-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P0Y4oa5jmhmvWu+TYrcPPofaPvTXXiUr2zWdS/D9uHh7ahx+N5JNExGX58ZN0ims 2uuO4lIdBDeM8ZL//GOrlg== 0000950123-97-007750.txt : 19970929 0000950123-97-007750.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950123-97-007750 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970911 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONY CORP CENTRAL INDEX KEY: 0000313838 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 000000000 STATE OF INCORPORATION: M0 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-06439 FILM NUMBER: 97678883 BUSINESS ADDRESS: STREET 1: 7-35 KITASHINAGAWA STREET 2: 6-CHOME SHINAGAWA-KU CITY: TOKYO 141 JAPAN STATE: M0 BUSINESS PHONE: 0354482180 MAIL ADDRESS: STREET 1: 7-35 KITASHINAGAWA STREET 2: 6-CHOME, SHINAGAWA-KU CITY: TOKYO 141 JAPAN STATE: M0 20-F 1 SONY CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 F O R M 2 0 - F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 Commission file number 1-6439 SONY KABUSHIKI KAISHA (Exact name of registrant as specified in its charter) SONY CORPORATION (Translation of registrant's name into English) JAPAN (Jurisdiction of incorporation or organization) 7-35, KITASHINAGAWA 6-CHOME, SHINAGAWA-KU, TOKYO 141, JAPAN (Address of principal executive offices) Securities registered pursuant to Section 12(b) of the Act.
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. Each American Depositary Share represents one share of Common Stock. ** Par value 50 Japanese yen per share. Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the relevant exchanges. Securities registered pursuant to Section 12(g) of the Act. None ---------------- (Title of Class) 1 2 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None ---------------- (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
Outstanding as of March 31, 1997 March 28, 1997 Title of Class (Tokyo Time) (New York Time) -------------- ------------ --------------- Common Stock 384,185,043 American Depositary Shares 13,322,505
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18 X ----- ----- In this document, Sony Corporation is referred to as the "Company" and the Company and its consolidated subsidiaries are together referred to as "Sony". Also, sales and operating revenue is referred to as "sales" in the narrative description except in Consolidated Financial Statements. The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on August 29, 1997 was 120.65 yen = U.S. 1 dollar. As of March 31, 1997, the Company had 1,074 consolidated subsidiaries. It has applied the equity accounting method in respect to its 26 affiliated companies. Cautionary Statement With Respect to Forward-Looking Statements Statements made in this annual report with respect to Sony's plans, strategies and beliefs and other statements that are not historical facts are forward-looking statements, which involve risks and uncertainties. Potential risks and uncertainties include, without limitation, general economic conditions in Sony's markets, particularly levels of consumer spending; exchange rates, particularly between the yen and the U.S. dollar, in which Sony makes significant sales; and Sony's ability to continue to win acceptance of its products, which are offered in highly competitive markets characterized by continual new product introductions, rapid developments in technology (particularly in the Electronics Business), and subjective and changing consumer preferences (particularly in the Entertainment Business). 2 3 PART I Item 1. Description of Business General The Company was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha. In January 1958, it changed its name to Sony Kabushiki Kaisha (Sony Corporation in English). Sony is engaged in the development, manufacture, and sale of various kinds of electronic equipment, instruments, and devices. Sony's principal manufacturing facilities are located in Japan, the U.S., Europe, and Asia, and its products are marketed by sales subsidiaries and unaffiliated local distributors throughout the world. In addition to internationalizing its production operations, Sony has promoted the transfer of research and development activities and management functions overseas to bring its overseas operations in even closer contact with local communities. Sony is also engaged worldwide in the development, production, manufacture, and distribution of recorded music, in all commercial formats and musical genres, and image-based software, including film, video, television, and new entertainment technologies. These activities are carried on principally through Sony Music Entertainment Inc. (SMEI), Sony Music Entertainment (Japan) Inc. (SMEJ), and Sony Pictures Entertainment (SPE). In addition, Sony conducts insurance and financing business mainly in Japan. Products For revenue reporting purposes, Sony classifies its business into three segments: Electronics Business, which includes Video Equipment, Audio Equipment, Televisions, and Other Products; Entertainment Business, which includes Music Group and Pictures Group; and Insurance and Financing. The following table sets forth Sony's sales by business group for the periods indicated.
Year ended March 31 ------------------------------------------------------------ 1995 1996 1997 ----------------- ---------------- ----------------- (Millions of yen) Video Equipment 691,116 731,097 816,582 (17.3) (15.9) (14.4) Audio Equipment 898,507 905,441 1,034,769 (22.5) (19.7) (18.3) Televisions 708,574 794,767 1,036,010 (17.8) (17.3) (18.3) Other Products 777,031 1,098,849 1,500,378 (19.5) (24.0) (26.5) ----------------- ---------------- ----------------- Total Electronics Business 3,075,228 3,530,154 4,387,739 (77.1) (76.9) (77.5) ----------------- ---------------- ----------------- Music Group 494,931 512,908 584,960 (12.4) (11.2) (10.3) Pictures Group 281,677 318,305 438,505 (7.0) (6.9) (7.8) ----------------- ---------------- ----------------- Total Entertainment Business 776,608 831,213 1,023,465 (19.4) (18.1) (18.1) ----------------- ---------------- ----------------- Insurance and Financing 138,747 231,198 251,930 (3.5) (5.0) (4.4) ----------------- ---------------- ----------------- Sales and operating revenue 3,990,583 4,592,565 5,663,134 ================= ================ =================
Figures in parentheses indicate percentage of sales and operating revenue. 3 4 Video Equipment: Video Equipment offered by Sony includes a wide range of products, such as 8mm, VHS, and Consumer-Use Digital VCR Specifications (DV format) videotape recorders (VTRs), DVD-Video players, video CD players, digital still cameras, broadcast- and industrial-use video equipment, and videotapes. In the spring of 1997, Sony launched its first DVD-Video player in Japan and the U.S. Audio Equipment: Audio Equipment offered by Sony includes MiniDisc (MD) systems, CD players, headphone stereos, personal component stereos, hi-fi components, radio-cassette tape recorders, tape recorders, digital audio tape (DAT) recorders/players, IC recorders, radios, headphones, car stereos, car navigation systems, professional-use audio equipment, audiotapes, and blank MDs. Sony is working to expand the new MD system lineup, which includes MD Walkman models, MD decks, and compact stereo systems that incorporate MD decks. Televisions: Televisions offered by Sony include color TVs, Hi-Vision (Japanese high-definition TV standard) TVs, projection TVs, flat display panels, personal liquid crystal display (LCD) monitors, satellite broadcasting reception systems, computer displays, professional-use monitors/projectors, and large color video display systems. In June 1997, Sony introduced in Japan a new series of wide-screen TVs incorporating newly developed FD Trinitron cathode ray tubes (CRTs) that are flat in both the horizontal and vertical axes. Other Products: Other Products offered by Sony include semiconductors, LCDs, electronic components, CRTs, personal computers (PCs), computer peripherals, telecommunications equipment, game consoles and software, batteries, and factory automation (FA) systems. Sony began marketing a new series of home-use PCs in the U.S. in September 1996, and in Japan in July 1997. Music Group: SMEI and SMEJ produce, manufacture, market, and distribute CDs, MDs, DVDs, laserdiscs (LDs), records, and pre-recorded audio and video cassettes, and produce and manufacture CD-ROMs. They hold contracts with many top artists worldwide in all musical genres. Sony has a leading CD production capacity, with plants in the U.S., Austria, Japan, Brazil, Australia, Canada, Hong Kong, and Mexico. 4 5 Pictures Group: Pictures Group's global operations encompass motion picture production and distribution, television programming and syndication, theatrical exhibition, home video distribution, development and implementation of new entertainment technologies, operation of studio facilities, and distribution of filmed entertainment worldwide. SPE's motion picture arm, the Columbia TriStar Motion Pictures Group, includes Columbia Pictures, TriStar Pictures, Sony Pictures Classics, Sony Pictures Releasing, and Columbia TriStar Film Distributors International, SPE's international theatrical business. SPE's Columbia TriStar Television Group is comprised of Columbia TriStar Television, Columbia TriStar Television Distribution, and Columbia TriStar International Television, SPE's international television business. SPE's home video operations are conducted through Columbia TriStar Home Video. SPE also manages two studio facilities, Sony Pictures Studios and The Culver Studios, both of which are located at SPE's world headquarters in Culver City, California. Currently, through Sony Retail Entertainment's Loews Theatres division, Sony operates 1,018 motion picture screens in 142 locations in the U.S. Insurance and Financing: Insurance and Financing consists principally of the individual life insurance business operated in Japan by Sony Life Insurance Co., Ltd. and certain consumer financing and leasing businesses conducted by Sony Finance International, Inc. in Japan. Sales and Distribution The following table shows Sony's sales in each of its major markets for the periods indicated.
Year ended March 31 ----------------------------------------------------------- 1995 1996 1997 ----------------- ---------------- ---------------- (Millions of yen) Japan 1,105,152 1,379,804 1,590,820 (27.7) (30.0) (28.1) United States 1,152,081 1,259,926 1,639,334 (28.9) (27.4) (29.0) Europe 905,416 1,054,010 1,304,491 (22.7) (23.0) (23.0) Other Areas 827,934 898,825 1,128,489 (20.7) (19.6) (19.9) ----------------- ---------------- ---------------- Sales and operating revenue 3,990,583 4,592,565 5,663,134 ================= ================ ================
Figures in parentheses indicate percentage of sales and operating revenue. Electronics Business Sony's electronic products are sold throughout the world under the trademark "Sony", which has been registered in 193 countries and territories. In most cases, sales of Sony's electronic products are made to subsidiaries of the Company located in diverse geographical areas, and these subsidiaries sell to local distributors and dealers. In some locations, the Company sells directly to local distributors. 5 6 Japan: In April 1997, the Company established Sony Marketing (Japan) Inc., by consolidating its consumer products marketing divisions, seven domestic sales subsidiaries and a sales administrative subsidiary. Sony Marketing (Japan) Inc. currently operates marketing and sales of primarily Sony's consumer electronic products in Japan. For non-consumer electronic products, the Company has a sales company in Tokyo and sales offices throughout the country which sell products to wholesalers, manufacturers, and industrial and professional users. In addition, the Company plans to transfer most of its non-consumer products marketing and sales divisions in Japan to Sony Marketing (Japan) Inc. in April 1998. North America: Sony Electronics Inc. markets Sony's electronic products for both consumer and non-consumer use in the U.S. This subsidiary has 21 sales and distribution branches and offices throughout the U.S. In Canada, Sony markets its electronic products through Sony of Canada Ltd. Europe: In Europe, Sony's electronic products for both consumer and non-consumer use are marketed through 12 sales subsidiaries, including Sony United Kingdom Limited, Sony Deutschland G.m.b.H. and Sony France S.A. Other Areas: In overseas areas other than North America and Europe, Sony's electronic products are marketed through 10 sales subsidiaries, including Sony Corporation of Hong Kong Limited, Sony Gulf FZE in United Arab Emirates, and Sony Comercio e Industria Ltda. in Brazil. In areas where the Company has no subsidiary, it markets its products through local distributors. Entertainment Business Music Group: SMEI and SMEJ market and distribute CDs, MDs, DVDs, LDs, records, and pre-recorded audio and video cassettes. SMEI conducts this business in the U.S. under the "Columbia", "Epic", "Sony Classical", and other labels. The Columbia House Company, a 50:50 partnership between SMEI and a subsidiary of Time Warner Inc., is engaged in direct marketing of music and home-video products in the U.S. and Canada. SMEI's affiliates located outside the U.S. conduct the aforesaid business in countries other than the U.S. and Japan. 6 7 Pictures Group: SPE generally secures all rights relating to the worldwide distribution of its internally produced motion pictures, including rights for theatrical exhibition, home videocassette, DVD, and LD distribution, pay and free television exhibition and other markets. SPE may also acquire distribution rights to motion pictures produced by other companies, and these rights may be limited to particular geographic regions or specific forms of media. SPE uses its own distribution services business for the U.S. theatrical release of its films and those acquired from and produced by others. Outside the U.S., SPE generally distributes and markets the films through one of its Columbia Tristar Film Distributors International subsidiaries. However, in certain countries, SPE has joint distribution facilities with other studios or arrangements with independent local distributors. The worldwide home video distribution of motion pictures, television programs, and other video products of SPE (and those acquired or licensed from others) is handled through Columbia TriStar Home Video. SPE produces television programming and licenses it to network television for prime-time or daytime broadcast and, in certain instances, for first-run syndication or directly to cable services. SPE also licenses rights to its library of television programming and motion pictures to network affiliates and independent stations in the U.S. and to international television stations and other broadcasters throughout the world. The Pictures Group, through Sony Retail Entertainment's Loews Theatres division, exhibits its own and other motion picture companies' films. SPE also distributes its films for theatrical exhibition in theatres operated by others. Overseas Operations Sony has actively expanded its overseas production capabilities following a basic policy that products should be manufactured in the markets in which they are sold. During the fiscal year ended March 31, 1997, Sony set up additional manufacturing facilities in such countries as Hungary, Slovakia, Mexico, and China. As of March 31, 1997, it operated 15 manufacturing facilities in the U.S., 12 in Europe, and 31 in other overseas areas. Sony intends to further expand its overseas production to build a corporate structure less susceptible to the negative impact of foreign exchange rate fluctuations. In addition to internationalizing its manufacturing operations overseas, Sony continued to promote the localization of R&D, design, materials and parts procurement, and management functions to bring its overseas operations in even closer contact with local communities. After-sales Service Sony maintains a policy of providing repair and servicing functions in the countries where its electronic products are sold. In large markets such as Japan, the U.S., and Europe, Sony provides these services through its own service stations, authorized independent service stations and authorized servicing dealers; other markets are mainly serviced by authorized servicing dealers. In line with industry practice, almost all of Sony's electronic products sold in Japan carry a warranty for a period of generally one year from the date of purchase for repairs, free of charge, for malfunctions occurring in the course of ordinary use. Overseas warranties are generally provided for various periods of time depending on the product and the country where it is marketed. To further ensure customer satisfaction, Sony maintains customer information centers in each market. 7 8 Competition In each of its principal product lines, Sony encounters intense competition throughout the world. Sony believes, however, that in the aggregate it competes successfully and has a major position in all of the principal product lines in which it is engaged, although the strength of its position varies with products and markets. Sony believes that the high quality of its products, its record of innovative product introductions and product improvements, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position. The success in the music entertainment business is dependent to a large extent upon the artistic and creative abilities of its employees and outside talent and is subject to the vagaries of public taste. SPE faces intense competition from other major motion picture studios and, to a lesser extent, from independent production companies for the attention of the movie-going public. Competition in television production, distribution, and syndication is also intense because available broadcast time is limited and the audience is increasingly fragmented among broadcast, cable, and other networks. Research and Development The Company restructured its R&D operations as part of an overall corporate reorganization on April 1, 1997. To meet the diverse product-related needs of its various businesses, the Company actively carries out R&D at each of its independent companies. Strategic R&D relating to the entire Sony Group, particularly the development of new key technologies, is delegated to six corporate laboratories, the Research Center, the Advanced Production Laboratory, the Architecture Laboratory, the Advanced Development Laboratory, the Media Processing Laboratory, and the Information Technology Laboratory, as well as the D21 Laboratory. These facilities are located in Tokyo and Kanagawa prefecture in Japan and directly controlled by corporate headquarters. The Company's R&D operations are focusing on such fields as electronic materials technologies, basic devices, semiconductor technologies, software and hardware architectures for information and network products, optical discs and magnetic recording technologies, signal processing technologies, computer technologies, as well as long-term R&D themes based on visions of the 21st century. In the U.S., there are Research Laboratories, which specialize in R&D fields such as digital signal processing, DTV, telecommunications, broadcasting systems, semiconductors, and display technology. There are additional development centers in the U.K., Germany, Belgium, and Singapore. R&D expenses were 239.2 billion yen in the fiscal year ended March 31, 1995; 257.3 billion yen in the fiscal year ended March 31, 1996; and 282.6 billion yen in the fiscal year ended March 31, 1997. Sony believes R&D activities are vital to its long-term growth in electronics. Through its R&D activities, Sony has recently developed: - - A high-capacity optical disc which offers a single-sided storage capacity of 12 Gigabytes (GB) on a 12 cm-diameter disc. This technology allows the recording and playback of high-bit-rate video signals with a high access rate. - - Digital Reality Creation technology which creates a super-real four times picture resolution from a standard television signal. This technology allows very high resolution picture quality from conventional TV broadcasts and other video sources. - - A real-time MPEG2 video encoder LSI which features the industry's widest motion search area and integrates MPEG2 encoding system controller and motion estimation circuitry onto a single chip. This technology allows high quality encoding of even the most rapidly moving scenes and video taken with fast camera movements. 8 9 Patents and Licenses Sony has a number of patents in Japan and other countries, and licenses granted from other firms. Sony considers a number of its license agreements to be important to its business. Sony has license agreements with RCA Thomson Licensing Corporation covering a wide range of its products, such as color televisions, VTRs, and other related equipment. Sony has license agreements with Lucent Technologies Inc. covering semiconductors and has cross license agreements with Philips Electronics N.V. covering optical disc players and VTRs. Sony also has license agreements with Matsushita Electric Industrial Co., Ltd. and Victor Company of Japan Limited covering magnetic and optical recorder products, Ampex Corporation covering video tape recorder related products, and International Business Machines Corporation covering a wide range of information processing products. Sources of Supply Sony has been pursuing optimum procurement of raw materials, parts, and components to be used in the production of its products on a global basis. These items are purchased from various suppliers around the world, and Sony maintains multiple suppliers for every category of parts and components. Employee Relations As of March 31, 1997, Sony had approximately 163,000 employees, of which approximately 15% were members of labor unions. Approximately 68,000 employees were located in Japan and 95,000 overseas. Sony considers its labor relations to be very good. Basic wage rates of the Company are reviewed annually in April. In addition, in accordance with Japanese custom, the Company grants its full-time employees semi-annual bonuses. The Company provides its employees with a wide variety of fringe benefits. Basic wage rates, bonus policies, fringe benefits, retirement ages and retirement benefits may vary for Sony employees outside Japan because of diverse employment practices in the countries where Sony does business throughout the world. 9 10 Item 2. Description of Property Sony has a number of plants throughout the world. Most of the buildings and land on which they are located are owned by Sony free from significant encumbrances. Sony makes a point of maintaining its plants and other properties carefully to insure that production capacity is adequate for present requirements. The following table sets forth information as of March 31, 1997 with respect to principal plants for electronic products:
Approximate Location floor space Principal products manufactured -------- ----------- ------------------------------- (square feet) In Japan Kanagawa (Atsugi Technology Center) 3,229,000 Semiconductors and broadcast- and industrial-use video equipment Miyagi (Sendai Technology Center) 1,122,000 Magnetic and optical recording media and electronic components Kagoshima(Sony Kokubu Corporation) 1,059,000 Semiconductors Aichi (Sony Kohda Corporation) 928,000 VTRs Aichi (Sony Inazawa Corporation) 876,000 CRTs Aichi (Sony Ichinomiya Corporation) 831,000 Color TVs, computer displays, and professional-use monitors Tochigi (Sony Chemicals Corporation) 739,000 Videotapes, adhesives, electronic components, and thermal transfer ribbon Nagasaki (Sony Nagasaki Corporation) 690,000 Semiconductors Shizuoka (Sony Broadcast 625,000 Broadcast- and industrial-use video Products Corporation) equipment, audio equipment, and computers Chiba (Sony Kisarazu Corporation) 616,000 VTRs and game consoles Gifu (Sony Minokamo Corporation) 577,000 VTRs
10 11
Approximate Location floor space Principal products manufactured -------- ----------- ------------------------------- (square feet) Overseas Pittsburgh, Pennsylvania, U.S.A. 2,715,000 Rear-projection TVs/CRTs (Sony Electronics Inc.) San Diego, California, U.S.A. 2,234,000 Color TVs, computer displays, and (Sony Electronics Inc.) CRTs Dothan, Alabama, U.S.A. 952,000 Video tapes and data storage media (Sony Magnetic Products Inc. of America) San Antonio, Texas, U.S.A. 461,000 Semiconductors (Sony Electronics Inc.) Bridgend, Wales, U.K. 740,000 CRTs (Sony United Kingdom Limited) Pencoed, Wales, U.K. 707,000 Color TVs and computer displays (Sony United Kingdom Limited) Barcelona, Spain 461,000 Color TVs and rear-projection TVs (Sony Espana, S.A.) Alsace, France 419,000 Audio equipment and VTRs (Sony France S.A.) Penang, Malaysia 860,000 Audio equipment (SONY ELECTRONICS (M) SDN. BHD.) Nuevo Laredo, Mexico 786,000 Audio tapes and micro floppydisks (Sony Magneticos de Mexico, S.A. de C.V.) Jurong, Singapore 776,000 CRTs and computer displays (Sony Display Device (Singapore) Pte. Ltd.) Tijuana, Mexico 671,000 Color TVs and computer displays (Sony de Tijuana Este, S.A. de C.V.) Bekasi, Indonesia 462,000 Audio equipment (P.T. SONY ELECTRONICS INDONESIA) Bangi, Malaysia 448,000 VTRs and CD-ROM drives (SONY VIDEO (M) SDN. BHD.)
In addition to the above, Sony has a number of other plants for electronic products throughout the world. The Company owns R&D facilities of the Research Center and other laboratories and employee housing and recreation facilities, as well as the headquarters buildings in Tokyo at which administrative functions and product development activities are carried on. 11 12 The following table sets forth information as of March 31, 1997 with respect to principal plants for software of the Music Group:
Approximate Location floor space Principal products manufactured -------- ----------- ------------------------------- (square feet) Shizuoka, Japan 537,000 CDs, MDs, and LDs (Sony Music Entertainment (Japan) Inc.) Carrollton, Georgia, U.S.A. 661,000 CDs and audio and video cassettes (Sony Music Entertainment Inc.) Terre Haute, Indiana, U.S.A. 653,000 CDs, CD-ROMs, MDs, and LDs (Digital Audio Disc Corporation) Pitman, New Jersey, U.S.A. 500,000 CDs (Sony Music Entertainment Inc.) Springfield, Oregon, U.S.A. 336,000 CDs and CD-ROMs (Sony Music Entertainment Inc.) Haarlem, Holland 464,000 Records and audio cassettes (Sony Music Entertainment (Holland) B.V.) Salzburg, Austria 377,000 CDs, CD-ROMs, MDs, and LDs (Sony DADC Austria AG)
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. SMEJ's offices, including leased premises, are mainly located in Tokyo, Japan. SPE's corporate offices and major motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates two studio facilities, Sony Pictures Studios and The Culver Studios. SPE also leases office space and motion picture and television support facilities from affiliates of the Company and other third parties. Its film and tape operations are located in Inwood, New York, where SPE also leases space. Loews Theatres leases administrative office space in New York City. Additionally, Loews Theatres leases approximately 88% of the facilities it operates, primarily long-term land leases, owns approximately 6% and has management agreements and partnership agreements covering the remaining 6%. Item 3. Legal Proceedings The Company and certain of its subsidiaries are defendants in several pending lawsuits. However, based upon the information currently available to both the Company and its legal counsel, management of the Company believes that damages from such lawsuits, if any, would not have a material effect on the Company's consolidated financial statements. 12 13 Item 4. Control of Registrant (a) As far as known to the Company, it is not directly or indirectly owned or controlled by any other corporation or by the Japanese government or any foreign government. (b) (1) To the knowledge of the Company, no person owns of record or beneficially more than 10% of the outstanding Common Stock. (2) The total number of shares of the Company's Common Stock beneficially owned by the Directors and Statutory Auditors as of March 31, 1997 is as follows:
Number of Shares Percentage Title of Class Identity of Person or Group Beneficially Owned of Class -------------- --------------------------- ------------------ ----------- (in thousands) Common Directors and Statutory 1,956 0.5% Stock Auditors
(c) As far as is known to the Company, there is no arrangement, the operation of which may at a subsequent date result in a change in control of the Company. Item 5. Nature of Trading Market The primary markets for the Company's Common Stock are the Tokyo Stock Exchange (the "TSE") in the form of Common Stock and the New York Stock Exchange (the "NYSE") in the form of American Depositary Shares evidenced by American Depositary Receipts ("ADRs"). Each American Depositary Share represents one share of Common Stock. The Company's Common Stock, par value 50 yen per share, has been listed on the TSE since 1958, and is also listed on the four other stock exchanges in Japan: Osaka, Nagoya, Fukuoka and Sapporo. In addition, the Company's Common Stock is listed on the following stock exchanges outside Japan: Pacific, Chicago, Toronto, London, Paris, Frankfurt, Dusseldorf, Brussels, Antwerp, Vienna, and Swiss. The Company's ADRs have been traded in the U.S. since 1961 and have been listed on the NYSE since 1970. The Company's ADRs are issued and exchanged by Morgan Guaranty Trust Company of New York, as Depositary. At March 31, 1997, there were 384,185,043 shares of Common Stock outstanding, of which 13,322,505 shares were in the form of ADRs and 36,531,897 shares were held of record in the form of Common Stock by residents in the U.S. The number of registered ADR holders was 6,052, and the number of registered holders of shares of Common Stock in the U.S. was 222. 13 14 The following table sets forth for the periods indicated the reported high and low sales prices of the Company's Common Stock on the TSE and the reported high and low sales prices of American Depositary Shares on the NYSE.
Tokyo Stock New York Stock Exchange Price Exchange Price Per Share of Per American Common Stock Depositary Share ----------------------- ---------------------- High Low High Low ---- --- ---- --- Fiscal year ended March 31, 1996 1st quarter 4,320 yen 3,730 yen 52 1/2 dollars 45 7/8 dollars 2nd quarter 5,630 4,010 58 1/4 48 3/4 3rd quarter 6,230 4,570 61 1/2 45 1/2 4th quarter 7,030 6,040 66 1/4 57 3/8 Fiscal year ended March 31, 1997 1st quarter 7,310 yen 6,350 yen 66 5/8 dollars 59 dollars 2nd quarter 7,260 6,680 66 1/4 61 1/2 3rd quarter 7,700 6,720 67 7/8 58 7/8 4th quarter 9,180 7,250 74 1/4 63 3/8
Item 6. Exchange Controls and Other Limitations Affecting Security Holders (a) JAPANESE FOREIGN EXCHANGE CONTROLS The Foreign Exchange and Foreign Trade Control Law of Japan (the "Foreign Exchange Law"), and the cabinet orders and ministerial ordinances thereunder govern certain aspects relating to the acquisition and holding of shares by "non-residents of Japan" and by "foreign investors" (as hereinafter defined). "Non-residents of Japan" are defined as individuals who are not resident in Japan and corporations whose principal offices are located outside Japan. Generally, branches and other offices of Japanese corporations located outside Japan are regarded as non-residents of Japan, but branches and other offices of non-resident corporations located within Japan are regarded as residents of Japan. Acquisition of Shares Acquisition by a non-resident of Japan of shares of stock of a Japanese corporation from a resident of Japan generally requires prior notification by the acquiring person to the Minister of Finance. The notification must be filed not more than 10 days prior to the proposed acquisition. If, however, a party to the transaction is one of the Japanese securities companies (or licensed branches of foreign securities companies) which are designated by the Minister of Finance ("designated securities companies") or if a designated securities company acts as an intermediary (broker or agent) in such transaction, no prior notification is required. The designated securities companies are subject to reporting requirements to the Minister of Finance through The Bank of Japan. The acquisition of shares by non-resident shareholders by way of a stock split is not subject to any notification requirements. 14 15 Notwithstanding the foregoing, if the proposed transaction falls within the category of "inward direct investment" referred to below, the transaction is subject to different regulations. The term "inward direct investment" in relation to transactions in shares means: (i) acquisition by a "foreign investor" (a non-resident individual or a corporation which was organized under the laws of a foreign country or whose principal business office is located outside Japan or a Japanese corporation a majority of whose shares are owned, directly or indirectly, by non-residents and/or foreign corporations or a majority of whose officers or officers having the power of representation are non-resident individuals) of shares of stock of a Japanese corporation whose shares are not listed on any stock exchange (or registered with a securities dealers' association as shares to be traded on an over-the-counter market) other than acquisition of such shares from other foreign investors; (ii) acquisition by a foreign investor of shares of an unlisted corporation from a non-resident who had held such shares since the time when he was a resident; and (iii) acquisition of shares of a listed corporation by a foreign investor (whether from a resident, a non-resident or any other foreign investor) the result of which would be such investor's holding directly or indirectly 10% or more of the total outstanding shares of such corporation or, if such foreign investor already holds 10% or more of the total outstanding shares of such corporation, acquisition of additional shares in such corporation. Except in limited cases prescribed by the law as requiring a prior notification, whenever an inward direct investment was made, the foreign investor who made such investment must make a post facto report to the Minister of Finance and other Ministers having jurisdiction over the business of the issuer of the shares within 15 days from the acquisition. Dividends and Proceeds of Sale Under the foreign exchange regulations, dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may in general be converted into any foreign currency and repatriated abroad. Exercise or Transfer of Subscription Rights Acquisition by a non-resident shareholder of shares of Common Stock of the Company upon exercise of subscription rights is subject to the same formalities and restrictions as referred to under "Acquisition of Shares" above and such non-resident may in general exercise such rights after filing a prior notification with the Minister of Finance as to such acquisition. If a non-resident shareholder wishes to dispose of, rather than exercise, any subscription rights, he may sell such rights in or outside Japan without restriction. As to the transferability of subscription rights by non-residents, see "(b) DESCRIPTION OF COMMON STOCK - Subscription Rights" below. American Depositary Shares Neither the deposit of shares of Common Stock of the Company by a non-resident of Japan, the issuance of ADRs in exchange therefor, nor the withdrawal of the underlying shares of Common Stock of the Company upon surrender of ADRs is subject to any formalities or restrictions referred to under "Acquisition of Shares" above. 15 16 On May 23, 1997 the Foreign Exchange and Foreign Trade Control Law was amended with effect from April 1, 1998. Pursuant to this amendment, the title of the statute will be changed to the Foreign Exchange and Foreign Trade Law and, with minor exceptions, all aspects of the foreign exchange and foreign trade transactions which under the existing law are subject to licensing or other approval or prior notification requirements (including those relating to the acquisition of and other transactions in shares of stock of Japanese corporations referred to above, except for limited cases of inward direct investment) will be substituted by the post facto reporting requirement. However, the Minister of Finance will have the power to impose a licensing requirement for certain transactions in limited circumstances. Detailed implementing regulations have not yet been issued but are expected to be made before the amendments' effective date of April 1, 1998. (b) DESCRIPTION OF COMMON STOCK Set forth below is certain information relating to the Common Stock of the Company, including brief summaries of certain provisions of the Company's Articles of Incorporation and Shares Handling Regulations, as currently in effect, and of the Commercial Code of Japan relating to a joint stock company (Kabushiki Kaisha) and certain related legislation. General The presently authorized capital stock of the Company is 1,350,000,000 shares, which may be issued with a par value of 50 yen per share or without a par value. The Commercial Code requires that shares be in registered form. Under the Commercial Code shares are transferable by delivery of share certificates, but in order to assert shareholders' rights against the Company, the transferee must have his name registered in the Company's register of shareholders. All of the presently outstanding shares of the Company are of a par value of 50 yen per share. The Company may, by a resolution of the Board of Directors, covert per value shares into non-par value shares or vice versa. Shareholders are required to file their names, addresses and seals with The Toyo Trust and Banking Company, Limited, the transfer agent for the Company, and shareholders not resident in Japan are required to file a mailing address in Japan or appoint a resident proxy in Japan. These requirements do not apply to the holders of ADRs. The central clearing system of share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan applies to the shares of Common Stock of the Company. Pursuant to this system a holder of shares of Common Stock is able to choose, at his discretion, to participate in this system and all certificates of shares of Common Stock elected to be put into this system are deposited with the central clearing system and all such shares are registered in the name of the clearing house in the Company's register of shareholders. Each participating shareholder is in turn registered in the register of beneficial shareholders and treated the same way as shareholders registered in the Company's register of shareholders. 16 17 Dividends The Articles of Incorporation of the Company provide that the accounts shall be closed on March 31 of each year and that dividends, if any, shall be paid to the shareholders of record as of the end of such fiscal period. After the close of the fiscal period, the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Statutory Auditors of the Company and to independent certified public accountants and then submitted for approval to the ordinary general meeting of shareholders, which is normally held in June each year. In addition to provisions for dividends, if any, and for the legal reserve and other reserves, the allocation of profits customarily includes a bonus to Directors and Statutory Auditors. In addition to annual dividends, the Board of Directors of the Company may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an "interim dividend") to shareholders who are registered in the Company's register of shareholders at the end of each September 30, subject to the limitations described below. The Commercial Code provides that a company may not make any distribution of profits by way of dividends or interim dividends for any fiscal period 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 until the legal reserve is one-quarter of its stated capital. Under the Commercial Code the Company is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets over the aggregate of (i) its stated capital, (ii) its capital surplus, (iii) its accumulated legal reserve, (iv) the legal reserve to be set aside in respect of the fiscal period concerned, and (v) the excess, if any, of unamortized expenses incurred in preparation for commencement of business and in connection with research and development expense over the aggregate of amounts referred to in (ii), (iii) and (iv) above. If the Company has on its balance sheet a number of shares of its Common Stock which the Company has acquired for the purpose of transferring the same to its Directors and/or employees pursuant to the amendments to the Commercial Code which took effect on October 1, 1994 and June 1, 1997 but such shares are yet to be so transferred, the book value of such shares shall be deducted from the amount available for payment of dividends. In the case of interim dividends, the net assets are calculated by reference to the balance sheet as at the last closing of the Company's accounts, but adjusted to reflect any subsequent dividend and the legal reserve in respect thereof, provided that interim dividends may not be paid where there is a risk that at the end of the fiscal year there might not be any excess of net assets over the aggregate of the amounts referred to in (i), (ii), (iii), (iv) and (v) above, and, in addition to the deduction referred to in the immediately preceding sentence, if the Company's shareholders have adopted a resolution for the Company's purchase of shares of its Common Stock for the purpose of transferring the same to its Directors and/or employees or for the purpose of canceling the same, the total amount of purchase price authorized by such resolution shall, so long as such resolution has not expired, and whether or not such purchase has been effected, be deducted from the amount available for interim dividends. The Commercial Code, currently in effect, does not provide for "stock dividends". However, under the Code, the shareholders may by resolution transfer any amount which is distributable as dividends to stated capital and the Board of Directors may by resolution issue additional shares by way of a stock split up to the aggregate par value equal to the amount so transferred; thus, the same effect as a stock dividend can be achieved. 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. 17 18 Transfer of Capital Surplus and Legal Reserve to Stated Capital and Stock Splits (Free Share Distributions) When the Company issues new shares of Common Stock, the entire amount of the issue price of such new shares is required to be accounted for as stated capital, although the Company may account for an amount not exceeding one-half of such issue price as capital surplus (subject to the remainder being not less than the total par value of the new shares being issued). The Board of Directors may transfer the whole or any part of capital surplus and legal reserve to stated capital and grant to shareholders additional shares of Common Stock free of charge by way of a stock split, without affecting the par value thereof, with reference to the whole or any part of the amount of capital surplus and legal reserve so transferred to stated capital; such additional shares may also be granted by reference to the amount representing the portion of the issue price of shares of Common Stock in excess of the par value thereof which has been accounted for as stated capital. The Commercial Code permits the Company to make a partially free distribution to shareholders by way of a rights issue at a subscription price per share which is less than the par value thereof if (a) the difference between the subscription price and the par value does not exceed the amount of the stated capital minus the aggregate par value of all outstanding shares, divided by the number of new shares to be issued pursuant to such rights issue, (b) the sum of the net assets of the Company (as appearing on the latest balance sheet) and the total subscription price, divided by the number of the shares outstanding immediately after the issue of the new shares, is at least 50 yen and (c) the subscription rights are made transferable. In order to satisfy the requirement mentioned in (a) above, the Board of Directors may transfer the whole or any part of capital surplus or legal reserve to stated capital. General Meeting of Shareholders The ordinary general meeting of shareholders to settle accounts of the Company for each fiscal period is normally held in June each year in Shinagawa-ku, Tokyo, Japan. In addition, the Company may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks' advance notice to shareholders. 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 his resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Voting Rights A shareholder is entitled to one vote per share subject to the limitations on voting rights set forth in the following paragraph and ""Unit" Share System -Voting rights of a holder of shares representing less than one unit" below. Except as otherwise provided by law or by the Company's Articles of Incorporation, a resolution can be adopted at a general meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Commercial Code and the Company's Articles of Incorporation provide, however, that the quorum for the election of Directors and Statutory Auditors shall not be less than one-third of the total number of outstanding shares having voting rights. The Company's shareholders are not entitled to cumulative voting in the election of Directors. A corporate shareholder, more than one-quarter of whose outstanding shares are directly or indirectly owned by the Company, may not exercise its voting rights in respect of the shares of the Company. The Company has no voting rights with respect to its own Common Stock. Shareholders may exercise their voting rights through proxies provided that the proxies are also shareholders holding voting rights. The Company's shareholders also may cast their votes in writing. 18 19 The Commercial Code provides that in order to amend the articles of incorporation and in certain other instances, including an increase in the total number of shares authorized to be issued, a reduction of the stated capital, the removal of a Director or Statutory Auditor, dissolution, merger or consolidation of a corporation, the transfer of the whole or an important part of the business, the taking over of the whole of the business of any other corporation, any offering of new shares at a "specially favorable" price (or any offering of convertible bonds or debentures with "specially favorable" conversion conditions or of bonds or debentures with warrants or rights to subscribe for new shares with "specially favorable" conditions) to persons other than shareholders or granting to Directors or employees rights to subscribe for new shares which are to be permitted from October 1, 1997 by virtue of the 1997 amendments to the Commercial Code, the quorum shall be a majority of the total number of shares having voting rights outstanding and the approval of the holders of at least two-thirds of the shares having voting rights represented at the meeting is required. Subscription Rights Holders of the Company's Common Stock have no pre-emtive rights under its Articles of Incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the Board of Directors determines, subject to the limitations as to the offering of new shares at a "specially favorable" price mentioned above. The Board of Directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue of new shares, in which case such rights must be given on uniform terms to all shareholders as at a record date of which not less than two weeks' 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. Rights to subscribe for new shares may be made generally transferable by the Board of Directors. Whether the Company will make subscription rights generally transferable in future rights offerings will depend upon the circumstances at the time of such offerings. If subscription rights are not made generally transferable, transfers by a foreign investor (as defined above under the heading "(a) JAPANESE FOREIGN EXCHANGE CONTROLS") not resident in Japan will be enforceable against the Company and third parties only if the Company's prior written consent to each such transfer is obtained. When such consent is necessary in the future for the transfer of subscription rights, the Company intends to consent, on request, to all such transfers by such a foreign investor. Dilution In the future it is possible that market conditions and other factors might make a rights offering to shareholders at par or substantially below the market price of shares of Common Stock desirable. If the number of shares offered in a rights offering is substantial in relation to the number of shares outstanding and the market price exceeds the subscription price at the time of the offering, a shareholder who does not exercise and is unable otherwise to realize the full value of his subscription rights would suffer economic dilution of his equity interest in the Company. Liquidation Rights In the event of a liquidation of the Company, the assets remaining after payment of all debts and liquidation expenses and taxes will be distributed among the shareholders in proportion to the respective numbers of shares held. 19 20 Liability to Further Calls or Assessments All the Company's presently outstanding shares of Common Stock including shares represented by the American Depositary Shares are fully paid and non-assessable. Transfer Agent The Toyo Trust and Banking Company, Limited is the transfer agent for the Company's Common Stock; as such transfer agent, it keeps the Company's register of shareholders in its office at 10-11, Higashisuna 7-chome, Koto-ku, Tokyo, Japan, and makes transfer of record ownership upon presentation of the certificates representing the transferred shares. Record Date March 31 is the record date for the Company's year-end dividends. The shareholders who are registered as the holders of 100 shares or more in the Company's register of 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 period ending on such March 31. September 30 is the record date for interim dividends. In addition, the Company may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks' public notice. The price of the 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. Repurchase by the Company of its Common Stock Except as otherwise permitted by the Commercial Code as set out below, the Company or any of its subsidiaries cannot acquire the Company's Common Stock except by means of a reduction of capital in the manner provided in the Commercial Code. The Company may acquire, its Common Stock in response to a shareholder's request for purchase of his shares representing less than one unit. See ""Unit" Share System -- Right of a holder of shares representing less than one unit to require the Company to purchase such shares" below. Shares so purchased must be sold or otherwise transferred to a third party within a reasonable period thereafter. The 1994 and 1997 amendments to the Commercial Code now enable the Company to acquire its Common Stock for the following purposes, subject to the authorization of shareholders at an ordinary general meeting (if the Articles of Incorporation provide that the shares may be purchased for the purpose of cancellation by resolution of the Board of Directors, pursuant to the resolution of the Board of Directors): (1) for the purpose of transferring the same to its Directors and/or employees; and (2) for the purpose of cancellation thereof. Acquisition by the Company of shares of its Common Stock for the purpose of (1) above is subject to, among other things, the following restrictions: (a) number of shares to be acquired does not exceed 10% of all issued and outstanding shares; (b) total amount of purchase price does not exceed the amount of the retained earnings available for dividend payment minus the amount to be paid by way of appropriation of earnings for the fiscal year and, if any amount of retained earnings is to be capitalized, such amount (if the purchase is made pursuant to the resolution of the Board of Directors as referred to in the parentheses above, one-half of such permitted amount); and (c) acquisition shall be made through a stock exchange transaction or by way of tender offer. 20 21 At the ordinary general meeting of shareholders held on June 27, 1997, the Articles of Incorporation of the Company were amended to permit the Company to acquire and retire up to 30 million outstanding shares of its Common Stock with the retained earnings available for dividend payment whenever the Board of Directors deems it necessary in view of the general economic condition, the Company's performance and financial condition and other factors and so determines by its resolution. (No resolution has been taken by the Board of Directors for the acquisition of shares pursuant to this authority.) "Unit" Share System Pursuant to the Commercial Code the Company has adopted 100 shares as one unit of shares. Transferability of shares representing less than one unit Certificates for shares representing less than one unit may only be issued in certain limited circumstances. Since the transfer of shares normally requires delivery of the certificates therefor, fractions of a unit for which no share certificates are issued are not transferable. Shares representing less than one unit for which share certificates have been issued continue to be transferable, but the transfer may be registered in the Company's register of shareholders only if the transferee is already a registered shareholder (whether in respect of units or of shares representing less than one unit). Right of a holder of shares representing less than one unit to require the Company to purchase such shares A holder of shares representing less than one unit may at any time require the Company to purchase such shares at their last reported sale price on the Tokyo Stock Exchange on the day when such request is made or, if no sale takes place on the Tokyo Stock Exchange on such day, the price at which the first sale of the shares is effected on the Tokyo Stock Exchange thereafter, less applicable brokerage commission. The usual securities transfer tax is applicable to such transactions. Other rights of a holder of shares representing less than one unit A holder of shares representing less than one unit has the following rights in respect of such shares: (i) the right to receive dividends (including interim dividends), (ii) the right to receive shares and/or cash by way of a stock split or upon consolidation or subdivision of shares or upon a capital decrease or merger of the Company, (iii) the right to be allotted subscription rights with respect to new shares, convertible bonds and bonds with warrants to subscribe for shares when such rights are granted to shareholders, (iv) the right to participate in the distribution of surplus assets in the event of the liquidation of the Company, and (v) the right to require the Company to issue replacement share certificates for lost, stolen or destroyed share certificates. All other rights, including voting rights, cannot be exercised with respect to shares representing less than one unit. Voting rights of a holder of shares representing less than one unit A holder of shares representing less than one unit cannot exercise any voting rights with respect to such shares. In calculating the quorum for various voting purposes, the aggregate number of shares representing less than one unit will be excluded from the number of outstanding shares. A holder of shares representing one or more whole units will have one vote for each such share, except as stated in "Voting Rights" above. Consolidation by operation of law of shares constituting one unit into one share The unit share system is intended to be an interim measure with a view ultimately to achieve shares of a much higher denomination than at present. On a date to be specified by separate legislation, the shares comprising one unit will be deemed to be consolidated into one share. Presently it is not known 21 22 when the bill specifying such date will be submitted to the Japanese parliament. If the consolidation takes place, the holder of any fractional share constituting one-hundredth of one share or any integral multiple thereof, which may result from such consideration, will be registered as the holder thereof in the register of fractional shares and the holder of any fraction representing less than a whole hundredth of one share will be entitled to receive a cash payment. (c) REPORTING OF SUBSTANTIAL SHAREHOLDINGS The Securities and Exchange Law of Japan, as amended, requires any person who has become, beneficially and solely or jointly, a holder of more than 5% of the total issued shares 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 Minister of Finance within five business days a report concerning such shareholdings. A similar report must also be made in respect of any subsequent change of 1% or more in any such holding. For this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants are taken into account in determining both the number of shares held by such holder and the issuer's total issued share capital. Copies of each 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 Securities Dealers Association of Japan. Item 7. Taxation Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by a Japanese corporation. Stock splits in themselves (whether for the purpose of making a free distribution or dividend in shares), subject as set out below, are not subject to Japanese income tax. However, a transfer of retained earnings or legal reserve (but not capital surplus) to stated capital (whether made in connection with a stock split or otherwise) is treated as a dividend payment to shareholders for Japanese tax purposes and is, in general, subject to Japanese income tax. Under the Income Tax Convention between the U.S. and Japan (the "Convention"), the maximum rate of Japanese withholding tax that may be imposed on dividends paid to a U.S. resident or corporation not having a "permanent establishment" (as defined therein) in Japan is generally 15%. For purposes of the Convention and the U.S. Internal Revenue Code of 1986, as amended (the "Code"), U.S. holders of ADRs will be treated as the owners of the Common Stock underlying the American Depositary Shares evidenced by the ADRs. In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax on dividends paid by Japanese corporations to non-residents of Japan or non-Japanese corporations is 20%. Gains derived by a non-resident of Japan or a non-Japanese corporation from the sale of Common Stock or ADRs outside Japan, or from the sale of Common Stock within Japan by a non-resident of Japan or by a non-Japanese corporation not having a permanent establishment in Japan, are in general not subject to Japanese income or corporation taxes. Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired Common Stock or ADRs as a legatee, heir or donee. Dividends received by a U.S. holder of ADRs or Common Stock will be includable in income for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of the Company as determined for U.S. federal income tax purposes. 22 23 Subject to limitations set out in the Code, a U.S. holder of ADRs or Common Stock of the Company will be entitled to a credit for Japanese tax withheld from dividends paid by the Company. 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 the Company to U.S. corporate holders of ADRs or Common Stock will not be eligible for the dividends-received deduction. Item 8. Selected Financial Data
Year ended March 31 -------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------------- -------------- -------------- -------------- --------------- (Millions of yen except per share amounts and yen exchange rates) FOR THE YEAR Sales and operating revenue 4,001,270 3,744,285 3,990,583 4,592,565 5,663,134 Operating income (loss) 130,640 106,962 (166,640) 235,324 370,330 Income (loss) before income taxes 92,561 102,162 (220,948) 138,159 312,429 Net income (loss) 36,260 15,298 (293,356) 54,252 139,460 Depreciation and amortization* 275,671 242,458 226,984** 227,316 266,532 Capital expenditures (additions to fixed assets) 251,117 195,937 250,678 251,197 298,078 R&D expenses 232,150 229,877 239,164 257,326 282,569 ---------------------------------------------------------------------------------------------------------------- Per share: Net income (loss) 92.2 42.1 (696.9) 134.0 309.2 Cash dividends declared Interim 25.00 25.00 25.00 25.00 25.00 (20.34cents) (22.88cents) (24.88cents) (24.48cents) (21.93cents) Year-end 25.00 25.00 25.00 25.00 30.00 (23.09cents) (25.22cents) (29.40cents) (22.77cents) (26.15cents) ---------------------------------------------------------------------------------------------------------------- AT YEAR-END Net working capital 367,009 616,089 537,739 816,387 843,596 Long-term debt 880,395 983,712 906,486 1,203,592 1,099,765 Stockholders' equity 1,428,219 1,329,565 1,007,808 1,169,173 1,459,428 Stockholders' equity per share 3,827.39 3,557.57 2,695.31 3,125.57 3,798.76 Total assets 4,529,830 4,269,885 4,223,920 5,045,725 5,680,342 ---------------------------------------------------------------------------------------------------------------- Number of shares outstanding in thousands: Average 417,687 417,454 417,665 421,973 458,992 At year-end 373,158 373,728 373,911 374,068 384,185 ---------------------------------------------------------------------------------------------------------------- Yen exchange rates per U.S. dollar: At year-end 114.90 102.40 86.85 107.00 123.72 Average 123.98 107.87 99.30 96.43 112.52 High 114.90 101.10 86.85 81.12 104.49 Low 134.53 114.20 105.38 107.29 124.54
* Including amortization of deferred insurance acquisition costs ** Excluding write-off of goodwill 23 24 Notes to Selected Financial Data: 1. Net income (loss) per share is computed based on the average number of common shares outstanding during each period after consideration of the dilutive effect of common stock equivalents. 2. During the fiscal year ended March 31, 1996, the Company changed its method of accounting for assessing the carrying values of intercompany foreign currency commitments to comply with the Emerging Issues Task Force Issue No. 95-2. This did not have a material impact on results of operations for the years ended March 31, 1996 and 1997. 3. The consolidated results for the fiscal year ended March 31, 1995 reflect the write-off of goodwill of 265 billion yen in the Pictures Group (refer to Note 3 of Notes to Consolidated Financial Statements) and losses in the Pictures Group of approximately 50 billion yen arising from a combination of unusual items, such as abandoning a large number of projects in development and providing for settlement of outstanding lawsuits and contract claims. 4. Refer to Note 2 of Notes to Consolidated Financial Statements, regarding the accounting policy for the earnings per share computation. 5. Cash dividends declared in U.S. dollars are based on the exchange rates at each respective payment date, using the noon buying rates for cable transfers in yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York. Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES Sony's management aims to maintain a solid financial position with ample liquidity to provide operational flexibility. At March 31, 1997, total assets were 5,680.3 billion yen, 12.6% more than the 5,045.7 billion yen at the previous year-end. One reason was the significantly lower value of the yen in relation to foreign currencies at the end of the year compared with the previous year-end. An increase in operating assets of Sony Life Insurance Co., Ltd., which recorded higher insurance premiums, also contributed to the rise in assets. Total short- and long-term borrowings and debt decreased 202.0 billion yen to 1,427.9 billion yen. This was the result of an improvement in Sony's cash flows and the conversion of convertible bonds, offset to some degree by an increase in foreign currency denominated liabilities caused by the yen's depreciation. Stockholders' equity grew by 290.3 billion yen to 1,459.4 billion yen. The ratio of stockholders' equity to total assets increased by 2.5 percentage points, from 23.2% to 25.7%. Based on the number of shares outstanding at March 31, 1997, stockholders' equity per share rose to 3,798.76 yen from 3,125.57 yen at the previous year-end. In cash flows from operating activities, depreciation and amortization rose 17.3% to 266.5 billion yen. This figure includes the amortization of goodwill and intangibles as well as the amortization of deferred insurance acquisition costs. Net cash provided by operating activities grew to 723.1 billion yen, up significantly from 234.2 billion yen in the previous year, primarily due to the increase in net income and the decrease in inventories. In cash flows from investing activities, net cash used in investing activities amounted to 518.0 billion yen, up from 371.0 billion yen in the previous year. This increase was mainly attributable to growth in payments for purchases of fixed assets and marketable securities. 24 25 In cash flows from financing activities, net cash used in financing activities totaled 247.5 billion yen, mainly due to a significant decrease in short-term borrowings. Due to the above factors, and including the effect of exchange rate changes, there was a net decrease in cash and cash equivalents of 30.8 billion yen, resulting in a balance of 428.5 billion yen at year-end. Capital expenditures during the fiscal year ended March 31, 1997, increased 18.7% to 298.1 billion yen. Major components of this figure are semiconductor-related expenditures of approximately 50 billion yen and capital expenditures in the field of displays. In the fiscal year ending March 31, 1998, Sony plans to increase semiconductor-related capital expenditures for next-generation products and other requirements. The company also plans to expand manufacturing facilities for lithium-ion batteries and other products. As a result, capital expenditures are expected to exceed the level of the fiscal year ended March 31, 1997. RESULTS OF OPERATIONS (The fiscal year ended March 31, 1997 compared to the fiscal year ended March 31, 1996) Sales and Operating Revenue Sony's consolidated sales during the fiscal year ended March 31, 1997, amounted to 5,663.1 billion yen, up 23.3% from the previous fiscal year. In Electronics, sales in Video Equipment rose 11.7% from the previous year, mainly due to the increase in unit sales of home-use camcorders. Sales in Audio Equipment increased 14.3%. In this category, sales of MD systems were brisk and car stereos recorded sales growth. Sales in Televisions increased 30.4%, reflecting the growth in sales of color TVs and strong sales of computer displays worldwide. Sales in Other Products rose 36.5%. The PlayStation game console and software, cellular phones, and lithium-ion batteries contributed to the sales increase in this category. However, sales of personal computer-related semiconductors, optical pickups, and CD-ROM drives declined. In Entertainment, sales in the Music Group increased 14.0% despite the weak retail environment in the U.S., primarily due to favorable sales growth outside Japan. Sales in the Pictures Group rose 37.8%, mainly benefiting from continued strength in the television operations, including U.S. network prime-time, daytime, and game show programming, the success of sell-through videos, and licensing agreements of SPE's filmed entertainment library. In Insurance and financing, revenues increased 9.0% from the previous year, reflecting the expansion of Sony's life insurance business in Japan. By geographic area, sales in Japan rose 15.3%. Televisions and Other Products, which includes the home video game business, were the most important contributors. Sony's overseas sales were higher in both the Electronics Business and the Entertainment Business. As a result, sales were up 30.1% in the U.S., 23.8% in Europe, and 25.6% in Other Areas. Sales in Japan accounted for 28.1% of the consolidated sales, with overseas sales accounting for 71.9%, an increase of 1.9 percentage points from the previous year. Impact of Foreign Exchange Trends During the fiscal year ended March 31, 1997, the U.S. dollar, German mark, and British pound accounted for approximately 67%, 5%, and 5%, respectively, of Sony's overseas sales. Approximately 97% of overseas sales were denominated in foreign currencies. During the year, the yen depreciated approximately 15% against the U.S. dollar, 7% against the German mark, and 16% against the British pound, each in terms of average rate, compared with the previous year. It is estimated that sales would have been approximately 520 billion yen lower than the reported figure, if the value of the yen had remained the same as in the previous year. 25 26 To minimize the adverse effects of foreign exchange fluctuations on its financial results, Sony promotes the localization of material and parts procurement, design, and manufacturing operations outside Japan. During the fiscal year ended March 31, 1997, overseas activities represented approximately 50% of total manufacturing output in Sony's Electronics Business. This figure is expected to continue to rise. Sony employs foreign exchange forward contracts and foreign currency option contracts to hedge against foreign exchange risks that arise from export and import transactions of Sony Corporation and its subsidiaries. In addition, interest rate currency swap agreements are used in connection with certain foreign currency denominated borrowings and debt. Cost of Sales, Selling, General and Administrative Expenses, and Operating Income The revenue and expenses of Insurance and financing are not included in the figures in the following two paragraphs. Cost of sales increased 22.2% to 3,930.1 billion yen, and the ratio of cost of sales to consolidated sales improved 1.2 percentage points, to 72.6%. Research and development expenses rose 9.8% to 282.6 billion yen, but as a percentage of consolidated sales declined 0.7 percentage point, to 5.2%. Selling, general and administrative expenses rose 23.4% to 1,132.2 billion yen. These expenses as a percentage of consolidated sales improved 0.1 percentage point, to 20.9%. Insurance and financing expenses were up 3.6% to 230.5 billion yen. This is mainly attributable to higher future insurance policy benefits due to growth in Sony's life insurance business. As a percentage of insurance and financing revenue, these expenses improved 4.8 percentage points, to 91.5%. Operating income grew by 57.4% to 370.3 billion yen, and the ratio of operating income to consolidated sales increased 1.4 percentage points, to 6.5%. Other Income and Expenses Other income rose 40.9% to 92.6 billion yen, while other expenses decreased 7.6% to 150.5 billion yen. These changes are primarily attributable to the foreign exchange gain, net, posted during the fiscal year ended March 31, 1997, following a substantial foreign exchange loss, net, in the previous year. During the fiscal year ended March 31, 1997, the exchange rates of the yen at settlement of foreign currency denominated sales were about the same as prevailing exchange rates. However, yen exchange rates for settlement of imports were higher than prevailing rates, resulting in a foreign exchange gain. Among other income and expenses, the balance of interest and dividend income less interest expenses resulted in net interest payments of 51.5 billion yen. This is 2.4 billion yen more than in the previous year, mainly because of the yen's depreciation. Income before Income Taxes and Net Income Income before income taxes was up 126.1% to 312.4 billion yen. Income taxes as a percentage of income before income taxes declined 3.4 percentage points, to 52.4%. Net income increased 157.1% to 139.5 billion yen, and represented 2.5% of consolidated sales, up 1.3 percentage points from the previous year. Net income per share rose from 134.0 yen to 309.2 yen (refer to Note 2 of Notes to Consolidated Financial Statements). The return on average stockholders' equity increased 5.6 percentage points, to 10.6%. 26 27 Segment Information The following discussion is based on segment information (refer to Note 18 of Notes to Consolidated Financial Statements) and differs from the sales classification described in Products and Sales and Distribution in Item 1. By Industry Segment, sales in the Electronics Business grew 23.6%. Backed by the rise in sales and the yen's depreciation, operating income surged 59.2%. Operating income as a percentage of sales in the Electronics Business improved by 1.6 percentage points, to 6.9%. Sales in the Entertainment Business were up 24.0%, and operating income climbed 20.8%. As a percentage of sales in the segment, operating income declined by 0.2 percentage point to 6.3%. Strong results outside Japan were behind higher operating income in the Music Group. The Pictures Group also posted an increase in operating income, primarily due to strength in the home video and television businesses, and to licensing agreements involving SPE's filmed entertainment library. In Insurance and financing, the strong performance of the life insurance business was mainly responsible for a 9.0% rise in revenue and a large 153.6% increase in operating income. By Geographic Area, Sony generated higher sales in all areas. In Japan, sales rose 12.9%. Operating income was up by a substantial 75.8%, mainly the result of a strong performance in the Electronics Business, including higher profitability of exports as the yen weakened. As a percentage of sales in Japan, operating income rose 2.8 percentage points, to 7.6%. In the U.S., sales increased 31.9%, but operating income declined 4.5% and fell 0.7 percentage point as a percentage of sales. This decline is primarily due to substantial losses incurred at a semiconductor manufacturing equipment subsidiary. In Europe, sales increased 24.7% and operating income advanced 45.2%, representing 6.2% of sales, 0.9 percentage point more than in the previous year. In Other Areas, sales were up 20.8% and operating income rose 25.3%, representing 4.8% of sales, 0.1 percentage point more than in the previous year. (The fiscal year ended March 31, 1996 compared to the fiscal year ended March 31, 1995) Sales and Operating Revenue Sony's consolidated sales during the fiscal year ended March 31, 1996, amounted to 4,592.6 billion yen, up 15.1% from the previous fiscal year. In Electronics, sales in Video Equipment rose 5.8% from the previous year, due to the increase in unit sales of home-use camcorders and favorable sales performances of broadcast- and industrial-use video products including Digital Betacam VTRs. Sales in Audio Equipment increased 0.8%. In this category, MD system unit sales showed significant growth, particularly in Japan. Sales in Televisions increased 12.2%, reflecting the growth in unit sales of color TVs and strong sales of computer displays worldwide. Sales in Other Products rose 41.4%, due to the strong sales of semiconductors, electronic components, CD-ROM drives, and cellular phones. In addition, the PlayStation game console and software gained popularity in Japan, the U.S., and Europe, contributing substantially to the sales increase in Other Products. In Entertainment, sales in the Music Group increased 3.6% over the previous year. Strong sales gains in international markets more than offset a sales decline in the U.S. that resulted from the weak retail environment. The Pictures Group sales rose 13.0%, reflecting strong box office revenues from several hit films as well as the successful off-network syndication of a hit comedy. In Insurance and financing, revenues increased 66.6% from the previous year, reflecting the expanded business operations of Sony Life Insurance Co., Ltd. 27 28 By geographic area, sales in Japan increased 24.9%, supported by overall sales advances in electronics products and higher sales of the PlayStation game console and software, as well as revenue growth in the life insurance business. Sales in the U.S. rose 9.4%, reflecting gains in computer-related products. In Europe, sales rose 16.4%, due to overall sales growth of the Electronics Business as well as favorable results of the Entertainment Business. In addition, the successful launch of the PlayStation in the U.S. and Europe in the fiscal year contributed to sales in both areas. Sales in Other Areas advanced 8.6%, led by expansion in Asian countries. Sales in Japan accounted for 30.0% of the consolidated sales, with overseas sales accounting for 70.0%, a decrease of 2.3 percentage points from the previous year. Impact of Foreign Exchange Trends During the fiscal year ended March 31, 1996, overseas sales were denominated approximately 63% in U.S. dollars, 8% in German mark, 5% in British pound, and 4% in Hong Kong dollars. In total, approximately 97% of overseas sales were denominated in foreign currencies. In terms of average rate, the yen rose approximately 3% against both the U.S. dollar and British pound, while it fell approximately 6% against the German mark. It is estimated that consolidated sales would have been approximately 20 billion yen higher than the reported figure if the value of the yen had remained the same as in the previous fiscal year. To minimize the adverse effects of foreign exchange fluctuations on its financial results, Sony promotes the localization of its operations, from R&D to design, materials and parts procurement, and manufacturing. During the fiscal year ended March 31, 1996, approximately 47% of total manufacturing in Sony's Electronics Business was conducted outside Japan, and the percentage is expected to continue to rise in the future. Foreign exchange forward contracts and foreign currency options are employed to hedge against foreign exchange risks in Sony's export and import transactions. In addition, currency swap agreements are entered into for certain foreign currency denominated borrowings and debt. Cost of Sales, Selling, General and Administrative Expenses, and Operating Income The revenue and expenses of Insurance and financing were reported separately for the first time in the fiscal year ended March 31, 1996. Such revenue and expenses are not included in the figures in the following two paragraphs. Cost of sales rose 10.3% from the previous year, to 3,216.8 billion yen, and the ratio of cost of sales to consolidated sales improved 1.9 percentage points, to 73.8%. This improvement reflects higher sales and Companywide efforts to reduce costs. Research and development expenses increased 7.6%, to 257.3 billion yen, but as a percentage of consolidated sales declined 0.3 percentage point, to 5.9%. Selling, general and administrative expenses increased 8.9% from the previous year, to 917.9 billion yen. These expenses as a percentage of consolidated sales improved 0.9 percentage point, to 21.0%. Insurance and financing expenses, which were reported separately, rose 67.6% from the previous year, to 222.5 billion yen, primarily due to an increase in future insurance policy benefits reflecting the expanded operations of Sony's life insurance business. Insurance and financing expenses as a percentage of Insurance and financing revenue increased 0.6 percentage point, to 96.3%. Sony posted operating income of 235.3 billion yen for the fiscal year ended March 31, 1996, and the ratio of operating income to consolidated sales was 5.1%. During the previous fiscal year, due to the write-off of goodwill and additional losses in the Pictures Group, Sony posted an operating loss of 166.6 billion yen. 28 29 Other Income and Expenses Other income declined 5.5%, to 73.3 billion yen, and other expenses increased 29.3%, to 170.5 billion yen, due mainly to a large foreign exchange loss, net, as opposed to a foreign exchange gain, net, in the previous year. During the fiscal year ended March 31, 1996, the exchange rates of the yen at settlement of foreign exchange forward contracts were higher than prevailing exchange rates, resulting in a foreign exchange loss. Among other income and expenses, the balance of interest and dividend income less interest expenses resulted in net interest payments of 49.0 billion yen, a deterioration of 6.1 billion yen from the previous year, due primarily to an increase in total borrowings and debt. Income before Income Taxes and Net Income Income before income taxes amounted to 138.2 billion yen, compared with a loss before income taxes of 220.9 billion yen in the previous year. Income taxes as a percentage of income before income taxes came to 55.8%. Net income for the fiscal year ended March 31, 1996, was 54.3 billion yen, compared with a net loss of 293.4 billion yen in the previous year. The ratio of net income to consolidated sales was 1.2%. Sony registered net income per share of 134.0 yen, compared with a net loss per share of 696.9 yen in the previous year (refer to Note 2 of Notes to Consolidated Financial Statements). Segment Information The following discussion is based on segment information (refer to Note 18 of Notes to Consolidated Financial Statements) and differs from the sales classification described in Products and Sales and Distribution in Item 1. By industry segment, sales in the Electronics Business rose 15.6% and operating income surged 56.7%, reflecting the increase in sales and Companywide efforts to cut costs and expenses. Operating income as a percentage of sales in the Electronics Business improved from 3.9% to 5.3%. In the Entertainment Business, sales rose 7.7%. Operating income of 54.9 billion yen was posted, compared with an operating loss of 273.3 billion yen in the previous fiscal year, which was the result of the write-off of goodwill and additional losses in the Pictures Group. Operating income as a percentage of sales in the Entertainment Business amounted to 6.5%. The Pictures Group posted operating income thanks to several hit films, successful television syndication in the U.S., management efforts to control costs, and lower amortization charges following the previous year's write-off of goodwill. The operating income of the Music Group declined from the previous year due to the weak U.S. retail environment, which was not totally offset by a strong international performance. In Insurance and financing, revenues soared 61.7% from the previous year and operating income climbed 40.6%. These gains were primarily the result of a strong performance by Sony Life Insurance Co., Ltd. Operating income as a percentage of revenues in Insurance and financing declined from 3.9% to 3.4%. 29 30 By geographic area, Sony's sales increased significantly in all areas. In Japan, sales advanced 14.6%, mainly as the result of an increase in sales in the Electronics Business, and operating income soared 94.5%. Consequently, operating income as a percentage of sales was 4.8%, a major improvement from 2.9% in the previous year. In the U.S., due to a 13.2% increase in overall sales as well as improved profit from Pictures Group operations, operating income was recorded. In the previous fiscal year, a large operating loss was posted due to the write-off of goodwill and additional losses in the Pictures Group. In Europe, while sales climbed 16.0%, operating income rose only 3.5% and operating income as a percentage of sales worsened from 5.9% in the previous year to 5.3%. In Other Areas, sales rose 15.7%, operating income increased 16.5%, and operating income as a percentage of sales improved marginally, to 4.7%. Item 9A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. COMPLIANCE WITH STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In February 1997, the FASB issued FAS 128, Earnings per Share, which replaces the presentation of primary Earnings per Share (EPS) with a presentation of basic EPS and also requires dual presentation of basic and diluted EPS with an appropriate reconciliation of both computations. Basic EPS is computed based on the average number of shares of common stock outstanding during each period. Diluted EPS assumes the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. This Statement is effective for the both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After the effective date, all prior-period EPS data presented shall be restated to conform with this Statement. Under the provisions of this Statement, the company's basic EPS for the years ended March 31, 1995, 1996, and 1997 would be (784.7) yen, 145.1 yen, and 367.7 yen, respectively, and also its diluted EPS for the years ended March 31, 1995, 1996, and 1997 would be (784.7) yen, 134.0 yen, and 309.2 yen, respectively (yen amounts in parentheses represent loss per share). In February 1997, FAS 129, Disclosure of Information about Capital Structure, and in June 1997, FAS 130, Reporting Comprehensive Income and FAS 131, Disclosures about Segments of an Enterprise and Related Information about Capital Structure were issued. FAS 129 is effective for financial statements for periods ending after December 15, 1997 and FAS 130 and FAS 131 are effective for financial statements for periods beginning after December 15, 1997. The statements are primarily disclosure oriented and will not effect the Company's consolidated financial position or operating results. Item 10. Directors and Officers of Registrant On June 27, 1997, the Company made a major reform of its Board of Directors and at the same time introduced a new system of executive officers. While the Company selects appropriate and qualified persons for the management of Sony as candidates for directorship, the Company intends to increase the number of outside Directors in order to reinforce the Board's supervisory function on the conduct of business. The number of Directors are reduced adequately so that more active discussion may be conducted and proper decisions may be taken at the Board of Directors. Under the new system of executive officers, the executive officers appointed by the Board of Directors execute their respective assigned duties upon the delegation of power and authority by the Representative Directors, who have unlimited statutory authority and power to represent and act on behalf of the Company in all respects, and assist the relevant Representative Directors in their respective areas of responsibility. This new system was introduced with a view to strengthening the executive function of officers headed by the Representative Directors who are in charge of business operations in line with the basic policies set by the Board of Directors and under the supervision of the Board of Directors. 30 31 Set forth below are the names of the Company's Directors and Statutory Auditors as of July 1, 1997.
Director or Statutory Auditor Directors and Statutory Auditors since -------------------------------- ----------------- Chairman and Representative Director, Chief Executive Officer Norio Ohga --------------------------------------------------------------------------------------1964 Vice Chairman and Representative Director Tsunao Hashimoto --------------------------------------------------------------------------------1980 President and Representative Director, Chief Operating Officer Nobuyuki Idei -----------------------------------------------------------------------------------1989 Executive Deputy President and Representative Directors Minoru Morio -----------------------------------------------------------------------------------1988 Kozo Ohsone -----------------------------------------------------------------------------------1987 Yoshiyuki Kaneda --------------------------------------------------------------------------------1986 Tamotsu Iba ------------------------------------------------------------------------------------1992 Directors Peter G. Peterson -------------------------------------------------------------------------------1991 Kenichi Suematsu --------------------------------------------------------------------------------1997 Hideo Ishihara ----------------------------------------------------------------------------------1997 Standing Statutory Auditors Nobuo Kanoi ------------------------------------------------------------------------------------1996 Akihisa Ohnishi ---------------------------------------------------------------------------------1993 Yoshisuke Mohri ---------------------------------------------------------------------------------1994 Statutory Auditor Kazuaki Morita ----------------------------------------------------------------------------------1995
Set forth below are the names of the Company's executive officers (including seven Representative Directors) as of July 1, 1997.
Executive Officers (Since June 27, 1997) ---------------------------------------- Norio Ohga Tsunao Hashimoto-----------------Chief Human Resources Officer, In charge of Corporate External Relations Division Nobuyuki Idei Minoru Morio---------------------Chief Technology Officer, In charge of Home Entertainment & Information Group, Semiconductor Company, and Intellectual Property Development Center Kozo Ohsone----------------------Chief Production Officer, In charge of Personal Entertainment & Communication Group and Computer Peripherals & Components Company Yoshiyuki Kaneda-----------------Executive Representative, Western Japan Tamotsu Iba----------------------Chief Financial Officer, In charge of Legal Division
31 32
Corporate Executive Vice President Kiyoshi Yamakawa-----------------In charge of Image Creation & Communication Group Suehiro Nakamura-----------------President of Display Company Kenichi Oyama--------------------Senior General Manager of Accounting & Finance Division Corporate Senior Vice President Hideo Nakamura-------------------In charge of Manufacturing System Business Center, Circuit Board Business Center, and Production Engineering Center Teruaki Aoki---------------------President of Computer Peripherals & Components Company, In charge of Bionics Department Masayuki Takano------------------President of Broadcast Products Company Yasumasa Mizushima---------------In charge of Procurement Center and Logistics Center Masayoshi Morimoto---------------Senior General Manager of Corporate Human Resources Division, In charge of Employee Relations & General Affairs Center and Capital Market & Investor Relations Shizuo Takashino-----------------President of Personal A&V Products Company, In charge of MD Business Center Akiyosi Kawashima----------------President of Recording Media & Energy Company Mario Tokoro---------------------President of IT Laboratories and Sony Computer Science Laboratory Corporate Vice President Toshitada Doi--------------------President of D-21 Laboratory Seiichi Watanabe-----------------President of Semiconductor Company Kenji Hori-----------------------In charge of Information Systems Center and Customer Satisfaction Center Toshiyuki Yamada-----------------President of Research Center Katsuaki Tsurushima--------------President of Advanced Development Laboratory Kunitake Ando--------------------President of Information Technology Company Takeo Eguchi---------------------President of Image & Sound Communication Company, In charge of Visual Communication Center, New Video Theater Systems Planning Department, and Card Systems Department Shigeyuki Ochi-------------------President of Media Processing Laboratories Nobuyuki Watanabe----------------Senior General Manager of Electronic Devices Marketing Group Tadasu Kawai---------------------Senior General Manager of International Marketing Center, In charge of Corporate AD Center Masao Morita---------------------President of Personal & Mobile Communication Company Mitsuru Ohki---------------------Senior General Manager of Corporate Communication Center Yoshio Nishi---------------------Senior Vice President of Recording Media & Energy Company Yutaka Nakagawa------------------Senior Vice President of Personal A&V Products Company Yukio Kubota---------------------Senior Vice President of Display Company, Vice President of Information Technology Company Katsumi Ihara--------------------President of Home A&V Products Company
(a) All of the aforementioned persons, with the exception of Mr. Peter G. Peterson, Chairman of The Blackstone Group, Mr. Kenichi Suematsu, Advisor of The Sakura Bank, Limited, Mr. Hideo Ishihara, Chairman of Goldman Sachs (Japan) Ltd., and Mr. Kazuaki Morita, Chairman of Morita and Co., are engaged full-time in the affairs of Sony. (b) Mr. Kazuaki Morita is an uncle of Mr. Masao Morita. All Directors and Statutory Auditors shall be elected by the general meeting of shareholders. In general, the term of office of Directors shall expire at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within one year after their assumption of office, and the term of office of Statutory Auditors shall expire at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within three years after their assumption of office; however, they may serve any number of consecutive terms. 32 33 The Board of Directors may elect from among its members a Chairman and Director, a Vice Chairman and Director, a President and Director, and one or more Executive Deputy Presidents and Directors. From among the Directors the Board of Directors shall elect one or more Representative Directors. Each of the Representative Directors has the authority individually to represent the Company in the conduct of its affairs. The Statutory Auditors of the Company are not required to be and are not certified public accountants. However, at least one of the Statutory Auditors should be a person who has not been a director, general manager or employee of the Company or any of its subsidiaries during the five-year period prior to his election as a Statutory Auditor. The Statutory Auditors may not at the same time be Directors, managers or employees of the Company. Each Statutory Auditor has the statutory duty to examine the financial statement and business reports to be submitted by the Board of Directors at the general meeting of shareholders and also to supervise the administration by the Directors of the Company's affairs. They are entitled to participate in meetings of the Board of Directors but are not entitled to vote. Under the Law concerning Special Measures to the Commercial Code with respect to Audit, the Board of Statutory Auditors has a statutory duty to prepare and submit its audit report to the Board of Directors each year. A Statutory Auditor may note his opinion in the audit report if his opinion is different from the opinion expressed in the audit report. The Board of Statutory Auditors is empowered to establish audit principles, the method of examination by Statutory Auditors of the Company's affairs and financial position and other matters concerning the performance of the Statutory Auditors' duties. There is not any arrangement or understanding between a Director or a Statutory Auditor and any other person pursuant to which he was selected as a Director or a Statutory Auditor. Item 11. Remuneration of Directors and Statutory Auditors (a) The aggregate amount of remuneration, including bonuses, paid by Sony to all Directors and Statutory Auditors of the Company as a group (45 persons) who served during the fiscal year ended March 31, 1997, was approximately 2,572 million yen. (b) The aggregate amount accrued for lump-sum severance indemnities by Sony during the fiscal year for Directors of the Company totaled 695 million yen. (See Note 12 of Notes to Consolidated Financial Statements.) Item 12. Options to Purchase Securities from Registrant or Subsidiaries As of September 1, 1997, the Company had granted the following outstanding Warrants to purchase shares of Common Stocks to certain Directors and executive officers as part of their compensation.
(a) Number of Shares Initial Issue Price per Share* Exercise Period ---------------- ------------------------------ --------------- Number of shares of 5,330 yen October 1, 1995 to Common Stock having an August 31, 1999 issue price of 1 billion yen Number of shares of 7,022 yen October 1, 1996 to Common Stock having an August 15, 2000 issue price of 2 billion yen
* Subject to antidilution adjustment 33 34 (b) As of September 1, 1997, the total amount of Common Stock called for by Warrants held by Directors and executive officers is 1.9 billion yen. Item 13. Interest of Management in Certain Transactions (a) None of the information which the Company is required by Japanese law or stock exchange requirements to disclose to its shareholders or otherwise make public with respect to the interest of management in certain transactions relates to any material transaction required to be disclosed by this item. (b) None. PART II Item 14. Description of Securities to be Registered Not applicable. PART III Item 15. Defaults Upon Senior Securities None. Item 16. Changes in Securities and Changes in Security for Registered Securities (a) None. (b) None. (c) None. (d) None. PART IV Item 17. Financial Statements Not applicable. Item 18. Financial Statements See Financial Statements. Item 19. Financial Statements and Exhibits (a) Financial Statements See accompanying index to Consolidated Financial Statements. 34 35 (b) Exhibits (1) Articles of Incorporation, as amended (English translation) (2) Regulations of the Board of Directors, as amended (English translation) (3) Certificate of English translations 35 36 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. SONY CORPORATION (Registrant) BY /s/ Kenichi Oyama -------------------------------------- Kenichi Oyama Corporate Executive Vice President Date September 11, 1997 ------------------ 36 37 S O N Y C O R P O R A T I O N AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 38 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of independent accountants F-2 Consolidated balance sheets at March 31, 1996 and 1997 F-3 Consolidated statements of income and retained earnings for the years ended March 31, 1995, 1996, and 1997 F-5 Consolidated statements of cash flows for the years ended March 31, 1995, 1996, and 1997 F-7 Notes to consolidated financial statements F-10 Financial statement schedule for the years ended March 31, 1995, 1996, and 1997 II - Valuation and qualifying accounts F-43
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 39 Report of Independent Accountants 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 consolidated subsidiaries at March 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility 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 generally accepted auditing standards which 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 the opinion expressed above. As discussed in Note 3 to the consolidated financial statements, the company changed its method of accounting for assessing the carrying values of its investments in acquired businesses including goodwill in the year ended March 31, 1995. /s/ PRICE WATERHOUSE - -------------------- Price Waterhouse May 6, 1997 Tokyo, Japan F-2 40 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
Yen in millions -------------------------- March 31 -------------------------- 1996 1997 --------- --------- Current assets: Cash and cash equivalents 459,339 428,518 Time deposits 32,605 52,518 Marketable securities 28,420 120,094 Notes and accounts receivable, trade 923,566 1,066,314 Allowance for doubtful accounts and sales returns (68,763) (93,732) Inventories 856,638 869,800 Deferred income taxes 83,291 111,756 Prepaid expenses and other current assets 208,891 240,195 --------- --------- Total current assets 2,523,987 2,795,463 --------- --------- Noncurrent inventories-film 186,007 242,727 --------- --------- Investments and advances: Affiliated companies 40,470 52,547 Securities investments and other 640,182 734,332 --------- --------- 680,652 786,879 --------- --------- Property, plant and equipment: Land 164,563 179,011 Buildings 714,419 818,084 Machinery and equipment 1,618,612 1,805,851 Construction in progress 78,078 72,661 --------- --------- 2,575,672 2,875,607 Less-Accumulated depreciation 1,454,913 1,636,696 --------- --------- 1,120,759 1,238,911 --------- --------- Other assets: Intangibles 104,733 112,080 Goodwill 148,729 161,840 Deferred insurance acquisition costs 112,820 148,032 Other 168,038 194,410 --------- --------- 534,320 616,362 --------- --------- 5,045,725 5,680,342 ========= =========
The accompanying notes are an integral part of these statements. F-3 41 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
Yen in millions -------------------------- March 31 -------------------------- 1996 1997 --------- --------- Current liabilities: Short-term borrowings 292,396 117,801 Current portion of long-term debt 133,863 210,315 Notes and accounts payable, trade 565,044 653,826 Accounts payable, other and accrued expenses 418,612 537,726 Accrued income and other taxes 74,029 169,480 Other 223,656 262,719 --------- --------- Total current liabilities 1,707,600 1,951,867 --------- --------- Long-term liabilities: Long-term debt 1,203,592 1,099,765 Accrued pension and severance costs 123,959 146,289 Deferred income taxes 160,398 173,951 Future insurance policy benefits and other 447,316 579,263 Other 126,233 154,912 --------- --------- 2,061,498 2,154,180 --------- --------- Minority interest in consolidated subsidiaries 107,454 114,867 --------- --------- Stockholders' equity: Common stock, 50 yen par value- Authorized: 1,350,000,000 shares Issued: 1996 - 374,067,706 shares 299,885 1997 - 384,185,043 shares 332,037 Additional paid-in capital 441,735 474,033 Legal reserve 31,380 35,831 Unrealized gain on securities 81,333 67,278 Retained earnings 617,343 731,470 Cumulative translation adjustment (302,503) (181,221) --------- --------- 1,169,173 1,459,428 --------- --------- Commitments and contingent liabilities 5,045,725 5,680,342 ========= =========
The accompanying notes are an integral part of these statements. F-4 42 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Yen in millions ------------------------------------------ Year ended March 31 ------------------------------------------ 1995 1996 1997 --------- --------- --------- Sales and operating revenue: Net sales 3,826,693 4,339,411 5,383,911 Insurance and financing revenue 138,747 231,198 251,930 Other operating revenue 25,143 21,956 27,293 --------- --------- --------- 3,990,583 4,592,565 5,663,134 --------- --------- --------- Costs and expenses: Cost of sales 2,916,475 3,216,806 3,930,107 Selling, general and administrative 842,783 917,887 1,132,241 Insurance and financing expenses 132,798 222,548 230,456 Goodwill write-off 265,167 -- -- --------- --------- --------- 4,157,223 4,357,241 5,292,804 --------- --------- --------- Operating income (loss) (166,640) 235,324 370,330 --------- --------- --------- Other income: Interest and dividends 22,362 18,053 19,406 Foreign exchange gain, net 22,789 -- 18,085 Other 27,992 47,702 55,152 --------- --------- --------- 73,143 65,755 92,643 --------- --------- --------- Other expenses: Interest 65,354 67,095 70,892 Foreign exchange loss, net -- 25,580 -- Other 62,097 70,245 79,652 --------- --------- --------- 127,451 162,920 150,544 --------- --------- --------- Income (loss) before income taxes (220,948) 138,159 312,429 --------- --------- --------- Income taxes: Current 84,108 72,088 169,060 Deferred (18,935) 5,070 (5,490) --------- --------- --------- 65,173 77,158 163,570 --------- --------- --------- Income (loss) before minority interest (286,121) 61,001 148,859 Minority interest in consolidated subsidiaries 7,235 6,749 9,399 --------- --------- --------- Net income (loss) (293,356) 54,252 139,460 ========= ========= =========
(Continued on following page) The accompanying notes are an integral part of these statements. F-5 43 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Continued)
Yen in millions -------------------------------------- Year ended March 31 -------------------------------------- 1995 1996 1997 -------- ------- ------- Net income (loss) (from preceding page) (293,356) 54,252 139,460 Retained earnings: Balance, beginning of year 901,847 585,553 617,343 Common stock issue costs, net of tax (8) (2) -- Cash dividends (18,692) (18,700) (20,882) Transfer to legal reserve (4,238) (3,760) (4,451) -------- ------- ------- Balance, end of year 585,553 617,343 731,470 ======== ======= =======
Yen -------------------------------------- Per common share: Net income (loss) (696.9) 134.0 309.2 Cash dividends 50.0 50.0 55.0
The accompanying notes are an integral part of these statements. F-6 44 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Yen in millions --------------------------------------- Year ended March 31 --------------------------------------- 1995 1996 1997 -------- -------- ------- Cash flows from operating activities: Net income (loss) (293,356) 54,252 139,460 Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation and amortization, including amortization of deferred insurance acquisition costs 226,984 227,316 266,532 Goodwill write-off 265,167 -- -- Accrual for pension and severance costs, less payments 15,364 9,604 19,521 Loss on disposal of fixed assets 17,838 9,429 13,411 Deferred income taxes (18,935) 5,070 (5,490) Changes in assets and liabilities: Increase in notes and accounts receivable (116,093) (150,158) (65,905) (Increase) decrease in inventories (86,740) (69,157) 41,825 Increase in other current assets (4,385) (32,117) (2,906) Increase (decrease) in notes and accounts payable 56,112 (4,169) 66,099 Increase (decrease) in accrued income and other taxes 10,528 (6,064) 89,887 Increase in other current liabilities 57,309 54,438 73,786 Increase in future insurance policy benefits and other 76,100 174,223 131,947 Other (23,954) (38,490) (45,032) -------- -------- ------- Net cash provided by operating activities 181,939 234,177 723,135 ======== ======== =======
(Continued on following page) The accompanying notes are an integral part of these statements. F-7 45 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Yen in millions ---------------------------------------- Year ended March 31 ---------------------------------------- 1995 1996 1997 -------- -------- -------- Cash flows from investing activities: Payments for purchases of fixed assets (222,861) (250,157) (298,187) Proceeds from sales of fixed assets 6,637 22,823 14,940 Payments for investments and advances (326,684) (490,330) (450,399) Proceeds from sales of investment securities and collections of advances 273,919 313,769 316,787 Payments for purchases of marketable securities (115,244) (54,964) (128,929) Proceeds from sales of marketable securities 81,432 101,913 46,105 (Increase) decrease in time deposits 27,595 (12,359) (18,361) Other (2,727) (1,694) 46 -------- -------- -------- Net cash used in investing activities (277,933) (370,999) (517,998) ======== ======== ========
(Continued on following page) The accompanying notes are an integral part of these statements. F-8 46 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Yen in millions --------------------------------------- Year ended March 31 --------------------------------------- 1995 1996 1997 ------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 29,853 381,239 171,698 Payments of long-term debt (69,039) (87,500) (209,383) Increase (decrease) in short-term borrowings 153,515 (145,527) (192,034) Dividends paid (18,681) (18,772) (18,657) Other (2,595) 1,037 881 ------- -------- -------- Net cash provided by (used in) financing activities 93,053 130,477 (247,495) ------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (5,735) (9,871) 11,537 ------- -------- -------- Net decrease in cash and cash equivalents (8,676) (16,216) (30,821) Cash and cash equivalents at beginning of year 484,231 475,555 459,339 ------- -------- -------- Cash and cash equivalents at end of year 475,555 459,339 428,518 ======= ======== ========
The accompanying notes are an integral part of these statements. F-9 47 SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of operations: The company is engaged in the development, manufacture, and sale of various kinds of electronic equipment, instruments, and devices. The company's principal manufacturing facilities are located in Japan, the United States, Europe, and Asia, and its products are marketed by sales subsidiaries and unaffiliated local distributors throughout the world. The company is also engaged worldwide in the development, production, manufacture, and distribution of recorded music, in all commercial formats and musical genres, and image-based software, including film, video, television, and new entertainment technologies. Further, the company is engaged in insurance and financing activities. These activities are carried on principally through a Japanese stock life insurance subsidiary and also a Japanese financing subsidiary. 2. Summary of significant accounting policies: The parent company and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domicile. Certain adjustments and reclassifications, including those relating to the tax effects of temporary differences, capitalization of stock purchase warrants, deferral of insurance acquisition costs, the accrual of certain expenses, and the accounting for foreign currency translation, have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America (U.S. GAAP). These adjustments were not recorded in the statutory books of account. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-10 48 Significant accounting policies are as follows: Basis of consolidation and accounting for investments in affiliated companies - The consolidated financial statements include the accounts of the parent company and those of its majority-owned subsidiary companies. All significant intercompany transactions and accounts are eliminated. Investments in 20% to 50% owned companies are stated at cost plus equity in undistributed earnings; consolidated net income (loss) includes the company's equity in current earnings (loss) of such companies, after elimination of unrealized intercompany profits. On occasion, a subsidiary or affiliated company accounted for by the equity method may issue its shares to third parties as either a public offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than the company's average per share carrying value. With respect to such transactions, the resulting gains or losses arising from change in interest are recorded in income for the year the change in interest transaction occurs. The excess of the cost over the underlying net equity of investments in subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable assets based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over the underlying net equity is recognized as goodwill. During the year ended March 31, 1995, the company changed its method of accounting for assessing the carrying value of its investments in acquired businesses including goodwill (see Note 3). Translation of foreign currencies - All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate year-end current rates and all income and expense accounts are translated at rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of stockholders' equity. Foreign currency receivables and payables are translated at appropriate year-end current rates and the resulting translation gains or losses are taken into income currently. F-11 49 Revenue recognition - Revenues from electronics sales and music are recognized when products are shipped to customers. Motion picture revenue is recognized beginning on the date of theatrical exhibition. Revenue from television licensing agreements is recognized when the motion picture or television series first becomes available for telecast. Revenue from home videocassette sales is generally recognized on the date of shipment. Insurance premiums are reported as revenue when due from policyholders. Benefits and expenses are associated with earned insurance premiums so as to result in the recognition of profits over the life of the contracts. This association is accomplished through a provision for liabilities for future benefits and amortization of acquisition costs. Cash and cash equivalents - Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates. Debt and equity securities - On April 1, 1994, the company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities, and recorded 73,000 million yen of unrealized gains on available-for-sale securities as a separate component of stockholders' equity on a net of tax basis. Under FAS 115, unrealized gains and losses on debt securities and equity securities classified as available-for-sale, whose fair values are readily determinable, are reported in a separate component of stockholders' equity, net of tax. Debt securities that are expected to be held to maturity are reported at amortized cost. Inventories - Inventories in electronics and music entertainment 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 determined on the "first-in, first-out" basis. Film costs include production, print, certain advertising costs, and allocated overhead. Film costs are amortized in the proportion that revenue for a period relates to management's estimate of ultimate revenues. F-12 50 Unamortized film costs are compared with estimated net realizable value on an individual film basis and write-downs are recorded when indicated. Film costs for motion pictures and television programs that are expected to be amortized against revenues from primary markets are classified as current assets. Primary markets for motion pictures include theatrical, home videocassette, and pay television. Primary markets for television programs include network and first-run syndication. All other film costs are classified as noncurrent. Property, plant and equipment and depreciation - Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment is computed on the declining-balance method for the parent company and Japanese subsidiaries and on the straight-line method for foreign subsidiary companies at rates based on estimated useful lives of the assets according to general class, type of construction and use. Significant renewals and additions are capitalized at cost. Maintenance and repairs and minor renewals and betterments are charged to income as incurred. Intangibles and goodwill - Intangibles, which mainly consist of artist contracts and music catalogs, are being amortized on a straight-line basis principally over 16 years and 21 years, respectively. Goodwill recognized in acquisitions accounted for as purchases is being amortized on a straight-line basis principally over a 40-year period. Deferred insurance acquisition costs - Costs that vary with and are primarily related to acquiring new insurance policies are deferred and are being amortized mainly over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. Liability for insurance future policy benefits - Liability for insurance future policy benefits is computed based on actuarial assumptions. F-13 51 Accounting for the impairment of long-lived assets - During the fiscal year ended March 31, 1997, the company has adopted FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires that long-lived assets and certain identifiable intangibles held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or intangibles may not be recoverable. The effect of adopting this statement was not material. Income taxes - The provision for income taxes is computed based on the pretax income (loss) included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Derivative financial instruments - Derivative financial instruments are used in the company's risk management of foreign currency and interest rate risk exposures of its financial assets and liabilities. Gains and losses on derivative financial instruments qualified as hedges to manage existing financial assets and liabilities are deferred and effectively offset gains and losses arising from the related assets and liabilities. Others used for hedging purposes but not qualifying for hedge accounting under U.S. GAAP are marked to market. In July 1995, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus with regard to EITF No. 95-2, Determination of What Constitutes a Firm Commitment for Foreign Currency Transactions Not Involving a Third Party. EITF No. 95-2 requires companies to mark to market forward exchange contracts to hedge intercompany foreign currency commitments which do not qualify as firm commitments as defined by such consensus. Accordingly, the company has applied the provisions of EITF No. 95-2 effective as of the second quarter of the year ended March 31, 1996. Previously, gains or losses on those forward exchange contracts to hedge intercompany foreign currency commitments have been deferred in accordance with FAS 52 and EITF No. 91-1. The application of the provisions of EITF No. 95-2 did not have a material impact on the results of operations for the years ended March 31, 1996 and 1997. F-14 52 Net income (loss) per common share - Net income (loss) per common share is computed based on the average number of shares of common stock outstanding during each period after consideration of the dilutive effect of common stock equivalents which include warrants and certain convertible bonds. Net income (loss) per common share is appropriately adjusted for any free distributions of common stock. In February 1997, the FASB issued FAS 128, Earnings per Share, which replaces the presentation of primary Earnings per Share (EPS) with a presentation of basic EPS and also requires dual presentation of basic and diluted EPS with an appropriate reconciliation of both computations. Basic EPS is computed based on the average number of shares of common stock outstanding during each period. Diluted EPS assumes the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. This Statement is effective for the both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After the effective date, all prior-period EPS data presented shall be restated to conform with this Statement. Under the provisions of this Statement, the company's basic EPS for the years ended March 31, 1995, 1996, and 1997 would be (784.7 yen), 145.1 yen, and 367.7 yen, respectively, and also its diluted EPS for the years ended March 31, 1995, 1996, and 1997 would be (784.7 yen), 134.0 yen, and 309.2 yen, respectively (yen amounts in parentheses represent loss per share). Distribution of common stock - On occasion, the company may make a free distribution of common stock which is accounted for either by a transfer of the applicable par value from the additional paid-in capital to the common stock account or with no entry if free shares are distributed from the portion of previously issued shares accounted for as excess of par value in the common stock account. Under the Japanese Commercial Code, a stock dividend can be effected by an appropriation of retained earnings to the common stock account by resolution of the general stockholders' meeting and the free share distribution with respect to the amount as appropriated by resolution of the Board of Directors' Meeting. Common stock issue costs - Common stock issue costs are directly charged to retained earnings, 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. F-15 53 Other recent pronouncements- In June 1996, FAS 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, was issued and was effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. The adoption of FAS 125 did not have a material effect on the company's consolidated financial position or operating results. In February 1997, FAS 129, Disclosure of Information about Capital Structure, and in June 1997, FAS 130, Reporting Comprehensive Income and FAS 131, Disclosures about Segments of an Enterprise and Related Information about Capital Structure were issued. FAS 129 is effective for financial statements for periods ending after December 15, 1997 and FAS 130 and FAS 131 are effective for financial statements for periods beginning after December 15, 1997. The statements are primarily disclosure oriented and will not effect the company's consolidated financial position or operating results. Reclassifications - Certain reclassifications of the statements of income and retained earnings in the years ended March 31, 1995 and 1996 have been made to conform with the presentation in the year ended March 31, 1997. 3. Intangible assets and other long-lived assets including goodwill: During the second quarter of the year ended March 31, 1995, the company changed its method of accounting for assessing the carrying value of its investments in acquired businesses including goodwill. Previously, the company assessed the carrying value of its investments in acquired businesses including goodwill on the basis of projections of undiscounted future operating cash flows plus an amount for an anticipated residual value. Under the new method adopted, the company applied a discount factor to those projected cash flows. The company believed that the new method provided a better measurement of the recoverability of its investments because the discounted cash flows method recognized the effect of the substantial cost of capital employed to carry the investments. The effect of this accounting change was to reduce the goodwill of the Entertainment segment associated with the Pictures Group by 265,167 million yen. Since its acquisition in November 1989, there had been slower than expected growth of the business of the Pictures Group, higher than expected levels of operating costs and expenses and higher than anticipated capital investment requirements. The deterioration experienced in the year ended March 31, 1994 gave rise to a thorough internal review. Similar results experienced in the first half of the year ended March 31, 1995, F-16 54 together with the resignation of the Pictures Group top management, caused the company to conclude that additional funding would be needed to attain acceptable levels of profitability. In light of the level of investments and likelihood of additional funding requirements, the company determined in the second quarter of the year ended March 31, 1995 that a discounted cash flows method provided a preferable measurement of the recoverability of its investments in acquired businesses because this method recognizes the effect of the cost of capital. The discounted future results of the Pictures Group, based on the company's forecasts, were not sufficient to justify the carrying value as of the end of the second quarter of the year ended March 31, 1995. In formulating the financial forecasts, the company considered historical performance and the medium-term plans as well as the longer-term economic outlook. These forecasts took into consideration market conditions during the second quarter of the year ended March 31, 1995 as well as foreseeable opportunities for future growth in existing lines of business. Although the company believed it could fund the Pictures Group over the entire forecast period, it had not determined whether additional investments would be made in areas other than the existing lines of business. The operating cash flows were based upon the short-term plans in effect in the second quarter of the year ended March 31, 1995 that called for a substantial improvement in earnings through recovered market share and cost reductions. For the longer term, it was assumed that the low levels of inflation then existing would continue and that the industry would grow at a slightly better rate than the economy as a whole. At the end of the forecast period a residual was included based on an appropriate multiple of the final year's results. The company believes that the forecast results, based on the historical financial trends and market conditions during the second quarter of the year ended March 31, 1995, were the best estimate of the company's future performance. In arriving at the discounted net present value, the company used a discount rate of 9% reflecting its weighted average cost of funds, including a factor for equity allocated to the Pictures Group, commensurate with the risk associated with that business as indicated by reference to comparable industry statistics. Over the entire forecast period, after giving effect to significant additional investment required to complete the investment program contemplated during the second quarter of the year ended March 31, 1995, the company forecast total operating cash flows of 4,166,374 million yen. Based on such forecasts, the cumulative results of the Pictures Group's operating cash flows on a discounted net present value basis of 309,005 million yen as of September 30, 1994 were insufficient to recover a significant portion of the investment. The amount of the resultant shortfall reduced the goodwill balance arising from the Pictures Group to 85,197 million yen as of September 30, 1994. F-17 55 As a result, the changes in the company's goodwill during the year ended March 31, 1995 are summarized as follows:
Yen in millions --------------- Balance at March 31, 1994 424,482 Amortization of goodwill (8,037) Goodwill write-off (265,167) Translation adjustment and other (29,895) -------- Balance at March 31, 1995 121,383 ========
During the years ended March 31, 1996 and 1997, there were no significant impairments of intangible assets or other long-lived assets including goodwill. 4. Accumulated amortization of intangibles and goodwill: Accumulated amortization of intangibles and goodwill amounted to 151,131 million yen and 188,943 million yen at March 31, 1996 and 1997, respectively. 5. Cash flow information: Cash payments during the year- Cash payments for income taxes were 80,499 million yen, 88,565 million yen, and 87,723 million yen for the years ended March 31, 1995, 1996, and 1997, respectively; in these respective years, interest payments were 70,464 million yen, 69,882 million yen, and 68,004 million yen. Noncash investing and financing activities- Capital lease obligations of 6,557 million yen, 9,563 million yen, and 4,824 million yen were incurred during the years ended March 31, 1995, 1996, and 1997, respectively. Conversions of convertible debt into common stock and additional paid-in capital were 791 million yen, 680 million yen, and 63,578 million yen for the years ended March 31, 1995, 1996, and 1997, respectively. F-18 56 6. Inventories: Inventories comprise the following:
Yen in millions --------------------- March 31 --------------------- 1996 1997 ------- ------- Current: Finished products 521,826 527,418 Work in process 121,035 119,406 Raw materials, purchased components and supplies 135,411 127,366 Film - released 52,761 73,767 - in process 25,605 21,843 ------- ------- 856,638 869,800 ======= ======= Noncurrent: Film - released 115,796 143,003 - in process 70,211 99,724 ------- ------- 186,007 242,727 ======= =======
7. Account balances and transactions with affiliated companies: Account balances and transactions with affiliated companies are presented below:
Yen in millions ------------------- March 31 ------------------- 1996 1997 ------ ------ Accounts receivable, trade 25,890 13,232 ====== ====== Accounts payable, trade 425 89 ====== ======
Yen in millions ----------------------------------- Year ended March 31 ----------------------------------- 1995 1996 1997 ------- ------- ------- Sales 226,237 123,623 96,183 ======= ======= ======= Purchases 3,338 2,647 733 ======= ======= =======
Dividends from affiliated companies accounted for by the equity method for the years ended March 31, 1995, 1996, and 1997 were 4,721 million yen, 6,639 million yen, and 3,071 million yen, respectively. F-19 57 8. Marketable securities and securities investments: Marketable securities and securities investments and other include debt and equity securities of which the aggregate fair value, gross unrealized gains and losses, and cost pertaining to available-for-sale securities are as follows:
Yen in millions ----------------------------------------------------------------------------------------------------------- March 31, 1996 March 31, 1997 ------------------------------------------------- ---------------------------------------------------- Gross Gross Gross Gross unrealized unrealized unrealized unrealized Cost gains losses Fair value Cost gains losses Fair value ------- ---------- ---------- ---------- ------- ---------- ---------- ---------- Available-for-sale Debt securities 341,554 11,592 2,149 350,997 531,968 22,001 1,338 552,631 Equity securities 49,842 158,279 1,006 207,115 49,512 124,682 2,364 171,830 ------- ------- ----- ------- ------- ------- ----- ------- Total 391,396 169,871 3,155 558,112 581,480 146,683 3,702 724,461 ======= ======= ===== ======= ======= ======= ===== =======
At March 31, 1997, debt securities mainly consist of Japanese government and municipal bonds and corporate debt securities due within 1 to 15 years. During the years ended March 31, 1995, 1996, and 1997, the net unrealized gains on available-for-sale securities included in the separate component of stockholders' equity, net of applicable taxes, decreased by 8,028 million yen, increased by 16,361 million yen, and decreased by 14,055 million yen, respectively. Proceeds from sales of available-for-sale securities on a specifically identified average cost basis were 299,727 million yen, 397,774 million yen, and 347,790 million yen for the years ended March 31, 1995, 1996, and 1997, respectively. On those sales, gross realized gains were 3,440 million yen, 14,605 million yen, and 19,174 million yen and gross realized losses were 1,863 million yen, 7,734 million yen, and 9,877 million yen, respectively. The net change in unrealized gain or loss on trading securities that has been included in earnings during the years ended March 31, 1995, 1996, and 1997 was insignificant. In the ordinary course of business, the company maintains long-term investment securities, included in securities investments and other, issued by a number of nonpublic companies. The aggregate carrying amounts of the investments in nonpublic companies were 50,146 million yen and 62,346 million yen at March 31, 1996 and 1997, respectively. The corresponding fair values at those dates were not computed as such estimation was not readily determinable. F-20 58 9. Short-term borrowings and long-term debt: Short-term borrowings at March 31, 1997 comprise the following:
Yen in millions -------- Loans, principally from banks, with interest ranging from 0.68% to 9.80% per annum 103,851 Commercial paper with interest ranging from 0.65% to 3.10% per annum 13,950 ------- 117,801 =======
As at March 31, 1997, the company had unused lines of credit amounting to 1,213,438 million yen of which 376,401 million yen related to commercial paper programs and 95,060 million yen related to medium term notes. Under these programs, the company is authorized to obtain short-term financing at prevailing interest rates for periods not in excess of 360 days. F-21 59 Long-term debt at March 31, 1997 comprises the following:
Yen in millions --------- Unsecured loans, representing obligations principally to banks, due 1997 to 2017 with interest ranging from 1.0% to 9.25% per annum 128,312 Secured loans, representing obligations principally to insurance companies and banks, due 1998 to 2000 with interest ranging from 5.7% to 10.13% per annum 4,024 Medium-term notes of consolidated subsidiaries due 1997 to 2006 with interest ranging from 3.02% to 8.04% per annum 338,371 Unsecured 6.0% convertible debentures due 1997, convertible currently at 3,200.2 yen for one common share, redeemable before due date 14 Unsecured 2.0% convertible bonds due 2000, convertible currently at 4,159.9 yen for one common share, redeemable before due date 352 Unsecured 0.15% convertible bonds due 2001, convertible currently at 6,519 yen for one common share, redeemable before due date 243,326 Unsecured 1.5% convertible bonds due 2002, convertible currently at 4,387.9 yen for one common share, redeemable before due date 1,122 Unsecured 1.4% convertible bonds due 2003, convertible currently at 5,415.5 yen for one common share, redeemable before due date 25,391 Unsecured 1.4% convertible bonds due 2005, convertible currently at 7,990.9 yen for one common share, redeemable before due date 298,581 Unsecured 0.125% convertible bonds of a consolidated subsidiary, due 1998, convertible currently at 1,815 yen for one common share 316 Unsecured 0.1% bonds, due 1999 with detachable warrants 1,000 Unsecured 0.1% bonds, due 2000 with detachable warrants 2,000 Unsecured 6.875% bonds due 2000 50,232 Unsecured 4.4% bonds due 2001 80,000 Unsecured 1.95% bonds of a consolidated subsidiary, due 1998 15,000 Unsecured 2.55% notes of a consolidated subsidiary, due 2000 5,000 Unsecured 9-7/8% senior subordinated notes of a consolidated subsidiary, due 1998 38,240 Unsecured Nikkei-linked coupon notes of a consolidated subsidiary, due 1997 6,627 Unsecured 6.0% notes of a consolidated subsidiary, due 1997 12,565 Unsecured floating rate notes of a consolidated subsidiary, due 1997 14,830 Unsecured fixed coupon notes linked to the Yen/U.S. dollar rate of a consolidated subsidiary, due 2001 807 Secured 3.8% bonds of a consolidated subsidiary, due 2001, redeemable before due date 3,000 Long-term capital lease obligations, 1.15% to 16.28% per annum, due 1997 to 2015 29,314 Guarantee deposits received 11,656 --------- 1,310,080 Less - Portion due within one year 210,315 --------- 1,099,765 =========
F-22 60 On September 1, 1995, the company issued 1 billion yen of 0.1% bonds, with detachable warrants. One warrant entitles the holders to subscribe 2 million yen for shares of common stock of the company at 5,330 yen per share (subject to adjustment in certain circumstances). Upon issuance of the bonds, the company bought all of these warrants and distributed such instruments at fair market value to the directors of the company as a part of their directors' remuneration. At March 31, 1997, 255 warrants were outstanding and will expire on August 31, 1999. On February 26, 1996, the company issued 300 billion yen of 0.15% convertible bonds due 2001, which may be converted into shares of common stock of the company, at the option of the holder thereof, at any time. The conversion price is subject to adjustment in certain circumstances. On August 16, 1996, the company issued 2 billion yen of 0.1% bonds, with detachable warrants. One warrant entitles the holders to subscribe 2 million yen for shares of common stock of the company at 7,022 yen per share (subject to adjustment in certain circumstances). Upon issuance of the bonds, the company bought all of these warrants and distributed such instruments at fair market value to the directors and employees of the company as a part of their remuneration or salary. At March 31, 1997, 909 warrants were outstanding and will expire on August 15, 2000. At March 31, 1997, 80,083 thousand shares of common stock would be issued upon conversion or exercise of all convertible debentures and warrants outstanding. At March 31, 1997, property, plant and equipment with a book value of 4,627 million yen is mortgaged as security for loans and bonds issued by consolidated subsidiaries. Aggregate amounts of annual maturities of long-term debt during the next five years are as follows:
Year ending March 31 Yen in millions ----------- --------------- 1998 210,315 1999 94,465 2000 107,705 2001 348,834 2002 152,670
The basic agreements with certain banks in Japan include provisions that collateral (including sums on deposit with such banks) or guarantors will be furnished upon the banks' request and that any collateral furnished, pursuant to such agreements or otherwise, will be applicable to all present or future indebtedness to such banks. F-23 61 10. Insurance-related operations: The company's stock life insurance subsidiary maintains accounting records as noted in Note 2 in accordance with the accounting principles and practices prescribed by the Japanese Ministry of Finance ( the "MOF" ), which vary in some respects from U.S. GAAP. Those differences are mainly: that insurance acquisition costs are deferred and amortized generally over the premium-paying period of the insurance policies, that future policy benefits calculated locally under the authorization of the MOF are comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions and that deferred income taxes are not recognized under local accounting practices. For purposes of preparing the consolidated financial statements, appropriate adjustments have been made to reflect such items in accordance with U.S. GAAP. The amounts of statutory net equity as of March 31, 1996 and 1997 were 12,624 million yen and 12,625 million yen, respectively. Deferred insurance acquisition costs- Insurance acquisition costs to be deferred, such as commission expenses, medical examination, and inspection report fees, etc., vary with and are primarily related to acquiring new insurance policies and are amortized mainly over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. Amortization charged to income for the years ended March 31, 1995, 1996, and 1997 amounted to 7,148 million yen, 9,694 million yen, and 15,855 million yen, respectively. Future insurance policy benefits- Liabilities for future policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, mortality and withdrawals. Future policy benefits are computed using interest rates ranging from approximately 3.5% to 6.25%, generally graded down after 10 to 20 years. Mortality, morbidity, and withdrawal assumptions for all policies are based on either the life insurance subsidiary's own experience or various actuarial tables. At March 31, 1996 and 1997, future insurance policy benefits amounted to 392,119 million yen and 528,204 million yen, respectively. F-24 62 11. Financial instruments: The company has certain financial instruments including financial assets and liabilities and off-balance-sheet financial instruments incurred in the normal course of business. In applying a consistent risk management strategy, the company manages its exposure to market rate movements of its financial assets and liabilities through the use of derivative financial instruments which include currency forward exchange and option contracts and interest rate currency swap agreements designated as hedges. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, German mark, and other currencies of major industrialized countries. Although the company may be exposed to losses in the event of nonperformance by counterparties or interest and currency rate movements, it does not anticipate significant losses due to the nature of its counterparties or the hedging arrangements. Following are explanatory notes regarding the financial assets and liabilities and off-balance-sheet financial instruments. Cash and cash equivalents, time deposits, and notes and accounts receivable, trade- In the normal course of business, substantially all cash and cash equivalents, time deposits, and notes and accounts receivable, trade, are highly liquid and are carried at amounts which approximate fair value. Notes and accounts payable, trade- In the normal course of business, substantially all notes and accounts payable, trade, are to be paid currently and their carrying amounts approximate fair value. Short-term borrowings and long-term debt- The fair values of short-term borrowings and total long-term debt including the current portion were estimated based on the discounted amounts of future cash flows using the company's current incremental borrowing rates for similar liabilities. F-25 63 Derivative financial instruments- The company enters into various currency forward exchange contracts, interest rate swap and interest rate currency swap agreements and foreign currency purchased and written options as a normal part of its risk management efforts, which include those transactions designed as hedges but that do not qualify for hedge accounting under U.S. GAAP. Gains and losses on those derivative financial instruments qualified for hedge accounting are deferred and effectively offset gains and losses on the underlying hedged assets and liabilities by recognizing them in the same period. Others used for hedging purposes but not qualified for hedge accounting under U.S. GAAP are marked to market. Such off-balance-sheet activities comprise the following: Foreign exchange forward contracts, the majority of which mature within three months, are used to hedge the risk of changes in foreign currency exchange rates substantially associated with accounts receivable and payable and commitments on future trade transactions denominated in foreign currencies. The purpose of the company's foreign currency hedging activities is to protect the company from the risk that the eventual Yen net cash inflows resulting from the sale of products to foreign customers will be adversely affected by changes in exchange rates. The contracted amounts outstanding at March 31, 1996 and 1997 were 843,090 million yen and 756,294 million yen, respectively. The fair values of these contracts were estimated based on the market quotes. Interest rate swap and interest rate currency swap agreements mature during 1997 to 2006 and the related differentials to be paid or received are recognized in interest expense over the terms of the agreements. Currency swap portions of the interest rate currency swap agreements are marked to market at the end of each period and the foreign exchange gain or loss recognized on the swap offsets the foreign exchange gain or loss recorded on the foreign-denominated debt. These agreements were arranged to lower funding costs, to diversify sources of funding and to limit the company's exposure to loss in relation to underlying debt instruments resulting from adverse fluctuations in foreign currency exchange and interest rates. At March 31, 1996 and 1997, the aggregate notional principal amounts of the interest rate swap agreements were 155,306 million yen and 176,705 million yen, respectively, and those of the interest rate currency swap agreements were 233,685 million yen and 300,269 million yen, respectively. The fair values of such agreements were estimated based on the discounted amounts of net future cash flows. The company entered into foreign currency option purchased contracts in the notional amounts of 106,549 million yen and 196,990 million yen at March 31, 1996 and 1997, respectively. These contracts, the majority of which expire within three months of the balance sheet dates, are used in conjunction with the forward exchange contracts to hedge foreign currency exposure arising from accounts receivable and commitments on future F-26 64 trade transactions denominated in foreign currencies. The company also entered into foreign currency option written contracts in the notional amounts of 164,439 million yen and 185,621 million yen at March 31, 1996 and 1997, respectively. The majority of these contracts are part of range forward contract arrangements and expire in the same month with the corresponding currency option contracts purchased shown above and are limited to those which lower the premiums paid. The fair values of such foreign currency options were estimated based on the values quoted by brokers. A consolidated insurance subsidiary entered into written government bond option contracts as an integral part of short-term investing activities in order to fix the yields from bonds on hand to certain ranges. All of these contracts expire within two months of the balance sheet dates and their notional principal amounts were 91,485 million yen and 204,945 million yen at March 31, 1996 and 1997, respectively. For accounting purposes, those transactions do not qualify for hedge accounting. Accordingly, those written bond option contracts were marked to market. The fair values of such written bond option contracts were estimated based on the market quotes. F-27 65 The estimated fair values of the company's financial instruments excluding debt and equity securities, both on and off the balance sheets, are summarized as follows:
Yen in millions --------------------------------------- Estimated fair Carrying amount value --------------- -------------- At March 31, 1996 Cash and cash equivalents 459,339 459,339 Time deposits 32,605 32,605 Notes and accounts receivable, trade 923,566 923,566 Short-term borrowings (292,396) (292,396) Notes and accounts payable, trade (565,044) (565,044) Long-term debt including the current portion (1,337,455) (1,247,781) Forward exchange contracts (2,226) (4,058) Interest rate and currency swap agreements -- 9,740 Option contracts purchased 1,577 1,577 Option contracts written (1,232) (1,232) Bond option contracts written (526) (526) At March 31, 1997 Cash and cash equivalents 428,518 428,518 Time deposits 52,518 52,518 Notes and accounts receivable, trade 1,066,314 1,066,314 Short-term borrowings (117,801) (117,801) Notes and accounts payable, trade (653,826) (653,826) Long-term debt including the current portion (1,310,080) (1,248,046) Forward exchange contracts 997 2,464 Interest rate and currency swap agreements -- (27,740) Option contracts purchased 724 724 Option contracts written (1,035) (1,035) Bond option contracts written (1,026) (1,026)
F-28 66 12. Pension and severance plans: Upon terminating employment, employees of the parent company and subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. For employees voluntarily retiring, under normal circumstances, minimum payment is an amount based on current rates of pay and lengths of service. In calculating the minimum payment for employees involuntarily retiring, including employees retiring due to meeting mandatory retirement age requirements, the company may grant additional benefits. With respect to directors' resignations, lump-sum severance indemnities are calculated using a similar formula and are normally paid subject to the approval of the company's stockholders. The parent company and most subsidiaries in Japan have contributory funded defined benefit pension plans, which are pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans cover a portion of the governmental welfare pension program, under which the contributions are made by the companies and their employees, and an additional portion representing the substituted noncontributory pension plans. Under the contributory pension plans, the defined benefits representing the noncontributory portion of the plans, in general, cover 60% of the indemnities under the existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The company has a recorded pension liability to cover the amount of the projected benefit obligation in excess of plan assets, net of unrecognized items. The pension benefits are determined based on years of service and the compensation amounts, as stipulated in the aforementioned regulations, are payable at the option of the retiring employee in a lump-sum amount or on a monthly pension. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations. Most foreign subsidiaries have defined benefit pension plans or severance indemnity plans which substantially cover all of their employees, under which the cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on current rate of pay and lengths of service. F-29 67 Net pension and severance costs and the related pension plans' funded status including the employees' contributory portion and rate assumptions are shown below: Japanese plans:
Yen in millions ----------------------------------- Year ended March 31 ----------------------------------- 1995 1996 1997 ------ ------ ------- Net pension and severance cost (credit): Service cost - benefits earned during the year 23,987 29,276 32,772 Interest cost on projected benefit obligation 11,024 11,090 11,959 Actual return on plan assets (3,672) (9,545) (14,373) Net amortization and deferral 2,828 7,245 14,053 ------ ------ ------- Actuarial net pension and severance cost for the year 34,167 38,066 44,411 Employee contributions (3,614) (4,098) (4,073) ------ ------ ------- Net pension and severance cost for the year 30,553 33,968 40,338 ====== ====== =======
Foreign plans:
Yen in millions ---------------------------------- Year ended March 31 ---------------------------------- 1995 1996 1997 ------ ------ ------ Net pension and severance cost (credit): Service cost - benefits earned during the year 10,198 10,790 15,988 Interest cost on projected benefit obligation 2,839 3,197 4,108 Actual return on plan assets 68 (4,122) (3,897) Net amortization and deferral (1,016) 1,860 870 ------ ------ ------ Net pension and severance cost for the year 12,089 11,725 17,069 ====== ====== ======
F-30 68 Pension plans' funded status:
Japanese plans Foreign plans ---------------------- ------------------------ Yen in millions Yen in millions ---------------------- ------------------------ March 31 March 31 ---------------------- ------------------------ 1996 1997 1996 1997 ------- ------- -------- -------- Actuarial present value of obligations- Vested benefit 207,925 268,719 38,439 50,325 Nonvested benefit 42,544 53,311 3,877 4,060 ------- ------- -------- -------- Accumulated benefit obligation 250,469 322,030 42,316 54,385 Additional benefits related to projected salary increase 60,184 71,418 18,735 20,288 ------- ------- -------- -------- Projected benefit obligation 310,653 393,448 61,051 74,673 Plan assets at fair value 171,240 204,491 31,280 43,837 ------- ------- -------- -------- Excess of projected benefit obligation over plan assets 139,413 188,957 29,771 30,836 Unrecognized net loss (30,722) (59,740) (5,280) (4,805) Unrecognized net transition asset 3,479 3,104 (771) 1,453 Unrecognized prior service cost (10,766) (12,807) -- -- ------- ------- -------- -------- Net pension liability recognized in the balance sheet 101,404 119,514 23,720 27,484 ======= ======= ======== ======== Assumptions used in developing the pension obligation as of March 31: Discount rate 4.0% 3.5% 7.0- 9.0% 6.5- 9.0% Long-term rate of salary increase 3.2% 3.0% 3.0- 8.5% 2.5- 8.5% Long-term rate of return on funded assets 3.5% 3.7% 7.0-10.0% 7.0-10.0%
As required under FAS 87, the assumptions are reviewed in accordance with changes in circumstances. Such changes in assumptions are the primary reason for the fluctuation in the projected benefit obligation and unrecognized net gains and losses. The plan assets are invested primarily in interest bearing securities and listed equity securities. F-31 69 13. Income taxes: Income (loss) before income taxes and income tax expense comprise the following:
Yen in millions -------------------------------------- Year ended March 31 -------------------------------------- 1995 1996 1997 -------- ------- ------- Income (loss) before income taxes: Parent company and domestic subsidiaries 58,038 78,154 226,847 Foreign subsidiaries (278,986) 60,005 85,582 -------- ------- ------- (220,948) 138,159 312,429 ======== ======= ======= Income taxes - Current: Parent company and domestic subsidiaries 53,258 40,488 125,028 Foreign subsidiaries * 30,850 31,600 44,032 -------- ------- ------- 84,108 72,088 169,060 ======== ======= ======= Income taxes - Deferred: Parent company and domestic subsidiaries (15,935) 6,543 (6,543) Foreign subsidiaries * (3,000) (1,473) 1,053 -------- ------- ------- (18,935) 5,070 (5,490) ======== ======= =======
* Includes taxes provided on undistributed earnings of foreign subsidiaries. The company is subject to a number of different income taxes which, in the aggregate, indicate a statutory rate in Japan of approximately 51%. Reconciliations of the differences between the statutory tax rate and the effective income tax rate are as follows:
Year ended March 31 ----------------------------------- 1995 1996 1997 ----- ---- ---- Statutory tax rate (51.0%) 51.0% 51.0% Increase (reduction) in taxes resulting from: Income tax credit (2.0) (2.8) (2.8) Nondeductible goodwill write-off 61.2 -- -- Current operating losses of subsidiaries, excluding nondeductible goodwill write-off 17.6 7.9 5.2 Other 3.7 (0.2) (1.0) ----- ---- ---- Effective income tax rate 29.5% 55.9% 52.4% ===== ==== ====
F-32 70 The significant components of deferred tax assets and liabilities are as follows:
Yen in millions ------------------------ March 31 ------------------------ 1996 1997 -------- -------- Deferred tax assets: Operating loss carryforwards for tax purposes 58,304 75,536 Warranty reserve and accrued expenses 29,998 46,187 Accrued pension and severance costs 37,938 45,418 Inventory - intercompany profits and write-down 38,793 44,416 Future insurance policy benefits 25,717 34,580 Other accrued employees' compensation 11,723 14,465 Other 94,261 87,125 -------- -------- Gross deferred tax assets 296,734 347,727 Less: Valuation allowance (118,356) (122,258) -------- -------- Total deferred tax assets 178,378 225,469 -------- -------- Deferred tax liabilities: Unrealized gain on securities (85,204) (72,741) Undistributed earnings of foreign subsidiaries (51,995) (68,928) Insurance acquisition costs (51,064) (67,004) Depreciation (18,807) (17,041) Other (33,647) (39,133) -------- -------- Gross deferred tax liabilities (240,717) (264,847) -------- -------- Net deferred tax liabilities (62,339) (39,378) ======== ========
The valuation allowance mainly relates to deferred tax assets of consolidated subsidiaries with operating loss carryforwards for tax purposes that are not expected to be realized. The net changes in the total valuation allowance for the years ended March 31, 1995, 1996, and 1997 were increases of 9,264 million yen, 28,174 million yen, and 3,902 million yen, respectively. Net deferred tax liabilities are included in the consolidated balance sheets as follows:
Yen in millions ------------------------ March 31 ------------------------ 1996 1997 -------- -------- Deferred income taxes (Current assets) 83,291 111,756 Other assets - Other 18,351 27,158 Current liabilities - Other (3,583) (4,341) Deferred income taxes (Long-term liabilities) (160,398) (173,951) -------- -------- Net deferred tax liabilities (62,339) (39,378) ======== ========
F-33 71 At March 31, 1997, no deferred income taxes have been provided on undistributed earnings of foreign subsidiaries not expected to be remitted in the foreseeable future totaling 214,815 million yen, and on the gain on a subsidiary's sale of stock of 61,544 million yen arising from the issuance of common stock of Sony Music Entertainment (Japan) Inc. in a public offering to third parties in November 1991, as the company does not anticipate any significant tax consequences on possible future disposition of its remaining investment based on its tax planning strategies. The unrecognized deferred tax liabilities as of March 31, 1997 for such temporary differences amounted to 104,743 million yen. Operating loss carryforwards for tax purposes of consolidated subsidiaries at March 31, 1997 amounted to approximately 218,100 million yen and are available as an offset against future taxable income of such subsidiaries. These carryforwards expire at various dates primarily up to 15 years. Realization is dependent on such subsidiaries generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized. The amount of such net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. F-34 72 14. Stockholders' equity: Changes in each caption of stockholders' equity, except for retained earnings, have resulted from the following:
Yen in millions ---------------------------------------- Year ended March 31 ---------------------------------------- 1995 1996 1997 -------- -------- -------- Common stock: Balance at beginning of year 299,194 299,589 299,885 Exercise of stock purchase warrants -- -- 336 Conversion of convertible debt 395 296 31,816 -------- -------- -------- Balance at end of year 299,589 299,885 332,037 ======== ======== ======== Additional paid-in capital: Balance at beginning of year 440,845 441,241 441,735 Exercise of stock purchase warrants -- -- 336 Conversion of convertible debt 396 384 31,762 Common stock warrants -- 110 200 -------- -------- -------- Balance at end of year 441,241 441,735 474,033 ======== ======== ======== Legal reserve: Balance at beginning of year 23,382 27,620 31,380 Transfer from retained earnings 4,238 3,760 4,451 -------- -------- -------- Balance at end of year 27,620 31,380 35,831 ======== ======== ======== Unrealized gain on securities: Balance at beginning of year 73,000 64,972 81,333 Net charge during the year (8,028) 16,361 (14,055) -------- -------- -------- Balance at end of year 64,972 81,333 67,278 ======== ======== ======== Cumulative translation adjustment: Balance at beginning of year (335,703) (411,167) (302,503) Aggregate translation adjustment for the year (75,354) 114,461 127,705 Income taxes for the year allocated to translation adjustment (110) (5,797) (6,423) -------- -------- -------- Balance at end of year (411,167) (302,503) (181,221) ======== ======== ========
On November 20, 1991, the company 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, 201,078 million yen would have been transferred from retained earnings to the appropriate capital accounts. F-35 73 During the years ended March 31, 1995 and 1996, the company issued 183,167 shares and 156,216 shares, respectively, of common stock arising from the conversion of convertible debt, and during the year ended March 31, 1997, the company issued 117,838 shares and 9,999,499 shares, respectively, of common stock arising from the exercise of stock purchase warrants and the conversion of convertible debt. Conversions of convertible debt into common stock are accounted for in accordance with the provisions of the Japanese Commercial Code by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account. The Japanese Commercial Code provides that an amount equal to at least 10% of cash dividends and other distributions from retained earnings paid by the company and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriation is required when the legal reserve equals 25% of stated capital. The amounts of statutory retained earnings of the parent company available for the payments of dividends to stockholders as of March 31, 1996 and 1997 were 490,265 million yen and 507,253 million yen, respectively. These amounts include cash dividends for the six-month periods ended March 31, 1996 and 1997, respectively, which have been incorporated in the accompanying consolidated financial statements. The appropriations of retained earnings for the year ended March 31, 1997, which have been incorporated in the accompanying consolidated financial statements, will be proposed for approval at the general stockholders' meeting to be held on June 27, 1997 and will be recorded in the statutory books of account, in accordance with the Japanese Commercial Code, after stockholders' approval. Retained earnings at March 31, 1997 include parent company and its consolidated subsidiaries' equity in undistributed earnings of 20% to 50% owned companies accounted for by the equity method in the amount of 15,751 million yen. 15. 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, 1995, 1996, and 1997 were 239,164 million yen, 257,326 million yen, and 282,569 million yen, respectively. F-36 74 Advertising costs- Advertising costs included in selling, general and administrative expenses for the years ended March 31, 1995, 1996, and 1997 were 141,017 million yen, 159,821 million yen, and 216,579 million yen, respectively. 16. Leased assets: The company leases certain plant facilities, office space, warehouses, employees' residential facilities, and other assets. An analysis of leased assets under capital leases is as follows:
Yen in millions ---------------------- March 31 ---------------------- Class of property 1996 1997 - ------------------------ ------- ------- Land 2,351 2,538 Buildings 23,080 24,623 Machinery and equipment 8,466 9,682 Accumulated amortization (9,838) (13,022) ------- ------- 24,059 23,821 ======= =======
The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 1997:
Yen in millions ---------------- Year ending March 31: 1998 6,521 1999 5,222 2000 4,643 2001 4,118 2002 4,239 Later years 13,909 ------ Total minimum lease payments 38,652 Less - Amount representing interest 9,338 ------ Present value of net minimum lease payments 29,314 Less - Current obligations 4,409 ------ Long-term capital lease obligations 24,905 ======
F-37 75 Rental expenses under operating leases for the years ended March 31, 1995, 1996, and 1997 were 79,295 million yen, 81,385 million yen, and 86,570 million yen, respectively. The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 1997 are as follows:
Yen in millions --------------- Year ending March 31: 1998 38,526 1999 34,687 2000 30,388 2001 23,864 2002 20,643 Later years 132,739 ------- Total minimum future rentals 280,847 =======
17. Commitments and contingent liabilities: Commitments outstanding at March 31, 1997 for the purchase of property, plant and equipment and other assets approximated 49,562 million yen. Contingent liabilities for notes discounted and guarantees given in the ordinary course of business and for employee loans amounted to 98,377 million yen at March 31, 1997. The company has entered into agreements with financial institutions whereby the company can sell up to 62,000 million yen of specifically identified accounts receivable and future receivables with limited recourse. For the years ended March 31, 1995, 1996, and 1997, the company did not sell any specifically identified accounts receivable or future receivables. As of March 31, 1996 and 1997, the outstanding balance of all receivables sold with limited recourse amounted to 6,678 million yen and 868 million yen, respectively. The company has also entered into agreements with financial institutions whereby the company can sell up to 117,800 million yen of undivided interests in a pool of eligible receivables with limited recourse. The maximum pool of eligible receivables sold outstanding at any one time during the years ended March 31, 1995, 1996, and 1997 amounted to 72,535 million yen, 71,868 million yen, and 0 million yen, respectively. As of March 31, 1996 and 1997, there were no outstanding balances of receivables sold. F-38 76 Under the terms of each of the receivable sale agreements, the company has retained substantially the same risk of credit loss as if the receivables had not been sold. The company has fully reserved for these potential credit losses. The company pays fees which approximate the purchasers' costs of issuing commercial paper and are included in other expense. Certain subsidiaries in the music entertainment industry 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, 2000. As of March 31, 1997, these subsidiaries were committed to make payments under such long-term contracts of 21,545 million yen. The company and certain of its subsidiaries are defendants in several pending lawsuits. However, based upon the information currently available to both the company and its legal counsel, management of the company believes that damages from such lawsuits, if any, would not have a material effect on the company's consolidated financial statements. 18. Business segment information: The company operates on a worldwide basis principally within three industry segments: 1) Electronics, 2) Entertainment, and 3) Insurance and financing. The Electronics segment designs, develops, manufactures, and distributes video equipment, audio equipment, televisions, and other products. The Entertainment segment manufactures, markets, and distributes music and pictures entertainment products. The Insurance and financing segment represents insurance business, primarily individual life insurance business in the Japanese market, and other financing business, which consists of customer financing and leasing business also in the Japanese market. The following tables present certain information regarding the company's industry segments and operations by geographic areas at March 31, 1995, 1996, and 1997 and for the years then ended: F-39 77 Industry segments -
Yen in millions -------------------------------------------- Year ended March 31 -------------------------------------------- 1995 1996 1997 --------- --------- ---------- Sales and operating revenue: Electronics - Customers 3,075,228 3,530,154 4,387,739 Intersegment 12,963 39,321 22,664 --------- --------- --------- Total 3,088,191 3,569,475 4,410,403 Entertainment - Customers 776,608 831,213 1,023,465 Intersegment 4,959 10,838 20,521 --------- --------- --------- Total 781,567 842,051 1,043,986 Insurance and financing - Customers 138,747 231,198 251,930 Intersegment 14,106 16,001 17,424 --------- --------- --------- Total 152,853 247,199 269,354 Elimination (32,028) (66,160) (60,609) --------- --------- --------- Consolidated 3,990,583 4,592,565 5,663,134 ========= ========= ========= Operating income (loss): Electronics 121,624 190,586 303,406 Entertainment, including write-off of goodwill in 1995 (273,270) 54,878 66,279 Insurance and financing 5,949 8,362 21,209 Corporate and elimination (20,943) (18,502) (20,564) --------- --------- --------- Consolidated (166,640) 235,324 370,330 ========= ========= ========= Identifiable assets: Electronics 2,469,688 2,903,430 3,168,676 Entertainment 1,007,741 1,271,860 1,533,185 Insurance and financing 528,277 748,150 870,406 Corporate assets and elimination 218,214 122,285 108,075 --------- --------- --------- Consolidated 4,223,920 5,045,725 5,680,342 ========= ========= ========= Depreciation and amortization: Electronics 164,914 167,591 191,041 Entertainment, excluding write-off of goodwill in 1995 37,952 33,697 43,614 Insurance and financing, including deferred insurance acquisition costs 20,600 23,001 29,047 Corporate 3,518 3,027 2,830 --------- --------- --------- Consolidated 226,984 227,316 266,532 ========= ========= ========= Capital expenditures: Electronics 175,070 194,417 231,756 Entertainment 58,898 41,782 50,205 Insurance and financing 13,118 12,844 14,171 Corporate 3,592 2,154 1,946 --------- --------- --------- Consolidated 250,678 251,197 298,078 ========= ========= =========
F-40 78 Geographic areas -
Yen in millions ---------------------------------------------- Year ended March 31 ---------------------------------------------- 1995 1996 1997 ---------- ---------- ---------- Sales and operating revenue: Japan - Customers 1,479,190 1,768,132 2,048,406 Intersegment 1,175,446 1,275,251 1,386,422 ---------- ---------- ---------- Total 2,654,636 3,043,383 3,434,828 U.S.A. - Customers 1,153,550 1,250,712 1,672,173 Intersegment 51,637 113,121 126,637 ---------- ---------- ---------- Total 1,205,187 1,363,833 1,798,810 Europe - Customers 778,465 886,468 1,100,958 Intersegment 11,994 30,299 42,381 ---------- ---------- ---------- Total 790,459 916,767 1,143,339 Other - Customers 579,378 687,253 841,597 Intersegment 454,854 509,120 603,518 ---------- ---------- ---------- Total 1,034,232 1,196,373 1,445,115 Elimination (1,693,931) (1,927,791) (2,158,958) ---------- ---------- ---------- Consolidated 3,990,583 4,592,565 5,663,134 ========== ========== ========== Operating income (loss): Japan 75,878 147,582 259,376 U.S.A., including write-off of goodwill in 1995 (296,417) 32,372 30,928 Europe 46,959 48,621 70,597 Other 47,862 55,772 69,858 Corporate and elimination (40,922) (49,023) (60,429) ---------- ---------- ---------- Consolidated (166,640) 235,324 370,330 ========== ========== ========== Identifiable assets: Japan 2,282,291 2,603,041 2,888,019 U.S.A 931,884 1,243,565 1,517,302 Europe 498,259 623,069 697,940 Other 395,517 547,348 690,100 Corporate assets and elimination 115,969 28,702 (113,019) ---------- ---------- ---------- Consolidated 4,223,920 5,045,725 5,680,342 ========== ========== ========== Export sales and operating revenue: To U.S.A 110,645 125,547 141,420 To Europe 85,589 110,718 122,947 To Other 193,818 169,271 209,568 ---------- ---------- ---------- Total 390,052 405,536 473,935 ========== ========== ==========
F-41 79 Transfers between industry or geographic segments are made at arms-length prices. Operating income (loss) is sales and operating revenue less costs and operating expenses. Corporate expenses of the geographic segments include certain research and development expenses unallocable to the segments. Identifiable assets are those assets used in the operations of each industry or geographic segment. Unallocated corporate assets consist primarily of cash and cash equivalents and marketable securities maintained for general corporate purposes. F-42 80 SCHEDULE II SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Yen in millions ------------------------------------------------------------------------- Additions Balance at charged to Balance at beginning costs and Deductions Other end of of period expenses (Note 1) (Note 2) period ---------- ---------- ---------- -------- ---------- Year ended March 31, 1995: Allowance for doubtful accounts and sales returns 45,485 15,002 (6,790) (5,512) 48,185 ====== ====== ======= ====== ====== Year ended March 31, 1996: Allowance for doubtful accounts and sales returns 48,185 25,556 (14,136) 9,158 68,763 ====== ====== ======= ====== ====== Year ended March 31, 1997: Allowance for doubtful accounts and sales returns 68,763 42,285 (28,570) 11,254 93,732 ====== ====== ======= ====== ======
Notes: 1. Amounts written off. 2. Translation adjustment.
Balance at Balance at beginning Other end of of period Additions Deductions (Note 1) period ---------- ---------- ---------- -------- ---------- Year ended March 31, 1995: Valuation allowance - Deferred tax assets 80,918 30,076 (10,424) (10,388) 90,182 ======= ===== ======= ====== ======= Year ended March 31, 1996: Valuation allowance - Deferred tax assets 90,182 22,532 (9,942) 15,584 118,356 ======= ===== ======= ====== ======= Year ended March 31, 1997: Valuation allowance - Deferred tax assets 118,356 7,802 (19,974) 16,074 122,258 ======= ===== ======= ====== =======
Note: 1. Translation adjustment. F-43 EX-99.1 2 ARTICLES OF INCORPORATION 1 (TRANSLATION) ARTICLES OF INCORPORATION SONY CORPORATION 2 Enacted: April 19, 1946 Amended: August 3, 1946 November 20, 1946 May 27, 1947 June 30, 1947 November 22, 1947 May 3, 1948 August 30, 1948 March 4, 1950 May 27, 1950 November 25, 1950 June 23, 1951 November 30, 1951 February 10, 1953 June 26, 1954 June 25, 1955 June 25, 1956 December 24, 1956 June 24, 1957 December 25, 1957 December 23, 1958 June 30, 1959 December 26, 1959 June 25, 1960 June 5, 1961 June 29, 1961 December 26, 1961 June 29, 1962 December 27, 1962 December 27, 1966 December 26, 1970 June 29, 1971 June 29, 1972 December 26, 1974 January 30, 1976 January 28, 1982 January 28, 1983 January 30, 1987 June 27, 1991 June 29, 1994 June 27, 1997 3 (TRANSLATION) ARTICLES OF INCORPORATION OF SONY CORPORATION (Sony Kabushiki Kaisha) CHAPTER I GENERAL PROVISIONS ARTICLE 1. (Trade Name) The name of the Corporation shall be "Sony Kabushiki Kaisha" and in English translation it shall be "SONY CORPORATION". ARTICLE 2. (Location of the Head Office) The head office of the Corporation shall be located at Shinagawa-ku, Tokyo, Japan. ARTICLE 3. (Purpose) The purpose of the Corporation shall be to engage in the following business activities: (1) Manufacture and sale of electronic and electrical machines and equipment; (2) Manufacture and sale of medical instruments, optical instruments and other equipment, machines and instruments; (3) Planning, production and sale of mediums (software programs) for audio-visual equipment; (4) Manufacture and sale of metal industrial products, chemical industrial products and ceramic industrial products; (5) Manufacture and sale of textile products, paper products and wood-crafted articles, daily necessities, foodstuffs and toys; -1- 4 (6) Manufacture and sale of transportation machines and equipment and petroleum and coal products; (7) Real estate activities, construction business, transportation business and warehousing business; (8) Publishing business and printing business; (9) Advertising agency business, insurance agency business, broadcasting enterprise, recreation business, such as travel, management of sporting facilities, etc. and other service enterprises; (10) Manufacture, sale, export and import of products which are incidental to or related to those mentioned in the preceding items; (11) Rendering of services related to those mentioned in the preceding items; (12) Investment in businesses mentioned in the preceding items operated by other companies or persons; and (13) All businesses which are incidental to or related to those mentioned in the preceding items. ARTICLE 4. (Method of Public Notice) Public notices of the Corporation shall be given in the Nihon Keizai Shimbun published in Tokyo. CHAPTER II SHARES ARTICLE 5. (Number of Shares) The total number of shares authorized to be issued by the Corporation shall be one billion three hundred and fifty million (1,350,000,000). Provided, however, if shares are retired, the number of shares equal to the number of the retired shares shall be reduced from the total number of shares authorized to be issued by the Corporation. -2- 5 ARTICLE 6. (Shares to be Issued) 1. The Corporation may issue either par value shares or non-par value shares, or both. 2. The amount of each par value share to be issued by the Corporation shall be fifty yen (50 yen). 3. The Corporation may, by a resolution of the Board of Directors, convert par value shares to non-par value shares, or non-par value shares to par value shares. ARTICLE 7. (Number of Shares Constituting One Unit of Stock) The number of shares constituting one unit of stock shall be one hundred (100). ARTICLE 8. (Transfer Agent) 1. The Corporation shall appoint a transfer agent in respect to shares. The transfer agent and its handling office shall be decided in accordance with a resolution of the Board of Directors and the public notice thereof shall be given. 2. The Corporation's register of shareholders (including the register of beneficial shareholders; hereinafter the same interpretation being applicable) shall be kept at the handling office of the transfer agent. The Corporation shall cause the transfer agent to handle the business pertaining to shares, such as registration of transfers of shares, entry in the register of beneficial shareholders, and purchase of shares constituting less than one full unit, etc. The Corporation itself shall not handle the above matters directly. ARTICLE 9. (Share Handling Regulations) The business pertaining to shares of the Corporation, including denominations of share certificates, registration of transfers of shares, entry in the register of beneficial shareholders, and purchase of shares constituting less than one full unit, etc. shall be governed by, in addition to these Articles of Incorporation, the Share Handling Regulations adopted by the Board of Directors. -3- 6 ARTICLE 10. (Record Date) 1. The Corporation shall deem any shareholder (including beneficial shareholders; hereinafter the same interpretation being applicable) having voting rights as appearing on the register of shareholders as of the close of the last day of each accounting period to be a shareholder who is entitled to exercise voting rights at the ordinary general meeting of shareholders for that particular accounting period. 2. In addition to the preceding paragraph, whenever necessary, in accordance with a resolution of the Board of Directors and upon giving prior public notice, the Corporation may deem any shareholder or registered pledgee whose name appears on the register of shareholders as of the close of a specified date to be the shareholder or the pledgee who is entitled to exercise the rights of a shareholder or a pledgee. CHAPTER III GENERAL MEETINGS OF SHAREHOLDERS ARTICLE 11. (Convocation) The ordinary general meeting of shareholders shall be convened within three months after April 1 of each year, and an extraordinary general meeting of shareholders may be convened whenever necessary, in any of the Wards of Tokyo by the director-president in accordance with a resolution of the Board of Directors. When the director-president is unable to act, another director, who shall be decided in accordance with an order of priority previously determined by a resolution of the Board of Directors, shall convene the meeting. ARTICLE 12. (Chairman) The director-president of the Corporation shall act as the chairman of general meetings of shareholders. When the director-president is unable to act, another director, who shall be decided in accordance with an order of priority previously determined by a resolution of the Board of Directors, shall act as the chairman. -4- 7 ARTICLE 13. (Method of Adopting Resolutions) Except as otherwise provided by law or by these Articles of Incorporation, all resolutions of a general meeting of shareholders shall be adopted by a majority of votes held by the attending shareholders. ARTICLE 14. (Exercise of Voting Rights by Proxy) When a shareholder or its legal representative is not able to attend a general meeting of shareholders personally, he may entrust his voting rights to an attending shareholder who has voting rights. However, a document evidencing the authority of a proxy must be filed with the Corporation. ARTICLE 15. (Adjournment or Change of Location of the Meeting) The chairman, in accordance with a resolution adopted at a general meeting of shareholders, may adjourn, or change the location of the meeting. ARTICLE 16. (Minutes) The substance of the proceedings at a general meeting of shareholders and the results thereof shall be recorded in the minutes, and the chairman and other directors present shall inscribe their names and affix their seals thereon. CHAPTER IV DIRECTORS AND BOARD OF DIRECTORS ARTICLE 17. (Election of Directors) 1. Directors shall be elected at the general meetings of shareholders. 2. In order to adopt a resolution for the election of directors, the attendance of shareholders holding not less than one-third of the total share with voting rights issued and outstanding shall be required. -5- 8 3. With respect to resolutions for the election for directors, no cumulative voting shall be used. ARTICLE 18. (Term of Office of Directors) 1. The term of office of a director shall expire at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within one year after his or her assumption of office. 2. The term of office of a director elected to fill a vacancy or to increase the number of directors shall be the same as the remaining term of office of the other directors then in office. ARTICLE 19. (Representative Directors and Directors with Managerial Positions) One or more directors who shall represent the Corporation, one director-president and other directors with managerial positions shall be appointed by a resolution of the Board of Directors. ARTICLE 20. (Members of the Board of Directors) The directors of the Corporation shall constitute the Board of Directors. ARTICLE 21. (Holding of Meetings of the Board of Directors) Meetings of the Board of Directors shall be either of ordinary or extraordinary meetings. Ordinary meetings of the Board of Directors shall be held once a month, as a general rule, while extraordinary meetings of the Board of Directors shall be held whenever necessary. ARTICLE 22. (Notice of Convocation of the Board of Directors) Notice of a meeting of the Board of Directors, giving the date, location and agenda, shall be sent to each director and statutory auditor at least five days prior to the meeting; provided, however, that in case of urgency, such period may be shortened. -6- 9 ARTICLE 23. (Authority of the Board of Directors) The Board of Directors shall make decisions concerning the affairs of the Corporation as provided by law and by these Articles of Incorporation, as well as all other important affairs of the Corporation. ARTICLE 24. (Method of Adopting Resolutions of the Board of Directors) Resolutions of the Board of Directors shall be adopted by a majority of the directors present, which present directors shall constitute in number a majority of the total number of directors. ARTICLE 25. (Minutes of the Board of Directors) The substance of proceedings of a meeting of the Board of Directors and the results thereof shall be recorded in the minutes, and the attending directors and statutory auditors shall inscribe their names and affix their seals thereon. CHAPTER V STATUTORY AUDITORS AND BOARD OF STATUTORY AUDITORS ARTICLE 26. (Election of Statutory Auditors) 1. Statutory auditors shall be elected at the general meetings of shareholders. 2. In order to adopt a resolution for the election of statutory auditors, the attendance of shareholders holding not less than one-third of the total share with voting rights issued and outstanding shall be required. ARTICLE 27. (Term of Office of Statutory Auditors) 1. The term of office of a statutory auditor shall expire at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within three years after his or her assumption of office. -7- 10 2. The term of office of a statutory auditor elected to fill a vacancy shall be the same as the remaining term of office of his or her predecessor. ARTICLE 28. (Members of the Board of Statutory Auditors) All statutory auditors of the Corporation shall constitute the Board of Statutory Auditors. ARTICLE 29. (Notice of Convocation of the Board of Statutory Auditors) Notice of a meeting of the Board of Statutory Auditors, giving the date, location and agenda, shall be sent to each statutory auditor at least five days prior to the meeting; provided, however, that in case of urgency, such period may be shortened. ARTICLE 30. (Authority of the Board of Statutory Auditors) The Board of Statutory Auditors shall make decisions concerning the affairs of the Corporation as provided by law, as well as all other affairs concerning the execution by statutory auditors of their duties; however, the Board of Statutory Auditors shall not interfere with the execution by statutory auditors of their duties. ARTICLE 31. (Method of Adopting Resolutions of the Board of Statutory Auditors) Resolutions of the Board of Statutory Auditors shall be adopted by a majority of the statutory auditors except as otherwise provided by law. ARTICLE 32. (Minutes of the Board of Statutory Auditors) The substance of proceedings of a meeting of the Board of Statutory Auditors and the results thereof shall be recorded in the minutes, and the attending statutory auditors shall inscribe their names and affix their seals thereon. -8- 11 CHAPTER VI ACCOUNTS ARTICLE 33. (Business Year and Closing of Accounts) The business year of the Corporation shall commence on April 1 of each year and shall end on March 31 of the next following year, and the Corporation's accounts shall be closed at the end of each March 31. ARTICLE 34. (Dividends) Dividends shall be paid to shareholders or registered pledgees whose names appear on the register of shareholders as of the close of the last day of each accounting period. ARTICLE 35. (Interim Dividends) The Corporation may, by a resolution of the Board of Directors, pay to the shareholders or registered pledgees whose names appear on the register of shareholders as of the close of each September 30 a cash distribution in accordance with Article 293-5 of the Commercial Code. ARTICLE 36. (Expiration Period) In case a dividend, or a cash distribution pursuant to the provisions of the preceding Article, shall not be received within three years after the due date of each payment, the Corporation shall be relieved of the obligation for the payment thereof. Dividends and cash distributions pursuant to the preceding Article shall bear no interest. ARTICLE 37. (Conversion of Convertible Debentures and Dividends) 1. With respect to the calculation of the first dividend to be paid on shares issued upon conversion of convertible debentures, such conversion shall be deemed to have occurred at the beginning of the business year in which the conversion was applied for. -9- 12 2. For purposes of applying the preceding paragraph, each cash distribution pursuant to Article 35 above shall be deemed a dividend, and the periods from April 1 to September 30 of the same year, and from October 1 to March 31 of the next following year, shall be deemed business years, respectively. CHAPTER VII MISCELLANEOUS PROVISION ARTICLE 38. (Transfer Agent with respect to bonds) The Corporation may appoint a transfer agent or agents with respect to bonds. ARTICLE 39. (Retirement of Shares) On and after June 28, 1997 the Corporation may, by a resolution of the Board of Directors, purchase shares of the Corporation and retire them with its profit up to a total not exceeding thirty million (30,000,000) shares when it determines that such purchase and retirement is particularly necessary taking into consideration economic conditions, the business performance and financial condition of the Corporation and other matters. -10- EX-99.2 3 REGULATIONS OF THE BOARD OF DIRECTORS 1 (TRANSLATION) REGULATIONS OF THE BOARD OF DIRECTORS (ENFORCEMENT: JUNE 27, 1997) SONY CORPORATION 2 (TRANSLATION) Enforcement: June 27, 1997 REGULATIONS OF THE BOARD OF DIRECTORS OF SONY CORPORATION (Sony Kabushiki Kaisha) (Purpose) 1. (1) The Board of Directors shall determine fundamental policies and important matters with respect to the management and operation of the Corporation and the Sony Group. (2) The Board of Directors shall, in accordance with the determination pursuant to the preceding paragraph, administer and supervise the performance by the Corporation and the Sony Group companies of their business operation. (Constitution of the Board of Directors, etc) 2. (1) All the Directors of the Corporation shall constitute the Board of Directors. (2) The Board of Directors may, by its resolution, designate the Executive Committee consisting of Directors. (3) The Board of Directors may, by its resolution, designate the Nomination Committee and the Compensation Committee, each consisting of Directors. (Ordinary and Special Meetings) 3. Meetings of the Board of Directors shall be either ordinary or special meetings. Ordinary meetings of the Board of Directors shall be held, as a general rule, once a month and after the conclusion of the ordinary general meeting of shareholders, while special meetings of the Board of Directors may be held whenever necessary. (Convocation) 4. (1) Meetings of the Board of Directors shall, unless otherwise provided by laws or ordinances, be convened by the Chairman and Director. -1- 3 (2) When the office of the Chairman and Director is vacant or such person is unable to act, another Director, who shall be selected in accordance with an order of priority previously determined by a resolution of the Board of Directors, shall convene the meeting. (Convocation Procedures) 5. (1) In convening a meeting of the Board of Directors, notice of the meeting stating the date, location and agenda of the meeting shall be sent to each Director and Statutory Auditor at least five (5) days prior to the date set for the meeting; provided, however, that in case of emergency, such period may be shortened. (2) In case a waiver of all the Directors and Statutory Auditors is obtained, a meeting of the Board of Directors may be convened without following the procedure for convening the meeting. (Chairman) 6. The Chairman and Director shall act as chairman of the meetings of the Board of Directors. When the office of the Chairman and Director is vacant or such person is unable to act, another Director, who shall be selected in accordance with the order of priority provided in 4 (2) above, shall act as chairman. (Resolutions of the Board of Directors) 7. (1) Resolutions of the Board of Directors shall be adopted by a majority of the Directors present, which Directors present shall constitute in number a majority of all Directors in office. (2) No Director who has a special interest in an agenda item shall participate in the resolution with respect thereto provided in the preceding paragraph. (Attendance of Persons Other Than Directors) 8. (1) Statutory Auditors are entitled to attend meetings of Board of Directors and express their opinion thereat. (2) The chairman of the meeting of the Board of Directors may ask any person as deemed necessary to attend meetings of the Board of Directors to make reports or express their opinions thereat. -2- 4 (Matters to be Resolved) 9. The following matters shall be resolved at meetings of the Board of Directors: (1) Matters concerning general meetings of shareholders: Determination of the convocation of ordinary and extraordinary general meetings of shareholders, the agenda items and proposals to be submitted thereto. (2) Matters concerning the settlement of accounts: 1. Approval of proposed financial statements and appended schedules. 2. Approval of the semi-annual financial results 3. Approval of the quarterly and the annual consolidated financial results. (3) Matters concerning interim dividends: Determination whether the interim dividends are to be paid or not; if paid, of the amount, date of commencement of payment and any other matters necessary relating thereto. (4) Matters concerning Directors: 1. Appointment and removal of the Representative Directors. 2. Appointment and removal of Directors with special titles, including the Chairman, the Vice Chairman, the President and the Executive Deputy Presidents. 3. Determination of the order of the Directors. 4. Determination of the amounts of remuneration, the distribution of bonuses to the Directors and the details of the payment of retirement allowances to the retiring Directors. 5. Approval of a Director's engaging in a competitive transaction. 6. Approval of transactions on a Director's own behalf. -3- 5 7. Assignment of special job responsibility to a Director and discharge from such responsibility. 8. Approval of a Director's taking a concurrent office as a director or an employee in a company which may result in the Director's engaging in a competitive transaction. (5) Matters concerning shares, bonds and debentures: 1. Conversion between par-value shares and non-par-value shares and vice versa. 2. Issuance of new shares. 3. Acquisition of own shares in the markets and tender offer. 4. Retirement of own shares with the profit. 5. Granting of rights to subscribe for new shares to shareholders or other persons. 6. Capitalization of reserves. 7. Splitting of shares. 8. Issuance of debentures, convertible bonds and bonds with warrants to subscribe for new shares. 9. Appointment of a transfer agent and designation of its handling offices. 10. Enactment, amendment and abolishment of the Share Handling Regulations. 11. Closing of the register of shareholders and fixing of a record date. 12. Listing of shares and debentures on stock exchanges and delisting thereof. (6) Matters concerning organization and personnel: 1. Appointment and removal of managers and other important employees. 2. Establishment, amendment and cancellation of branches and other important organizations. -4- 6 (7) Matters concerning the execution of business: 1. Determination of fundamental policies, strategy and plan for important business projects. 2. Transfer or take over of material assets. 3. Borrowings and loans in a large amount. 4. Giving of guarantee in a large amount. 5. Determination of fundamental policies regarding material contracts. 6. Determination of fundamental policies regarding material law suits. (8) Matters concerning the management and operation of the Sony Group and the Sony Group companies: 1. Determination of fundamental policies, strategy and plan for the management and operation of the Sony Group. 2. Establishment, merger, dissolution, liquidation or other disposition of the Sony Group companies which has a material nature. 3. Approval of the listing of share and debentures issued by the Sony Group companies on stock exchanges and of the delisting thereof which has a material nature. 4. Approval of the personnel administration of the Sony Group companies which has a material nature. 5. Approval of the matter of organization of the Sony Group companies which has a material nature. 6. Approval of the performance of operation of business of the Sony Group companies which has a material nature. (9) Other matters: 1. Matters entrusted by the resolutions of the general meetings of shareholders. -5- 7 2. Any other matters provided in the laws and ordinances and the Articles of Incorporation of the Corporation. 3. Any other matters which the Board of Directors deems necessary. (Matters to be reported) 10. (1) The Representative Directors and Directors in charge of the business operation shall report to a meeting of the Board of Directors on the conditions of the execution of business at least once in three months or at each meeting of the Board of Directors. (2) The Representative Directors and Directors in charge of the business operation may appoint another Director or another appropriate person to give the preceding reports. (3) A Director who has been engaged in a competitive transaction shall report to a meeting of the Board of Directors with respect to any important matter related to such transaction. (Minutes) 11. (1) With respect to the proceedings at meetings of the Board of Directors, the minutes shall be prepared and kept at the headquarter office for ten years. (2) The proceedings at meetings of the Board of Directors and the results thereof shall be recorded in the minutes of meetings and the Directors and Statutory Auditors present shall affix their names and seals thereon. (Administrative Office) 12. The Board of Directors shall have an administrative office to administer the business concerning the Board of Directors. (Coverage) 13. The Board of Directors shall be governed by these Regulations with respect to the matters which are not provided in the laws and ordinances and the Articles of Incorporation of the Corporation. -6- 8 (Amendment) 14. For any amendment to these Regulations, a resolution of the Board of Directors shall be required. ADDENDUM These Regulations, as amended, shall come into force on June 27, 1997. -7- EX-99.3 4 CERTIFICATE OF ENGLISH TRANSLATIONS 1 CERTIFICATE OF ENGLISH TRANSLATIONS Pursuant to Rule 306 of Regulation S-T, the registrant certifies that the two exhibits in Item 19. (b), (1) Articles of Incorporation, (2) Regulations of the Board of Directors, are fair and accurate English translations. SONY CORPORATION (Registrant) BY /s/ Kenichi Oyama -------------------------------------- Kenichi Oyama Corporate Executive Vice President Date September 11, 1997 ------------------ -----END PRIVACY-ENHANCED MESSAGE-----