Sony 2005 Annual Report Download - page 124

Sony Corporation 121
On October 1, 2002, Sony implemented a share exchange as
a result of which Aiwa Co.,Ltd. became a wholly-owned subsid-
iary. As a result of this share exchange, Sony issued 2,502
thousand shares. The shares were included in the computation
of basic and diluted EPS.
On May 1, 2003, Sony implemented a share exchange as a
result of which CIS Corporation became a wholly-owned subsid-
iary. As a result of this share exchange, Sony issued 1,088
thousand shares. The shares were included in the computation
of basic and diluted EPS.
As a result of the adoption of EITF Issue No. 04-8, Sony’s
diluted EPS of income before cumulative effect of an accounting
change for the year ended March 31, 2004 was restated in the
above table (Note 2).
(3) EPS attributable to subsidiary tracking stock:
Weighted-average shares used for computation of EPS attribut-
able to subsidiary tracking stock for the years ended March 31,
2003, 2004 and 2005 were 3,072 thousand shares. As dis-
cussed in Note 2, there were no potentially dilutive securities for
EPS of subsidiary tracking stock outstanding at March 31,
2003, 2004 and 2005.
23. Variable interest entities
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 and ¥27,035 million, respectively, and a cumula-
tive effect of accounting change of ¥1,729 million 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 ¥27,374 million ($256 million). 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 ¥27,374 million ($256 million), Sony is obligated to
make up the lesser of the shortfall or ¥22,973 million ($215 million).
A subsidiary in the Pictures segment 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 ¥43,584 million. Of
this amount, ¥1,181 million was contributed by the subsidiary,
¥10,198 million was provided by unrelated third party investors
and the remaining funding is provided through a ¥32,205 million
bank credit facility. On July 1, 2003, Sony consolidated this entity.
Upon consolidation of the VIE, assets and liabilities increased by
¥10,179 million and ¥10,586 million, respectively, and a cumula-
tive effect of accounting change of ¥388 million was charged to
net income with no tax effect. As of March 31, 2005, the total
outstanding under the bank credit facility was ¥6,441 million
($60 million). Under the agreement, the subsidiary’s ¥1,181
million ($11 million) equity investment is the last equity to be
repaid. Additionally, it must pay to the third party investors up
to ¥2,040 million ($19 million) of any losses out of a portion of
its distribution fees. Any losses incurred by the VIE over and
above ¥3,221 million ($30 million) will be shared by the other
investors. The subsidiary acquired the international distribution
rights, as defined, to twelve pictures meeting certain minimum
requirements within the time period provided in the agreement.
Sony had 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 and
¥60,329 million, respectively. However, there was no impact to
Sony’s net income. On November 4, 2004, Sony purchased the
remaining shares of the VIE from other partners. As a result, it is
now a 100% owned subsidiary and no longer a VIE.
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, 2005, the balance of
the bank loan was ¥3,034 million ($28 million).
As of March 31, 2005, there is no VIE in which Sony holds a
significant variable interest that Sony is not the primary beneficiary.
As described in Note 6, on April 8, 2005, a consortium led by
SCA and its equity partners completed the acquisition of MGM.
Sony has reviewed the investment and determined that MGM is
a VIE. However, MGM will not be consolidated but accounted
for under the equity method as Sony is not the primary beneficiary
of this VIE.
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