Sony 2003 Annual Report Download - page 222

Consolidated Financial Information 2003
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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 ¥48,720 million ($406 million). Of this
amount, ¥1,320 million ($11 million) was contributed by the subsidiary, ¥11,400 million ($95 million) was
provided by unrelated third party investors and the remaining funding is provided through a ¥36,000 million
($300 million) bank credit facility of which ¥1,320 million ($11 million) was outstanding as of March 31, 2003.
Effective July 1, 2003, Sony will be required to consolidate this entity. Upon consolidation of the VIE, assets
and liabilities are expected to increase by ¥7,080 million ($59 million); however, there will be no impact to net
income. Under the agreement, the subsidiary’s ¥1,320 million ($11 million) equity investment is the last equity
to be repaid. Additionally, it must pay to the third party investors up to ¥2,280 million ($19 million) of any losses
out of a portion of its distribution fees. Any losses incurred by the VIE over and above the ¥3,600 million
($30 million) 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. 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 certain
minimum returns to the third party equity investors. At March 31, 2003, the maximum exposure amount is
¥30,574 million ($255 million).
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 at March 31, 2002 and 2003. Effective July 1, 2003,
Sony will be required to consolidate this entity. Upon consolidation of the VIE, assets and liabilities are
expected to increase by ¥59,662 million ($497 million). However, there will be no impact to Sony’s net
income. The VIE was initially capitalized with ¥90,790 million ($757 million) of total funding, ¥32,561
million ($271 million) was provided by the equity investors with the remaining funding of ¥58,229 million
($486 million) 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. Should the VIE be unable to meet
its obligations under the syndicated bank loan, Sony would be exposed to the potential impairment of its
investment in the VIE which was ¥12,840 million ($107 million) at March 31, 2003.
Sony has utilized a VIE to implement a stock option plan for Japanese selected employees. The VIE has
been consolidated by Sony since its establishment. There will be 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 which has been guaranteed by Sony Corporation. If the market
value of common stock is below the price that Sony acquired the treasury stock for at the time of