer, Sony Corporation | ||
President and Chief Operating Officer, Sony Electronics Inc. | |||
2000 | President, Consumer Electronics Group, Sony Electronics Inc. | ||
1998 | President, Consumer Products Marketing Group, Sony Electronics Inc. | ||
1996 | Senior Vice President, Home A/V Division, Consumer AV Group, | ||
Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation) | |||
1972 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None |
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Takao Yuhara | ||||||
Date of Birth: June 7, 1946 | ||||||
Corporate Executive Officer Since: 2003 | ||||||
Current Positions: Senior Vice President, Officer in charge of Finance and Investor Relations | ||||||
Prior Positions: | ||||||
2003 | Group Chief Financial Officer, Sony Corporation | |||||
2001 | Senior General Manager, Corporate Planning & Control, Global Hub, Sony Corporation | |||||
1999 | Senior Vice President, Corporate Planning & Control, Group HQ, Sony Corporation | |||||
1996 | Vice President, Display Company, General Manager, Planning & Control Department, Display Company, Sony Corporation | |||||
1995 | General Manager, Planning & Control Department, Display Device Division, Component Company, Sony Corporation | |||||
1971 | Entered Sony Corporation | |||||
1969 | Entered Nippon Chemical Industrial Co., Ltd. | |||||
Principal Business Activities Outside Sony: None |
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Nobuyuki Oneda | ||
Date of Birth: May 6, 1945 | ||
Corporate Executive Officer Since: 2004 | ||
Current Positions: | Senior Vice President, Officer in charge of Transformation 60, Corporate Planning & Control, Accounting and Information Systems |
Prior Positions: | |||
2003 | Senior Vice President, Executive Officer, Sony Corporation | ||
2002 | Officer and Chief Financial Officer, Network Application & Content Service Sector, Sony Corporation, | ||
Corporate Senior Vice President, Sony Corporation | |||
2000 | Deputy President, and Chief Financial Officer, Sony Electronics Inc. | ||
Group Executive Officer, Sony Corporation | |||
1999 | Executive Vice President and Chief Financial Officer, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation) | ||
1996 | General Manager, Corporate Planning & Control Department, Sony Corporation | ||
1969 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None | |||
Yasunori Kirihara | |||
Date of Birth: November 20, 1946 | |||
Corporate Executive Officer Since: 2004 | |||
Current Positions: Senior Vice President, Officer in charge of Corporate Human Resources | |||
Prior Positions: | |||
2003 | Vice President, Executive Officer, Sony Corporation | ||
1998 | Representative Director and President, Sony Service Corporation | ||
1997 | Senior Vice President, Recording Media & Energy Company, Sony Corporation | ||
1989 | General Manager, Human Resources, Human Resources Development, Sony Corporation | ||
1970 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None |
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Nicole Seligman | |||
Date of Birth: October 25, 1956 | |||
Corporate Executive Officer Since: 2003 | |||
Current Positions: | Group Deputy General Counsel, Sony Corporation Executive Vice President and General Counsel, Sony Corporation of America |
Prior Positions: | |||
2000 | Entered Sony Corporation of America as Executive Vice President and General Counsel | ||
1992 | Partner, Williams & Connolly LLP | ||
1985 | Entered Williams & Connolly LLP | ||
1978 | Associate Editorial Page Editor for The Asian Wall Street Journal, Hong Kong | ||
Principal Business Activities Outside Sony: None |
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Yutaka Nakagawa | ||
Date of Birth: December 4, 1945 | ||
Current Positions: | Executive Vice President, Executive Officer, NC President, Personal Audio Visual Network Company, President, Personal Audio Business Group |
Prior Positions: | |||
2003 | Deputy President, Micro Systems Network Company, President, Energy Company, MSNC, Sony Corporation | ||
1999 | Corporate Senior Vice President, Sony Corporation | ||
1998 | President, Personal and Mobile Communication Company, Sony Corporation | ||
1997 | Corporate Vice President, Sony Corporation | ||
1992 | General Manager, Camcorder Products Division, Personal Video Group, Sony Corporation | ||
1968 | Entered Sony Corporation | ||
Principal Business Activities Outside Sony: None |
As required under
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Code (or, when the New Company Law becomes effective, the larger of the amount determined by Sony Corporation or the minimum responsibility amount as set forth by the New Company Law).
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Employees
As of March 31, 2004, Sony had approximately 162,000 employees, including fixed-term employees. Although the number of employees was reduced through restructuring activities, due to an increase at manufacturing facilities in Asia, primarily in China, the number of employees at the end of March 2004 increased by approximately 900 from the end of March 2003. In addition, approximately 3,600 employees in Japan who left Sony on March 31, 2004, through the early retirement program and other means, are included in this year-end total.2003. As of March 31, 2004, approximately 65,600 employees were located in Japan and approximately 96,400 outside Japan, and approximately 13 percent were members of labor unions.
As of March 31, 2003, Sony had approximately 161,100 employees, including fixed-term employees, a decrease of approximately 6,900 from the number as of March 31, 2002. As of March 31, 2003, approximately 67,100 employees were located in Japan and approximately 94,100 outside Japan, and approximately 13 percent were members of labor unions. The following table shows the number of employees by segment as of March 31, 2002, 2003, 2004 and 2004.2005.
March 31 | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
Electronics | 128,000 | 127,100 | 123,600 | ||||||||||
Game | 4,400 | 4,800 | 4,300 | ||||||||||
Music | 8,400 | 6,600 | 2,100 | ||||||||||
Pictures | 5,700 | 6,200 | 5,900 | ||||||||||
Financial Services | 6,600 | 6,700 | 6,800 | ||||||||||
Other | 7,300 | 8,300 | 6,800 | ||||||||||
Unallocated — Corporate employees | 700 | 2,300 | 1,900 | ||||||||||
Total | 161,100 | 162,000 | 151,400 | ||||||||||
March 31 | |||||||||||||
2002 | 2003 | 2004 | |||||||||||
Electronics | 131,500 | 122,100 | 121,700 | ||||||||||
Game | 4,100 | 4,400 | 4,800 | ||||||||||
Music | 14,900 | 13,400 | 12,000 | ||||||||||
Pictures | 5,500 | 5,700 | 6,200 | ||||||||||
Financial Services | 6,800 | 6,600 | 6,700 | ||||||||||
Other | 4,500 | 7,300 | 8,300 | ||||||||||
Unallocated — Corporate employees | 700 | 1,600 | 2,300 | ||||||||||
Total | 168,000 | 161,100 | 162,000 | ||||||||||
102
contracts.
100
Number of shares | Percentage | Number of shares | Percentage | |||||||||||||||
Title of class | Identity of person or group | beneficially owned | of class | Identity of person or group | beneficially owned | of class | ||||||||||||
(in thousands) | (In thousands) | |||||||||||||||||
Common Stock | Directors and Executive Officers | 1,158 | 0.1 | Directors and Executive Officers | 1,161 | 0.1 |
None of Sony’s Directors or Executive Officers is a beneficial owner of more than one percent of Sony Corporation’s Common Stock.
2004,2005, Sony granted stock acquisition rights, which represent rights to subscribe for shares of common stock of Sony Corporation, to Directors, Corporate Executive Officers, Executive Officers, Group Executive Officers, and selected employees. The stock acquisition rights generally vest ratably up to three years from the date of grant and are generally exercisable up to ten years from the date of grant. The following table shows the portion of those stock acquisition rights which were granted by Sony to Directors and Corporate Executive Officers as of May 31, 20042005 and which were outstanding as of the same date.
Total number of | Total number of | |||||||||||
Year granted | shares subject to stock | shares subject to stock | ||||||||||
(Year ended March 31) | acquisition rights | Exercise price per share | ||||||||||
(Fiscal Year Ended March 31) | acquisition rights | Exercise price per share | ||||||||||
(in thousands) | (In thousands) | |||||||||||
2005 | 230 | 40.34 U.S. dollars | ||||||||||
2005 | 482 | 3,782 yen | ||||||||||
2004 | 225 | 40.90 U.S. dollars | 225 | 40.90 U.S. dollars | ||||||||
2004 | 444 | 4,101 yen | 444 | 4,101 yen | ||||||||
2003 | 200 | 36.57 U.S. dollars | 200 | 36.57 U.S. dollars | ||||||||
2003 | 375 | 5,396 yen | 345 | 5,396 yen |
103
Year granted | Total number of shares | Total number of shares | ||||||||||
(Year ended March 31) | subject to warrants | Exercise price per share | ||||||||||
(Fiscal Year ended March 31) | subject to warrants | Exercise price per share | ||||||||||
(in thousands) | (yen) | (In thousands) | (Yen) | |||||||||
1999 | 139 | 6,264 | ||||||||||
2000 | 171 | 7,167 | 153 | 7,167 | ||||||||
2001 | 261 | 12,457 | 245 | 12,457 | ||||||||
2002 | 291 | 6,039 | 275 | 6,039 |
conversion priceprincipal amount of CBs to such executives for their purchase of the CBs until the date of conversion. The CBs generally vest ratably up to three years from the date of sale and are generally exercisable up to ten years from the date of sale. The
101
Year issued | Total number of shares | Total number of shares | ||||||||||
(Year ended March 31) | subject to CBs | Exercise price per share | ||||||||||
(Fiscal Year Ended March 31) | subject to CBs | Exercise price per share | ||||||||||
(in thousands) | (U.S. dollars) | (In thousands) | (U.S. dollars) | |||||||||
2001 | 60 | 122.98 | 60 | 122.98 | ||||||||
2002 | 106 | 71.28 | 106 | 71.28 | ||||||||
2003 | 115 | 52.29 | 115 | 52.29 |
20042005 and which were outstanding as of the same date. The exercise price per share has been adjusted for the two-for-one stock split and is subject to anti-dilution adjustment. A range of exercise prices is given when such compensation was granted several times during the respective fiscal year.
Year granted | Total number of shares | Total number of shares | ||||||||||
(Year ended March 31) | subject to SARs | Exercise price per share | ||||||||||
(Fiscal Year Ended March 31) | subject to SARs | Exercise price per share | ||||||||||
(Yen for the Japanese plan, | (In thousands) | (Yen for the Japanese plan, | ||||||||||
(in thousands) | U.S. dollars for the U.S. plan) | U.S. dollars for the U.S. plan) | ||||||||||
The Japanese plan | ||||||||||||
1999 | 2 | 5,586 | ||||||||||
2000 | 3 | 7,445 | 10 | 7,445 | ||||||||
The U.S. plan | ||||||||||||
1999 | 236 | 37.28 | ||||||||||
2002 | 11 | 44.00 | 10 | 44.00 |
104
Item 7. | Major Shareholders and Related Party Transactions |
Persons or groups that
Identity of | Number of | Percentage of | ||||||||||
Title of class | person or group | shares owned | class owned | |||||||||
(in thousands) | ||||||||||||
Common Stock | Moxley & Co. | 115,546 | 12.5 | |||||||||
Common Stock | Japan Trustee Services Bank, Ltd. (Trust Account) | 48,748 | 5.3 |
Moxley & Co. istotal. To the nominee of JPMorgan Chase Bank, which is the depositaryknowledge of Sony Corporation’s American Depositary Receipts (“ADRs”). The shares held by Japan Trustee Services Bank, Ltd. (Trust Account) are held in trust for investors, including shares in securities investment trusts. There wasCorporation, there is no other significant change in the percentage ownership held by any major beneficial shareholders during the past three years. Major shareholders of Sony Corporation do not have different voting rights.
238.
102
105
Item 8. | Financial Information |
103
Item 9. | The Offer and Listing |
106
104
Tokyo Stock Exchange | New York Stock | |||||||||||||||||
Price Per Share of | Exchange Price Per | |||||||||||||||||
Common Stock | Share of ADS | |||||||||||||||||
High | Low | High | Low | |||||||||||||||
(yen) | (U.S. dollars) | |||||||||||||||||
Annual highs and lows | ||||||||||||||||||
The fiscal year ended March 31, 2000* | 16,950 | 5,360 | 157.38 | 44.63 | ||||||||||||||
The fiscal year ended March 31, 2001 | 15,100 | 7,510 | 141.25 | 65.40 | ||||||||||||||
The fiscal year ended March 31, 2002 | 10,340 | 3,960 | 85.75 | 32.80 | ||||||||||||||
Quarterly highs and lows | ||||||||||||||||||
The fiscal year ended March 31, 2003 | ||||||||||||||||||
1st quarter | 7,460 | 5,800 | 59.95 | 47.91 | ||||||||||||||
2nd quarter | 6,360 | 4,810 | 53.49 | 40.20 | ||||||||||||||
3rd quarter | 5,590 | 4,850 | 45.84 | 39.79 | ||||||||||||||
4th quarter | 5,130 | 4,070 | 43.40 | 34.85 | ||||||||||||||
The fiscal year ended March 31, 2004 | ||||||||||||||||||
1st quarter | 4,240 | 2,720 | 35.82 | 23.16 | ||||||||||||||
2nd quarter | 4,450 | 3,350 | 38.30 | 28.33 | ||||||||||||||
3rd quarter | 4,280 | 3,490 | 38.04 | 32.42 | ||||||||||||||
4th quarter | 4,670 | 3,760 | 42.81 | 34.81 |
Tokyo Stock | New York Stock | |||||||||||||||||
Exchange Price | Exchange Price | |||||||||||||||||
Per Share of | Per Share of | |||||||||||||||||
Common Stock | ADS | |||||||||||||||||
High | Low | High | Low | |||||||||||||||
(Yen) | (U.S. dollars) | |||||||||||||||||
Annual highs and lows* | ||||||||||||||||||
The fiscal year ended March 31, 2001 | 15,100 | 7,510 | 141.25 | 65.40 | ||||||||||||||
The fiscal year ended March 31, 2002 | 10,340 | 3,960 | 85.75 | 32.80 | ||||||||||||||
The fiscal year ended March 31, 2003 | 7,460 | 4,070 | 59.95 | 34.85 | ||||||||||||||
Quarterly highs and lows* | ||||||||||||||||||
The fiscal year ended March 31, 2004 | ||||||||||||||||||
1st quarter | 4,240 | 2,720 | 35.82 | 23.16 | ||||||||||||||
2nd quarter | 4,450 | 3,350 | 38.30 | 28.33 | ||||||||||||||
3rd quarter | 4,280 | 3,490 | 38.04 | 32.42 | ||||||||||||||
4th quarter | 4,670 | 3,760 | 42.81 | 34.81 | ||||||||||||||
The fiscal year ended March 31, 2005 | ||||||||||||||||||
1st quarter | 4,710 | 3,880 | 43.67 | 33.95 | ||||||||||||||
2nd quarter | 4,200 | 3,550 | 38.50 | 32.35 | ||||||||||||||
3rd quarter | 3,990 | 3,620 | 39.20 | 33.77 | ||||||||||||||
4th quarter | 4,420 | 3,750 | 41.81 | 36.26 | ||||||||||||||
Monthly highs and lows* | ||||||||||||||||||
2004 | ||||||||||||||||||
December | 3,990 | 3,670 | 38.76 | 35.75 | ||||||||||||||
2005 | ||||||||||||||||||
January | 4,090 | 3,750 | 39.53 | 36.26 | ||||||||||||||
February | 4,010 | 3,770 | 38.31 | 36.46 | ||||||||||||||
March | 4,420 | 3,960 | 41.81 | 37.85 | ||||||||||||||
April | 4,410 | 3,830 | 40.79 | 35.77 | ||||||||||||||
May | 4,140 | 3,850 | 38.45 | 36.30 | ||||||||||||||
June (through June 20) | 4,080 | 3,860 | 37.63 | 35.10 |
107
Tokyo Stock Exchange | New York Stock | |||||||||||||||||
Price Per Share of | Exchange Price Per | |||||||||||||||||
Common Stock | Share of ADS | |||||||||||||||||
High | Low | High | Low | |||||||||||||||
(yen) | (U.S. dollars) | |||||||||||||||||
Monthly highs and lows | ||||||||||||||||||
2003 | ||||||||||||||||||
December | 3,830 | 3,490 | 34.89 | 32.42 | ||||||||||||||
2004 | ||||||||||||||||||
January | 4,470 | 3,760 | 42.00 | 34.81 | ||||||||||||||
February | 4,610 | 4,150 | 42.81 | 39.52 | ||||||||||||||
March | 4,670 | 4,120 | 42.15 | 38.29 | ||||||||||||||
April | 4,710 | 4,240 | 43.67 | 38.13 | ||||||||||||||
May | 4,340 | 3,880 | 39.34 | 33.95 | ||||||||||||||
June (through June 21) | 4,130 | 3,910 | 37.49 | 35.36 |
* |
106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 12521, 2004,20, 2005, the closing sales price per share of Sony Corporation’s Common Stock on the TSE was 4,0503,860 yen. On June 21, 2004,20, 2005, the closing sales price per share of Sony Corporation’s ADS on the NYSE was 36.9035.39 U.S. dollars.Selling ShareholdersNot ApplicableDilutionNot ApplicableExpenses of the IssueNot ApplicableItem 10.Additional InformationShare CapitalNot applicableMemorandum and Articles of AssociationOrganizationSony Corporation is a joint stock corporation(Kabushiki Kaisha)incorporated in Japan under the Commercial Code(Shoho)of Japan. It is registered in the Commercial Register(Shogyo Tokibo)maintained by the Shinagawa Branch Office of the Tokyo Bureau of Legal Affairs.108Objects and purposes Article 3 of the Articles of Incorporation of Sony Corporation provides that its purpose is to engage in the following business activities:(i)manufacture and sale of electronic and electrical machines and equipment, medical instruments, optical instruments and other equipment, machines and instruments;(ii)planning, production and sale of audio-visual software and computer software programs;(iii)manufacture and sale of metal industrial products, chemical industrial products and ceramic industrial products, textile products, paper products and wood-crafted articles, daily necessities, foodstuffs and toys, transportation machines, equipment, petroleum and coal products;(iv)real estate activities, construction business, transportation business and warehousing business;(v)publishing business and printing business;(vi)advertising agency business, insurance agency business, broadcasting enterprise, recreation business such as travel, management of sporting facilities, etc. and other service enterprises;(vii)financial business;(viii)Type I and Type II telecommunications business under the Telecommunications Business Law;(ix)investing in stocks and bonds, etc.;(x)manufacture, sale, export and import of products which are incidental to or related to those mentioned above;(xi)rendering of services related to those mentioned above;(xii)investment in businesses mentioned above operated by other companies or persons; and(xiii)all businesses which are incidental to or related to those mentioned above.DirectorsUnder the Commercial Code (including the Law for Special Exceptions to the Commercial Code concerning Audit, etc. ofKabushiki-Kaisha, collectively the “Commercial Code”), Directors have no power to execute the business of Sony Corporation except in limited circumstances permitted by law. If a Director also serves concurrently as a Corporate Executive Officer, then he or she can execute the business of Sony Corporation in the capacity of Corporate Executive Officer. Under the Commercial Code, Directors must refrain from engaging in any business competing with Sony Corporation unless approved by the Board of Directors, and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The amount of remuneration to each Director is determined by the Compensation Committee which consists of Directors, the majority of whom are outside Directors (refer to “Board Practices” in “Item 6.Directors, Senior Management and Employees”). No member of the Compensation Committee may vote on a resolution with respect to his or her own compensation as a Director or a Corporate Executive Officer. Except as stated below, neither the Commercial Code nor Sony Corporation’s Articles of Incorporation make a special provision as to the borrowing powers exercisable by Directors, their retirement age, or a requirement to hold any shares of capital stock of Sony Corporation. The Commercial Code specifically requires a resolution of the Board of Directors, or a determination of the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors, for Sony Corporation to acquire or dispose of material assets; to borrow a substantial amount of money; to employ or discharge from employment important employees, such as general managers; and to establish, change or abolish a material corporate organization such as a branch office. The Regulations of the Board of Directors of Sony Corporation require a109resolution of the Board of Directors for Sony Corporation’s lending in an amount not less than one hundred billion yen or its equivalent.Capital stockUnless otherwise indicated or the context otherwise requires, the following discussion applies equally to both the shares of Common Stock and the shares of subsidiary tracking stock.(General) Set forth below is information relating to Sony Corporation’s capital stock, including brief summaries of the relevant provisions of Sony Corporation’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Commercial Code and related legislation. In order to assert shareholders’ rights against Sony Corporation, a shareholder must, except as set forth below, have its name and address registered on Sony Corporation’s register of shareholders, in accordance with Sony Corporation’s Share Handling Regulations. The registered beneficial holder of deposited shares underlying the American Depositary Shares (“ADSs”) is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights against Sony Corporation. UFJ Trust Bank Limited is the transfer agent for Sony Corporation’s capital stock. As such, it keeps Sony Corporation’s registers of shareholders and beneficial shareholders in its office at 4-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo, and records transfers of shares upon presentation of the certificates representing the transferred shares.A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with Japan Securities Depository Center, Inc., or JASDEC. If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or bank having a clearing account with JASDEC. All shares deposited with JASDEC will be registered in the name of JASDEC on Sony Corporation’s register of shareholders. Each participating shareholder will in turn be registered on Sony Corporation’s register of beneficial shareholders and be treated in the same way as shareholders registered on Sony Corporation’s register of shareholders. Entry of the share transfer in the book maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial shareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Sony Corporation. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for these purposes. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates.(Authorized capital) Article 5 of the Articles of Incorporation of Sony Corporation provides that Sony Corporation may issue both shares of Common Stock and shares of subsidiary tracking stock. Subsidiary tracking stock is stock which dividend rights track the dividend rights of a particular subsidiary of Sony Corporation. The rights of the holders of such stock may be different from those of the holders of Sony Corporation’s Common Stock in certain other respects such as rights to receive residual assets in the event of liquidation of Sony Corporation. Paragraph 2 of Article 5 of Sony Corporation’s Articles of Incorporation provides that the total number of shares authorized to be issued by Sony Corporation is 3.6 billion shares, of which 3.5 billion shares shall be Common Stock and 100 million shares shall be subsidiary tracking stock. If shares of Common Stock are retired or shares of subsidiary tracking stock are either retired or converted into shares110of Common Stock, the respective numbers of shares so retired or converted shall be deducted from the respective total numbers of shares authorized to be issued by Sony Corporation.All shares of capital stock of Sony Corporation have no par value.(Dividends) The Articles of Incorporation of Sony Corporation provide that the accounts shall be closed on March 31 of each year. Year-end dividends, if any, shall be paid to shareholders, beneficial shareholders and pledgees of record as of the end of such day. After the close of the fiscal period, a Corporate Executive Officer designated by the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Audit Committee and to independent certified public accountants and then submitted for approval to the Board of Directors. If each independent certified accountant states in his or her audit report the opinion that the financial statements prepared by such Corporate Executive Officer and proposed allocation of profits are in accordance with relevant laws and the Articles of Incorporation, and if the Audit Committee does not state in its audit report any objection to such independent accountants’ opinion or an opinion that the proposed allocation of profits is significantly inappropriate, such proposal shall be deemed to be approved by the shareholders when approved by the Board of Directors. In addition to year-end dividends, the Board of Directors may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) to shareholders, beneficial shareholders and pledgees of record at the end of each September 30, without shareholders’ approval, but subject to the limitation described below. The Commercial Code provides that a company may not make any distribution of profit by way of dividends or interim dividends 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, or equal to one-tenth of the amount of interim dividends, until the aggregate amount of its additional paid-in capital and its legal reserve is at least one-quarter of its stated capital. Under the Commercial Code, Sony Corporation is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets, on a non-consolidated basis, 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)such other amounts as are provided for by an ordinance of the Ministry of Justice.In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet as at the last date of the preceding fiscal year, but adjusted to reflect (a) the legal reserve to be set aside in respect of interim dividends, (b) any subsequent payment by way of appropriation of retained earnings and transfer to legal reserve in respect thereof, (c) any subsequent transfer of retained earnings to stated capital and (d) if Sony Corporation has been authorized, pursuant to a resolution of an Ordinary General Meeting of Shareholders, a resolution of the Board of Directors or both, to purchase shares of its Common Stock or shares of its subsidiary tracking stock (refer to “(Acquisition by Sony Corporation of its capital stock)” and “Subsidiary tracking stock — (Acquisition by Sony Corporation of its subsidiary tracking stock)” below), the total amount of the purchase price of such shares so authorized by such resolution that may be paid by Sony Corporation and (e) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan, provided that the amount distributable as interim dividends, as described above, will be increased by (x) any amount reduced by Sony Corporation if Sony Corporation reduces the amount of its stated capital, additional paid-in capital or accumulated legal reserve after the end of the preceding fiscal year, less the amount paid to shareholders upon such reduction and certain other amounts, and (y) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan.111 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.Under its Articles of Incorporation, Sony Corporation is not obliged to pay any dividends which are left unclaimed for a period of five years after the date on which they first became payable.(Stock Splits) Sony Corporation may at any time split shares in issue into a greater number of shares by a resolution of the Executive Board.In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made Sony Corporation must give public notice of the stock split, specifying the record date thereof, at least two weeks prior to such record date. In addition, promptly after the stock split takes effect Sony Corporation must give notice to each shareholder specifying the number of shares to which such shareholder is entitled by virtue of the stock split.(General Meeting of Shareholders) The Ordinary General Meeting of Shareholders of Sony Corporation for each fiscal year is normally held in June of each year in Tokyo, Japan. In addition, Sony Corporation may hold an Extraordinary General Meeting of Shareholders whenever necessary by giving notice thereof at least two weeks prior to the date set for the meeting. 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 such shareholder’s resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Under the Commercial Code, such notice may be given to shareholders by electronic means, subject to obtaining consent by the relevant shareholders. The record date for an Ordinary General Meeting of Shareholders is March 31 of each year. Any shareholder or group of shareholders holding at least three percent of the total number of voting rights for a period of six months or more may require the convocation of a General Meeting of Shareholders for a particular purpose. Unless such shareholders’ meeting is convened promptly or a convocation notice of a meeting which is to be held not later than eight weeks from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such a shareholders’ meeting.Any shareholder or group of shareholders holding at least 300 voting rights or one percent of the total number of voting rights for a period of six months or more may propose a matter to be considered at a General Meeting of Shareholders by submitting a written request to Sony Corporation at least eight weeks prior to the date set for such meeting.(Voting rights)So long as Sony Corporation maintains the unit share system, a holder of shares (whether shares of Common Stock or shares of subsidiary tracking stock) constituting one or more units is entitled to one vote for each such unit of stock (refer to “(Unit share system)” below, currently 100 shares constitute one unit), except that no voting rights with respect to shares of capital stock of Sony Corporation are afforded to Sony Corporation or any corporate shareholder more than one-quarter of the total voting rights of which are directly or indirectly held by Sony Corporation. If Sony Corporation eliminates from its Articles of Incorporation the provisions relating to units of stock, holders of capital stock will have one vote for each share they hold. Except as otherwise provided by law or by the Articles of Incorporation of Sony Corporation, a resolution can be adopted at a General Meeting of Shareholders by a majority of the number of voting rights of all the shareholders represented at the meeting. The Commercial Code and Sony Corporation’s Articles of Incorporation provide, however, that the quorum for the election of112Directors shall not be less than one-third of the total number of voting rights of all the shareholders. Sony Corporation’s shareholders are not entitled to cumulative voting in the election of Directors. Shareholders may cast their votes in writing and may also exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Shareholders may also exercise their voting rights by electronic means pursuant to the method designated by Sony Corporation.The Commercial Code and the Articles of Incorporation of Sony Corporation provide that in order to amend the Articles of Incorporation and in certain other instances, including a reduction of stated capital, the removal of a Director, dissolution, merger or consolidation requiring shareholders resolution, the transfer of the whole or a substantial part of the business, the taking over of the whole of the business of any other corporation requiring shareholders resolution, share exchange or share transfer requiring shareholders resolution for the purpose of establishing 100 percent parent-subsidiary relationships, any splitting of the company into two or more corporations requiring shareholders resolution, any offering of new shares at a “specially favorable” price to any persons other than shareholders, any granting of rights to subscribe for or acquire shares from Sony Corporation (shinkabu-yoyakuken; “stock acquisition rights”) or bonds with stock acquisition rights, under “specially favorable” conditions to any persons other than shareholders, the quorum shall be one-third of the total number of voting rights of all the shareholders, and the approval by at least two-thirds of the number of voting rights of all the shareholders represented at the meeting is required (the “special shareholders resolutions”).(Issue of additional shares and pre-emptive rights)Holders of Sony Corporation’s shares of capital stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares (whether of Common Stock or of subsidiary tracking stock) may be issued at such times and upon such terms as the Board of Directors or the Executive Board determines, subject to the limitations as to the offering of new shares at a “specially favorable” price mentioned under “(Voting rights)” above. The Board of Directors or the Executive Board may, however, determine that shareholders of a particular class of stock shall be given subscription rights regarding a particular issue of new shares of that class, in which case such rights must be given on uniform terms to all shareholders of that class of stock as at a record date of which not less than two weeks’ prior 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.Subject to certain conditions, Sony Corporation may issue stock acquisition rights by a resolution of the Board of Directors or the Executive Board. Holders of stock acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their stock acquisition rights. Upon exercise of stock acquisition rights, Sony Corporation will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of treasury stock held by it.(Liquidation rights)In the event of a liquidation of Sony Corporation, the assets remaining after payment of all debts, liquidation expenses and taxes will, subject to the rights of the holders of subsidiary tracking stock discussed under “Subsidiary tracking stock —(Distribution of residual assets)” below, be distributed among the holders of shares of Common Stock in proportion to the respective numbers of shares of Common Stock held.(Record date) March 31 is the record date for Sony Corporation’s year-end dividends, if declared. So long as Sony Corporation maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more unit of stock in Sony Corporation’s register of shareholders and/or beneficial 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 year ending on such March 31.113September 30 is the record date for interim dividends. In addition, Sony Corporation may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights and for other purposes by giving at least two weeks prior public notice.The price of 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.(Acquisition by Sony Corporation of its capital stock)Sony Corporation may acquire its own shares through a stock exchange on which such shares are listed (pursuant to an ordinary resolution of an Ordinary General Meeting of Shareholders or a resolution of the Board of Directors), by way of tender offer (pursuant to an ordinary resolution of an Ordinary General Meeting of Shareholders or a resolution of the Board of Directors), by purchase from a specific party other than a subsidiary of Sony Corporation (pursuant to a special resolution of an Ordinary General Meeting of Shareholders) or from a subsidiary of Sony Corporation (pursuant to a resolution of the Executive Board). When such acquisition is made by Sony Corporation from a specific party other than a subsidiary of Sony Corporation, any other shareholder may make a request to the Company in writing, not later than five days prior to the relevant shareholders’ meeting, to include him/her as a seller in the proposed purchase. Any such acquisition of shares must satisfy certain requirements, including that in cases other than the acquisition by Sony Corporation of its own shares pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the sum of the amount of retained earnings available for year-end dividend payments after taking into account any reduction, if any, of the stated capital, additional paid-in capital or legal reserve (if such reduction of the stated capital, additional paid-in capital or legal reserve has been authorized pursuant to a resolution of the relevant Ordinay General Meeting of Shareholders), minus the sum of the amount to be paid by way of appropriation of retained earnings for the relevant fiscal year and the amount to be transferred to stated capital in respect of the relevant fiscal year pursuant to a resolution of such General Meeting of Shareholders. If Sony Corporation purchases shares pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the amount of the retained earnings available for an interim dividend payment minus the amount of any interim dividend Sony Corporation actually paid. However, if it is anticipated that the net assets on the non-consolidated balance sheet as at the end of the relevant fiscal year will be less than the aggregate amount of the stated capital, additional paid-in capital and other items as described in (i) through (v) to “(Dividends)” above, Sony Corporation may not acquire such shares.Shares acquired by Sony Corporation may be held by it for any period or may be retired by resolution of the Executive Board. Sony Corporation may also transfer (public or private sale or otherwise) to any person the shares held by it, subject to a resolution of the the Executive Board, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in “(Issue of additional shares and pre-emptive rights)” above. Sony Corporation may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.(Unit share system) The Articles of Incorporation of Sony Corporation provide that 100 shares constitute one “unit” of shares of stock. The Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors is permitted to amend the Articles of Incorporation to reduce the number of shares that constitute a unit or to abolish the unit share system entirely. The number of shares constituting one unit cannot exceed 1,000 shares or one-two hundredth (1/200) of the aggregate number of all issued shares.114 Under the unit share system, shareholders have one voting right for each unit of stock that they hold. Any number of shares less than one full unit have no voting rights nor rights related to voting rights. The Articles of Incorporation of Sony Corporation provide that no share certificates may be issued with respect to any number of shares constituting less than one full unit, unless Sony Corporation deems the issue of such share certificates to be necessary for any shareholder(s). As the transfer of shares normally requires delivery of the certificates therefor, fractions of a unit for which no share certificate has been issued are not transferable. Except as otherwise described above, holders of the shares constituting less than one full unit will have all the rights granted to shareholders under the Commercial Code. A holder of shares constituting less than one full unit may require Sony Corporation to purchase such Shares at their market value in accordance with the provisions of the Share Handling Regulations of Sony Corporation. The Articles of Incorporation of Sony Corporation provide that a holder of shares constituting less than one full unit may request Sony Corporation to sell to such holder such amount of shares which will, when added together with the shares constituting less than one full unit, constitute one full unit of stock. Such request by a holder and the sale by Sony Corporation must be made in accordance with the provisions of the Share Handling Regulations of Sony Corporation.A holder who owns ADRs evidencing less than 100 ADSs will indirectly own less than one full unit. Although, as discussed above, under the unit share system holders of less than one full unit have the right to require Sony Corporation to purchase their shares or sell shares held by Sony Corporation to such holders, holders of ADRs evidencing ADSs that represent other than integral multiples of whole units are unable to withdraw the underlying shares of capital stock representing less than one full unit and, therefore, are unable, as a practical matter, to exercise the rights to require Sony Corporation to purchase such underlying shares or sell shares held by Sony Corporation to such holders. 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 less than one full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.(Sale by Sony Corporation of shares held by shareholders whose location is unknown) Sony Corporation is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation continuously for five years or more.In addition, Sony Corporation may sell or otherwise dispose of shares of capital stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, and (ii) the shareholder fails to receive dividends on the shares continuously for five years or more at the address registered in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, Sony Corporation may sell or otherwise dispose of the shareholder’s shares at the then market price of the shares by a determination of the Corporate Executive Officer serving as Group Chief Strategy Officer and after giving at least three months’ prior public and individual notice, and hold or deposit the proceeds of such sale or disposal of shares for such shareholder.Subsidiary tracking stock By a special resolution of the Extraordinary General Meeting of Shareholders held on January 25, 2001, Sony Corporation’s Articles of Incorporation were amended to enable Sony Corporation to issue shares of subsidiary tracking stock. By resolutions of the Board of Directors dated May 15 and 31, 2001, Sony Corporation created and issued 3,072,000 shares of a series of subsidiary tracking stock. The subsidiary whose economic value this series of subsidiary tracking stock tracks is Sony Communication115Network Corporation (“SCN”), a Japanese corporation directly and indirectly wholly-owned by Sony Corporation. Except as otherwise stated in the preceding paragraphs and as stated in the following paragraphs, the shares of the subsidiary tracking stock have the same rights and characteristics as those of shares of Common Stock described above.(Dividends)The dividend (the year-end dividend and the interim dividend) on the shares of this series of subsidiary tracking stock is payable only when the board of directors of SCN has resolved to pay to the holders of its common stock a dividend (in the case of year-end dividend, SCN’s year-end dividend, and in the case of interim dividend, SCN’s interim dividend) in an amount per share of the subsidiary tracking stock equal to the smaller of the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the Articles of Incorporation: currently one one-hundredth, which is subject to adjustment in the occurrence of certain dilutive events) or 100,000 yen multiplied by the Standard Ratio per share (the “Maximum Dividend Amount”), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock referred to under “Capital stock —(Dividends)” above. If the amount of interim dividend paid to the holders of shares of a series of subsidiary tracking stock for any fiscal year is less than the amount calculated in accordance with the foregoing formula, such shortfall will be added to the amount of the year-end dividend of such fiscal year. If the amount of dividends paid to the holders of shares of a series of subsidiary tracking stock is less than the amount which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the holders of shares of the subsidiary tracking stock for subsequent fiscal period(s), subject to the statutory limitation set forth above and the Maximum Dividend Amount. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the holders of shares of Common Stock. However, the holders of shares of subsidiary tracking stock have no right to participate in the dividends to holders of shares of Common Stock. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to the holders of SCN common stock, Sony Corporation may decide to pay dividends to the holders of its Common Stock.(Voting rights)The holders of shares of subsidiary tracking stock have the same voting rights, subject to the same limitation on voting rights, as those of the holders of shares of Common Stock and, thus, are entitled to participate and vote at any General Meeting of Shareholders in the same way as the shareholders of Common Stock. In addition, as each series of subsidiary tracking stock is a separate class of stock different from the Common Stock, if any resolution of the General Meeting of Shareholders for amending the Articles of Incorporation, any granting to shareholders of any series of subsidiary tracking stock certain rights with respect to certain matters including the issue of new shares, stock acquisition rights, bonds with stock acquisition rights, consolidation, split, purchase or retirement of shares, share exchange or share transfer, or a merger or consolidation or splitting of Sony Corporation would adversely affect the rights of the holders of shares of a particular class or classes of subsidiary tracking stock, the holders of shares of each such class of subsidiary tracking stock will have the right to approve or disapprove such resolution by a special resolution of the meeting of holders of shares of that class of subsidiary tracking stock.(Distribution of residual assets) In the event of distribution of residual assets to the shareholders of Sony Corporation, as long as such assets include shares of common stock of SCN, the number of shares of SCN common stock obtained by multiplying the number of shares of the subsidiary tracking stock held by each holder by the Standard Ratio (if the total number of shares of SCN common stock available for distribution is less than the total number so to be distributed, the lesser number adjusted in proportion to the respective numbers of shares of the subsidiary tracking stock held by such holders) or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of shares of the subsidiary116tracking stock. Such distribution will be made in priority to the distribution of residual assets to the holders of shares of Common Stock. No other distribution of residual assets will be made to the holders of shares of subsidiary tracking stock.(Acquisition of shares of tracking stock)The shares of subsidiary tracking stock may be subject to acquisition in the same manner and under the same restriction as the shares of Common Stock referred to under “Capital stock —(Acquisition by Sony Corporation of its capital stock)” above. In addition, Sony Corporation may at any time retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the holders thereof an amount equal to the current market price (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments.Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Commercial Code for the reduction of capital upon payment to the holders of shares of the subsidiary tracking stock an amount equal to the market value thereof as set forth above.(Conversion of subsidiary tracking stock)So long as the shares of Sony Corporation’s Common Stock are listed or registered on any stock exchange or over-the-counter market (a “Stock Exchange”), Sony Corporation may at any time convert the entire amount of all outstanding shares of the subsidiary tracking stock into shares of Sony Corporation’s Common Stock at the rate of the multiple of 1.1 of the market value (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of shares of Sony Corporation’s Common Stock.(Compulsory termination) If any of the following events occurs, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above:(i)SCN transfers its assets representing 80 percent or more of the total assets appearing on its most recent consolidated balance sheet or transfers its business as a result of which its consolidated revenue is expected to decrease by 80 percent or more from its most recent consolidated profit and loss statement;(ii)SCN ceases to be a subsidiary of Sony Corporation;(iii)the number of shares of capital stock of SCN which Sony Corporation directly holds becomes less than the total number of outstanding shares of tracking stock multiplied by the Standard Ratio and such situation continues for a period of 3 months or more;(iv)a resolution was taken by SCN’s shareholders for its dissolution;(v)certain events of bankruptcy; or(vi)occurrence of any event which causes de-listing or de-registration of the subsidiary tracking stock from all Stock Exchanges where the tracking stock is listed or registered. If the shares of capital stock of SCN are approved by any Stock Exchange for listing or registration thereon, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above on the date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors prior to the date of such approval of the Stock Exchange; or, they may be retired in their entirety by117distributing the number of shares of SCN common stock to each holder of shares of the subsidiary tracking stock at the rate calculated by multiplying the number of such shares by the Standard Ratio on the date of such listing or registration or the date prior to such date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors.(Miscellaneous)Either or both of the shares of Common Stock and the shares of subsidiary tracking stock may be consolidated or split at the same ratio or at different ratios. The holders of shares of Common Stock and/or the holders of shares of subsidiary tracking stock may be allotted rights to subscribe for new shares (to the holders of Common Stock, new shares of Common Stock, and to the holders of subsidiary tracking stock, new shares of subsidiary tracking stock) at the same ratio or different ratios and on different conditions.Reporting of substantial shareholdings The Securities and Exchange Law of Japan and its related regulations require any person, regardless of residence, who has become, beneficially and solely or jointly, a holder of more than five percent of the total issued shares of capital stock 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 Director General of the competent Regional Finance Bureau of the Ministry of Finance within five business days a report concerning such shareholdings. A similar report must also be filed in respect of any subsequent change of one percent or more in any such holding, with certain exceptions. For this purpose, shares issuable to such persons upon conversion of convertible securities or exercise of share subscription warrants or stock acquisition rights are taken into account in determining both the number of shares held by such holders and the issuer’s total issued share capital. Copies of 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. Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial Code or Sony Corporation’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to Sony Corporation or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the shares of capital stock of Sony Corporation.There is no provision in Sony Corporation’s Articles of Incorporation or by-laws that would have an effect of delaying, deferring or preventing a change in control of Sony Corporation and that would operate only with respect to merger, acquisition or corporate restructuring involving Sony Corporation.Material ContractsNoneExchange Controls The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the“Foreign Exchange Regulations”) govern the acquisition and holding of shares of capital stock of Sony Corporation by “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.118 Exchange non-residents are:• individuals who do not reside in Japan; and• corporations whose principal offices are located outside Japan. Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents. Foreign investors are:• individuals who are exchange non-residents;• corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and• corporations (1) of which 50 percent or more of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents. In general, the acquisition of shares of a Japanese company (such as the shares of capital stock of Sony Corporation) by an exchange non-resident from a resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where a resident of Japan transfers shares of a Japanese company (such as the shares of capital stock of Sony Corporation) for consideration exceeding 100 million yen to an exchange non-resident, the resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law. If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of capital stock of Sony Corporation) or that is traded on an over-the-counter market in Japan and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 10 percent or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.Under the Foreign Exchange Regulations, dividends paid on and the proceeds from sales in Japan of shares of capital stock of Sony Corporation held by non-residents of Japan may generally be converted into any foreign currency and repatriated abroad.TaxationThe following is a summary of the major Japanese national tax and U.S. federal tax consequences of the ownership, acquisition and disposition of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation by a non-resident of Japan or a non-Japanese corporation without a permanent establishment in Japan. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor depending on its individual circumstances. Accordingly, holders of shares of Common Stock or119ADSs of Sony Corporation are encouraged to consult their tax advisors regarding the application of the considerations discussed below to their particular circumstances. U.S. holders (as defined below) should note that the United States and Japan have ratified the new income tax convention (the “New Treaty”), which is to replace its predecessor income tax convention signed on March 8, 1971 (the “Prior Treaty”). The New Treaty entered into force on March 30, 2004 and shall be applicable in Japan, in place of the Prior Treaty, (i) with respect to taxes withheld at source, for amounts taxable on or after July 1, 2004, and (ii) with respect to taxes on income which are not withheld at source and the enterprise taxes, as regards income for any taxable year beginning on or after January 1, 2005 (subject to certain transitional rules with respect to both items (i) and (ii) above). The Prior Treaty shall cease to have effect in relation to any tax from the date on which the New Treaty shall be applicable (subject to certain transitional rules allowing for exceptions). Where relevant, U.S. holders are urged to confirm with their tax advisors whether they are entitled to the treaty benefit provided under the Prior Treaty or the New Treaty, as the case may be. In addition, this summary is based upon the representations of the Depositary and the assumption that each obligation in the deposit agreement in relation to the ADSs dated as of June 1, 1961, as amended and restated as of October 31, 1991, as further amended and restated as of March 17, 1995, and in any related agreement, will be performed under its terms. For purposes of the Prior Treaty and/or New Treaty and the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. holders of ADSs generally will be treated as owning the Common Stock underlying the ADSs evidenced by the ADRs. For the purposes of the following discussion, a “U.S. holder” is a holder that:(i)is a resident of the U.S. for purposes of the Prior Treaty or the New Treaty, as applicable from time to time;(ii)does not maintain a permanent establishment or fixed base in Japan to which shares of Common Stock or ADSs of Sony Corporation 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)is not otherwise ineligible for benefits under the Prior Treaty or the New Treaty, as applicable, with respect to income and gain derived in connection with shares of Common Stock or ADSs of Sony Corporation.Japanese Taxation The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation who are non-resident individuals or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”). Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Sony Corporation withholds taxes from dividends it pays as required by Japanese law. Stock splits in themselves are not subject to Japanese income tax. In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to individuals who are non-residents of Japan or non-Japanese corporations is 20 percent. With respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of Common Stock of Sony Corporation) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or Japanese non-resident individuals, such as non-resident Holders), except for any individual shareholder who holds 5 percent or more of the total shares issued by the relevant Japanese corporation, the aforementioned 20 percent withholding tax rate is reduced to (i) 7 percent for dividends due and payable on or before120March 31, 2008, and (ii) 15 percent for dividends due and payable on or after April 1, 2008. As of the date of this document, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the U.K. Under the Prior Treaty, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to a U.S. holder that is a portfolio investor was limited to 15 percent of the gross amount actually distributed. However, under the New Treaty which would become applicable to dividends declared by Sony Corporation on or after July 1, 2004, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to a U.S. holder that is a portfolio investor is generally limited to 10 percent of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to a U.S. holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund. If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Sony Corporation to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance through Sony Corporation to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits two Application Forms (one before payment of dividends and the other within eight months after Sony Corporation’s fiscal year-end). To claim this reduced rate or exemption, a non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced rate which is lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the full amount of tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority. Sony Corporation does not assume any responsibility to ensure withholding at the reduced treaty rate or to ensure not withholding for shareholders who would be eligible under any applicable income tax treaty but do not follow the required procedures as stated above. Gains derived from the sale of shares of Common Stock or ADSs of Sony Corporation outside Japan by a non-resident Holder holding such shares or ADSs as portfolio investors are, in general, not subject to Japanese income or corporation tax. U.S. holders are not subject to Japanese income or corporation tax with respect to such gains under the Prior Treaty or the New Treaty, as applicable. Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of Common Stock or ADSs of Sony Corporation as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident. Holders of shares of Common Stock or ADSs of Sony Corporation should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.121United States Taxation with respect to shares of Common Stock and ADSs The U.S. dollar amount of dividends received (prior to deduction of Japanese taxes) by a U.S. holder of ADSs 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 Sony Corporation as determined for U.S. federal income tax purposes. Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2009 with respect to the ADSs or Common Stock will be subject to taxation at a maximum rate of 15 percent if the dividends are “qualified dividends.” Dividends paid on the Common Stock or ADSs will be treated as qualified dividends if we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”), foreign personal holding company (“FPHC”) or foreign investment company (“FIC”). Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC, FPHC or FIC for U.S. federal income tax purposes with respect to our 2003 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC, FPHC or FIC for the 2004 taxable year. The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or Common Stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of ADSs and Common Stock should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of the considerations discussed above and their own particular circumstances. Subject to limitations set out in the Code, a U.S. holder of ADSs or Common Stock of Sony Corporation will be entitled to a credit for Japanese tax withheld in accordance with the Tax Convention from dividends paid by 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 Sony Corporation to U.S. corporate holders of ADSs or Common Stock will not be eligible for the dividends-received deduction.In general, a U.S. holder will recognize capital gain or loss upon the sale or other disposition of ADSs or Common Stock equal to the difference between the amount realized on the sale or disposition and the U.S. holder’s tax basis in the ADSs or Common Stock. Such capital gain or loss will be long-term capital gain or loss if the ADSs or Common Stock have been held for more than one year. The net amount of long-term capital gain recognized by an individual holder after May 5, 2003 and before January 1, 2009 generally is subject to taxation at a maximum rate of 15 percent. The net long-term capital gain recognized by an individual holder before May 6, 2003 or after December 31, 2008 generally is subject to taxation at a maximum rate of 20 percent.Dividends and Paying AgentNot ApplicableStatement by ExpertsNot ApplicableDocuments on Display It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. You can also access the documents at the SEC’s home page (http://www.sec.gov/index.html).122105Subsidiary InformationSelling ShareholdersItem 11.10.Quantitative and Qualitative Disclosures About Market Risk Sony’s normal course of business is continuously exposed to market fluctuations, such as fluctuations in currency exchange rates, interest rates or stock prices. Sony utilizes several derivative instruments, such as foreign exchange forward contracts, foreign currency option contracts, interest rate swap agreements and currency swap agreements in order to hedge the potential downside risk on the cash flow from the normal course of business caused by market fluctuation. Sony uses foreign exchange forward contracts and foreign currency option contracts primarily to reduce the foreign exchange volatility risk that accounts receivable or accounts payable denominated in yen, U.S. dollars, euros or other currencies have through the normal course of Sony’s worldwide business. Interest rate swap agreements and currency swap agreements are utilized to diversify funding conditions or to reduce funding costs. Sony uses these derivative financial instruments solely for risk-hedging purposes as described above, and no derivative transactions are held or utilized for trading purposes. If hedge accounting cannot be applied because the accounts receivables or accounts payables to be hedged are not yet booked, or because cash flows from derivative transactions do not coincide with the underlying exposures recorded on Sony’s balance sheet, then Sony understands that such derivatives agreements should be subject to a mark-to-market evaluation and their unrealized gains or losses are recognized in earnings. In addition, Sony holds marketable securities in the Financial Services segment in order to realize interest income or capital gain on the financial assets under management. Sony understands that such investment in marketable securities is also subject to market fluctuation. Sony measures the economic impact of market fluctuations on the value of derivatives agreements and marketable securities by using Value-at-Risk (“VaR”) analysis in order to comply with Item 11 disclosure requirements. VaR in this context indicates 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. Until March 31, 2004, Sony disclosed market risk solely on a consolidated basis. Henceforth, however, in addition to disclosing market risk on a consolidated basis, Sony will make two additional disclosures: (i) the risk for the Financial Services segment and (ii) the risk for all other segments excluding Financial Services. Sony believes that such a comparative presentation may be useful in understanding and analyzing Sony’s market risk on a consolidated basis, since the risks faced by the Financial Services segment are different from those faced by Sony’s other business segments. The following table shows the results of VaR. These analyses for the fiscal year ending March 31, 2004 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. The VaR of currency exchange rate risk principally consists of risks arising from the volatility of the exchange rates between the yen and U.S. dollar and between the yen and the euro, the currencies in which a significant amount of financial assets and liabilities and derivative transactions are maintained on a consolidated basis. The VaR of interest rate risk and stock price risk consist of risks arising from the volatility of the interest rates and stock prices against trading securities in the Financial Services segment. 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 and potential profits and losses arising from each component of market risk may to some degree be mutually offsetting. The disclosed VaR amounts simply represents the calculated potential maximum loss on the specified dates and do not necessarily indicate an estimate of actual or future loss.123Consolidated March 31, June 30, September 30, December 31, March 31, 2003 2003 2003 2003 2004 (Yen in billions) Net VaR 0.7 1.1 1.3 1.7 2.1 VaR of currency exchange rate risk 0.3 0.8 1.2 0.5 1.1 VaR of interest rate risk 0.1 0.3 0.4 0.4 0.7 VaR of stock price risk 0.8 0.8 0.6 1.8 1.7 Financial Services March 31, June 30, September 30, December 31, March 31, 2003 2003 2003 2003 2004 (Yen in billions) Net VaR 0.7 0.8 0.8 1.5 1.5 VaR of currency exchange rate risk 0.0 0.0 0.0 0.0 0.0 VaR of interest rate risk 0.1 0.4 0.5 0.5 0.8 VaR of stock price risk 0.8 0.8 0.6 1.8 1.7 All other segments excluding Financial Services March 31, June 30, September 30, December 31, March 31, 2003 2003 2003 2003 2004 (Yen in billions) Net VaR 0.3 0.8 1.2 0.5 1.1 VaR of currency exchange rate risk 0.3 0.8 1.2 0.5 1.1 VaR of interest rate risk 0.0 0.1 0.2 0.1 0.1 VaR of stock price risk 0.0 0.0 0.0 0.0 0.0 Item 12.Description of Securities Other Than Equity SecuritiesNot ApplicableItem 13.Defaults, Dividend Arrearages and DelinquenciesNoneItem 14.Material Modifications to the Rights of Security Holders and Use of ProceedsIn June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”), a directly and indirectly wholly-owned subsidiary of Sony Corporation, which is engaged in Internet-related services. Regarding the rights of holders of Sony Corporation’s Common Stock and subsidiary tracking stock, refer to “Memorandum and Articles of Association” in “Item 10.Additional Information.”Item 15.Controls and Procedures Sony has carried out an evaluation(i) manufacture and sale of electronic and electrical machines and equipment, medical instruments, optical instruments and other equipment, machines and instruments; (ii) planning, production and sale of audio-visual software and computer software programs; (iii) manufacture and sale of metal industrial products, chemical industrial products and ceramic industrial products, textile products, paper products and wood-crafted articles, daily necessities, foodstuffs and toys, transportation machines, equipment, petroleum and coal products; (iv) real estate activities, construction business, transportation business and warehousing business; (v) publishing business and printing business; (vi) advertising agency business, insurance agency business, broadcasting enterprise, recreation business such as travel, management of sporting facilities, etc. and other service enterprises; (vii) financial business; (viii) Type I and Type II telecommunications business under the supervisionTelecommunications Business Law;(ix) investing in stocks and bonds, etc.; (x) manufacture, sale, export and import of products which are incidental to or related to those mentioned above; (xi) rendering of services related to those mentioned above; (xii) investment in businesses mentioned above operated by other companies or persons; and (xiii) all businesses which are incidental to or related to those mentioned above. (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) such other amounts as are provided for by an ordinance of the Ministry of Justice. (1) its liabilities; (2) its stated capital; (3) its additional paid-in capital and accumulated legal reserve; (4) other amounts as provided for by an ordinance of the Ministry of Justice; (5) (if Sony Corporation transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock after subtracting the book value thereof; (6) (if Sony Corporation decreased its stated capital after the end of the last fiscal year) the amount of decrease in its stated capital (excluding the amount transferred to the additional paid-in capital or legal reserve); (7) (if Sony Corporation decreased its additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of decrease in its additional paid-in capital or legal reserve (excluding the amount transferred to the stated capital); (8) (if Sony Corporation cancelled its treasury stock after the end of the last fiscal year) the book value of its treasury stock so cancelled; (9) (if Sony Corporation distributed surplus to shareholders after the end of the last fiscal year) the assets distributed to shareholders by way of such distribution of surplus; and (10) other amounts as provided for by an ordinance of the Ministry of Justice. (1) the book value of its treasury stock; (2) (if Sony Corporation transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock; (3) the losses as recorded for the period after the end of Sony Corporation’s last fiscal year until the date of an extraordinary settlement of account (if any) as provided for in an ordinance of the Ministry of Justice; and (4) other amounts as provided for by an ordinance of the Ministry of Justice. (1) the book value of Sony Corporation’s treasury stock; (2) (if Sony Corporation transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock after the end of Sony Corporation’s last fiscal year; (3) other amounts as provided for by an ordinance of the Ministry of Justice. (1) acquisition of its own shares from a specific party; (2) consolidation of shares; (3) any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to subscribe for or acquire shares of capital stock, or bonds with stock acquisition rights at “specially favorable” conditions) to any persons other than shareholders; (4) the participationremoval of Sony’s management, includinga Director (when the Group ChiefNew Company Law becomes effective, the removal of a Director who is elected by cumulative voting);(5) the exemption of liability of a Director or Corporate Executive Officer Group Chief Strategy Officer and Group Chief Financial Officer,with certain exceptions;(6) a reduction of stated capital (when the New Company Law becomes effective, with certain exceptions in which a shareholders’ resolution is not required); (7) (when the New Company Law becomes effective) a distribution of in-kind dividends which meets certain requirements; (8) dissolution, merger, or consolidation with certain exceptions in which a shareholders’ resolution is not required; (9) the transfer of the effectivenesswhole or a material part of the designbusiness;(10) the taking over of the whole of the business of any other corporation with certain exceptions in which a shareholders’ resolution is not required; (11) share exchange or share transfer for the purpose of establishing 100 percent parent-subsidiary relationships with certain exceptions in which a shareholders’ resolution is not required; or (12) separating of the corporation into two or more corporations with certain exceptions in which a shareholders’ resolution is not required, (i) SCN transfers its assets representing 80 percent or more of the total assets appearing on its most recent consolidated balance sheet or transfers its business as a result of which its consolidated revenue is expected to decrease by 80 percent or more from its most recent consolidated profit and operationloss statement;(ii) SCN ceases to be a subsidiary of Sony’s disclosure controlsSony Corporation;(iii) the number of shares of capital stock of SCN which Sony Corporation directly holds becomes less than the total number of outstanding shares of tracking stock multiplied by the Standard Ratio and procedures assuch situation continues for a period of March 31, 2004.3 months or more;(iv) a resolution was taken by SCN’s shareholders for its dissolution; (v) certain events of bankruptcy; or (vi) occurrence of any event which causes de-listing or de-registration of the subsidiary tracking stock from all Stock Exchanges where the tracking stock is listed or registered. • individuals who do not reside in Japan; and • corporations whose principal offices are inherentlocated outside Japan.• individuals who are exchange non-residents; • corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and • corporations (1) of which 50 percent or more of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents. (i) is a resident of the U.S. for purposes of the Treaty; (ii) does not maintain a permanent establishment in Japan (a) with which shares of Common Stock or ADSs of Sony Corporation are effectively connected or (b) of which shares of Common Stock or ADSs of Sony Corporation form part of the business property; and (iii) is eligible for benefits under the Treaty with respect to income and gain derived in connection with shares of Common Stock or ADSs of Sony Corporation. Item 11. Quantitative and Qualitative Disclosures about Market Risk June 30, September 30, December 30, March 31, 2004 2004 2004 2005 (Yen in billions) Net VaR 3.5 1.7 2.3 1.9 VaR of currency exchange rate risk 1.1 0.8 0.7 0.6 VaR of interest rate risk 0.2 0.1 0.1 0.1 VaR of stock price risk 3.1 1.5 2.1 1.7 June 30, September 30, December 30, March 31, 2004 2004 2004 2005 (Yen in billions) Net VaR 3.2 1.4 2.1 1.7 VaR of currency exchange rate risk 0.2 0.2 0.2 0.2 VaR of interest rate risk 0.2 0.1 0.1 0.1 VaR of stock price risk 3.1 1.5 2.1 1.7 June 30, September 30, December 30, March 31, 2004 2004 2004 2005 (Yen in billions) Net VaR 1.0 0.8 0.6 0.5 VaR of currency exchange rate risk 1.0 0.8 0.6 0.5 VaR of interest rate risk 0.0 0.0 0.0 0.0 VaR of stock price risk 0.0 0.0 0.0 �� 0.0 Item 12. Description of Securities Other Than Equity Securities Item 13. Defaults, Dividend Arrearages and Delinquencies Item 14. Material Modifications to the effectivenessRights of any systemSecurity Holders and Use of disclosure controlsProceedsItem 15. Controls and Procedures Item 16. [Reserved] Item 16A. Audit Committee Financial Expert Item 16B. Code of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon Sony’s evaluation,124the Group Chief Executive Officer, Group Chief Strategy Officer and Group Chief Financial Officer have concluded that, as of March 31, 2004, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports Sony files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.EthicsThere has been no change in Sony’s internal control over financial reporting during the fiscal year ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, Sony’s internal control over financial reporting.Item 16.[Reserved]Item 16A.Audit Committee Financial ExpertSony’s Board of Directors has determined that Mr. Yoshiaki Yamauchi and Mr. Akihisa Ohnishi each qualify as an “audit committee financial expert” as defined in this Item 16A, and are both “independent” as defined in Rule 10A-3 under the Securities and Exchange Act of 1934, as amended.Item 16B.Code of EthicsSony has adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. The code of ethics applies to Sony’s chief executive officer, chief financial officer, chief accounting officer and persons performing similar functions, as well as to directors and all other officers and employees of Sony Group, as defined in the code of ethics. The code of ethics is available athttp://www.sony.net/SonyInfo/Environment/management/code/pdf/codeofconduct.pdfItem 16C.Principal Accountant Fees and ServicesAudit and Non-Audit FeesPricewaterhouseCoopers has served as Sony’s principal accountant for the three fiscal years ended March 31, 2004. ChuoAoyama PricewaterhouseCoopers is a member firm of PricewaterhouseCoopers in Japan. The following table presents fees for audit and other services rendered by PricewaterhouseCoopers for the years ended March 31, 2004 and March 31, 2005.
March 31 | ||||||||
2004 | 2005 | |||||||
(Yen in millions) | ||||||||
Audit Fees | 2,118 | 1,939 | ||||||
Audit-Related Fees(1) | 284 | 570 | ||||||
Tax Fees(2) | 970 | 737 | ||||||
All Other Fees(3) | 150 | 68 | ||||||
3,522 | 3,314 | |||||||
(1) | Audit-Related Fees consist primarily of employee benefit plan audits and due diligence related to mergers. |
(2) | Tax Fees primarily include tax compliance, tax advice, tax planning and expatriate tax services. |
(3) | All Other Fees comprise fees for all other services not included in any of the other categories noted above. |
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(c) Total Number | (d) Maximum | |||||||||||||||
of Shares | Number of Shares | |||||||||||||||
(a) Total | Purchased as Part | that May Yet Be | ||||||||||||||
Number of | (b) Average | of Publicly | Purchased Under | |||||||||||||
Shares | Price Paid | Announced Plans | the Plans or | |||||||||||||
Period | Purchased | per Share | or Programs | Programs | ||||||||||||
April 1st — 30th, 2005 | 5,532 | 4,461.48 | N/A | N/A | ||||||||||||
May 1st — 31st, 2005 | 3,448 | 4,087.27 | N/A | N/A | ||||||||||||
June 1st — 30th, 2005 | 7,476 | 4,040.85 | N/A | N/A | ||||||||||||
July 1st — 31st, 2005 | 7,284 | 4,021.33 | N/A | N/A | ||||||||||||
August 1st — 31st, 2005 | 4,464 | 3,752.49 | N/A | N/A | ||||||||||||
September 1st — 30th, 2005 | 6,530 | 3,837.16 | N/A | N/A | ||||||||||||
October 1st — 31st, 2005 | 7,131 | 3,772.45 | N/A | N/A | ||||||||||||
November 1st — 30th, 2005 | 12,726 | 3,749.51 | N/A | N/A | ||||||||||||
December 1st — 31st, 2005 | 21,959 | 3,874.00 | N/A | N/A | ||||||||||||
January 1st — 31st, 2005 | 8,355 | 3,963.88 | N/A | N/A | ||||||||||||
February 1st — 28th, 2005 | 6,133 | 3,905.57 | N/A | N/A | ||||||||||||
March 1st — 31st, 2005 | 13,847 | 4,232.54 | N/A | N/A | ||||||||||||
Total | 104,885 | 3,960.99 | N/A | N/A |
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Item 17. | Financial Statements |
Item 18. | Financial Statements |
1.1 | Articles of Incorporation, including proposed amendments to be ratified at the Ordinary General Shareholders’ Meeting to be held on June 22, 2005 (English Translation) | |
1.2 | Regulations of the Board of Directors, as amended, including an amendment to be effective as of June 22, 2005 (English Translation) | |
8.1 | Significant subsidiaries (as defined in §210.1-02(w) of Regulation S-X) of Sony Corporation, including additional subsidiaries that management has deemed to be significant, as of March 31, 2005: Incorporated by reference to “Business Overview and Organizational Structure” in “Item 4. Information on the Company” | |
12.1 | Principal Executive Officer Certification Required by 17 C.F.R. 240.13a-14(a) | |
12.2 | Principal Financial Officer Certification Required by 17 C.F.R. 240.13a-14(a) | |
13 | Chief Executive Officer Certification required by 18 U.S.C. Section 1350 | |
Chief Financial Officer Certification required by 18 U.S.C. Section 1350 | ||
15.1 | Consent of ChuoAoyama PricewaterhouseCoopers |
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Sony Corporation | |
(Registrant) |
By: | /s/Katsumi Ihara |
(Signature) | |
Katsumi Ihara | |
Executive Deputy President | |
Group Chief Strategy Officer & | |
Group Chief Financial Officer |
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Consolidated Statements of Income for the years ended March 31, 2003, 2004 and
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Index to
Notes to Consolidated Financial Statements
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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 subsidiaries (“the Company”) at March 31, 2004 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 our opinion. As discussed in Note 2 to the consolidated financial statements, the Company changed its methods of accounting for long-duration life insurance contracts and separate accounts and its treatment of the effects of contingently convertible instruments on diluted earnings per share in the year ended March 31, 2005.
Tokyo, Japan May 27, 2005 F-2 (This page intentionally left blank) F-3 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEET
(Continued on following page.) F-4 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEET — (Continued)
The accompanying notes are an integral part of these statements. F-5 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Continued on following page.) F-6 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME — (Continued)
The accompanying notes are an integral part of these statements. F-7 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued on following page.) F-8 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
The accompanying notes are an integral part of these statements.. F-9 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Continued on following page.) F-10 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)
(Continued on following page.) F-11 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)
F-12 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Notes to Consolidated Financial Statements
Reconciliation of the differences between basic and diluted | F-64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
22. | Variable interest entities | F-65 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
23. | Commitments and | F-66 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
24. | Business segment information | F-68 |
F-13
1. | Nature of operations |
2. | Summary of significant accounting policies |
(1) | Newly adopted accounting pronouncements: |
F-14
F-15
F-16
F-17
F-18
F-19
Year Ended March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
(Yen in millions) | ||||||||||||
Income before cumulative effect of an accounting change allocated to common stock: | ||||||||||||
As reported | 115,648 | 90,756 | 168,498 | |||||||||
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects | (7,008 | ) | (6,334 | ) | (4,690 | ) | ||||||
Pro forma | 108,640 | 84,422 | 163,808 | |||||||||
Net income allocated to common stock: | ||||||||||||
As reported | 115,648 | 88,639 | 163,785 | |||||||||
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects | (7,008 | ) | (6,334 | ) | (4,690 | ) | ||||||
Pro forma | 108,640 | 82,305 | 159,095 | |||||||||
F-20
Year Ended March 31 | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
(Yen) | |||||||||||||
Income before cumulative effect of an accounting change allocated to common stock: | |||||||||||||
— Basic EPS: | |||||||||||||
As reported | 125.74 | 98.26 | 180.96 | ||||||||||
Pro forma | 118.12 | 91.40 | 175.92 | ||||||||||
— Diluted EPS: | |||||||||||||
As reported | 118.21 | 89.03 | 162.59 | ||||||||||
Pro forma | 111.20 | 82.96 | 158.10 | ||||||||||
Net income allocated to common stock: | |||||||||||||
— Basic EPS: | |||||||||||||
As reported | 125.74 | 95.97 | 175.90 | ||||||||||
Pro forma | 118.12 | 89.11 | 170.86 | ||||||||||
— Diluted EPS: | |||||||||||||
As reported | 118.21 | 87.00 | 158.07 | ||||||||||
Pro forma | 111.20 | 80.94 | 153.58 |
F-21
F-22
F-23
(3) | Recent Pronouncements: |
F-24
(4) | Reclassifications: |
3. | Inventories |
March 31 | ||||||||
2004 | 2005 | |||||||
(Yen in millions) | ||||||||
Finished products | 427,877 | 405,616 | ||||||
Work in process | 98,607 | 93,181 | ||||||
Raw materials, purchased components and supplies | 140,023 | 132,552 | ||||||
666,507 | 631,349 | |||||||
4. | Film costs |
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Theatrical: | |||||||||
Released (including acquired film libraries) | 136,057 | 119,438 | |||||||
Completed not released | 7,946 | 11,358 | |||||||
In production and development | 79,198 | 118,271 | |||||||
Television licensing: | |||||||||
Released (including acquired film libraries) | 33,378 | 29,894 | |||||||
In production and development | 161 | 0 | |||||||
256,740 | 278,961 | ||||||||
5. | Related party transactions |
F-25
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Current assets | 433,154 | 942,328 | |||||||
Property, plant and equipment | 94,130 | 361,406 | |||||||
Other assets | 57,756 | 250,245 | |||||||
Total assets | 585,040 | 1,553,979 | |||||||
Current liabilities | 397,242 | 876,430 | |||||||
Long-term liabilities | 27,639 | 115,999 | |||||||
Stockholders’ equity | 160,159 | 561,550 | |||||||
Total liabilities and stockholders’ equity | 585,040 | 1,553,979 | |||||||
Number of companies at end of the fiscal year | 66 | 56 |
Year Ended March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
(Yen in millions) | ||||||||||||
Sales and revenue | 785,697 | 1,009,005 | 1,473,273 | |||||||||
Gross profit | 140,078 | 231,083 | 477,796 | |||||||||
Net income (loss) | (81,422 | ) | 11,323 | 63,404 |
F-26
F-27
March 31 | ||||||||
2004 | 2005 | |||||||
(Yen in millions) | ||||||||
Accounts receivable, trade | 62,359 | 50,062 | ||||||
Advances | 561 | 16,756 | ||||||
Accounts payable, trade | 13,547 | 15,225 | ||||||
Year Ended March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
(Yen in millions) | ||||||||||||
Sales | 161,983 | 258,454 | 256,799 | |||||||||
Purchases | 102,735 | 106,100 | 101,976 | |||||||||
6. | Accounts receivable securitization programs |
F-28
7. | Marketable securities and securities investments and other |
March 31, 2004 | March 31, 2005 | |||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||
unrealized | unrealized | unrealized | unrealized | |||||||||||||||||||||||||||||||
Cost | gains | losses | Fair value | Cost | gains | losses | Fair value | |||||||||||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||||
Debt securities | 1,938,673 | 55,922 | (2,072 | ) | 1,992,523 | 2,090,605 | 58,161 | (2,464 | ) | 2,146,302 | ||||||||||||||||||||||||
Equity securities | 86,517 | 63,225 | (1,886 | ) | 147,856 | 107,126 | 49,350 | (814 | ) | 155,662 | ||||||||||||||||||||||||
Held-to-maturity securities | 26,439 | 381 | (28 | ) | 26,792 | 27,431 | 530 | (13 | ) | 27,948 | ||||||||||||||||||||||||
Total | 2,051,629 | 119,528 | (3,986 | ) | 2,167,171 | 2,225,162 | 108,041 | (3,291 | ) | 2,329,912 | ||||||||||||||||||||||||
F-29
Less than 12 Months | 12 months or more | Total | ||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||||
Fair value | losses | Fair value | losses | Fair value | losses | |||||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||
Debt securities | 242,388 | (2,044 | ) | 41,523 | (420 | ) | 283,911 | (2,464 | ) | |||||||||||||||||
Equity securities | 11,010 | (457 | ) | 1,225 | (357 | ) | 12,235 | (814 | ) | |||||||||||||||||
Held-to-maturity securities | 239 | (0 | ) | 660 | (13 | ) | 899 | (13 | ) | |||||||||||||||||
Total | 253,637 | (2,501 | ) | 43,408 | (790 | ) | 297,045 | (3,291 | ) | |||||||||||||||||
8. | Leased assets |
March 31 | ||||||||
Class of property | 2004 | 2005 | ||||||
(Yen in millions) | ||||||||
Land | 174 | 181 | ||||||
Buildings | 12,421 | 11,089 | ||||||
Machinery, equipment and others | 36,907 | 33,747 | ||||||
Accumulated depreciation | (19,385 | ) | (18,509 | ) | ||||
30,117 | 26,508 | |||||||
F-30
Yen in | |||||
millions | |||||
Year ending March 31: | |||||
2006 | 15,211 | ||||
2007 | 11,062 | ||||
2008 | 8,895 | ||||
2009 | 10,873 | ||||
2010 | 3,001 | ||||
Later years | 5,428 | ||||
Total minimum lease payments | 54,470 | ||||
Less — Amount representing interest | 14,169 | ||||
Present value of net minimum lease payments | 40,301 | ||||
Less — Current obligations | 11,713 | ||||
Long-term capital lease obligations | 28,588 | ||||
Yen in | |||||
millions | |||||
Year ending March 31: | |||||
2006 | 38,182 | ||||
2007 | 30,568 | ||||
2008 | 22,993 | ||||
2009 | 14,060 | ||||
2010 | 10,496 | ||||
Later years | 53,652 | ||||
Total minimum future rentals | 169,951 | ||||
9. | Goodwill and intangible assets |
F-31
March 31 | ||||||||||||||||
2004 | 2005 | |||||||||||||||
Gross | Gross | |||||||||||||||
carrying | Accumulated | carrying | Accumulated | |||||||||||||
amount | amortization | amount | amortization | |||||||||||||
(Yen in millions) | ||||||||||||||||
Artist contracts | 80,675 | (68,300 | ) | 15,218 | (11,094 | ) | ||||||||||
Music catalog | 109,795 | (47,610 | ) | 65,674 | (19,641 | ) | ||||||||||
Acquired patent rights | 52,996 | (23,172 | ) | 55,173 | (26,139 | ) | ||||||||||
Software to be sold, leased or otherwise marketed | 31,983 | (13,577 | ) | 31,907 | (16,181 | ) | ||||||||||
Other | 55,048 | (27,422 | ) | 27,648 | (11,625 | ) | ||||||||||
Total | 330,497 | (180,081 | ) | 195,620 | (84,680 | ) | ||||||||||
Yen in | |||||
millions | |||||
Year ending March 31, | |||||
2006 | 22,650 | ||||
2007 | 18,287 | ||||
2008 | 12,202 | ||||
2009 | 10,623 | ||||
2010 | 8,874 |
March 31 | ||||||||
2004 | 2005 | |||||||
(Yen in millions) | ||||||||
Trademarks | 57,384 | 57,195 | ||||||
Distribution agreement | 18,834 | 18,848 | ||||||
76,218 | 76,043 | |||||||
F-32
Financial | ||||||||||||||||||||||||||||
Electronics | Game | Music | Pictures | Services | Other | Total | ||||||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||||||
Balance at March 31, 2003 | 53,179 | 110,606 | 46,021 | 78,697 | — | 1,624 | 290,127 | |||||||||||||||||||||
Goodwill acquired during year | 5,634 | — | 76 | 1,666 | — | 534 | 7,910 | |||||||||||||||||||||
Impairment losses | (6,049 | ) | — | — | — | — | — | (6,049 | ) | |||||||||||||||||||
Other * | (528 | ) | (244 | ) | (3,771 | ) | (9,574 | ) | — | (1 | ) | (14,118 | ) | |||||||||||||||
Balance at March 31, 2004 | 52,236 | 110,362 | 42,326 | 70,789 | — | 2,157 | 277,870 | |||||||||||||||||||||
Reallocated from Music segment to Electronics segment | 12,329 | — | (12,329 | ) | — | — | — | — | ||||||||||||||||||||
Goodwill acquired during year | 5,872 | 4,349 | 52 | 5,868 | 441 | 2,069 | 18,651 | |||||||||||||||||||||
Goodwill contributed to the Joint Venture with Bertelsmann AG | — | — | (15,626 | ) | — | — | — | (15,626 | ) | |||||||||||||||||||
Other * | 378 | 29 | 1,281 | 1,277 | — | 63 | 3,028 | |||||||||||||||||||||
Balance at March 31, 2005 | 70,815 | 114,740 | 15,704 | 77,934 | 441 | 4,289 | 283,923 | |||||||||||||||||||||
* | Other consists of translation adjustments and reclassification to/from other accounts. |
10. | Insurance-related accounts |
F-33
(1) | Insurance policies: |
(2) | Deferred insurance acquisition costs: |
(3) | Future insurance policy benefits: |
(4) | Separate account assets: |
F-34
11. | Short-term borrowings and long-term debt |
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Unsecured loans, principally from banks: | |||||||||
with weighted-average interest rate of 1.80% | 26,260 | ||||||||
with weighted-average interest rate of 2.79% | 38,796 | ||||||||
Secured call money: | |||||||||
with weighted-average interest rate of 0.01% | 65,000 | — | |||||||
Secured bills sold: | |||||||||
with weighted-average interest rate of 0.00% | — | 24,600 | |||||||
91,260 | 63,396 | ||||||||
F-35
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Secured loans, representing obligations to banks: | |||||||||
Due 2004 to 2008 with interest ranging from 2.20% to 3.73% per annum | 58,786 | ||||||||
Due 2005 to 2008 with interest of 2.20% per annum | 1,122 | ||||||||
Unsecured loans, representing obligations principally to banks: | |||||||||
Due 2004 to 2017 with interest ranging from 1.77% to 5.89% per annum | 77,646 | ||||||||
Due 2005 to 2017 with interest ranging from 0.23% to 5.89% per annum | 113,436 | ||||||||
Medium-term notes of consolidated subsidiaries: | |||||||||
Due 2004 to 2006 with interest ranging from 1.09% to 4.95% per annum | 60,537 | ||||||||
Due 2006 with interest ranging from 2.78% to 4.95% per annum | 58,755 | ||||||||
Unsecured 1.4% convertible bonds, due 2005, convertible at 3,995.5 yen for one common share, redeemable before due date | 287,753 | — | |||||||
Unsecured zero coupon convertible bonds, due 2008, convertible currently at 5,605 yen for one common share, redeemable before due date | 250,000 | 250,000 | |||||||
Unsecured 0.03% bonds, due 2004 with detachable warrants, net of unamortized discount | 3,981 | — | |||||||
Unsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount | 3,924 | 3,981 | |||||||
Unsecured 1.55% bonds, due 2006 with detachable warrants | 12,000 | 12,000 | |||||||
Unsecured 0.9% bonds, due 2007 with detachable warrants | 7,300 | 7,300 | |||||||
Unsecured 0.9% bonds, due 2007 with detachable warrants of subsidiary tracking stock | 150 | 150 | |||||||
Unsecured 1.42% bonds, due 2005, net of unamortized discount | 99,994 | 99,998 | |||||||
Unsecured 0.64% bonds, due 2006, net of unamortized discount | 99,994 | 99,996 | |||||||
Unsecured 2.04% bonds, due 2010, net of unamortized discount | 49,981 | 49,984 | |||||||
Unsecured 1.52% bonds, due 2011, net of unamortized discount | 49,996 | 49,997 | |||||||
Unsecured 2.0% bonds, due 2005 | 15,000 | 15,000 | |||||||
Unsecured 1.99% bonds, due 2007 | 15,000 | 15,000 | |||||||
Unsecured 2.35% bonds, due 2010 | 4,900 | 4,900 | |||||||
Capital lease obligations: | |||||||||
Due 2004 to 2014 with interest ranging from 2.15% to 30.00% per annum | 42,689 | ||||||||
Due 2005 to 2019 with interest ranging from 1.55% to 30.00% per annum | 40,301 | ||||||||
Guarantee deposits received | 21,775 | 23,942 | |||||||
1,161,406 | 845,862 | ||||||||
Less — Portion due within one year | 383,757 | 166,870 | |||||||
777,649 | 678,992 | ||||||||
F-36
Year Ended March 31 | |||||||||||||
2002 | 2003 | 2004 | |||||||||||
(Yen in millions) | |||||||||||||
Income before cumulative effect of accounting changes allocated to the common stock | 9,381 | 115,648 | 90,756 | ||||||||||
Effect of dilutive securities: | |||||||||||||
Convertible bonds | — | 2,398 | 2,260 | ||||||||||
Income before cumulative effect of accounting changes allocated to the common stock for diluted EPS computation | 9,381 | 118,046 | 93,016 | ||||||||||
Thousands of shares | |||||||||||||
Weighted-average shares | 918,462 | 919,706 | 923,650 | ||||||||||
Effect of dilutive securities: | |||||||||||||
Warrants | 108 | 12 | 48 | ||||||||||
Convertible bonds | 2,664 | 78,873 | 76,517 | ||||||||||
Weighted-average shares for diluted EPS computation | 921,234 | 998,591 | 1,000,215 | ||||||||||
Yen | ||||||||||||
Basic EPS | 10.21 | 125.74 | 98.26 | |||||||||
Diluted EPS | 10.18 | 118.21 | 93.00 | |||||||||
For the year ended March 31, 2002, 75,201 thousand
Exercise | Number of shares per | |||||||||
Issued on | Exercisable during | price | warrant | Status of exercise | ||||||
(Yen) | ||||||||||
August 23, 1999 | September 1, 2000 through August 22, 2005 | 7,167 | 279 shares of
| 2,000 warrants outstanding | ||||||
October 19, 2000 | November 1, 2001 through October 18, 2006 | 12,457 | 100 shares of | 9,600 warrants outstanding | ||||||
December | January 6, 2003 | 6,039 | 100 shares of
| 11,534 warrants | ||||||
December 21, 2001 | June 20, 2002 through June 20, 2007 | 3,300 | 75 shares
| 600 warrants outstanding |
Year ending March 31 | Yen in millions | |||
2006 | 166,870 | |||
2007 | 178,117 | |||
2008 | 32,059 | |||
2009 | 282,430 | |||
2010 | 2,909 |
12. | Deposits from customers in the banking business |
13. | Financial instruments |
F-37
F-38
F-39
(2) | Fair value of financial instruments: |
March 31 | ||||||||||||||||||||||||
2004 | 2005 | |||||||||||||||||||||||
Notional | Carrying | Estimated | Notional | Carrying | Estimated | |||||||||||||||||||
amount | amount | fair value | amount | amount | fair value | |||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||
Long-term debt including the current portion | — | (1,161,406 | ) | (1,235,669 | ) | — | (845,862 | ) | (856,321 | ) | ||||||||||||||
Foreign exchange forward contracts | 1,348,157 | (994 | ) | (994 | ) | 1,545,814 | (55 | ) | (55 | ) | ||||||||||||||
Currency option contracts purchased | 375,582 | 10,781 | 10,781 | 428,261 | 1,646 | 1,646 | ||||||||||||||||||
Currency option contracts written | 124,925 | (1,000 | ) | (1,000 | ) | 146,506 | (3,390 | ) | (3,390 | ) | ||||||||||||||
Interest rate swap agreements | 218,101 | (4,229 | ) | (4,229 | ) | 171,133 | (4,417 | ) | (4,417 | ) | ||||||||||||||
Interest rate and currency swap agreements | 8,574 | 384 | 384 | 5,734 | 131 | 131 | ||||||||||||||||||
Interest rate future contracts | 17,007 | (9 | ) | (9 | ) | 136,470 | (92 | ) | (92 | ) | ||||||||||||||
Embedded derivatives | 421,416 | 12,885 | 12,885 | 405,756 | 11,894 | 11,894 |
F-40
14. | Pension and severance plans |
F-41
Year Ended March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
(Yen in millions) | ||||||||||||
Service cost | 47,884 | 54,501 | 31,971 | |||||||||
Interest cost | 20,857 | 19,489 | 21,364 | |||||||||
Expected return on plan assets | (25,726 | ) | (22,812 | ) | (16,120 | ) | ||||||
Amortization of net transition asset | (375 | ) | (375 | ) | (375 | ) | ||||||
Recognized actuarial loss | 20,655 | 31,019 | 20,236 | |||||||||
Amortization of prior service cost | (939 | ) | (939 | ) | (7,216 | ) | ||||||
Gains on curtailments and settlements | (1,380 | ) | — | (876 | ) | |||||||
Net periodic benefit cost | 60,976 | 80,883 | 48,984 | |||||||||
Year Ended March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
(Yen in millions) | ||||||||||||
Service cost | 13,954 | 11,252 | 6,419 | |||||||||
Interest cost | 8,478 | 8,566 | 8,091 | |||||||||
Expected return on plan assets | (7,319 | ) | (6,812 | ) | (6,712 | ) | ||||||
Amortization of net transition asset | (47 | ) | (27 | ) | (18 | ) | ||||||
Recognized actuarial loss | 1,452 | 1,569 | 1,637 | |||||||||
Amortization of prior service cost | (208 | ) | (117 | ) | (114 | ) | ||||||
(Gains) losses on curtailments and settlements | (460 | ) | 5,574 | 1,713 | ||||||||
Net periodic benefit cost | 15,850 | 20,005 | 11,016 | |||||||||
F-42
Japanese plans | Foreign plans | ||||||||||||||||
March 31 | March 31 | ||||||||||||||||
2004 | 2005 | 2004 | 2005 | ||||||||||||||
(Yen in millions) | (Yen in millions) | ||||||||||||||||
Change in benefit obligation: | |||||||||||||||||
Benefit obligation at beginning of the fiscal year | 1,031,760 | 993,542 | 157,580 | 155,838 | |||||||||||||
Service cost | 54,501 | 31,971 | 11,252 | 6,419 | |||||||||||||
Interest cost | 19,489 | 21,364 | 8,566 | 8,091 | |||||||||||||
Plan participants’ contributions | 5,802 | 2,111 | 644 | 873 | |||||||||||||
Amendments | — | (120,873 | ) | 3,900 | 286 | ||||||||||||
Actuarial (gain) loss | (81,873 | ) | 1,641 | 431 | 12,210 | ||||||||||||
Foreign currency exchange rate changes | — | — | (17,082 | ) | 14,288 | ||||||||||||
Curtailments and settlements | — | (2,988 | ) | (66 | ) | (628 | ) | ||||||||||
Benefits paid | (36,137 | ) | (25,042 | ) | (9,387 | ) | (11,639 | ) | |||||||||
Divestiture | — | — | — | (32,140 | ) | ||||||||||||
Benefit obligation at end of the fiscal year | 993,542 | 901,726 | 155,838 | 153,598 | |||||||||||||
Change in plan assets: | |||||||||||||||||
Fair value of plan assets at beginning of the fiscal year | 405,248 | 513,095 | 67,937 | 85,662 | |||||||||||||
Actual return (loss) on plan assets | 93,154 | (354 | ) | 13,065 | 7,513 | ||||||||||||
Foreign currency exchange rate changes | — | — | (3,420 | ) | 3,517 | ||||||||||||
Employer contribution | 23,243 | 34,581 | 16,475 | 18,406 | |||||||||||||
Plan participants’ contributions | 5,802 | 2,111 | 644 | 873 | |||||||||||||
Curtailments and settlements | — | — | — | (112 | ) | ||||||||||||
Benefits paid | (14,352 | ) | (14,982 | ) | (9,039 | ) | (11,168 | ) | |||||||||
Divestiture | — | — | — | (12,666 | ) | ||||||||||||
Fair value of plan assets at end of the fiscal year | 513,095 | 534,451 | 85,662 | 92,025 | |||||||||||||
F-43
Japanese plans | Foreign plans | ||||||||||||||||
March 31 | March 31 | ||||||||||||||||
2004 | 2005 | 2004 | 2005 | ||||||||||||||
(Yen in millions) | (Yen in millions) | ||||||||||||||||
Funded status | (480,447 | ) | (367,275 | ) | (70,176 | ) | (61,573 | ) | |||||||||
Unrecognized actuarial loss | 328,467 | 322,237 | 27,550 | 37,383 | |||||||||||||
Unrecognized net transition asset | (479 | ) | (104 | ) | 211 | 7 | |||||||||||
Unrecognized prior service cost | (20,784 | ) | (134,440 | ) | (748 | ) | (501 | ) | |||||||||
Net amount recognized | (173,243 | ) | (179,582 | ) | (43,163 | ) | (24,684 | ) | |||||||||
Amounts recognized in the consolidated balance sheet consist of: | |||||||||||||||||
Prepaid benefit cost | — | 1,795 | 2,609 | 1,351 | |||||||||||||
Accrued pension and severance costs, including current portion | (322,677 | ) | (309,957 | ) | (61,452 | ) | (42,934 | ) | |||||||||
Intangibles | 21,263 | — | 113 | 41 | |||||||||||||
Accumulated other comprehensive income | 128,171 | 128,580 | 15,567 | 16,858 | |||||||||||||
Net amount recognized | (173,243 | ) | (179,582 | ) | (43,163 | ) | (24,684 | ) | |||||||||
Japanese plans | Foreign plans | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||
(Yen in millions) | (Yen in millions) | |||||||||||||||
Accumulated benefit obligation | 830,898 | 835,420 | 129,879 | 121,176 |
Japanese plans | Foreign plans | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||||
(Yen in millions) | (Yen in millions) | |||||||||||||||
Projected benefit obligations | 991,030 | 898,985 | 135,459 | 132,556 | ||||||||||||
Accumulated benefit obligations | 830,362 | �� | 835,420 | 113,020 | 115,147 | |||||||||||
Fair value of plan assets | 512,720 | 533,926 | 74,167 | 86,070 |
March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
Discount rate | 1.9 | % | 2.4 | % | 2.3 | % | ||||||
Rate of compensation increase | 3.0 | 3.0 | 3.3 |
F-44
March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
Discount rate | 6.3 | % | 5.8 | % | 5.5 | % | ||||||
Rate of compensation increase | 4.1 | 4.0 | 3.3 |
Year Ended March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
Discount rate | 2.4 | % | 1.9 | % | 2.4 | % | ||||||
Expected return on plan assets | 4.0 | 4.0 | 3.2 | |||||||||
Rate of compensation increase | 3.0 | 3.0 | 3.3 |
Year Ended March 31 | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
Discount rate | 6.6 | % | 6.3 | % | 5.8 | % | ||||||
Expected return on plan assets | 8.1 | 8.3 | 7.8 | |||||||||
Rate of compensation increase | 4.5 | 4.1 | 4.0 |
March 31, | ||||||||
2004 | 2005 | |||||||
Equity securities | 39.0 | % | 28.0 | % | ||||
Debt securities | 14.7 | 34.7 | ||||||
Cash | 42.7 | 33.7 | ||||||
Other | 3.6 | 3.6 | ||||||
Total | 100 | % | 100 | % | ||||
F-45
March 31, | ||||||||
2004 | 2005 | |||||||
Equity securities | 63.2 | % | 68.3 | % | ||||
Debt securities | 26.6 | 23.4 | ||||||
Real estate | 3.2 | 4.0 | ||||||
Other | 7.0 | 4.3 | ||||||
Total | 100 | % | 100 | % | ||||
Japanese plans | Foreign plans | ||||||||
(Yen in millions) | (Yen in millions) | ||||||||
Year ending March 31, | |||||||||
2006 | 18,281 | 5,625 | |||||||
2007 | 19,734 | 5,977 | |||||||
2008 | 22,075 | 6,308 | |||||||
2009 | 24,600 | 6,860 | |||||||
2010 | 29,475 | 7,912 | |||||||
2011 — 2015 | 181,527 | 51,919 |
15. | Stockholders’ equity |
F-46
F-47
(2) | Common stock: |
Number of shares | ||||
Balance at March 31, 2002 | 919,744,355 | |||
Conversion of convertible bonds | 138,330 | |||
Stock issued under exchange offering | 2,502,491 | |||
Balance at March 31, 2003 | 922,385,176 | |||
Conversion of convertible bonds | 2,944,800 | |||
Stock issued under exchange offering | 1,088,304 | |||
Balance at March 31, 2004 | 926,418,280 | |||
Conversion of convertible bonds | 70,765,533 | |||
Exercise of stock acquisition rights | 27,400 | |||
Balance at March 31, 2005 | 997,211,213 | |||
F-48
(3) | Retained earnings: |
F-49
(4) | Other comprehensive income: |
Pre-tax | Tax | Net-of-tax | |||||||||||||
amount | expense | amount | |||||||||||||
(Yen in millions) | |||||||||||||||
For the year ended March 31, 2003: | |||||||||||||||
Unrealized gains on securities — | |||||||||||||||
Unrealized holding gains (losses) arising during the period | (18,575 | ) | 8,948 | (9,627 | ) | ||||||||||
Less: Reclassification adjustment for gains (losses) included in net income | 3,421 | 867 | 4,288 | ||||||||||||
Unrealized losses on derivative instruments — | |||||||||||||||
Unrealized holding gains (losses) arising during the period | (6,268 | ) | 1,791 | (4,477 | ) | ||||||||||
Less: Reclassification adjustment for gains (losses) included in net income | 682 | (287 | ) | 395 | |||||||||||
Minimum pension liability adjustment | (181,725 | ) | 71,089 | (110,636 | ) | ||||||||||
Foreign currency translation adjustments — | |||||||||||||||
Translation adjustments arising during the period | (87,103 | ) | 3,110 | (83,993 | ) | ||||||||||
Less: Reclassification adjustment for losses included in net income | 7,665 | — | 7,665 | ||||||||||||
Other comprehensive income | (281,903 | ) | 85,518 | (196,385 | ) | ||||||||||
For the year ended March 31, 2004: | |||||||||||||||
Unrealized gains on securities — | |||||||||||||||
Unrealized holding gains (losses) arising during the period | 89,861 | (31,890 | ) | 57,971 | |||||||||||
Less: Reclassification adjustment for gains (losses) included in net income | (7,371 | ) | 1,692 | (5,679 | ) | ||||||||||
Unrealized losses on derivative instruments — | |||||||||||||||
Unrealized holding gains (losses) arising during the period | 11,586 | (4,049 | ) | 7,537 | |||||||||||
Less: Reclassification adjustment for gains (losses) included in net income | (5,961 | ) | 2,617 | (3,344 | ) | ||||||||||
Minimum pension liability adjustment | 162,408 | (68,993 | ) | 93,415 | |||||||||||
Foreign currency translation adjustments — | |||||||||||||||
Translation adjustments arising during the period | (134,312 | ) | 5,199 | (129,113 | ) | ||||||||||
Less: Reclassification adjustment for losses included in net income | 1,232 | — | 1,232 | ||||||||||||
Other comprehensive income | 117,443 | (95,424 | ) | 22,019 | |||||||||||
F-50
Pre-tax | Tax | Net-of-tax | |||||||||||||
amount | expense | amount | |||||||||||||
(Yen in millions) | |||||||||||||||
For the year ended March 31, 2005: | |||||||||||||||
Unrealized gains on securities — | |||||||||||||||
Unrealized holding gains (losses) arising during the period | 7,184 | (1,541 | ) | 5,643 | |||||||||||
Less: Reclassification adjustment for gains (losses) included in net income | (18,140 | ) | 5,216 | (12,924 | ) | ||||||||||
Unrealized losses on derivative instruments — | |||||||||||||||
Unrealized holding gains (losses) arising during the period | (2,015 | ) | 1,806 | (209 | ) | ||||||||||
Less: Reclassification adjustment for gains (losses) included in net income | (2,848 | ) | 1,167 | (1,681 | ) | ||||||||||
Minimum pension liability adjustment | (1,700 | ) | 931 | (769 | ) | ||||||||||
Foreign currency translation adjustments — | |||||||||||||||
Translation adjustments arising during the period | 76,585 | (2,361 | ) | 74,224 | |||||||||||
Other comprehensive income | 59,066 | 5,218 | 64,284 | ||||||||||||
16. | Stock-based compensation plans |
(1) | Warrant plan: |
(2) | Convertible Bond plan: |
F-51
(3) | Stock Acquisition Rights: |
Year Ended March 31 | ||||||||||||||||||||||||
2003 | 2004 | 2005 | ||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
average | average | average | ||||||||||||||||||||||
Number of | exercise | Number of | exercise | Number of | exercise | |||||||||||||||||||
Shares | price | Shares | price | Shares | price | |||||||||||||||||||
(Yen) | (Yen) | (Yen) | ||||||||||||||||||||||
Outstanding at beginning of the fiscal year | 5,853,892 | 8,648 | 9,640,892 | 7,832 | 11,705,592 | 6,082 | ||||||||||||||||||
Granted | 3,874,100 | 5,313 | 2,621,400 | 5,017 | 2,433,600 | 3,996 | ||||||||||||||||||
Exercised | — | — | — | — | (27,400 | ) | 3,896 | |||||||||||||||||
Forfeited | (87,100 | ) | 8,306 | (556,700 | ) | 6,760 | (998,592 | ) | 5,923 | |||||||||||||||
Outstanding at end of the fiscal year | 9,640,892 | 7,832 | 11,705,592 | 6,082 | 13,113,200 | 5,754 | ||||||||||||||||||
Exercisable at end of the fiscal year | 4,314,292 | 9,773 | 5,853,892 | 7,522 | 7,223,600 | 6,994 | ||||||||||||||||||
Outstanding | Exercisable | |||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||
Exercise price | Number of | average | average | Number of | average | |||||||||||||||||
range | Shares | exercise price | remaining life | Shares | exercise price | |||||||||||||||||
(Yen) | (Yen) | (Years) | (Yen) | |||||||||||||||||||
3,782~7,000 | 10,497,600 | 4,680 | 8.24 | 4,608,000 | 5,250 | |||||||||||||||||
7,001~13,202 | 2,615,600 | 10,065 | 3.14 | 2,615,600 | 10,065 | |||||||||||||||||
3,782~13,202 | 13,113,200 | 5,754 | 7.22 | 7,223,600 | 6,994 | |||||||||||||||||
F-52
Outstanding | Exercisable | |||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||
Exercise price | Number of | average | average | Number of | average | |||||||||||||||
range | Shares | exercise price | remaining life | Shares | exercise price | |||||||||||||||
(Yen) | (Yen) | (Years) | (Yen) | |||||||||||||||||
815~3,300 | 181,500 | 1,591 | 7.22 | 90,300 | 2,118 |
Year Ended March 31 | ||||||||||||
Weighted-average assumptions | 2003 | 2004 | 2005 | |||||||||
Risk-free interest rate | 2.76% | 2.18% | 2.04% | |||||||||
Expected lives | 4.23 years | 3.67 years | 3.54 years | |||||||||
Expected volatility | 47.33% | 42.83% | 35.56% | |||||||||
Expected dividend | 0.47% | 0.57% | 0.62% |
(4) | SAR plan: |
F-53
Year Ended March 31 | ||||||||||||||||||||||||
2003 | 2004 | 2005 | ||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
Number of | average | Number of | average | Number of | average | |||||||||||||||||||
SARs | exercise price | SARs | exercise price | SARs | exercise price | |||||||||||||||||||
(Yen) | (Yen) | (Yen) | ||||||||||||||||||||||
Outstanding at beginning of the fiscal year | 2,410,394 | 6,644 | 2,343,028 | 6,341 | 1,526,568 | 6,424 | ||||||||||||||||||
Granted | 28,750 | 6,323 | — | — | — | — | ||||||||||||||||||
Exercised | (11,800 | ) | 5,727 | — | — | (241,134 | ) | 3,955 | ||||||||||||||||
Expired or forfeited | (84,316 | ) | 7,274 | (816,460 | ) | 5,494 | (420,350 | ) | 5,855 | |||||||||||||||
Outstanding at end of the fiscal year | 2,343,028 | 6,341 | 1,526,568 | 6,424 | 865,084 | 7,436 | ||||||||||||||||||
Exercisable at end of the fiscal year | 2,176,319 | 6,211 | 1,462,391 | 6,421 | 856,156 | 7,455 | ||||||||||||||||||
Outstanding | Exercisable | |||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||
Exercise price | Number of | average | average | Number of | average | |||||||||||||||||
range | SARs | exercise price | remaining life | SARs | exercise price | |||||||||||||||||
(Yen) | (Yen) | (Years) | (Yen) | |||||||||||||||||||
3,234~5,000 | 61,850 | 4,767 | 6.77 | 61,850 | 4,767 | |||||||||||||||||
5,001~10,000 | 749,109 | 7,365 | 1.08 | 740,181 | 7,386 | |||||||||||||||||
10,001~13,419 | 54,125 | 11,471 | 4.56 | 54,125 | 11,471 | |||||||||||||||||
3,234~13,419 | 865,084 | 7,436 | 1.70 | 856,156 | 7,455 | |||||||||||||||||
17. | Restructuring charges and asset impairments |
F-54
F-55
F-56
F-57
F-58
Employee | Non-cash | ||||||||||||||||
termination | write-downs | Other associated | |||||||||||||||
benefits | and disposals | costs | Total | ||||||||||||||
(Yen in millions) | |||||||||||||||||
Balance at March 31, 2002 | 6,243 | — | 13,637 | 19,880 | |||||||||||||
Restructuring costs | 46,953 | 42,768 | 16,530 | 106,251 | |||||||||||||
Non-cash charges | — | (42,240 | ) | — | (42,240 | ) | |||||||||||
Cash payments | (38,548 | ) | — | (23,172 | ) | (61,720 | ) | ||||||||||
Adjustments | 136 | (528 | ) | (1,208 | ) | (1,600 | ) | ||||||||||
Balance at March 31, 2003 | 14,784 | — | 5,787 | 20,571 | |||||||||||||
Restructuring costs | 133,367 | 19,170 | 15,554 | 168,091 | |||||||||||||
Non-cash charges | — | (19,170 | ) | — | (19,170 | ) | |||||||||||
Cash payments | (124,674 | ) | — | (13,686 | ) | (138,360 | ) | ||||||||||
Adjustments | 1,173 | 0 | 333 | 1,506 | |||||||||||||
Balance at March 31, 2004 | 24,650 | — | 7,988 | 32,638 | |||||||||||||
Restructuring costs | 53,563 | 25,564 | 10,836 | 89,963 | |||||||||||||
Non-cash charges | — | (25,564 | ) | — | (25,564 | ) | |||||||||||
Cash payments | (61,523 | ) | — | (10,427 | ) | (71,950 | ) | ||||||||||
Adjustments* | (1,705 | ) | — | (3,096 | ) | (4,801 | ) | ||||||||||
Balance at March 31, 2005 | 14,985 | — | 5,301 | 20,286 | |||||||||||||
* | Adjustments primarily consist of the transfer of the accrued restructuring charges to SONY BMG, a |
18. | Research and development costs, advertising costs and shipping and handling costs |
(2) | Advertising costs: |
(3) | Shipping and handling costs: |
19. | Gain on change in interest in subsidiaries and equity investees |
F-59
F-60
20. | Income taxes |
Year Ended March 31 | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
(Yen in millions) | |||||||||||||
Income (loss) before income taxes: | |||||||||||||
Sony Corporation and subsidiaries in Japan | (7,998 | ) | (84,571 | ) | 5,005 | ||||||||
Foreign subsidiaries | 255,619 | 228,638 | 152,202 | ||||||||||
247,621 | 144,067 | 157,207 | |||||||||||
Income taxes — Current: | |||||||||||||
Sony Corporation and subsidiaries in Japan | 69,311 | 22,286 | 23,497 | ||||||||||
Foreign subsidiaries | 109,536 | 64,933 | 62,013 | ||||||||||
178,847 | 87,219 | 85,510 | |||||||||||
Income taxes — Deferred: | |||||||||||||
Sony Corporation and subsidiaries in Japan | (90,016 | ) | (32,845 | ) | 4,976 | ||||||||
Foreign subsidiaries | (8,000 | ) | (1,600 | ) | (74,442 | ) | |||||||
(98,016 | ) | (34,445 | ) | (69,466 | ) | ||||||||
Year Ended March 31 | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
Statutory tax rate | 42.0 | % | 43.9 | % | 41.0 | % | |||||||
Increase (reduction) in taxes resulting from: | |||||||||||||
Income tax credits | (1.9 | ) | (2.4 | ) | (0.1 | ) | |||||||
Change in valuation allowances | 5.5 | 6.5 | (22.7 | ) | |||||||||
Decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries | (14.8 | ) | (9.2 | ) | (4.0 | ) | |||||||
Lower tax rate applied to life and non-life insurance business in Japan | (0.6 | ) | (2.6 | ) | (1.9 | ) | |||||||
Other | 2.4 | 0.4 | (2.1 | ) | |||||||||
Effective income tax rate | 32.6 | % | 36.6 | % | 10.2 | % | |||||||
F-61
March 31 | |||||||||||
2004 | 2005 | ||||||||||
(Yen in millions) | |||||||||||
Deferred tax assets: | |||||||||||
Operating loss carryforwards for tax purposes | 196,308 | 193,212 | |||||||||
Accrued pension and severance costs | 150,073 | 159,610 | |||||||||
Film costs | 54,194 | 56,746 | |||||||||
Warranty reserve and accrued expenses | 45,664 | 56,551 | |||||||||
Future insurance policy benefits | 35,855 | 36,654 | |||||||||
Accrued bonus | 36,285 | 34,536 | |||||||||
Inventory — intercompany profits and write-down | 30,241 | 30,270 | |||||||||
Depreciations | 14,108 | 15,320 | |||||||||
Tax credit carryforwards | 13,740 | 8,552 | |||||||||
Reserve for doubtful accounts | 14,005 | 6,574 | |||||||||
Other | 141,731 | 153,525 | |||||||||
Gross deferred tax assets | 732,204 | 751,550 | |||||||||
Less: Valuation allowance | (127,577 | ) | (89,110 | ) | |||||||
Total deferred tax assets | 604,627 | 662,440 | |||||||||
Deferred tax liabilities: | |||||||||||
Insurance acquisition costs | (125,768 | ) | (135,083 | ) | |||||||
Unbilled accounts receivable in the Pictures business | (71,586 | ) | (57,314 | ) | |||||||
Unrealized gains on securities | (45,239 | ) | (41,564 | ) | |||||||
Intangible assets acquired through exchange offerings | (36,490 | ) | (35,418 | ) | |||||||
Undistributed earnings of foreign subsidiaries | (44,778 | ) | (30,865 | ) | |||||||
Gain on securities contribution to employee retirement benefit trust | (16,899 | ) | (6,184 | ) | |||||||
Other | (39,435 | ) | (58,714 | ) | |||||||
Gross deferred tax liabilities | (380,195 | ) | (365,142 | ) | |||||||
Net deferred tax assets | 224,432 | 297,298 | |||||||||
F-62
March 31 | |||||||||
2004 | 2005 | ||||||||
(Yen in millions) | |||||||||
Current assets — Deferred income taxes | 125,532 | 141,154 | |||||||
Other assets — Deferred income taxes | 203,203 | 240,396 | |||||||
Current liabilities — Other | (8,110 | ) | (12,025 | ) | |||||
Long-term liabilities — Deferred income taxes | (96,193 | ) | (72,227 | ) | |||||
Net deferred tax assets | 224,432 | 297,298 | |||||||
F-63
21. | Reconciliation of the differences between basic and diluted net income per share (“EPS”) |
(1) | Income before cumulative effect
|
Year Ended March 31 | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
(Yen in millions) | |||||||||||||
Income before cumulative effect of an accounting change allocated to the common stock | 115,648 | 90,756 | 168,498 | ||||||||||
Income before cumulative effect of an accounting change allocated to the subsidiary tracking stock | (129 | ) | (128 | ) | 53 | ||||||||
Income before cumulative effect of an accounting change | 115,519 | 90,628 | 168,551 | ||||||||||
Net income allocated to the Common stock | 115,648 | 88,639 | 163,785 | ||||||||||
Net income allocated to the subsidiary tracking stock | (129 | ) | (128 | ) | 53 | ||||||||
Net income | 115,519 | 88,511 | 163,838 | ||||||||||
(2) | EPS attributable to common stock: |
Year Ended March 31 | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
(Yen in millions) | |||||||||||||
Income before cumulative effect of an accounting change allocated to the common stock | 115,648 | 90,756 | 168,498 | ||||||||||
Effect of dilutive securities: | |||||||||||||
Convertible bonds | 2,398 | 2,260 | 1,209 | ||||||||||
Subsidiary tracking stock | — | — | (0 | ) | |||||||||
Income before cumulative effect of an accounting change allocated to the common stock for diluted EPS computation | 118,046 | 93,016 | 169,707 | ||||||||||
Thousands of shares | |||||||||||||
Weighted-average shares | 919,706 | 923,650 | 931,125 | ||||||||||
Effect of dilutive securities: | |||||||||||||
Warrants and stock acquisition rights | 12 | 48 | 61 | ||||||||||
Convertible bonds | 78,873 | 121,120 | 112,589 | ||||||||||
Weighted-average shares for diluted EPS computation | 998,591 | 1,044,818 | 1,043,775 | ||||||||||
Yen | ||||||||||||
Basic EPS | 125.74 | 98.26 | 180.96 | |||||||||
Diluted EPS | 118.21 | 89.03 | 162.59 | |||||||||
F-64
(3) | EPS attributable to subsidiary tracking stock: |
22. | Variable interest entities |
F-65
23. | Commitments and |
A. | Purchase Commitments |
Sony has, from time to time, entered into various arrangements with VIEs. These arrangements consist of facilities which provide for the leasing of certain property, the financing of film production, the development and operation of a multi-use real estate complex and the implementation of a stock option plan for Japanese employees. As described in Note 2, the FASB issued FIN No. 46, which requires the consolidation or disclosure of VIEs. The VIEs that have been consolidated by Sony are described as follows:
Sony leases the headquarters of its U.S. subsidiary from a VIE, which has been consolidated by Sony since July 1, 2003. Upon consolidation of the VIE, assets and liabilities increased by 25,277 million yen and 27,035 million yen, respectively, and a cumulative effect of accounting change of 1,729 million yen was charged to net income with no tax effect. Sony has the option to purchase the building at any time during the lease term which expires in December 2008 for 26,941 million yen. The debt held by the VIE is unsecured. At the end of the lease term, Sony has agreed to either renew the lease, purchase the building or remarket it to a third party on behalf of the owner. If the sales price is less than 26,941 million yen, Sony is obligated to make up the lesser of the shortfall or 22,609 million yen.
A subsidiary in the Pictures business entered into a joint venture agreement with a VIE for the purpose of funding the acquisition of certain international film rights. The subsidiary is required to distribute the product internationally, for contractually defined fees determined as percentages of gross receipts, as defined, and is responsible for all distribution and marketing expenses, which are recouped from such distribution fees. The VIE was capitalized with total financing of 42,894 million yen. Of this amount, 1,162 million yen was contributed by the subsidiary, 10,037 million yen was provided by unrelated third party investors and the remaining funding is provided through a 31,695 million yen bank credit facility. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 10,179 million yen and 10,586 million yen, respectively, and a cumulative effect of accounting change of 388 million yen was charged to net income with no tax effect. As of March 31, 2004, the total outstanding under the bank credit facility was 15,251 million yen. Under the agreement, the subsidiary’s 1,162 million yen equity investment is the last equity to be repaid. Additionally, it must pay to the third party investors up to 2,007 million yen of any losses out of a portion of its distribution fees. Any losses incurred by the VIE over and above 3,170 million yen will be shared by the other investors. The subsidiary is obligated to acquire the international distribution rights, as defined, for twelve pictures meeting certain minimum requirements within a 3.5 to 4.5 year period and transfer those rights to the VIE at cost plus a 5 percent fee. Sony has certain limited obligations to repay any outstanding balance under the bank credit facility up to certain amounts as defined in the agreement. Separately, if the subsidiary is unable to deliver twelve pictures to the VIE and the bank credit facility or the third party equity investors are not paid in full by March 10, 2008 (or earlier upon the occurrence of certain events), the subsidiary is required to reimburse the VIE to the extent necessary to repay the bank credit facility in full and pay
F-64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
certain minimum returns to the third party equity investors. See Note 22 for more information on the contingent liability on this agreement.
Sony has utilized a VIE to erect and operate a multi-use real estate complex in Berlin, Germany, which had been accounted for under the equity method by Sony until June 30, 2003. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 61,320 million yen and 60,329 million yen, respectively. However, there was no impact to Sony’s net income. The VIE was capitalized with 89,650 million yen of total funding, 32,343 million yen was provided by equity investors with the remaining funding of 57,307 million yen being provided through a syndicated bank loan which matures in November 2004. The syndicated bank loan is secured by the multi-use real estate complex, of which book value was 61,912 million yen at March 31, 2004. Creditors of the VIE have no recourse to the general credit of Sony.
Sony has utilized a VIE to implement a stock option plan for selected Japanese employees. The VIE has been consolidated by Sony since its establishment. With respect to this entity, there was no impact to Sony’s results of operations and financial position upon the adoption of FIN No. 46. Under the terms of the stock option plan, upon exercise, Japanese employees receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the plan. In order to minimize cash flow exposure associated with the plan, Sony holds treasury stock through the VIE. The VIE purchased the common stock with funding provided by the employee’s cash contribution and a bank loan. At March 31, 2004, the balance of the bank loan was 5,046 million yen.
There is no VIE in which Sony holds a significant variable interest that Sony is not the primary beneficiary.
Commitments outstanding at March 31, 20042005 amounted to 316,066240,729 million yen. The major components of these commitments are as follows:
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, 2007. As of March 31, 2004, these subsidiaries were committed to make payments under such long-term contracts of 39,073 million yen.
F-66
Certain subsidiaries in the Pictures | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A subsidiary in the Pictures
portion of the production cost and is responsible for all distribution and marketing expenses. As of March 31,
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The schedule of the aggregate amounts of year-by-year payment of purchase commitments during the next five years and thereafter is as follows:
|
Year Ending March 31, | Yen in millions | ||||
2006 | 145,111 | ||||
2007 | 53,753 | ||||
2008 | 16,412 | ||||
2009 | 1,632 | ||||
2010 | 712 | ||||
Thereafter | 23,109 | ||||
Total | 240,729 | ||||
B. | Loan Commitments |
Subsidiaries in the Financial Services segment have entered into loan agreements with their customers in accordance with the condition of the contracts. As of March 31, 2005, the total unused portion of the line of credit extended under these contracts was 199,878 million yen. | |||||
At August 2004, Sony and
| |||||
The aggregate amounts of |
F-67
(2) | Contingent liabilities: |
Year Ended March 31, | ||||||||
2004 | 2005 | |||||||
(Yen in millions) | ||||||||
Balance at beginning of the fiscal year | 51,892 | 50,670 | ||||||
Provision for warranty reserve | 51,569 | 33,493 | ||||||
Settlements (in cash or in kind) | (46,971 | ) | (40,358 | ) | ||||
Changes in estimate for pre-existing warranty reserve | (2,970 | ) | (751 | ) | ||||
Translation adjustment | (2,850 | ) | 1,865 | |||||
Balance at end of the fiscal year | 50,670 | 44,919 | ||||||
24. | Business segment information |
F-68
F-69
Year Ended March 31 | |||||||||||||||
2003 | 2004 | 2005 | |||||||||||||
(Yen in millions) | |||||||||||||||
Sales and operating revenue: | |||||||||||||||
Electronics — | |||||||||||||||
Customers | 4,624,181 | 4,838,268 | 4,786,236 | ||||||||||||
Intersegment | 471,798 | 204,051 | 235,411 | ||||||||||||
Total | 5,095,979 | 5,042,319 | 5,021,647 | ||||||||||||
Game — | |||||||||||||||
Customers | �� | 936,274 | 753,732 | 702,524 | |||||||||||
Intersegment | 18,757 | 26,488 | 27,230 | ||||||||||||
Total | 955,031 | 780,220 | 729,754 | ||||||||||||
Music — | |||||||||||||||
Customers | 433,147 | 409,487 | 216,779 | ||||||||||||
Intersegment | 33,191 | 30,819 | 32,326 | ||||||||||||
Total | 466,338 | 440,306 | 249,105 | ||||||||||||
Pictures — | |||||||||||||||
Customers | 802,770 | 756,370 | 733,677 | ||||||||||||
Intersegment | 0 | 0 | 0 | ||||||||||||
Total | 802,770 | 756,370 | 733,677 | ||||||||||||
Financial Services — | |||||||||||||||
Customers | 509,398 | 565,752 | 537,715 | ||||||||||||
Intersegment | 27,878 | 27,792 | 22,842 | ||||||||||||
Total | 537,276 | 593,544 | 560,557 | ||||||||||||
Other — | |||||||||||||||
Customers | 167,863 | 172,782 | 182,685 | ||||||||||||
Intersegment | 93,282 | 95,535 | 71,742 | ||||||||||||
Total | 261,145 | 268,317 | 254,427 | ||||||||||||
Elimination | (644,906 | ) | (384,685 | ) | (389,551 | ) | |||||||||
Consolidated total | 7,473,633 | 7,496,391 | 7,159,616 | ||||||||||||
F-70
Segment profit or loss: |
Year Ended March 31 | |||||||||||||||
2003 | 2004 | 2005 | |||||||||||||
(Yen in millions) | |||||||||||||||
Operating income (loss): | |||||||||||||||
Electronics | 65,939 | (6,824 | ) | (34,305 | ) | ||||||||||
Game | 112,653 | 67,578 | 43,170 | ||||||||||||
Music | (28,261 | ) | (5,997 | ) | 8,783 | ||||||||||
Pictures | 58,971 | 35,230 | 63,899 | ||||||||||||
Financial Services | 22,758 | 55,161 | 55,490 | ||||||||||||
Other | (28,316 | ) | (12,054 | ) | (4,077 | ) | |||||||||
Total | 203,744 | 133,094 | 132,960 | ||||||||||||
Elimination | 15,065 | 13,226 | 13,530 | ||||||||||||
Unallocated amounts: | |||||||||||||||
Corporate expenses | (33,369 | ) | (47,418 | ) | (32,571 | ) | |||||||||
Consolidated operating income | 185,440 | 98,902 | 113,919 | ||||||||||||
Other income | 157,528 | 122,290 | 97,623 | ||||||||||||
Other expenses | (95,347 | ) | (77,125 | ) | (54,335 | ) | |||||||||
Consolidated income before income taxes | 247,621 | 144,067 | 157,207 | ||||||||||||
Assets: |
March 31 | ||||||||||||||
2003 | 2004 | 2005 | ||||||||||||
(Yen in millions) | ||||||||||||||
Total assets: | ||||||||||||||
Electronics | 2,973,972 | 2,995,306 | 3,434,138 | |||||||||||
Game | 673,208 | 684,226 | 482,037 | |||||||||||
Music | 500,627 | 483,990 | 325,928 | |||||||||||
Pictures | 868,395 | 856,517 | 863,056 | |||||||||||
Financial Services | 2,897,119 | 3,475,039 | 3,885,517 | |||||||||||
Other | 333,485 | 371,720 | 347,885 | |||||||||||
Total | 8,246,806 | 8,866,798 | 9,338,561 | |||||||||||
Elimination | (266,167 | ) | (319,204 | ) | (439,489 | ) | ||||||||
Corporate assets | 389,906 | 543,068 | 600,028 | |||||||||||
Consolidated total | 8,370,545 | 9,090,662 | 9,499,100 | |||||||||||
F-71
Other significant items: |
Year Ended March 31 | ||||||||||||||
2003 | 2004 | 2005 | ||||||||||||
(Yen in millions) | ||||||||||||||
Depreciation and amortization: | ||||||||||||||
Electronics | 203,433 | 210,888 | 275,701 | |||||||||||
Game | 53,496 | 57,256 | 16,504 | |||||||||||
Music | 20,008 | 16,123 | 9,451 | |||||||||||
Pictures | 8,552 | 7,844 | 5,598 | |||||||||||
Financial Services, including deferred insurance acquisition costs | 52,041 | 56,586 | 52,788 | |||||||||||
Other | 10,157 | 13,455 | 8,564 | |||||||||||
Total | 347,687 | 362,152 | 368,606 | |||||||||||
Corporate | 4,238 | 4,117 | 4,259 | |||||||||||
Consolidated total | 351,925 | 366,269 | 372,865 | |||||||||||
Capital expenditures for segment assets: | ||||||||||||||
Electronics | 181,316 | 251,980 | 311,101 | |||||||||||
Game | 40,986 | 100,360 | 18,824 | |||||||||||
Music | 9,291 | 3,651 | 2,894 | |||||||||||
Pictures | 7,138 | 6,013 | 5,808 | |||||||||||
Financial Services | 3,655 | 4,618 | 3,845 | |||||||||||
Other | 16,993 | 10,124 | 6,149 | |||||||||||
Total | 259,379 | 376,746 | 348,621 | |||||||||||
Corporate | 1,862 | 1,518 | 8,197 | |||||||||||
Consolidated total | 261,241 | 378,264 | 356,818 | |||||||||||
F-72
Year Ended March 31 | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
(Yen in millions) | |||||||||||||
Audio | 784,114 | 675,496 | 571,864 | ||||||||||
Video | 828,308 | 949,261 | 1,034,736 | ||||||||||
Televisions | 981,655 | 925,501 | 957,122 | ||||||||||
Information and Communications | 836,724 | 834,757 | 778,374 | ||||||||||
Semiconductors | 204,710 | 253,237 | 246,314 | ||||||||||
Components | 527,782 | 623,799 | 619,477 | ||||||||||
Other | 460,888 | 576,217 | 578,349 | ||||||||||
Total | 4,624,181 | 4,838,268 | 4,786,236 | ||||||||||
Year Ended March 31 | ||||||||||||||
2003 | 2004 | 2005 | ||||||||||||
(Yen in millions) | ||||||||||||||
Sales and operating revenue: | ||||||||||||||
Japan | 2,093,880 | 2,220,747 | 2,100,793 | |||||||||||
U.S.A. | 2,403,946 | 2,121,110 | 1,977,310 | |||||||||||
Europe | 1,665,976 | 1,765,053 | 1,612,536 | |||||||||||
Other | 1,309,831 | 1,389,481 | 1,468,977 | |||||||||||
Total | 7,473,633 | 7,496,391 | 7,159,616 | |||||||||||
March 31 | ||||||||||||||
2003 | 2004 | 2005 | ||||||||||||
(Yen in millions) | ||||||||||||||
Long-lived assets: | ||||||||||||||
Japan | 1,365,160 | 1,430,443 | 1,414,632 | |||||||||||
U.S.A. | 713,524 | 671,534 | 662,120 | |||||||||||
Europe | 164,459 | 211,147 | 183,620 | |||||||||||
Other | 148,616 | 133,640 | 144,896 | |||||||||||
Total | 2,391,759 | 2,446,764 | 2,405,268 | |||||||||||
F-73
Year Ended March 31 | |||||||||||||||
2003 | 2004 | 2005 | |||||||||||||
(Yen in millions) | |||||||||||||||
Sales and operating revenue: | |||||||||||||||
Japan — | |||||||||||||||
Customers | 2,247,030 | 2,352,923 | 2,249,548 | ||||||||||||
Intersegment | 2,433,998 | 2,514,698 | 2,575,093 | ||||||||||||
Total | 4,681,028 | 4,867,621 | 4,824,641 | ||||||||||||
U.S.A. — | |||||||||||||||
Customers | 2,632,176 | 2,341,304 | 2,166,323 | ||||||||||||
Intersegment | 189,502 | 198,450 | 235,362 | ||||||||||||
Total | 2,821,678 | 2,539,754 | 2,401,685 | ||||||||||||
Europe — | |||||||||||||||
Customers | 1,520,930 | 1,647,694 | 1,524,182 | ||||||||||||
Intersegment | 121,598 | 66,950 | 52,417 | ||||||||||||
Total | 1,642,528 | 1,714,644 | 1,576,599 | ||||||||||||
Other — | |||||||||||||||
Customers | 1,073,497 | 1,154,470 | 1,219,563 | ||||||||||||
Intersegment | 789,444 | 813,798 | 804,721 | ||||||||||||
Total | 1,862,941 | 1,968,268 | 2,024,284 | ||||||||||||
Elimination | (3,534,542 | ) | (3,593,896 | ) | (3,667,593 | ) | |||||||||
Consolidated total | 7,473,633 | 7,496,391 | 7,159,616 | ||||||||||||
Operating income: | |||||||||||||||
Japan | 11,444 | (69,875 | ) | (765 | ) | ||||||||||
U.S.A. | 98,762 | 85,290 | 72,414 | ||||||||||||
Europe | 62,206 | 78,822 | 12,186 | ||||||||||||
Other | 63,773 | 70,543 | 58,554 | ||||||||||||
Corporate and elimination | (50,745 | ) | (65,878 | ) | (28,470 | ) | |||||||||
Consolidated total | 185,440 | 98,902 | 113,919 | ||||||||||||
F-74
Additions | |||||||||||||||||||||
Balance at | charged to | Balance | |||||||||||||||||||
beginning | costs and | Deductions | Other | at end of | |||||||||||||||||
of period | expenses | (Note 1) | (Note 2) | period | |||||||||||||||||
(Yen in millions) | |||||||||||||||||||||
Year ended March 31, 2003: | |||||||||||||||||||||
Allowance for doubtful accounts and sales returns | 120,826 | 87,330 | (89,284 | ) | (8,378 | ) | 110,494 | ||||||||||||||
Year ended March 31, 2004: | |||||||||||||||||||||
Allowance for doubtful accounts and sales returns | 110,494 | 78,323 | (65,281 | ) | (10,862 | ) | 112,674 | ||||||||||||||
Year ended March 31, 2005: | |||||||||||||||||||||
Allowance for doubtful accounts and sales returns | 112,674 | 56,863 | (84,507 | ) | 2,679 | 87,709 | |||||||||||||||
1. | Amounts written off. |
2. | Translation adjustment. |
Balance at | Balance | ||||||||||||||||||||
beginning | Deductions | Other | at end of | ||||||||||||||||||
of period | Additions | (Note 1) | (Note 2) | period | |||||||||||||||||
(Yen in millions) | |||||||||||||||||||||
Year ended March 31, 2003: | |||||||||||||||||||||
Valuation allowance — Deferred tax assets | 252,208 | 72,303 | (189,843 | ) | (18,600 | ) | 116,068 | ||||||||||||||
Year ended March 31, 2004: | |||||||||||||||||||||
Valuation allowance — Deferred tax assets | 116,068 | 63,936 | (39,199 | ) | (13,228 | ) | 127,577 | ||||||||||||||
Year ended March 31, 2005: | |||||||||||||||||||||
Valuation allowance — Deferred tax assets | 127,577 | 67,889 | (104,670 | ) | (1,686 | ) | 89,110 | ||||||||||||||
1. | Decrease resulting from
|