Year Ended March 31, 1999 March Ended Year Annual Report 1999 Sony Corporation Annual Report 1999 Sony Corporation Annual Report 1999 Financial Highlights Sony Corporation and Consolidated Subsidiaries Year ended March 31 Dollars in Yen in millions thousands except except per share amountsPercent change per share amounts OPERATING RESULTS 1998 1999 1999/1998 1999 FOR THE YEAR Sales and operating revenue . ¥6,755,490 ¥6,794,619 +0.6% $56,621,825 Operating income . 520,210 338,649 –34.9 2,822,075 Income before income taxes . 453,749 368,128 –18.9 3,067,733 Net income . 222,068 179,004 –19.4 1,491,700 Per share data: Net income–Basic . ¥ 557.7 ¥ 436.9 –21.7% $ 3.64 –Diluted . 483.4 391.0 –19.1 3.26 Cash dividends . 60.0 50.0 0.42 AT YEAR-END Stockholders’ equity . ¥1,815,555 ¥1,823,665 +0.4% $15,197,208 Total assets . 6,403,043 6,299,053 –1.6 52,492,108 Number of employees . 173,000 177,000 Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥120=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 1999. 2. As of March 31, 1999, Sony had 1,041 consolidated subsidiaries. It has applied the equity accounting method in respect to its 65 affiliated companies. 3. Cash dividends per share for the year ended March 31, 1999 include a year-end dividend of ¥25 ($0.21), which is subject to approval of the ordinary general meeting of stockholders to be held on June 29, 1999. 4. Income before income taxes and net income figures for the fiscal year ended March 31, 1999 include gains of ¥58.7 billion ($489 million) and ¥30.7 billion ($256 million), respectively, which resulted from a contribution of securities to an outside trust for employee retirement benefit purposes. TABLE OF CONTENTS To Our Shareholders 1 29 Management’s Discussion and Analysis of Business Overview 6 Financial Condition and Results of Operations Topics 8 43 Quarterly Financial and Stock Information Review of Operations 44 Five-Year Summary of Selected Financial Data Electronics 12 45 Composition of Sales and Operating Revenue Game 18 by Business and Geographic Segment Music 20 46 Consolidated Balance Sheets Pictures 22 48 Consolidated Statements of Income Insurance 24 49 Consolidated Statements of Cash Flows Environmental Activities at Sony 26 50 Consolidated Statements of Changes in Management 28 Stockholders’ Equity 52 Notes to Consolidated Financial Statements 76 Reports of Independent Accountants 78 Investor Information Cautionary Statements 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. These statements are based on management’s assumptions and beliefs in light of the information currently available to it and therefore you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. Such factors 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, and other currencies in which Sony makes significant sales or in which Sony’s assets and liabilities are denominated; and (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 developments in technology (particularly in the Electronics business), and subjective and changing consumer preferences (particularly in the Game, Music and Pictures businesses). Sony Corporation Annual Report 1999 To Our Shareholders 1 The fiscal year ended March 31, 1999 was not only a very challenging one but also a very important one in which Sony began a reorganization focused on the future. page During the year under review, although Sony’s consolidated sales and operating revenue rose 0.6% to ¥6,794.6 billion ($56,622 million), operating income fell 34.9% to ¥338.6 billion ($2,822 million) compared with the previous year. Sony expects the difficult oper- ating environment to continue for at least part of its current fiscal year which started in April 1999. In this environment, Sony took significant steps toward growth and reorganization. In March 1999, Sony Computer Entertainment (SCE) announced the basic design of the next generation PlayStation. In the same month, Sony also announced a wide-ranging corporate reorganization and reinforcement of group management capabilities, including the reorga- nizing and strengthening of our Electronics business as well as the privatization of three Sony Group subsidiaries. These announcements appear to have been received favorably by investors. We recog- nize that shareholders have considerable expectations of our management strategies, and we are committed to the steady implementation of these strategies. REALIGNING AND STRENGTHENING THE ELECTRONICS BUSINESS As part of the new group framework, Sony reorganized the internal company structure of the Electronics business in April 1999. The existing Electronics business was consolidated into three main business units: the Home Network Company, the Personal IT Network Com- pany, and the Core Technology & Network Company. Separately, SCE, which is responsible for the PlayStation business, was designated as another main business unit related to the Electronics business. Research and support functions have been transferred from the group headquarters to the three Network Companies. In addition, to encourage autonomy and independence, we have transferred management authority to these Companies. Also, as appropriate, the Net- work Companies may independently or jointly create new ventures. With these steps, Sony aims to flexibly take advantage of new business opportunities in today’s rapidly changing digital network era. Sony Corporation Annual Report 1999 2 Furthermore, Sony operates Digital Network Solutions (DNS) directly under the group headquarters in order to focus on building new network-related businesses. By developing page essential technologies and charting business strategies, DNS will strive to create network business platforms that directly link Sony with its customers. DNS aims to support the building of network services for the distribution of not only digital content, such as music and movies, but also insurance and financial services. Finally, to enhance the profitability of the Electronics business, we have continued to review our cost structure. We will set concrete goals and make aggressive efforts to improve our supply chain, reorganize our manufacturing infrastructure, and maintain proper em- ployment levels. With regard to manufacturing, we plan to consolidate our current 70 manufacturing facilities into approximately 55 by the end of March 2003. With regard to human resources, we intend to reduce the total group headcount by approximately 10% by the end of March 2003, including normal attrition. PRIVATIZING THREE SONY GROUP SUBSIDIARIES Sony Corporation has agreed with Sony Music Entertainment (Japan) Inc., Sony Chemicals Corporation, and Sony Precision Technology Inc. to make each of these Sony Group compa- nies a 100% owned subsidiary of Sony Corporation, with January 1, 2000 as a target date. Sony believes this action will enable it to deepen cooperation among its businesses, maxi- mize the merits of working together, and implement group-wide strategies more quickly. We plan to carry out these transactions through a share exchange mechanism that will be permitted if certain proposed amendments to the Commercial Code, which are to be considered during the 1999 ordinary session of the Japanese Diet, are adopted. If these amendments are not adopted, we plan to privatize the three companies under existing law. We estimate that the integration of these companies will result in the issuance of approxi- mately 33 million new shares of Sony Corporation common stock. Whichever method is used, it will be necessary for the appropriate shareholder resolutions to be adopted both by Sony Corporation and by each subsidiary. Sony Corporation Annual Report 1999 3 page Norio Ohga Nobuyuki Idei Chairman and President and Chief Executive Officer Co-Chief Executive Officer Sony Corporation Annual Report 1999 4 AIMING TO CREATE GREATER SHAREHOLDER VALUE Our corporate reorganization aims to maximize shareholder value. To meet this goal, we are page working to increase the profitability of the Electronics business, our largest unit, and to reorganize our group companies and internal divisions for quicker decision-making and execution in a rapidly changing environment. Furthermore, we have decided to review the functioning of our group headquarters in order to clarify its role as an “active investor” that puts shareholder value above all else. This reorganization also clarifies the Board’s role as a supervisor in order to improve its monitoring ability. In addition, we included the top managers of each business unit in headquarters’ Management Committee in order to promote closer mutual ties among busi- ness units. With this reorganization, we are moving to separate the functions of the Board, which serves to make decisions and supervise, and the Management Committee, which carries out day-to-day management. In this way, we intend to facilitate