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Annual Report 1999
Year Ended March 31, 1999

Table of contents

  • Page 1
    Annual Report 1999 Year Ended March 31, 1999

  • Page 2
    ...' Equity Notes to Consolidated Financial Statements Reports of Independent Accountants Investor Information 26 28 Cautionary Statements With Respect to Forward-Looking Statements Statements made in this annual report with respect to Sony's current plans, estimates, strategies and beliefs and other...

  • Page 3
    ... the new group framework, Sony reorganized the internal company structure of the Electronics business in April 1999. The existing Electronics business was consolidated into three main business units: the Home Network Company, the Personal IT Network Company, and the Core Technology & Network Company...

  • Page 4
    Sony Corporation Annual Report 1999 2 Furthermore, Sony operates Digital Network Solutions (DNS) directly under the group headquarters in order to focus on building new network-related businesses. By developing essential technologies and charting business strategies, DNS will strive to create ...

  • Page 5
    Sony Corporation Annual Report 1999 3 p a g e Norio Ohga Chairman and Chief Executive Officer Nobuyuki Idei President and Co-Chief Executive Officer

  • Page 6
    ... Annual Report 1999 4 p a g e AIMING TO CREATE GREATER SHAREHOLDER VALUE Our corporate reorganization aims to maximize shareholder value. To meet this goal, we are working to increase the profitability of the Electronics business, our largest unit, and to reorganize our group companies...

  • Page 7
    ...This system is based on the concept of economic profit, which is obtained by deducting the cost of equity and debt from after-tax operating income. Goin g forward, our group headquarters will establish goals for the creation of shareh older value in all business units and ask each unit to design and...

  • Page 8
    ... Sales to Customers* (Billion ¥) 3,027 3,283 3,930 4,377 4,355 Electronics business consists of Audio, Video, Televisions, Information and communications, and Electronic components and other. Audio -Audio encompasses MD systems, CD players, headphone stereos, personal component stereos, hi-fi...

  • Page 9
    Sony Corporation Annual Report 1999 MUSIC Sales to Customers* (Billion ¥) 481 506 570 660 719 Music business is conducted through Sony Music Entertainment Inc. (SMEI) and Sony Music Entertainment (Japan) Inc. (SMEJ). SMEI encompasses Columbia Records Group; Epic Records Group; RED ...

  • Page 10
    ... personal component stereo system features the Direct Touch Editor function, making recording from CD to MD simple. A new DVD-Video player designed with an emphasis on high quality and reliability. The first Super Audio CD player is scheduled to be launched in Japan in May 1999. The Super Audio CD...

  • Page 11
    ...Corporation Annual Report 1999 This model integrates both DV digital and S-VHS video formats in a single deck. An i.LINK-compatible DV terminal on it allows for easy connection to digital camcorders or PCs that are i.LINK-ready. This LCD projection TV can reproduce sharply defined, clear images...

  • Page 12
    ... by Sony Computer Entertainment (SCE). This processor incorporates a massively parallel rendering engine. 10 p a g e An image from a demonstration program created by SCE for the next generation PlayStation. This demonstration program is based on data from Gran Turismo , SCE's super-hit game title...

  • Page 13
    ...a g e The touching family drama Stepmom rounded out Sony Pictures Entertainment's top hits in 1998, demonstrating the box office draw of leading actresses Julia Roberts and Susan Sarandon. Wheel of Fortune has been the highest-rated game show in the United States for the past 13 years and has been...

  • Page 14
    ... and production to marketing. A NEW SYSTEM AIMED AT REALIGNING THE ELECTRONICS BUSINESS In order to respond quickly in this environment, in April 1999, Sony reorganized its Electronics business into a structure that is centered on three Network Companies: the Home Network Company, the Personal IT...

  • Page 15
    ... unit and will work toward contributing to improving the Sony Group's shareholder value through such activities as supplying the key devices critical to next generation digital AV products. In the field of broadcast-use video equipment, through its Broadcasting & Professional Systems Company, Sony...

  • Page 16
    ..., VAIO home-use PCs, and Wega color TVs performed well. These products have such features as quality images and sound as well as easy operation and sophisticated designs. In addition, Sony has been quick to incorporate network era technologies and functions. Through the new Network Company structure...

  • Page 17
    ... VAIO series in combination with digital AV equipment. During the year, Sony began selling in Japan and the United States compact-size VAIO notebook PC models with built-in miniature CCD video cameras. This opened the door to a new market by making it easy to capture moving or still images and store...

  • Page 18
    ...worldwide market. Supporting their popularity is a broad product line, extending from standard 4:3 dimensions to widescreen models and from small to large screens. Some models feature Sony's new Digital Reality Creation: Multi-Function (DRC-MF), a digital technology which creates high quality images...

  • Page 19
    ... to create the new marketing methods needed to take advantage of the rapid proliferation of digital networks. In the United States, Sony sells VAIO home-use PCs, peripherals, digital still cameras, and AV accessories through its Sony VAIO Direct and Sony Extras Direct internet web sites. In February...

  • Page 20
    ... TOP MANAGEMENT KEN KUTARAGI President and Chief Executive Officer Sony Computer Entertainment Inc. Ever since the first PlayStation game console went on sale in December 1994, Sony Computer Entertainment (SCE) has made a concerted effort to grow rapidly in Japan, North America, and Europe. As...

  • Page 21
    ... to build new production lines at Toshiba's facilities in Oita, Japan. These lines will employ next generation 0.18-0.15 micron process technology. Also, for the Graphics Synthesizer, SCE is founding a wholly owned subsidiary and is currently constructing a plant at Sony Nagasaki Corporation, which...

  • Page 22
    Sony Corporation Annual Report 1999 R E V I E W O F O P E R AT I O N S M u s i c 20 p a g e MESSAGE FROM TOP MANAGEMENT Sony Music Entertainment Inc. (SMEI), responsible for Sony's Music business outside Japan, achieved a record year, reaching new heights financially, creatively, and ...

  • Page 23
    ... agreements were reached for the American Recordings and Kassner catalogues, and subpublishing agreements for the world outside North America for the Foreign Imported Production & Publishing, Journey, and UB40 catalogues. SONY MUSIC ENTERTAINMENT (JAPAN) INC. (SMEJ) SMEJ celebrated its...

  • Page 24
    ...our annual film slate. Our Television group now produces programming on five continents and continues to be the leading independent programming supplier in the United States. At the same time, we made real progress in positioning Sony Pictures Entertainment (SPE) for global leadership in the digital...

  • Page 25
    ...the year, Columbia TriStar Television continued to report consistently high earnings with a total of 34 programs (including 17 network prime time series) on air in the United States-more than any other independent supplier. Our game shows- Wheel of Fortune and Jeopardy! -and soap operas- Days of Our...

  • Page 26
    ...) Corporation in the Republic of the Philippines with Sony and its local subsidiary in August 1998, and plans to start operations in the fall of 1999. BUSINESS EXPANSION CONTINUES In recent years, insurance-in-force and total assets at Japan's life insurance companies have in general been declining...

  • Page 27
    ... and is planning to commence a new business line of selling individual automobile insurance in Japan in the fall of 1999. LOOKING AHEAD TO MORE GROWTH Consulting services offered by Lifeplanners will remain the mainstay of Sony Life's sales activities. To address customers' needs, Sony Life is...

  • Page 28
    ...on this strategy, Sony has set targets for operations in Japan, North America, Latin America, Europe, and Asia. DEVELOPING TECHNOLOGIES TO PROTECT THE ENVIRONMENT Sony is striving to promote R&D programs that focus on the environment. In Japan, the Environmental Technology Center, located within the...

  • Page 29
    ... in DVD-Video players to be introduced in Japan, the United States, and Europe. These technologies will be applied to a growing range of products in coming years. In the United States, Sony Electronics Inc. (SEL) is committed to increasing the number of products that meet the Energy Star standard...

  • Page 30
    Sony Corporation Annual Report 1999 Management [Founder and Honorary Chairman] Akio Morita [Board of Directors] * Corporate Executive Officer Norio Ohga* 28 p a g e Nobuyuki Idei* President and Representative Director, Co-Chief Executive Officer Chairman and Representative Director, Chief...

  • Page 31
    ... total assets would have increased by approximately 3% compared with the previous fiscal year-end if the value of the yen had remained the same at March 31, 1999 as at the previous fiscal year-end.) LIQUIDITY AND CAPITAL RESOURCES Debt Finance and Liquidity Management Sony's financial policy is...

  • Page 32
    ... in Japan and the U.S. Notes and accounts payable, trade declined due principally to the effect of reductions in production. Accrued income and other taxes decreased principally in line with Sony Corporation's decline in profit. Among long-term liabilities, the large decline in long-term debt was...

  • Page 33
    ..., the Game business maintained positive momentum principally outside Japan. In the Pictures business, operating income also increased. Impact of Foreign Exchange Fluctuations and Basic Countermeasures During the year, sales outside Japan accounted for approximately 72% of Sony's consolidated sales...

  • Page 34
    ... in the Electronics business, to minimize the adverse effects of foreign exchange fluctuations on its financial results and to reduce inventory and cost, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations outside Japan. Sales During the...

  • Page 35
    ... operating income was principally attributable to sluggish sales and increases in cost of sales and selling, general and administrative expenses. In cost of sales, research and development expenses, principally for technologies related to semiconductors, broadcast-use equipment, and digital networks...

  • Page 36
    ...PC sales increased primarily due to much higher sales of both notebook and desktop VAIO PCs in Japan. In terms of earnings, the positive contribution from notebook PCs in the second half of the year was overshadowed by the overall negative impact of desktop PCs. In computer peripherals, CD-RW drives...

  • Page 37
    ... for video CD players and other applications. Financial performance worsened because the reduced sales heightened the impact of depreciation of production equipment. Sales and operating income of CRTs for computer displays also deteriorated, principally in Europe, due to increased price competition...

  • Page 38
    ... Music's online initiatives. Increased production and improved operating efficiencies in compact disc manufacturing plants, which supply disks for the Game business and for third parties in addition to the Music business, also contributed to earnings. Pictures In the Pictures business, sales...

  • Page 39
    ...Sony Life conservatively managed its investment assets principally through government and corporate bonds. For future business development, Sony Insurance Planning Inc. was established in October 1998 in order to start direct sales of individual automobile insurance in Japan. Sony Insurance Planning...

  • Page 40
    ... in Japan, internet-related businesses in the U.S., and location-based entertainment complex businesses. Development of location-based entertainment complexes is in progress in San Francisco, Berlin, and Tokyo. In San Francisco, an entertainment complex including stores and theatres will open in...

  • Page 41
    ...to increase research and development expenses and seek strategic alliances when necessary. Furthermore, Sony intends to accelerate the streamlining of its manufacturing facilities and supply chain management. In the Game business, Sony seeks to promote integration with the Electronics business. Sony...

  • Page 42
    ... are expected to continue due to start-up expenses at such long-term strategic businesses as satellite distribution services including program supplying businesses in Japan, and location-based entertainment complexes in San Francisco, Berlin, and Tokyo. EURO On January 1, 1999, the introduction of...

  • Page 43
    ... status of ordering systems connected to major suppliers, sales distributors, and dealers by electronic data interchange. Facilities and Infrastructure; Sony is addressing the Year 2000 readiness of control units of plants and buildings, such as clean room facilities, telephone exchanges, networks...

  • Page 44
    ... impact on its performance at this time. Communication networks may be affected if third party vendors such as network service carriers fail to be Year 2000 compliant. Logistics of Sony's global operations may be affected if vendors, customers, freight forwarders, shipping companies, and other...

  • Page 45
    ...Net income (loss) ...Net income (loss) per share Basic ...Diluted ...Depreciation and amortization* . . Capital expenditures (additions to fixed assets) ...R&D expenses ...Tokyo Stock Exchange price per share of Common Stock: High ...Low ...New York Stock Exchange price per American Depositary Share...

  • Page 46
    ...Â¥120=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 1999, as described in Note 3 of Notes to Consolidated Financial Statements. 2. Basic net income (loss) per share (EPS) is computed based on the average number of shares of common stock outstanding during each period and...

  • Page 47
    ..., Sony believes that the information in this table is useful to investors in understanding the sales contributions of the products in this business segment. Operating income information by product category is not available. BY GEOGRAPHIC SEGMENT Japan ...Â¥1,105,152 27.7% United States ...Europe...

  • Page 48
    ...12) ...Time deposits (Note 12) ...Marketable securities (Note 9) ...Notes and accounts receivable, trade (Note 8) ...Allowance for doubtful accounts and sales returns ...Inventories (Note 7) ...Deferred income taxes (Note 14) ...Prepaid expenses and other current assets ...Total current assets ...46...

  • Page 49
    ...17) ...Notes and accounts payable, trade (Note 8) ...Accounts payable, other and accrued expenses (Note 13) ...Accrued income and other taxes ...Other (Note 14) ...Total current liabilities ...Long-term liabilities: Long-term debt (Notes 10, 12 and 17) ...Accrued pension and severance costs (Note 13...

  • Page 50
    Sony Corporation Annual Report 1999 Consolidated Statements • of Income Sony Corporation and Consolidated Subsidiaries Year ended March 31 Yen in millions 1997 1998 1999 Dollars in thousands (Note 3) 1999 Sales and operating revenue: Net sales (Note 8) ...Insurance revenue ...Other ...

  • Page 51
    ... inventories ...Increase in film inventories ...Increase (decrease) in notes and accounts payable ...Increase (decrease) in accrued income and other taxes ...Increase in future insurance policy benefits and other ...Increase in deferred insurance acquisition costs ...Changes in other current assets...

  • Page 52
    Sony Corporation Annual Report 1999 Consolidated Statements Stockholders' Equity Sony Corporation and Consolidated Subsidiaries Year ended March 31 • of Changes in Yen in millions Additional paid-in capital Accumulated other comprehensive income Treasury stock, at cost Common stock ...

  • Page 53
    Sony Corporation Annual Report 1999 Yen in millions Additional paid-in capital Accumulated other comprehensive income Treasury stock, at cost Common stock Retained earnings Total Balance at March 31, 1998 ...Â¥ 406,196 Exercise of stock purchase warrants . . 81 Conversion of convertible ...

  • Page 54
    ... development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and industrial markets. Sony's principal manufacturing facilities are located in Japan, the United States, Europe, and Asia, and its products are marketed by sales subsidiaries...

  • Page 55
    ... on the average cost method and are reflected in income. Inventories Inventories in electronics, game and music are valued at cost, not in excess of market, cost being determined on the "average cost" basis except for the cost of finished products carried by certain subsidiary companies which is...

  • Page 56
    ...as the Japanese Commercial Code prohibits charging such stock issue costs to capital accounts which is the prevailing practice in the United States of America. Comprehensive income Sony adopted Statement of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income" in the quarter...

  • Page 57
    ... ¥120=U.S.$1, the approximate current rate at March 31, 1999, has been used for the purpose of presentation of the U.S. dollar amounts in the accompanying consolidated financial statements. 4. Reconciliation of the differences between basic and diluted net income per share (EPS) Reconciliation of...

  • Page 58
    .... In connection with the Loews merger and the subsequent public offering, Sony received proceeds of ¥53,007 million ($441,725 thousand) and recorded a gain of ¥5,181 million ($43,175 thousand), which is reflected in other income-other. 56 p a g e Current: Finished products ...Work in process...

  • Page 59
    ..., Sony Corporation contributed certain marketable equity securities, not including those of its subsidiaries and affiliated companies, to an employee retirement benefit trust, with no cash proceeds thereon. The fair value of these securities at 10. Short-term borrowings and long-term debt Short-term...

  • Page 60
    Sony Corporation Annual Report 1999 Long-term debt comprises the following: Yen in millions March 31 1998 1999 Dollars in thousands March 31, 1999 58 p a g e Unsecured loans, representing obligations principally to banks: Due ...

  • Page 61
    ... such agreements or otherwise, will be applicable to all present or future indebtedness to such banks. 11. Insurance-related operations Sony's stock life insurance subsidiary maintains accounting records as noted in Note 2 in accordance with the accounting principles and practices prescribed by the...

  • Page 62
    ...approximate fair value. Short-term borrowings and long-term debt The fair values of short-term borrowings and total longterm debt, including the current portion, were estimated based on either the market value or the discounted amounts of future cash flows using Sony's current incremental borrowing...

  • Page 63
    ...are summarized as follows: Yen in millions Carrying amount Estimated fair value At March 31, 1998 Cash and cash equivalents ...Time deposits ...Short-term borrowings ...Long-term debt including the current portion ...Forward exchange contracts ...Interest rate and currency swap agreements ...Option...

  • Page 64
    Sony Corporation Annual Report 1999 13. Pension and severance plans Upon terminating employment, employees of Sony Corporation and subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. For employees voluntarily retiring, ...

  • Page 65
    Sony Corporation Annual Report 1999 The changes in benefit obligation and plan assets, funded status, composition of amounts recognized in the consolidated balance sheet and assumptions used were as follows: Foreign plans Dollars in thousands March 31, 1999 Yen in millions March 31 1998 1999 ...

  • Page 66
    ... as plan assets under U.S. GAAP. Yen in millions 64 Dollars in thousands 1999 Year ended March 31, 1999 Year ended March 31 1997 1998 p a g e Income before income taxes: Sony Corporation and subsidiaries in Japan ...¥226,847 Foreign subsidiaries ...85,582 ¥312,429 Income taxes-Current: Sony...

  • Page 67
    Sony Corporation Annual Report 1999 Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows: Year ended March 31 1997 1998 1999 Statutory tax rate ...Increase (reduction) in taxes resulting from: Income tax credit ...Valuation allowance ...

  • Page 68
    ... listed subsidiaries are described in Note 18. On November 20, 1991, Sony Corporation made a free share distribution of 33,908,621 shares for which no accounting entry is required in Japan. Had the distribution been accounted for in the manner adopted by companies in the United States of America...

  • Page 69
    ... stock had been acquired nor had any share subscription rights been granted under this approval. During the year ended March 31, 1998, Sony adopted stock appreciation rights (SAR) plans in Japan and Europe as incentive plans for selected employees. Sony also adopted an SAR plan in the United States...

  • Page 70
    Sony Corporation Annual Report 1999 Other comprehensive income for the years ended March 31, ... Reclassification adjustment for gains included in net income ...Minimum pension liability adjustment ...Foreign currency translation adjustments ...Other comprehensive income ... $ 62,367 (489,150) ...

  • Page 71
    Sony Corporation Annual Report 1999 16. Research and development expenses and advertising costs Research and development expenses Research and development expenses charged to cost of sales for the years ended March 31, 1997, 1998 and 1999 were ¥282,569 million, ¥318,044 million and ¥375,314 ...

  • Page 72
    ...and credit card businesses, a business focused on parts trading services within the Sony group, satellite distribution services including program supplying businesses in Japan, internet-related businesses in the United States and development of location-based entertainment complexes. Sony's products...

  • Page 73
    Sony Corporation Annual Report 1999 Business segments Sales and operating revenue: Yen in millions Year ended March 31 1997 1998 1999 Dollars in thousands Year ended March 31, 1999 Sales and operating revenue: Electronics - Customers ...Intersegment ...Total ...Game - Customers ...Intersegment...

  • Page 74
    Sony Corporation Annual Report 1999 Segment profit or loss: Yen in millions Year ended March 31 1997 1998 1999 Dollars in thousands Year ended March 31, 1999 Operating income (loss): Electronics ...Game ...Music ...Pictures ...Insurance ...Other ...Total ...Elimination ...Unallocated amounts: ...

  • Page 75
    ...breakdown of Electronics sales and operating revenue to external customers by product category. The Electronics business is managed as a single operating segment by Sony's management. Yen in millions Year ended March 31 Dollars in thousands Year ended 1999 March 31, 1999 1997 1998 Audio ...Video...

  • Page 76
    Sony Corporation Annual Report 1999 Geographic information Sales and operating revenue which are attributed to countries based on location of customers and long-lived assets for the years ended March 31, 1997, 1998 and 1999 are as follows: Yen in millions Year ended March 31 1997 1998 1999 ...

  • Page 77
    Sony Corporation Annual Report 1999 The following information is sales and operating revenue and operating income which show those recognized by geographic origin for the years ended March 31, 1997, 1998 and 1999. In addition to the disclosure requirements under FAS 131, Sony discloses this ...

  • Page 78
    ... of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the...

  • Page 79
    ..., in accordance with generally accepted auditing standards in the United States of America, the consolidated financial statements of Sony as of March 31, 1998 and 1999, and for each of the years in the three-year period ended March 31, 1999, and in our report dated April 26, 1999, we expressed...

  • Page 80
    ... Sony Europe Finance Plc Investor Relations 15th Floor, Commercial Union Tower, St. Helens, 1 Undershaft, London EC3A 8NP Phone: 0171-426-8606 Facsimile: 0171-426-8677 Depositary, Transfer Agent, and Registrar for American Depositary Receipts Morgan Guaranty Trust Company of New York Shareholder...

  • Page 81
    Sony Corporation Printed in Japan