SONY

Business Context and Reporting Period

This Form 20-F covers Sony Corporation (Sony) for the fiscal year ended March 31, 1999. Sony is a global conglomerate engaged in electronics, games, music, pictures, and insurance. The reporting period was characterized by a worsening global economic environment, particularly in Asia, Russia, and Latin America, alongside a rapid appreciation of the Japanese yen in the second half of the year. Sony reorganized its Electronics business into three main units effective April 1, 1999, and announced plans to privatize three listed subsidiaries (SMEJ, SCC, SPT) by January 1, 2000.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Stagnation: Consolidated sales increased only 0.6% to 6,794.6 billion yen, driven by declines in Electronics and Pictures segments, partially offset by growth in Game, Music, and Insurance.
• Profitability Decline: Operating income fell 34.9% to 338.6 billion yen. The Electronics segment saw a 58.7% drop in operating income due to price competition, increased R&D, and inventory reduction efforts. Net income decreased 19.4% to 179.0 billion yen.
• Foreign Exchange Impact: While the average yen value depreciated slightly compared to the prior year (positively impacting reported results), a sharp appreciation in the second half of the year adversely affected business results. On a constant currency basis, sales and operating income would have declined by approximately 2% and 49%, respectively.
• Balance Sheet: Total assets decreased 1.6% to 6,299.1 billion yen, primarily due to yen appreciation. Long-term debt decreased 6.1% due to debt redemptions and convertible bond conversions. Cash and cash equivalents increased 39.9%.
• Unusual Items: Net income included a 30.7 billion yen (net of tax) gain from the contribution of marketable securities to an employee retirement benefit trust.

Guidance, Outlook, and Risks

• Outlook for FY2000: Management expects sales to decline slightly or remain flat compared to FY1999, while earnings are expected to decline substantially. This is due to anticipated gross margin deterioration, intensifying price competition, and necessary investments in digitization and networking.
• Strategic Initiatives: Sony plans to introduce the next-generation PlayStation console in Japan before the end of FY2000. Capital expenditures for FY2000 are expected to be approximately 430 billion yen, including 100 billion yen for the new game console.
• Accounting Changes: A proposed FASB Statement of Position regarding film accounting could result in a cumulative non-cash charge of approximately 950 million U.S. dollars if implemented as drafted, though the final impact is uncertain.
• Risks: Key risks include continued economic weakness in key markets, further yen appreciation, intense competition in the electronics and music sectors, and the Year 2000 (Y2K) issue, for which Sony estimates total compliance costs of approximately 21.2 billion yen (external and internal).

Investor Verification Checklist

• Electronics Segment Margins: Verify the sustainability of the Electronics segment's operating margin (2.8%) given the aggressive inventory reduction and price competition.
• Next-Gen Console Costs: Monitor the impact of depreciation related to the "Emotion Engine" and "Graphics Synthesizer" for the new PlayStation on FY2000 profitability.
• Privatization of Subsidiaries: Confirm the completion of the share exchange to privatize SMEJ, SCC, and SPT, and the resulting impact on capital structure and goodwill amortization.
• Foreign Exchange Sensitivity: Assess the exposure to yen fluctuations, as a significant portion of sales (approx. 72%) is generated outside Japan.
• Legal Proceedings: Review the status of antitrust investigations regarding CD pricing in the U.S. and Italy, and the potential for future litigation costs.