<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
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
141-0001, JAPAN
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act.
<TABLE>
<S> <C>
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
</TABLE>
* 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)
<PAGE> 2
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
6 1/8% Notes due March 4, 2003
......................................................
(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.
<TABLE>
<CAPTION>
Outstanding as of
March 31, 1998 March 30, 1998
Title of Class (Tokyo Time) (New York Time)
............. ................ ................
<S> <C> <C>
Common Stock 407,195,271
American Depositary Shares 17,390,505
</TABLE>
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.
<TABLE>
<S> <C> <C> <C>
Yes X No
.... ....
</TABLE>
Indicate by check mark which financial statement item the registrant has elected
to follow.
<TABLE>
<S> <C> <C> <C>
Item 17 Item 18 X
.... ....
</TABLE>
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 31, 1998 was 140.90 yen = U.S.
1 dollar.
As of March 31, 1998, the Company had 1,142 consolidated subsidiaries. It has
applied the equity accounting method in respect to its 61 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 about the future performance of Sony which are based
on management's assumptions and belief in light of the information currently
available to it and 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, and other currencies in which Sony makes
significant sales or in which Sony's assets and liabilities are denominated; and
Sony's ability to continue to win acceptance of its products and services, 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
Game, Music, and Picture businesses).
2
<PAGE> 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, design, manufacture, and sale of
various kinds of electronic equipment, instruments, and devices for consumer and
industrial markets. Sony's principal manufacturing facilities are located in
Japan, the 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 been
promoting the transfer of research and development activities and management
functions overseas to bring its overseas operations in even closer contact with
local communities.
Sony develops, produces, manufactures, and markets home-use game consoles
and software, mainly through Sony Computer Entertainment (SCE).
Sony is engaged in the development, production, manufacture, and
distribution of recorded music, in all commercial formats and musical genres
worldwide, through Sony Music Entertainment Inc. (SMEI), and, in Japan, through
Sony Music Entertainment (Japan) Inc. (SMEJ).
Sony is also engaged in the development, production, manufacture,
marketing and distribution of image-based software, including film, video,
television, and new entertainment technologies principally through Sony Pictures
Entertainment (SPE).
In addition, Sony conducts insurance and financing business mainly in
Japan and has begun to participate in new business activities including digital
broadcasting and internet-related business mainly in Japan.
Products and Services
Sony has adopted Statement of Financial Accounting Standards No. 131,
commencing with the fiscal year ended March 31, 1998. As a result, financial
results will now be reported using a new operating segment configuration as
described below. The prior year's results have also been reclassified, to
conform to the new presentation.
Operating segment configuration is as follows:
<TABLE>
<CAPTION>
Previous New
........ .....
<S> <C>
Electronics Primarily divided into "Electronics" and "Game"
Entertainment Primarily divided into "Music" and "Pictures"
Insurance and Financing "Insurance" separated, financing business moved to
newly created "Other"
</TABLE>
Within the Electronics segment, the previous four product category
classifications, Audio Equipment, Video Equipment, Televisions, and Other
Products have been changed to the following five product categories: "Audio",
"Video", "Televisions", "Information and communications", and "Electronic
components and other". The most significant of these changes include the removal
of game operations from Other Products to a new, independent segment entitled
Game. A new product category, Information and communications, includes computer
displays (formerly in Televisions). Also included in this new product category
are personal computers, computer peripherals, and telephones (all formerly in
Other
3
<PAGE> 4
Products). The new Electronic components and other product category includes
remaining products from the Other Products category such as semiconductors,
electronic components, and batteries.
The following table sets forth Sony's sales by the operating segments and
the new product categories.
<TABLE>
<CAPTION>
Year ended March 31
.....................................................
1996 1997 1998
............... ............... ...............
(Millions of yen)
<S> <C> <C> <C>
Electronics 3,283,234 3,930,292 4,377,346
(71.5) (69.4) (64.8)
............... ............... ...............
Audio 900,400 1,029,961 1,127,788
(19.6) (18.2) (16.7)
Video 731,097 816,582 870,854
(15.9) (14.4) (12.9)
Televisions 554,023 704,075 709,043
(12.1) (12.4) (10.5)
Information and
communications 540,719 764,512 894,810
(11.8) (13.5) (13.2)
Electronic components and
other 556,995 615,162 774,851
(12.1) (10.9) (11.5)
............... ............... ...............
Game 200,894 408,335 699,574
(4.4) (7.2) (10.4)
............... ............... ...............
Music 506,455 570,119 660,407
(11.0) (10.1) (9.8)
............... ............... ...............
Pictures 317,382 438,551 642,714
(6.9) (7.7) (9.5)
............... ............... ...............
Insurance 206,802 227,920 291,061
(4.5) (4.0) (4.3)
............... ............... ...............
Other 77,798 87,917 84,388
(1.7) (1.6) (1.2)
............... ............... ...............
Sales and operating revenue 4,592,565 5,663,134 6,755,490
............... ............... ...............
............... ............... ...............
Figures in parentheses indicate percentage of sales and operating revenue.
The Electronics business is managed as a single operating segment by Sony's
management. However, Sony believes that the product category information in the
Electronics segment is useful to investors in understanding the sales
contributions of the products in this business segment. Operating income
information by product category is not available.
4
</TABLE>
<PAGE> 5
Electronics
Audio:
Audio 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, professional-use audio
equipment, audiotapes, and blank MDs.
Video:
Video includes 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.
Televisions:
Televisions include color TVs, Hi-Vision (Japanese high-definition
TV standard) TVs, projection TVs, flat display panels, professional-use
monitors/projectors, and large color video display systems.
Information and communications:
Information and communications include computer displays, personal
computers, computer peripherals, satellite broadcasting reception systems,
internet terminals, telephones, and car navigation systems.
Electronic components and other:
Electronic components and other include semiconductors, LCDs,
electronic components, cathode ray tubes (CRTs), batteries, and factory
automation (FA) systems.
Game
SCE develops, designs, and sells PlayStation game consoles and related
software mainly in Japan, the U.S., and Europe, and licenses to third party
software developers.
Music
SMEI and SMEJ produce recorded music through contracts with many top
artists worldwide in all musical genres. SMEI and SMEJ manufacture, market, and
distribute CDs, MDs, records, and pre-recorded audio and video cassettes, and
produce and manufacture CD-ROMs.
Sony has an extensive and geographically diversified CD production
capacity, with plants in the U.S., Austria, Japan, Brazil, Australia, Canada,
Hong Kong, and Mexico.
5
<PAGE> 6
Pictures
Pictures group global operations encompass motion picture production,
acquisition and distribution, television programming and syndication, theatrical
exhibition, home video acquisition and distribution, development of new
entertainment products, services and technologies, and operation of studio
facilities.
SPE's motion picture arm, the Columbia TriStar Motion Picture Group,
includes SPE's principal motion picture production organization, Columbia
Pictures, as well as Sony Pictures Classics, Sony Pictures Releasing, and
Columbia TriStar Film Distributors International.
SPE's Columbia TriStar Television Group is principally comprised of
Columbia TriStar Television, Columbia TriStar Television Distribution, and
Columbia TriStar International Television.
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.
Insurance
Insurance includes insurance-related underwriting business, primarily
individual life insurance business in Japan conducted through Sony Life
Insurance Co., Ltd. (Sony Life), a Japanese life insurance subsidiary.
Other
Other business includes trading of raw materials and other products
mainly through Sony Trading International Corporation, customer credit and
leasing business through Sony Finance International, and businesses relating to
digital broadcasting and communication in Japan mainly through Sony Broadcast
Media Co., Ltd.
Sales and Distribution
The following table shows Sony's sales in each of its major markets for
the periods indicated.
<TABLE>
<CAPTION>
Year ended March 31
.........................................
1996 1997 1998
............ ............ ............
(Millions of yen)
<S> <C> <C> <C>
Japan 1,379,804 1,590,820 1,843,149
(30.0) (28.1) (27.3)
United States 1,259,926 1,639,334 2,101,907
(27.4) (29.0) (31.1)
Europe 1,054,010 1,304,491 1,567,121
(23.0) (23.0) (23.2)
Other Areas 898,825 1,128,489 1,243,313
(19.6) (19.9) (18.4)
............ ............ ............
Sales and operating revenue 4,592,565 5,663,134 6,755,490
............ ............ ............
............ ............ ............
Figures in parentheses indicate percentage of sales and operating revenue.
6
</TABLE>
<PAGE> 7
Electronics
Sony's electronic products are sold throughout the world under the
trademark "Sony", which has been registered in 210 countries and territories.
In most cases, sales of Sony's electronic products are made to
subsidiaries of the Company located in the countries and territories where
Sony's products are sold, and these subsidiaries sell to local distributors and
dealers. In some locations, the Company sells directly to local distributors.
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.
In April 1998, the Company transferred most of its broadcast- and
industrial-use electronic products marketing and sales divisions in Japan
to Sony Marketing (Japan) Inc.
Sony Marketing (Japan) Inc. markets Sony's consumer electronic
products through retailers in Japan, and markets Sony's broadcast- and
industrial-use electronic products mainly to professional and industrial
users in Japan.
North America:
Sony Electronics Inc. markets Sony's electronic products for both
consumer-use and broadcast- and industrial-use in the U.S. Sony Electronics
Inc. has 18 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-use and
broadcast- and industrial-use are marketed through 14 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 22 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.
Game
SCE conducts the marketing and distribution of PlayStation game consoles
and related software. This business is conducted in Japan through SCE, in the
U.S. through Sony Computer Entertainment America Inc., and in Europe through
Sony Computer Entertainment Europe Limited.
Music
SMEI and SMEJ market and distribute CDs, MDs, DVDs, LDs, records, and
pre-recorded audio and video cassettes.
7
<PAGE> 8
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 this business in
countries other than the U.S. and Japan.
Pictures
SPE, with its global operations in 67 countries, 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 its 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 U.S. 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.
In addition, SPE produces original language programming in key markets
around the world in conjunction with local partners. SPE currently develops
original programming in eight languages and during the year launched the AXN
branded channel, devoted to action/adventure programming, in Asia.
Insurance
Sony Life conducts insurance business in Japan, using qualified Life
Planner financial consultants to serve customers. As of March 31, 1998, Sony
Life employed approximately 3,700 such consultants, of whom approximately 2,300
possess the AFP (Affiliated Financial Planner) certification from the Japan
Association for Financial Planners. Sony Life maintains an extensive service
network including 94 Life Planner branch offices, 23 regional sales offices, and
1,400 independent agencies at the end of March 1998.
Overseas Operations
Sony has actively expanded its overseas production capabilities following
a general policy that products should be manufactured in the markets in which
they are sold. During the fiscal year ended March 31, 1998, Sony set up
additional manufacturing facilities in China. As of March 31, 1998, it operated
12 manufacturing facilities in the U.S., 11 in Europe, and 35 in other areas
outside Japan. Sony intends to further expand its overseas production to build a
corporate structure less susceptible to the impact of foreign exchange rate
fluctuations. In addition to internationalizing its manufacturing
8
<PAGE> 9
operations, 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 provides 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 centers, authorized
independent service centers and authorized servicing dealers, and its
subsidiaries; 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. In the case of broadcast- and industrial-use products,
Sony maintains support contracts with customers in addition to warranties.
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.
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.
In the Electronics business, Sony believes that its attractive product
planning, 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 Game business is a historically volatile and highly dynamic industry
affected by changing technology, limited platform life cycles, hit-or-miss
software titles, seasonality, consumer spending and other economic trends.
Sony's chief competitors in the field of hardware market their own game consoles
and software titles. In the software business, development of hit titles is
increasingly challenging.
Success in the music entertainment business is dependent to a large
extent upon the artistic and creative abilities of employees and outside talent
and is subject to the vagaries of public taste. Although SMEI is one of the
largest recorded music companies in the world, its competitive position depends
on its continuing ability to attract and develop talent that can achieve a high
degree of public acceptance. In addition, the recorded music business continues
to be adversely affected by counterfeiting, piracy, and parallel imports.
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 worldwide. 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 both in the U.S. and internationally. In addition, SPE faces
significant long-term competition in supplying television programming from U.S.
network productions and ownership of their own television programs.
In the insurance business, as Japan begins the deregulation of the
insurance industry through the year 2001, the marketplace will likely become
increasingly product and price competitive with more newcomers entering the
business from other industries and from outside Japan. Although Sony Life has
9
<PAGE> 10
competitive strengths in products and marketing, it is impossible to predict the
impact which deregulation of the insurance market will have on Sony Life's
business.
Research and Development
Sony actively carries out R&D at each of its internal Electronics
companies to meet the diverse product-related needs of its various businesses.
However, strategic R&D relating to Sony, particularly the development of new key
technologies, is delegated to eight corporate laboratories -- the Research
Center, the Giga Byte Laboratory, the Media Processing Laboratory, the IT
Laboratory, the Advanced Design & Production Laboratory, the EP Laboratories,
the Platform Software Development Center, the System LSI Design Center -- as
well as the D21 Laboratory and the Algorithm Research Center. As part of Sony's
R&D operations restructuring, the Platform Software Development Center was
established on February 1, 1998, the Giga Byte Laboratory and the System LSI
Design Center on June 1, 1998, and the EP Laboratories on July 1, 1998. These
facilities are located in Tokyo and Kanagawa Prefecture in Japan and are
directly controlled by corporate headquarters. The R&D areas include 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 projects.
In the U.S., Sony has supplementary research laboratories, which
specialize in R&D fields such as digital signal processing, DTV,
telecommunications, broadcasting systems, semiconductors, and display
technology. Sony also has additional development centers in the United Kingdom,
Germany, Belgium, and Singapore.
R&D expenses were 257.3 billion yen in the fiscal year ended March 31,
1996; 282.6 billion yen in the fiscal year ended March 31, 1997; and 318.0
billion yen in the fiscal year ended March 31, 1998.
Sony believes R&D activities are vital to its long-term growth in
electronics. Through its R&D activities, Sony has recently been developing:
- - "Super Audio CD," a next generation music carrier based on Direct Stream
Digital (DSD) which was co-developed with Philips Electronics. N.V. This is
a new, high resolution digital encoding system that allows music recording
of unprecedented quality.
- - "AMInet (Advanced Multimedia Information Network)," a next-generation
Internet architecture which maintains compatibility with current internet
technology, for real-time transmission of continuous media and high-speed
bulk data. AMInet was co-developed with Nippon Telegraph and Telephone
Corporation and Keio University.
- - "HiFD (High Capacity Floppy Disk)," a new 3.5-inch floppy disk system with a
substantially more storage capacity than the current 3.5-inch floppy disk.
HiFD drives will also be able to read from and write to existing 3.5-inch
floppy disks (2DD/2HD). HiFD was co-developed with Fuji Photo Film Co., Ltd.
10
<PAGE> 11
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. Generally, Sony
maintains multiple suppliers for every category of parts and components.
Employee Relations
As of March 31, 1998, Sony had approximately 173,000 employees, of which
approximately 16% were members of labor unions. Approximately 69,000 employees
were located in Japan and 104,000 overseas. Sony considers its labor relations
to be very good.
11
<PAGE> 12
Item 2. Description of Property
Sony has a number of offices, plants and warehouses throughout the world.
Most of the buildings and land on which they are located are owned by Sony free
from significant encumbrances.
The following table sets forth information as of March 31, 1998 with
respect to plants with floor space of more than 500 thousand square feet for
electronic products:
<TABLE>
<CAPTION>
Approximate
Location floor space Principal products manufactured
.................................... ............ .................................
(square feet)
<S> <C> <C>
In Japan
Kanagawa (Atsugi Technology Center) 3,229,000 Broadcast- and industrial-use video
equipment, and semiconductors
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 Products 625,000 Broadcast- and industrial-use video
Corporation) equipment, audio equipment, and
computers
Chiba (Sony Kisarazu Corporation) 616,000 VTRs and game consoles
Tochigi (Sony Tochigi Corporation) 611,000 Magnetic and optical recording
media and electronic components
Gifu (Sony Minokamo Corporation) 577,000 VTRs
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Approximate
Location floor space Principal products manufactured
.................................... ............ ................................
(square feet)
<S> <C> <C>
Overseas
Pittsburgh, Pennsylvania, U.S.A. 2,715,000 Rear-projection TVs/CRTs
(Sony Electronics Inc.)
San Diego, California, U.S.A. 2,208,000 Computer displays, and CRTs
(Sony Electronics Inc.)
Dothan, Alabama, U.S.A. 998,000 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. 742,000 CRTs
(Sony United Kingdom Limited)
Pencoed, Wales, U.K. 707,000 Color TVs and computer displays
(Sony United Kingdom Limited)
Barcelona, Spain 470,000 Color TVs and rear-projection TVs
(Sony Espana, S.A.)
Alsace, France 414,000 Audio equipment, VTRs, and cellular
(Sony France S.A.) phones
Nuevo Laredo, Mexico 786,000 Audio tapes and micro floppydisks
(Sony Magneticos de Mexico, S.A. de
C.V.)
Penang, Malaysia 782,000 Audio equipment
(SONY ELECTRONICS (M) SDN.BHD.)
Jurong, Singapore 775,000 CRTs and computer displays
(Sony Display Device (Singapore) Pte.
Ltd.)
Tijuana, Mexico 678,000 Color TVs and computer displays
(Sony de Tijuana Este, S.A. de C.V.)
Bekasi, Indonesia 502,000 Audio equipment
(P.T. SONY ELECTRONICS INDONESIA)
Bangi, Malaysia 464,000 VTRs and CD-ROM drives
(SONY VIDEO (M) SDN. BHD.)
</TABLE>
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In addition to the above, Sony has a number of other plants for
electronic products throughout the world. The Company owns R&D facilities 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.
The following table sets forth information as of March 31, 1998 with
respect to plants with floor space of more than 300 thousand square feet for
software of the Music Group:
<TABLE>
<CAPTION>
Approximate
Location floor space Principal products manufactured
................................... ............ ................................
(square feet)
<S> <C> <C>
Shizuoka, Japan 537,000 CDs, MDs, and LDs
(Sony Music Entertainment (Japan)
Inc.)
Carrollton, Georgia, U.S.A. 673,000 CDs and audio and video cassettes
(Sony Music Entertainment Inc.)
Terre Haute, Indiana, U.S.A. 653,000 CDs, CD-ROMs, DVDs, MDs, and LDs
(Digital Audio Disc Corporation)
Pitman, New Jersey, U.S.A. 500,000 CDs and CD-ROMs
(Sony Music Entertainment Inc.)
Springfield, Oregon, U.S.A. 336,000 CDs and CD-ROMs
(Sony Music Entertainment Inc.)
Haarlem, Netherlands 665,000 Records and audio cassettes
(Sony Music Entertainment (Holland) B.V.)
Salzburg, Austria 377,000 CDs, CD-ROMs, MDs, and LDs
(Sony DADC Austria AG)
</TABLE>
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
videotape storage operations are located in Inwood, New York, where SPE also
leases space.
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<PAGE> 15
Item 3. Legal Proceedings
In August 1998, the Securities and Exchange Commission issued a settled
cease-and-desist order which found that the Company had violated certain
periodic reporting requirements of the federal securities laws by making
inadequate disclosure concerning (i) Sony Pictures' net losses prior to the
quarter ended September 30, 1994 and (ii) the impact of those losses on the
Company's consolidated results for the fiscal year ended March 31, 1994 and the
quarter ended June 30, 1994. The Order also found that a former director, who
was at the time the General Manager of the Company's Capital Markets & Investor
Relations Division, was a cause of the Company's violations. The Order, to which
the Company and the former director consented without admitting or denying the
matters set forth therein, requires (i) an independent auditor to examine and
issue a written opinion on the Company's MD&A presentation for the fiscal year
ending March 31, 1999; (ii) the Company's Chief Financial Officer to ensure that
the Company's public financial disclosures comply with applicable requirements;
and (iii) compliance with applicable segment reporting requirements. In a
parallel civil action by the Commission, the Company, without admitting or
denying the allegations in the action, also consented to payment of a civil
penalty of 1 million U.S. dollars.
On or about July 23, 1996, SMEI was served with an antitrust civil
investigation demand from the Office of the Attorney General of the State of
Florida seeking the production of documents in connection with an investigation
to determine whether there "is, has been or may be" a "conspiracy to fix the
prices" of compact discs ("CDs") or conduct consisting of "unfair methods of
competition" or "unfair trade practices" in the sale and marketing of CDs. No
allegations of unlawful conduct have been made against SMEI. By letter dated
January 8, 1998, SMEI was notified by the Office of the Attorney General of the
State of Florida that certain documents that SMEI had produced to its office
were shared under a confidentiality provision in the Florida statutes with the
Office of the Attorney General of the State of Illinois and the Office of the
Attorney General of the State of New York. To date, no action has been taken by
the Attorneys General of these states.
By letter dated April 11, 1997, the Federal Trade Commission ("FTC")
advised SMEI of the existence of a preliminary investigation to determine
whether minimum advertised pricing programs used by major record distributors
constitute an unfair method of competition in violation of Section 5 of the
Federal Trade Commission Act. SMEI received a subpoena dated September 19, 1997
for the production of documents in connection with that investigation.
On May 30, 1995, a purported class action was filed with the United
States District Court for the Central District of California, entitled Digital
Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and PolyGram Group Distribution,
Inc., No. 95-3536. The plaintiff, representing a class of direct purchasers of
recorded music CDs, alleged that defendants violated the federal antitrust laws
by engaging in a conspiracy to fix the prices of CDs, and sought an injunction
and treble damages. On January 9, 1996, the defendants' motion to dismiss the
amended complaint was granted and the action was dismissed, with prejudice.
Plaintiff appealed the dismissal to the United States Court of Appeals for the
Ninth Circuit, No. 96-55264. On July 3, 1997, the United States Court of Appeals
for the Ninth Circuit reversed the dismissal of the amended complaint and
remanded the case to the District Court, holding that the amended complaint was
sufficient to meet the pleading requirements of the Federal Rules of Civil
Procedure and that the action should proceed. On October 29, 1997, the District
Court stayed proceedings in the action due to the filing on May 12, 1997 of a
Chapter 7 Petition under the U.S. Bankruptcy Code by plaintiff. After
15
<PAGE> 16
further proceedings in the bankruptcy court on the part of plaintiff, the Court
lifted the stay and restored the matter to the docket. On August 25, 1998, SMEI
answered the amended complaint, denying its material allegations, asserting
affirmative defenses and demanding judgment against the plaintiffs.
On September 30, 1997, a purported class action was commenced in the
United States District Court for the Central District of California entitled
Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music
Distribution, Inc., Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, Universal Music and Video Distribution, Bertelsmann Music Group,
Inc. and PolyGram Group Distribution, Inc., No. 97-7226. On October 16, 1997,
plaintiffs filed a first amended complaint. Plaintiffs, purporting to represent
a class of direct purchasers of CDs, allege that defendants violated the federal
and state antitrust laws by engaging in a conspiracy to fix the prices of CDs
and seek an injunction and treble damages. On December 22, 1997, SMEI answered
the amended complaint, denying its material allegations, asserting affirmative
defenses and demanding judgment against the plaintiffs.
On October 21, 1997, an individual action was commenced in the United
States District Court for the Southern District of New York, entitled T. Obie,
Inc., d/b/a Chestnut Hill Company Disc v. EMI Music Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music and
Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97 Civ. 7764. The claims asserted are substantially the
same as those asserted in the Chandu Dani action. On January 16, 1998, SMEI
answered the complaint, denying its material allegations of the complaint,
asserting affirmative defenses and demanding judgment against plaintiffs.
On December 2, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Third
Street Jazz and Rock Holding Corporation v. EMI Music Distribution, Inc., Sony
Music Entertainment Inc., Warner Elektra Atlantic Corporation, Universal Music
and Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97-8864. The claims asserted are substantially the same
as those asserted in the Chandu Dani action reported above. On January 20, 1998,
SMEI answered the complaint, denying its material allegations, asserting
affirmative defenses and demanding judgment against plaintiffs.
On January 28, 1998, a purported class action was commenced in the United
States District Court for the Southern District of New York, entitled Nathan
Muchnick, Inc., v. Sony Music Entertainment, Inc., PolyGram Group Distribution,
Inc., Universal Music and Video Distribution, Warner Elektra Atlantic
Corporation and EMI Music Distribution, No. 98 Civ. 0612. The claims asserted
are substantially the same as those asserted in the Chandu Dani action reported
above. On February 23, 1998, SMEI answered the complaint, denying its
allegations, asserting affirmative defenses and demanding judgments against
plaintiffs.
In April, 1998, the Judicial Panel on Multidistrict Litigation ("JPML")
directed that the Chandu Dani, Third Street Jazz, T. Obie and Nathan Muchnick
actions be coordinated for pretrial proceedings and assigned the coordinated
case to the United States District Court for the Central District of California.
In August, 1998, plaintiffs' counsel asked the JPML to add the Digital action to
the coordinated proceedings as a "Tag along" action.
On February 17, 1998, a purported class action was commenced in the
Circuit Court of Cocke County, Tennessee at Newport, entitled Ottinger &
Silvery, et al. v. EMI Music Distribution, Inc., Sony
16
<PAGE> 17
Music Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and PolyGram Group Distribution, Inc.
The action is brought on behalf of persons who from January 29, 1993 to the
present purchased CDs indirectly from the defendants in Alabama, Arizona,
California, the District Court of Columbia, Florida, Kansas, Maine, Michigan,
Minnesota, Mississippi, New Mexico, North Carolina, North Dakota, South Dakota,
Tennessee, West Virginia and Wisconsin, and alleges that the defendants are
engaged in a conspiracy to fix the prices of CDs, in violation of antitrust,
unfair trade practices and consumer protection statutes of each of those
jurisdictions. On May 11, 1998, SMEI and all of the other defendants moved to
dismiss the action.
On October 24, 1996, the Italian Competition and Market Commission (the
"ICMC") commenced an investigation against Warner Music Italia S.p.A., PolyGram
Italia S.r.l., EMI Music Italy S.p.A., BMG Ricordi S.p.A., Sony Music
Entertainment S.p.A. and the Italian Music Industry Federation regarding prices
of CDs sold in Italy by those companies. On October 9, 1997, the ICMC issued an
administrative decision concluding, in part, that those record companies had
agreed on a uniform commercial structure for CDs sold to dealers. The ICMC
imposed monetary sanctions on each of the record companies identified above,
including a penalty against Sony Music Entertainment S.p.A. in the amount of
1,495,952,000 Italian Lira. Each of the record companies has appealed the ICMC's
order to the Regional Administrative Court of Lazio and the appeal remains
pending.
In addition, the Company and certain of its subsidiaries are defendants
in several ongoing and 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 position.
Item 4. Control of Registrant
(a) To the knowledge of 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, 1998 is
as follows:
<TABLE>
<CAPTION>
Number of Shares
Title of Class Identity of Person or Group Beneficially Owned Percentage
........... ....................... ................ of Class
(in thousands) .........
<S> <C> <C> <C>
Common Directors and Statutory 1,570 0.4%
Stock Auditors
</TABLE>
(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.
17
<PAGE> 18
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, 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, 1998, there were 407,195,271 shares of Common Stock
outstanding, of which 17,390,505 shares were in the form of ADRs and 56,613,393
shares were held of record in the form of Common Stock by residents in the U.S.
The number of registered ADR holders was 7,139 and the number of registered
holders of shares of Common Stock in the U.S. was 315.
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.
<TABLE>
<CAPTION>
Tokyo Stock New York Stock
Exchange Price Exchange Price
Per Share of Per American
Common Stock Depositary Share
................. .......................
High Low High Low
..... .... ..... ....
<S> <C> <C> <C> <C> <C>
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
Fiscal year ended March 31, 1998
1st quarter 10,100 yen 8,520 yen 88 7/8 dollars 69 1/2 dollars
2nd quarter 12,600 9,550 103 11/16 85 1/16
3rd quarter 12,200 9,320 98 7/16 74 1/2
4th quarter 12,700 10,400 97 3/16 82 5/16
</TABLE>
18
<PAGE> 19
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
(a) Japanese Foreign Exchange Controls
Effective from April 1, 1998, the Foreign Exchange and Foreign Trade
Control Law was amended and the title of the statute was changed to the Foreign
Exchange and Foreign Trade Law. Under the amended Law, all aspects of
regulations on foreign exchange and foreign trade transactions which were
subject to licensing or other approval or prior notification requirements are,
with minor exception relating to certain inward direct investment (which is not
applicable to the Company's shares), now subject to the post facto reporting
requirements. However, the Minister of Finance has the power to impose a
licensing requirement for certain transactions in limited circumstances.
(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 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, convert par 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's Common Stock, 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.
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 day. 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
19
<PAGE> 20
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 year 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 additional paid-in capital, (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 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
payment by way of appropriation of retained earnings and transfer to 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 retiring the same with retained earnings, 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, 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.
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<PAGE> 21
Transfer of Additional Paid-in Capital 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 additional paid-in capital (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 additional paid-in
capital 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
additional paid-in capital 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 additional paid-in capital 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.
Any shareholder holding at least 300 units of shares or 1% of the total
number of outstanding shares for six months or more may propose a matter to be
considered at a general meeting of shareholders by submitting a written request
to a Representative Director at least six weeks prior to the date set for such
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
21
<PAGE> 22
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.
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 (with an
exception of the merger of a small company) 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 and/or employees rights to subscribe for new shares, 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 (the "special shareholders
resolution").
Subscription Rights
Holders of the Company's Common Stock have no pre-emptive 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 non-resident of Japan or a corporation
organized under the laws of a foreign country or whose principal office is
located in a foreign country 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 non-resident or foreign corporation.
The 1997 amendments to the Commercial Code permit a company to provide in
its articles of incorporation that it may, by a special shareholders resolution,
grant to its directors and/or employees rights to subscribe for new shares if
there exists a justifiable reason. The Company has provided such a provision in
its Articles of Incorporation by amending them in June 1998, and, therefore,
may, if there exists a justifiable reason, by a special shareholders resolution
(which is effective for one year) grant to its Directors and/or employees rights
to subscribe for new shares (in aggregate (together with the number of shares
issuable upon exercise of all outstanding subscription rights which have been
granted to Directors
22
<PAGE> 23
and/or employees, if any) not more than 10% of the total issued and outstanding
shares) to particular Directors and/or employees designated by such resolution,
which rights may be made exercisable not more than ten years from the resolution
in accordance with the terms approved by the resolution. Such special
shareholders resolution cannot be taken if shareholders have already adopted a
resolution for repurchase by the Company of its shares for the purpose of
transferring the same to its Directors and/or employees by way of a stock option
and any such stock option is outstanding unexercised. No such special
shareholders resolution has yet been taken by the Company's shareholders.
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. If the rights to subscribe for new shares
are granted to the Company's Directors and/or employees which rights are
exercisable at a price below the market price of the shares and the number of
shares issuable upon such exercise is substantial, existing shareholders' equity
interest in the Company will be diluted.
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.
Liability to Further Calls or Assessments
All the Company's presently outstanding shares of Common Stock including
shares represented by the American Depository 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.
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<PAGE> 24
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 and the Law of
Special Exception to the Commercial Code Concerning Retirement of Shares enacted
in 1997 (the "Special Retirement Law") 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 and the Special
Retirement Law 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 retirement by resolution of the Board of Directors
if the Board deems it especially necessary to do so in view of general economic
condition, the business and financial condition of the Company and other
factors, by the resolution of the Board of Directors): (1) for the purpose of
transferring the same to its Directors and/or employees if there exists a
justifiable reason; and (2) for the purpose of retirement thereof with retained
earnings. Acquisition by the Company of shares of its Common Stock for the above
purposes is subject to, among other things, the following restrictions: (a) the
number of shares to be acquired may not exceed 10% of all issued and outstanding
shares (except in the case of purchase of shares for retirement pursuant to
shareholders' authorization); (b) total amount of purchase price may not exceed
the amount of the retained earnings available for dividend payment minus the
amount to be paid by way of appropriation of retained 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. No such acquisition pursuant to a resolution of the Board of
Directors may be made after the conclusion of the ordinary general meeting of
shareholders for the fiscal year ending immediately after the Board resolution.
The Company's shareholders have not given an authorization for the acquisition
of shares pursuant to (1) above. In June 1997, the Company amended its Articles
of Incorporation providing for the authority for the Company to purchase shares
of its Common Stock not exceeding 30,000,000 shares by resolution of the Board
of Directors for the purpose of retirement thereof with retained earnings. No
Board resolution has been made for this purpose.
The Special Retirement Law was amended in March 1998 enabling the Company
to acquire its own shares for the purpose of retiring the same with additional
paid-in capital by resolution of the Board of Directors if the Articles of
Incorporation so provide and if the Board deems it especially necessary to do so
in view of general economic condition, the business and financial condition of
the Company and other factors. On June 26, 1998, the Company amended its
Articles of Incorporation providing for the authority for the Company to
purchase shares of its Common Stock not exceeding 30,000,000 shares with the
total purchase price not exceeding 400 billion yen by resolution of the Board of
Directors for the purpose of retiring the same with additional paid-in capital.
The acquisition of shares under this authorization is subject to the restriction
that (x) the total amount of the purchase price may not exceed
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<PAGE> 25
the total amount of additional paid-in capital and accumulated legal reserve
minus the amount equal to one-fourth of stated capital, and (y) if the aggregate
of the amounts of (i) through (v) referred to under "Dividends" above and the
amount of interim dividend distributed exceeds the net assets appearing on the
balance sheets as at the latest closing of the Company's accounts, no purchase
of shares for this purpose can be made. No Board resolution has been taken for
this purpose.
"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.
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<PAGE> 26
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 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 Japan Securities Dealers Association.
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 additional paid-in capital) to stated capital 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. For purpose of this discussion, a "U.S. holder" is a holder that
(i) is a resident of the United States for purposes of the Convention, (ii) does
not maintain a permanent establishment or fixed base in Japan to which ADRs or
Common Stock are attributable and through which the beneficial owner carries on
or has carried on business (or in the case of an individual, performs or has
performed independent personal services) and (iii) who is not otherwise
ineligible for benefits under the Convention with respect to income and gain
derived in connection with the ADRs or Common Stock.
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<PAGE> 27
Japanese Taxation of Common Stock or 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 corporation to non-residents of Japan or
non-Japanese corporation 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 tax. Japanese inheritance or gift tax at
progressive rates may be payable by an individual who has acquired Common Stock
or ADRs as a legatee, heir or donee.
If the Company purchases shares of its Common Stock by way of a tender
offer for the purpose of retirement with retained earnings as described under
"Item 6. Exchange Controls and Other Limitations Affecting Security Holders (b)
Description of Common Stock -- Repurchase by the Company of its Common Stock"
and so retires such shares, the selling shareholders are deemed to have received
a dividend in an amount equal to the selling price less the aggregate of the
stated capital and the additional paid-in capital attributable to the shares so
sold, except that if such retirement is made on or before March 31, 1999, no
such dividend is deemed to have been received but the entire profits realized by
the selling shareholders from such sales are treated as gains realized from the
ordinary sales of the shares and is subject to income tax or corporation tax, as
appropriate. In addition, when shares acquired by the Company (whether by way of
a tender offer or otherwise) for the purpose of retirement with retained
earnings are retired by the Company with retained earnings, the shareholders
existing at the time of such retirement are deemed to have received a dividend
in an amount equal to the amount of the stated capital attributable to the
retired shares and calculated in proportion to each shareholder's shares at the
time of such retirement, except that if such retirement is made on or before
March 31, 1999, no income tax is payable with respect to such portion deemed as
a dividend. If the Company purchases shares of its Common Stock for the purpose
of retirement with additional paid-in capital and so retires such shares, the
entire profits realized by the selling shareholders from such sales are treated
as gains realized from ordinary sales of the shares and is subject to income tax
or corporation tax, as appropriate. In this case, no taxable event is deemed to
accrue from such retirement to the shareholders existing at the time of
retirement.
United States Taxation of Common Stock or ADRs
Dividends received by an U.S. holder of ADRs or Common Stock will be
includable in income as ordinary 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.
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 in accordance with the Convention 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.
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<PAGE> 28
Item 8. Selected Financial Data
<TABLE>
<CAPTION>
Year ended March 31
...........................................................
1994 1995 1996 1997 1998
.......... .......... .......... .......... ..........
(Millions of yen except per share amounts and yen exchange rates)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Sales and operating revenue 3,744,285 3,990,583 4,592,565 5,663,134 6,755,490
Operating income (loss) 106,962 (166,640) 235,324 370,330 520,210
Income (loss) before income
taxes 102,162 (220,948) 138,159 312,429 453,749
Net income (loss) 15,298 (293,356) 54,252 139,460 222,068
Depreciation and
amortization* 242,458 226,984** 227,316 266,532 301,665
Capital expenditures
(additions to fixed
assets) 195,937 250,678 251,197 298,078 387,955
R&D expenses 229,877 239,164 257,326 282,569 318,044
.......................................................................................
Per share:
Net income (loss)
-Basic 41.0 (784.7) 145.1 367.7 557.7
-Diluted 41.0 (784.7) 134.0 309.2 483.4
Cash dividends declared
Interim 25.00 25.00 25.00 25.00 25.00
(22.88cents) (24.88cents) (24.48cents) (21.93cents) (19.23cents)
Year-end 25.00 25.00 25.00 30.00 35.00
(25.22cents) (29.40cents) (22.77cents) (26.15cents) (24.41cents)
AT YEAR-END
Net working capital 616,020 537,733 816,361 843,500 1,151,152
Long-term debt 983,712 906,486 1,203,592 1,099,765 1,104,420
Stockholders' equity 1,329,496 1,007,802 1,169,147 1,459,332 1,815,555
Stockholders' equity per
share 3,557.50 2,695.31 3,125.53 3,798.62 4,461.39
Total assets 4,269,816 4,223,914 5,045,699 5,680,246 6,403,043
.......................................................................................
Number of shares outstanding in thousands:
At year-end 373,728 373,911 374,068 384,185 407,195
.......................................................................................
Yen exchange rates per U.S. dollar:
At year-end 102.40 86.85 107.00 123.72 133.20
Average 107.87 99.30 96.43 112.52 122.78
High 101.10 86.85 81.12 104.49 111.42
Low 114.20 105.38 107.29 124.54 133.99
</TABLE>
* Including amortization of deferred insurance acquisition costs
** Excluding write-off of goodwill
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<PAGE> 29
Notes to Selected Financial Data:
1. Net income (loss) per share amounts were computed based on Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). All
prior-period net income (loss) per share amounts have been restated to
conform with FAS 128. FAS 128 requires presentation of basic and diluted net
income per share on the face of the income statement. Under FAS 128, basic
net income per share is computed based on the average number of shares of
common stock outstanding during each period and diluted net income per share
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. Refer to Note 2 and 3 of Notes to
Consolidated Financial Statements.
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, 1997, and 1998.
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 segment and losses
in the Pictures segment 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. Certain amounts at year-end for the prior years have been reclassified to
conform to the 1998 presentation.
5. Cash dividends declared in U.S. dollars are based on the exchange rates at
each respective payment date.
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<PAGE> 30
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operation
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Management
One of the most important policies of Sony's financial strategy is to
strengthen consolidated financial structure while keeping an appropriate level
of liquidity on hand. Aiming to strengthen financial structure, Sony has been
making efforts to redeem liabilities by utilizing cash and cash equivalents in
order to reduce the size of the balance sheet. In order to complement the
smaller liquidity resulting from making such efforts, Sony recently enhanced its
liquidity management by means of improving the committed credit facilities so
that it could eventually promote a credit-facility-oriented liquidity management
rather than a cash-based one.
Sony generally maintains total liquidity equal to at least 80% of the
expected gross sales for the month in the year in which gross sales are expected
to be greatest plus 80% of debt redemption for the month in the year in which
total redemption are highest. In order to maintain a stable level of liquidity,
the Company entered into contracts with banks to establish committed credit
facilities for the first time in the fiscal year ended March 31, 1998. In
addition, Sony has maintained committed commercial paper (CP) backup lines of
its financial subsidiaries in the U.S. and Europe in order to maintain an
adequate level of liquidity in the regions.
Sony selects banks on criteria in which banks rated "A" and "B" of
Moody's Bank Financial Strength ratings account for at least 70% of all
committed credit facilities and banks rated "C" for the remaining portion when
entering into backup and credit commitments. Sony conducts an annual review to
confirm that all banks continue to fulfill such rating conditions. In the fiscal
year ending March 31, 1999, Sony has set credit facilities amounting to
approximately 330 billion yen and apportioned the facilities among the Company
and its overseas subsidiaries in accordance with funding requirements of each
entity.
Also, to further enhance Sony's liquidity, Sony is currently arranging a
U. S. 900 million dollar accounts receivable financing facility in the U.S. This
facility, whereby Sony securitizes its accounts receivables, enables Sony to
raise off-balance sheet funds.
Assets, Liability and Stockholders' Equity
Total assets at March 31, 1998 were 6,403.0 billion yen, 12.7% more than
at the previous fiscal year-end. One reason for the increase was the yen's
depreciation at the end of the year compared with the previous fiscal year-end.
Among current assets, cash and time deposits rose mostly due to higher earnings,
and marketable securities increased as the Company raised short-term
investments. Notes and accounts receivable increased as sales grew with an
almost flat turnover ratio of trade receivables during the year. While growth in
sales resulted in increases in inventories, the inventory turnover ratio to cost
of sales (based on the average of inventories at March 31, 1997 and 1998)
improved by 0.22 months to 2.42 months resulting from efforts to shorten product
lead-times from manufacture to sale. The increase in investments and advances
was due to higher investment assets at Sony Life as insurance premium revenues
posted strong growth.
Total current and long-term liabilities increased 8.7% to 4,461.7 billion
yen. Among current liabilities, short-term borrowings and debt declined sharply,
mainly due to the redemptions of medium-term notes (MTN) issued by a U.S.
subsidiary and maturing during the year. Repayment of MTN was refinanced through
the issuance of CP by the subsidiary. By the end of this fiscal year, most of
the outstanding CP was repaid using proceeds from the 1.5 billion U.S. dollar
Notes issued in March 1998.
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<PAGE> 31
Notes and accounts payable, trade and accounts payable, other and accrued
expenses increased due to the growth in Sony's businesses. Among long-term
liabilities, long-term debt increased only slightly despite the issuance of the
Notes because of the conversion of 146.5 billion yen of convertible bonds into
common stock during the year. As a result, total short- and long-term borrowings
and debt amounted to 1,303.8 billion yen, 8.7% less than the previous fiscal
year-end. The increase in accrued pension and severance costs resulted from a
reduction in the assumed discount rate used in developing projected benefit
obligations for Sony's Japanese plans, due to a decline in long-term interest
rates in Japan for the past few years, and from the minimum pension liability
recognized at March 31, 1998 (refer to Note 12 of Notes to Consolidated
Financial Statements). Future insurance policy benefits were higher because of
growth in insurance premium revenues at Sony Life.
Stockholders' equity increased 24.4% to 1,815.6 billion yen, mostly
because of higher earnings and the conversion of convertible bonds. The ratio of
stockholders' equity to total assets increased by 2.7 percentage points, from
25.7% to 28.4%. Based on the number of shares outstanding at March 31, 1998,
stockholders' equity per share rose to 4,461.39 yen from 3,798.62 yen at the
previous fiscal year-end. In addition, the cumulative translation adjustment at
March 31, 1998 decreased in absolute amount to 140.7 billion yen from 181.2
billion yen at the previous fiscal year-end mainly due to the yen's
depreciation.
Cash Flows
There was a net decrease in cash and cash equivalents at end of the year
of 5.2 billion yen, including the effect of exchange rate changes of 1.1 billion
yen, resulting in a balance of 423.3 billion yen at year-end.
During the year, net cash provided by operating activities decreased to
612.4 billion yen from the previous fiscal year, mainly due to an increase in
inventories, decreases in accrued income and other taxes and other factors.
While the balance of inventories rose, the inventory turnover ratio to cost of
sales decreased, as is discussed in the assets, liabilities and stockholders'
equity section. The decrease in accrued income and other taxes was mainly due to
an increase in this account in the previous year, due to higher earnings at the
Company and its subsidiaries in Japan and smaller interim tax payments. Larger
interim tax payments in the fiscal year ended March 31, 1998 also contributed to
the decrease in accrued income and other taxes. Notes and accounts payable and
receivable increased; however, as was the case with inventories, both figures
decreased as a percentage of sales. Depreciation and amortization, including
amortization of goodwill and intangibles and deferred insurance acquisition
costs, rose 13.2% to 301.7 billion yen. This amount is broken down into tangible
assets for approximately 260 billion yen, goodwill and intangibles for
approximately 20 billion yen, and deferred insurance acquisition costs for
approximately 20 billion yen.
During the year, net cash used in investing activities increased to 598.7
billion yen from the previous fiscal year, mainly due to higher payments for
purchases of fixed assets. Capital expenditures were up 26.8% to 378.1 billion
yen. Major components of the capital expenditures were approximately 70.0
billion yen in the semiconductor field, which was the largest amount, and
investments in such fields as displays and recording media. In the fiscal year
ending March 31, 1999, while Sony plans to maintain a high level of investment
in these business areas, total capital expenditures are expected to decrease.
Refer to the Major Agreements section for information on other investments and
loans.
During the year, net cash used in financing activities decreased
significantly to 17.8 billion yen from the previous fiscal year. This was due to
a small net repayment of short-term borrowings, reflecting the substantial
demand for funds during the year mentioned above, compared to a significant net
repayment of short-term borrowings in the previous fiscal year. In addition,
proceeds from issuance of
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<PAGE> 32
debt, mainly of the Notes, increased from the previous fiscal year, while net
repayment of long-term debt also increased because of redemption, mainly of MTN
in the U.S.
Major Agreements
This section details major agreements having an effect on liquidity or
earnings during the year and expected in the fiscal years ending March 31, 1999
and thereafter.
In June 1997, the Company made an equity investment of approximately 5.0
billion yen in Japan Sky Broadcasting Co., Ltd. (JSkyB), a digital
communications satellite broadcaster. In May 1998, JSkyB and PerfecTV
Corporation completed their merger. As a result of this merger, the Company owns
11.375% of shares of the combined company, Japan Digital Broadcasting Services
Inc. Sony also invested a total of approximately 4.2 billion yen in broadcast
programming companies relating to the digital communications satellite
broadcasting business during the year. In the fiscal year ending March 31, 1999,
Sony plans to make additional investments of approximately 3.9 billion yen in
other broadcast programming companies. These communications satellite related
businesses are currently in start-up phases. Sony is committed to such new
business areas, and is required to make additional investments in accordance
with its share of equity.
In October 1997, the Company and Toyoda Automatic Loom Works, Ltd.
jointly established S.T. Liquid Crystal Display Corp. for the purpose of
manufacturing next-generation LCD panels. During the year, Sony made an
investment in this firm of 4.0 billion yen. In the fiscal year ending March 31,
1999, Sony expects to make additional investments in this firm in the amount of
11.0 billion yen.
In January 1998, Sony announced a plan to form a strategic alliance with
NextLevel Systems Inc. of the U.S. (now called General Instrument Corp.), to
jointly develop digital TV technologies, subject to definitive agreements. When
definitive agreements are reached, Sony plans to purchase 7.5 million shares of
General Instrument Corp. at a price of 25 U.S. dollars per share, resulting in a
total investment of approximately 187.5 million U.S. dollars.
In May 1998, Loews Theatres Exhibition Group ("Loews Theatres"), a unit
of SPE, and Cineplex Odeon Corporation, a Canadian theatre chain, combined and
created Loews Cineplex Entertainment Corporation. In conjunction with the
combination, Sony received approximately 53.6 billion yen in cash from the
repayment of all of the intercompany debt of Loews Theatres, which was
refinanced with third party debt, and receipt of a dividend. Sony plans to use
these funds to reduce its U.S. debt and meet internal funding requirements. As a
result of the combination, SPE and certain of its subsidiaries owned 51.1%
(representing 49.9% of the voting shares) of Loews Cineplex Entertainment
Corporation. After giving effect to the public offering of shares of common
stock of Loews Cineplex Entertainment Corporation in August 1998, SPE and
certain of its subsidiaries currently own 38.5% of Loews Cineplex Entertainment
Corporation. The new company has been deconsolidated and Sony accounts for it on
the equity basis for the fiscal year ending March 31, 1999. The revenues and
operating income of Loews Theatres for the fiscal year ended March 31, 1998,
were approximately 56.3 billion yen and 2.5 billion yen, respectively. In
addition, Sony recorded a gain of approximately 4.8 billion yen on the
combination in the first quarter ended June 30, 1998.
A building complex to house Sony's European headquarters, rental office
space, stores, residences, a movie and broadcasting museum with educational
facilities, and entertainment space is currently under construction in Berlin,
Germany. The structure is located in Potsdam Platz on a site that Sony purchased
from the City of Berlin. The developer of the building complex is a partnership
controlled by Sony, Tishman Speyer Properties, Inc. of the U.S., and Kajima
Corporation of Japan. Completion is scheduled for 2000. The budget for this
project is approximately 1.5 billion German marks. Of this amount, approximately
1.0 billion German marks will be procured by the partnership in the form of
project financing. In addition, Sony is constructing an entertainment complex
which includes stores and theatres
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<PAGE> 33
on a site in San Francisco, U.S.A. Completion is scheduled for 1999. The budget
for this project is approximately 85 million U.S. dollars. Sony also plans to
construct a similar entertainment complex in Tokyo, Japan, with completion
scheduled for 2000. Currently, the estimated budget for this project is
approximately 12.0 billion yen.
In June 1998, Sony entered into an agreement with Fujitsu Limited to
jointly develop and manufacture next-generation semiconductor devices.
Manufacturing is scheduled to begin during the fiscal year ending March 31,
1999, and capital expenditures are estimated to total approximately 28.0 billion
yen.
On August 12, 1998, SPE, together with certain partners, completed the
acquisition of Telemundo Group, Inc. (Telemundo), one of two Spanish-language
television broadcast companies currently operated in the United States. Through
a series of transactions, SPE now owns 50% of a newly formed company holding
Telemundo's network operations and 24.95% of an entity holding Telemundo's
station operations, including seven full-power UHF stations. SPE's initial
capital investment totaled approximately 15.1 billion yen.
RESULTS OF OPERATIONS
(The fiscal year ended March 31, 1998 compared to the fiscal year ended March
31, 1997)
Sales and Operating Revenue
During the fiscal year ended March 31, 1998, Sony's consolidated sales
and operating revenue (herein referred to as "sales") increased in all business
segments. Along with the yen's depreciation, this resulted in a 1,092.4 billion
yen, or 19.3%, increase in sales compared with the previous fiscal year to
6,755.5 billion yen and the second consecutive fiscal year of record sales and
earnings.
Impact of Foreign Exchange Trends
During the year, overseas (outside Japan) sales accounted for
approximately 73% of Sony's consolidated sales. During the year, the yen
depreciated approximately 8% against the U.S. dollar and 11% against the British
pound, but appreciated approximately 5% against the German mark, each in terms
of average rates, compared with the previous fiscal year. It is estimated that
sales and operating income would have been lower by approximately 291 billion
yen and 110 billion yen, respectively, than the reported figures if the average
value of the yen had remained the same as in the previous fiscal year. Note that
these estimates are obtained by simply applying the yen's average exchange rate
in the prior fiscal year to foreign currency denominated sales, cost of sales,
and selling, general and administrative expenses of the year under review.
Therefore, the estimate does not take into account the effect of foreign
exchange fluctuations on prices of products and production and sales costs in
each region of the world. Constant currency growth rates discussed in the
Results by Business Segment are also calculated as above.
To minimize the adverse effects of foreign exchange fluctuations on its
financial results and to reduce inventory and cost, Sony promotes the
localization of material and parts procurement, design, and manufacturing
operations outside Japan. During the year, Sony expanded manufacturing
operations mainly in North America and Eastern Europe. Overseas activities
represented approximately 50% of total manufacturing output in Sony's
Electronics business. Sony employs foreign exchange forward contracts
and foreign currency option contracts to hedge against foreign exchange risks
that arise from the export and import transactions of the Company and its
consolidated subsidiaries. In addition, interest rate and currency swap
agreements are used in connection with certain foreign currency denominated
borrowings and debt.
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Impact of the Asian Currency Turmoil and Weak Local Markets
During the year, Asia accounted for approximately 13% of sales in Sony's
Electronics business, while comprising approximately 25% of manufacturing. About
63% of this manufacturing output in Asia was exported for sale outside the
region.
Currency and economic turmoil occurred in Asia during the second half of
1997. The overall impact of this situation was positive for Sony's earnings
during the year, mainly due to a decline in costs in Asia, a major manufacturing
base for Sony. However the decline in Asian currencies is expected to lead to
aggressive price-cutting from competing companies with Asian production bases,
making it difficult for Sony to continue to benefit from the cost reductions
brought about by weakened Asian currencies.
Sony's Electronics sales in Asia including China, Australia and New
Zealand in the fiscal year ended March 31, 1998 increased by 2% from the prior
year. During the year, sales results in Asian countries were mixed. Sony's sales
in Thailand were negatively impacted by the currency and economic turmoil.
Sony's sales in Hong Kong declined due to poor economic conditions. However,
Sony's sales in Indonesia and Malaysia increased, compared with the previous
year.
Impact of Sluggish Market Conditions in Brazil
Sales in Brazil experienced a significant decline mainly due to lower
sales of color TVs and audio equipment because of a worsening economic
environment and bankruptcies of dealers.
Cost of Sales and Selling, General and Administrative Expenses
During the year, cost of sales rose by 688.9 billion yen, or 17.5%, to
4,619.0 billion yen, mainly due to higher sales. However, the ratio of cost of
sales to consolidated sales improved 0.8 percentage point, to 71.5%. This
improvement was attributable to the sales growth, continuous cost reduction
efforts, the yen's depreciation against the U.S. dollar and a reduction in
manufacturing costs due to falling Asian currencies in the second half of the
fiscal year; this ratio was, however, adversely affected by reductions in sales
prices due to intense competition worldwide. Research and development expenses
charged to cost of sales increased by 35.5 billion yen, or 12.6%, to 318.0
billion yen, mainly due to increases in the semiconductor business, information
and communication business, and Game business, but declined by 0.3 percentage
point as a percentage of sales, to 4.9%. Research and development expenses for
the fiscal year ending March 31, 1999 are expected to exceed those of the year
under review, mainly due to higher expenses in business areas such as
broadcast-use equipment and digital network related equipment as well as the
semiconductor business.
Selling, general and administrative expenses rose by 191.7 billion yen,
or 16.6%, to 1,345.6 billion yen, mainly due to sales growth as well as
increases in personnel expenses and advertising costs in the Game business, but
improved 0.4 percentage point as a percentage of sales, to 20.8%.
Figures in the above two paragraphs do not include the Insurance segment
revenue and expenses.
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Operating Income
Operating income during the year grew by 149.9 billion yen, or 40.5%, to
520.2 billion yen. Despite an increased operating loss in the Other segment,
higher operating income in the Electronics, Music, Pictures, and Insurance
segments, and particularly strong results in the Game segment, contributed to
overall growth. Sales and operating income in the Game segment reached
approximately 10% and 22%, respectively, of Sony's consolidated sales and
operating income before elimination of intersegment transactions. As a
percentage of sales, operating income improved by 1.2 percentage points, to
7.7%.
Other Income and Expenses
Other income decreased by 8.7 billion yen, or 9.4%, to 84.0 billion yen,
while other expenses remained at 150.4 billion yen about the same as that in the
previous fiscal year. The decline in other income is primarily due to a decrease
in the foreign exchange gain, net, compared with the previous fiscal year.
Foreign exchange gains and losses mainly arise from the difference between the
value of foreign currency denominated exports and imports when converted into
various currencies using prevailing exchange rates and the value at settlement
of these exports and imports. The rates used for settlement are primarily based
on foreign exchange forward contracts and foreign currency option contracts that
Sony employs to hedge risks from exchange rate fluctuations. Among other income
and expenses, interest and dividends increased, mainly because of an increase in
cash and time deposits and higher investment returns at overseas subsidiaries.
Interest expense decreased, mainly due to lower outstanding debt at overseas
subsidiaries. As a result, the balance of interest and dividend income less
interest expense improved by 9.9 billion yen to net interest expense of 41.5
billion yen.
Income Before Income Taxes
Income before income taxes during the year rose by 141.3 billion yen, or
45.2%, to 453.7 billion yen.
Income Taxes
Income taxes as a percentage of income before income taxes (the effective
tax rate) declined 5.0 percentage points, to 47.4%. The decline in the effective
tax rate is mainly attributable to a reduction in the loss incurred by
subsidiaries for which there was no tax benefit. Due to the reduction of the
Japanese statutory income tax rate, effective April 1, 1998, the new statutory
tax rate has been used in calculating the future expected tax effects of
temporary differences. The effect of the enacted change in tax rate, which
resulted in a reduction of income tax expenses, was insignificant (refer to Note
13 of Notes to Consolidated Financial Statements).
The valuation allowance mainly relates to deferred tax assets of
consolidated subsidiaries in the U.S. with operating loss carryforwards for tax
purposes. Sony believes there is little likelihood that such deferred tax assets
will be realized.
Net Income
Net income increased by 82.6 billion yen, or 59.2%, to 222.1 billion yen.
Basic net income per share was 557.7 yen and diluted net income per share was
483.4 yen. Net income represented 3.3% of sales, up 0.8 percentage point, and
the return on average stockholders' equity increased 3.0 percentage points, to
13.6%.
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Results by Business Segment
The following discussion is based on segment information (refer to Note
18 of Notes to Consolidated Financial Statements).
Electronics
During the year, despite weak markets in Brazil and Asia, including
China, many successful products and the yen's depreciation helped to increase
Electronics sales by 558.5 billion yen, or 13.5% (up approximately 10% on a
constant currency basis), to 4,690.1 billion yen. Operating income increased by
75.2 billion yen, or 31.4%, to 314.5 billion yen, and as a percentage of sales
improved by 0.9 percentage point to 6.7%. Operating income was aided by the
yen's depreciation against the U.S. dollar and the decrease in manufacturing
costs due to the decline in the value of Asian currencies as well as sales
growth and the benefits of cost cutting. However, late in the fiscal year, the
business environment in Electronics became more difficult due to deterioration
in the semiconductor business and slowing sales in Southeast Asia. Sales in
Japan, where Sony had attained steady growth despite sluggish market conditions,
also slowed toward the end of the fiscal year.
Breaking down Electronics sales to customers by product category, "Audio"
products sales grew by 97.8 billion yen, or 9.5%, to 1,127.8 billion yen due to
sales expansion of MiniDisc systems. However lower growth in sales of car audio
products and a decline in sales of Walkman headphone stereos partially offset
growth in this category. Sales also expanded by 54.3 billion yen, or 6.6%, to
870.9 billion yen in the "Video" category, as demand grew for home-use digital
camcorders and the Digital Mavica still camera. Although the highly successful
Wega series of color TVs in Japan, which incorporate flat-surface cathode ray
tubes, contributed to sales in "Televisions", the category overall increased by
only 5.0 billion yen, or 0.7%, to 709.0 billion yen, due to sluggishness in
Brazil and Asia, including China. Sales in the "Information and communications"
category increased by 130.3 billion yen, or 17.0%, to 894.8 billion yen, boosted
by the popularity of new VAIO notebook PCs in Japan, and expansion of digital
cellular phone sales in Japan, the U.S., and Europe. However, a slowing of
computer display sales caused by weakness in PC markets partially offset growth
in the category. In the "Electronic components and other" category, sales grew
by 159.7 billion yen, or 26.0%, to 774.9 billion yen primarily due to higher
sales in electronic components such as optical pickups, more than offsetting
declining demand for memory chips.
Game
The Game business posted extremely strong results due to the popularity
of PlayStation game consoles and software worldwide. Sales increased by 303.3
billion yen, or 72.3% (up approximately 64% on a constant currency basis), to
722.6 billion yen. Operating income more than doubled from the previous fiscal
year, reaching 116.9 billion yen and rose by 2.6 percentage points, to 16.2% of
sales. In addition to strong growth in console sales outside Japan, sales of
software, which has a high profit margin, rose as a percentage of sales in the
Game business along with the growing number of consoles in use. During the year,
worldwide production shipments of PlayStation game consoles increased to 19.37
million units compared with 9.2 million units in the previous fiscal year. As of
March 31, 1998, cumulative production shipments to markets worldwide have
reached 32.82 million consoles and 236 million software units.
Music
Sony's Music business continued to post strong results as revenue
increased by 102.6 billion yen, or 17.3% (up approximately 11% on a constant
currency basis), to 694.7 billion yen. Operating income
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increased by 8.9 billion yen, or 19.6%, to 54.1 billion yen. As a percentage of
sales, operating income improved by 0.2 percentage point, to 7.8%. The Music
group performed strongly throughout most territories around the world. Global
bestsellers, combined with local artist successes worldwide, contributed to the
year's results, more than offsetting lower results from direct marketing
operations in the U.S.
Pictures
Sony's Pictures business recorded strong results. Revenue increased by
204.6 billion yen, or 46.7% (up approximately 35% on a constant currency basis),
to 643.2 billion yen. Sales increased significantly over the prior year,
benefiting from record motion picture box office revenue and strong sell-
through video sales as well as the inclusion of 13 months of activity from March
1, 1997 to March 31, 1998 due to a change in the Pictures group fiscal year. In
television operations, the group benefited from continued strong performance
from its game shows and daytime programs as well as network and syndication
revenue. Operating income was up by 6.6 billion yen, or 22.9% to 35.5 billion
yen, but declined 1.1 percentage points, to 5.5% of sales. This was mainly due
to the start-up losses on new international television ventures and losses due
to the underutilization of its special effects studio.
Insurance
The expansion of Sony's life insurance business in Japan led to growth in
insurance revenue during the year. Insurance revenue increased by 63.1 billion
yen, or 27.7%, to 291.1 billion yen. Operating income grew by 1.2 billion yen,
or 6.4%, to 20.3 billion yen but declined 1.4 percentage points, to 7.0% of
sales. The lower operating margin was primarily due to an increase in
amortization of deferred insurance acquisition costs and higher expenses such as
benefit payments at Sony Life. Expenses related to the acquisition of new
policies and other expenses that fluctuate in relation to such acquisitions are
accounted for as deferred insurance acquisition costs and amortized over the
premium-paying period of the insurance policies (refer to Notes 2 and 10 of
Notes to Consolidated Financial Statements). The amortization of deferred
insurance acquisition costs increased by 6.0 billion yen, or 37.7%, to 21.8
billion yen.
In July 1997, Sony Life received a capital infusion from the Company,
increasing its capital by 28.0 billion yen to 50.0 billion yen. This action was
taken to ensure the ability to further preserve and enhance Sony Life's
soundness and to ensure the ability to adapt to changes in the operating
environment caused by Japan's Big Bang of financial deregulation. Furthermore,
taking advantage of growing opportunities created by deregulation, Sony is
evaluating the benefits of entering property and casualty insurance business in
Japan. Focusing on automobile insurance, Sony is aiming to enter this business
in the second half of the fiscal year ending March 31, 2000.
Other
The Other segment consists of various operating activities including
customer financing, leasing, broadcasting, networking, and other businesses.
Sales in the Other segment grew by 7.9 billion yen, or 3.3%, to 248.2 billion
yen and the operating loss increased to 10.3 billion yen from the prior year's
operating loss of 1.4 billion yen. This increase in the operating loss was due
to higher costs incurred in the start-up of new businesses including location
based entertainment businesses, satellite distribution services, and
internet-related businesses.
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Outlook
The following outlook is based on current business conditions and
management's outlook and on the assumption that the average yen-dollar exchange
rate for the remainder of the fiscal year ending March 31, 1999, will be around
135 yen. It is anticipated that any favorable impact on operating income of a
depreciation of the yen from this assumption against various currencies in terms
of average rates would be very limited, mainly due to severe price competition
in the electronics business. While sales are expected to increase, Sony
estimates that earnings will be lower and recognizes that recent instability in
global financial markets, especially currency and stock markets, caused by Asian
currency turmoil since last year followed by the recent currency devaluation in
Russia, has been increasing uncertainty regarding Sony's sales and earnings
outlook. As for cash flows during the fiscal year ending March 31, 1999, net
cash provided by operating activities is anticipated to decrease, due to lower
earnings and larger increase of accounts receivable than that of accounts
payable resulting from reducing inventory as well as growing sales, while
depreciation and amortization is projected to be higher in the fiscal year
ending March 31, 1999. Cash used in investing activities is expected to decrease
from the previous year mainly through maintaining lower level of capital
expenditures and is to be covered by the net cash provided by operating
activities.
In the Electronics segment, while sales in areas such as Brazil, Russia,
and Asia are forecast to be sluggish due to no foreseeable improvement in the
market conditions in these areas during the period, sales are expected to
increase overall, due to sales growth in Japan and Western Europe and the yen's
depreciation. However, intense price competition in broadcast- and
professional-use equipment, computer displays and cellular phones, as well as a
lack of improvement in semiconductor markets, will make it difficult in the
fiscal year ending March 31, 1999, to maintain the level of earnings generated
in the fiscal year ended March 31, 1998.
In the Game segment, despite sales growth in the U.S. and Europe as well
as the yen's depreciation, lower sales in Japan and an increase in next
generation PlayStation-related R&D expenses are forecast to cause a slight
profit decline.
In the Music segment, despite continuing sluggishness in worldwide CD
sales, growth outside Japan is expected to continue. While efforts in Japan are
underway to develop new and established artists, the operating environment in
that market remains challenging.
In the Pictures segment, while earnings from "Godzilla" are less than
expected, contributions from carryover releases, other current year releases,
and the television business lead to a projection of relatively flat profit for
the fiscal year.
The insurance segment is expected to post another year of solid growth
despite challenges posed by rising competition due to deregulation of financial
services in Japan.
In the Other segment, new business areas such as satellite broadcasting
remain in start-up stages and cannot be expected to contribute to profit.
In this business environment, Sony is continuing to work toward improving
its business results by efforts such as strengthening the competitiveness of its
products, carefully selecting investments, imposing more rigorous inventory
control, and raising the efficiency and effectiveness of operations through
enhancement of its supply chain management systems mainly in the Electronics
business.
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(The fiscal year ended March 31, 1997 compared to the fiscal year ended March
31, 1996)
Sales and Operating Revenue
During the fiscal year ended March 31, 1997, sales growth across all
businesses except the Other segment as well as the yen's depreciation led to a
1,070.6 billion yen, or 23.3%, increase in sales to 5,663.1 billion yen.
Impact of Foreign Exchange Trends
During the year, overseas (outside Japan) sales accounted for
approximately 72% of Sony's consolidated sales. 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 rates,
compared with the previous fiscal year. It is estimated that sales and operating
income would have been lower by approximately 520 billion yen and 150 billion
yen, respectively, than the reported figures if the average value of the yen had
remained the same as in the previous fiscal year. Note that these estimates are
obtained by simply applying the yen's average exchange rate in the prior fiscal
year to foreign currency denominated sales, cost of sales, and selling, general
and administrative expenses of the year under review. Therefore, the estimate
does not take into account the effect of foreign exchange fluctuations on prices
of products and production and sales costs in each region of the world. Constant
currency growth rates discussed in the Results by Business Segment are also
calculated as above.
Cost of Sales and Selling, General and Administrative Expenses
During the year, cost of sales rose by 713.3 billion yen, or 22.2%, to
3,930.1 billion yen, mainly due to higher sales. However, the ratio of cost of
sales to consolidated sales improved 1.1 percentage points, to 72.3%. This
improvement was mostly attributable to a significant depreciation of the yen. In
some cases, this depreciation enabled Sony to lower effective sales prices to
preserve and increase its competitive edge, leading to higher sales and market
shares. Nevertheless, continuous efforts to cut costs resulted in a decline in
the cost of sales ratio. Research and development expenses charged to cost of
sales increased by 25.2 billion yen, or 9.8%, to 282.6 billion yen, mainly due
to increases in the information and communication business and semiconductor
business, but declined by 0.7 percentage point as a percentage of sales, to
5.2%.
Selling, general and administrative expenses increased 216.0 billion yen,
or 23.0%, to 1,153.9 billion yen, mainly due to sales growth as well as
increases in personnel expenses and advertising costs in the Electronics
business and Game business, but improved 0.2 percentage point as a percentage of
sales, to 21.2%.
Figures in the above two paragraphs do not include the Insurance segment
revenue and expenses.
Operating Income
Operating income during the year increased by 135.0 billion yen, or
57.4%, to 370.3 billion yen. The Game segment began making a substantial
contribution to operating income, and operating income was higher in the
Electronics, Music, Pictures, and Insurance segments as well. Sales and
operating income in the Game segment reached approximately 7% and 15%,
respectively, of Sony's consolidated sales and operating income before
elimination of intersegment transactions. As a percentage of sales, operating
income improved by 1.4 percentage points, to 6.5%.
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Other Income and Expenses
Other income increased by 26.9 billion yen, or 40.9%, to 92.6 billion
yen, while other expenses decreased by 12.4 billion yen, or 7.6%, to 150.5
billion yen. These changes are primarily attributable to the foreign exchange
gain, net, posted during the year, following a substantial foreign exchange
loss, net, in the prior fiscal year. During the year, the exchange rates of the
yen at settlement of foreign currency denominated sales were about the same as
prevailing exchange rates at the date of the sales. However, yen exchange rates
for settlement of imports were higher than prevailing rates at the date of the
purchase, resulting in a foreign exchange gain. Among other income and expenses,
the balance of interest and dividend income less interest expense 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
Income before income taxes during the year rose by 174.3 billion yen, or
126.1%, to 312.4 billion yen.
Income Taxes
Income taxes as a percentage of income before income taxes (the effective
tax rate) declined 3.5 percentage points, to 52.4%. Both consolidated income
before income taxes and loss at subsidiaries, that have no tax benefit because
they were in a loss carryforward position, increased this year. Since increase
in consolidated income before income taxes was larger than increase in loss at
subsidiaries, the effective tax rate declined.
Net Income
Net income increased by 85.2 billion yen, or 157.1%, to 139.5 billion
yen. Basic net income per share was 367.7 yen and diluted net income per share
was 309.2 yen. Net income represented 2.5% of sales, up 1.3 percentage points,
and the return on average stockholders' equity increased 5.6 percentage points,
to 10.6%.
Results by Business Segment
The following discussion is based on segment information (refer to Note
18 of Notes to Consolidated Financial Statements).
Electronics
During the year, growth in all product categories and the yen's
depreciation lifted Electronics sales by 666.2 billion yen, or 19.2% (up
approximately 8% on a constant currency basis), to 4,131.6 billion yen.
Operating income increased by 46.0 billion yen, or 23.8%, to 239.3 billion yen,
and as a percentage of sales improved by 0.2 percentage point to 5.8%. A higher
gross profit due to sales growth, the benefits of cost cutting, and the yen's
depreciation were major contributors.
Breaking down Electronics sales to customers by product category, "Audio"
products sales increased by 129.6 billion yen, or 14.4%, to 1,030.0 billion yen
because of higher sales of MiniDisc systems and car audio products. Sales rose
by 85.5 billion yen, or 11.7%, to 816.6 billion yen in the "Video" category, as
demand grew for home-use camcorders. In "Televisions", sales increased in Japan,
the U.S. and Europe, but were lower in China and Russia. The result was an
increase of 150.1 billion yen, or 27.1%, to 704.1 billion yen. Although sales of
CD-ROM drives decreased, sales of computer displays
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rose worldwide and sales of digital cellular phones were up in Japan, the U.S.
and Europe. This caused sales in the "Information and communications" category
to increase by 223.8 billion yen, or 41.4%, to 764.5 billion yen. In the
"Electronic components and other" category, sales were up by 58.2 billion yen,
or 10.4%, to 615.2 billion yen as growth in sales of lithium-ion batteries
offset weakness in memory chips and optical pickups.
Game
Sales in the Game business more than doubled (up approximately 94% on a
constant currency basis) to 419.3 billion yen. Operating income was 57.0 billion
yen, compared with an operating loss of 8.9 billion yen in the previous fiscal
year. Sales growth of game consoles was strong in Japan as well as the U.S. and
Europe. There was also a substantial increase in software, which has a high
profit margin, as a percentage of sales in the Game business. During the year,
worldwide production shipments of PlayStation game consoles were 9.2 million
units.
Music
Strong overseas results raised Music business revenue by 74.2 billion
yen, or 14.3% (up approximately 4% on a constant currency basis), to 592.1
billion yen. Operating income grew by 5.1 billion yen, or 12.7%, to 45.2 billion
yen. As a percentage of sales, operating income decreased by 0.1 percentage
point, to 7.6%. This decrease mainly reflects restructuring steps taken at SMEJ.
SMEJ revised its policy for releasing new titles and reduced the number of new
releases, causing earnings to fall.
Pictures
Despite disappointing box office results from certain releases, results
in the Pictures business were supported by growth in sell-through video sales,
television operations, and licensing agreements involving SPE's filmed
entertainment library. As a result, revenue rose by 121.0 billion yen, or 38.1%
(up approximately 20% on a constant currency basis), to 438.6 billion yen.
Operating income increased by 5.1 billion yen, or 21.2%, to 28.9 billion yen,
but decreased by 0.9 percentage point to 6.6% as a percentage of sales.
Insurance
The expansion of Sony's life insurance business in Japan caused insurance
revenue to increase by 21.0 billion yen, or 10.2%, to 227.9 billion yen.
Operating income surged 12.0 billion yen, or 168.4%, to 19.1 billion yen and
rose 5.0 percentage points, to 8.4% of sales. The improvement in the operating
margin mainly reflects a decrease in the addition to liability for future
insurance policy benefits in relation to the prior fiscal year when there was a
large increase in single premium life insurance policies, which require a
greater ratio of liability for future insurance policy benefits.
Other
Sales in the Other segment decreased by 33.6 billion yen, or 12.3%, to
240.4 billion yen and the operating loss declined to 1.4 billion yen from the
prior year's operating loss of 6.1 billion yen. The prior year's loss was mostly
caused by the termination of a 16-bit game software business at an U.S.
subsidiary.
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The Year 2000 Issue
Until recently, computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, such programs may
be unable to distinguish properly between the year 1900 and the year 2000.
Sony has initiated a comprehensive corporate-wide project to implement a
transition into the year 2000 for all internal information systems and Sony
products. In October 1997, Sony completed an identification and assessment
project in respect of the potential impact of the Year 2000 issue on Sony's
products, by May 1998, established a structure to enable it to address this
issue around the world. With plans continuing on schedule, Sony expects to
complete remediation of the Year 2000 issue for major internal information
systems by December 1998, although no assurance can be given of timely
completion of this project. Sony is also taking steps intended to ensure that
customers around the world will be able to depend on Sony products in and after
the year 2000. In the broadcast- and professional-use product field, Sony
continues to work with its customers to address the Year 2000 issue, and expects
completion by the end of March 1999, although no assurance can be given of
timely completion of this project.
The external cost to modify all internal information systems for
compliance with the Year 2000 issue is estimated to be approximately 9.2 billion
yen, of which approximately 2.1 billion yen was expensed as incurred by the end
of the fiscal year ended March 31, 1998. Additionally, while extremely difficult
to estimate precisely, the cost to replace certain internal information systems,
including hardware equipment, relating to the Year 2000 issue is estimated to be
approximately 13 billion yen. This cost includes other elements such as
enhancement of functionality of current systems. The external cost associated
with the Year 2000 issue for all Sony products is currently expected to be
minimal. Sony expects total external cost of Year 2000 compliance would not have
a material adverse effect on consolidated operations and financial results.
For major software and hardware which comprise Sony's information systems
and major non-IT systems such as production equipment which contain
microcontrollers, Sony has taken steps to assess the level of risk by acquiring
information from external vendors and, where necessary, asking for written
reports to confirm the status of compliance measures for the Year 2000 issue.
Sony is also addressing the information systems of external vendors by obtaining
confirmations from external service suppliers and tests are conducted where
necessary. However, given the reliance on the third party information as it
relates to their compliance programs and the difficulty of determining potential
errors on the part of external service suppliers, no assurance can be given that
Sony's information systems or operations will not be affected by mistakes, if
any, of third parties or third party failures to complete the Year 2000 project
on a timely basis.
The cost of Sony's Year 2000 project and the date on which Sony believes
it will complete the necessary modifications are based on Sony's estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of resources, third party modification plans and
other factors. Sony presently believes that the Year 2000 issue will not pose
significant operational problems for its internal information systems and
products. However, if the anticipated modifications and conversions are not
completed on a timely basis, or if the systems of other companies on which
Sony's systems and operations rely are not converted on a timely basis, the Year
2000 issue could have an adverse effect on Sony's operations.
Sony recognizes the importance of readiness for potential worst case
scenarios. As a result, Sony is working to identify scenarios requiring
contingency plans; however, to date no such plans have been established.
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Euro
The January 1, 1999 scheduled adoption of the Euro will create a
single-currency market in much of Europe. For a transition period from January
1, 1999 to January 1, 2002, the existing local currencies are anticipated to
remain legal tender as denominations of the Euro.
In March 1998, Sony completed a project to identify and assess the
potential impact of the adoption of the Euro on its operations. Sony is making
preparations to handle Euro invoices for transactions with third parties from
January 1999. Sony intends to take action in marketing areas as necessary to
deal with these ongoing changes. Regarding transactions within the Sony Group,
preparations are under way to enable all such transactions to be switched to the
Euro from the local currencies of EMU countries in April 1999, although no
assurance can be given that such transactions will be switched to the Euro by
such time. This will eliminate the need for foreign exchange commissions and
hedging expenses. Sony estimates that this will result in an annual cost saving
in Europe of approximately 20 million German marks.
Due to the preparation for adoption of the Euro, Sony will need to
conduct a certain number of revisions to its information systems. Such revisions
have started and are proceeding on schedule to the anticipated completion date
of December 1998 for systems related to transactions with the third parties and
March 1999 for systems related to transactions within the Sony Group,
respectively. Sony expects the cost of such revisions would not have a material
adverse effect on consolidated operations and financial results. However, no
assurance can be given that such revisions will be completed on a timely basis.
No policy change is expected on foreign exchange hedging for trades
between Europe and other regions as well as funding in Europe even after the
adoption of the Euro.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk
The financial instruments including financial assets and liabilities that
Sony holds in the normal course of business are continuously exposed to
fluctuations in markets, such as currency exchange rates, interest rates, and
market prices of investments. In applying a consistent risk management strategy
in order to remove adverse effects caused by market fluctuations in the cash
flow value of these financial instruments, Sony hedges the market risk of these
financial assets and liabilities by using derivative financial instruments which
include foreign exchange forward contracts, foreign currency option contracts,
interest rate swap agreements, and interest rate and currency swap agreements.
Sony utilizes foreign exchange forward contracts and foreign currency option
contracts primarily to fix the value of cash flow resulting from accounts
receivable and payable and future transactions denominated in foreign currencies
in relation to the core currencies (Japanese yen, U.S. dollars, and German
marks) of Sony's major operating units. Interest rate swap agreements and
interest rate and currency swap agreements are used to diversify funding methods
and lower funding costs. Sony's basic policy is to use fixed interest rates when
procuring funds for investments having a long-term recovery period and variable
interest rates for funding requirements of a short-term nature, such as working
capital. The above swaps are utilized to enable Sony to choose between fixed and
variable interest rates depending on how the funds are to be used, as well as to
hedge foreign exchange risks that result when assets denominated in one currency
are funded by liabilities denominated in a different currency. Sony uses these
derivative financial instruments solely for risk hedging purposes as described
above, and no derivative transactions are held or used for trading purposes. In
addition, bond option contracts are used as an integral part of short-term
investing activities in order to fix the yields from bonds held by Sony Life to
certain ranges. Note that among the market risks described above, no specific
hedging activities are taken against the price
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fluctuations of equity securities held by Sony as marketable securities (refer
to Notes 2 and 11 of Notes to Consolidated Financial Statements).
Sony measures the effect of market fluctuations on the value of financial
instruments and derivatives by using Value-at-Risk (herein referred to as "VaR")
analysis. In order to comply with Item 9A disclosure requirements, Sony uses VaR
which measures a potential maximum amount of loss in fair value resulting from
adverse market fluctuations, for a selected period of time and at a selected
level of confidence. Sony uses the variance/co-variance model in calculation of
VaR. The calculation includes financial instruments such as cash and cash
equivalents, time deposits, marketable securities, non-lease short- and
long-term borrowings and debt, investments and advances and derivatives, held by
the Company and consolidated subsidiaries. Sony calculates VaR for one day from
the portfolio of financial instruments and derivatives as of March 31, 1998, at
a confidence level of 95%.
Based on this assumption, Sony's consolidated VaR at March 31, 1998 is
calculated to be 6.9 billion yen, which indicates the potential maximum loss in
fair value resulting from market fluctuations in one day at a 95% confidence
level. By item, the VaR of currency exchange rate risk is calculated to be 7.2
billion yen which mainly consists of risks arising from the volatility of the
exchange rates between yen and U.S. dollars in which relatively large amount of
financial assets and liabilities and derivative transactions is maintained. VaR
of interest rate risk and stock price risk are calculated to be 3.4 billion yen
and 3.3 billion yen, respectively. The net VaR for Sony's entire portfolio is
smaller than the simple aggregate of VaR for each component of market risk. This
is due to the fact that market risk factors such as currency exchange rates,
interest rates, and stock prices are not completely independent, thus have the
effect of offsetting a portion of overall profits and losses.
The calculated VaR does not include the effect of accounts receivable and
payable and anticipated transactions denominated in foreign currencies as of
March 31, 1998, that are the object of Sony's derivative hedging. Therefore, the
above amount of VaR does not reflect the full effect of the hedging activities
related to all of the underlying exposures and Sony expects that the actual risk
would be less than the disclosed VaR if those accounts receivable and payable
and anticipated transactions are taken into account in the calculation. The
disclosed VaR amount simply represents the calculated potential maximum loss on
the following day and by no means indicates an estimate of future loss.
44
<PAGE> 45
COMPLIANCE WITH STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Effective for the fiscal year ended March 31, 1998, Sony adopted
Statement of Financial Accounting Standards No. 131 (FAS 131). This resulted in
the reporting of business results based on new operating segments (refer to Note
18 of Notes to Consolidated Financial Statements). Segment information as well
as certain items in the consolidated statements of income in prior fiscal years
have been reclassified to conform to the presentation for the fiscal year ended
March 31, 1998.
Sony also adopted FAS 128 during the fiscal year ended March 31, 1998.
FAS 128 requires presentation of basic and diluted net income per share on the
face of the statements of income (refer to Notes 2 and 3 of Notes to
Consolidated Financial Statements). Net income per share amounts in prior fiscal
years have been restated to conform with FAS 128.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income".
This standard requires additional disclosures in the financial statements for
periods beginning after December 15, 1997, and will have no effect on Sony's
financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP, which is effective
for financial statements for fiscal years beginning after December 15, 1998,
provides guidance on accounting for the costs of computer software developed or
obtained solely to meet the company's internal needs. Sony adopted the SOP in
the first quarter of the year ending March 31, 1999. At this stage, it is not
possible to estimate the impact of adoption on Sony's financial statements for
the full fiscal year ending March 31,1999, although the effect of this change on
the first quarter results was not material.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard, which is effective for
fiscal years beginning after June 15, 1999, requires all derivatives to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. To implement this standard, all hedging
relationship must be reassessed. At this stage, it is not possible to estimate
the impact of adoption on Sony's financial position or results of operations.
45
<PAGE> 46
Item 10. Directors and Statutory Auditors of Registrant
On June 27, 1997, the Company altered the composition of its Board of
Directors and at the same time introduced a new system of executive officers.
While the Company has been selecting appropriate and qualified persons mainly
from 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 was
reduced so that more active discussion may be conducted among 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.
On May 7, 1998, President Nobuyuki Idei became Co-Chief Executive Officer
(Co-CEO). In his role as Co-CEO, President Idei shares with Chairman and CEO
Norio Ohga the responsibility for overseeing management operations of the
Company.
Set forth below are the names of the Company's Directors and Statutory
Auditors as of July 1, 1998.
<TABLE>
<CAPTION>
Director or
Statutory Auditor
Directors and Statutory Auditors since
............................ ...............
<S> <C>
Chairman and Representative Director, Chief Executive
Officer
Norio Ohga 1964
President and Representative Director, Co-Chief Executive
Officer
Nobuyuki Idei 1989
Executive Deputy Presidents and Representative Directors
Minoru Morio Chief Technology Officer 1988
Kozo Ohsone Chief Production Officer 1987
Yoshiyuki Kaneda Executive Representative, Western
Japan 1986
Tamotsu Iba Chief Financial Officer 1992
Executive Director
Akiyoshi Kawashima 1998
Directors
Peter G. Peterson 1991
Kenichi Suematsu 1997
Standing Statutory Auditors
Nobuo Kanoi 1996
Akihisa Ohnishi 1993
Yoshisuke Mohri 1994
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C>
Statutory Auditor
Kazuaki Morita 1995
</TABLE>
(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, and Mr. Kazuaki Morita, Chairman of Morita and
Co., are engaged full-time in the affairs of Sony.
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.
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 statements 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.
47
<PAGE> 48
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 (April to June
1997; 45 persons, July 1997 to March 1998; 14 persons) who served during the
fiscal year ended March 31, 1998, was approximately 1,710 million yen.
(b) The aggregate amount accrued for lump-sum severance indemnities by Sony
during the fiscal year for Directors of the Company totaled 123 million yen.
(See Note 12 of Notes to Consolidated Financial Statements.)
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
As of August 31, 1998, 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.
<TABLE>
<CAPTION>
Total amount of issue price Warrant Value Initial Issue Price Exercise Period
(a) ....................... ............. ............... ..............
per Share*
.........
<S> <C> <C> <C> <C>
Number of shares of 110 million yen 5,330 yen October 1, 1995 to
Common Stock having an August 31, 1999
issue price of 1 billion
yen
Number of shares of 200 million yen 7,022 yen October 1, 1996 to
Common Stock having an August 15, 2000
issue price of 2 billion
yen
Number of shares of 315 million yen 11,788 yen November 2, 1998
Common Stock having an to October 12,
issue price of 3.5 billion 2001
yen
Number of shares of 640 million yen 12,527 yen September 1, 1999 to
Common Stock having an August 16, 2004
issue price of 4 billion
yen
</TABLE>
* Subject to antidilution adjustment
(b) As of August 31, 1998, the total amount of Common Stock called for upon
exercise of Warrants held by Directors and executive officers is 2.5 billion
yen, or 403,171 shares.
48
<PAGE> 49
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
None.
PART IV
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See Financial Statements.
49
<PAGE> 50
Item 19. Financial Statements and Exhibits
(a) Financial Statements
See accompanying index to Consolidated Financial Statements.
(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
50
<PAGE> 51
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/ TAMOTSU IBA
............................
Tamotsu Iba
Executive Deputy President, and C.F.O.
Date September 14, 1998
...........................
51
<PAGE> 52
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
<PAGE> 53
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of independent accountants F- 2
Consolidated balance sheets at March 31, 1997 and 1998 F- 3
Consolidated statements of income and retained earnings for
the years ended March 31, 1996, 1997 and 1998 F- 5
Consolidated statements of cash flows for the years ended
March 31, 1996, 1997 and 1998 F- 6
Notes to consolidated financial statements F- 8
Financial statement schedule
for the years ended March 31, 1996, 1997 and 1998
II -- Valuation and qualifying accounts F-46
</TABLE>
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
<PAGE> 54
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, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended March 31, 1998, 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 auditing standards
generally accepted in the United States of America 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.
/s/ PRICE WATERHOUSE
- ------------------------------------
Price Waterhouse
May 7, 1998
Tokyo, Japan
F-2
<PAGE> 55
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Yen in millions
--------------------------
March 31
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents 428,518 423,286
Time deposits 52,518 107,139
Marketable securities 120,094 169,209
Notes and accounts receivable, trade 1,066,314 1,230,799
Allowance for doubtful accounts and sales returns (93,732) (114,911)
Inventories 869,800 993,927
Deferred income taxes 111,756 121,189
Prepaid expenses and other current assets 240,099 336,839
----------- -----------
Total current assets 2,795,367 3,267,477
----------- -----------
Noncurrent inventories--film 242,727 249,066
- --------------------------------- ----------- -----------
Investments and advances:
- -----------------------------
Affiliated companies 52,547 65,912
Securities investments and other 734,332 784,550
----------- -----------
786,879 850,462
----------- -----------
Property, plant and equipment:
- -----------------------------------
Land 179,011 184,427
Buildings 818,084 864,324
Machinery and equipment 1,805,851 1,947,454
Construction in progress 72,661 95,799
----------- -----------
2,875,607 3,092,004
Less--Accumulated depreciation 1,636,696 1,744,877
----------- -----------
1,238,911 1,347,127
----------- -----------
Other assets:
- --------------
Intangibles 112,080 124,817
Goodwill 161,840 160,491
Deferred insurance acquisition costs 148,032 163,120
Other 194,410 240,483
----------- -----------
616,362 688,911
----------- -----------
5,680,246 6,403,043
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 56
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Yen in millions
--------------------------
March 31
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current liabilities:
Short-term borrowings 117,801 114,617
Current portion of long-term debt 210,315 84,794
Notes and accounts payable, trade 653,826 768,152
Accounts payable, other and accrued expenses 537,726 676,547
Accrued income and other taxes 169,480 157,123
Other 262,719 315,092
----------- -----------
Total current liabilities 1,951,867 2,116,325
----------- -----------
Long-term liabilities:
Long-term debt 1,099,765 1,104,420
Accrued pension and severance costs 146,289 186,871
Deferred income taxes 173,951 147,116
Future insurance policy benefits and other 579,263 713,970
Other 154,912 193,000
----------- -----------
2,154,180 2,345,377
----------- -----------
Minority interest in consolidated subsidiaries 114,867 125,786
- --------------------------------------------------- ----------- -----------
Stockholders' equity:
Common stock, 50 yen par value--
Authorized: 1,350,000,000 shares
Issued: 1997 -- 384,185,043 shares 332,037
1998 -- 407,195,271 shares 406,196
Additional paid-in capital 474,033 548,422
Legal reserve 35,831 38,885
Retained earnings 731,470 926,198
Unrealized gain on securities 67,278 45,173
Minimum pension liability adjustment -- (5,714)
Cumulative translation adjustment (181,221) (140,725)
Treasury stock, at cost (1997--11,150 shares,
1998--246,714 shares) (96) (2,880)
----------- -----------
1,459,332 1,815,555
----------- -----------
Commitments and contingent liabilities
- --------------------------------------------
5,680,246 6,403,043
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 57
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------------
Year ended March 31
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales and operating revenue:
Net sales 4,339,411 5,383,911 6,424,805
Insurance revenue 207,691 227,920 291,061
Other operating revenue 45,463 51,303 39,624
----------- ----------- -----------
4,592,565 5,663,134 6,755,490
----------- ----------- -----------
Costs and expenses:
Cost of sales 3,216,806 3,930,107 4,618,961
Selling, general and administrative 937,910 1,153,876 1,345,584
Insurance expenses 202,525 208,821 270,735
----------- ----------- -----------
4,357,241 5,292,804 6,235,280
----------- ----------- -----------
Operating income 235,324 370,330 520,210
----------- ----------- -----------
Other income:
Interest and dividends 18,053 19,406 20,976
Foreign exchange gain, net -- 18,085 10,094
Other 47,702 55,152 52,893
----------- ----------- -----------
65,755 92,643 83,963
----------- ----------- -----------
Other expenses:
Interest 67,095 70,892 62,524
Foreign exchange loss, net 25,580 -- --
Other 70,245 79,652 87,900
----------- ----------- -----------
162,920 150,544 150,424
----------- ----------- -----------
Income before income taxes 138,159 312,429 453,749
----------- ----------- -----------
Income taxes
Current 72,088 169,060 210,113
Deferred 5,070 (5,490) 4,755
----------- ----------- -----------
77,158 163,570 214,868
----------- ----------- -----------
Income before minority interest 61,001 148,859 238,881
Minority interest in consolidated subsidiaries 6,749 9,399 16,813
----------- ----------- -----------
Net income 54,252 139,460 222,068
Retained earnings:
Balance, beginning of year 585,553 617,343 731,470
Common stock issue costs, net of tax (2) -- --
Cash dividends (18,700) (20,882) (24,286)
Transfer to legal reserve (3,760) (4,451) (3,054)
----------- ----------- -----------
Balance, end of year 617,343 731,470 926,198
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Yen
-----------------------------------------
<S> <C> <C> <C>
Per share data:
Net income - Basic 145.1 367.7 557.7
- Diluted 134.0 309.2 483.4
Cash dividends 50.0 55.0 60.0
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 58
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Yen in millions
-------------------------------------
Year ended March 31
-------------------------------------
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 54,252 139,460 222,068
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization, including
amortization of deferred insurance acquisition
costs 227,316 266,532 301,665
Accrual for pension and severance costs, less
payments 9,604 19,521 40,367
Loss on disposal of fixed assets 9,429 13,411 22,678
Deferred income taxes 5,070 (5,490) 4,755
Changes in assets and liabilities:
Increase in notes and accounts receivable (150,158) (65,905) (113,050)
(Increase) decrease in inventories (69,157) 41,825 (96,138)
Increase in other current assets (32,117) (2,906) (69,198)
Increase (decrease) in notes and accounts payable (4,169) 66,099 109,785
Increase (decrease) in accrued income and other
taxes (6,064) 89,887 (28,775)
Increase in other current liabilities 54,438 73,786 155,401
Increase in future insurance policy benefits and
other 174,223 131,947 134,707
Increase in deferred insurance acquisition costs (42,798) (51,067) (39,553)
Other 4,308 6,035 (32,362)
---------- --------- ----------
Net cash provided by operating activities 234,177 723,135 612,350
========== ========= ==========
</TABLE>
(Continued on following page)
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 59
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Yen in millions
--------------------------------------
Year ended March 31
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from investing activities:
Payments for purchases of fixed assets (250,157) (298,187) (378,053)
Proceeds from sales of fixed assets 22,823 14,940 22,413
Payments for investments and advances (490,330) (450,399) (463,239)
Proceeds from sales of investment securities and
collections of advances 313,769 316,787 323,443
Payments for purchases of marketable securities (54,964) (128,929) (95,163)
Proceeds from sales of marketable securities 101,913 46,105 46,730
Increase in time deposits (12,359) (18,361) (54,831)
Other (1,694) 46 --
---------- ---------- ----------
Net cash used in investing activities (370,999) (517,998) (598,700)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 381,239 171,698 342,101
Payments of long-term debt (87,500) (209,383) (332,154)
Decrease in short-term borrowings (145,527) (192,034) (2,345)
Dividends paid (18,772) (18,657) (21,582)
Other 1,037 881 (3,790)
---------- ---------- ----------
Net cash provided by (used in) financing
activities 130,477 (247,495) (17,770)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash
equivalents (9,871) 11,537 (1,112)
---------- ---------- ----------
Net decrease in cash and cash equivalents (16,216) (30,821) (5,232)
Cash and cash equivalents at beginning of year 475,555 459,339 428,518
---------- ---------- ----------
Cash and cash equivalents at end of year 459,339 428,518 423,286
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 60
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations:
The company is engaged in the development, design, manufacture, and sale of
various kinds of electronic equipment, instruments, and devices for consumer and
industrial markets. 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 also develops, produces, manufactures, and markets home-use game
consoles and software. The company is engaged in the development, production,
manufacture, and distribution of recorded music, in all commercial formats and
musical genres. The company is also engaged in the development, production,
manufacture and marketing of image-based software, including film, video, and
television. Further, the company conducts insurance operations principally
through a Japanese stock life insurance subsidiary. In addition to the above,
the company is engaged in customer financing and leasing business and has begun
to participate in new business activities including digital broadcasting,
information and communications, and others.
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.
F-8
<PAGE> 61
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.
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 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 includes the company's equity in current earnings/losses 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 the 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.
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-9
<PAGE> 62
Revenue recognition -
Revenues from electronics, game and music sales 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.
Marketable securities -
Marketable securities consist of debt and equity securities. Debt securities and
equity securities designated as available-for-sale, whose fair values are
readily determinable, are carried at fair value with unrealized gains or losses
included as a component of stockholders' equity, net of applicable taxes. Debt
and equity securities classified as trading securities are carried at fair value
with unrealized gains or losses included in income. Debt securities that are
expected to be held-to-maturity are carried at amortized cost. Individual
securities classified as either available-for-sale or held-to-maturity are
reduced to net realizable value by a charge to income for other than temporary
declines in fair value. Realized gains and losses are determined on the average
cost method and are reflected in income.
Inventories -
Inventories in electronics, game and music are valued at cost, not in excess of
market, cost being determined on the "average cost" basis except for the cost of
finished products carried by certain subsidiary companies which is determined on
the "first-in, first-out" basis.
F-10
<PAGE> 63
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.
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.
Future insurance policy benefits -
Future insurance policy benefits are computed based on actuarial assumptions.
F-11
<PAGE> 64
Accounting for the impairment of long-lived assets -
The company's long-lived assets, including goodwill and identifiable
intangibles, held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. When the sum of expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized, based on the fair value of the asset. The fair
value of goodwill is determined using a discounted cash flows analysis.
Income taxes -
The provision for income taxes is computed based on the pretax income included
in the consolidated statements of income. The asset and liability approach is
used to recognize deferred tax assets and liabilities 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, which include foreign exchange forward
contracts, foreign currency option contracts, interest rate swap agreements, and
interest rate and currency swap agreements, are used in the company's risk
management of foreign currency and interest rate risk exposures of its financial
assets and liabilities.
Foreign exchange forward contracts:
Foreign exchange forward contracts are used to limit exposure to losses,
resulting from changes in foreign currency exchange rates, on accounts
receivable and payable and anticipated transactions denominated in foreign
currencies. Foreign exchange forward contracts which are designated and
effective as hedges of such currency exchange rate risk on existing assets
and liabilities are marked to market and included as an offset to foreign
exchange gains/losses recorded on the existing assets and liabilities. Such
contracts on anticipated transactions, including contracts used to hedge
intercompany foreign currency commitments which do not qualify as firm
commitments, are marked to market with changes in value recognized in
foreign exchange gains/losses.
F-12
<PAGE> 65
Foreign currency option contracts:
The company enters into purchased foreign currency option contracts to
limit exposure to losses, resulting from changes in foreign currency
exchange rates, on accounts receivable and anticipated transactions
denominated in foreign currencies. The company also enters into written
foreign currency option contracts, of which the majority are part of range
forward contracts corresponding to the purchased foreign currency option
contracts. The carrying values of all foreign currency option contracts are
marked to market with changes in value recognized in foreign exchange
gains/losses.
Interest rate swap agreements and interest rate
and currency swap agreements:
The company enters into interest rate swap agreements or interest rate and
currency swap agreements in order 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
interest rates or foreign currency exchange rates. The related interest
differentials paid or received under the interest rate swap agreements and
under the interest rate and currency swap agreements are recognized over
the terms of the agreements in interest expense. Currency swap portions of
the interest rate and currency swap agreements which are designated and
effective as hedges of exposure to losses resulting from changes in foreign
currency exchange rates on underlying debt denominated in foreign currency
are marked to market and included as an offset to foreign exchange
gains/losses on the underlying debt.
After an underlying hedged transaction is settled or ceases to exist, all
changes in fair value of related derivatives which have not been settled are
recognized in foreign exchange gains/losses.
F-13
<PAGE> 66
Net income per share -
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No.128 (FAS 128), "Earnings per
Share" (EPS), which replaces the presentation of primary earnings per share 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 and 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. Net income per
share is appropriately adjusted for any free distributions of common stock. FAS
128 was effective for both interim and annual periods ending after December 15,
1997. All prior-period EPS data presented have been restated to conform with FAS
128.
Free 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 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,
followed by a free share distribution with respect to the amount 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.
Recent pronouncements -
Comprehensive income:
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income".
This standard requires additional disclosures in the financial statements
for periods beginning after December 15, 1997, and will have no effect on
the company's financial position or results of operations.
F-14
<PAGE> 67
Internal-use software:
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This SOP, which
is effective for financial statements for fiscal years beginning after
December 15, 1998, provides guidance on accounting for the costs of
computer software developed or obtained solely to meet the company's
internal needs. The company intends early adoption of the SOP in the first
quarter of the year ending March 31, 1999. At this stage, it is not
possible to estimate the impact of adoption on the company's financial
statements for the year ending March 31, 1999.
Derivative instruments and hedging activities (unaudited):
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard, which is effective for
fiscal years beginning after June 15, 1999, requires all derivatives to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. To implement this standard, all
hedging relationship must be reassessed. At this stage, it is not possible
to estimate the impact of adoption on the company's financial position or
results of operations.
Reclassifications -
Certain reclassifications of the financial statements and related footnote
amounts in the years ended March 31, 1996 and 1997 have been made to conform to
the presentation in the year ended March 31, 1998.
F-15
<PAGE> 68
3. Reconciliation of the differences between basic and
diluted net income per share (EPS):
Reconciliation of the differences between basic and diluted EPS for the years
ended March 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Yen in Thousands
millions of shares Yen
--------- ----------- -------
Weighted-
average
Income shares EPS
--------- ----------- -------
<S> <C> <C> <C>
For the year ended March 31, 1996
Basic EPS
Net income available to common stockholders 54,252 373,999 145.1
--------- --------- -------
Effect of Dilutive Securities
Warrants 15
Convertible bonds 2,305 47,976
--------- ---------
Diluted EPS
Net income for computation 56,557 421,990 134.0
========= ========= =======
For the year ended March 31, 1997
Basic EPS
Net income available to common stockholders 139,460 379,230 367.7
--------- --------- -------
Effect of Dilutive Securities
Warrants 69
Convertible bonds 2,455 79,729
--------- ---------
Diluted EPS
Net income for computation 141,915 459,028 309.2
========= ========= =======
For the year ended March 31, 1998
Basic EPS
Net income available to common stockholders 222,068 398,181 557.7
--------- --------- -------
Effect of Dilutive Securities
Warrants 51
Convertible bonds 2,271 65,890
--------- ---------
Diluted EPS
Net income for computation 224,339 464,122 483.4
========= ========= =======
</TABLE>
4. Accumulated amortization of intangibles and goodwill:
Accumulated amortization of intangibles and goodwill amounted to 188,943 million
yen and 218,225 million yen at March 31, 1997 and 1998, respectively.
F-16
<PAGE> 69
5. Cash flow information:
Cash payments during the year -
Cash payments for income taxes were 88,565 million yen, 87,723 million yen and
239,054 million yen for the years ended March 31, 1996, 1997 and 1998,
respectively; in these respective years, cash payments for interest were 69,882
million yen, 68,004 million yen and 64,102 million yen.
Noncash investing and financing activities -
Capital lease obligations of 9,563 million yen, 4,824 million yen and 4,406
million yen were incurred during the years ended March 31, 1996, 1997 and 1998,
respectively.
Conversions of convertible debt into common stock and additional paid-in capital
were 680 million yen, 63,578 million yen and 146,512 million yen for the years
ended March 31, 1996, 1997 and 1998, respectively.
6. Inventories:
Inventories comprise the following:
<TABLE>
<CAPTION>
Yen in millions
----------------------
March 31
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Current:
Finished products 527,418 630,613
Work in process 119,406 110,035
Raw materials, purchased components and supplies 127,366 134,392
Film -- released 73,767 104,585
-- in process 21,843 14,302
--------- ---------
869,800 993,927
========= =========
Noncurrent:
Film -- released 143,003 172,515
-- in process 99,724 76,551
--------- ---------
242,727 249,066
========= =========
</TABLE>
F-17
<PAGE> 70
7. Account balances and transactions with
affiliated companies:
Account balances and transactions with affiliated companies are presented below:
<TABLE>
<CAPTION>
Yen in millions
-------------------
March 31
-------------------
1997 1998
-------- -------
<S> <C> <C> <C>
Accounts receivable, trade 13,232 9,425
======== =======
Accounts payable, trade 89 945
======== =======
</TABLE>
<TABLE>
<CAPTION>
Yen in millions
---------------------------------
Year ended March 31
---------------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Sales 123,623 96,183 27,419
========= ======== ========
Purchases 2,647 733 3,199
========= ======== ========
</TABLE>
Dividends from affiliated companies accounted for by the equity method for the
years ended March 31, 1996, 1997 and 1998 were 6,639 million yen, 3,071 million
yen and 1,074 million yen, respectively.
F-18
<PAGE> 71
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:
<TABLE>
<CAPTION>
Yen in millions
-------------------------------------------------------------------------------------------------------
March 31, 1997 March 31, 1998
-------------------------------------------------- --------------------------------------------------
Gross Gross Gross Gross
unrealized unrealized Fair unrealized unrealized Fair
Cost gains losses value Cost gains losses value
-------- ------------ ------------ --------- --------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
Debt securities 531,968 22,001 1,338 552,631 613,905 27,146 2,135 638,916
Equity securities 49,512 124,682 2,364 171,830 60,049 65,486 4,220 121,315
-------- -------- ------- --------- --------- -------- ------- --------
Total 581,480 146,683 3,702 724,461 673,954 92,632 6,355 760,231
======== ======== ======= ========= ========= ======== ======= ========
</TABLE>
Marketable securities and securities investments and other as of March 31, 1997
and 1998 include short-term investments in money market funds and long-term
advances to third parties of 65,776 million yen and 131,662 million yen,
respectively.
At March 31, 1998, 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, 1996, 1997 and 1998, the net unrealized gains
on available-for-sale securities included in the separate component of
stockholders' equity, net of applicable taxes, increased by 16,361 million yen,
decreased by 14,055 million yen and decreased by 22,105 million yen,
respectively.
Proceeds from sales of available-for-sale securities were 397,774 million yen,
347,790 million yen and 359,815 million yen for the years ended March 31, 1996,
1997 and 1998, respectively. On those sales, gross realized gains computed on
the average cost basis were 14,605 million yen, 19,174 million yen and 18,028
million yen and gross realized losses were 7,734 million yen, 9,877 million yen
and 13,793 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, 1996, 1997 and 1998 was
insignificant.
F-19
<PAGE> 72
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 62,346 million yen and 60,527 million yen at March 31,
1997 and 1998, respectively. The corresponding fair values at those dates were
not computed as such estimation was not readily determinable.
9. Short-term borrowings and long-term debt:
Short-term borrowings at March 31, 1998 comprise the following:
<TABLE>
<CAPTION>
Yen in
millions
--------
<S> <C>
Loans, principally from banks, with interest ranging from
0.77% to 12.00% per annum 112,636
Commercial paper with interest of 6.15% per annum 1,981
-------
114,617
=======
</TABLE>
As at March 31, 1998, the company had unused lines of credit amounting to
1,310,206 million yen of which 404,529 million yen related to commercial paper
programs and 151,987 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-20
<PAGE> 73
Long-term debt at March 31, 1998 comprises the following:
<TABLE>
<CAPTION>
Yen in
millions
-----------
<S> <C>
Unsecured loans, representing obligations principally to
banks, due 1998 to 2017 with interest ranging from 1.0% to
9.25% per annum 83,158
Secured loans, representing obligations principally to
banks, due 1999 to 2003 with interest ranging from 3.0% to
10.13% per annum 4,148
Medium-term notes of consolidated subsidiaries due 1998 to
2006 with interest ranging from 3.41% to 8.04% per annum 231,419
Unsecured 2.0% convertible bonds due 2000, convertible
currently at 4,159.9 yen for one common share, redeemable
before due date 342
Unsecured 0.15% convertible bonds due 2001, convertible
currently at 6,519 yen for one common share, redeemable
before due date 105,882
Unsecured 1.5% convertible bonds due 2002, convertible
currently at 4,387.9 yen for one common share, redeemable
before due date 772
Unsecured 1.4% convertible bonds due 2003, convertible
currently at 5,415.5 yen for one common share, redeemable
before due date 17,428
Unsecured 1.4% convertible bonds due 2005, convertible
currently at 7,990.9 yen for one common share, redeemable
before due date 297,772
Unsecured 0.1% bonds, due 1999 with detachable warrants 1,000
Unsecured 0.1% bonds, due 2000 with detachable warrants 2,000
Unsecured 0.1% bonds, due 2001 with detachable warrants 3,500
Unsecured 6.875% bonds due 2000, net of unamortized premium 50,149
Unsecured 4.4% bonds due 2001 80,000
Unsecured 6.125% notes due 2003, net of unamortized discount 193,022
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 5.01% notes of a consolidated subsidiary, due 2000 25,362
Unsecured 2.0% bonds of a consolidated subsidiary, due 2001 15,000
Unsecured 2.5% bonds of a consolidated subsidiary, due 2003 15,000
Unsecured fixed coupon notes linked to the Yen/U.S. dollar
rate of a consolidated subsidiary, due 2001 859
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 1998 to 2006 26,863
Guarantee deposits received 12,538
-----------
1,189,214
Less -- Portion due within one year 84,794
-----------
1,104,420
===========
</TABLE>
F-21
<PAGE> 74
On September 1, 1995, the company issued 1 billion yen of 0.1% bonds, with
detachable 500 warrants. One warrant, which became exercisable from October 1,
1995, entitles the holder 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, 1998, 41
warrants were outstanding and will expire on August 31, 1999.
On August 16, 1996, the company issued 2 billion yen of 0.1% bonds, with
detachable 1,000 warrants. One warrant, which became exercisable from October 1,
1996, entitles the holder 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 selected employees of the company as a part of their remuneration or salary.
At March 31, 1998, 262 warrants were outstanding and will expire on August 15,
2000.
On October 13, 1997, the company issued 3.5 billion yen of 0.1% bonds, with
detachable 1,750 warrants. One warrant, which will be exercisable from November
2, 1998, entitles the holder to subscribe 2 million yen for shares of common
stock of the company at 11,788 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 selected employees of the company as a part of their remuneration or salary.
At March 31, 1998, all warrants were outstanding and will expire on October 12,
2001.
On March 4, 1998, the company issued unsecured 1.5 billion U.S. dollar Notes due
2003 denominated in U.S. dollars with an interest rate of 6.125%. The Notes are
redeemable before the due date.
At March 31, 1998, 57,369 thousand shares of common stock would be issued upon
conversion or exercise of all convertible debentures and warrants outstanding.
At March 31, 1998, property, plant and equipment with a book value of 5,191
million yen is mortgaged as security for loans and bonds issued by consolidated
subsidiaries.
F-22
<PAGE> 75
Aggregate amounts of annual maturities of long-term debt during the next five
years are as follows:
<TABLE>
<CAPTION>
Year ending
March 31 Yen in millions
----------- ---------------
<S> <C>
1999 84,794
2000 101,053
2001 245,517
2002 154,486
2003 224,114
</TABLE>
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.
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 of the subsidiary as of March 31, 1997 and
1998 were 12,625 million yen and 40,625 million yen, respectively.
F-23
<PAGE> 76
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, 1996, 1997 and 1998 amounted to 9,694
million yen, 15,855 million yen and 21,838 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 2.75% 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, 1997 and 1998, future insurance policy
benefits amounted to 528,204 million yen and 673,473 million yen, respectively.
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 the exposure to market rate movements of its financial assets
and liabilities through the use of derivative financial instruments which
include foreign exchange forward contracts, foreign currency option contracts,
interest rate swap agreements and interest rate and 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 marks and other currencies of major 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.
F-24
<PAGE> 77
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.
Derivative financial instruments -
The company utilizes foreign exchange forward contracts and foreign currency
option contracts primarily to fix the cash flow value resulting from accounts
receivable and payable and future transactions denominated in foreign currencies
in relation to the core currencies (Japanese yen, U.S. dollars, and German
marks) of the company's major operating units. Foreign exchange forward
contracts, the majority of which mature within three months, are used to hedge
this risk which is substantially associated with accounts receivable and payable
and anticipated transactions denominated in foreign currencies. The contracted
amounts outstanding at March 31, 1997 and 1998 were 756,294 million yen and
733,020 million yen, respectively. The fair values of these contracts were
estimated based on market quotations.
The company has entered into interest rate swap agreements and interest rate and
currency swap agreements which mature from 1998 to 2006 to reduce its exposure
to losses resulting from adverse fluctuations in interest rates or foreign
currency exchange rates on underlying debt instruments. At March 31, 1997 and
1998, the aggregate notional principal amounts of the interest rate swap
agreements were 176,705 million yen and 91,235 million yen, respectively, and
those of the interest rate and currency swap agreements were 300,269 million yen
and 430,297 million yen, respectively. The fair values of such agreements were
estimated based on the discounted amounts of net future cash flows.
F-25
<PAGE> 78
The company has entered into purchased foreign currency option contracts in the
notional amounts of 196,990 million yen and 233,184 million yen at March 31,
1997 and 1998, respectively. The majority of these contracts expire within three
months of the balance sheet dates. The company has also entered into written
foreign currency option contracts in the notional amounts of 185,621 million yen
and 279,406 million yen at March 31, 1997 and 1998, respectively. The majority
of these contracts are part of range forward contract arrangements and expire in
the same month with the corresponding purchased foreign currency option
contracts described above. The fair values of such foreign currency options were
estimated based on values quoted by brokers.
A consolidated insurance subsidiary has 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 date and their notional principal
amounts were 204,945 million yen and 181,509 million yen at March 31, 1997 and
1998, 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 market quotations.
F-26
<PAGE> 79
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:
<TABLE>
<CAPTION>
Yen in millions
--------------------------
Carrying Estimated
amount fair value
----------- -----------
<S> <C> <C>
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)
At March 31, 1998
- ---------------------
Cash and cash equivalents 423,286 423,286
Time deposits 107,139 107,139
Notes and accounts receivable, trade 1,230,799 1,230,799
Short-term borrowings (114,617) (114,617)
Notes and accounts payable, trade (768,152) (768,152)
Long-term debt including the current portion (1,189,214) (1,191,367)
Forward exchange contracts (471) (1,682)
Interest rate and currency swap agreements -- (24,757)
Option contracts purchased 2,461 2,461
Option contracts written (2,548) (2,548)
Bond option contracts written (909) (909)
</TABLE>
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.
F-27
<PAGE> 80
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 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.
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:
<TABLE>
<CAPTION>
Yen in millions
------------------------------------
Year ended March 31
------------------------------------
1996 1997 1998
--------- ---------- ---------
<S> <C> <C> <C>
Net pension and severance cost (credit):
Service cost -- benefits earned during the year 29,276 32,772 39,436
Interest cost on projected benefit obligation 11,090 11,959 13,303
Actual return on plan assets (9,545) (14,373) (7,843)
Net amortization and deferral 7,245 14,053 7,037
--------- ---------- ---------
Actuarial net pension and severance cost for the year 38,066 44,411 51,933
Employee contributions (4,098) (4,073) (4,118)
--------- ---------- ---------
Net pension and severance cost for the year 33,968 40,338 47,815
========= ========== =========
</TABLE>
F-28
<PAGE> 81
Foreign plans:
<TABLE>
<CAPTION>
Yen in millions
--------------------------------
Year ended March 31
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net pension and severance cost (credit):
Service cost -- benefits earned during the year 10,790 15,988 15,625
Interest cost on projected benefit obligation 3,197 4,108 4,911
Actual return on plan assets (4,122) (3,897) (6,149)
Net amortization and deferral 1,860 870 2,365
-------- -------- --------
Net pension and severance cost for the year 11,725 17,069 16,752
======== ======== ========
</TABLE>
Pension plans' funded status:
<TABLE>
<CAPTION>
Japanese plans Foreign plans
--------------------- ------------------------
Yen in millions Yen in millions
--------------------- ------------------------
March 31 March 31
--------------------- ------------------------
1997 1998 1997 1998
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Actuarial present value of obligations -
Vested benefit 268,719 327,802 50,325 57,119
Nonvested benefit 53,311 61,508 4,060 5,850
--------- --------- ----------- ----------
Accumulated benefit obligation 322,030 389,310 54,385 62,969
Additional benefits related to projected salary
increase 71,418 86,758 20,288 22,190
--------- --------- ----------- ----------
Projected benefit obligation 393,448 476,068 74,673 85,159
Plan assets at fair value 204,491 236,966 43,837 54,597
--------- --------- ----------- ----------
Excess of projected benefit obligation over plan
assets 188,957 239,102 30,836 30,562
Unrecognized net loss (59,740) (91,343) (4,805) (4,617)
Unrecognized net transition asset 3,104 2,729 1,453 492
Unrecognized prior service cost (12,807) (12,496) -- 2,651
Adjustment required to recognize minimum pension
liability -- 20,692 -- --
--------- --------- ----------- ----------
Net pension liability recognized in the balance
sheet 119,514 158,684 27,484 29,088
========= ========= =========== ==========
Assumptions used in developing the pension
obligation as of March 31:
Discount rate 3.5% 3.0% 6.5 - 9.0% 6.5 - 8.0%
Long-term rate of salary increase 3.0% 3.0% 2.5 - 8.5% 2.5 - 8.5%
Long-term rate of return on funded assets 3.7% 4.0% 7.0 - 10.0% 6.5 - 9.8%
</TABLE>
As required under FAS 87 "Employers' Accounting for Pensions", 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.
F-29
<PAGE> 82
Under FAS 87, the company has recorded a pension liability to cover the amount
of the projected benefit obligation in excess of plan assets, considering
unrealized items and the minimum pension liability. The minimum pension
liability which the company has recognized represents the excess of accumulated
benefits over plan assets and accrued pension cost. A corresponding amount was
recognized as an intangible asset to the extent of unrecognized prior service
cost, and the balance was recorded as a separate reduction of stockholders'
equity, net of tax.
The plan assets are invested primarily in interest bearing securities and listed
equity securities.
13. Income taxes:
Income before income taxes and income tax expense comprise the following:
<TABLE>
<CAPTION>
Yen in millions
---------------------------------
Year ended March 31
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income before income taxes:
Parent company and domestic subsidiaries 78,154 226,847 293,520
Foreign subsidiaries 60,005 85,582 160,229
--------- --------- ---------
138,159 312,429 453,749
========= ========= =========
Income taxes -- Current:
Parent company and domestic subsidiaries 40,488 125,028 145,890
Foreign subsidiaries* 31,600 44,032 64,223
--------- --------- ---------
72,088 169,060 210,113
========= ========= =========
Income taxes -- Deferred:
Parent company and domestic subsidiaries 6,543 (6,543) 7,221
Foreign subsidiaries* (1,473) 1,053 (2,466)
--------- --------- ---------
5,070 (5,490) 4,755
========= ========= =========
</TABLE>
- ---------------
* 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%. Due to a
change in Japanese income tax regulations, effective April 1, 1998, the
statutory rate was reduced to approximately 48% and such amount has been used in
calculating the future expected tax effects of temporary differences. The effect
of the enacted change in the tax rate was insignificant.
F-30
<PAGE> 83
Reconciliation of the differences between the statutory tax rate and the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Statutory tax rate 51.0% 51.0% 51.0%
Increase (reduction) in taxes resulting from:
Income tax credit (2.8) (2.8) (2.4)
Current operating losses of subsidiaries 7.9 5.2 1.9
Other (0.2) (1.0) (3.1)
------- ------- -------
Effective income tax rate 55.9% 52.4% 47.4%
======= ======= =======
</TABLE>
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
Yen in millions
----------------------
March 31
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards for tax purposes 75,536 79,761
Accrued pension and severance costs 45,418 54,487
Warranty reserve and accrued expenses 46,187 52,445
Inventory -- intercompany profits and write-down 44,416 38,915
Future insurance policy benefits 34,580 38,686
Accrued enterprise taxes 12,952 18,276
Other accrued employees' compensation 14,465 12,336
Other 74,173 77,232
--------- ---------
Gross deferred tax assets 347,727 372,138
Less: Valuation allowance (122,258) (125,908)
--------- ---------
Total deferred tax assets 225,469 246,230
--------- ---------
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries (68,928) (77,833)
Insurance acquisition costs (67,004) (67,858)
Unrealized gain on securities (72,741) (41,185)
Depreciation (17,041) (13,264)
Other (39,133) (45,773)
--------- ---------
Gross deferred tax liabilities (264,847) (245,913)
--------- ---------
Net deferred tax assets (liabilities) (39,378) 317
========= =========
</TABLE>
F-31
<PAGE> 84
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, 1996, 1997 and 1998 were increases of 28,174 million
yen, 3,902 million yen and 3,650 million yen, respectively.
Net deferred tax assets (liabilities) are included in the consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
Yen in millions
--------------------------
March 31
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets -- Deferred income taxes 111,756 121,189
Other assets -- Other 27,158 30,523
Current liabilities -- Other (4,341) (4,279)
Long-term liabilities -- Deferred income taxes (173,951) (147,116)
----------- -----------
Net deferred tax assets (liabilities) (39,378) 317
=========== ===========
</TABLE>
At March 31, 1998, no deferred income taxes have been provided on undistributed
earnings of foreign subsidiaries not expected to be remitted in the foreseeable
future totaling 295,778 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, 1998 for such temporary differences amounted to 109,827 million yen.
Operating loss carryforwards for tax purposes of consolidated subsidiaries at
March 31, 1998 amounted to approximately 235,319 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-32
<PAGE> 85
14. Stockholders' equity:
Changes in each caption of stockholders' equity, except for retained earnings,
have resulted from the following:
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------
Year ended March 31
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year 299,589 299,885 332,037
Exercise of stock purchase warrants -- 336 861
Conversion of convertible debt 296 31,816 73,298
--------- --------- ---------
Balance at end of year 299,885 332,037 406,196
========= ========= =========
Additional paid-in capital:
Balance at beginning of year 441,241 441,735 474,033
Exercise of stock purchase warrants -- 336 860
Conversion of convertible debt 384 31,762 73,214
Common stock warrants 110 200 315
--------- --------- ---------
Balance at end of year 441,735 474,033 548,422
========= ========= =========
Legal reserve:
Balance at beginning of year 27,620 31,380 35,831
Transfer from retained earnings 3,760 4,451 3,054
--------- --------- ---------
Balance at end of year 31,380 35,831 38,885
========= ========= =========
Unrealized gain on securities:
Balance at beginning of year 64,972 81,333 67,278
Net charge during the year 16,361 (14,055) (22,105)
--------- --------- ---------
Balance at end of year 81,333 67,278 45,173
========= ========= =========
Minimum pension liability adjustment:
Balance at beginning of year -- -- --
Valuation adjustment, net of related income taxes -- -- (5,714)
--------- --------- ---------
Balance at end of year -- -- (5,714)
========= ========= =========
Cumulative translation adjustment:
Balance at beginning of year (411,167) (302,503) (181,221)
Aggregate translation adjustment for the year 114,461 127,705 35,985
Income taxes for the year allocated to translation
adjustment (5,797) (6,423) 4,511
--------- --------- ---------
Balance at end of year (302,503) (181,221) (140,725)
========= ========= =========
</TABLE>
F-33
<PAGE> 86
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------
Year ended March 31
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Treasury stock, at cost:
Balance at beginning of year (6) (26) (96)
Purchase of treasury stock (955) (3,156) (7,948)
Reissuance of treasury stock 935 3,086 5,164
--------- --------- ---------
Balance at end of year (26) (96) (2,880)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Number of shares
-----------------------------------------------
Year ended March 31
-----------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year 373,911,490 374,067,706 384,185,043
Exercise of stock purchase warrants -- 117,838 264,562
Conversion of convertible debt 156,216 9,999,499 22,745,666
------------- ------------- -------------
Balance at end of year 374,067,706 384,185,043 407,195,271
============= ============= =============
</TABLE>
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.
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 parent
company and its Japanese subsidiaries be appropriated as a legal reserve. The
amounts of statutory retained earnings of the parent company available for the
payments of dividends to stockholders as of March 31, 1997 and 1998 were 507,253
million yen and 555,643 million yen, respectively. These amounts include cash
dividends for the six-month periods ended March 31, 1997 and 1998, respectively,
which have been incorporated in the accompanying consolidated financial
statements.
F-34
<PAGE> 87
The appropriations of retained earnings for the year ended March 31, 1998, 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 26, 1998 and will be recorded in the statutory books of account, in
accordance with the Japanese Commercial Code, after stockholders' approval.
The ordinary general meeting of stockholders held on June 27, 1997 authorized
the company, pursuant to the Japanese regulations, to acquire and retire up to a
total not exceeding 30 million yen outstanding shares of its common stock with
its profit, on and after June 28, 1997, whenever deemed necessary by the Board
of Directors in view of general economic conditions, the company's business
performance and financial condition and other factors. At March 31, 1998, no
common stock had been acquired under this authorization.
On May 7, 1998, the company's Board of Directors resolved the following
proposals to be approved by the general stockholders' meeting to be held on June
26, 1998. The proposals resolve that (a) in addition to the shares discussed in
the preceding paragraph, on and after June 27, 1998, the company may, by a
resolution of the Board of Directors, acquire and retire up to a total not
exceeding 30 million yen outstanding shares of its common stock with its
additional paid-in capital at prices in total not exceeding 400 billion yen and
(b) the company may grant share subscription rights to directors and/or
employees pursuant to the Japanese regulations.
In February 1998, the company adopted a cash stock appreciation rights plan (the
"SARs") as an incentive plan for selected employees. Under the terms of the
plan, the SARs may be exercised during the period from 1999 until 2004. No
compensation expense was recognized for the SARs in the year ended March 31,
1998 as the company's stock price did not exceed the strike price of the SARs.
Retained earnings at March 31, 1998 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 18,566 million yen.
F-35
<PAGE> 88
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, 1996, 1997 and 1998 were 257,326 million yen, 282,569 million yen and
318,044 million yen, respectively.
Advertising costs -
Advertising costs included in selling, general and administrative expenses for
the years ended March 31, 1996, 1997 and 1998 were 159,821 million yen, 216,579
million yen and 268,985 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:
<TABLE>
<CAPTION>
Yen in millions
--------------------
March 31
--------------------
Class of property 1997 1998
- ------------------------- -------- --------
<S> <C> <C>
Land 2,538 2,501
Buildings 24,623 21,682
Machinery and equipment 9,682 10,103
Accumulated amortization (13,022) (12,243)
-------- --------
23,821 22,043
======== ========
</TABLE>
F-36
<PAGE> 89
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, 1998:
<TABLE>
<CAPTION>
Yen in
millions
--------
<S> <C>
Year ending March 31:
1999 6,675
2000 5,449
2001 4,459
2002 4,431
2003 4,198
Later years 9,378
--------
Total minimum lease payments 34,590
Less -- Amount representing interest 7,727
--------
Present value of net minimum lease payments 26,863
Less -- Current obligations 5,135
--------
Long-term capital lease obligations 21,728
========
</TABLE>
Rental expenses under operating leases for the years ended March 31, 1996, 1997
and 1998 were 81,385 million yen, 86,570 million yen and 87,564 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, 1998 are as follows:
<TABLE>
<CAPTION>
Yen in
millions
--------
<S> <C>
Year ending March 31:
1999 44,269
2000 42,416
2001 35,119
2002 28,575
2003 24,000
Later years 158,396
---------
Total minimum future rentals 332,775
=========
</TABLE>
17. Commitments and contingent liabilities:
Commitments outstanding at March 31, 1998 for the purchase of property, plant
and equipment and other assets approximated 54,474 million yen.
F-37
<PAGE> 90
Contingent liabilities for guarantees given in the ordinary course of business
and for employee loans amounted to 123,065 million yen at March 31, 1998.
The company has entered into agreements with financial institutions whereby the
company can sell specifically identified accounts receivable and future
receivables with limited recourse. For the years ended March 31, 1996, 1997 and
1998, the company did not sell any specifically identified accounts receivable
or future receivables. As of March 31, 1997 and 1998, the outstanding balance of
all receivables sold with limited recourse amounted to 868 million yen and 0
million yen, respectively.
The company has also entered into agreements with financial institutions whereby
the company can sell up to 125,400 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,
1996, 1997 and 1998 amounted to 71,868 million yen, 0 million yen and 0 million
yen, respectively. As of March 31, 1997 and 1998, there were no outstanding
balances of receivables sold.
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 business 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, 2001. As of March 31, 1998, these subsidiaries were committed
to make payments under such long-term contracts of 24,211 million yen.
The parent 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.
F-38
<PAGE> 91
18. Business segment information:
Effective for the year ended March 31, 1998, the company adopted FAS 131,
"Disclosures about Segments of an Enterprise and Related Information" which
requires disclosure of financial and descriptive information about the company's
reportable operating segments. The operating segments reported below are the
segments of the company for which separate financial information is available
and for which operating profit/loss amounts are evaluated regularly by executive
management in deciding how to allocate resources and in assessing performance.
The operating segment information reported below differs from the industry
segment information previously disclosed under FAS 14, "Financial Reporting for
Segments of a Business Enterprise" in that the Game business was previously
included in the Electronics segment, the Music and Pictures businesses were
previously combined in the Entertainment segment, and the company's financing
operations, which were previously in the Insurance and financing segment, are
now included as part of the Other segment below. The operating segment
information, as well as geographic data, for previous years have been
reclassified to conform to the segment presentation for the year ended March 31,
1998.
The Electronics segment develops, designs, manufactures and distributes
audiovisual equipment, instruments and devices throughout the world. The Game
segment develops, designs and sells PlayStation game consoles and related
software mainly in Japan, the United States and Europe, and licenses to the
third party software developers. The Music segment is mainly engaged worldwide
in the development, production, manufacture, and distribution of recorded music,
in all commercial formats and musical genres. The Pictures segment develops,
produces, and manufactures image-based software, including film, video, and
television mainly in the United States, and in their marketing worldwide. The
Insurance segment represents insurance-related underwriting business, primarily
individual life insurance business in the Japanese market. The Other segment
consists of other various operating activities primarily including customer
financing and leasing business, and media-communication network businesses
relating to broadcasting and information technology. The company's products and
services are generally unique to a single operating segment.
F-39
<PAGE> 92
Business segments -
Sales and operating revenue:
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------------
Year ended March 31
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales and operating revenue:
Electronics -
Customers 3,283,234 3,930,292 4,377,346
Intersegment 182,222 201,339 312,764
----------- ----------- -----------
Total 3,465,456 4,131,631 4,690,110
Game -
Customers 200,894 408,335 699,574
Intersegment 3,017 10,943 22,977
----------- ----------- -----------
Total 203,911 419,278 722,551
Music -
Customers 506,455 570,119 660,407
Intersegment 11,380 21,961 34,307
----------- ----------- -----------
Total 517,835 592,080 694,714
Pictures -
Customers 317,382 438,551 642,714
Intersegment 198 3 450
----------- ----------- -----------
Total 317,580 438,554 643,164
Insurance -
Customers 206,802 227,920 291,061
Intersegment 101 14 7
----------- ----------- -----------
Total 206,903 227,934 291,068
Other -
Customers 77,798 87,917 84,388
Intersegment 196,177 152,457 163,841
----------- ----------- -----------
Total 273,975 240,374 248,229
Elimination (393,095) (386,717) (534,346)
----------- ----------- -----------
Consolidated total 4,592,565 5,663,134 6,755,490
=========== =========== ===========
</TABLE>
F-40
<PAGE> 93
Segment profit or loss:
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------------
Year ended March 31
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating income (loss):
Electronics 193,331 239,312 314,538
Game (8,938) 57,045 116,936
Music 40,129 45,216 54,084
Pictures 23,862 28,925 35,544
Insurance 7,116 19,099 20,326
Other (6,078) (1,422) (10,292)
----------- ----------- -----------
Total 249,422 388,175 531,136
Elimination 5,188 3,390 10,749
Unallocated amounts:
Corporate expenses (19,286) (21,235) (21,675)
----------- ----------- -----------
Consolidated operating income 235,324 370,330 520,210
Other income 65,755 92,643 83,963
Other expenses (162,920) (150,544) (150,424)
----------- ----------- -----------
Consolidated income before income taxes 138,159 312,429 453,749
=========== =========== ===========
</TABLE>
Assets:
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------------
March 31
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Total assets:
Electronics 2,798,818 3,014,756 3,253,990
Game 75,964 128,056 197,605
Music 594,949 714,792 835,939
Pictures 635,284 796,942 915,545
Insurance 563,784 716,843 899,016
Other 318,128 275,824 309,150
----------- ----------- -----------
Total 4,986,927 5,647,213 6,411,245
Elimination (227,635) (204,006) (221,112)
Corporate assets 286,407 237,039 212,910
----------- ----------- -----------
Consolidated total 5,045,699 5,680,246 6,403,043
=========== =========== ===========
</TABLE>
F-41
<PAGE> 94
Other significant items:
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------
Year ended March 31
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Depreciation and amortization:
Electronics 162,592 187,960 197,449
Game 2,198 3,738 12,536
Music 22,323 28,707 30,933
Pictures 10,613 13,286 16,668
Insurance, including deferred insurance
acquisition costs 9,880 15,870 22,410
Other 16,683 14,141 17,539
--------- --------- ---------
Total 224,289 263,702 297,535
Corporate 3,027 2,830 4,130
--------- --------- ---------
Consolidated total 227,316 266,532 301,665
========= ========= =========
Capital expenditures for segment assets:
Electronics 185,638 226,696 301,197
Game 4,776 5,757 17,114
Music 25,842 31,807 28,361
Pictures 15,658 15,194 13,477
Insurance 1,484 176 633
Other 15,645 16,502 24,102
--------- --------- ---------
Total 249,043 296,132 384,884
Corporate 2,154 1,946 3,071
--------- --------- ---------
Consolidated total 251,197 298,078 387,955
========= ========= =========
</TABLE>
Equity earnings for the years ended March 31, 1996, 1997 and 1998, which were
included in sales and operating revenue for the years then ended, were not
material.
F-42
<PAGE> 95
Geographic information -
Sales and operating revenue which are attributed to countries based on location
of customers and long-lived assets for the years ended March 31, 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------------
Year ended March 31
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales and operating revenue:
Japan 1,379,804 1,590,820 1,843,149
U.S.A. 1,259,926 1,639,334 2,101,907
Europe 1,054,010 1,304,491 1,567,121
Other 898,825 1,128,489 1,243,313
----------- ----------- -----------
Total 4,592,565 5,663,134 6,755,490
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Yen in millions
-----------------------------------------
March 31
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Long-lived assets:
Japan 701,413 730,075 843,800
U.S.A. 694,733 824,439 845,887
Europe 147,339 174,524 192,695
Other 166,842 194,683 209,984
----------- ----------- -----------
Total 1,710,327 1,923,721 2,092,366
=========== =========== ===========
</TABLE>
There are not any individually material countries with respect to the sales and
operating revenue and long-lived assets included in the Europe and Other areas.
Transfers between reportable business or geographic segments are made at
arms-length prices. Operating income is sales and operating revenue less costs
and operating expenses. Unallocated corporate assets consist primarily of cash
and cash equivalents and marketable securities maintained for general corporate
purposes.
There has been no sales and operating revenue with a single major external
customer for the years ended March 31, 1996, 1997 and 1998.
F-43
<PAGE> 96
The following information is sales and operating revenue and operating income
which show those recognized by geographic origin for the years ended March 31,
1996, 1997 and 1998. In addition to the disclosure requirements under FAS 131,
the company discloses this information as the supplemental information in light
of the disclosure requirement of the Japanese Securities and Exchange Law, which
a Japanese public company is subject to.
<TABLE>
<CAPTION>
Yen in millions
------------------------------------------
Year ended March 31
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Sales and operating revenue:
Japan -
Customers 1,768,132 2,048,406 2,361,734
Intersegment 1,275,251 1,386,422 1,697,655
------------ ------------ ------------
Total 3,043,383 3,434,828 4,059,389
U.S.A. -
Customers 1,250,712 1,672,173 2,156,173
Intersegment 113,121 126,637 153,603
------------ ------------ ------------
Total 1,363,833 1,798,810 2,309,776
Europe -
Customers 886,468 1,100,958 1,338,232
Intersegment 30,299 42,381 62,506
------------ ------------ ------------
Total 916,767 1,143,339 1,400,738
Other -
Customers 687,253 841,597 899,351
Intersegment 509,120 603,518 715,156
------------ ------------ ------------
Total 1,196,373 1,445,115 1,614,507
Elimination (1,927,791) (2,158,958) (2,628,920)
------------ ------------ ------------
Consolidated 4,592,565 5,663,134 6,755,490
============ ============ ============
Operating income:
Japan 147,582 259,376 348,458
U.S.A 32,372 30,928 75,820
Europe 48,621 70,597 74,064
Other 55,772 69,858 69,490
Corporate and elimination (49,023) (60,429) (47,622)
------------ ------------ ------------
Consolidated 235,324 370,330 520,210
============ ============ ============
</TABLE>
F-44
<PAGE> 97
19. Events (unaudited) subsequent to the date
of the report of independent accountants:
In May 1998, Loews Theatres Exhibition Group (Loews Theatres), a unit of Sony
Pictures Entertainment (SPE), and Cineplex Odeon Corporation, a Canadian theatre
chain, combined and created Loews Cineplex Entertainment Corporation. In
conjunction with the combination, the company received approximately 53.6
billion yen in cash from the repayment of all of the intercompany debt of Loews
Theatres, which was refinanced with third party debt, and receipt of a dividend.
As a result of the combination, SPE and certain of its subsidiaries owned 51.1%
(representing 49.9% of the voting shares) of Loews Cineplex Entertainment
Corporation. After giving effect to the public offering of shares of common
stock of Loews Cineplex Entertainment Corporation in August 1998, SPE and
certain of its subsidiaries currently own 38.5% of Loews Cineplex Entertainment
Corporation. The new company has been deconsolidated and the company accounts
for it on the equity basis for the fiscal year ending March 31, 1999. The
revenues and operating income of Loews Theatres for the fiscal year ended March
31, 1998 were approximately 56.3 billion yen and 2.5 billion yen, respectively.
In addition, the company recorded a gain of approximately 4.8 billion yen on the
combination in the first quarter ended June 30, 1998.
On August 12, 1998, SPE, together with certain partners, completed the
acquisition of Telemundo Group, Inc. (Telemundo), one of two Spanish-language
television broadcast companies currently operated in the United States. Through
a series of transactions, SPE now owns 50% of a newly formed company holding
Telemundo's network operations and 24.95% of an entity holding Telemundo's
station operations, including seven full-power UHF stations. SPE's initial
capital investment totaled approximately 15.1 billion yen.
F-45
<PAGE> 98
SCHEDULE II
SONY CORPORATION
AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Yen in millions
--------------------------------------------------------------------
Additions
charged
Balance at to costs Balance
beginning and Deductions Other at end of
of period expenses (Note 1) (Note 2) period
------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
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
========= ======== ======== ======== =========
Year ended March 31, 1998:
Allowance for doubtful
accounts and sales returns 93,732 70,836 (55,855) 6,198 114,911
========= ======== ======== ======== =========
Notes: 1. Amounts written off.
2. Translation adjustment.
</TABLE>
<TABLE>
<CAPTION>
Balance at Balance
beginning Other at end of
of period Additions Deductions (Note 1) period
------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
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
========= ======== ======== ======== =========
Year ended March 31, 1998:
Valuation allowance
- Deferred tax assets 122,258 13,102 (15,032) 5,580 125,908
========= ======== ======== ======== =========
Note: 1. Translation adjustment.
</TABLE>
F-46
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<C> <S>
1 Articles of Incorporation, as amended (English translation)
2 Regulations of the Board of Directors, as amended (English
translation)
3 Certificate of English translations
</TABLE>
<PAGE> 1
(TRANSLATION)
ARTICLES OF INCORPORATION
SONY CORPORATION
<PAGE> 2
<TABLE>
<S> <C> <C>
Enacted: April 19, 1946
Amended: August 3, 1946 June 29, 1962
November 20, 1946 December 27, 1962
May 27, 1947 December 27, 1966
June 30, 1947 December 26, 1970
November 22, 1947 June 29, 1971
May 3, 1948 June 29, 1972
August 30, 1948 December 26, 1974
March 4, 1950 January 30, 1976
May 27, 1950 January 28, 1982
November 25, 1950 January 28, 1983
June 23, 1951 January 30, 1987
November 30, 1951 June 27, 1991
February 10, 1953 June 29, 1994
June 26, 1954 June 27, 1997
June 25, 1955 June 26, 1998
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
</TABLE>
<PAGE> 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;
(6) Manufacture and sale of transportation machines and equipment and
petroleum and coal products;
-1-
<PAGE> 4
(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.
ARTICLE 6. (Shares to be Issued)
1. The Corporation may issue either par value shares or non-par
value shares, or both.
-2-
<PAGE> 5
2. The amount of each par value share to be issued by the
Corporation shall be fifty yen (\50).
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.
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
-3-
<PAGE> 6
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.
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.
-4-
<PAGE> 7
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.
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.
-5-
<PAGE> 8
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.
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.
-6-
<PAGE> 9
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.
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.
-7-
<PAGE> 10
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.
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.
-8-
<PAGE> 11
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.
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 nest 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)
1. 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.
2. In addition to the preceding paragraph, on and after June 27,
1998, the Corporation may, by a resolution of the Board of Directors, purchase
shares of the Corporation and retire them with its additional paid-in-capital up
to a total not exceeding thirty million (30,000,000) shares, and at prices in
total not exceeding four hundred billion yen (400,000,000,000).
ARTICLE 40. (Granting of Share Subscription Rights)
The Corporation may grant share subscription rights to Directors and/or
employees pursuant to Article 280-19 of the Commercial Code.
-9-
<PAGE> 1
(TRANSLATION)
REGULATIONS OF THE BOARD OF DIRECTORS
(ENFORCEMENT: JUNE 26, 1998)
SONY CORPORATION
<PAGE> 2
(TRANSLATION)
Enforcement: June 26, 1998
REGULATIONS OF THE BOARD OF DIRECTORS
OF
SONY CORPORATION
(Sony Kabushiki Kaisha)
(Purpose)
1. (1) The Board of Directors shall determine matters to be approved by
the Board of Directors under the Commercial Code.
(2) The Board of Directors shall determine policies with respect to
the management and operation of the Corporation and the Sony Group companies.
(3) The Board of Directors shall oversee 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 Board
of Management consisting of Directors.
(3) The Board of Directors may, by its resolution, designate the
Nominating Committee and the Compensation Committee, each consisting of
Directors and persons approved by the Board 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.
-1-
<PAGE> 3
(Convocation)
4. (1) Meetings of the Board of Directors shall, unless otherwise
provided by laws or ordinances, be convened by the Chairman and Chief Executive
Officer and Director.
(2) When the office of the Chairman and Chief Executive Officer 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 Chief Executive Officer and Director shall act as
chairman of the meetings of the Board of Directors. When the office of the
Chairman and Chief Executive Officer 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-
<PAGE> 4
(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.
(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 financial results 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 and Chief Executive Officer, the Vice
Chairman of the Board, the President and Chief Operating
Officer and the Executive Deputy Presidents.
(3) Determination of the order of the Directors.
-3-
<PAGE> 5
(4) Determination of the amounts of compensation, 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.
(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:
<TABLE>
<CAPTION>
<C> <S>
Conversion between par-value shares and non-par-value shares
(1) 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.
Granting of rights to subscribe for new shares to
(5) shareholders or other persons.
(6) Capitalization of reserves.
(7) Splitting of shares.
Issuance of debentures, convertible bonds and bonds with
(8) warrants to subscribe for new shares.
Appointment of a transfer agent and designation of its
(9) handling offices.
Enactment, amendment and abolishment of the Share Handling
(10) Regulations.
Closing of the register of shareholders and fixing of a
(11) record date.
Listing of shares and debentures on stock exchanges and
(12) delisting thereof.
</TABLE>
-4-
<PAGE> 6
(6) Matters concerning personnel and organization:
(1) Appointment and removal of managers and other important
employees.
(2) Establishment, amendment and cancellation of branches and
other important organizations.
(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 Sony Group companies.
(2) Establishment, merger and acquisition, dissolution,
liquidation or other disposition of Sony Group companies
which has a material nature.
(3) Approval of the listing of shares 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 Sony Group
companies which has a material nature.
(5) Approval of the matter of organization of Sony Group
companies which has a material nature.
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(6) Approval of the performance of operation of business of Sony
Group companies which has a material nature.
(9) Other matters:
(1) Matters entrusted by the resolutions of the general meetings
of shareholders.
(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.
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<PAGE> 8
(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.
(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 26, 1998.
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CERTIFICATE OF ENGLISH TRANSLATIONS
Pursuant to Rule 306 of Regulation S-T, the registrant certifies that the two
exhibits in Item 19 (b), (I) Articles of Incorporation, (2) Regulations of the
Board of Directors, are fair and accurate English translations.
SONY CORPORATION
......................
(Registrant)
BY /s/ TAMOTSU IBA
............................
Tamotsu Iba
Executive Deputy President, and C.F.O.
Date September 14, 1998
.........................
