Sony 2006 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... the Flat Panel Era 16 Business Overview 18 Review of Operations Electronics 20 Game 28 Entertainment 32 Financial Services 37 All Other 39 Research and Development 40 Corporate Governance/New Directors and Corporate Executive Officers 42 Corporate Social Responsibility 44 Financial Section 47 Stock...

  • Page 3
    ... and equity investees. The effective tax rate was 61.6%, exceeding the Japanese statutory rate, primarily as a consequence of the recording of additional valuation allowance against deferred tax assets by Sony Corporation and certain of its subsidiaries in Japan and overseas, and the recording of...

  • Page 4
    To Our Shareholders A Message from Howard Stringer, CEO 2

  • Page 5
    .... As part of our new plan, Sony made firm commitments to the financial community regarding cost savings initiatives and also identified certain areas that we believed would be key to our future growth-such as high definition (HD), software development, digital content and Cell technology, among...

  • Page 6
    ...to be a leader in each of the areas on which we focus. In this year's annual report, we take a look at the Sony Group's mid-term strategies, recent financial and operating results, and key operating company highlights. I hope you will find the report informative and that it will provide a glimpse of...

  • Page 7
    ... "Network Company" system within Electronics in favor of a more centralized Electronics Business Group. As a result, key decision making and key functional areas-such as product planning, technology, procurement, manufacturing, and sales and marketing-have been consolidated under the Electronics CEO...

  • Page 8
    ... and HD content. Other key Electronics growth focus areas include: • • • • Semiconductors for games and imaging, and key components for developing innovative technologies for system LSIs-for home and mobile products-and next-generation displays, as well as Blu-ray Disc-related devices...

  • Page 9
    ...Electronics CEO, Representative Corporate Executive Officer Ryoji Chubachi entered Sony Corporation after obtaining his Ph.D. in Resource Engineering in 1977. He was involved in developing recording media, and in 1989 was transferred to Sony Magnetic Products Inc. of America. Upon returning to Japan...

  • Page 10
    ...• Development of unique products by Sony Ericsson Mobile Communications (e.g., Walkman® phones) that leverage Sony's electronics and entertainment assets; Continued strong performance from Sony Financial Holdings- including Sony Life, Sony Assurance and Sony Bank-with its initial public offering...

  • Page 11
    ... product appeal, technological strength and operational power. In these pages, Electronics CEO Ryoji Chubachi responds to questions about the tasks ahead for Sony as it revitalizes its electronics business. He also elaborates on the progress of structural reforms, measures to revive the television...

  • Page 12
    ..., responsive management by eliminating our internal "Network Company" system and adopting a new system based on business groups that clearly identifies key areas of focus. At the same time, we strengthened horizontal corporate functions. Specifically, while I, as Electronics CEO, have direct control...

  • Page 13
    ... Blu-ray Disc player in the United States. We also plan to introduce a VAIO â„¢ PC with a Blu-ray Disc drive. We expect the Blu-ray Disc format will be a driver of growth for HD-related businesses. Sony is the only company positioned to offer both a broad selection of HD hardware and a large library...

  • Page 14
    ...-to-use products that are uniquely Sony-that is, they reflect our unparalleled electronics technologies and entertainment and service capabilities and are still a half step ahead of their time. application programs, codecs (coder/decoders) and digital rights management (DRM) software. Reinforcing...

  • Page 15
    Feature Story HD World The World of High Definition, Created by Sony BRAVIA High-Resolution, Slim-Profile LCD Televisions for the Flat Panel Era 13

  • Page 16
    ... of image quality, and the advanced digital signal processing technology that reflects our accumulated expertise in broadcasting cameras. I look forward to this camera going on the market, in our continuing effort to meet the customer's expectations. 4K-SXRD Sony's 4K-SXRD is a display device for...

  • Page 17
    ... a single disc. Blu-ray Disc also incorporates a robust content protection mechanism that features superior data encoding. More than 180 partner companies from the consumer electronics, IT, game, movie and music industries currently support Blu-ray Disc. Sony Pictures Entertainment Inc. (SPE), Metro...

  • Page 18
    ... developed Sony Panels and other technologies designed to achieve outstanding image quality and implementing a full-scale advertising program. As a consequence, BRAVIA won major acceptance, particularly in the United States, Japan and Europe, earning the top share of the global LCD television market...

  • Page 19
    ... implementing a full-scale, global marketing program. We doubled our annual advertising budget in Europe and Japan and conducted our largest-ever promotions in North America. Moreover, close communication between the TV Business Group, regional sales companies and Inazawa TEC, the core manufacturing...

  • Page 20
    ...Sony's Employee Pension Fund, as well as favorable exchange rates. â- Products that recorded an increase in operating income included Handycam® video cameras and VAIO PCs. Operating income declined for such products as CRT televisions, image sensors and LCD televisions. â- Sales in this business...

  • Page 21
    ... the music content business of Sony Music Entertainment (Japan) Inc. (SMEJ), the music publishing business of Sony Music Entertainment Inc. (SMEI), the network services business of Sony Communication Network Corporation (SCN), and an animation products production and marketing business. Sales in...

  • Page 22
    ...-screen flat panel televisions and spurring demand for HD content for the home. In response, we plan to roll out Blu-ray Disc players in 2006 in the U.S. market. We will continue expanding our lineup of products with the aim of realizing "HD World," one of Sony's growth strategies. LCD television...

  • Page 23
    21

  • Page 24
    ... manufacturing operations-with the intent of bolstering our digital imaging business. This allowed us to accelerate development of a new line of SLR cameras based on the α mount system, which we launched in summer 2006. We believe that the digital SLR market offers serious potential for expansion...

  • Page 25
    23

  • Page 26
    ... in the digital video camera market and will introduce a diverse array of products meeting the needs of each region. We continued to expand our portable audio lineup by introducing the Walkman® A Series of digital music players, which incorporate a hard disk or flash memory. Stylishly executed...

  • Page 27
    25

  • Page 28
    ...television or video playing in the home from a remote location inside or outside the home via an Internet connection or wireless LAN connection. We will make LocationFreeâ„¢ software development kits available to third-party developers in the mobile phone and personal digital assistant (PDA) markets...

  • Page 29
    27

  • Page 30
    ... grown into the biggest-ever home entertainment platform, with cumulative worldwide shipments surpassing the 100 million-unit mark, exceeding the total number of PlayStation® (PS) consoles shipped. More than 7,000 software titles were released for PS2 from third-party developers and SCE, and, as of...

  • Page 31
    29

  • Page 32
    ... HD, bringing enjoyment of advanced computer entertainment to homes around the world. With the overwhelming processing capabilities of the Cell, PS3 is capable of playing back content recorded on Blu-ray Disc with unparalleled image and sound quality. The controller included as standard equipment...

  • Page 33
    ... and the effective positioning of people in each studio. Going forward, SCE WWS will spearhead efforts to further consolidate and shape the SCE Group's software resources. As part of its long-term strategy, SCE also acquired Guerrilla B.V., a Netherlands-based software developer with a global...

  • Page 34
    ...ray Disc. SPHE launched its new digital sell-through distribution business in April 2006, making films available for sale via the Internet on sites including Movielink and CinemaNow. SPHE also continued to focus on international expansion and its third-party acquisition as well as production program...

  • Page 35
    ... 2005 Columbia Pictures Industries, Inc., DreamWorks L.L.C. and Spyglass Entertainment Group, LLC. All Rights Reserved. WHEEL OF FORTUNE © 2006 Califon Productions, Inc. 2 Wheel of Fortune Wheel of Fortune, which has ranked as television's No. 1 syndicated series for 88 consecutive rating sweeps...

  • Page 36
    ... new channels, producing local language TV programs and signing new distribution deals with international broadcasters and other media outlets. SPTI is responsible for licensing Sony Pictures' feature films and television programming to television, mobile and digital content delivery outlets outside...

  • Page 37
    ... and highest-charting album in the group's history. The album sold over 3 million copies worldwide. 7 6 9 Ken Hirai One of Japan's best-known male vocalists, Ken Hirai, celebrated 10 years in the music business with an anthology of all of his singles, from his debut right up to his most recent...

  • Page 38
    ...the joint venture's first CEO, moved to the post of Chairman of the Board. Digital Music SONY BMG has been at the forefront of developing the digital market for its entertainment content, and during calendar year 2005 music sales through online outlets and mobile phones accounted for 7% of the joint...

  • Page 39
    ... services by SFH Group companies. Sony Life's Lifeplanner* life insurance sales professionals sell Sony Assurance's automobile insurance products and introduce Sony Bank's mortgage loans to their own customers. Similarly, Sony Bank sells Sony Life's individual annuities, Sony Life underwrites group...

  • Page 40
    ... service. As Sony Bank expands its products and services, its financial indicators are keeping pace. Deposited assets (the total of deposits and investment trusts) amounted to ¥675.1 billion at fiscal year-end, up 17%, while loans outstanding climbed 89%, to ¥239.4 billion. The number of accounts...

  • Page 41
    ... support to BLOOD+ and Aniplex's business on a global scale. In addition to the launch of a BLOOD+ video package and Internet transmission of BLOOD+ by other Group companies, Sony Music Entertainment (Japan) provided the opening and closing theme music for the series and Sony Pictures Entertainment...

  • Page 42
    .... In the area of device technologies, we are concentrating on Blu-ray Disc-related technologies, such as blue-violet laser diodes, as part of our effort to realize the "HD World" concept, a major Sony initiative. In addition, in October 2005 we launched the Display Device Development Group to spur...

  • Page 43
    ... of added value. To make effective use of patented assets, we are pursuing cross-licensing agreements and alliances with other companies. In addition to patents, we are utilizing copyrights, registering designs and trademarks and otherwise securing intellectual property protection to protect our...

  • Page 44
    ... Audits the performance of duties by Directors and Corporate Executive Officers (with regard to preparation process of financial statements, disclosure controls and procedures, internal controls, compliance structure, risk management structure, internal audit structure, internal hotline system and...

  • Page 45
    ..., Officer in charge of Procurement Strategies and TV & Video Business Advisor, Sumitomo Mitsui Banking Corporation Senior Vice President, JFE Steel Corporation Chief Corporate Advisor, Fuji Xerox Co., Ltd. Representative Director & Regional Managing Director-Japan, Korn/Ferry International Member of...

  • Page 46
    ... business practices and activities, including respect for human rights, safety of products and services, environmental conservation and information disclosure. Following the implementation of the Sony Group Code of Conduct, we have centralized development and management of key internal rules to help...

  • Page 47
    ... Channel, a reporting channel the objective of which is to gather product quality-related information and opinions from Sony Group employees, thereby helping us to detect problems early and respond promptly. Customer Service System Sony established its first Customer Information Center in Japan...

  • Page 48
    ... able to do so, to help address the needs of communities in regions around the world where it conducts business. Sony Group companies, offices and foundations in Japan, the United States, Europe, Canada and Australia engage in a range of activities in such fields as education, science and the arts...

  • Page 49
    ... and Stock Information ...81 Segment Information ...82 Consolidated Balance Sheets ...84 Consolidated Statements of Income ...86 Consolidated Statements of Cash Flows ...88 Consolidated Statements of Changes in Stockholders' Equity ...90 Notes to Consolidated Financial Statements ...93 Report of...

  • Page 50
    ... value of the asset group and the present value of estimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. In addition to the above restructuring efforts, Sony undertook several headcount reduction programs...

  • Page 51
    ... the previous fiscal year. This increase was a result of losses recorded on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, as well as an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex. 49

  • Page 52
    ... tax rate primarily due to the recording of additional valuation allowances against deferred tax assets by Sony Corporation and several of Sony's Japanese domestic and overseas consolidated subsidiaries, mainly within the Electronics segment, due to continued losses recorded at these businesses...

  • Page 53
    ... from the settlement of a patent-related suit. In the current fiscal year, Sony Ericsson Mobile Communications AB ("Sony Ericsson"), as a result of increased sales of products including camera phone and "Walkman®" phone models, contributed ¥29.0 billion to equity in net income, an increase of...

  • Page 54
    ... geographic areas ("Other Areas"). In Japan, although there was a significant increase in the sales of LCD televisions, as well as increased sales for flash memory and hard drive digital audio players, sales decreased for such products as mobile phones, principally to Sony Ericsson, CRT televisions...

  • Page 55
    ... flat panel televisions. In addition, sales of plasma televisions, where new product development has been terminated, also decreased worldwide. "Information and Communications" sales increased by ¥26.4 billion, or 3.2%, to ¥842.5 billion. Although sales of desktop PCs decreased, overall sales...

  • Page 56
    ...incurred by Sony. â- Manufacturing by Geographic Area Slightly more than 50% of the Electronics segment's total annual production during the fiscal year ended March 31, 2006 took place in Japan, including the production of digital cameras, video cameras, flat panel televisions, PCs, semiconductors...

  • Page 57
    ... year. Television product revenues increased by approximately $220 million primarily due to higher advertising and subscription sales from several of SPE's international channels, higher sales of television library product and the extension of a licensing agreement for Wheel of Fortune. â- 55

  • Page 58
    ... and credit card revenue. In terms of profitability, a reduced operating loss was recorded compared to the previous fiscal year, as a result of improved profitability at a credit card business at Sony Finance. Revenue and operating income in the Financial Services segment SERVICES Please note...

  • Page 59
    ... AG's recorded music business to form the SONY BMG joint venture which is accounted for by the equity method. Sales for the fiscal year ended March 31, 2006 decreased by ¥51.0 billion, or 11.1%, to ¥408.9 billion, compared with the previous fiscal year. Of total segment sales, 80% were sales to...

  • Page 60
    ... recorded in the music business, a loss was recorded within All Other mainly as the result of an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex. This was offset to some extent by cost reductions at network-related businesses within Sony Corporation...

  • Page 61
    ... 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...

  • Page 62
    ...the Electronics segment due to continued losses recorded at these businesses. Other assets in the Financial Services segment on March 31, 2006 increased by Â¥70.2 billion, or 14.7%, to Â¥548.0 billion compared with the previous fiscal year-end. â- PROPERTY, LIABILITIES Total current and long-term...

  • Page 63
    ...'s Employee Pension Fund. Long-term liabilities on March 31, 2006 in the Financial Services segment increased by ¥302.6 billion, or 11.0%, to ¥3,059.3 billion. This was due to an increase in insurance-inforce in the life insurance business which resulted in an increase in future insurance policy...

  • Page 64
    ...at cost ...Property, plant and equipment ...Other assets ...Deferred insurance acquisition costs ...Other ...Liabilities and stockholders' equity Current liabilities ...Short-term borrowings ...Notes and accounts payable, trade ...Deposits from customers in the banking business ...Other ...Long-term...

  • Page 65
    ...the future based on Sony's evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets and the effect of world wide interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into...

  • Page 66
    ...interest rates in Japan started to trend upward, Sony Life invested mainly in long-term Japanese government bonds. Sony Bank operates using a similar basic investment policy as Sony Life, taking expected returns and investment risks into account in order to disperse associated risks, and structuring...

  • Page 67
    ...all distribution and marketing expenses relating to these films under a distribution agreement with a third party. Further, certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of films and television programming as well as...

  • Page 68
    ... sold. Losses from these transactions were insignificant. This program was terminated in May 2005. Refer to Note 7 of Notes to Consolidated Financial Statements for more information on the accounts receivable securitization. In addition, a subsidiary in the Picture segment entered into a production...

  • Page 69
    ... proactive capital expenditures in semiconductors mainly within the Electronics segment, mostly associated with image sensors. Within the Financial Services segment, payments for investments and advances exceeded proceeds from maturities of marketable securities, sales of securities investments and...

  • Page 70
    ... financial and capital markets. In order to meet long-term funding requirements, Sony Corporation utilizes its access to global equity and bond markets. During the fiscal year ended March 31, 2006, based on a bond shelf registration filed in Japan, Sony issued three series of straight bonds totaling...

  • Page 71
    ... and Poor's Rating Services ("S&P"). In addition, Sony maintains a rating from Rating and Investment Information, Inc. ("R&I"), a rating agency in Japan, for access to the Japanese capital market. Sony's current debt ratings from each agency are noted below: Moody's Long-term debt Short-term debt A2...

  • Page 72
    ... for home and mobile electronics; semiconductor and device technology essential for product differentiation and for creating added-value to products; and software technology. Reflecting Sony's mid-term corporate strategy, in October 2005, the company established the Display Device Development Group...

  • Page 73
    ..., Sony is implementing reorganization initiatives to strengthen horizontal coordination in the key areas of product planning, technology, procurement, manufacturing, and sales and marketing. For Sony's growth strategy in Electronics, resources will be focused on the development and commercialization...

  • Page 74
    ... of motion pictures with broad worldwide appeal on existing and new home entertainment formats, including Blu-ray, and other emerging platforms, including digital download. â- FINANCIAL SERVICES In the Financial Services segment, the value of assets accumulated by the businesses in the segment has...

  • Page 75
    ... activities in the Electronics segment. It also included ¥3.0 billion for the impairment of long-lived assets in the Music business such as a certain CD manufacturing facility to be abandoned or sold and a recording studio and equipment to be held and used in Japan. Fair value of these assets...

  • Page 76
    ... its impairment review, Sony performs internal valuation analyses or utilizes third-party valuations when management believes it to be appropriate, and considers other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flow analysis...

  • Page 77
    ... the fair value of the plans' assets. This liability was established by a charge to stockholders' equity, resulting in no impact to the accompanying consolidated statements of income. The following table illustrates the sensitivity to a change in the discount rate and the expected return on pension...

  • Page 78
    ... Public Accountants issued Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration â- ACCOUNTING CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB...

  • Page 79
    ... rights was Â¥4.4 billion. Sony expects the total expenses to be recorded in the future periods will be consistent with the pro forma information shown in Note 2 of Notes to Consolidated Financial Statements (2) Significant accounting policies-Stock-based compensation. â- OF NONMONETARY ASSETS...

  • Page 80
    ... on Sony's results of operations and financial position. â- ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS In March 2006, the FASB issued FAS No. 156, "Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140." This statement amends FASB Statement No. 140, "Accounting for...

  • Page 81
    ...and amortization* ...Capital expenditures (additions to property, plant and equipment) ...Research and development expenses ...AT YEAR-END Net working capital ...Stockholders' equity ...Stockholders' equity per share attributable to common stock ...Total assets ...Number of shares issued at year-end...

  • Page 82
    ... foreign exchange market rate as of March 31, 2006. 2. 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...

  • Page 83
    ... costs ** Stock price data are based on daily closing prices. Notes: 1. In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration...

  • Page 84
    ... Tokyo foreign exchange market rate as of March 31, 2006. ELECTRONICS SALES AND OPERATING REVENUE TO CUSTOMERS BY PRODUCT CATEGORY Yen in millions Years ended March 31 2004 2005 2006 Dollars in millions* 2006 Audio ...Video ...Televisions ...Information and Communications ...Semiconductors...

  • Page 85
    ... dollar amounts have been translated from yen, for convenience only, at the rate of ¥117=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2006. Note: Classification of geographic segment information shows sales and operating revenue recognized by location of customers. 83

  • Page 86
    ... equivalents ...Marketable securities (Notes 8 and 12) ...Notes and accounts receivable, trade (Notes 6 and 7) ...Allowance for doubtful accounts and sales returns ...Inventories (Note 4) ...Deferred income taxes (Note 21) ...Prepaid expenses and other current assets ...Total current assets ...Film...

  • Page 87
    ... taxes ...Deposits from customers in the banking business (Note 13) ...Other (Notes 21 and 24) ...Total current liabilities ...Long-term liabilities: Long-term debt (Notes 9, 12 and 14) ...Accrued pension and severance costs (Note 15) ...Deferred income taxes (Note 21) ...Future insurance policy...

  • Page 88
    ...Interest ...Loss on devaluation of securities investments ...Foreign exchange loss, net ...Other ...Income before income taxes ...Income taxes (Note 21): Current ...Deferred ...Income before minority interest, equity in net income of affiliated companies and cumulative effect of an accounting change...

  • Page 89
    ... -Basic ...-Diluted ...Cumulative effect of an accounting change -Basic ...-Diluted ...Net income -Basic ...-Diluted ...Cash dividends ...Subsidiary tracking stock (Note 16) Net income (loss) -Basic ...The accompanying notes are an integral part of these statements. ¥98.26. 89.03. (2.29.) (2.03...

  • Page 90
    ... taxes ...Increase in future insurance policy benefits and other ...Increase in deferred insurance acquisition costs ...(Increase) decrease in marketable securities held in the financial service business for trading purpose ...Increase in other current assets ...Increase in other current liabilities...

  • Page 91
    ...customers in the financial service business (Note 13) ...Increase (decrease) in call money and bills sold in the banking business (Note 12) ...Dividends paid ...Proceeds from issuance of stocks by subsidiaries (Note 20) ...Other ...Net cash provided by financing activities ...Effect of exchange rate...

  • Page 92
    ... Statements of Changes in Stockholders' Equity Sony Corporation and Consolidated Subsidiaries-Years ended March 31 Yen in millions Subsidiary tracking stock Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock, at cost Total...

  • Page 93
    ... ...Exercise of stock acquisition rights ...Conversion of convertible bonds ...Conversion of subsidiary tracking stock (Note 16) ...Comprehensive income: Net income ...Other comprehensive income, net of tax (Note 16)- Unrealized gains on securities: Unrealized holding gains (losses) arising during...

  • Page 94
    ... Less: included in net income ...Total comprehensive income ...Stock issue costs, net of tax ...Dividends declared ...Purchase of treasury stock ...Reissuance of treasury stock ...Balance at March 31, 2006 ...The accompanying notes are an integral part of these statements. $ 33 $5,280 8 13 33...

  • Page 95
    ... and intangible assets ...106 11. Insurance-related accounts ...108 12. Short-term borrowings and long-term debt ...108 13. Deposits from customers in the banking business ...110 14. Financial instruments ...110 15. Pension and severance plans ...112 16. Stockholders' equity ...117 17. Stock-based...

  • Page 96
    ...Sony also develops, produces, manufactures, and markets home-use game consoles and software. Sony's principal manufacturing facilities are located in Japan, the United States of America, Europe, and Asia. Its electronic products are marketed throughout the world and game products are marketed mainly...

  • Page 97
    ... investment is written down to its fair value. On occasion, a consolidated subsidiary or an affiliated company accounted for by the equity method may issue its shares to third parties in either a public or private offering or upon conversion of convertible debt to common stock at amounts per share...

  • Page 98
    ... amount. Fair value for those assets is generally determined using a discounted cash flow analysis. Intangible assets with finite lives that are determined not to have an indefinite life mainly consist of artist contracts, music catalogs, acquired patent rights and software to be sold, leased or...

  • Page 99
    ..., Sony expenses software development costs for the Game segment as incurred as a part of research and development in cost of sales. â- Deferred assumptions are reviewed on a periodic basis. Liabilities for future insurance policy benefits also include liabilities for guaranteed benefits related to...

  • Page 100
    ... hedges and hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet or to the specific forecasted transaction...

  • Page 101
    ..., net of tax, in the accompanying consolidated financial statements as the Japanese Commercial Code prohibits charging such stock issue costs to capital accounts which is the prevailing practice in the United States of America. recognition Revenues from electronics and game sales are recognized upon...

  • Page 102
    ...by customers for shipping and handling costs are included in net sales. â- Income taxes The provision for income taxes is computed based on the pretax income included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities...

  • Page 103
    ...31, 2006, the aggregate value of the unvested stock acquisition rights was ¥4,402 million ($38 million). Sony expects the total expenses to be recorded in the future periods will be consistent with the pro forma information shown above in (2) Significant accounting policies-Stock-based compensation...

  • Page 104
    ... partnerships are also accounted for under the equity method. Such investments include but are not limited to Sony's interest in Sony Ericsson Mobile Communications, AB (50%), SONY BMG MUSIC ENTERTAINMENT ("SONY BMG") (50%), S-LCD Corporation ("S-LCD") (50% minus 1 share), ST Liquid Crystal Display...

  • Page 105
    ...owns 45% of the total outstanding common stock and therefore, records 45% of MGM Holdings' net income (loss) as equity in net income of affiliated companies. In September 2005, Sony sold 230,000 shares of Monex Beans Holdings, Inc. As a result of this sale, Sony's ownership interest has been reduced...

  • Page 106
    ...), respectively, which consist of debt and equity securities including short-term investments in money market funds. In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The 104

  • Page 107
    ... 31, 2006, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature. 9. Leased assets Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees' residential facilities...

  • Page 108
    ...Total minimum lease payments ...Less-Amount representing interest ...Present value of net minimum lease payments ...Less-Current obligations ...Long-term capital...Music catalog ...Acquired patent rights ...Software to be sold, leased or otherwise marketed ...Other ...Total... for intangible assets for ...

  • Page 109
    ... the Music segment to the Electronics segment. Consistent with the presentation of business segment information in Note 25, the Music segment is included within All Other. During the year ended March 31, 2006, Sony performed the annual impairment test for goodwill and recorded an impairment loss of...

  • Page 110
    ...million), respectively. (1) Insurance policies: Life insurance policies that the life insurance subsidiary writes, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the fiscal...

  • Page 111
    ... no adverse debt covenants or cross-default provisions relating to Sony's borrowings. A summary of the exercise rights of the detachable warrants as of March 31, 2006 is as follows: Exercise price Issued on Exercisable during Yen Dollars Number of shares per warrant Status of exercise October 19...

  • Page 112
    ... for portfolio investments in the Financial Services segment are executed within a certain limit in accordance with an internal risk management policy. Derivative financial instruments held by Sony are classified and accounted for as described below pursuant to FAS No. 133. Fair value hedges The...

  • Page 113
    ... Services segment have interest rate and bond future contracts as part of their portfolio investments, which are marked-to-market with changes in value recognized in financial service revenue. Stock price index option contracts Certain subsidiaries in the Financial Services segment have stock price...

  • Page 114
    ... values of long-term 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 debt rates for similar liabilities. Derivative financial instruments The fair values of foreign exchange forward...

  • Page 115
    ... plans, which substantially cover all of their employees. Under such plans, the related cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service. Sony uses a measurement date of March 31 for substantially...

  • Page 116
    ...assets: Fair value of plan assets at beginning of the fiscal year ...Actual return (loss) on plan assets ...Foreign currency exchange rate changes ...Employer... $1,660 In connection with the establishment of the SONY BMG joint venture with Bertelsmann AG as discussed in Note 6, Sony transferred ¥32,...

  • Page 117
    ... actuarial loss ...Unrecognized net transition asset ...Unrecognized prior service cost ...Net amount recognized ...Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost ...Accrued pension and severance costs, including current portion ...Intangibles ...Accumulated...

  • Page 118
    ... 20.8 6.8 3.3 100.0% For the pension plans of Sony Corporation and most of its subsidiaries in Japan, the target allocation as of March 31, 2006, is, as a result of our Asset Liability management, 34% of public equity, 56% of fixed income securities and 10% of other. When determining an appropriate...

  • Page 119
    16. Stockholders' equity (1) Subsidiary tracking stock: On June 20, 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 ...

  • Page 120
    ... 31, 2004, 2005 and 2006 were as follows: Yen in millions Pre-tax amount Tax expense Net-of-tax amount For the fiscal year ended March 31, 2004: Unrealized gains on securities- Unrealized holding gains (losses) arising during the period ...Less: Reclassification adjustment included in net income...

  • Page 121
    ...music businesses in a joint venture. In connection with the establishment of the joint venture, the minimum pension liability attributable to employees who were transferred to SONY BMG totaling ¥6,053 million was transferred from other comprehensive income to the carrying value of Sony's investment...

  • Page 122
    ...2003, Sony adopted an equity-based compensation plan that issues common stock acquisition rights for the purpose of granting stock options to selected directors, corporate executive officers and employees of Sony, pursuant to the Commercial Code of Japan. The stock acquisition rights generally vest...

  • Page 123
    ... plan: Sony granted stock appreciation rights ("SARs") in Japan, Europe and the United States of America for selected employees. Under the terms of these plans, employees on exercise receive cash equal to the amount that the market price of Sony Corporation's common stock exceeds the strike price of...

  • Page 124
    ... March 31, 2005, as part of this restructuring program, Sony recorded a non-cash impairment charge of ¥7,479 million for CRT TV display manufacturing facilities located in Europe. The impairment charge was calculated as the difference between the carrying value of the asset group and the present...

  • Page 125
    ... implement programs to reduce headcount by streamlining business operations, including closure and consolidation of manufacturing sites, as well as headquarters and administrative functions. Pictures Segment In an effort to improve the performance of the Pictures segment, Sony has undergone a number...

  • Page 126
    ... of facilities worldwide excluding Japan. As part of this restructuring program, Sony combined its recorded music business with the recorded music business of Bertelsmann AG to form SONY BMG, a joint venture that is accounted for under the equity method. See Note 6 for more information on this...

  • Page 127
    ... sell a U.S. entertainment complex in March 2006. As a result, Sony recorded an impairment charge of ¥8,522 million ($73 million). The impairment charge was based on the negotiated sales price of the complex, and is recorded in loss on sale, disposal or impairment of assets, net in the consolidated...

  • Page 128
    ... business is Mobile FeliCa IC chip development and production/sales licensing and operation of the Mobile FeliCa service platform, issued 115,000 shares at ¥100,000 per share with a total value of ¥11,500 million in connection with its private offering. As a result of this issuance, Sony recorded...

  • Page 129
    ...) in taxes resulting from: Income tax credits ...Change in valuation allowances ...Increase (decrease) in deferred tax liabilities on undistributed earnings of foreign subsidiaries ...Lower tax rate applied to life and non-life insurance business in Japan ...Other ...Effective income tax rate ... 43...

  • Page 130
    ... tax assets ...Less: Valuation allowance ...Total deferred tax assets ...Deferred tax liabilities: Insurance acquisition costs ...Unbilled accounts receivable in the Pictures segment...Unrealized gains on securities ...Intangible assets acquired through stock exchange offerings ...Undistributed...

  • Page 131
    ... common stock of Sony Music Entertainment (Japan) Inc. in a public offering to third parties in November 1991, as Sony does not anticipate any significant tax consequences on possible future disposition of its investment based on its tax planning strategies. The unrecognized deferred tax liabilities...

  • Page 132
    ...of diluted EPS since such stock options did not have a dilutive effect. On May 1, 2003, Sony implemented a share exchange as a result of which CIS Corporation became a wholly-owned subsidiary. As a result of this share exchange, Sony issued 1,088 130 thousand shares. The shares were included in the...

  • Page 133
    ... rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use. Under the terms of the joint venture, Sony has the obligation to fund any working capital deficits. In addition, the third party investor receives a guaranteed annual dividend...

  • Page 134
    ...product through its global distribution channels. The VIE shares in the net profits of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs. In April 2005, Sony Corporation has entered into a partnership...

  • Page 135
    ... semiconductor supply structure, the Sony group has integrated its semiconductor manufacturing business by transferring Sony Computer Entertainment's semiconductor manufacturing operation from the Game segment to the Electronics segment. As a result of this transfer, sales revenue and expenditures...

  • Page 136
    ...Europe, and licenses to third party software developers. The Pictures segment develops, produces and manufactures imagebased software, including film, video, and television mainly in the United States of America, and markets, distributes and broadcasts in the worldwide market. The Financial Services...

  • Page 137
    ... is sales and operating revenue less costs and operating expenses. Assets: Dollars in millions 2006 2006 Yen in millions Years ended March 31 2004 2005 Total assets: Electronics ...Game ...Pictures ...Financial Services ...All Other ...Total ...Elimination ...Corporate assets ...Consolidated total...

  • Page 138
    ...Game ...Pictures ...Financial Services, including deferred insurance acquisition costs ...All Other ...Total ...Corporate ...Consolidated total ...Capital expenditures for segment assets: Electronics ...Game ...Pictures ...Financial Services ...All Other ...Total ...Corporate ...Consolidated total...

  • Page 139
    ... with respect to the sales and operating revenue and long-lived assets included in Europe and Other areas. Transfers between reportable business or geographic segments are made at arms-length prices. There are no sales and operating revenue with a single major external customer for the fiscal years...

  • Page 140
    ...this supplemental information in accordance with disclosure requirements of the Japanese Securities and Exchange Law, to which Sony, as a Japanese public company, is subject. Yen in millions Years ended March 31 2004 2005 2006 Dollars in millions 2006 Sales and operating revenue: Japan- Customers...

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    Report of Independent Auditors 139

  • Page 142
    ... of daily closing prices for each day of every month at the Tokyo Stock Exchange. Years ended March 31 2002 2003 2004 2005 2006 Stock price ( Yen) At year-end ...High ...Low ...Annual increase/decrease ...Number of shares outstanding at year-end (thousands of shares) ...Market capitalization...

  • Page 143
    ... executives of Sony Corporation as an equity-based incentive plan. The fourteenth series of unsecured bonds with warrants for shares of subsidiary tracking stock was issued for distribution to the directors and other executives of Sony Communication Network. Regarding the tenth series of unsecured...

  • Page 144
    ... to: Sony Corporation Corporate Social Responsibility Department Phone: 81-(0)3-5448-3533 Facsimile: 81-(0)3-5448-7838 â- â- SONY ON THE INTERNET Sony's Investor Relations Home Pages on the World Wide Web offer a wealth of corporate information, including the latest annual report and financial...

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    Printed on 100% recycled paper. Printed using VOC (volatile organic compound)-free vegetable oil-based ink.

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