Contents Financial Highlights 1 Operating Performance Highlights 2 To Our Shareholders 4 Review of Operations 8 Electronics 8 Game 13 Entertainment 16 Financial Services 20 Other 22 R&D Strategies and Selection of Key Technological Fields 23 The Sony Challenge: Seeing is Believing 26 Corporate Governance/New Directors and Corporate Executive Officers 32 Corporate Social Responsibility 34 Financial Section 35 Stock Information 130 Stock Acquisition Rights and Bond Information 131 Investor Information 132 Cautionary Statement 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 statements using words such as “believe”, “expect”, “plans”, “strategy”, “prospects”, “forecast”, “estimate”, “project”, “anticipate”, “aim”, “may” or “might” and words of similar meaning in connection with a discussion of future operations, finan- cial performance, events or conditions. 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 cur- rently 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 there- fore 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) the global economic environment in which Sony operates, as well as the economic conditions in Sony’s markets, particularly levels of con- sumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, the euro and other currencies in which Sony makes significant sales or in which Sony’s assets and liabilities are denomi- nated; (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 intro- ductions, rapid development in technology and subjective and chang- ing consumer preferences (particularly in the Electronics, Game, Music, Pictures and Other segments); (iv) Sony’s ability to implement successfully personnel reduction and other business reorganization activities in its Electronics, Music, Pictures and Other segments; (v) Sony’s ability to implement successfully its network strategy for its Electronics, Music, Pictures and Other segments and to develop and implement successful sales and distribution strategies in its Music, Pictures and Other segments in light of the Internet and other techno- logical developments; (vi) Sony’s continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to correctly prioritize investments (particularly in the Electronics segment); (vii) shifts in customer demand for financial ser- vices such as life insurance and failure to conduct successful Asset Liability Management and (viii) the success of Sony’s joint ventures and alliances. Risks and uncertainties also include the impact of any future events with material unforeseen impacts. SONY AR-E0629 Page 36 05.7.6, 2:16 PM Adobe PageMaker 6.0J/PPC Financial Highlights Sony Corporation and Consolidated Subsidiaries—Years ended March 31 Dollars in millions* Yen in millions Percent except per except per share amounts and number of employees change share amounts 2003 2004 2005 2005/2004 2005 FOR THE YEAR Sales and operating revenue . ¥7,473,633 ¥7,496,391 ¥7,159,616 –4.5% $66,912 Operating income . 185,440 98,902 113,919 +15.2 1,065 Income before income taxes . 247,621 144,067 157,207 +9.1 1,469 Income taxes . 80,831 52,774 16,044 –69.6 150 Equity in net income (loss) of affiliated companies . (44,690) 1,714 29,039 +1,594.2 271 Income before cumulative effect of an accounting change . 115,519 90,628 168,551 +86.0 1,575 Net income . 115,519 88,511 163,838 +85.1 1,531 Cash flows from operating activities . 853,788 632,635 646,997 +2.3 6,047 Cash flows from investing activities . (706,425) (761,792) (931,172) — (8,703) Per share data: (Yen, dollars) Income before cumulative effect of an accounting change —Basic . ¥ 125.74. ¥ 98.26. ¥ 180.96. +84.2% $ 1.69. —Diluted . 118.21. 89.03. 162.59. +82.6 1.52. Net income —Basic . 125.74. 95.97. 175.90. +83.3 1.64. —Diluted . 118.21. 87.00. 158.07. +81.7 1.48. Cash dividends . 25.00. 25.00. 25.00. — 0.23. AT YEAR-END Stockholders’ equity. ¥2,280,895 ¥2,378,002 ¥2,870,338 +20.7% $26,826 Total assets . 8,370,545 9,090,662 9,499,100 +4.5 88,777 Number of employees . 161,100 162,000 151,400 –6.5% * U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2005. Please refer to pages 70 and 71 for detailed footnotes to the table above. Sales and operating revenue Net income and ROE Cash flows and operating income (Yen in trillions) (Yen in billions) (Yen in billions) (%) (Yen in billions) 8 800 200 8 1,000 6.2% 6 600 150 6 500 5.0% 4 400 100 4 0 3.8% 2 200 50 2 –500 0 0 0 0 –1,000 2003 2004 2005 2003 2004 2005 2003 2004 2005 ■ Sales and operating revenue (left) ■ Net income ■ Cash flows from operating activities ■ Operating income (right) ● Return on equity ■ Cash flows from investing activities *Years ended March 31 *Years ended March 31 *Years ended March 31 Sony Corporation 1 SONY AR-E0629 Page 1 05.7.6, 2:42 PM Adobe PageMaker 6.0J/PPC Operating Performance Highlights Sales (Financial Services Revenues) and Financial Highlights by Business Segment Operating Income (Loss) (Years ended March 31) (Yen in billions) 2005/2004 Electronics 5,096.0 5,042.3 5,021.6 (Percent (Yen in billions, %) 2003 2004 2005 change) Sales ¥5,096.0 ¥5,042.3 ¥5,021.6 –0.4% 65.9 66.5% Operating (loss) income 65.9. (6.8.) (34.3.) —% (6.8) Operating margin 1.3 — — % (34.3) 2003 2004 2005 Assets 2,974.0 2,995.3 (3,434.1) ■ Sales ■ Operating (loss) income (Yen in billions) 2005/2004 Game (Percent 955.0 (Yen in billions, %) 2003 2004 2005 change) 112.7 780.2 729.8 Sales ¥955.0 ¥780.2 ¥729.8 –6.5% 9.7% 67.6 Operating income 112.7 67.6 43.2 –36.1% 43.2 Operating margin 11.8 8.7 5.9 Assets 673.2 684.2 482.0 2003 2004 2005 ■ Sales ■ Operating income (Yen in billions) 2005/2004 Music (Percent (Yen in billions, %) 2003 2004 2005 change) 466.3 440.3 Sales ¥466.3 ¥440.3 ¥249.1 –43.4% 3.3% 249.1 Operating income 8.8 (loss) (28.3.)(6.0.) 8.8. —% (6.0) Operating margin ——3.5 % (28.3) 2003 2004 2005 Assets 500.6 484.0 325.9 ■ Sales ■ Operating income (loss) (Yen in billions) 2005/2004 Pictures (Percent (Yen in billions, %) 2003 2004 2005 change) 802.8 756.4 733.7 Sales ¥802.8 ¥756.4 ¥733.7 –3.0% 9.7% 59.0 63.9 Operating income 59.0 35.2 63.9 +81.4% 35.2 Operating margin 7.3 4.7 8.7 Assets 868.4 856.5 863.1 2003 2004 2005 ■ Sales ■ Operating income (Yen in billions) Financial 2005/2004 Financial (Percent Services (Yen in billions, %) 2003 2004 2005 change) Financial services 593.5 537.3 560.6 revenues ¥537.3 ¥593.5 ¥560.6 –5.6% 7.4% 55.2 55.5 Operating income 22.8 55.2 55.5 0.+0.6% 22.8 Operating margin 4.2 9.3 0.9.9 2003 2004 2005 Assets 2,897.1 3,475.0 3,885.5 0.0 ■ Financial Services revenues ■ Operating income (Yen in billions) 2005/2004 Other (Percent (Yen in billions, %) 2003 2004 2005 change) Sales ¥261.1 ¥268.3 ¥254.4 –5.2% 261.1 268.3 254.4 3.4% Operating loss (28.3.) (12.1.) (4.1.) —% Operating margin ——— % (4.1) (12.1) (28.3) Assets 333.5 371.7 347.9 2003 2004 2005 ■ Sales ■ Operating loss Notes: 1. Sales=Sales and operating revenue 2. Operating margin=Operating income / Sales and operating revenue x 100 2 Sony Corporation 3. Includes intersegment transactions SONY AR-E0629 Page 2 05.7.6, 2:42 PM Adobe PageMaker 6.0J/PPC Description of Business Fiscal Year in Review The Electronics segment com- • Segment sales were essentially level. Calculated using the same exchange rates as the previous fiscal year, prises audio, video, televisions, segment sales edged up 1%. information and communications • Sales of flat panel televisions, Cyber-shot digital still cameras and liquid crystal display (LCD) rear-projection equipment, semiconductors, televisions increased, while sales of cathode-ray tube (CRT) televisions and portable audio products declined. components and other products. • Despite a decrease in restructuring expenses, the segment’s operating loss widened as falling sales prices prompted a further increase in the cost of sales ratio. Products contributing to the worsening of the segment’s operating loss included CRT televisions, portable audio products and video cameras.