Annual Report 2002 Annual Report 2002 year ended March 31, 2002 Sony Corporation Sony Corporation Annual Report 2002 Financial Highlights Sony Corporation and Consolidated Subsidiaries Year ended March 31 Yen in millions Dollars in except per share amounts and millions except number of employeesPercent change per share amounts 2001 2002 2002/2001 2002 FOR THE YEAR Sales and operating revenue ¥7,314,824 ¥7,578,258 +3.6% $56,979 Operating income 225,346 134,631 – 40.3 1,012 Income before income taxes 265,868 92,775 – 65.1 698 Income before cumulative effect of accounting changes 121,227 9,332 –92.3 70 Net income 16,754 15,310 –8.6 115 Per share data: Income before cumulative effect of accounting changes —Basic ¥ 132.64 ¥ 10.21 – 92.3% $ 0.08 —Diluted 124.36 10.18 – 91.8 0.08 Net income —Basic 18.33 16.72 –8.8 0.13 —Diluted 19.28 16.67 – 13.5 0.13 Cash dividends 25.00 25.00 0.19 AT YEAR-END Stockholders‘ equity ¥2,315,453 ¥2,370,410 +2.4% $17,823 Total assets 7,827,966 8,185,795 +4.6 61,547 Number of employees 181,800 168,000 Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥133=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 29, 2002. 2. Cash dividends per share of common stock for the year ended March 31, 2002 include a dividend which is subject to approval of the Ordinary General Meeting of Shareholders to be held on June 20, 2002. 3. In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No.142 “Goodwill and Other Intangible Assets.” Sony adopted FAS No. 142 retroactive to April 1, 2001. As a result, Sony‘s operating income and income before income taxes for the year ended March 31, 2002 increased by ¥20.1 billion ($151 million) and income before cumulative effect of accounting changes as well as net income for the year ended March 31, 2002 increased by ¥18.9 billion ($142 million). 4. On April 1, 2001, Sony adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by FAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of FASB statement No. 133.” As a result, Sony‘s operating income, income before income taxes and net income for the year ended March 31, 2002 decreased by ¥3.0 billion ($23 million), ¥3.4 billion ($26 million) and ¥2.2 billion ($16 million), respectively. Additionally, Sony recorded a one-time non-cash after-tax unrealized gain of ¥1.1 billion ($8 million) in accumulated other comprehensive income in the consolidated balance sheet, as well as an after-tax gain of ¥6.0 billion ($45 million) in the cumulative effect of accounting changes in the consolidated statement of income. 5. In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 00-2, “Accounting by Producers or Distributors of Films.” Sony adopted SOP 00-2 retroactive to April 1, 2000. As a result, Sony’s net income for the year ended March 31, 2001 included a one-time, non-cash charge with no tax effect of ¥101.7 billion, primarily to reduce the carrying value of its film inventory. 6. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” Sony adopted SAB No. 101 in the fourth quarter ended March 31, 2001 retroactive to April 1, 2000. As a result, a one-time non-cash cumulative effect adjustment of ¥2.8 billion was recorded in the income statement directly above the caption of “Net income” for a change in an accounting principle. Sony Corporation Annual Report 2002 Contents To Our Shareholders . 2 Message from Top Management . 5 At a Glance . 20 Sony World . 24 Research and Development . 48 Corporate Social Responsibility . 51 Management . 54 Financial Section . 57 Stock Information . 76 New Directors, New Statutory Auditor and Statutory Auditors . 77 Investor Information . 80 Cautionary Statement with Respect to Forward–Looking Statements Statements made in this annual report with respect to Sony‘s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include but are not limited to those using words such as “believe”, “expect”, “plans”, “strategy”, “prospects”, “forecast”, “estimate”, “project”, “anticipate”, “may” or “might” and words of similar meaning in connection with a discussion of future operations or financial performance. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management‘s assumptions and beliefs in light of the information currently available to it. Sony cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on any obligation of Sony to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Sony disclaims any such obligation. Risks and uncertainties that might affect Sony include, but are not limited to (i) general economic conditions in Sony‘s markets, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, euro, and other currencies in which Sony makes significant sales or in which Sony‘s assets and liabilities are dominated; (iii) Sony‘s ability to continue to design and develop and win acceptance of its products and services, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology (particularly in the Electronics business), and subjective and changing consumer preferences (particularly in the Game, Music, and Pictures businesses), (iv) Sony‘s ability to implement successfully the restructuring of its Electronics business and its network strategy for its Electronics business; (v) Sony‘s ability to compete and develop and implement successful sales and distribution strategies in light of internet and other technologi- cal developments in its Music and Pictures businesses; (vi) Sony‘s continued ability to devote sufficient resources to research and development and capital expendi- tures; (vii) the success of Sony‘s joint ventures and alliances; and (viii) the outcome of contingencies. Risks and uncertainties also include the impact of the terrorist attacks of September 11, 2001 and any future events with material unforeseen impacts. 1 Sony Corporation Annual Report 2002 To Our Shareholders Review of Performance in the Year Ended March 2002 (Fiscal Year 2001) The business environment during Fiscal Year 2001 was an especially challenging one, with the collapse of the IT bubble and the impact of the terrorist attacks in the U.S. causing the world economy to stagnate. Sony had no choice but to revise downward, twice, the performance forecast we made at the beginning of the year. Despite the severe operating climate, consolidated sales increased 3.6% compared with the previous year, mostly attributable to the depreciation of the yen and a large increase in sales of the Game segment. On the other hand, operating income of the Group as a whole decreased 40.3% year on year, with the Electronics segment experiencing a significant drop in income despite an increase in Game segment income. In terms of restructuring, we were able to achieve a year ahead of schedule the headcount and manufacturing facility reduction targets we announced at our Corporate Strategy Meeting in March 1999. Furthermore, in October 2001 we established a joint venture with Ericsson of Sweden for our mobile phone handset business, and we announced our decision to take Aiwa Co., Ltd. private in October 2002. These and other actions made the 2001 Fiscal Year a year in which we responded to many concerns raised by shareholders and investors. Sony Group’s Management Strategy Sony is working to build an environment in which individuals can enjoy their favorite content and services whenever and wherever they want, by 2005, the year in which we believe the broadband network era will achieve critical mass. To make this new world a reality, we have positioned three business domains – Electronics, Game, and Content – as core sectors that will form the nucleus of business at Sony Group, and we have concentrated management resources in these areas. In anticipation of the broadband network era, each core sector with its own mission, will enhance Sony’s competitiveness by increasing both economic value and brand value. Aiming to make our Electronics business number one in the field of network consumer electronics, we will introduce hardware products that are especially attractive at home and on the move. In the Game business, we will further develop our PlayStation business and create a broadband computer entertainment industry that transcends the existing game industry framework. In our Content business, we will create high-quality entertainment content, not only in Hollywood, but also in other regions and distribute them globally. 2 To Our Shareholders Nobuyuki Idei Kunitake Ando Chairman and Chief Executive Officer President and Chief Operating Officer 3 Sony Corporation Annual Report 2002 In addition to augmenting the competitiveness of each core sector, we will advance the formulation of a new business model for the broadband era. In order to build a close cooperative relationship between the Electronics, Game and Content sectors, and to create a platform for this cooperation to expand, in April 2002, we established the Network Application and Content Service Sector (NACS).