Annual Reports

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  • 20-F (Jun 28, 2010)

 
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Sony 20-F 2009
Sony Corporation
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
     
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
     
 
or
     
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
     
    For the fiscal year ended March 31, 2009
     
 
or
     
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
     
    For the transition period from/to
     
 
or
     
     
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
     
    Date of event requiring this shell company report:
     
 
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)
 
7-1, KONAN 1-CHOME, MINATO-KU,
TOKYO 108-0075 JAPAN
(Address of principal executive offices)
 
Samuel Levenson, Senior Vice President, Investor Relations
 
Sony Corporation of America
550 Madison Avenue
New York, NY 10022
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
 
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
American Depositary Shares*
  New York Stock Exchange
Common Stock**
  New York Stock Exchange
 
  American Depositary Shares evidenced by American Depositary Receipts.
Each American Depositary Share represents one share of Common Stock.
 
**  No par value per share
Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
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:
 
         
    Outstanding as of
    March 31, 2009
  March 31, 2009
Title of Class
 
(Tokyo Time)
 
(New York Time)
Common Stock
  1,003,522,077    
American Depositary Shares
      118,672,923
 
Indicate by check mark if the registrant is a well-seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ
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.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer o Accelerated filer o Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP þ International Financial Reporting Standards as issued by the International Accounting Standards Board o Other o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o       Item 18 þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
 


Table of Contents

 
 
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,” “intend,” “seek,” “may,” “might,” “could” or “should,” and words of similar meaning in connection with a discussion of future operations, financial 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 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) the global economic environment in which Sony operates and the economic conditions in Sony’s markets, particularly levels of consumer spending as well as the recent worldwide crisis in the financial markets and housing sectors; (ii) exchange rates, particularly between the yen and the U.S. dollar, the euro and other currencies in which Sony makes significant sales and incurs production costs, or in which Sony’s assets and liabilities are denominated; (iii) Sony’s ability to continue to design and develop and win acceptance of, as well as achieve sufficient cost reductions for, its products and services, including newly introduced platforms within the Game segment, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology and subjective and changing consumer preferences (particularly in the Electronics, Game and Pictures segments, and the music business); (iv) Sony’s ability and timing to recoup large-scale investments required for technology development and increasing production capacity; (v) Sony’s ability to implement successfully business restructuring and transformation efforts; (vi) Sony’s ability to implement successfully its hardware, software, and content integration strategy for its Electronics, Game and Pictures segments, and All Other, including the music business, and to develop and implement successful sales and distribution strategies in its Pictures segment and the music business in light of the Internet and other technological developments; (vii) 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); (viii) Sony’s ability to maintain product quality (particularly in the Electronics and Game segments); (ix) Sony’s ability to secure adequate funding to finance restructuring activities and capital investments given the current state of global capital markets; (x) the success of Sony’s joint ventures and alliances; (xi) the outcome of pending legal and/or regulatory proceedings; (xii) shifts in customer demand for financial services such as life insurance and Sony’s ability to conduct successful asset liability management in the Financial Services segment; and (xiii) the impact of unfavorable conditions or developments (including market fluctuations or volatility) in the Japanese equity markets on the revenue and operating income of the Financial Services segment.  Risks and uncertainties also include the impact of any future events with material adverse impacts.
 
Important information regarding risks and uncertainties is also set forth elsewhere in this annual report, including in “Risk Factors” included in “Item 3. Key Information,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” “Legal Proceedings” included in “Item 8. Financial Information,” Sony’s consolidated financial statements referenced in “Item 8. Financial Information,” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”
 
In this document, Sony Corporation and its consolidated subsidiaries are together referred to as “Sony.”  In addition, sales and operating revenue are referred to as “sales” in the narrative description except in the consolidated financial statements.
 
As of March 31, 2009, Sony Corporation had 1,242 consolidated subsidiaries (including variable interest entities).  It has applied the equity accounting method with respect to its 85 affiliated companies.


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 EX-1.1 Articles of Incorporation, as amended (English Translation)
 EX-1.2 Share Handling Regulations, as amended (English Translation)
 EX-12.1 302 Certification
 EX-12.2 302 Certification
 EX-13.1 906 Certification
 EX-15.1A Consent of PricewaterhouseCoopers Aarata
 EX-15.1B Consent of PricewaterhouseCoopers AB


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Item 1.  Identity of Directors, Senior Management and Advisers
 
Not Applicable
 
Item 2.  Offer Statistics and Expected Timetable
 
Not Applicable
 
Item 3.  Key Information
 
 
                                         
    Fiscal Year Ended March 31
    2005   2006   2007   2008   2009
    (Yen in millions, Yen per share amounts)
 
Income Statement Data:
                                       
Sales and operating revenue
    7,191,325       7,510,597       8,295,695       8,871,414       7,729,993  
Equity in net income (loss) of affiliated companies*
    29,039       13,176       78,654       100,817       (25,109 )
Operating income (loss)
    174,667       239,592       150,404       475,299       (227,783 )
Income (loss) before income taxes, cumulative effect of accounting changes and minority interest
    186,246       299,506       180,691       567,134       (174,955 )
Income taxes
    16,044       176,515       53,888       203,478       (72,741 )
Income (loss) before cumulative effect of accounting changes
    168,551       123,616       126,328       369,435       (98,938 )
Net income (loss)
    163,838       123,616       126,328       369,435       (98,938 )
Data per Share of Common Stock:
                                       
Income (loss) before cumulative effect of accounting changes
                                       
— Basic
    180.96       122.58       126.15       368.33       (98.59 )
— Diluted
    162.59       116.88       120.29       351.10       (98.59 )
Net income (loss)**
                                       
— Basic
    175.90       122.58       126.15       368.33       (98.59 )
— Diluted
    158.07       116.88       120.29       351.10       (98.59 )
Cash dividends declared
                                       
Interim
    12.50       12.50       12.50       12.50       30.00  
      (12.12 cents )     (10.36 cents )     (10.78 cents )     (11.26 cents )     (31.89 cents )
Fiscal year-end
    12.50       12.50       12.50       12.50       12.50  
      (11.29 cents )     (11.04 cents )     (10.24 cents )     (11.92 cents )     (13.01 cents )
Depreciation and amortization***
    372,865       381,843       400,009       428,010       405,443  
Capital expenditures (additions to fixed assets)
    356,818       384,347       414,138       335,726       332,068  
Research and development costs
    502,008       531,795       543,937       520,568       497,297  
Balance Sheet Data:
                                       
Net working capital (deficit)
    746,803       569,296       994,871       986,296       (190,265 )
Long-term debt
    678,992       764,898       1,001,005       729,059       660,147  
Stockholders’ equity
    2,870,338       3,203,852       3,370,704       3,465,089       2,964,653  
Total assets
    9,499,100       10,607,753       11,716,362       12,552,739       12,013,511  
Number of shares issued at fiscal year-end (thousands of shares of common stock)
    997,211       1,001,680       1,002,897       1,004,443       1,004,535  
Stockholders’ equity per share of common stock
    2,872.21       3,200.85       3,363.77       3,453.25       2,954.25  
 
* Effective from the fiscal year ended March 31, 2009, Sony revised the presentation of its financial information to ensure that it is consistent with the way management views its consolidated operations.  Since Sony considers


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Sony Ericsson Mobile Communications AB (“Sony Ericsson”) and S-LCD Corporation (“S-LCD”) to be integral to Sony’s operations, Sony determined that the most appropriate method to report equity in net income (loss) of all affiliated companies was as a component of operating income (loss).  In connection with this reclassification, consolidated operating income (loss) and consolidated income (loss) before income taxes for all prior periods have been reclassified to conform with the current year presentation.
 
** Refer to Note 22 to the notes to the consolidated financial statements.
 
*** Depreciation and amortization includes amortization expenses for intangible assets and deferred insurance acquisition costs.
 
                                 
    Average*   High   Low   Period-End
    (Yen)
 
Yen Exchange Rates per U.S. Dollar:
                               
Fiscal year ended March 31
                               
2005
    107.49       114.30       102.26       107.22  
2006
    113.15       120.93       104.41       117.78  
2007
    116.92       121.81       110.07       117.56  
2008
    114.31       124.09       96.88       99.85  
2009
    100.62       110.48       87.80       99.15  
2009
                               
January
          94.20       87.80       89.83  
February
          98.55       89.09       97.74  
March
          99.34       93.85       99.15  
April
          100.71       96.49       98.76  
May
          99.24       94.45       95.55  
June (through June 19)
          98.56       95.65       96.15  
 
The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on June 19, 2009 was 96.15 yen = 1 U.S. dollar.
 
* The average yen exchange rates represent average noon buying rates of all the business days during the respective year.
 
Capitalization and Indebtedness
 
Not Applicable
 
Reasons for the Offer and Use of Proceeds
 
Not Applicable
 
 
Sony plans to change its business segment classification to reflect the Company’s reorganization as of April 1, 2009.  Sony expects to report its operating results in line with new business segments from the first quarter of the fiscal year ending March 31, 2010.  Please note that the following Risk Factors section is based on the business segment classification that applies to the fiscal year ended March 31, 2009.
 
This section contains forward-looking statements that are subject to the Cautionary Statement appearing on page 2 of this annual report.  Risks to Sony are also discussed elsewhere in this annual report, including without limitation in the other sections of this annual report referred to in the Cautionary Statement.


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Sony’s Electronics segment produces consumer products that compete against products sold by competitors, including new entrants, on the basis of several factors such as price and function.  In order to produce products that appeal to changing and increasingly diverse consumer preferences, and to overcome the fact that a relatively high percentage of consumers already possess products similar to those that Sony offers, Sony’s Electronics and Game segments must develop superior technology, anticipate consumer tastes and rapidly develop attractive products with competitive selling prices.  In the Electronics segment, Sony faces increasingly intense pricing pressure and shorter product cycles in a variety of consumer product categories.  Sony’s operating results depend on Sony’s ability to continue to develop efficiently and offer Electronics and Game products at competitive prices that meet changing and increasingly diverse consumer preferences.  If Sony is unable to effectively anticipate and counter the ongoing price erosion that frequently accompanies its products, or if the average selling prices of its products decrease faster than Sony is able to reduce its manufacturing costs, Sony’s cost of sales ratio will increase and its operating results and financial condition may be negatively impacted.
 
 
Due to the highly volatile and competitive nature of the PC, consumer electronics and mobile communication industries, Sony must continually introduce new products, services and technologies, enhance existing products and services, and effectively stimulate customer demand for new and upgraded products and services.  The success of new product and service introductions depends on a number of factors, such as the timely and successful completion of development efforts, market acceptance, Sony’s ability to manage the risks associated with new products and production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products and services may have quality or other defects in the early stages of introduction.  New and upgraded products and services can affect the sales and profitability of existing products and services.  Accordingly, Sony cannot determine in advance the ultimate effect that new product introductions and transitions will have on its operating results and financial condition.
 
 
Sony has several business segments in different industries and has many product categories within the Electronics segment, which causes it to face a broad range of existing and new competitors ranging from large international companies to highly specialized entities that focus on only a few businesses.  As a result, Sony may not be able to fund or invest in certain areas of its businesses to the same degree that its competitors do.  Furthermore, these competitors may have greater financial, technical, and marketing resources available to them than those available to the businesses of Sony.  In addition, the businesses within Sony’s Financial Services segment may not be able to compete effectively, especially against established competitors with superior financial, marketing and other relevant resources.  A failure to efficiently anticipate and respond to these new and established competitors may negatively impact Sony’s operating results.
 
 
Sony’s sales and profitability are sensitive to economic, employment and other trends in each of the major markets in which Sony operates.  Most of these markets have recently experienced significant economic downturns which have had, and may continue to have, a material adverse impact on Sony’s operating results and financial position.  In the fiscal year ended March 31, 2009, 24.2 percent, 23.6 percent, and 25.7 percent of Sony’s sales and operating revenue were attributable to Japan, the U.S. and Europe, respectively.
 
Examples of trends that may cause a material impact on Sony’s results include, but are not limited to, reduced demand from either or both end consumers or commercial customers.  An actual or expected deterioration of economic conditions in any of Sony’s major markets could act to depress end consumer confidence and result in an


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actual decline in consumption, which could have a materially adverse impact on Sony’s short- to mid-term sales and profitability.  Commercial customers may experience deterioration in their own businesses due to cash flow shortages, difficulty in obtaining financing and reduced end-user demand, among other factors.  Commercial customers’ difficulty in meeting their obligations to Sony could also have an adverse impact on Sony’s operating results and cash flows.  In addition, the further weakening of economic conditions or rising unemployment may further affect Sony’s business in these respects.
 
Sony’s suppliers are also susceptible to similar conditions that may impact their ability to fulfill their contractual obligations and could impact Sony’s revenues or cost of sales ratio if products and services cannot be obtained at competitive prices.
 
Global economic conditions may also impact Sony in other ways including, for example, further restructuring charges, higher pension and post-retirement benefit costs or funding requirements, additional asset impairment charges, among other factors, any of which could materially impact Sony’s operating results, financial condition and cash flows.
 
 
The global financial and credit markets have been experiencing unprecedented levels of volatility and disruption, generally putting downward pressure on financial and other asset prices and impacting the credit availability even for major global issuers.  The central governments and the central banks of major global economies, including Japan, have recently created a number of programs to help stabilize credit markets and financial institutions and to restore liquidity.  These programs have improved conditions in these credit and financial markets to some extent, but there can be no assurance that these programs, individually or collectively, will continue to have beneficial effects on the markets overall, or that they will resolve the credit and liquidity issues.
 
Historically, Sony’s primary sources of funds are cash flows from operations, offerings of commercial paper and other debt securities such as term debt as well as borrowings from banks and other institutional lenders.  As a result of the impact of the global economic downturn, Sony may become more dependent on commercial paper and debt markets in the future to meet its cash flow requirements.  Although the commercial paper and term debt markets, have continued to be available to Sony during the recent periods of volatility and disruption, there can be no assurance that such sources will continue to be available or, that if available, the cost of such funding will not substantially increase due to market factors.  If current levels of market disruption and volatility continue or worsen, Sony may seek to repay commercial paper and term debt as it becomes due, or to meet other liquidity needs by drawing upon contractually committed lending facilities primarily provided by global banks and/or seeking other sources of funding including, potentially, the sale of assets.  There can be no assurance that under such extreme market conditions such alternate funding sources would be available or sufficient.  Further, a failure of one or more of Sony’s major lenders, or a decision by one or more of them to stop lending to Sony due to instability in the Japanese or global financial and credit markets could have an adverse impact on Sony’s access to funding from such sources.  In turn, this could have a material adverse impact on Sony’s operating results, financial position or liquidity.
 
Similarly, a downgrade in Sony’s credit ratings could result in an increase in Sony’s cost of funding and could have an adverse impact on Sony’s ability to access commercial paper or term debt markets, with a corresponding adverse effect on Sony’s results, financial position and liquidity.
 
 
Sony’s businesses, particularly the Electronics and Game segments, operate in intensely competitive markets characterized by changing consumer preferences and rapid technological innovation.  Due to advanced technological innovation and relative ease of technology imitation, new products and services tend to become standardized more rapidly, leading to more intense competition and ongoing price erosion.  In order to strengthen the competitiveness of its products in this environment, Sony continues to invest heavily in research and development.  However, these investments may not yield the results expected, hindering Sony’s ability to commercialize,


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in a timely manner, new and competitive products that meet the needs of the market, which consequently may negatively impact Sony’s reputation and operating results.
 
 
Sony continues to invest in production equipment in the Electronics segment.  Sony also invests in production-related joint ventures.  One example is the investment Sony and Samsung Electronics Co., Ltd.  (“Samsung”) made in connection with 8th generation production capacity for amorphous thin film transistor (“TFT”) LCD panel production, following investments in 7th generation production capacity at S-LCD Corporation (“S-LCD”), a joint venture of the two companies in Korea.  The accumulated total amount of the investment in S-LCD by Sony and Samsung for 7th and 8th generation production capacity is approximately 400 billion yen (approximately 50 percent of which was contributed by Sony).  Sony may not be able to recover its capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take longer than expected.  As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect Sony’s profitability.
 
 
During the last several years Sony has moved toward the establishment of joint ventures and strategic alliances in order to supplement or replace functions that were previously performed by divisions of Sony Corporation or wholly-owned subsidiaries.
 
Sony currently has investments in several joint ventures, including Sony Ericsson Mobile Communications AB and S-LCD.  If Sony and its partners from existing alliances, joint ventures and strategic investments are unable to reach their common financial objectives successfully, Sony’s financial performance may be adversely affected.  Sony’s financial performance may also be adversely affected temporarily or in the short- and medium-term during the period of alliances, joint ventures and strategic investments even if Sony and its partners remain on course to achieve their common objectives.  In February 2008, Sony and Sharp Corporation (“Sharp”) signed a non-binding memorandum of intent to establish a joint venture to manufacture 10th generation amorphous TFT LCD panels and modules.  Sony has set June 30, 2009 as the target date by which to enter into a definitive agreement and is negotiating in good faith with Sharp.
 
Sony may not adequately manage the growing number of joint ventures and strategic alliances, and, in particular, may not deal effectively with the legal and cultural differences that can arise in such relationships, with changes in the relationships, or with changes in the financial status of its partners.  In addition, by participating in joint ventures or strategic alliances, Sony may encounter conflicts of interest, may not maintain sufficient control over the joint venture or strategic alliance, including over cash flow, and may be faced with an increased risk of the loss of proprietary technology or know-how.  Sony’s reputation could be harmed by the actions or activities of a joint venture that uses the Sony brand.
 
 
Sony implemented restructuring initiatives in the fiscal year ended March 31, 2009 that focused on a review of its investment plan, realignment of manufacturing sites, and workforce reallocation and headcount reduction.  In association with these restructuring initiatives, 75.4 billion yen of restructuring charges were recorded for the fiscal year ended March 31, 2009.  Sony anticipates the recording of approximately 110 billion yen of restructuring charges for the fiscal year ending March 31, 2010 for these initiatives.  Restructuring charges are recorded in cost of sales, selling, general and administrative expenses and loss on sale, disposal or impairment of assets, net and thus decrease Sony’s operating and net income.
 
In addition, due to internal or external factors, the improved efficiencies and projected cost savings may not be realized as scheduled and, even if those benefits are realized, Sony may not be able to achieve the level of profitability expected due to the worsening of market conditions beyond expectations.  Such possible internal factors could include, for example, a decision to implement new restructuring initiatives not already planned or a decision to increase research and development outlays or other expenditures beyond currently projected levels,


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either of which might increase total costs.  Possible external factors could include, for example, increased burdens from regional labor regulations, labor union agreements and Japanese customary labor practices that could prevent Sony from executing its restructuring initiatives as planned.  Therefore, such restructuring and transformation may not result in improved efficiency, increased ability to respond to market changes or the reallocation of resources to more profitable businesses.  The inability to fully and successfully implement restructuring programs may cause Sony to have insufficient financial resources to carry out its research and development plans and to invest in targeted growth areas for its businesses.  Additionally, operating cash flows could be reduced as a result of the payment for restructuring charges.
 
 
Sony’s consolidated statements of income are prepared from the local currency-denominated financial results of Sony Corporation’s subsidiaries around the world, which are then translated into yen at the monthly average currency exchange rate.  Sony’s consolidated balance sheets are prepared using the local currency-denominated assets and liabilities of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market exchange rate at the end of each financial period.  A large proportion of Sony’s consolidated financial results, assets and liabilities is accounted for in currencies other than the Japanese yen.  For example, only 24.2 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, 2009 were originally recorded in Japan.  Accordingly, Sony’s consolidated financial results and the assets and liabilities in Sony’s businesses that operate internationally, principally in its Electronics, Game and Pictures segments and the music business, may be materially affected by changes in the exchange rates of foreign currencies when translating into Japanese yen.  Foreign exchange rate fluctuations may have a negative impact on Sony’s operating results and financial condition in the future, especially if the yen strengthens significantly against the U.S. dollar, the euro or other foreign currencies.
 
 
Exchange rate fluctuations affect Sony’s operating profitability because many of Sony’s products are sold in countries other than the ones in which they were developed and/or manufactured.  The concentration of research and development, administrative functions, and manufacturing activities within the Electronics segment in Japan makes this segment particularly sensitive to the yen’s appreciation as the ratio of yen-denominated costs to total costs is higher than the ratio of yen-denominated revenue to total revenue.  Mid- to long-term changes in exchange rate levels may interfere with Sony’s global allocation of resources and hinder Sony’s ability to engage in research and development, procurement, production, logistics, and sales activities in a manner that is profitable after the effect of such exchange rate changes.
 
Although Sony hedges most of the net short-term foreign currency exposure resulting from import and export transactions shortly before they are projected to occur, such hedging activity cannot entirely eliminate the risk of adverse short-term exchange rate fluctuations.
 
 
In the Electronics and Game segments, Sony uses a large volume of parts and components, such as semiconductors and LCD panels, for its products.  Market fluctuations in the availability and pricing of parts and components can adversely affect Sony’s operating results.  For instance, shortages of parts or components may occur during periods of excess demand, which can result in sharply higher prices and an increase in the cost of goods sold.  Additionally, the prices of parts or components fluctuate with the prices of underlying basic or raw materials, such as petrochemical products, cobalt and copper, which can also affect the cost of goods sold.
 
Sony places orders for parts and components and determines production and inventory plans in advance based on its forecast of consumer demand, which is highly volatile and difficult to predict.  Inaccurate forecasts of consumer demand or inadequate management can lead to a shortage or excess of inventory, which can disrupt


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production plans and result in revenue shortfalls or inventory adjustments.  Sony writes down the value of its inventory when the underlying parts, components or products have become obsolete, when inventory levels exceed the amount expected to be used, or when the value of the inventory is otherwise recorded at a higher value than net realizable value.  In the past, for example, Sony has experienced a shortage of certain semiconductors and LCD panels, which resulted in Sony’s inability to meet consumer demand for its PCs and audio visual products, as well as a surplus in certain semiconductors and LCD panels that resulted in inventory write-downs when the prices of these parts and components fell.  Such revenue shortfalls or inventory adjustments have had and, if Sony is not successful in managing its inventory in the future, could have a material adverse effect on Sony’s operating results.
 
 
Most of Sony’s activities are conducted outside of Japan, and international operations bring challenges.  For example, in the Electronics and Game segments, production and procurement of products and parts in Asian countries such as China are increasing, and this creates a risk that production and shipping of products and parts could be interrupted by a natural disaster or pandemic in the region, similar to the spread of Severe Acute Respiratory Syndrome (“SARS”) or a novel influenza virus.  In addition, production of electronics products in China and other Asian countries increases the time necessary to supply products to Europe and the U.S., which can make it more difficult to meet changing customer demand.  Further, Sony may encounter difficulty in planning and managing operations due to unfavorable political or economic factors, such as cultural and religious conflicts, non-compliance with expected business conduct, unexpected legal or regulatory changes such as foreign exchange, import or export controls, nationalization of assets or restrictions on the repatriation of returns from foreign investments and the lack of adequate infrastructure.  If the effects of international political and military instability or natural disasters disrupt Sony’s business operations or depress consumer confidence in those regions, Sony’s operating results and financial condition may be adversely affected.  In addition, as emerging markets are becoming increasingly important in its operations, Sony becomes more susceptible to the above-mentioned risks which could have an adverse impact on its operating results and financial condition.
 
 
Within the Game segment, developing and providing products that maintain competitiveness over an extended life-cycle require large-scale investment relating to research and development, particularly during the development and introductory period of a new platform.  In the past, large-scale investment relating to capital expenditures and research and development for the development and manufacture of key components, including semiconductors supplied for PLAYSTATION®3 (“PS3”), was also recorded within the Electronics segment.  Moreover, it is particularly important in the Game segment that these products are provided to consumers at competitive prices with compelling game software and online services to ensure favorable market penetration of the platform.  Should the platform fail to achieve such favorable market penetration, there is a risk that this investment, or a part thereof, will not be recouped, resulting in a significant negative impact on Sony’s profitability.  In addition, even if the platform is ultimately successful and Sony is able to sufficiently recoup its investment, this may take longer than expected, resulting in a negative impact on Sony’s profitability.
 
An example of a negative impact on profitability within the Game segment is PS3-related charges that in the past resulted in significant overall segment losses.  These losses arose mainly from the strategic pricing of PS3 hardware at points lower than its production cost.
 
 
Since the Game segment offers a relatively small range of hardware products (including PlayStation®2, PSP® (PlayStation®Portable), and PS3) and a significant portion of overall demand is weighted towards the year-end holiday season, factors such as changes in the competitive environment, changes in market conditions, delays in the release of highly anticipated software titles and insufficient supply of hardware during the year-end holiday season can negatively impact the financial performance of both the Game and the Electronics segments.  The Electronics segment is also dependent upon year-end holiday season demand and, to a lesser extent than the Game segment, is


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susceptible to weak sales as well as supply shortages that may prevent it from meeting demand for its products during this season.
 
 
In the Game segment, the penetration of gaming platforms is a significant factor driving sales and profitability, which may be affected by the ability to provide customers with sufficient software line-ups, including software produced by third parties and online services.  Software line-ups and online services affect not only software sales and profitability, as in many other content businesses, but also affect the penetration of gaming platforms, which can affect hardware sales and profitability.
 
 
The development and declining prices of digital technology along with the increased penetration and speed of broadband Internet connections and the availability of content in digital formats have created risks with respect to Sony’s ability to protect the copyrighted content of its music business, the Pictures segment and the Game segment from digital piracy and counterfeiting.  In particular, advances in software and technology that enable the duplication, transfer or downloading of digital audio and video files from the Internet and other sources without authorization from the owners of the rights to such content threaten the conventional copyright-based business model by making it easier to create, transmit, and redistribute high quality, unauthorized audio and video files.  These advances include, for example, digital devices such as hard disk drive video and audio recorders, CD, DVD, and Blu-ray DiscTM recorders, file compression algorithms, and peer-to-peer digital distribution services.  The availability of unauthorized content contributes to a decrease in legitimate product sales and puts pressure on the price of legitimate product sales, which could adversely affect operating results within the music business, the Pictures segment, and the Game segment.  Sony has incurred and will continue to incur expenses to ensure adequate copyright protection, to develop new services for the authorized digital distribution of music, movies, television programs and video games, and to combat unauthorized digital distribution of its copyrighted content.  These initiatives will increase Sony’s near-term expenses and may not achieve their intended result.
 
 
Operating results for motion picture releases and television productions within the Pictures segment can materially fluctuate depending primarily upon the cost of such productions, marketing costs, and consumer acceptance of such productions, each of which is difficult to predict, as well as the timing of new motion picture releases and the syndication of television productions.  In addition, the commercial success of Sony’s Pictures segment’s motion picture and television productions depends upon consumer acceptance of other competing products released at or near the same time, and the availability of alternative forms of entertainment and leisure activities, including many new options such as social networking sites, that have been enabled by technological advancements.  Given the limited number of motion pictures released during any period, the underperformance of an “event” or “tent-pole” motion picture that generally has higher production and marketing costs than other films can have an adverse impact on operating results of Sony’s Pictures segment.
 
 
The Pictures segment’s television operations, including its global channel network, derives a significant portion of its revenues from the sale of advertising.  A decline of the advertising market due to the global economic downturn could have an adverse impact on the operating results of Sony’s Pictures segment.  The Pictures segment also earns revenues from the licensing of its image-based software, including its motion picture and television


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content, to the U.S. and international television networks, where a decline in the networks’ ability to generate advertising and subscription revenues may adversely impact the license fees paid to the Pictures segment.  The Pictures segment also depends on third party cable, satellite and other distribution systems to distribute its global channel network.  The failure to renew, or renewal on less favorable terms of, carriage contracts (broadcasting agreements) with these third-party distributors may adversely affect the Pictures segment’s ability to generate advertising and subscription revenues through its global channel network.
 
 
The Pictures segment is dependent upon highly specialized union members, including writers, directors, actors and other talent, and trade and technical employees, who are covered by union contracts and are essential to the development and production of motion pictures and television programs.  A strike by one or more of these unions or the possibility of a strike, work slowdown or work stoppage caused by uncertainties about, or the inability to reach agreement on, a new contract could delay or halt production activities.  Such a delay or halt, depending on the length of time involved, could cause a delay or interruption in the release of new motion pictures and television programs and thereby could adversely affect operating results and cash flows in the Pictures segment.  An inability to reach agreement on one or more of these union contracts could also increase costs within Sony’s Pictures segment and have an adverse effect on operating results.
 
Continued increases in the costs of producing or acquiring entertainment content and other changes in the business environments of Sony’s music business and Pictures segment could adversely affect their sales and operating results.
 
The success of Sony’s music business is highly dependent on finding and establishing artists that appeal to customers over the long-term and if the music business is unable to find and establish new talented artists, operating results may be adversely affected.  Competition with other entertainment companies to identify, sign and retain such talent is intense as is the competition to sell their music, resulting in increased talent-related spending and higher marketing and promotional costs.  In the Pictures segment, high demand for top talent has contributed to increases in the cost of producing motion pictures, which can impact operating results as can the cost of acquiring programming produced by third parties.
 
In addition to escalating costs to produce or acquire content, Sony’s music business and Pictures segment have experienced and could continue to experience significant changes in their respective business environments, which have had and could continue to have an adverse impact on operating results.  For instance, primarily as a result of digital piracy and illegal downloading, bankruptcies of music wholesalers and retailers and ongoing competition for consumer discretionary spending have resulted in declining physical sales, particularly of the CD format.  While new models for selling recorded music content have begun to emerge, including the legal download of music over the Internet and the distribution of music content on mobile phones, these digital revenues streams have not been sufficient to offset the decline in physical sales that have affected and could continue to affect the operating results of Sony’s music business.  Industry-wide trends such as the deteriorating financial condition of major retailers, the maturation of the DVD format, increasing competition for consumer discretionary spending and leisure time, digital piracy and increased competition for retailer shelf space have contributed to and could continue to contribute to an industry-wide decline in DVD sales both in the U.S. and worldwide which could impact the operating results of Sony’s Pictures segment.
 
 
In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG (“Bertelsmann”), forming SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), after receiving antitrust approval from, among others, the European Commission.  On December 3, 2004, Impala, an international association of 2,500 independent recorded music companies, appealed the European Commission’s clearance decision to the EU Court of First Instance (“CFI”).  On July 13, 2006, the CFI annulled the Commission’s decision to allow the merger to go forward, requiring the Commission to re-examine the transaction.  In October 2006, Sony Corporation of America (“SCA”) and Bertelsmann filed an appeal of the CFI’s judgment to the Court of Justice of the European Communities (“ECJ”).  On October 3, 2007, following its re-


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examination of the merger, the Commission rendered a second clearance decision reaffirming the conclusion reached in 2004 that the transaction raised no competition concerns.  On June 16, 2008 Impala announced it had filed an appeal of that second clearance decision to the CFI and then SCA filed an application to intervene in that appeal.  On July 10, 2008, the ECJ rendered judgment on the 2006 appeal of SCA and Bertelsmann, setting aside the CFI’s annulment of the original clearance decision and referring the case back to the CFI for further consideration.  On September 26, 2008, the CFI stayed Impala’s 2008 appeal of the second clearance decision pending a final ruling by the CFI on the original clearance decision.  As of October 1, 2008 SONY BMG became a wholly-owned subsidiary of Sony and was renamed Sony Music Entertainment as of January 1, 2009.  On February 10, 2009, Impala informed the CFI that Impala believed that the Commission’s approval of Sony’s acquisition of sole control, which Impala noted was final and not appealable, made their original appeal devoid of purpose.  The Commission subsequently agreed with Impala’s view in this regard.  The CFI is not bound by the parties’ view in this regard and is currently deliberating whether the appeal proceedings as to the original clearance decision should proceed or should be terminated.  In the event the CFI (and upon a further appeal, the ECJ) were to annul both the Commission’s original clearance decision in 2004 and the Commission’s second clearance decision in 2007, and if the Commission subsequently, following a further investigation, reversed the position it had taken in 2004 and 2007, the previously combined company could be forced to unwind the merger in whole or in part.  In such circumstance, Sony might incur significant costs and might not be able to achieve its objectives with respect to its recorded music business.
 
 
Sony believes that utilizing broadband networks to facilitate the integration of hardware, software and content is essential for differentiating itself in the marketplace.  Sony also believes that this strategy will eventually lead to consistent revenue streams.  However, this strategy depends on the development (both inside and outside of Sony) of certain network technologies, coordination among Sony’s various business units, and the standardization of technological and interface specifications across business units and within industries.  If Sony is not successful in implementing this strategy, it could adversely affect Sony’s reputation, competitiveness and profitability.
 
 
Sony engages in a wide array of online activities, including entertainment network services, financial services, and sales and marketing of electronics products, and is thus subject to a broad range of related laws and regulations including, for example, those relating to such issues as privacy, consumer protection, data retention and data protection, content regulation, defamation, age verification and other online child protections, the installation of “cookies” (software that allows website providers to target online audiences and track their performance metrics) or other software on the end-user’s computer or other devices, pricing, advertising to both children and adults, taxation, copyright and trademark, promotions, and billing.  The application of such laws and regulations created to address online activities, and those passed prior to the popular use of the Internet that may be applied to online activities, varies among jurisdictions, may be unclear or unsettled in many instances, and is subject to change.  Sony could incur substantial costs necessary to comply with these laws and regulations and could incur substantial penalties, other liabilities, or damage to its reputation if it fails to comply with them.  Compliance with these laws and regulations also could cause Sony to change or limit its online activities in a manner that could adversely affect operating results.  In addition, Sony’s failure to anticipate changes to relevant laws and regulations, changes in laws that provide protections that Sony relies on in conducting its online activities, or judicial interpretations narrowing such protections, may subject Sony to greater risk of liability, increase the costs of compliance, or limit Sony’s ability to engage in certain online activities.
 
 
Sony’s Financial Services segment operates in industries subject to comprehensive regulation and supervision, including the Japanese insurance and banking industries.  Future developments or changes in laws, regulations, or


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policies and their effects are unpredictable and could lead to increased compliance costs or limitations on operations.  For example, Japan’s Financial Services Agency (“FSA”) has recently strengthened its regulatory supervision relating to non-payment of insurance claims.  Compliance with multiple regulatory regimes is challenging and, due to Sony’s common branding strategy, compliance failures in any of its businesses within Sony’s Financial Services segment could have a negative impact on the overall business reputation of the Financial Services segment.  Furthermore, additional compliance costs could have adverse effects on Sony’s operating results.
 
 
In the Financial Services segment, Sony Life Insurance Co., Ltd. (“Sony Life”) holds both convertible bonds and equity securities.  The convertible bonds are required to be marked to market at the end of each accounting period on the income statement under accounting principles generally accepted in the United States of America (“US GAAP”).  Declines in equity prices, such as those due to recent problems in the U.S. residential mortgage market that have resulted in recent large fluctuations in global equity prices, may result in valuation losses on the convertible bonds as well as impairment losses on the equity securities held by Sony Life.  In addition, reductions in gains on the sales of securities or unrealized gains on securities could trigger adverse effects on Sony’s operating results and financial condition.  Declines in the yield of Sony Life’s separate account assets may result in additional policy reserves being recorded and the early amortization of deferred acquisition cost, since US GAAP requires the review of actuarial assumptions used for the valuation of policy reserves concerning minimum death guarantees for variable life insurance and the amortization of deferred acquisition costs.
 
 
Sony engages in asset liability management (“ALM”) in an effort to manage the investment assets within the Financial Services segment in a manner appropriate to Sony’s liabilities, which arise from the insurance policies Sony underwrites in both its life insurance and non-life insurance businesses and the deposits, borrowings and other liabilities in its banking business.  ALM considers the long-term balance between assets and liabilities in an effort to ensure stable returns.  Any failure to appropriately conduct Sony’s ALM activities, or any significant changes in market conditions beyond what Sony’s ALM could reasonably address, could have a material adverse effect on the financial condition and operating results of its Financial Services segment.  In particular, because Sony Life’s liabilities to policyholders generally have longer durations than its investment assets, lower interest rates tend to reduce yields on Sony Life’s investment portfolio while premiums remain generally unchanged on outstanding policies.  As a result, Sony Life’s profitability and long-term ability to meet policy commitments could be materially and adversely affected.
 
 
In Sony’s Financial Services segment, generating stable investment income is important to its operations, and Sony invests in a variety of asset classes, including Japanese government and corporate bonds, foreign government and corporate bonds, Japanese stocks, loans and real estate.  In addition to risks related to changes in interest rates and the value of equity securities, the Financial Services segment’s investment portfolio exposes Sony to a variety of other risks, including foreign exchange risk, credit risk and real estate investment risk, any or all of which may have an adverse effect on the financial condition and operating results of the Financial Services segment.  For example, mortgage loans account for 98.2 percent of the total loan balance or 33.2 percent of the total assets of Sony Bank Inc. (“Sony Bank”) for the fiscal year ended March 31, 2009.  An increase in non-performing loans, or a decline in the prices of real estate, the collateral for these mortgage loans provided by Sony Bank, could have an adverse effect on the creditworthiness of Sony Bank’s loan portfolio and increase credit-related costs for Sony Bank.


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Sony’s life insurance and non-life insurance businesses establish policy reserves for future benefits and claims based on estimates of future payment obligations made by qualified actuaries.  These reserves are calculated based on many assumptions and estimates, including the frequency and timing of the event covered by the policy, the amount of benefits or claims to be paid and the investment returns on the assets these businesses purchase with the premiums received.  These assumptions and estimates are inherently uncertain, and Sony cannot determine with precision the ultimate amounts that Sony will be required to pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow at the level Sony assumes prior to the payment of benefits or claims.  The frequency and timing of the event covered by the policy and the amount of benefits or claims to be paid are subject to a number of risks and uncertainties, many of which are outside of Sony’s control, including:
 
•   changes in trends underlying Sony’s assumptions and estimates, such as mortality and morbidity rates;
 
•   the availability of sufficient reliable data and Sony’s ability to correctly analyze the data;
 
•   Sony’s selection and application of appropriate pricing and rating techniques; and
 
•   changes in legal standards, claim settlement practices and medical care expenses.
 
If the actual experience of Sony’s insurance businesses is less favorable than its assumptions or estimates, its policy reserves may be inadequate.  Any changes in regulatory guidelines or standards with respect to the required level of policy reserves may also require that Sony establishes policy reserves based on more stringent assumptions, estimates or actuarial calculations.  Such events could result in a need to increase provisions for policy reserves, which may have a significant adverse effect on the financial condition and operating results of the Financial Services segment.  Furthermore, actual insurance claims that are higher than the estimated provision for policy reserves due to the occurrence of catastrophic events such as earthquakes or pandemic diseases in Japan could have a significant adverse effect on the financial condition and the result of operations in the Financial Services segment.
 
 
Sony’s headquarters, some of Sony’s major data centers and many of Sony’s most advanced device manufacturing facilities, including those for semiconductors, are located in Japan, where the risk of earthquakes is relatively higher than in other parts of the world.  In addition, Sony’s offices and facilities, including those used for research and development, material procurement, manufacturing, motion picture and television program production, logistics, sales and services are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected catastrophic events such as natural disasters, pandemic diseases, terrorist attacks, and large-scale power outages.  If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt Sony’s operations, delay production, interrupt shipments and postpone the recording of revenue, and result in large expenses to repair or replace these facilities or offices.  Moreover, as network and information systems have become increasingly important to Sony’s operating activities, network and information system shutdowns caused by the above and other unforeseen events such as software or hardware defects, computer viruses and computer hacking pose increasing risks.  Although Sony is developing counter-measures, such events could result in the disruption of Sony’s major business operations, delays in production, shipments and recognition of revenue, and large expenditures necessary to repair or replace such facilities as well as network information systems, which could have a material adverse impact on Sony’s operating results and financial condition.
 
 
Sony makes extensive use of online services and centralized data processing, including through third-party service providers, particularly in the Financial Services segment.  The secure maintenance and transmission of


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confidential information is a critical element of Sony’s operations.  However, Sony’s customers’ personal information may be lost or disclosed or taken without customers’ consent.  In addition, Sony’s information technology and other systems, or those of service providers or strategic business partners, may be compromised.  If Sony were to lose customers’ personal information or if a malicious third party were to penetrate the network security of Sony, its business partners or service providers and to misappropriate or acquire customers’ personal information, or if there were an advertent or inadvertent loss, disclosure or misappropriation of customers’ personal information by Sony employees, Sony’s reputation could be damaged and Sony could be subject to lawsuits or claims.
 
Any loss, disclosure or misappropriation of customers’ personal information or other breach of its information security may have a serious impact on Sony’s reputation and could have a significant adverse effect on its businesses and operating results.
 
 
Sony products, such as software and electronic devices including semiconductors are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur and as demand increases for digital equipment.  At the same time, product quality and liability issues may present greater risks.  Sony’s efforts to manage the rapid advancements in technologies and increased demand as well as to control product quality may not be successful.  If they are not, Sony may incur expenses in connection with, for example, product recalls, after-sales services and lawsuits, and Sony’s brand image and reputation as a producer of high-quality products may suffer.  These issues are not only relevant to the final Sony products that are sold directly to customers but also to the final products of other companies that are equipped with Sony’s components, such as the semiconductors mentioned above.  An example of these issues is the recording of a 51.2 billion yen provision during the fiscal year ended March 31, 2007 in relation to the recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion battery cells manufactured by Sony as well as the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony.  (Portions of the provisions totaling 15.7 billion yen and 2.3 billion yen were reversed in the fiscal years ended March 31, 2008 and March 31, 2009, respectively, based on the actual results of recalls and replacements as compared to Sony’s original estimates.)
 
 
Sony recognizes the unfunded pension obligation as consisting of the (i) Projected Benefit Obligation (“PBO”) less (ii) the fair value of pension plan assets.  Actuarial gains and losses are included in pension expenses in a systematic manner over employees’ average remaining service periods in a manner consistent with FAS No. 87, “Employers’ Accounting for Pensions,” FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” and the related amendments to those standards.  Any decrease of the pension asset value due to low returns from investments or increases in the PBO due to a lower discount rate, increases in rates of compensation and changes in certain other actuarial assumptions could increase the unfunded pension obligations and could, subject to the provisions of FAS No. 87, result in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense.
 
Most pension assets and liabilities recognized on Sony’s consolidated balance sheets relate to Japanese plans, which are subject to the Japanese Defined Benefit Corporate Pension Plan Act pursuant to which Sony is required to meet certain financial criteria including periodic actuarial revaluation and annual settlement of gains or losses of the plan.  Since the fall of 2008, the fair value of pension plan assets invested in equity securities were negatively affected by the global financial crisis, the global economic downturn and the significant decreases in corporate earnings.  The Japanese plan had invested approximately 30% of its pension plan assets in equity securities.  In the event that the actuarial reserve required by law exceeds the fair value of pension assets and that the fair value of pension assets would not be recovered within a certain moratorium period permitted by laws and/or special legislative decree, Sony may be required to make an additional contribution to the plan, which could reduce cash flows.  Similarly, if Sony is required to make an additional contribution to a foreign plan to meet any funding requirements in accordance with local laws and regulations in each country, Sony’s cash flows might be adversely


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affected.  If Sony is required to increase cash contributions to its pension plans when actuarial assumptions, such as an expected long-term rate of return of the pension plan assets, are updated for purposes of determining statutory contributions, it might become a negative factor for Sony’s cash flow for a considerable number of years.
 
 
Sony is subject to income taxes in Japan and numerous other jurisdictions, and in the ordinary course of Sony’s business, there are many situations where the ultimate tax determination can be uncertain, sometimes for an extended period.  The calculation of Sony’s tax provision and the carrying value of tax assets and liabilities requires significant judgment and the use of estimates.
 
Sony currently believes that its deferred tax assets, a significant component of which are net operating loss carryforwards, are more likely than not to be realized through sufficient future taxable income coupled with prudent and feasible tax planning strategies.  However, some of these deferred tax assets could expire unused or not be realizable if Sony is unable to implement tax planning strategies or generate taxable income in the future (from operations and/or tax planning strategies) sufficient to utilize them or if Sony enters into transactions that limit its legal ability to use them.  If it becomes more likely than not that Sony’s deferred tax assets will expire unused and are not available to offset future taxable income, or otherwise will not be realizable, Sony will have to recognize a valuation allowance.  This may materially increase Sony’s income tax expense or result in Sony’s forgoing any associated cash tax reduction available in future periods.  Therefore, Sony’s earnings and financial position would be adversely affected in the period or periods in which a valuation allowance is recorded or deferred tax assets expire unused.
 
A key factor in the evaluation of the deferred tax assets and the valuation allowances is the determination of the uncertain tax positions related to the more likely than not adjustments for Sony’s intercompany transfer pricing.  Sony is subject to income taxes in Japan and numerous other jurisdictions, and in the ordinary course of Sony’s business there are many transactions, including intercompany charges where the ultimate tax determination is uncertain.  Sony is subject to continuous examination of its income tax returns by tax authorities and, as a result, Sony regularly assesses the likelihood of the adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.  Significant judgment is required in making these assessments, and as additional evidence becomes available in subsequent periods, the ultimate outcomes for Sony’s uncertain tax positions, and, accordingly, its valuation allowance assessments could potentially have an adverse impact on Sony’s future earnings and financial position.
 
In addition to the above, Sony’s future effective tax rates could be unfavorably affected by changes in both the statutory rates and the mix of earnings in countries with differing statutory rates or by other factors such as changes in tax laws and regulations or their interpretation.
 
 
Sony has a significant amount of goodwill, intangible assets and other long-lived assets, and future financial performance lower than anticipated or changes in estimates and assumptions, which in many cases require significant judgments, could result in impairment charges.  Sony tests goodwill and intangible assets that are determined to have an indefinite life for impairment on a reporting unit basis during the fourth quarter of each fiscal year, and assesses whether factors or indicators, such as unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, become apparent that would require an interim test.  The recoverability of the carrying value of long-lived assets held and used and long-lived assets to be disposed of is reviewed whenever events or changes in circumstances indicate that the carrying value of the assets or asset groups may not be recoverable.  Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the asset or asset group with their estimated undiscounted future cash flows.  If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value.


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When determining whether an impairment has occurred or calculating such impairment for goodwill, intangible asset or other long-lived asset, fair value is determined using the present value of estimated net cash flows or comparable market values.  This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate comparable entities and the determination of whether a premium or discount should be applied to comparables.  Resulting from changes in estimates and/or revised assumptions impacting the present value of estimated net future cash flows, a decrease in the fair value of a reporting unit, intangible assets, or long-lived assets or asset groups could result in an impairment and a non-cash charge would be required.  Any such charge could adversely affect on Sony operating results and financial position.
 
 
Sony faces the risk of litigation and regulatory proceedings in connection with its operations.  Lawsuits, including regulatory actions, may seek recovery of very large indeterminate amounts or limit Sony’s operations, and the possibility that they may arise and their magnitude may remain unknown for substantial periods of time.  A substantial legal liability or adverse regulatory outcome and the substantial cost to defend the litigation or regulatory proceedings could have a material adverse effect on Sony’s business, operating results, financial condition, cash flows and reputation.
 
 
Sony’s products incorporate a wide variety of technologies.  Claims have been and could be asserted against Sony that such technology infringes the intellectual property owned by others.  Such claims might require Sony to enter into settlement or license agreements, to pay significant damage awards, and/or to face a temporary or permanent injunction prohibiting Sony from marketing or selling certain of its products, which could have a material adverse effect on Sony’s business, operating results, financial condition, and reputation.
 
 
Many of Sony’s products are designed under the license of patents and other intellectual property rights owned by third parties.  Based upon past experience and industry practice, Sony believes that it will be able to obtain or renew licenses relating to various intellectual properties useful in its business that it needs in the future; however, such licenses may not be available at all or on acceptable terms, and Sony may need to redesign or discontinue marketing or selling such products as a result.
 
 
With the increasing necessity of pursuing quick business development and high operating efficiency with limited managerial resources, Sony increasingly procures from third-party suppliers components (including LCD panels for televisions) and technologies (such as operating systems for PCs).  Reliance on third-party suppliers increases the chance that Sony will be unable to prevent products from incorporating defective or inferior third-party technology or components.  Products with such defects can adversely affect Sony’s operating results and its reputation for quality products.  Sony has also become more reliant upon the services of third-party original equipment and design manufacturers in the Electronics and Game segments.  In addition, Sony consigns to external business partners extensive activities including procurement, logistics, sales and other services.  Reliance on external business partners may also expose Sony to the effects of insufficient compliance with applicable regulations or infringement of third-party intellectual property rights by external business partners as well as certain risks, such as accidents, natural disasters, or bankruptcies under a deteriorating business environment, to which external business partners might be exposed.


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Sony is subject to a broad range of environmental and occupational health and safety laws and regulations, including laws and regulations relating to air pollution, water pollution, the management, elimination or reduction of the use of hazardous substances, decreases in the level of standby power of certain products, waste management, recycling of products, batteries and packaging materials, site remediation and worker and consumer health and safety.  These regulations or the application of these regulations could become more stringent or additional regulations could be adopted in the future, which could cause Sony to incur additional compliance costs or limit Sony’s activities.  Further, a failure to comply with applicable environmental or health and safety laws could result in fines, penalties, legal judgments or other costs or remediation obligations.  Such a finding of noncompliance could also injure Sony’s reputation.  Such events could adversely affect Sony’s financial performance.
 
Sony monitors and evaluates new environmental and health and safety requirements that may affect its operations.  For example, Sony has established an internal risk management system in response to two directives enacted by the EU: The Restriction of Hazardous Substances Directive (“RoHS”) and the Waste Electrical and Electronic Equipment Directive (“WEEE”).  Similar regulations are being formulated in other parts of the world, including China.  Sony may incur substantial costs in complying with other similar programs that might be enacted outside Europe in the future.  Furthermore, Sony has been developing a risk management system to comply with the EU’s Registration, Evaluation, Authorization and Restriction of Chemicals program (“REACH”).  Going forward, Sony will continue to evaluate the potential impact of these regulations, including whether REACH could directly or indirectly increase its costs or restrict Sony’s activities, which could have an adverse impact on Sony’s operating results and financial condition.
 
In addition, Sony sees issues related to climate change as a potential risk if Sony does not respond or undertake environmental activities appropriately.  Sony recognizes that climate change issues could possibly lead to an increase in or additional costs due to new regulations or governmental policies including carbon disclosure, green house gas emission reduction, carbon taxes and energy efficiency for electronics products.  A regulation for cargo owners to exert efforts to rationally control energy consumption and CO2 emission from their logistics has already been introduced in Japan, and other countries may introduce similar regulations in the near future.  In addition, in the event that Sony is unable to respond appropriately to consumers’ growing concern for climate change issues, there is a risk that Sony’s reputation could be harmed and that consumers may choose to purchase products from other companies.
 
 
The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining Sony’s accounting books and records, and exercising appraisal rights are available only to shareholders of record.  Because the depositary, through its custodian agents, is the record holder of the shares underlying the American Depositary Shares (“ADSs”), only the depositary can exercise those rights in connection with the deposited shares.  The depositary will make efforts to vote the shares underlying ADSs in accordance with the instructions of ADS holders and will pay the dividends and distributions collected from Sony.  However, ADS holders will not be able to bring a derivative action, examine Sony’s accounting books and records, or exercise appraisal rights through the depositary.
 
Sony Corporation is incorporated in Japan with limited liability.  A majority of Sony’s directors and corporate executive officers are non U.S. residents, and a substantial portion of the assets of Sony Corporation and the assets of Sony’s directors and corporate executive officers are located outside the U.S.  As a result, it may be more difficult for investors to enforce against Sony Corporation or such persons mentioned above judgments obtained in U.S. courts predicated upon civil liability provisions of the federal and state securities laws of the U.S. or similar judgments obtained in other courts outside Japan.  There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal and state securities laws of the U.S.


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Item 4.  Information on the Company
 
 
Sony Corporation was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha, a joint stock company (Kabushiki Kaisha) under Japanese law.  In January 1958, it changed its name to Sony Kabushiki Kaisha (“Sony Corporation” in English).
 
In December 1958, Sony Corporation was listed on the Tokyo Stock Exchange (the “TSE”).  In June 1961, Sony Corporation issued American Depositary Receipts (“ADRs”) in the U.S.
 
In March 1968, Sony Corporation established CBS/Sony Records Inc. in Japan, currently Sony Music Entertainment (Japan) Inc. (“SMEJ”), as a 50-50 joint venture company between Sony Corporation and CBS Inc. in the U.S. In January 1988, SMEJ became a wholly-owned subsidiary of Sony Corporation.  In November 1991, SMEJ was listed on the Second Section of the TSE.
 
In September 1970, Sony Corporation was listed on the New York Stock Exchange (the “NYSE”).
 
In August 1979, Sony Corporation established Sony Prudential Life Insurance Co., Ltd. in Japan, currently Sony Life Insurance Co., Ltd. (“Sony Life”), as a 50-50 joint venture company between Sony Corporation and The Prudential Insurance Company of America.  In March 1996, Sony Life became a wholly-owned subsidiary of Sony Corporation, and in April 2004, with the establishment of Sony Financial Holdings Inc. (“SFH”), Sony Life became a wholly-owned subsidiary of SFH.
 
In July 1984, Sony Magnescale Inc., a subsidiary of Sony Corporation and currently Sony Precision Technology Inc., was listed on the Second Section of the TSE.  In July 1987, Sony Chemicals Corporation, a subsidiary of Sony Corporation, was listed on the Second Section of the TSE.
 
In January 1988, Sony Corporation acquired CBS Records Inc., a music business division of CBS Inc.  in the U.S. In January 1991, CBS Records Inc. changed its name to Sony Music Entertainment Inc. (“SMEI”).  In November 1989, Sony Corporation acquired Columbia Pictures Entertainment, Inc. in the U.S. In August 1991, Columbia Pictures Entertainment, Inc. changed its name to Sony Pictures Entertainment Inc. (“SPE”).
 
In November 1993, Sony established Sony Computer Entertainment Inc. (“SCEI”) in Japan.
 
In January 2000, acquisition transactions by way of exchanges of stock were completed such that SMEJ, Sony Chemicals Corporation (currently Sony Chemical & Information Device Corporation), and Sony Precision Technology Inc. (currently Sony Manufacturing Systems Corporation) became wholly-owned subsidiaries of Sony Corporation.
 
In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which was intended to be linked to the economic value of Sony Communication Network Corporation, which was renamed So-net Entertainment Corporation (“So-net”) in October 2006.  All shares of the subsidiary tracking stock were terminated and converted to shares of Sony’s common stock in December 2005.  So-net was listed on the Mother’s market of the TSE in December 2005 (and has been traded on the First Section of the TSE since January 2008).  Sony Corporation continues to hold a majority of the shares of So-net.
 
In October 2001, Sony Ericsson Mobile Communications AB, a 50-50 joint venture company between Sony Corporation and Telefonaktiebolaget LM Ericsson of Sweden, was established.
 
In October 2002, Aiwa Co., Ltd. (“Aiwa”) became a wholly-owned subsidiary of Sony Corporation.  In December 2002, Aiwa was merged into Sony Corporation.
 
In June 2003, Sony Corporation adopted the “Company with Committees” system in line with the revised Japanese Commercial Code.  (Refer to “Board Practices” in “Item 6. Directors, Senior Management and Employees.”)
 
In April 2004, Sony Corporation established SFH in Japan.  Sony Life, Sony Assurance Inc. (“Sony Assurance”), and Sony Bank Inc. (“Sony Bank”) became subsidiaries of SFH.


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In April 2004, S-LCD Corporation, a joint venture between Sony Corporation and Samsung Electronics Co., Ltd. of Korea, for the manufacture of amorphous thin film transistor (“TFT”) LCD panels, was established in Korea.
 
In August 2004, Sony combined its worldwide recorded music business, excluding its recorded music business in Japan, with the worldwide recorded music business of Bertelsmann AG (“Bertelsmann”), forming the 50-50 joint venture, SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”).
 
In October 2007, SFH was listed on the First Section of the TSE in conjunction with the global initial public offering of shares of SFH by Sony Corporation and SFH.
 
In October 2008, Sony acquired Bertelsmann’s 50 percent equity interest in SONY BMG.  As a result of the acquisition, SONY BMG became a wholly-owned subsidiary of Sony.  In January 2009, SONY BMG changed its name to Sony Music Entertainment (“SME”).
 
Sony Corporation’s registered office is located at 7-1, Konan 1-chome, Minato-ku, Tokyo 108-0075, Japan, telephone +81-3-6748-2111.
 
The agent in the U.S. for purposes of this Item 4 is Sony Corporation of America, 550 Madison Avenue, New York, NY 10022 (Attn: Office of the General Counsel).
 
 
In the fiscal years ended March 31, 2007, 2008 and 2009, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 414.1 billion yen, 335.7 billion yen and 332.1 billion yen, respectively.  Sony’s capital expenditures are expected to be 250 billion yen during the fiscal year ending March 31, 2010.  For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5. Operating and Financial Review and Prospects.”  Sony invested approximately 80 billion yen in the semiconductor business during the fiscal year ended March 31, 2009.  Sony plans to invest approximately 35 billion yen in the semiconductor business in the fiscal year ending March 31, 2010.  The funding requirements of such various capital expenditures are expected to be financed by cash provided by operating and financing activities or cash and cash equivalents.  Refer to “Property, Plant and Equipment” below for a geographic distribution of these investments.
 
 
Sony plans to change its business segment classification to reflect the Company’s reorganization as of April 1, 2009.  Sony expects to report its operating results in line with new business segments from the first quarter of the fiscal year ending March 31, 2010.  Please note that the following section is based on the business segment classification that applies to the fiscal year ended March 31, 2009.
 
 
The following table sets forth Sony’s sales and operating revenue by reportable segments.  Figures in parentheses indicate the percentage contribution of each segment to total sales and operating revenue.
 
                                                 
    Fiscal Year Ended March 31
    2007   2008   2009
    (Yen in millions)
 
Electronics
    5,443,336       (65.6 )     5,931,708       (67.0 )     5,032,920       (65.1 )
Game
    974,218       (11.7 )     1,219,004       (13.7 )     984,855       (12.7 )
Pictures
    966,260       (11.7 )     855,482       (9.6 )     717,513       (9.3 )
Financial Services
    624,282       (7.5 )     553,216       (6.2 )     523,307       (6.8 )
All Other
    287,599       (3.5 )     312,004       (3.5 )     471,398       (6.1 )
             
             
Sales and operating revenue
    8,295,695       (100.0 )     8,871,414       (100.0 )     7,729,933       (100.0 )
             
             


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The following table sets forth Sony’s Electronics segment sales and operating revenue by product categories.  Figures in parentheses indicate the percentage contribution of each product category to the segment total.
 
                                                 
    Fiscal Year Ended March 31
    2007   2008   2009
    (Yen in millions)
 
Audio
    522,879       (9.6 )     558,624       (9.4 )     453,976       (9.0 )
Video
    1,143,120       (21.0 )     1,279,225       (21.6 )     1,042,014       (20.7 )
Televisions
    1,226,971       (22.5 )     1,367,078       (23.0 )     1,275,810       (25.3 )
Information and Communications
    954,163       (17.5 )     1,103,212       (18.6 )     942,517       (18.7 )
Semiconductors
    219,546       (4.0 )     237,870       (4.0 )     205,062       (4.1 )
Components
    835,490       (15.4 )     833,334       (14.1 )     662,453       (13.2 )
Other
    541,167       (10.0 )     552,365       (9.3 )     451,088       (9.0 )
             
             
Electronics Total
    5,443,336       (100.0 )     5,931,708       (100.0 )     5,032,920       (100.0 )
             
             
 
Commencing April 1, 2008, Sony has partially realigned its product category configuration in the Electronics segment.  Accordingly, results for all prior fiscal years have been reclassified to conform to the current presentation.
 
In the Electronics segment, Sony is engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments and devices for consumer and professional markets.  Sony’s principal manufacturing facilities are located in Japan, Malaysia, China, the U.S., Singapore, Spain and Mexico, and its products are marketed by sales subsidiaries and unaffiliated local distributors and sold through direct sales via the Internet throughout the world.  In addition to internationalizing its production operations, Sony is conducting research and development activities outside Japan to bring these operations into closer proximity to local communities and markets.
 
 
“Audio” includes home audio, portable audio, car audio, and personal navigation systems.
 
 
“Video” includes video cameras, compact digital cameras, digital single-lens reflex (“SLR”) cameras, Blu-ray Disctm players/recorders, and DVD-Video players/recorders.
 
Televisions:
 
“Televisions” includes LCD televisions.
 
 
“Information and Communications” includes PCs, broadcast- and professional-use audio, video, and monitors, and other professional-use equipment.
 
 
“Semiconductors” includes charged coupled devices (“CCDs”), complementary metal-oxide semiconductor (“CMOS”) image sensors and other semiconductors.
 
 
“Components” includes optical pickups, batteries, audio/video/data recording media, data recording systems and LCDs.


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“Other” includes sales to outside customers, such as sales of CD, DVD, Blu-ray Disc manufacturing and physical distribution businesses, mobile phones produced for wireless customers by Sony EMCS Corporation (“Sony EMCS”), and products and services that are not included in the above categories.
 
 
SCEI develops, produces, markets and distributes PlayStation®2 (“PS2”), PSP® (PlayStation®Portable) (“PSP”) and PLAYSTATION®3 (“PS3”) hardware and related software.  Sony Computer Entertainment America Inc. (“SCEA”) and Sony Computer Entertainment Europe Ltd. (“SCEE”) market and distribute PS2, PSP and PS3 hardware, and develop, produce, market and distribute related software in the U.S. and Europe.  SCEI, SCEA and SCEE enter into licenses with third-party software developers.
 
 
Global operations in the Pictures segment encompass motion picture production and distribution; television production and distribution; digital content creation and distribution; worldwide channel investments; home entertainment acquisition and distribution; operation of studio facilities; development of new entertainment products, services and technologies; and distribution of filmed entertainment in more than 130 countries.
 
SPE’s motion picture arm, the Columbia TriStar Motion Picture Group, includes SPE’s principal motion picture production organizations, Columbia Pictures, TriStar Pictures, Screen Gems, Sony Pictures Classics, and the International Motion Picture Production Group.
 
Sony Pictures Television (“SPT”) develops and produces television programming for broadcast, cable and first-run syndication, including scripted series, unscripted “reality” or “light entertainment,” daytime serials, games shows, animated series, made for television movies and miniseries and other programming.  SPT also produces content for the Internet and mobile devices and operates Crackle, a premium video website.  Internationally, SPT produces local language programming in key markets around the world, some of which are co-produced with local partners, and sells SPE-owned formats in approximately 70 countries.  SPT also owns and operates a global channel network with 114 channel feeds, which are available in more than 130 countries worldwide.
 
Sony Pictures Home Entertainment produces and distributes SPE’s home entertainment products (DVD and Blu-ray Disc) and, together with Sony Pictures Worldwide Acquisitions Group, acquires or licenses third party product for distribution in the home entertainment market as well as other distribution windows.  Sony Pictures Digital Production operates Sony Pictures Imageworks, a digital effects studio, and Sony Pictures Animation, a developer and producer of computer graphic animated films.  SPE also manages a studio facility, Sony Pictures Studios, which includes post production facilities, at SPE’s world headquarters in Culver City, California.
 
 
In the Financial Services segment, on April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company for Sony Life, Sony Assurance and Sony Bank, with the aim of integrating various financial services including insurance and savings and loans, and offering individual customers high value-added products and high-quality services.  On October 11, 2007, in conjunction with the global initial public offering of shares of SFH, the shares of SFH were listed for trading on the First Section of the TSE.  Following this global offering, SFH remains a consolidated subsidiary with Sony Corporation as the majority shareholder.
 
Sony conducts insurance and banking operations primarily through Sony Life, a Japanese life insurance company, Sony Assurance, a Japanese non-life insurance company, and Sony Bank, a Japanese Internet-based bank, which are all wholly-owned by SFH.  Aside from SFH, Sony is also engaged in a leasing and credit financing business in Japan through Sony Finance International Inc., a wholly-owned subsidiary of Sony Corporation.


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On October 1, 2008, Sony acquired Bertelsmann’s 50 percent equity interest in SONY BMG, for cash consideration of 900 million U.S. dollars and transaction costs of 19 million U.S. dollars.  SONY BMG was a 50-50 joint venture between Sony and Bertelsmann created in August 2004.  Prior to this acquisition, Sony’s 50 percent equity interest was accounted for under the equity method of accounting.  As a result of the acquisition, SONY BMG became a wholly-owned subsidiary of Sony.  The results of SONY BMG were consolidated by Sony within All Other beginning October 1, 2008.  SONY BMG changed its name to SME on January 1, 2009.
 
All Other is mainly comprised of SME, a global entertainment company, excluding Japan, engaged primarily in the development, production and distribution of recorded music in all commercial formats and genres; SMEJ, a Japanese domestic recorded music business that produces recorded music and music videos through contacts with many artists in all music genres; a U.S. based music publishing business that owns and acquires rights to musical compositions, exploiting and marketing these compositions and receiving royalties or fees for their use; So-net, an Internet-related service business subsidiary operating mainly in Japan; and an advertising agency business in Japan.
 
 
The following table shows Sony’s sales in each of its major markets for the periods indicated.  Figures in parentheses indicate the percentage contribution of each region to total worldwide sales and operating revenue.
 
                                                 
    Fiscal Year Ended March 31
    2007   2008   2009
    (Yen in millions)
 
Japan
    2,127,841       (25.6 )     2,056,374       (23.2 )     1,873,219       (24.2 )
United States
    2,232,453       (26.9 )     2,221,862       (25.1 )     1,827,812       (23.6 )
Europe
    2,037,658       (24.6 )     2,328,233       (26.2 )     1,987,692       (25.7 )
Other Areas
    1,897,743       (22.9 )     2,264,945       (25.5 )     2,041,270       (26.5 )
             
             
Sales and operating revenue
    8,295,695       (100.0 )     8,871,414       (100.0 )     7,729,993       (100.0 )
             
             
 
 
Sony’s electronics products and services are marketed throughout the world under the trademark “Sony,” which has been registered in approximately 200 countries and territories.
 
In most cases, sales of Sony’s electronics products are made to sales subsidiaries of Sony Corporation located in or responsible for sales in the countries and territories where Sony’s products and services are marketed.  These subsidiaries then sell those products to unaffiliated local distributors and dealers or through direct sales via the Internet.  In some regions, sales of certain products and services are made directly to local distributors by Sony Corporation.
 
Sales in the Electronics segment are particularly seasonal and also vary significantly with the timing of new product introductions and economic conditions of each country.  Sales for the third quarter ending December 31 of each fiscal year are generally higher than other quarters of the same fiscal year due to demand in the year-end holiday season.
 
 
Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services.  For electronic components, Sony sells products directly to wholesalers and manufacturers.
 
 
Sony markets its electronics products and services through Sony Electronics Inc. and other wholly-owned subsidiaries in the U.S.


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In Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony United Kingdom Limited, Sony France S.A., Sony Deutschland G.m.b.H., ZAO Sony Electronics in Russia, and Sony Espana S.A.
 
 
In overseas areas other than the U.S. and Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony (China) Limited, Sony Corporation of Hong Kong Limited, Sony Gulf FZE in the United Arab Emirates, Sony Taiwan Limited, and Sony of Canada Limited.
 
 
SCEI, SCEA, SCEE and subsidiaries in Asia, market and distribute PS2, PSP and PS3 entertainment hardware and related software.
 
Sales in the Game segment are dependent on the timing of the introduction of attractive software and a significant portion of overall demand is weighted towards the year-end holiday season.
 
 
SPE, with global operations in more than 130 countries, generally retains all rights relating to the worldwide distribution of its internally produced motion pictures, including rights for theatrical exhibition, home entertainment distribution, pay and free television exhibition and other markets.  SPE also acquires distribution rights to motion pictures produced by other companies and jointly produces films with other studios or production companies.  These rights may be limited to particular geographic regions, specific forms of media or periods of time.  SPE uses its own distribution service business, Sony Pictures Releasing, for the U.S. theatrical release of its films and for the theatrical release of films acquired from and produced by others.
 
Outside the U.S., SPE generally distributes and markets its films through one of its Sony Pictures Releasing International subsidiaries.  In certain countries, however, SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.
 
SPE’s theatrical release strategy focuses on offering a diverse slate of films with a mix of genres, talent and budgets.  For the fiscal year ending March 31, 2010, 43 films are currently slated for release by SPE, including ten films under the Columbia banner, nine films under the Screen Gems or TriStar banner, one Sony Pictures Animation film and 23 Sony Pictures Classics releases.  SPE has a motion picture library of more than 3,500 feature films, including 12 that have won the Best Picture Academy Award®.  Currently, SPE is converting this library (including acquired product) to a digital format and approximately 2,700 titles have been converted.
 
The worldwide home entertainment distribution of SPE’s motion pictures and television programming (and programming acquired or licensed from others) is handled through Sony Pictures Home Entertainment, except in certain countries where SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.  Product is distributed on DVD and Blu-ray formats.
 
The worldwide television distribution of SPE’s motion pictures and television programming (and programming acquired or licensed from others) is handled through SPT.  SPE’s library of television programming and motion pictures is licensed to affiliated and independent stations and broadcasters in the U.S. and to affiliated and independent international television stations and other broadcasters throughout the world.  SPE’s global channel network generates advertising and subscription revenues.
 
 
Sony Life conducts its life insurance business primarily in Japan.  Sony Life’s core business is providing death protection and other insurance products to individuals, primarily through a consulting-based sales approach utilizing its experienced team of Lifeplanner® sales employees and Partner independent sales agents.  Sony Life provides tailor-made life insurance products that are optimized for each customer.  As of March 31, 2009, Sony


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Life employed 3,891 Lifeplanner® sales employees.  As of the same date, Sony Life maintained an extensive service network including 82 Lifeplanner® retail offices, 27 regional sales offices, and 2,112 sales agents in Japan.  Sony Life also has one representative office in Beijing, which opened in October 2008, for the purpose of researching the financial and life insurance market in China.  In addition, Sony Life’s life insurance business also includes sales in the Philippines through Sony Life’s wholly-owned subsidiary, Sony Life Insurance (Philippines) Corporation.  As part of its plan to expand its sales of individual annuity products, Sony Life has entered into an agreement with AEGON N.V. for the establishment of a new Japanese joint venture company.  The new joint venture company is expected to commence operations in the fiscal year ending March 31, 2010, subject to regulatory approval.
 
Sony Assurance has conducted a non-life insurance business in Japan since October 1999.  Sony Assurance’s core business is providing automobile insurance products and medical and cancer insurance products to individual customers, primarily through direct marketing via the Internet and the telephone.  The direct marketing business model employed by Sony Assurance enables it to improve operating efficiency and lower the costs of marketing and maintaining its insurance policies, creating savings which it passes on to policyholders in the form of competitively-priced premiums.
 
Sony Bank has conducted banking operations in Japan since June 2001.  As an Internet bank focusing on the asset management and borrowing needs of individual customers, Sony Bank offers an array of products and services including yen and foreign currency deposits, investment trusts, mortgages and other individual loans.  By using Sony Bank’s transaction channel, the “MONEYKit” service website, account holders can invest and manage assets according to their life plans over the Internet.  As part of its plan to respond to its customers’ diverse asset management needs, Sony Bank launched online securities brokerage services through its wholly-owned subsidiary, Sony Bank Securities Inc., in October 2007.
 
 
SME and SMEJ produce, market, and distribute CDs, DVDs, and pre-recorded audio and video software.  SME and its affiliates conduct business in countries other than Japan under “Columbia/Epic Label Group,” “RCA/Jive Label Group” and other labels.  SMEJ conducts business in Japan under “Sony Records,” “Epic Records,” “Ki/oon Records,” “SMEJ Associated Records,” “Defstar Records,” and other labels.
 
Sony owns and acquires rights to musical compositions, exploits and markets these compositions, receives royalties or fees for their use and conducts its music publishing business through a joint venture with a third-party investor in countries other than Japan primarily under the Sony/ATV Music Publishing name.
 
So-net provides Internet broadband network services to subscribers as well as creating and distributing content through its portal service to various platforms including PCs, mobile phones and other home electronics devices including TVs and game consoles.
 
 
Sony pursues procurement of raw materials, parts and components to be used in the production of its products on a global basis on the most favorable terms that it can achieve.  These items are purchased from various suppliers around the world.  Generally, Sony maintains multiple suppliers for most significant categories of parts and components.
 
When raw materials, parts and components become scarce, the cost of production rises.  For example, the market price of copper has the potential to proportionately affect the cost of parts that utilize copper, such as printed circuit boards and power cables.  The price of cobalt, which is used in applications involving lithium-ion batteries as well as a range of recording media, may also fluctuate and impact the cost of those items.  The price of resin may impact the cost of plastic parts.  With respect to parts and components, LCD panels and memory devices, which are used in multiple applications, can influence Sony’s business performance when the cost of such parts and components fluctuates substantially.


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In the Electronics and Game segments, Sony provides repair and servicing functions in the areas where its products are sold.  Sony provides these services through its own service centers, factories, authorized independent service centers, authorized servicing dealers and subsidiaries.
 
In line with the industry practices of the electronics and game businesses, almost all of Sony’s products sold in Japan carry a warranty, generally for a period of one year from the date of purchase, covering repairs, free of charge, in the case of a malfunction in the course of ordinary use of the product.  In the case of broadcast- and professional-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 area in which it is marketed.
 
To further ensure customer satisfaction, Sony maintains customer information centers in its principal markets.
 
 
Sony has a number of Japanese and foreign patents relating to its products.  Sony is licensed to use a number of patents owned by others, covering a wide range of products.  Certain licenses are important to Sony’s business, such as those for optical disc-related and Digital TV products.  With respect to optical disc-related products, Sony products that employ DVD-Video player functions, including PS2 and PS3 hardware, are substantially dependent upon certain patents that relate to technologies specified in the DVD specification and are licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp.  Sony products that employ Blu-ray Disc player functions, including PS3 hardware, and that also employ DVD-Video player functions, are substantially dependent upon certain patents that relate to technologies specified in the Blu-ray Disc specification and are licensed by MPEG LA LLC and AT&T, in addition to the patents that relate to technologies specified in the DVD specification, as described above.  Sony’s Digital TV products are substantially dependent upon certain patents that relate to technologies specified in the Digital TV specification and are licensed by Thomson Licensing Inc.  Sony considers its overall license position beneficial to its operations.  While Sony believes that its various proprietary intellectual property rights are important to its success, it believes that neither its business as a whole nor any business segment is materially dependent on any particular patent or license, or any particular group of patents or licenses, except as set forth above.
 
 
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.  Refer to “Risk Factors” in “Item 3. Key Information.”
 
In the Electronics segment, Sony believes that its product planning and product design expertise, the high quality of its products, its record of innovative product introductions and product improvements, its price competitiveness derived from reductions in manufacturing and indirect costs, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position.
 
The Game segment is in a historically volatile and highly dynamic industry, and SCE’s competitive position is affected by changing technology and product introductions, product pricing, limited platform life cycles, popularity of software titles, seasonality, consumer spending and other economic trends.  To be successful in the game industry, it is important to win customer acceptance of SCE’s platforms.
 
In the Pictures segment, SPE faces intense competition from all forms of entertainment and other leisure activities to attract the attention of audiences worldwide.  SPE competes with other major motion picture studios and, to a lesser extent, with independent production companies.  SPE must compete to obtain story rights and talent, including writers, actors, directors and producers, which are essential to the success of SPE’s products.  In motion picture production and distribution, SPE faces competition to obtain exhibition and distribution outlets and optimal release dates for its products.  Competition in television production and distribution is also intense because available broadcast time is limited and the audience is increasingly fragmented among broadcast networks, cable and other outlets both in the U.S. and internationally.  Furthermore, broadcast networks in the U.S. continue


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to produce their own shows internally.  This competitive environment may result in fewer opportunities to produce shows for U.S. networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings.  SPE’s global channel network competes for viewers with broadcast networks, cable and other forms of entertainment.  The growth in the number of networks has increased the competition for advertising and subscription revenues, acquisition of programming, and distribution by cable, satellite and other distribution systems.
 
In the Financial Services segment, Sony faces strong competition in the financial services markets in Japan.  In recent years, the regulatory barriers between the life insurance and non-life insurance industries as well as among the insurance, banking and securities industries have been relaxed, resulting in new competitive pressures.
 
Sony Life competes not only with traditional insurance companies in Japan but also with other companies including Japan’s largest financial services providers that either have their own insurance subsidiaries or enter into cooperative arrangements with major insurance companies, foreign-owned life insurance companies and a number of Japanese cooperative associations.
 
Sony Assurance competes against insurers that sell their policies through sales agents as well as insurers that, like Sony Assurance, primarily sell their policies through direct marketing via the telephone and the Internet.  Competition in Japan’s non-life insurance industry has intensified in recent years, in part due to a number of new market entrants, including foreign-owned insurers.
 
Some of the competitors in the life insurance and non-life insurance businesses have advantages over Sony including:
 
  •  greater financial resources and financial strength ratings;
 
  •  greater brand awareness;
 
  •  more extensive marketing and sales networks, including through tie-ups with other types of financial institutions;
 
  •  more competitive pricing;
 
  •  larger customer bases; and
 
  •  a wider range of products and services.
 
Sony Bank has focused on providing retail asset management and lending services for individuals, and faces significant competition in Japan’s retail financial services market.  Sony Bank competes with Japan’s traditional banking institutions, regional banks, trust banks, non-bank companies, and Japan’s full-service and online brokerage firms.  In addition, Sony Bank may also compete with Japan Post Bank Co., Ltd.
 
In the Financial Services segment, it is important to maintain a strong and healthy financial foundation for the business as well as to meet diversifying customer needs.  Sony Life has maintained a high solvency margin ratio, relative to Japanese domestic criteria that require the maintenance of a minimum solvency margin ratio.  Sony Assurance also has maintained a high solvency margin ratio relative to the aforementioned Japanese domestic criteria.  Sony Bank has maintained an adequate capital adequacy ratio relative to the Japanese domestic criteria concerning this ratio.
 
Within All Other, success at SME and SMEJ 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.  SME’s and SMEJ’s future competitive positions depend on their continuing ability to attract and develop artists who can achieve a high degree of public acceptance.  So-net faces competition in Japan from many existing large companies, as well as from new entrants to the market.  Telecommunications companies that possess a large Internet-ready infrastructure and other entrants that compete solely on the basis of price have created a market in which competitive price reductions are the norm.  Rapid technological advancement has created many new opportunities but it has also increased the rate at which new and more efficient services must be brought to market to earn customer approval.  Customer price elasticity is high, and users are able to change Internet service providers with increasing ease.  The penetration of mobile Internet services provided by telecommunications companies may also provide a substitute to the home-centric Internet service provided by So-net.


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Sony’s business activities are subject to various governmental regulations in the different countries in which it operates, including regulations relating to various business/investment approvals, trade affairs including customs, import and export control, competition and antitrust, anti-bribery, advertising and promotion, intellectual property, broadcasting, consumer and business taxation, foreign exchange controls, personal information protection, product safety, labor, occupational health, and environmental and recycling requirements.
 
In Japan, Sony’s insurance businesses are subject to the Insurance Business Act and approvals and oversight from the Financial Services Agency (“FSA”).  The Insurance Business Act specifies the types of businesses insurance companies may engage in, imposes limits on the types and amounts of investments that can be made and requires insurance companies to maintain specified reserves and a minimum solvency margin ratio.  Particularly, life insurance companies must maintain a premium reserve (other than unearned premiums), an unearned premium reserve, a reserve for refunds with respect to certain insurance contracts of life insurance companies specified in such regulations, and a contingency reserve in amounts no lower than the amounts of the “standard policy reserve” for which the method of provision was set forth by the regulatory guidelines.  Non-life insurance companies are also similarly required to provide a policy reserve.  The primary purpose of the Insurance Business Act and related regulations is to protect policyholders, not shareholders.  Sony Bank is also subject to regulation by the FSA under the Banking Act of Japan, including the requirement that it maintain a minimum capital adequacy ratio in accordance with capital adequacy guidelines adopted by the FSA based on the Basel II agreement.  The FSA has broad regulatory powers over insurance and banking businesses in Japan, including the authority to grant or revoke operating licenses and to request information and conduct onsite inspections of books and records.  In addition, Sony’s telecommunication businesses in Japan are subject to approvals and oversight from the Ministry of Internal Affairs and Communications, under its Telecommunication Business Act and other regulations related to the Internet businesses and communication methods in Japan.
 
Also refer to “Risk Factors” in “Item 3. Key Information.”
 
 
The following table sets forth the significant subsidiaries owned, directly or indirectly, by Sony Corporation.
 
             
    Country of
  (As of March 31, 2009)
Name of company
  incorporation   Percentage owned
 
Sony EMCS Corporation
  Japan     100.0  
Sony Semiconductor Kyushu Corporation
  Japan     100.0  
Sony Marketing (Japan) Inc. 
  Japan     100.0  
Sony Computer Entertainment Inc. 
  Japan     100.0  
Sony Music Entertainment (Japan) Inc
  Japan     100.0  
Sony Financial Holdings Inc. 
  Japan     60.0  
Sony Life Insurance Co., Ltd. 
  Japan     100.0  
Sony Americas Holding Inc. 
  U.S.A.     100.0  
Sony Corporation of America
  U.S.A.     100.0  
Sony Electronics Inc. 
  U.S.A.     100.0  
Sony DADC Austria A.G. 
  Austria     100.0  
Sony Computer Entertainment America Inc. 
  U.S.A.     100.0  
Sony Pictures Entertainment Inc. 
  U.S.A.     100.0  
Sony Europe G.m.b.H
  Germany     100.0  
Sony United Kingdom Ltd. 
  U.K.     100.0  
Sony Computer Entertainment Europe Ltd. 
  U.K.     100.0  
Sony Global Treasury Services Plc
  U.K.     100.0  
Sony Electronics Asia Pacific Pte. Ltd. 
  Singapore     100.0  
Sony Music Entertainment
  U.S.A.     100.0  


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Sony has a number of offices, plants and warehouses throughout the world.  Most of the buildings in, 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, 2009 with respect to plants used for the production of products mainly for the Electronics segment with floor space of more than 500,000 square feet:
 
             
    Approximate
     
Location
  floor space     Principal products produced
    (square feet)      
 
In Japan:
           
             
Nagasaki
(Sony Semiconductor Kyushu Corporation
— Nagasaki TEC)
    2,266,000     CMOS image sensors and other semiconductors
             
Kumamoto
(Sony Semiconductor Kyushu Corporation
— Kumamoto TEC)
    2,115,000     CCDs, CMOS image sensors, LCDs and other semiconductors
             
Kagoshima
(Sony Semiconductor Kyushu Corporation
— Kagoshima TEC)
    1,787,000     CCDs, CMOS image sensors, LCDs and other semiconductors
             
Higashiura, Aichi
(Sony Mobile Display Corporation)
    1,281,000     LCDs
             
Kohda, Aichi
(Sony EMCS Corporation — Kohda TEC)
    940,000     Video cameras, compact digital cameras and Memory Sticks
             
Inazawa, Aichi
(Sony EMCS Corporation — Inazawa TEC)
    864,000     LCD televisions and organic light-emitting diode televisions
             
Kanuma, Tochigi
(Sony Chemicals & Information Device Corporation — Kanuma Plant)
    791,000     Magnetic tapes, adhesives and electronic components
             
Tochigi, Tochigi
(Sony Energy Devices Corporation
— Tochigi Plant)
    609,000     Magneto-optical disc and batteries
             
Koriyama, Fukushima
(Sony Energy Devices Corporation
— Koriyama Plant)
    587,000     Batteries
             
Kosai, Shizuoka
(Sony EMCS Corporation — Kosai TEC)
    568,000     Broadcast- and professional-use video equipment
             
Minokamo, Gifu
(Sony EMCS Corporation — Minokamo TEC)
    544,000     Video cameras, compact digital cameras, digital SLR cameras, mobile phones and video conference systems
             
Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)
    539,000     Blu-ray Disc players/recorders, audio equipment and video conference systems


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    Approximate
     
Location
  floor space     Principal products produced
    (square feet)      
 
Overseas:            
             
Huizhou, China
(Sony Precision Devices (Huizhou) Co., Ltd.)
    1,386,000     Optical pickups and LCDs
             
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd., Sony Digital Products (Wuxi) Co., Ltd. and Sony (China) Ltd.)
    1,363,000     Batteries and compact digital cameras
             
Terre Haute, Indiana, U.S.A.
(Sony DADC US Inc.) 
    1,229,000     Blu-ray Disc-ROMs, CDs, DVDs and UMDs (Universal Media Disc)
             
Penang, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)
    988,000     Optical disc drives, batteries and audio equipment
             
Tijuana, Mexico
(Sony Baja California — Tijuana Factory)
    946,000     LCD televisions, TV components and audio equipment
             
Dothan, Alabama, U.S.A.
(Sony Dothan Alabama)
    809,000     Magnetic tapes
             
Bangi, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — KL TEC)
    797,000     LCD televisions, TV components, Blu-ray Disc players and DVD-players/recorders
             
Tuas, Singapore
(Sony Electronics (Singapore) Pte. Ltd. 
    776,000     Batteries
             
Guangzhou, China
(Sony Electronics Huanan Co., Ltd.)
    707,000     Optical pickups
             
Nitra, Slovakia
(Sony Slovakia s.r.o)
    665,000     LCD televisions and TV components
             
Viladecavallas, Spain
(Sony Espana, S.A.)
    578,000     LCD televisions and TV components
             
Bangkadi, Thailand
(Sony Device Technology (Thailand) Co.
— Bangkadi Technology Centre)
    501,000     CCDs, CMOS image sensors and other semiconductors
 
In addition to the above facilities, Sony has a number of other plants for electronic products throughout the world.  Sony owns research and development facilities, and employee housing and recreation facilities, as well as Sony Corporation’s headquarters main building, with a total floor space of approximately 1,753,000 square feet, in Tokyo, Japan, where administrative functions and product development activities are carried out.  SCEI leases its corporate headquarters buildings located in Tokyo, where administrative functions, product development, and software development are carried out.  SCEA and SCEE lease their offices in the U.S. and Europe, respectively.
 
SPE’s corporate offices and motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates a studio facility, Sony Pictures Studios, with aggregate floor space of approximately 1,373,000 square feet.  SPE also leases office space and motion picture and television support facilities from affiliates of Sony Corporation and other third parties in various worldwide locations.  SPE’s film and videotape storage operations are located in various leased locations in the U.S. and Europe.

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SME’s corporate offices are headquartered in New York, NY where it leases office space from Sony Corporation of America (“SCA”).  SME also leases office space from third parties in various locations worldwide.
 
Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.
 
In December 2008, SCA renewed its option under a lease with a variable interest entity, which is consolidated by Sony, for its corporate headquarters.  Sony has the option to purchase the building at any time during the lease term, which expires in December 2015.  The aggregate floor space of this building is approximately 723,000 square feet.
 
During the fiscal year ended March 31, 2009, Sony ceased or announced plans to cease manufacturing at a total of eight manufacturing sites, four in Japan and four outside of Japan.  In Japan, Sony plans to cease manufacturing at Sony EMCS Ichinomiya TEC in June 2009 and at Sony EMCS Omigawa TEC, Sony EMCS Hamamatsu TEC and Sony EMCS Senmaya TEC in December 2009.  Outside of Japan, manufacturing ceased at Sony Technology Center — Pittsburgh in February 2009, and at Sony France S.A. — Dax Technology Center in April 2009.  Sony also announced plans to cease manufacturing at Sony Baja California Mexicali in September 2009 and at Sony Chemicals Indonesia in September 2009, with plans to transfer its operations to PT Venturindo Jaya Batam.
 
Item 4A.  Unresolved Staff Comments
 
Not applicable.
 
Item 5.  Operating and Financial Review and Prospects
 
 
Operating Results for the Fiscal Year Ended March 31, 2009 compared with the Fiscal Year Ended
March 31, 2008
 
 
Effective from the fiscal year ended March 31, 2009, Sony revised the presentation of its financial information to ensure that it is consistent with the way management views its consolidated operations.  Since Sony considers Sony Ericsson Mobile Communications AB (“Sony Ericsson”) and S-LCD Corporation (“S-LCD”) to be integral to Sony’s operations, Sony determined that the most appropriate method to report equity in net income (loss) of all affiliated companies was as a component of operating income (loss).  The equity earnings from Sony Ericsson and S-LCD are recorded within operating income (loss) of the Electronics segment.  In connection with this reclassification, consolidated operating income (loss), operating income (loss) of each segment and consolidated income (loss) before income taxes and minority interest for all prior periods have been reclassified to conform with the current year presentation.  Through September 30, 2008, Sony also reported the equity results for SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”) within All Other.  As a result of Sony’s acquisition of Bertelsmann AG’s (“Bertelsmann”) 50 percent interest in SONY BMG on October 1, 2008, effective from that date, Sony consolidated the results of SONY BMG as a wholly-owned subsidiary within All Other.  SONY BMG changed its name to Sony Music Entertainment (“SME”) on January 1, 2009.
 
Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2009 decreased 12.9 percent compared with the previous fiscal year.  During the fiscal year ended March 31, 2009, the average value of the yen was 99.5 yen against the U.S. dollar and 142.0 yen against the euro, which was 13.8 percent and 12.7 percent higher against the U.S. dollar and the euro, respectively, compared with the average rates for the previous fiscal year.  Electronics segment sales decreased 17.0 percent compared to the prior fiscal year mainly due to the negative impact of the appreciation of the yen, deterioration in the business environment brought on by the slowing global economy and intensification of price competition.  In the Game segment, sales decreased 18.0 percent compared to the prior fiscal year primarily due to the impact of the appreciation of the yen, and a decrease in unit sales of PlayStation®2 (“PS2”).  In the Pictures segment, sales decreased 16.4 percent compared to the previous fiscal year primarily due to unfavorable exchange rates and lower home entertainment sales.  The prior fiscal year’s revenue also benefited from the sale of a bankruptcy claim against KirchMedia GmbH & Co. KGaA (“KirchMedia”).  In the Financial Services segment, although revenue from insurance premiums at Sony Life Insurance Co., Ltd. (“Sony


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Life”) increased, the segment revenue decreased 7.4 percent compared to the previous fiscal year, due to the impact of a significant decline in the Japanese stock market.
 
An operating loss of 227.8 billion yen was recorded, a deterioration of 703.1 billion yen compared to the previous fiscal year.  In the Electronics segment, an operating loss was recorded mainly due to the negative impact from the appreciation of the yen, deterioration in equity in net income (loss) for Sony Ericsson, the higher cost of sales ratio due to intensified price competition and a decrease in sales due to deterioration in the business environment.  In the Game segment, the operating loss decreased as a result of PLAYSTATION®3 (“PS3”) hardware cost reductions and increased sales of PS3 software.  In the Pictures segment, operating income decreased primarily due to the lower home entertainment sales and the absence of the prior fiscal year’s sale of the bankruptcy claim against KirchMedia.  In the Financial Services segment, an operating loss was recorded mainly due to deterioration in profitability at Sony Life resulting from a significant decline in the Japanese stock market.  In addition, operating income for the prior fiscal year included a gain on the sale of a portion of the site of Sony’s former headquarters of 60.7 billion yen which was recorded in “Corporate,” the recording of a 15.6 billion yen gain relating to the sale of a portion of Sony’s semiconductor manufacturing operations in Nagasaki, Japan, including machinery and equipment, which was recorded in the Electronics segment, and a gain on the sale of the urban entertainment complex “The Sony Center am Potsdamer Platz” in Berlin, Germany, of 10.0 billion yen, which was recorded in All Other.
 
 
In the fiscal year ended March 31, 2009, Sony incurred 75.4 billion yen of restructuring charges, mainly within the Electronics segment, compared with 47.3 billion yen in the prior fiscal year.  Of the overall total of 75.4 billion yen, 56.4 billion yen was for personnel-related restructuring costs.  For the fiscal year ending March 31, 2010, Sony anticipates recording restructuring charges of 110 billion yen.
 
In the Electronics segment, restructuring charges were 61.9 billion yen compared to 45.6 billion yen in the previous fiscal year.  Restructuring efforts undertaken in the current year included headcount reduction programs, initiatives to advance rationalization of manufacturing operations, shifting and aggregating manufacturing to lower-cost countries and utilizing the services of third-party original equipment and design manufacturers (OEMs and ODMs).  As part of its restructuring efforts, Sony ceased production in February 2009 at Sony Technology Center — Pittsburgh, United States (where LCD televisions were manufactured), and in April 2009 at Sony France S.A. — Dax Technology Center (where tape and other recording media were manufactured).  Furthermore, in addition to the factories mentioned above, Sony announced plans to cease or shift production at four sites in Japan and two sites outside of Japan by the end of December 2009.
 
As part of the above restructuring measures, Sony has undergone several headcount reduction programs to further reduce operating costs within its Electronics segment.  As a result of these programs, Sony recorded restructuring charges totaling 44.5 billion yen for the fiscal year ended March 31, 2009, and these charges were included in selling, general and administrative expenses in the consolidated statements of income.  The remaining liability balance as of March 31, 2009 was 42.4 billion yen and will be paid throughout the fiscal year ending March 31, 2010.
 
Sony will continue to implement programs to reduce headcount by streamlining business operations, including closure and consolidation of manufacturing sites and the consolidation of headquarters and administrative functions.
 
For more detailed information about restructuring, please refer to Note 18 of the notes to the consolidated financial statements.


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Operating Performance
 
                         
    Fiscal Year Ended
   
    March 31    
    2008   2009   Percent change
    (Yen in billions)    
 
Sales and operating revenue
    8,871.4       7,730.0       –12.9 %
Equity in net income (loss) of affiliated companies
    100.8       (25.1 )      
Operating income (loss)
    475.3       (227.8 )      
Income (loss) before income taxes and minority interest
    567.1       (175.0 )      
Net income (loss)
    369.4       (98.9 )      
 
 
Sales for the fiscal year ended March 31, 2009 decreased by 1,141.4 billion yen, or 12.9 percent, to 7,730.0 billion yen compared with the previous fiscal year.  A further breakdown of sales figures is presented under “Operating Performance by Business Segment” below.
 
“Sales” in the analysis of the ratio of cost of sales to sales and the ratio of selling, general and administrative expenses to sales, refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue (which excludes financial service revenue).  This is because “Financial Service expenses” are recorded separately from cost of sales and selling, general and administrative expenses in the consolidated financial statements.  The calculations of all ratios below that pertain to business segments include intersegment transactions.
 
 
Cost of sales for the fiscal year ended March 31, 2009 decreased by 629.5 billion yen, or 10.0 percent, to 5,660.5 billion yen compared with the previous fiscal year, and increased from 75.6 percent to 78.5 percent as a percentage of sales.  The cost of sales ratio increased from 77.9 percent to 83.5 percent in the Electronics segment, decreased from 93.9 percent to 87.7 percent in the Game segment, and increased from 58.6 percent to 58.8 percent in the Pictures segment compared with the prior fiscal year.
 
In the Electronics segment, there was deterioration in the cost of sales ratio for several products, in particular LCD televisions, PCs and compact digital cameras.  The cost of sales ratio in the Game segment improved as a result of PS3 hardware cost reductions and increased sales of PS3 software.
 
Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2009 decreased by 23.3 billion yen to 497.3 billion yen compared with the previous fiscal year.  The ratio of research and development costs to sales was 6.9 percent compared to 6.3 percent in the previous fiscal year.
 
Selling, general and administrative expenses for the fiscal year ended March 31, 2009 decreased by 28.4 billion yen, or 1.7 percent, to 1,686.0 billion yen compared with the previous fiscal year.  The overall ratio of selling, general and administrative expenses to sales increased from 20.6 percent in the previous fiscal year to 23.4 percent, 16.2 percent to 18.6 percent in the Electronics segment, from 15.8 percent to 17.8 percent in the Games segment and from 35.1 percent to 38.1 percent in the Pictures segment.
 
Personnel-related costs in selling, general and administrative expenses increased by 32.5 billion yen compared with the previous fiscal year mainly due to an increase in restructuring charges within the Electronics segment.  Overall advertising and publicity expenses for the fiscal year decreased by 32.3 billion yen compared with the previous fiscal year due to the impact of the appreciation of the yen and a decrease in advertising and publicity expenses mainly in the Game segment.
 
Loss on sale, disposal or impairment of assets, net was 38.3 billion yen, compared with a 37.8 billion yen gain on sale, disposal or impairment of assets, net in the previous fiscal year.  This loss was primarily the result of impairment charges including long-lived asset impairments mainly as a result of downsizing and withdrawal from


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certain businesses in the Electronics segment as well as goodwill impairment charges in All Other.  The gain recorded in the previous fiscal year was primarily from a gain on the sale of a portion of the site of Sony’s former headquarters of 60.7 billion yen and a gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin of 10.0 billion yen.
 
 
Equity in net loss of affiliated companies was 25.1 billion yen, a deterioration of 125.9 billion yen compared to the prior fiscal year.  Sony recorded equity in net loss for Sony Ericsson of 30.3 billion yen, compared to equity in net income of 79.5 billion yen in the previous fiscal year, primarily as a result of a less favorable product mix and price pressure, a decrease in unit shipments due to the global economic slowdown, as well as the recording of restructuring charges.  Equity in net income for S-LCD, a joint-venture with Samsung Electronics Co., Ltd. (“Samsung”), decreased 0.5 billion yen compared with the prior fiscal year to 6.9 billion yen.
 
Sony also recorded equity in net loss of 6.0 billion yen for SONY BMG, as opposed to equity in net income of 10.0 billion yen in the prior fiscal year.
 
 
Operating loss for the fiscal year ended March 31, 2009 was 227.8 billion yen, compared with a profit of 475.3 billion yen in the previous fiscal year.  The Electronics segment, the Game segment and the Financial Services segment contributed to the operating loss.  For a further breakdown of operating income (loss) for each segment, please refer to “Operating Performance by Business Segment” below.
 
 
For the fiscal year ended March 31, 2009, other income decreased by 50.6 billion yen, or 33.9 percent, to 98.8 billion yen, while other expenses decreased by 11.6 billion yen, or 20.2 percent, to 46.0 billion yen compared with the previous fiscal year.  The net amount of other income and other expenses was net other income of 52.8 billion yen, a decrease of 39.0 billion yen compared with the previous fiscal year.
 
The gain on change in interest in subsidiaries and equity investees decreased by 80.2 billion yen, or 97.7 percent compared to the previous fiscal year, to 1.9 billion yen.  This decrease is due to the recording of a gain of 81.0 billion yen for the change in interest in subsidiaries and equity investees as a result of the global initial public offering of shares of Sony Financial Holdings Inc. (“SFH”) in connection with the listing of shares on the First Section of the Tokyo Stock Exchange (“TSE”) in the previous fiscal year.
 
Interest and dividends in other income of 22.3 billion yen was recorded in the fiscal year ended March 31, 2009, a decrease of 12.0 billion yen, or 34.9 percent compared with the previous fiscal year.  For the fiscal year ended March 31, 2009, interest expense totaling 24.4 billion yen was recorded, an increase of 1.4 billion yen, or 6.3 percent compared with the previous fiscal year.
 
In addition, net foreign exchange income of 48.6 billion yen was recorded in the fiscal year ended March 31, 2009, an increase of 43.0 billion yen as compared to the previous fiscal year.  Net foreign exchange income was recorded due to the value of the yen, during the first through third quarter of the fiscal year ended March 31, 2009, appreciating against other currencies from the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts.
 
These contracts were entered into by Sony to mitigate the foreign exchange fluctuation risk to cash flows that arises from settlements of foreign currency denominated accounts receivable and accounts payable, as well as foreign currency denominated transactions between consolidated subsidiaries.
 
 
A loss before income taxes and minority interest of 175.0 billion yen was recorded, compared to income of 567.1 billion yen in the previous fiscal year primarily as a result of deterioration in operating profitability and a decrease in the gain on the change in interest in subsidiaries and equity investees mentioned above.


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Sony recorded an income tax benefit amounting to 72.7 billion yen resulting in an effective tax rate of 41.6 percent.  This is mainly due to a loss before income taxes and minority interest during the current fiscal year and the partial reversal of certain deferred tax liabilities amounting to 55.5 billion yen for undistributed earnings of foreign subsidiaries and affiliates, due to a change in the tax regulations in Japan to treat 95 percent of the dividends from overseas subsidiaries as non-taxable income, partially offset by the impact of the inclusion of equity in net loss of affiliated companies into net loss before income taxes and minority interest, the reversal of certain deferred tax assets for foreign tax credits at Sony Corporation and an increase in valuation allowances recorded on deferred tax assets for net operating loss carryforwards at certain subsidiaries.
 
 
In the fiscal year ended March 31, 2009, minority interest in loss of consolidated subsidiaries of 3.3 billion yen was recorded, a 2.5 billion yen decrease as compared to the previous fiscal year.  Minority interest in loss was recorded in the current fiscal year mainly due to the loss recorded at Sony Life.  The operating results of SFH in the fiscal year ended March 31, 2009 were negatively impacted mainly by the increase in net valuation losses from convertible bonds and an impairment loss on equity securities at Sony Life.
 
 
Net loss for the fiscal year ended March 31, 2009 was 98.9 billion yen, compared with net income of 369.4 billion yen in the previous fiscal year.
 
Basic net loss per share was 98.59 yen compared with net income per share of 368.33 yen in the previous fiscal year, and diluted net loss per share was 98.59 yen compared with diluted net income per share of 351.10 yen in the previous fiscal year.  Refer to Note 22 of the notes to the consolidated financial statements.
 
 
The following discussion is based on segment information.  Sales and operating revenue in each business segment include intersegment transactions.  Refer to Note 26 of the notes to the consolidated financial statements.
 
Business Segment Information
 
                         
    Fiscal Year Ended March 31    
    2008   2009   Percent change
    (Yen in billions)    
 
Sales and operating revenue
                       
Electronics
    6,613.8       5,488.0       −17.0 %
Game
    1,284.2       1,053.1       −18.0  
Pictures
    857.9       717.5       −16.4  
Financial Services
    581.1       538.2       −7.4  
All Other
    382.2       539.6       +41.2  
Elimination
    (847.9 )     (606.4 )      
                         
Consolidated
    8,871.4       7,730.0       −12.9  
                         
 


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    Fiscal Year Ended
   
    March 31    
    2008   2009   Percent change
    (Yen in billions)    
 
Operating income (loss)
                       
Electronics
    441.8       (168.1 )     %
Game
    (124.5 )     (58.5 )      
Pictures
    58.5       29.9       −48.9  
Financial Services
    22.6       (31.2 )      
All Other
    60.8       30.4       −50.1  
                         
Sub-Total
    459.2       (197.4 )      
Elimination and unallocated corporate expenses/gains
    16.1       (30.3 )      
                         
Consolidated
    475.3       (227.8 )      
                         
 
 
Sales and operating revenue for the fiscal year ended March 31, 2009 decreased 1,125.9 billion yen, or 17.0 percent, to 5,488.0 billion yen compared with the previous fiscal year.  An operating loss of 168.1 billion yen was recorded for the fiscal year ended March 31, 2009, compared to income of 441.8 billion yen for the prior fiscal year.  Sales to outside customers decreased 15.2 percent compared with the prior fiscal year.  Regarding sales to outside customers by geographical area, sales decreased by 14 percent in Japan, 20 percent in the U.S., 17 percent in Europe, and 11 percent in non-Japan Asia and other geographic areas (“Other Areas”).
 
In Japan, sales of products such as Blu-ray Disctm recorders increased while sales of products such as CCDs and CMOS image sensors, PCs, a contactless integrated circuit card business and home-use video cameras decreased.  In the U.S., sales of products such as Blu-ray Disc players increased while sales of products such as compact digital cameras, PCs and LCD rear-projection televisions, a business from which Sony has already withdrawn, decreased.  In Europe, sales of products such as digital single-lens reflex (“SLR”) cameras increased while sales of home-use video cameras, PCs, compact digital cameras, DVD recorders and recording media decreased.  In Other Areas, sales of LCD televisions increased while sales of cathode ray tube (“CRT”) televisions (a business from which Sony has already withdrawn), home-use video cameras, compact digital cameras and home audio decreased.
 
 
Sales and operating revenue by product category discussed below represent sales to outside customers, which do not include intersegment transactions.  Refer to Note 26 of the notes to the consolidated financial statements.
 
“Audio” sales decreased by 104.6 billion yen, or 18.7 percent, to 454.0 billion yen.  Sales of products, including home audio, car audio, portable audio and personal navigation systems, decreased.  Despite an increase in worldwide unit shipments of flash memory digital audio players by approximately 1.2 million units to approximately 7.0 million units, revenue decreased due to the impact of price declines and the appreciation of the yen.
 
“Video” sales decreased by 237.2 billion yen, or 18.5 percent, to 1,042.0 billion yen.  Sales of Blu-ray Disc players and recorders increased due to a significant worldwide increase in unit shipments.  Sales of digital SLR cameras increased significantly due to several factors including an expansion of the product line-up.  On the other hand, sales of home-use video cameras, compact digital cameras and DVD recorders decreased, with worldwide unit shipments of home-use video cameras decreasing by approximately 1.5 million units to 6.2 million units, compact digital cameras decreasing by approximately 1.5 million units to 22.0 million units and DVD recorders decreasing by approximately 500,000 units to approximately 1.2 million units.  Moreover, despite worldwide unit shipments of DVD players increasing by approximately 1.2 million units to approximately 9.7 million units, sales decreased due to the impact of price declines and the appreciation of the yen.

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“Televisions” sales decreased by 91.3 billion yen, or 6.7 percent, to 1,275.8 billion yen.  Worldwide LCD television unit shipments increased by approximately 4.6 million units to approximately 15.2 million units, but, due to the impact of price declines and the appreciation of the yen, sales increased only slightly.  Overall, “televisions” category sales decreased as sales of LCD rear-projection and CRT televisions, businesses from which Sony has already withdrawn, were contained in the previous fiscal year.
 
“Information and Communications” sales decreased by 160.7 billion yen, or 14.6 percent, to 942.5 billion yen.  Although worldwide PC unit shipments increased by approximately 600,000 units to approximately 5.8 million units, sales decreased due to price declines and the appreciation of the yen.  Sales of broadcast- and professional-use products decreased as a result of several factors including a decrease in the sales of high-definition related products.
 
“Semiconductors” sales decreased by 32.8 billion yen, or 13.8 percent, to 205.1 billion yen.  This decrease was primarily due to lower sales of CCDs and CMOS image sensors and system large-scale integration (“LSI”).
 
“Components” sales decreased by 170.9 billion yen, or 20.5 percent, to 662.5 billion yen, as sales of products such as recording media, Memory Sticks, optical pickups, low-temperature poli-silicon TFT LCD panels for mobile products, optical disc drives and lithium-ion batteries decreased.
 
“Other” sales decreased by 101.3 billion yen, or 18.3 percent, to 451.1 billion yen, as sales of mobile phones produced for wireless customers and sales of disc manufacturing decreased.
 
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2009 decreased by 573.1 billion yen, or 11.1 percent, to 4,581.5 billion yen.  The cost of sales ratio deteriorated by 5.6 percentage points to 83.5 percent compared to 77.9 percent in the previous fiscal year.  While the cost of sales ratio of such products as Blu-ray Disc players improved, the cost of sales ratio of products such as LCD televisions, PCs and compact digital cameras deteriorated.  Restructuring charges recorded in cost of sales amounted to 6.4 billion yen, a decrease of 13.1 billion yen compared with the 19.5 billion yen recorded in the previous fiscal year.  This change was due to the recording of significant charges for impairment losses and depreciation on LCD rear-projection televisions in the fiscal year ended March 31, 2008.  Research and development costs decreased 14.9 billion yen, or 3.4 percent, from 438.7 billion yen in the previous fiscal year to 423.9 billion yen.
 
Selling, general and administrative expenses decreased by 53.0 billion yen, or 4.9 percent, to 1,019.2 billion yen compared with the previous fiscal year.  The ratio of selling, general and administrative expenses to sales deteriorated 2.4 percentage points from the 16.2 percent recorded in the previous fiscal year to 18.6 percent.  Restructuring charges recorded in selling, general and administrative expenses in the Electronics segment increased by 37.3 billion yen from 12.6 billion yen in the previous fiscal year to 49.9 billion yen, which was one of the main reasons for the above mentioned deterioration.  Restructuring charges for both the current and prior fiscal years are mainly attributed to headcount reductions primarily through the early retirement program.  Additionally, a portion of the provision of the 51.2 billion yen charges recorded in the fiscal year ended March 31, 2007 related to notebook computer battery pack recalls and the subsequent global replacement program totaling 2.3 billion yen was reversed in the fiscal year ended March 31, 2009, compared to 15.7 billion yen reversed in the previous fiscal year, which also contributed to the deterioration in the ratio of selling, general and administrative expenses to sales.  An additional provision was recorded during the previous fiscal year for free repair expenses relating to Sony products and the products of other companies containing Sony-made charged coupled devices (“CCDs”), but there was no such provision recorded in the fiscal year ended March 31, 2009.  Loss on sale, disposal or impairment of assets, net recorded in selling, general and administrative expenses decreased 2.2 billion yen to 28.9 billion yen compared with the previous fiscal year.
 
Operating profitability of the Electronics segment deteriorated significantly primarily due to the negative impact of the appreciation of the yen, a deterioration in equity in net income (loss) for Sony Ericsson, the higher cost of sales ratio due to intensified price competition, a decrease in sales due to deterioration in the business environment and an increase in restructuring charges included in selling, general and administrative expenses.  Regarding profit performance by product, profitability of products such as compact digital cameras, PCs, LCD televisions and home-use video cameras deteriorated significantly.


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Slightly lower than 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2009 took place in Japan, including the production of compact digital cameras, home-use video cameras, LCD televisions, PCs, semiconductors and components including batteries and Memory Sticks.  Approximately 60 percent of the annual production in Japan was destined for other regions.  China accounted for slightly more than 15 percent of total annual production, approximately 70 percent of which was destined for other regions.  Asia, excluding Japan and China, accounted for slightly more than 10 percent of total annual production, with approximately 50 percent destined for the U.S., Europe, Japan and China.  The Americas and Europe together accounted for the remaining balance of approximately 25 percent of total annual production, most of which was destined for local sale.
 
 
Sales for the fiscal year ended March 31, 2009 decreased by 231.1 billion yen, or 18.0 percent, to 1,053.1 billion yen compared with the previous fiscal year.  Operating loss decreased by 66.1 billion yen to 58.5 billion yen for the fiscal year ended March 31, 2009.
 
Overall hardware sales decreased compared with the previous fiscal year, mainly due to the impact of the appreciation of the yen against the U.S. dollar and the euro, as well as a decrease in unit sales of PS2.  Despite an increase in PS3 software sales, overall software sales decreased as a result of the impact of the appreciation of the yen against the U.S. dollar and the euro, as well as a decrease in PS2 software sales.
 
Total worldwide unit sales of hardware and software for the fiscal year ended March 31, 2009 were as follows:
 
Worldwide hardware unit sales (increase/decrease compared to the prior fiscal year):
 
         
  à  PS2:      7.91 million units (a decrease of 5.75 million units)
  à  PSP:     14.11 million units (an increase of 0.30 million units)
  à  PS3:     10.06 million units (an increase of 0.94 million units)
 
Worldwide software unit sales (increase/decrease compared to the prior fiscal year):*
 
         
  à  PS2:      83.5. million units (a decrease of 70.5 million units)
  à  PSP:      50.3 million units (a decrease of 5.2 million units)
  à  PS3:     103.7 million units (an increase of 45.8 million units)
 
* Including those both from Sony and third parties under Sony licenses.
 
The operating loss decreased significantly compared with the previous fiscal year.  The decrease in the operating loss in the current fiscal year was due to an improvement in the operating performance of the PS3 business as a result of hardware cost reductions and increased software sales despite the impact of the decrease in sales in the PS2 business.
 
 
Sales for the fiscal year ended March 31, 2009 decreased by 140.4 billion yen, or 16.4 percent, to 717.5 billion yen compared to the previous fiscal year.  Operating income decreased by 28.6 billion yen, or 48.9 percent, to 29.9 billion yen and the operating margin decreased from 6.8 percent to 4.2 percent.  The results in the Pictures segment consist of the results of Sony Pictures Entertainment Inc. (“SPE”), a U.S.-based subsidiary.
 
On a U.S. dollar basis, sales for the current fiscal year in the Pictures segment decreased by approximately 360.7 million U.S. dollars (approximately 5 percent) and operating income decreased by approximately 234.0 million U.S. dollars (approximately 43 percent).  Motion pictures revenues decreased primarily due to lower home entertainment revenues of new release and catalog product.  This decrease was due to an accelerated contraction in the market, brought on principally by the global economic downturn, as well as fewer films being sold into the home entertainment market in the current fiscal year.  The decrease in motion picture sales was partially offset by higher theatrical revenues driven by the current year’s successful film slate, which included Hancock, Quantum of Solace


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and Paul Blart: Mall Cop.  Total home entertainment revenues decreased by approximately 500 million U.S. dollars while theatrical revenues increased by approximately 266 million U.S. dollars.  The prior year’s revenues for the Pictures segment also benefited from the sale of a bankruptcy claim against KirchMedia, a former licensee of film and television product.  Television revenues increased by approximately 101 million U.S. dollars due to increased advertising revenue from several international channels.
 
Operating income for the segment decreased primarily due to the lower home entertainment sales and the absence of the prior fiscal year’s sale of the bankruptcy claim against KirchMedia.  Operating income from motion picture product decreased by approximately 139 million U.S. dollars, reflecting the negative impact of the lower home entertainment sales.  Operating income from television product increased by approximately 70 million U.S. dollars reflecting the benefit of the higher advertising revenues noted above as well as higher equity income, partially due to the gain recorded by an equity affiliate from the sale of a European cable television channel.  Current year results were also negatively impacted by 53 million U.S. dollars of restructuring charges.
 
As of March 31, 2009, unrecognized license fee revenue at SPE was approximately 1.2 billion U.S. dollars.  SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television products.  The license fee revenue will be recognized in the fiscal year in which the product is made available for broadcast.
 
 
Note that the revenue and operating income (loss) at Sony Life, Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) discussed below on the basis of generally accepted accounting principles in the U.S. (“U.S. GAAP”) differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
 
Financial Services segment revenue for the fiscal year ended March 31, 2009 decreased by 42.9 billion yen, or 7.4 percent, to 538.2 billion yen compared with the previous fiscal year.  An operating loss of 31.2 billion yen was recorded compared to operating income of 22.6 billion yen in the previous fiscal year.
 
At Sony Life, revenue was 430.5 billion yen, a 33.5 billion yen or a 7.2 percent decrease compared to the previous fiscal year.  Revenue decreased compared to the prior fiscal year due to an increase of net valuation losses from convertible bonds and an increase of impairment losses on equity securities in the general account and an increase of net losses from investments in the separate account, due to a decline in the Japanese stock market during the fiscal year ended March 31, 2009, that was larger than the decline in the previous fiscal year.  Partially offsetting these unfavorable items was an increase in revenue from insurance premiums, reflecting a higher policy amount in force.  The operating loss at Sony Life was 29.8 billion yen, compared to operating income of 11.5 billion yen in the previous fiscal year.  This deterioration of profitability was mainly due to increased net valuation losses from convertible bonds, an impairment loss on equity securities in the general account and the additional recording of policy reserves for variable life insurance products in the separate account, as a result of the significant decline in the Japanese stock market.  This increase in losses more than offset the contribution from increased revenue from insurance premiums at Sony Life.
 
At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance policy amount in force.  Operating income increased mainly due to an increase in revenue and an improvement in the net loss ratio.
 
At Sony Bank, revenue decreased as a result of factors including deterioration in foreign exchange gains or losses on foreign-currency denominated customer deposits, and lower returns on investments.  Operating income decreased significantly mainly due to a decrease in revenue and an increase in operating expenses.
 
At Sony Finance International, Inc. (“Sony Finance”), revenue decreased overall due to lower revenue from the leasing business, reflecting the decline in capital expenditures in the weakening economy.  The operating loss increased due to the recording of restructuring charges including impairment losses and an early retirement program.


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Information of Operations Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited information of operations for the Financial Services segment alone and for all segments excluding the Financial Services segment.  These separate condensed presentations are not required or prepared under U.S. GAAP, which is used in Sony’s consolidated financial statements.  However, because the Financial Services segment is different in nature from Sony’s other segments, Sony utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements.  Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
 
                 
    Fiscal Year Ended March 31
  Financial Services segment   2008   2009
    (Yen in millions)
 
Financial service revenue
    581,121       538,206  
Financial service expenses
    558,488       567,567  
Equity in net income (loss) of affiliated companies
          (1,796 )
                 
Operating income (loss)
    22,633       (31,157 )
Other income (expenses), net
    (383 )     28  
                 
Income (loss) before income taxes and minority interest
    22,250       (31,129 )
Income taxes and other
    11,908       (6,922 )
                 
Net income (loss)
    10,342       (24,207 )
                 
 
                 
    Fiscal Year Ended March 31
  Sony without the Financial Services segment   2008   2009
    (Yen in millions)
 
Net sales and operating revenue
    8,324,828       7,212,492  
Costs and expenses
    7,974,630       7,387,236  
Equity in net income (loss) of affiliated companies
    100,817       (23,313 )
                 
Operating income (loss)
    451,015       (198,057 )
Other income (expenses), net
    100,479       58,254  
                 
Income (loss) before income taxes and minority interest
    551,494       (139,803 )
Income taxes and other
    194,190       (61,219 )
                 
Net income (loss)
    357,304       (78,584 )
                 
 


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    Fiscal Year Ended March 31
  Consolidated   2008   2009
    (Yen in millions)
 
Financial service revenue
    553,216       523,307  
Net sales and operating revenue
    8,318,198       7,206,686  
                 
      8,871,414       7,729,993  
Costs and expenses
    8,496,932       7,932,667  
Equity in net income (loss) of affiliated companies
    100,817       (25,109 )
                 
Operating income (loss)
    475,299       (227,783 )
Other income (expenses), net
    91,835       52,828  
                 
Income (loss) before income taxes and minority interest
    567,134       (174,955 )
Income taxes and other
    197,699       (76,017 )
                 
Net income (loss)
    369,435       (98,938 )
                 
 
 
During the fiscal year ended March 31, 2009, sales within All Other were comprised mainly of sales from SONY BMG, which was consolidated by Sony on October 1, 2008 as a wholly-owned subsidiary and renamed Sony Music Entertainment (“SME”) on January 1, 2009 Sony Music Entertainment (Japan) Inc. (“SMEJ”), a Japanese domestic recorded music business; Sony’s U.S.- based music publishing business; So-net Entertainment Corporation (“So-net”), an Internet-related service business subsidiary operating mainly in Japan and an advertising agency business in Japan.  Trademark royalty income from Sony Ericsson is also included in sales and operating income of All Other.
 
Sales for the fiscal year ended March 31, 2009 increased by 157.4 billion yen, or 41.2 percent, to 539.6 billion yen, compared with the previous fiscal year.  Of total sales, 87 percent were sales to outside customers.
 
The increase in sales is mainly due to the consolidation of SME on October 1, 2008.  During the six-month period ended March 31, 2009, sales at SME were 169.3 billion yen.  On a pro forma basis, this represents a 16 percent decrease on a U.S. dollar basis compared with the same six months of the previous fiscal year when sales of SME were not consolidated.  Revenues were negatively impacted by unfavorable exchange rates and the accelerated decline of the worldwide physical music market resulting from the global economic slowdown.  Best selling albums that contributed to sales during the six months ended March 31, 2009 included AC/DC’s Black Ice, Beyoncé’s I AM... SASHA FIERCE, P!nk’s Funhouse and Britney Spears’ Circus.
 
Excluding the impact of the consolidation of SME, sales of All Other decreased compared to the previous fiscal year.  This decrease was mainly due to lower sales at SMEJ in the current fiscal year and the absence of the receipt of a settlement payment related to copyright infringement claims in the prior fiscal year.  This was partially offset by higher fee revenue from broadband connection services at So-net.
 
Sales at SMEJ decreased compared to the prior fiscal year mainly due to a decrease in album sales resulting from a continuing decline in the physical music market.  SMEJ’s best-selling albums during the current fiscal year included I LOVED YESTERDAY by YUI, My song Your song by ikimono-gakari and VOICE by Mika Nakashima.
 
In terms of profit performance, operating income for All Other decreased by 30.4 billion yen, or 50.1 percent from the previous fiscal year, to 30.4 billion yen.  This decrease was mainly due to the absence of the 10.0 billion yen gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin and the receipt of the settlement payment related to copyright infringement claims, both recorded in the prior fiscal year.
 
Regarding SME, the current fiscal year includes equity in net loss of 6.0 billion yen and operating income for the six-month period ended March 31, 2009 of 13.7 billion yen, which totaled 7.7 billion yen for the full year.  This compared to the prior year’s results, which included 10.0 billion yen of equity in net income for Sony’s then

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50 percent share of SME.  On a pro forma basis, this 13.7 billion yen operating income for the six-month period ended March 31, 2009 represents a 30 percent decrease compared to the operating income for the comparable period of the prior fiscal year when its results were not consolidated.  This decrease was due to lower sales, higher restructuring charges and unfavorable exchange rates.
 
Operating income at SMEJ decreased approximately 10 percent, compared with the previous fiscal year, mainly due to a decrease in album sales.
 
 
During the fiscal year ended March 31, 2009, the average value of the yen was 99.5 yen against the U.S. dollar, and 142.0 yen against the euro, which was 13.8 percent and 12.7 percent higher against the U.S. dollar and the euro, respectively, compared with the average of the previous fiscal year.
 
In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S.-based operation that has worldwide subsidiaries).  Therefore, analysis and discussion of certain portions of the operating results of SPE are specified as being on “a U.S. dollar basis.”  Results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP.  Sony does not believe that these measures are a substitute for U.S. GAAP measures.  However, Sony believes that results presented on a local currency basis provide additional useful information to investors regarding operating performance.
 
Sony’s consolidated results are subject to foreign currency rate fluctuations largely because the countries where manufacturing takes place may be different from those where such products are sold.  In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy.  Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
 
Sony Global Treasury Services Plc (“SGTS”) in London provides integrated treasury services for Sony Corporation, its subsidiaries, and affiliated companies.  Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures.  Sony Corporation and most of its subsidiaries utilize SGTS for this purpose.  The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges most of the net foreign exchange exposure of Sony Corporation, its subsidiaries and affiliated companies.  SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions.  Most of these transactions are entered into against projected exposures before the actual export and import transactions take place.  In general, SGTS hedges the projected exposures on average three months before the actual transactions take place.  However, in certain cases SGTS partially hedges the projected exposures one month before the actual transactions take place when business requirements such as shorter production-sales cycles for certain products arise.  Sony enters into foreign exchange transactions with financial institutions primarily for hedging purposes.  Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives in the Financial Services segment.  In the Financial Services segment, Sony uses derivatives for Asset Liability Management (“ALM”) and trading.
 
To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
 
Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings.  Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.  The notional amount and the net fair value of all the foreign exchange derivative contracts as of March 31, 2009 were 1,951.0 billion yen and a liability of 4.5 billion yen, respectively.


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Operating Results for the Fiscal Year Ended March 31, 2008 compared with the Fiscal Year Ended
March 31, 2007
 
 
Sony’s sales for the fiscal year ended March 31, 2008 increased 6.9 percent compared with the previous fiscal year.  Sales within the Electronics segment and the Game segment increased while sales for the Pictures segment and revenue for the Financial Services segment decreased.  In the Electronics segment, while there was a decline in sales of such products as LCD rear-projection televisions, sales to outside customers increased 9.0 percent compared with the previous fiscal year mainly due to an increase in sales of LCD televisions, PCs and compact digital cameras.  Sales within the Game segment increased 26.3 percent compared to the previous fiscal year primarily as a result of a significant increase in sales of PS3.  In the Pictures segment, sales decreased 11.2 percent compared to the previous fiscal year as motion picture sales decreased primarily due to fewer films being released during the fiscal year ended March 31, 2008.  Revenues decreased 10.5 percent within the Financial Services segment primarily due to net losses from investments in the separate account and the deterioration in net valuation gains from convertible bonds in the general account reflecting a significant decline in the Japanese stock market partially offset by an increase in insurance premium revenue at Sony Life.
 
Operating income increased 216.0 percent compared with the previous fiscal year.  Operating income within the Electronics segment increased 75.8 percent mainly as a result of an increase in sales and the positive impact from the depreciation of the yen against the euro.  In the previous fiscal year, a 51.2 billion yen provision was recorded for charges related to recalls by certain notebook computer makers and the subsequent global replacement program by Sony and certain notebook computer makers involving battery packs containing Sony-manufactured battery cells.  A portion of the provision totaling 15.7 billion yen was reversed in the fiscal year ended March 31, 2008 based on the actual results of recalls and replacements as compared to original estimates.  In the Game segment, operating losses decreased by 107.8 billion yen to 124.5 billion yen primarily due to a decrease in the operating losses of the PS3 business as a result of successful PS3 hardware cost reductions and increased sales of PS3 software.  In the Pictures segment, operating income increased 119.1 percent compared with the previous fiscal year primarily due to the strong performance of prior year films in the home entertainment and television markets as well as the benefit from the sale of a bankruptcy claim against KirchMedia, a former licensee of film and television product, while the prior year was negatively impacted by losses recognized on Sony’s equity interest in Metro-Goldwyn-Mayer Inc. (“MGM”).  As of March 31, 2007, Sony no longer had any book basis in MGM and, accordingly, no additional losses were recorded during the fiscal year ended March 31, 2008.  In the Financial Services segment, operating income decreased 73.1 percent as compared to the previous fiscal year as a result of deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities in the general account of Sony Life reflecting a significant decline in the Japanese stock market.
 
Operating income in the fiscal year ended March 31, 2008 included one-time gains primarily from a gain on the sale of a portion of the site of Sony’s former headquarters of 60.7 billion yen which was recorded in “Corporate,” a 15.6 billion yen gain which was recorded in the operating income of the Electronics segment relating to the sale of a portion of Sony’s semiconductor operations in Nagasaki, Japan, including machinery and equipment, and a 10.0 billion yen gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin which was recorded in the operating income of All Other.  Operating income in the previous fiscal year included a gain on the sale of a portion of the site of Sony’s former headquarters of 21.7 billion yen, of which 2.6 billion yen was recorded within All Other and the remaining amount was recorded in “Corporate.”
 
Operating income in the fiscal year ended March 31, 2008 included a gain from the reversal of a portion of a legal provision as a result of the resolution of a legal matter, while a comparable gain was recorded in the previous fiscal year attributed to the reversal of a portion of patent-related provisions.
 
 
In the fiscal year ended March 31, 2008, Sony recorded restructuring charges of 47.3 billion yen, an increase from the 38.8 billion yen recorded in the previous fiscal year.  The primary restructuring activities were in the Electronics segment.  Of the total 47.3 billion yen incurred, Sony recorded 12.6 billion yen in personnel-related costs.


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Restructuring charges in the Electronics segment amounted to 45.6 billion yen for the fiscal year ended March 31, 2008, compared with 37.4 billion yen in the previous fiscal year.
 
Sony made the decision to exit the LCD rear-projection television business in the fiscal year ended March 31, 2008 due to the shrinking market for these products.  In association with this action, Sony recorded 19.7 billion yen of restructuring charges consisting mainly of inventory write downs.  Of this amount, 11.9 billion yen was recorded in cost of sales and 6.7 billion yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.  This phase of the restructuring program was completed in the fiscal year ended March 31, 2008, and the remaining liability balance as of March 31, 2008 was 1.6 billion yen, which was paid during the fiscal year ended March 31, 2009.
 
In addition to the restructuring efforts described above, Sony has undergone several headcount reduction programs to further reduce operating costs within its Electronics segment.  As a result of these programs, Sony recorded restructuring charges totaling 11.0 billion yen for the fiscal year ended March 31, 2008, and these charges were included in selling, general and administrative expenses in the consolidated statements of income.  The remaining liability balance as of March 31, 2008 was 9.4 billion yen and was paid throughout the fiscal year ended March 31, 2009.
 
Operating Performance
 
                         
    Fiscal Year Ended
   
    March 31    
    2007   2008   Percent change
    (Yen in billions)    
 
Sales and operating revenue
    8,295.7       8,871.4       +6.9 %
Equity in net income of affiliated companies
    78.7       100.8       +28.2  
Operating income
    150.4       475.3       +216.0  
Income before income taxes and minority interest
    180.7       567.1       +213.9  
Net income
    126.3       369.4       +192.4  
 
 
Sales for the fiscal year ended March 31, 2008 increased by 575.7 billion yen, or 6.9 percent, to 8,871.4 billion yen compared with the previous fiscal year.  A further breakdown of sales figures is presented under “Operating Performance by Business Segment” below.
 
“Sales” in the analysis of the ratio of cost of sales, including research and development costs, and selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes financial service revenue.  This is because financial service expenses are recorded separately from cost of sales and selling, general and administrative expenses.  The calculations of all ratios below that pertain to business segments include intersegment transactions.
 
 
Cost of sales for the fiscal year ended March 31, 2008 increased by 400.4 billion yen, or 6.8 percent, to 6,290.0 billion yen compared with the previous fiscal year, and decreased from 76.8 percent to 75.6 percent as a percentage of sales.  The cost of sales ratio decreased from 78.8 percent to 77.9 percent in the Electronics segment, decreased from 102.8 percent to 93.9 percent in the Game segment, and decreased from 60.3 percent to 58.6 percent in the Pictures segment compared with the previous fiscal year.
 
In the Electronics segment, there was an improvement in the cost of sales ratio for several products, in particular PCs, compact digital cameras and video cameras.  The cost of sales ratio in the Game segment improved primarily as a result of PS3 hardware cost reductions and increased sales of PS3 software.  In the Pictures segment, the cost of sales ratio decreased compared to the previous fiscal year mainly due to the higher home entertainment and television revenues from prior year films.


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Personnel-related costs included in cost of sales were 487.8 billion yen, an increase of 30.5 billion yen, primarily recorded within the Electronics segment.
 
Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2008 decreased by 23.4 billion yen to 520.6 billion yen compared with the previous fiscal year.  The ratio of research and development costs to sales was 6.3 percent compared to 7.1 percent in the previous fiscal year.
 
Selling, general and administrative expenses for the fiscal year ended March 31, 2008 decreased by 74.0 billion yen, or 4.1 percent, to 1,714.4 billion yen compared with the previous fiscal year.  The ratio of selling, general and administrative expenses to sales decreased from 23.3 percent in the previous fiscal year to 20.6 percent.  The ratio of selling, general and administrative expenses to sales decreased from 18.2 percent to 16.2 percent in the Electronics segment compared with the previous fiscal year.  This improvement is due to the recording of the provision for charges related to the notebook computer battery pack recalls and subsequent global replacement program in the previous fiscal year and a reversal of the portion of the provision in the fiscal year ended March 31, 2008 based on the actual results of recalls and replacements as compared to original estimates.  The ratio of selling, general and administrative expenses to sales decreased from 20.0 percent to 15.8 percent in the Game segment and from 35.2 percent to 35.1 percent in the Pictures segment.
 
Personnel-related costs in selling, general and administrative expenses increased by 19.8 billion yen compared with the previous fiscal year mainly within the Electronics and the Pictures segments.  Advertising and publicity expenses for the fiscal year decreased by 46.2 billion yen compared with the previous fiscal year primarily due to decreased advertising and publicity expenses within the Pictures segment.
 
Gain on sale, disposal or impairment of assets, net was 37.8 billion yen, compared with a 5.8 billion yen loss on sale, disposal or impairment of assets, net recorded in the previous fiscal year.  The gain recorded in the fiscal year ended March 31, 2008 is primarily from a gain on the sale of a portion of the site of Sony’s former headquarters of 60.7 billion yen and gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin of 10.0 billion yen.  A gain on the sale of a portion of the site of Sony’s former headquarters of 21.7 billion yen was recorded in the previous fiscal year.
 
 
Equity in net income of affiliated companies during the fiscal year ended March 31, 2008 was 100.8 billion yen, an increase of 22.2 billion yen, or 28.2 percent compared to the previous fiscal year.  Equity in net income of affiliated companies reported for Sony Ericsson was 79.5 billion yen, a decrease of 5.8 billion yen compared to the previous fiscal year, due to higher research and development expenses as a percentage of sales.  Sony recorded equity in net income of 10.0 billion yen for SONY BMG, an increase of 5.0 billion yen compared to the previous fiscal year primarily due to a reduction in restructuring costs compared to the previous fiscal year, lower marketing costs, a reduction in overhead costs from continued restructuring, a gain on the sale of an interest in a joint venture of SONY BMG and the favorable impact of currency fluctuations.  Sony recorded equity in net income of 7.4 billion yen, a 2.4 billion yen increase compared to the prior fiscal year, for S-LCD, a joint-venture with Samsung for the manufacture of amorphous TFT LCD panels.
 
Sony did not record any equity gain or loss for MGM in the fiscal year ended March 31, 2008 compared to equity in net loss of 18.9 billion yen recorded in the prior fiscal year.  As of March 31, 2007, Sony no longer had any book basis in MGM and, accordingly, no additional losses were recorded during the fiscal year ended March 31, 2008.
 
 
Operating income for the fiscal year ended March 31, 2008 increased by 324.9 billion yen, or 216.0 percent, to 475.3 billion yen compared with the previous fiscal year.  The operating income margin increased from 1.8 percent to 5.4 percent.  In descending order by yen amount, the Electronics segment, All Other, the Pictures segment and the Financial Services segment contributed to operating income.  An operating loss was recorded within the Game


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segment.  For a further breakdown of operating income (loss) for each segment, please refer to “Operating Performance by Business Segment” below.
 
 
For the fiscal year ended March 31, 2008, other income increased by 54.3 billion yen, or 57.0 percent, to 149.4 billion yen, while other expenses decreased by 7.3 billion yen, or 11.2 percent, to 57.6 billion yen compared with the previous fiscal year.  The net amount of other income and other expenses was net other income of 91.8 billion yen, an increase of 61.5 billion yen, compared with the previous fiscal year.
 
The gain on change in interest in subsidiaries and equity investees increased by 50.5 billion yen, or 160.4 percent compared to the previous fiscal year, to 82.1 billion yen.  This increase is due to the recording of a gain of 81.0 billion yen for the change in interest in subsidiaries and equity investees as a result of the global initial public offering of shares of SFH in connection with the listing of shares on the First Section of the TSE in October 2007.  During the fiscal year ended March 31, 2007, there was a gain on change in interest in subsidiaries and equity investees recorded on the sale of a portion of the stock held in StylingLife Holdings Inc.
 
Interest and dividends in other income of 34.3 billion yen was recorded in the fiscal year ended March 31, 2008, an increase of 6.0 billion yen, or 21.4 percent, compared with the previous fiscal year.  For the fiscal year ended March 31, 2008, interest expense totaling 22.9 billion yen was recorded, a decrease of 4.3 billion yen, or 15.9 percent compared with the previous fiscal year.
 
In addition, net foreign exchange income of 5.6 billion yen was recorded in the fiscal year ended March 31, 2008, compared to a net foreign exchange loss of 18.8 billion yen in the previous fiscal year.  Net foreign exchange income was recorded due to the value of the yen, especially during the second through fourth quarters of the fiscal year ended March 31, 2008, appreciating in value against other currencies from the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts.  These contracts are entered into by Sony to mitigate the foreign exchange rate risk to cash flows that arises from settlements of foreign currency denominated accounts receivable and accounts payable, as well as foreign currency denominated transactions between consolidated subsidiaries.
 
 
Income before income taxes and minority interest for the fiscal year ended March 31, 2008 increased 386.4 billion yen, or 213.9 percent, to 567.1 billion yen compared with the previous fiscal year, primarily as a result of the increase in operating income and the gain on the change in interest in subsidiaries and equity investees mentioned above.
 
 
During the fiscal year ended March 31, 2008, Sony recorded 203.5 billion yen of income taxes, resulting in an effective tax rate of 35.9 percent, which was lower than the Japanese statutory tax rate.  This was mainly due to the impact of the inclusion of equity in net income of affiliated companies into net income before income taxes and minority interest.
 
In the previous fiscal year, the effective tax rate was 29.8 percent, which was lower than the Japanese statutory tax rate as a result of the impact of the inclusion of equity in net income of affiliates into net income before income taxes and minority interest.
 
 
In the fiscal year ended March 31, 2008, minority interest in loss of consolidated subsidiaries of 5.8 billion yen was recorded compared to minority interest in income of 0.5 billion yen in the previous fiscal year.  Minority interest in loss was recorded mainly due to the loss recorded at SFH subsequent to the change in Sony Corporation’s ownership.  Sony Corporation’s ownership percentage in SFH was reduced from 100 percent to 60 percent after the global initial public offering of SFH shares during the fiscal year ended March 31, 2008.  The operating results


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of SFH in the second half of the fiscal year ended March 31, 2008 were negatively impacted mainly by the deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities at Sony Life.
 
 
Net income for the fiscal year ended March 31, 2008 increased by 243.1 billion yen, or 192.4 percent, to 369.4 billion yen compared with the previous fiscal year.  As a percentage of sales, net income increased from 1.5 percent to 4.2 percent.  Return on stockholders’ equity increased from 3.8 percent to 10.8 percent.  (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2008.)
 
Basic net income per share was 368.33 yen compared with 126.15 yen in the previous fiscal year, and diluted net income per share was 351.10 yen compared with 120.29 yen in the previous fiscal year.  Refer to notes 2 and 22 of the notes to the consolidated financial statements.
 
 
The following discussion is based on segment information.  Sales and operating revenue in each business segment include intersegment transactions.  Refer to note 26 of the notes to the consolidated financial statements.
 
Business Segment Information
 
                         
    Fiscal Year Ended
   
    March 31    
    2007   2008   Percent change
    (Yen in billions)    
 
Sales and operating revenue
                       
Electronics
    6,072.4       6,613.8       +8.9 %
Game
    1,016.8       1,284.2       +26.3  
Pictures
    966.3       857.9       −11.2  
Financial Services
    649.3       581.1       −10.5  
All Other
    355.1       382.2       +7.6  
Elimination
    (764.2 )     (847.9 )      
                         
Consolidated
    8,295.7       8,871.4       +6.9  
                         
 
                         
    Fiscal Year Ended
   
    March 31    
    2007   2008   Percent change
    (Yen in billions)    
 
Operating income (loss)
                       
Electronics
    251.3       441.8       +75.8 %
Game
    (232.3 )     (124.5 )      
Pictures
    26.7       58.5       +119.1  
Financial Services
    84.1       22.6       −73.1  
All Other
    32.8       60.8       +85.3  
                         
Sub-Total
    162.6       459.2       +182.4  
Elimination and unallocated corporate expenses/gains
    (12.2 )     16.1        
                         
Consolidated
    150.4       475.3       +216.0  
                         
 
 
Sales and operating revenue for the fiscal year ended March 31, 2008 increased 541.4 billion yen, or 8.9 percent, to 6,613.8 billion yen compared with the previous fiscal year.  Operating income increased by


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190.5 billion yen, or 75.8 percent, to 441.8 billion yen compared with the previous fiscal year and the operating income to sales ratio increased from 4.1 percent to 6.7 percent.  Sales to outside customers on a yen basis increased 9.0 percent compared to the previous fiscal year.  Regarding sales to outside customers by geographical area, sales decreased by 2 percent in Japan, but increased by 2 percent in the U.S., by 11 percent in Europe, and by 19 percent in non-Japan Asia and Other Areas.
 
In Japan, sales of products such as CCDs and complementary metal-oxide semiconductor (“CMOS”) image sensors increased while sales of mobile phones produced for wireless customers decreased.  In the U.S., sales of products such as LCD rear-projection and CRT televisions decreased while sales of products such as LCD televisions, compact digital cameras and PCs increased.  In Europe, sales of products such as LCD televisions and PCs increased while sales of mobile phones produced for wireless customers decreased.  In Other Areas, sales of LCD televisions, compact digital cameras and PCs increased while sales of CRT televisions decreased.
 
 
Sales and operating revenue by product category discussed below represent sales to outside customers, which do not include intersegment transactions.  Refer to Note 26 of the notes to the consolidated financial statements.
 
“Audio” sales increased by 35.7 billion yen, or 6.8 percent, to 558.6 billion yen.  Sales of flash memory digital audio players increased as worldwide unit shipments increased by approximately 1.3 million units to approximately 5.8 million units.  Sales of home audio, headphones and personal navigation systems also increased.  On the other hand, due to a shift in market demand, sales of CD format headphone stereos decreased.
 
“Video” sales increased by 136.1 billion yen, or 11.9 percent, to 1,279.2 billion yen.  Sales of compact digital cameras increased as worldwide unit shipments increased by approximately 6.5 million units to approximately 23.5 million units.  Sales of home-use video cameras increased as worldwide unit shipments increased by approximately 250,000 units to approximately 7.7 million units.  Sales of Blu-ray Disc recorders and players also increased.  On the other hand, sales of DVD recorders and players decreased, with unit shipments of DVD recorders decreasing by approximately 150,000 units to approximately 1.7 million units and unit shipments of DVD players decreasing by approximately 900,000 units to approximately 7.0 million units.
 
“Televisions” sales increased by 140.1 billion yen, or 11.4 percent, to 1,367.1 billion yen.  There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments increased by approximately 4.3 million units, to approximately 10.6 million units.  On the other hand, there was a decrease in sales of LCD rear-projection and CRT televisions as Sony decided to exit these businesses due to the shrinking market for these products.
 
“Information and Communications” sales increased by 149.0 billion yen, or 15.6 percent, to 1,103.2 billion yen.  Sales of PCs increased as worldwide unit shipments increased by approximately 1.2 million units to approximately 5.2 million units.  Sales of broadcast- and professional-use products increased as a result of favorable sales of high-definition related products.
 
“Semiconductors” sales increased by 18.3 billion yen, or 8.3 percent, to 237.9 billion yen.  The increase was primarily due to an increase in sales of CCDs and CMOS image sensors.
 
“Components” sales decreased by 2.2 billion yen, or 0.3 percent, to 833.3 billion yen.  Sales of lithium-ion batteries and low-temperature polysilicon TFT LCD panels for mobile devices increased.  On the other hand, sales of DVD+/-R/RW drives decreased due to a decline in unit selling prices, although unit sales increased in association with an expansion of the market.
 
“Other” sales increased by 11.2 billion yen, or 2.1 percent, to 552.4 billion yen.  Although sales of mobile phones produced for wireless customers in Japan and Europe decreased, sales of the disc manufacturing business increased.
 
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2008 increased by 372.4 billion yen, or 7.8 percent, to 5,154.6 billion yen compared with the previous fiscal year.  The cost of sales ratio improved by 0.9 percentage points to 77.9 percent compared to 78.8 percent in the previous fiscal year.  While the cost of sales ratio of such products as PCs, compact digital cameras and home-use video cameras improved, the cost of


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sales ratio of products such as LCD televisions deteriorated.  Restructuring charges recorded in cost of sales amounted to 19.5 billion yen, an increase of 7.0 billion yen compared with the 12.6 billion yen recorded in the previous fiscal year.  Research and development costs decreased 1.6 billion yen, or 0.4 percent, from 440.4 billion yen in the previous fiscal year to 438.7 billion yen.
 
Selling, general and administrative expenses decreased by 34.0 billion yen, or 3.1 percent, to 1,072.2 billion yen compared with the previous fiscal year.  Although advertising and marketing expenses and personnel expenses increased for the fiscal year ended March 31, 2008, selling, general and administrative expenses decreased as a provision of 51.2 billion yen was recorded in the previous fiscal year for charges related to the notebook computer battery pack recalls and subsequent global replacement program, while a portion of the provision totaling 15.7 billion yen was reversed in the fiscal year ended March 31, 2008 based on the actual results of recalls and replacements as compared to original estimates.  An additional provision was recorded during the fiscal year for free repair expenses relating to Sony products and the products of other companies containing Sony-made CCDs, but this amount was less than in the previous year.  Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 1.4 billion yen from 14.0 billion yen in the previous fiscal year to 12.6 billion yen.  This 12.6 billion yen was for headcount reductions, including reductions through the early retirement program.  The ratio of selling, general and administrative expenses to sales decreased 2.0 percentage points from the 18.2 percent recorded in the previous fiscal year to 16.2 percent.  Loss on sale, disposal or impairment of assets, net recorded in selling, general and administrative expenses increased 7.5 billion yen to 31.0 billion yen compared with the previous fiscal year.  This amount includes a 6.7 billion yen loss on sale, disposal or impairment of assets, net on LCD rear-projection televisions.
 
The amount of operating income recorded in the Electronics segment for the fiscal year ended March 31, 2008 increased significantly due to the impact of the provision recorded in the previous fiscal year for charges related to the notebook computer battery pack recalls and subsequent global replacement program, the reversal of a portion of the provision in the fiscal year ended March 31, 2008, increased sales of the segment and the positive impact of the depreciation of the yen against the euro.  Also contributing to the increase in Electronics segment profit was the recording of a 15.6 billion yen gain relating to the sale of a portion of Sony’s semiconductor operations in Nagasaki, Japan, including machinery and equipment.  Regarding profit performance by product, profitability of products such as LCD televisions worsened due to unit selling price declines while profit increased mainly for PCs and compact digital cameras, which experienced higher sales for system LSIs, which saw an increase in sales of semiconductors for the Game segment, and for home-use video cameras, which experienced increased sales of high value-added models.
 
 
Approximately 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2008 took place in Japan, including the production of compact digital cameras, home-use video cameras, LCD televisions, PCs, semiconductors and components such as batteries and Memory Sticks.  Approximately 60 percent of the annual production in Japan was destined for other regions.  China accounted for approximately 15 percent of total annual production, approximately 70 percent of which was destined for other regions.  Asia, excluding Japan and China, accounted for approximately 10 percent of total annual production, with approximately 60 percent destined for Japan, the U.S. and Europe.  The Americas and Europe together accounted for the remaining balance of approximately 25 percent of total annual production, most of which was destined for local distribution and sale.
 
 
Sales for the fiscal year ended March 31, 2008 increased by 267.5 billion yen, or 26.3 percent, to 1,284.2 billion yen compared with the previous fiscal year.  An operating loss of 124.5 billion yen was recorded for the fiscal year ended March 31, 2008, which was a decrease of 107.8 billion yen from the fiscal year ended March 31, 2007.
 
By region, although sales decreased slightly in Japan, there was an increase in sales in North America and Europe.


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Overall hardware sales increased as a result of a significant increase in sales of PS3, as well as an increase in sales of PSP® (PlayStation®Portable) (“PSP”), for which a new slimmer, lighter model was released.  Sales of PS2 decreased compared to the previous fiscal year.  Overall software sales increased as a result of an increase in PS3 software sales compared to the previous fiscal year.
 
Total worldwide unit sales of hardware and software for the fiscal year ended March 31, 2008 were as follows:
 
Worldwide hardware unit sales (increase/decrease year-on-year):*
 
         
  à  PS2:     13.73 million units (a decrease of 0.98 million units)
  à  PSP:     13.89 million units (an increase of 4.36 million units)
  à  PS3:      9.24 million units (an increase of 5.63 million units)
 
Worldwide software unit sales (increase/decrease year-on-year):*/**
 
         
  à  PS2:     154.0 million units (a decrease of 39.5 million units)
  à  PSP:      55.5 million units (an increase of 0.8 million units)
  à  PS3:      57.9 million units (an increase of 44.6 million units)
 
* For the fiscal year ended March 31, 2008, the method of reporting hardware and software unit sales has been changed from production shipments to recorded sales.  In accordance with this change, the numbers for the fiscal year ended March 31, 2007 have been restated.
 
** Including those both from Sony and third parties under Sony licenses.
 
The operating loss decreased significantly compared with the previous fiscal year.  Although there was a loss arising from the strategic pricing of PS3 hardware at points lower than its production cost, the operating losses of the PS3 business decreased as a result of successful hardware cost reductions and increased sales of software.  The strong performance of the PSP business with the introduction of a new model also contributed to the decrease in the operating loss of the overall Game segment.
 
Due to these reasons, the cost of sales to sales ratio decreased 8.9 percentage points, from 102.8 percent in the previous fiscal year, to 93.9 percent.  The ratio of selling, general and administrative expenses to sales decreased 4.2 percentage points from 20.0 percent in the previous fiscal year, to 15.8 percent mainly due to decreased advertising and marketing expenses.
 
 
Sales for the fiscal year ended March 31, 2008 decreased by 108.3 billion yen, or 11.2 percent, to 857.9 billion yen compared to the previous fiscal year.  Operating income increased by 31.8 billion yen, or 119.1 percent, to 58.5 billion yen and the operating margin increased from 2.8 percent to 6.8 percent.  The results in the Pictures segment consist of the results of Sony Pictures Entertainment Inc. (“SPE”), a U.S.-based subsidiary.
 
On a U.S. dollar basis, sales for the fiscal year in the Pictures segment decreased approximately 9 percent and operating income increased by approximately 142 percent.  Sales decreased primarily due to lower worldwide theatrical and home entertainment revenues as fewer films were released in the fiscal year ended March 31, 2008, as compared to the number of films released in the previous fiscal year.  Major films released in the fiscal year ended March 31, 2008 that contributed to both theatrical and home entertainment revenues included Spider-Man 3 and Superbad.  Sales for the fiscal year ended March 31, 2008 release slate decreased approximately 1.2 billion U.S. dollars as compared to the previous fiscal year.  The decrease in revenues from films released in the fiscal year ended March 31, 2008 was partially offset by an approximately 300 million U.S. dollar increase in home entertainment and television revenues from films of the previous fiscal year (i.e., films that had their initial U.S. theatrical release in the prior fiscal year).  Total revenues for the Pictures segment also benefited from the sale of a bankruptcy claim against KirchMedia, a former licensee of film and television product.  Television product revenues increased by approximately 29 million U.S. dollars primarily as a result of higher advertising and subscription sales from several international channels.


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Operating income for the segment increased primarily due to the strong performance of prior year films in the home entertainment and television markets.  Operating income from prior year films increased approximately 225 million U.S. dollars, due to the strong performance from a number of films including Ghost Rider, Stomp the Yard and Casino Royale.  Current year operating income also benefited from the sale of the bankruptcy claim and the higher television business revenues referred to above, while the operating income of the prior year was negatively impacted by losses recognized on Sony’s equity interest in MGM.  As of March 31, 2007, Sony no longer has any book basis in MGM and, accordingly, no additional losses were recorded in the fiscal year ended March 31, 2008.
 
As of March 31, 2008, unrecognized license fee revenue at SPE was approximately 1.3 billion U.S. dollars.  SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television products.  The license fee revenue will be recognized in the fiscal year in which the product is made available for broadcast.
 
 
Note that the revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed below on a U.S. GAAP basis differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
 
Financial Services segment revenue for the fiscal year ended March 31, 2008 decreased by 68.2 billion yen, or 10.5 percent, to 581.1 billion yen compared with the previous fiscal year.  Operating income decreased by 61.5 billion yen, or 73.1 percent, to 22.6 billion yen and the operating income margin decreased to 3.9 percent compared with 13.0 percent in the previous fiscal year.
 
At Sony Life, revenue decreased by 81.0 billion yen, or 14.9 percent, to 464.1 billion yen compared with the previous fiscal year.  Although revenue from insurance premiums increased due to an increase in insurance-in-force, revenue decreased due to a net loss from investments in the separate account, deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities in the general account reflecting a significant decline in the Japanese stock market this fiscal year.  Operating income at Sony Life decreased by 70.1 billion yen, or 85.9 percent, to 11.5 billion yen.  This decrease was mainly due to deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities in the general account which more than offset the contribution from increased insurance premium revenue.
 
At Sony Assurance, revenue increased due to higher insurance revenue brought about by a steady expansion in automobile insurance policy in force.  Despite higher insurance revenue, operating income decreased due to deterioration in the net loss ratio and expense ratio (the ratio of sales, general and administrative expenses and commissions to net premiums written).  At Sony Bank, revenue increased mainly due to foreign exchange valuation gains from part of Sony Bank’s foreign currency deposits brought about by a significant appreciation of the yen.  As a result, operating income significantly increased.
 
At Sony Finance, a leasing and credit financing business subsidiary in Japan, revenue increased overall mainly due to revenue increases from the electronic settlement business and the credit card business.  The operating loss at Sony Finance decreased overall primarily due to increased profit at the electronic settlement business and the leasing business, as well as a decrease in losses at the credit card business.


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Information of Operations Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited information of operations for the Financial Services segment alone and for all segments excluding the Financial Services segment.  These separate condensed presentations are not required or prepared under U.S. GAAP, which is used in Sony’s consolidated financial statements.  However, because the Financial Services segment is different in nature from Sony’s other segments, Sony utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements.  Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
 
                 
    Fiscal Year Ended March 31
  Financial Services segment   2007   2008
    (Yen in millions)
 
Financial service revenue
    649,341       581,121  
Financial service expenses
    565,199       558,488  
                 
Operating income
    84,142       22,633  
Other income (expenses), net
    9,886       (383 )
                 
Income before income taxes and minority interest
    94,028       22,250  
Income taxes and other
    33,536       11,908  
                 
Net income
    60,492       10,342  
                 
 
                 
    Fiscal Year Ended March 31
  Sony without the Financial Services segment   2007   2008
    (Yen in millions)
 
Net sales and operating revenue
    7,680,578       8,324,828  
Costs and expenses
    7,694,375       7,974,630  
Equity in net income of affiliated companies
    78,654       100,817  
                 
Operating income
    64,857       451,015  
Other income, net
    27,917       100,479  
                 
Income before income taxes and minority interest
    92,774       551,494  
Income taxes and other
    20,663       194,190  
                 
Net income
    72,111       357,304  
                 
 
                 
    Fiscal Year Ended March 31
  Consolidated   2007   2008
    (Yen in millions)
 
Financial service revenue
    624,282       553,216  
Net sales and operating revenue
    7,671,413       8,318,198  
                 
      8,295,695       8,871,414  
Costs and expenses
    8,223,945       8,496,932  
Equity in net income of affiliated companies
    78,654       100,817  
                 
Operating income
    150,404       475,299  
Other income, net
    30,287       91,835  
                 
Income before income taxes and minority interest
    180,691       567,134  
Income taxes and other
    54,363       197,699  
                 
Net income
    126,328       369,435  
                 


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During the fiscal year ended March 31, 2008, sales within All Other were comprised mainly of sales from SMEJ, a Japanese domestic recorded music business; Sony’s U.S.-based music publishing business; So-net, an Internet-related service business subsidiary operating mainly in Japan; and an advertising agency business in Japan.  Trademark royalty income from Sony Ericsson is also included in sales and operating income of All Other.
 
Sales for the fiscal year ended March 31, 2008 increased by 27.1 billion yen, or 7.6 percent, to 382.2 billion yen compared with the previous fiscal year.  Of total sales, 82 percent were sales to outside customers.  In terms of profit performance, operating income for All Other increased by 28.0 billion yen, or 85.3 percent from the previous fiscal year, to 60.8 billion yen.
 
The increase in sales is mainly due to the contribution of sales from Famous Music LLC (“Famous Music”), a U.S-based music publishing company that was acquired by Sony’s U.S.-based music publishing subsidiary Sony/ATV Music Publishing LLC (“Sony ATV”) and consolidated in the fiscal year ended March 31, 2008, the receipt of a settlement payment related to copyright infringement claims and an increase in sales at SMEJ and So-net.  An increase in trademark royalty income from Sony Ericsson also contributed to the increase in sales.
 
Sales at SMEJ increased compared with the previous fiscal year mainly due to an increase in music download sales.  Best selling albums that contributed to sales during the fiscal year included ORANGE RANGE’s ORANGE and RANGE, Ken Hirai’s FAKIN’ POP and YUI’s CAN’T BUY MY LOVE.
 
Sales at So-net increased compared to the previous fiscal year primarily due to higher fee revenue from broadband connections, especially fiber-optic.
 
Operating income for All Other increased compared to the previous fiscal year primarily due to recording a 10.0 billion yen gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin, the receipt of a settlement payment related to copyright infringement claims, an increase in trademark royalty income from Sony Ericsson and an increase in operating income at So-net.
 
Operating income at SMEJ increased approximately 4 percent compared with the previous fiscal year, mainly due to an increase in animation DVD sales as well as the above-mentioned increase in music download sales.
 
Part of the gain on the sale of a portion of Sony’s former headquarters site in the amount of 2.6 billion yen was included in operating income within All Other in the previous fiscal year.
 
 
During the fiscal year ended March 31, 2008, the average value of the yen was 113.3 yen against the U.S. dollar, and 160.0 yen against the euro, which was 2.4 percent higher against the U.S. dollar and 7.1 percent lower against the euro, respectively, compared with the average of the previous fiscal year.
 
In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S.-based operation that has worldwide subsidiaries).  Therefore, analysis and discussion of certain portions of the operating results of SPE are specified as being on “a U.S. dollar basis.”  Results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP.  Sony does not believe that these measures are a substitute for U.S. GAAP measures.  However, Sony believes that results presented on a local currency basis provide additional useful information to investors regarding operating performance.
 
Sony’s consolidated results are subject to foreign currency rate fluctuations largely because the countries where manufacturing takes place may be different from those where such products are sold.  In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy.  Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
 
SGTS in London provides integrated treasury services for Sony Corporation, its subsidiaries and affiliated companies.  Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should


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enter into commitments with SGTS for hedging their exposures.  Sony Corporation and most of its subsidiaries utilize SGTS for this purpose.  The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges most of the net foreign exchange exposure of Sony Corporation and its subsidiaries.  SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions.  Most of the transactions are entered into against projected exposures before the actual export and import transactions take place.  In general, SGTS hedges the projected exposures on average three months before the actual transactions take place.  However, in certain cases SGTS partially hedges the projected exposures one month before the actual transactions take place when business requirements such as shorter production-sales cycles for certain products arise.  Sony enters into foreign exchange transactions with financial institutions primarily for hedging purposes.  Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives in the Financial Services segment.  In the Financial Services segment, Sony uses derivatives for ALM and trading.
 
To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
 
Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings.  For the fiscal years ended March 31, 2007 and 2008, these cash flow hedges were fully effective.  Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.  The notional amount and the net fair value of all the foreign exchange derivative contracts as of March 31, 2008 were 2,265.5 billion yen and an asset of 22.6 billion yen respectively.
 
Assets, Liabilities and Stockholders’ Equity
 
 
Total assets as of March 31, 2009 decreased by 539.2 billion yen, or 4.3 percent, to 12,013.5 billion yen compared with the previous fiscal year-end.  Total assets as of March 31, 2009 in all segments excluding the Financial Services segment decreased by 814.0 billion yen, or 11.3 percent, to 6,370.9 billion yen compared with the previous fiscal year-end.  Total assets as of March 31, 2009 in the Financial Services segment increased by 280.0 billion yen, or 5.0 percent, to 5,905.7 billion yen compared with the previous fiscal year-end.
 
 
Current assets as of March 31, 2009 decreased by 1,389.0 billion yen, or 27.7 percent, to 3,620.6 billion yen compared with the previous fiscal year-end.  Current assets as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased by 995.3 billion yen, or 25.9 percent, to 2,841.4 billion yen.
 
Cash and cash equivalents as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased 383.7 billion yen, or 40.4 percent, to 565.0 billion yen compared with the previous fiscal year-end.  This was primarily due to a decrease in operating cash flow as a result of the deterioration in net income (loss), payments for manufacturing equipment in the Electronics segment and the acquisition of Bertelsmann’s 50 percent interest in SONY BMG exceeding proceeds received mainly from the sales of semiconductor fabrication equipment in the prior year.  Refer to “Cash Flows” below.
 
Notes and accounts receivable, trade (net of allowance for doubtful accounts and sales returns) as of March 31, 2009, excluding the Financial Services segment, decreased 236.3 billion yen, or 21.8 percent, compared with the previous fiscal year-end to 847.2 billion yen.  This was primarily due to a decrease in sales in the Electronics segment.
 
Other current assets as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased 375.4 billion yen, or 20.8 percent, to 1,426.0 billion yen compared with the previous fiscal year-end.  This was due to a decrease in inventory within the Electronics segment and the collection in the current year of a receivable


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recorded in the previous fiscal year relating to the sale of a portion of Sony’s semiconductor operations in Nagasaki, Japan, including machinery and equipment.
 
Inventories as of March 31, 2009 decreased by 208.5 billion yen, or 20.4 percent, to 813.1 billion yen compared with the previous fiscal year-end.  This decrease was primarily due to adjustments in production in the Electronics segment resulting from the decrease in sales.  The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each fiscal year and the previous fiscal year) was 1.94 months compared to 1.87 months at the end of the previous fiscal year.  Sony considers this level of inventory to be appropriate in the aggregate.
 
Current assets as of March 31, 2009 in the Financial Services segment decreased by 374.0 billion yen, or 31.0 percent, to 831.1 billion yen compared with the previous fiscal year-end.  This was primarily due to the transfer of assets managed at Sony Bank into Japanese government bonds and other marketable securities in the current fiscal year.  These assets were managed temporarily in the call loan market due to a rapid increase in deposits at Sony Bank at the end of the previous fiscal year.
 
 
Investments and advances as of March 31, 2009 increased by 462.8 billion yen, or 10.7 percent, to 4,798.4 billion yen compared with the previous fiscal year-end.
 
Investments and advances as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased by 179.1 billion yen, or 34.5 percent, to 339.4 billion yen.  This was primarily due to the impact of the decrease in investments in affiliated companies resulting from the deterioration of results at Sony Ericsson.
 
Investments and advances as of March 31, 2009 in the Financial Services segment increased by 630.8 billion yen, or 16.3 percent, to 4,510.7 billion yen compared with the previous fiscal year-end.  This increase was primarily due to investments mainly in Japanese fixed income securities by Sony Life, which increased assets as a result of an expansion of its business.  Investments and advances also increased due to a change in assets under management from call loans to Japanese government bonds and other marketable securities, and an increase in mortgage loans at Sony Bank.  Also refer to “Investments” below.
 
 
Property, plant and equipment as of March 31, 2009 decreased by 67.5 billion yen, or 5.4 percent, to 1,175.9 billion yen compared with the previous fiscal year-end.
 
Property, plant and equipment as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased by 59.8 billion yen, or 5.0 percent, to 1,145.1 billion yen compared with the previous fiscal year-end.
 
Capital expenditures (additions to property, plant and equipment) for the fiscal year ended March 31, 2009 decreased by 3.7 billion yen, or 1.1 percent, to 332.1 billion yen compared with the previous fiscal year.  Capital expenditures in the Electronics segment decreased by 62.1 billion yen, or 2.0 percent, to 300.5 billion yen.  Of this amount, approximately 80 billion yen was used for capital expenditures in the semiconductor business, including CCDs and CMOS image sensors.  Capital expenditures decreased in the Game segment by 0.5 billion yen, or 8.7 percent, to 5.1 billion yen.  In the Pictures segment, capital expenditures increased by 3.6 billion yen, or 36.3 percent to 13.5 billion yen.  In All Other, which includes Sony’s music business, 4.7 billion yen of capital expenditures were recorded, an increase of 1.7 billion yen, or 58.7 percent compared with the previous fiscal year.
 
The decrease in property, plant and equipment as of March 31, 2009 when compared to March 31, 2008 was also due to approximately 13.4 billion yen in impairment losses, primarily due to the downsizing and withdrawal from certain businesses in the Electronics segment.
 
Property, plant and equipment as of March 31, 2009 in the Financial Services segment decreased by 7.7 billion yen, or 20.1 percent, to 30.8 billion yen compared with the previous fiscal year-end.  Capital expenditures in the Financial Services segment decreased by 0.3 billion yen, or 5.0 percent, to 6.1 billion yen compared with the previous fiscal year.


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Other assets as of March 31, 2009 increased by 451.9 billion yen, or 27.2 percent, to 2,111.7 billion yen compared with the previous fiscal year-end.  This was primarily due to an increase in intangible assets and goodwill mainly as a result of the consolidation of SONY BMG as a wholly-owned subsidiary from October 1, 2008 and in deferred tax assets, primarily due to an increase in net operating loss carryforwards incurred in Japan and the U.S.
 
 
Total current and long-term liabilities as of March 31, 2009 decreased by 13.9 billion yen, or 0.2 percent, to 8,796.9 billion yen compared with the previous fiscal year-end.  Total current and long-term liabilities as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased by 363.7 billion yen, or 9.2 percent, to 3,603.7 billion yen.  Total current and long-term liabilities in the Financial Services segment as of March 31, 2009 increased by 355.0 billion yen, or 7.1 percent, to 5,339.4 billion yen compared with the previous fiscal year-end.
 
 
Current liabilities as of March 31, 2009 decreased by 212.5 billion yen, or 5.3 percent, to 3,810.9 billion yen compared with the previous fiscal year-end.  Current liabilities as of March 31, 2009 in all segments excluding the Financial Services segment decreased by 383.9 billion yen, or 14.2 percent, to 2,314.6 billion yen.
 
Short-term borrowings and the current portion of long-term debt as of March 31, 2009 in all segments, excluding the Financial Services segment, increased by 92.1 billion yen, or 27.1 percent, to 431.5 billion yen compared with the previous fiscal year-end.  This increase was the result of the issuance of commercial paper (“CP”), the transfer to the current portion of long-term debt of an 80.0 billion yen syndicated loan which matures in June 2009, and the execution of bank loans, all by Sony Corporation.  This increase was partially offset by the redemption of 250 billion yen of convertible bonds that came due during the fiscal year ended March 31, 2009.
 
Notes and accounts payable, trade as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased by 360.2 billion yen, or 39.7 percent, to 546.1 billion yen compared with the previous fiscal year-end.  This was primarily due to a decrease in procurement of raw materials resulting from the decrease in sales in the Electronics and Game segments.
 
Current liabilities as of March 31, 2009 in the Financial Services segment increased by 189.7 billion yen, or 13.9 percent, to 1,552.6 billion yen, mainly due to an increase in deposits from customers at Sony Bank.
 
 
Long-term liabilities as of March 31, 2009 increased by 198.6 billion yen, or 4.1 percent, to 4,986.0 billion yen compared with the previous fiscal year-end.
 
Long-term liabilities as of March 31, 2009 in all segments, excluding the Financial Services segment, increased by 20.2 billion yen, or 1.6 percent, to 1,289.1 billion yen.  In addition, long-term debt as of March 31, 2009 in all segments, excluding the Financial Services segment, decreased by 65.3 billion yen, or 10.0 percent, to 585.6 billion yen.  This was primarily due to the transfer to the current portion of long-term debt of an 80.0 billion yen syndicated loan as mentioned above.
 
Long-term liabilities as of March 31, 2009 in the Financial Services segment increased by 165.4 billion yen, or 4.6 percent, to 3,786.8 billion yen.  This was primarily due to an increase in policy amount in force at Sony Life.
 
 
Total interest-bearing debt as of March 31, 2009 increased by 27.1 billion yen, or 2.5 percent, to 1,111.3 billion yen compared with the previous fiscal year-end.  Total interest-bearing debt as of March 31, 2009 in all segments, excluding the Financial Services segment, increased by 26.7 billion yen, or 2.7 percent, to 1,017.2 billion yen.


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Stockholders’ equity as of March 31, 2009 decreased by 500.4 billion yen, or 14.4 percent, to 2,964.7 billion yen compared with the previous fiscal year-end.  Retained earnings decreased 142.4 billion yen, or 6.9 percent, to 1,917.0 billion yen compared with the previous fiscal year-end, primarily due to the recording of 98.9 billion yen in net loss.  Stockholders’ equity decreased due to a decrease in retained earnings, the recording of foreign currency translation and pension liability adjustments of 247.7 billion yen, and 75.1 billion yen, respectively, and dividend payments of 42.6 billion yen.  The ratio of stockholders’ equity to total assets decreased 2.9 percentage points compared to the end of the previous fiscal year, from 27.6 percent to 24.7 percent.
 
 
The following charts show Sony’s unaudited information of financial position for all segments excluding the Financial Services segment, and for the Financial Services segment alone.  These separate condensed presentations are not required or prepared under U.S. GAAP, which is used in Sony’s consolidated financial statements.  However, because the Financial Services segment is different in nature from Sony’s other segments, Sony utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements.  Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
 
 
                 
    March 31
    2008   2009
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    137,721       95,794  
Marketable securities
    424,709       463,809  
Notes and accounts receivable, trade
    14,143       13,380  
Other
    628,546       258,162  
                 
      1,205,119       831,145  
Investments and advances
    3,879,877       4,510,668  
Property, plant and equipment
    38,512       30,778  
Other assets:
               
Deferred insurance acquisition costs
    396,819       400,412  
Other
    105,332       132,654  
                 
      502,151       533,066  
                 
      5,625,659       5,905,657  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
Short-term borrowings
    44,408       65,636  
Notes and accounts payable, trade
    16,376       16,855  
Deposits from customers in the banking business
    1,144,399       1,326,360  
Other
    157,773       143,781  
                 
      1,362,956       1,552,632  
Long-term liabilities:
               
Long-term debt
    111,771       97,296  
Accrued pension and severance costs
    8,034       10,889  
Future insurance policy benefits and other
    3,298,506       3,521,060  
Other
    203,096       157,520  
                 
      3,621,407       3,786,765  
Minority interest in consolidated subsidiaries
    919       1,125  
Stockholders’ equity
    640,377       565,135  
                 
      5,625,659       5,905,657  
                 


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    March 31
    2008   2009
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    948,710       564,995  
Marketable securities
    3,000       3,103  
Notes and accounts receivable, trade
    1,083,489       847,214  
Other
    1,801,468       1,426,045  
                 
      3,836,667       2,841,357  
Film costs
    304,243       306,877  
Investments and advances
    518,536       339,389  
Investments in Financial Services, at cost
    116,843       116,843  
Property, plant and equipment
    1,204,837       1,145,085  
Other assets
    1,203,849       1,621,396  
                 
      7,184,975       6,370,947  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
Short-term borrowings
    339,485       431,536  
Notes and accounts payable, trade
    906,281       546,125  
Other
    1,452,756       1,336,947  
                 
      2,698,522       2,314,608  
Long-term liabilities:
               
Long-term debt
    650,969       585,636  
Accrued pension and severance costs
    223,203       354,817  
Other
    394,779       348,684  
                 
      1,268,951       1,289,137  
Minority interest in consolidated subsidiaries
    37,509       39,640  
Stockholders’ equity
    3,179,993       2,727,562  
                 
      7,184,975       6,370,947  
                 


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    March 31
    2008   2009
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    1,086,431       660,789  
Marketable securities
    427,709       466,912  
Notes and accounts receivable, trade
    1,090,285       853,454  
Other
    2,405,238       1,639,480  
                 
      5,009,663       3,620,635  
Film costs
    304,243       306,877  
Investments and advances
    4,335,648       4,798,430  
Property, plant and equipment
    1,243,349       1,175,863  
Other assets:
               
Deferred insurance acquisition costs
    396,819       400,412  
Other
    1,263,017       1,711,294  
                 
      1,659,836       2,111,706  
                 
      12,552,739       12,013,511  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
Short-term borrowings
    355,103       451,155  
Notes and accounts payable, trade
    920,920       560,795  
Deposits from customers in the banking business
    1,144,399       1,326,360  
Other
    1,602,945       1,472,590  
                 
      4,023,367       3,810,900  
Long-term liabilities:
               
Long-term debt
    729,059       660,147  
Accrued pension and severance costs
    231,237       365,706  
Future insurance policy benefits and other
    3,298,506       3,521,060  
Other
    528,632       439,096  
                 
      4,787,434       4,986,009  
Minority interest in consolidated subsidiaries
    276,849       251,949  
Stockholders’ equity
    3,465,089       2,964,653  
                 
      12,552,739       12,013,511  
                 


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The following table contains available-for-sale and held-to-maturity securities, including the breakdown of unrealized gains and losses by investment category.
 
                                 
    March 31, 2009  
                      Fair
 
          Unrealized
    Unrealized
    Market
 
    Cost     Gain     Loss     Value  
    Yen in millions  
 
Financial Services Business:
                               
Available-for-sale
                               
Debt securities
                               
Sony Life
    1,586,908       49,495       (1,922 )     1,634,481  
Sony Bank
    826,184       3,698       (26,096 )     803,786  
Other
    16,450       55       (12 )     16,493  
Equity securities
                               
Sony Life
    65,856       4,709       (5,314 )     65,251  
Sony Bank
    7,849                   7,849  
Other
    370       3,148             3,518  
Held-to-maturity
                               
Debt securities
                               
Sony Life
    1,398,821       31,331       (4,438 )     1,425,714  
Sony Bank
    21,812       501       (11 )     22,302  
Other
    44,776       528       (5 )     45,299  
 
 
Total Financial Services
    3,969,026       93,465       (37,798 )     4,024,693  
 
 
Non-Financial Services
                               
Available-for-sale securities
    47,139       3,642       (3,872 )     46,909  
Held-to-maturity securities
                       
 
 
Total Non-Financial Services
    47,139       3,642       (3,872 )     46,909  
 
 
Consolidated
    4,016,165       97,107       (41,670 )     4,071,602  
 
 
 
At March 31, 2009, Sony Life had debt and equity securities which had gross unrealized losses of 6.4 billion yen and 5.3 billion yen, respectively.  Of the unrealized loss amounts recorded by Sony Life, approximately 8.8 percent related to securities being in an unrealized loss position for periods greater than 12 months at March 31, 2009.  Sony Life principally invests in debt securities in various industries.  Almost all of these securities were rated “BBB” or higher by Standard & Poor’s, Moody’s or other rating agencies.  The percentage of non-investment grade securities held by Sony Life represents approximately 0.2 percent of Sony Life’s total investment portfolio, while the percentage of unrealized losses that relate to those non-investment grade securities was 4.4 percent of Sony Life’s total unrealized losses as of March 31, 2009.
 
At March 31, 2009, Sony Bank had debt securities which had gross unrealized losses of 26.1 billion yen.  Of the unrealized loss amounts recorded by Sony Bank, approximately 64.4 percent related to securities being in an unrealized loss position for periods greater than 12 months at March 31, 2009.  Sony Bank principally invests in Japanese government bonds, Japanese corporate bonds and foreign bonds.  Almost all of these securities were rated “BBB” or higher by Standard & Poor’s, Moody’s or other rating agencies.  These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position for periods greater than 12 months.  In addition, there was no individual security with unrealized losses that met the test for impairment as the declines in value were observed to be small both in amounts and percentage, and therefore, the decline in value for those investments was still determined to be temporary in nature.


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For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2009 (6.4 billion yen), maturity dates vary as follows:
 
         
• Within 1 year:
    1.8 percent  
• 1 to 5 years:
    5.2 percent  
• 5 to 10 years:
    1.1 percent  
• Above 10 years:
    91.9 percent  
 
For fixed maturity securities with unrecognized losses held by Sony Bank as of March 31, 2009 (26.1 billion yen), maturity dates vary as follows:
 
         
•   Within 1 year:
    13.7 percent  
• 1 to 5 years:
    59.8 percent  
• 5 to 10 years:
    1.6 percent  
• Above 10 years:
    24.9 percent  
 
In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other issued by a number of non-public companies.  The aggregate carrying amount of the investments in non-public companies at March 31, 2009 was 60.4 billion yen.  A non-public equity investment is valued at cost if fair value is not readily determinable.  If the value is estimated to have declined and such decline is judged to be other-than-temporary, the impairment of the investment is recognized immediately and the carrying value is reduced to its fair value.  For an investment where a quoted price is available in an active market, fair value is determined based on unadjusted quoted prices as of the date on which the impairment determination is made.  For an investment where no quoted price is available in an active market, fair value is usually determined based on quoted prices of securities with similar characteristics or measured through the use of various methodologies such as pricing models, discounted cash flow techniques, or similar techniques that require significant management judgment or estimation of assumptions that market participants would use in pricing the investments.
 
For the fiscal years ended March 31, 2007, 2008 and 2009, total realized impairment losses were 7.4 billion yen, 37.1 billion yen and 45.6 billion yen, respectively, of which 6.1 billion yen, 24.0 billion yen and 41.2 billion yen, respectively, were recorded in financial service revenue by the subsidiaries in the Financial Services segment.  Realized impairment losses recorded other than by subsidiaries in the Financial Services segment in each of the three fiscal years were reflected in non-operating expenses and primarily relate to certain strategic investments in non-financial services businesses.  These investments primarily relate to certain strategic investments in Japan and the U.S. with which Sony has strategic relationships for the purposes of developing and marketing new technologies.  Impairment losses were recorded for each of the three fiscal years as certain companies failed to successfully develop and market such technology, resulting in the operating performance of these companies being more unfavorable than previously expected.  As a result, the decline in the fair value of these companies was judged as other-than-temporary.  None of these impairment losses was individually material to Sony and the impairment losses that were recorded in each of the three fiscal years related to the unique facts and circumstances of each individual investment and did not significantly impact other investments.
 
Sony Life and Sony Bank’s investments constitute the majority of the investments in the Financial Services segment.  Sony Life and Sony Bank account for approximately 78 percent and 21 percent of the investments in the Financial Services segment, respectively.


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Contractual Obligations, Commitments, and Contingent Liabilities
 
The following table summarizes Sony’s contractual obligations and major commitments as of March 31, 2009.  The references to the notes below refer to the corresponding notes within the notes to the consolidated financial statements.
 
                                         
        Less than
  1 to 3
  3 to 5
  More than
    Total   1 year   years   years   5 years
 
    (Yen in millions)
 
Contractual Obligations and Major Commitments:
                                       
Short-term debt (Note 11)
    303,615       303,615                    
Long-term debt (Note 11)
                                       
Capital lease obligations (Notes 8 and 11)
    43,060       8,920       11,872       5,693       16,575  
Other long-term debt (Note 11)
    764,627       138,620       308,561       194,890       122,556  
Minimum rental payments required under operating leases (Note 8)
    181,982       44,488       61,401       32,271       43,822  
Purchase commitments for property, plant and equipment and other assets (Note 25)
    52,894       27,194       25,700              
Expected cost for the production or purchase of films and television programming or certain rights (Note 25)
    139,798       47,982       31,207       23,619       36,990  
Long-term contracts with recording artists and companies (Note 25)
    36,455       14,420       16,422       4,630       983  
Partnership program contract with Fédération Internationale de Football Association (Note 25)
    19,253       3,241       8,006       8,006        
Future insurance policy benefits and other in the life insurance business*(Note 10)
    10,769,646       269,943       593,336       622,494       9,283,873  
Gross unrecognized tax benefits** (Note 21)
    276,627       174                    
 
 
Total
    12,587,957       858,597       1,056,505       891,603       9,504,799  
 
 
 
* Future insurance policy benefits and other in the life insurance business is the estimated future cash payments to be made to policyholders and others for future policy benefits, policyholders’ account balances, policyholders’ dividends, separate account liabilities and others.  These cash payments are based upon assumptions including morbidity, mortality, withdrawals and other factors.  Amounts presented in the above table are undiscounted.  The sum of the cash payments of 10,769.6 billion yen exceeds the corresponding liability amounts of 3,506.8 billion yen included in the consolidated financial statements principally due to the time value of money (Note 10).
 
** The total amounts represent the liability for gross unrecognized tax benefits in accordance with FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”  Sony estimates 174 million yen of the liability is expected to be settled within one year.  The settlement period for the remaining portion of the liability, which totaled 276.5 billion yen, cannot be reasonably estimated due to the uncertainty associated with the timing of the settlements with the various taxing authorities (Note 21).
 
The following items are not included in either the above table or the total amount of commitments outstanding at March 31, 2009:
 
  •  The total amount of expected future pension payments is not included as such amount is not currently determinable.  Sony expects to contribute approximately 34 billion yen to Japanese pension plans and


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  approximately 17 billion yen to foreign pension plans during the fiscal year ending March 31, 2010 (Note 15).
 
  •  The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included as it is not foreseeable what loans will be incurred under such line of credit.  The total unused portion of the line of credit extended under these contracts was 247.1 billion yen as of March 31, 2009 (Note 25).
 
  •  Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on Sony.  These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction.  Purchase obligations do not include contracts that may be cancelled without penalty.  Sony enters into arrangements with certain component manufacturers whereby Sony procures goods and services, including product components, for these component manufacturers and is reimbursed for the related purchases.  Sony’s supply chain management allows for flexible and mutually beneficial purchase arrangements with these manufacturers in order to minimize inventory risk.  Consistent with industry practice, Sony purchases processed goods that meet technical criteria from these component manufacturers after issuing to these manufacturers information on Sony’s projected demand and manufacturing needs.  These purchases are made during the ordinary course of business in order to establish the best pricing and continuity of supply for Sony’s production and are not included in the above table as there are typically no binding purchase obligations.
 
The total amount of purchase commitments and other outstanding commitments at March 31, 2009 was 347.5 billion yen (Note 25).  This amount includes the following major purchase obligations as shown in the table above:
 
  •  In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment.  As of March 31, 2009, the outstanding amount of such commitments was 52.9 billion yen.
 
  •  Certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of films and television programming as well as agreements with third parties to acquire completed films, or certain rights thereon, and to acquire the rights to broadcast certain live action sporting events.  These agreements cover various periods through March 31, 2017.  As of March 31, 2009, these subsidiaries were committed to make payments under such contracts of 139.8 billion yen.
 
  •  Certain subsidiaries in the music business have 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 December 31, 2013.  As of March 31, 2009, these subsidiaries were committed to make payments of 36.5 billion yen under such long-term contracts.
 
  •  In April 2005, Sony Corporation entered into a partnership program contract with Fédération Internationale de Football Association (“FIFA”).  Through this program Sony Corporation will be able to exercise various rights as an official sponsor of FIFA events including the FIFA World Cuptm* from 2007 to 2014.  As of March 31, 2009, Sony Corporation was committed to make payments under such contract of 19.3 billion yen.
 
* FIFA World Cuptm is a registered trademark of FIFA.
 
In order to fulfill its commitments, Sony will use existing cash, cash generated by its operating activities, and intra-group borrowings, where possible.  Further, Sony may raise funds through bonds, CP programs and committed lines of credit from banks, when necessary.


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The following table summarizes Sony’s contingent liabilities as of March 31, 2009.
 
         
    Total Amounts of
    Contingent Liabilities
 
Contingent Liabilities: (Note 25)
    (Yen in millions )
Loan guarantees to a creditor of the third party investor
    29,469  
Other
    17,612  
Total contingent liabilities
    47,081  
 
 
Sony has certain off-balance sheet arrangements that provide liquidity, capital resources and/or credit risk support.
 
Sony has established several accounts receivable sales programs whereby Sony can sell up to 50.0 billion yen of eligible trade accounts receivable in the aggregate at any one time.  Through these programs, Sony can sell receivables to qualified special purpose entities owned and operated by banks.  Sony can sell receivables in which the agreed upon original due dates are no more than 190 days after the sales of receivables.  These transactions are accounted for as sales in accordance with FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” because Sony has relinquished control of the receivables.  Total trade accounts receivable sold during the fiscal years ended March 31, 2007, 2008 and 2009 were 152.5 billion yen, 181.4 billion yen and 130.8 billion yen, respectively.  Losses from these transactions were insignificant.  Although Sony continues servicing the receivables subsequent to being sold, no servicing liabilities are recorded as the costs of collection of the sold receivables are insignificant.
 
A subsidiary of the Financial Services segment has established several receivables sales programs whereby the subsidiary can sell up to 23.0 billion yen of eligible receivables in the aggregate at any one time.  Through these programs, the subsidiary can sell receivables to qualified special purpose entities owned and operated by banks.  The subsidiary can sell receivables in which the agreed upon original due dates are no more than 180 days after the sales of receivables.  These transactions are accounted for as sales in accordance with FAS No. 140, since the subsidiary has relinquished control of the receivables.  Total receivables sold during the fiscal year ended March 31, 2008 and 2009 were 113.8 billion yen and 166.1 billion yen, respectively.  Losses from these transactions were insignificant.  Although the subsidiary continues servicing the receivables subsequent to being sold, no servicing liabilities are recorded as the costs of collection of the sold receivables are insignificant.
 
Sony has, from time to time, entered into various arrangements with variable interest entities (“VIEs”).  In several of the arrangements in which Sony holds a significant variable interest, Sony is the primary beneficiary and therefore consolidates these VIEs.  These arrangements include facilities that provide for the leasing of certain property, the financing of film production, the U.S.-based music publishing business and several joint ventures in the recorded music business.  In addition, Sony holds a significant variable interest in VIEs in which Sony is not the primary beneficiary and therefore does not consolidate which is described as follows:
 
A subsidiary in the Pictures segment entered into two separate production/co-financing agreements with VIEs to co-finance 19 films that were released over the 31 months ended July 31, 2008.  The subsidiary received 570 million U.S. dollars over the term of the agreements to fund the production or acquisition cost of films (including fees and expenses).  Additionally, on January 19, 2007, the subsidiary entered into a third production/co-financing agreement with another VIE to co-finance a majority of the films to be submitted through March 2012.  The subsidiary has received a commitment from the third VIE that it will fund up to 525 million U.S. dollars on a revolving basis to fund the production or acquisition cost of films (including fees and expenses).  As of March 31, 2009, eight films of the subsidiary have been released and approximately 222 million U.S. dollars have been funded by the third VIE.  Under all three agreements, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels.  The VIEs shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third-party participation and residual costs, each as defined.  As the subsidiary did not make any equity investment in these three VIEs nor issue any guarantees with respect to the VIEs, the subsidiary does not absorb the majority of the losses or residual


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returns, and therefore does not qualify as the primary beneficiary for any of the VIEs.  As of March 31, 2009, there are no amounts recorded on the subsidiary’s balance sheet that relate to any of the VIEs other than the investors’ earned but unpaid share of the films’ net profits, as defined.
 
Refer to Note 23 of Notes to Consolidated Financial Statements for more information on VIEs.
 
(The fiscal year ended March 31, 2009 compared with the fiscal year ended March 31, 2008)
 
Operating Activities: During the fiscal year ended March 31, 2009, there was net cash inflow of 407.2 billion yen in operating activities, a decrease of 350.5 billion yen, or 46.3 percent compared with the previous fiscal year..  For all segments excluding the Financial Services segment, there was net cash inflow of 112.7 billion yen in operating activities, a decrease of 406.4 billion yen, or 78.3 percent compared to the previous fiscal year.  The Financial Services segment had a net cash inflow of 300.1 billion yen from operating activities, an increase of 57.5 billion yen, or 23.7 percent compared with the previous fiscal year.
 
With respect to all segments excluding the Financial Services segment, the major cash inflow factors include a cash contribution from net income (loss), after taking into account depreciation and amortization, and decreases in notes and accounts receivable, trade primarily due to a decrease in sales, both mainly in the Electronics segment during the fiscal year ended March 31, 2009.  These factors exceeded cash outflows, which included decreases in notes and accounts payable, trade mainly in the Electronics and Game segments.  The Financial Services segment generated net cash mainly from an increase in revenue from insurance premiums reflecting a steady increase in policy amount in force, primarily at Sony Life.  Compared with the previous fiscal year, within all segments excluding the Financial Services segment, net cash provided by operating activities decreased mainly as a result of a decrease in net income (loss), after taking into account depreciation and amortization.  Within the Financial Services segment, net cash provided increased mainly due to an increase in revenue from insurance premiums at Sony Life noted above compared with the previous fiscal year.
 
Investing Activities: During the fiscal year ended March 31, 2009, Sony used 1,081.3 billion yen of net cash in investing activities, an increase of 170.9 billion yen, or 18.8 percent .compared with the previous fiscal year.  For all segments, excluding the Financial Services segment, 487.4 billion yen of net cash was used in investing activities, an increase of 472.5 billion yen, or 3,166.0 percent. compared with the previous fiscal year.  The Financial Services segment used 602.4 billion yen in net cash, a decrease of 271.3 billion yen, or 31.1 percent. compared with the previous fiscal year.
 
During the fiscal year ended March 31, 2009, with respect to all segments, excluding the Financial Services segment, payments for items such as purchases of manufacturing equipment in the Electronics segment and the acquisition of Bertelsmann’s 50 percent interest in SONY BMG exceeded proceeds generated mainly from the sales of semiconductor fabrication equipment.  Within the Financial Services segment, payments primarily for investments carried out at Sony Life, as well as for investments and advances carried out at Sony Bank, where operations are expanding, exceeded proceeds mainly from the maturities and sales of marketable securities and collections of advances.  Compared with the previous fiscal year, net cash used in investing activities increased within all segments, excluding the Financial Services segment.  The previous fiscal year’s net cash outflows were partially offset by proceeds from the sale of shares in SFH, the sale of “The Sony Center am Potsdamer Platz” in Berlin, and the sale of a portion of Sony’s former headquarters site.  Net cash used in investing activities within the Financial Services segment decreased mainly because an increase in investment asset sales exceeded an increase in investments at Sony Life.
 
In all segments, excluding the Financial Services segment, net cash provided by operating activities and used in investing activities combined was a net outflow of 374.8 yen billion, a deterioration of 878.9 billion yen compared to the previous fiscal year.
 
Financing Activities: During the fiscal year ended March 31, 2009, 267.5 billion yen of net cash was provided by financing activities, a decrease of 238.1 billion yen, or 47.1 percent compared with the previous fiscal year..  For all segments excluding the Financial Services segment, there was a net cash inflow of 9.9 billion yen in financing activities, an increase of 22.0 billion yen compared to a net cash outflow of 12.1 billion yen in the previous


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fiscal year.  This was primarily due to issuances of CP and corporate bonds and borrowings from banks in the current fiscal year, partially offset by the redemption of convertible bonds.  In the Financial Services segment, since the increase primarily in policyholder accounts at Sony Life and in deposits from customers at Sony Bank were less than the increases in the previous fiscal year, financing activities generated 260.3 billion yen of net cash, a decrease of 231.4 billion yen, or 47.1 percent compared to the prior fiscal year.
 
Accounting for the above factors and the effect of fluctuations in exchange rates, the total outstanding balance of cash and cash equivalents at March 31, 2009 was 660.8 billion yen, a decrease of 425.6 billion yen, or 39.2 percent compared with the balance as of March 31, 2008.  The outstanding balance of cash and cash equivalents of all segments excluding the Financial Services segment was 565.0 billion yen, a decrease of 383.7 billion yen, or 40.4 percent compared with the balance as of March 31, 2008.  Within the Financial Services segment, the outstanding balance of cash and cash equivalents was 95.8 billion yen, a decrease of 41.9 billion yen, or 30.4 percent compared with the balance as of March 31, 2008.
 
Information of Cash Flows Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited cash flow information for all segments, excluding the Financial Services segment, and for the Financial Services segment alone.  These separate condensed presentations are not required or prepared under U.S. GAAP, which is used in Sony’s consolidated financial statements.  However, because the Financial Services segment is different in nature from Sony’s other segments, Sony utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements.  Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
 
                 
    Fiscal Year Ended March 31
  Financial Services segment   2008   2009
    (Yen in millions)
 
Net cash provided by operating activities
    242,610       300,096  
Net cash used in investing activities
    (873,646 )     (602,368 )
Net cash provided by financing activities
    491,709       260,345  
                 
Net decrease in cash and cash equivalents
    (139,327 )     (41,927 )
Cash and cash equivalents at beginning of the fiscal year
    277,048       137,721  
                 
Cash and cash equivalents at end of the fiscal year
    137,721       95,794  
                 
 
                 
    Fiscal Year Ended March 31
  Sony without the Financial Services segment   2008   2009
    (Yen in millions)
 
Net cash provided by operating activities
    519,112       112,695  
Net cash used in investing activities
    (14,925 )     (487,446 )
Net cash provided by (used in) financing activities
    (12,100 )     9,947  
Effect of exchange rate changes on cash and cash equivalents
    (66,228 )     (18,911 )
                 
Net increase (decrease) in cash and cash equivalents
    425,859       (383,715 )
Cash and cash equivalents at beginning of the fiscal year
    522,851       948,710  
                 
Cash and cash equivalents at end of the fiscal year
    948,710       564,995  
                 
 


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    Fiscal Year Ended March 31
  Consolidated   2008   2009
    (Yen in millions)
 
Net cash provided by operating activities
    757,684       407,153  
Net cash used in investing activities
    (910,442 )     (1,081,342 )
Net cash provided by financing activities
    505,518       267,458  
Effect of exchange rate changes on cash and cash equivalents
    (66,228 )     (18,911 )
                 
Net increase (decrease) in cash and cash equivalents
    286,532       (425,642 )
Cash and cash equivalents at beginning of the fiscal year
    799,899       1,086,431  
                 
Cash and cash equivalents at end of the fiscal year
    1,086,431       660,789  
                 
 
(The fiscal year ended March 31, 2008 compared with the fiscal year ended March 31, 2007)
 
Operating Activities: During the fiscal year ended March 31, 2008, Sony generated 757.7 billion yen of net cash from operating activities, an increase of 196.7 billion yen, or 35.1 percent compared with the previous fiscal year.  Of this total, all segments, excluding the Financial Services segment, generated 519.1 billion yen of net cash from operating activities, an increase of 213.5 billion yen, or 69.9 percent compared with the previous fiscal year, and the Financial Services segment generated 242.6 billion yen of net cash from operating activities, a decrease of 13.9 billion yen, or 5.4 percent, compared with the previous fiscal year.
 
During the fiscal year, a variety of factors had a positive impact on operating cash flow, including the contribution of net income from the Electronics segment after taking into account depreciation and amortization and an increase in insurance premium revenue reflecting a steady increase in insurance-in-force at Sony Life.  Partially offsetting these contributions was an increase in inventory primarily within the Electronics segment.
 
Compared with the previous fiscal year, net cash provided by operating activities increased during the fiscal year mainly as a result of the increase in net income after taking into account depreciation and amortization.
 
Investing Activities: During the fiscal year ended March 31, 2008, Sony used 910.4 billion yen of net cash in investing activities, an increase of 195.0 billion yen, or 27.3 percent compared with the previous fiscal year.  Of this total, all segments, excluding the Financial Services segment, used 14.9 billion yen of net cash in investing activities, a decrease of 416.2 billion yen, or 96.5 percent, compared with the previous fiscal year.  The Financial Services segment used 873.6 billion yen in net cash, an increase of 596.9 billion yen, or 215.7 percent compared with the previous fiscal year.
 
During the fiscal year ended March 31, 2008, semiconductor fabrication equipment was purchased and Sony ATV acquired Famous Music, a U.S.-based music publishing company.  Partially offsetting these uses of net cash were proceeds from the sale of a portion of SFH shares, the sale of “The Sony Center am Potsdamer Platz” in Berlin and the sale of a portion of the site of Sony’s former headquarters.  Within the Financial Services segment, payments for investments and advances, carried out primarily at Sony Life and at Sony Bank, where operations are expanding, exceeded proceeds from the maturities of marketable securities, sales of securities investments and collections of advances.
 
Compared with the previous fiscal year, net cash used in investing activities during the fiscal year ended March 31, 2008 decreased significantly within all segments, excluding the Financial Services segment, primarily due to the sale of a portion of SFH shares.  On the other hand, net cash used in investing activities within the Financial Services segment increased significantly compared to the previous fiscal year primarily because the increase in payments for investments and advances, carried out primarily at Sony Life and Sony Bank, exceeded the increase in proceeds from the maturities of marketable securities, sales of securities investments and collections of advances compared with the previous fiscal year.

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In all segments, excluding the Financial Services segment, net cash provided by operating and investing activities combined was 504.2 billion yen, an increase of 629.7 billion yen as compared to net cash used of 125.5 billion yen in the previous fiscal year ended March 31, 2007.
 
Financing Activities: During the fiscal year ended March 31, 2008, 505.5 billion yen of net cash was provided by financing activities.  Of the total, 12.1 billion yen of net cash was used in financing activities within all segments, excluding the Financial Services segment, a decrease of 71.7 billion yen compared to the 59.6 billion yen in net cash generated by financing activities in the previous fiscal year.  This was primarily due to the fact that straight bonds were redeemed during the fiscal year ended March 31, 2008.
 
In the Financial Services segment, as a result of an increase in policyholder accounts at Sony Life and an increase in deposits from customers in the banking business, financing activities generated 491.7 billion yen of net cash.
 
Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased by 286.5 billion yen, or 35.8 percent, to 1,086.4 billion yen, compared with the end of the previous fiscal year.  The total outstanding balance of cash and cash equivalents of all segments, excluding the Financial Services segment, increased by 425.9 billion yen, or 81.4 percent, to 948.7 billion yen, and for the Financial Services segment, decreased by 139.3 billion yen, or 50.3 percent, to 137.7 billion yen, compared with the end of the previous fiscal year.
 
Information of Cash Flows Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited cash flow information for all segments, excluding the Financial Services segment, and for the Financial Services segment alone.  These separate condensed presentations are not required or prepared under U.S. GAAP, which is used in Sony’s consolidated financial statements.  However, because the Financial Services segment is different in nature from Sony’s other segments, Sony utilizes this information to analyze its results without the Financial Services segment and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements.  Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
 
                 
    Fiscal Year Ended March 31
  Financial Services segment   2007   2008
    (Yen in millions)
 
Net cash provided by operating activities
    256,540       242,610  
Net cash used in investing activities
    (276,749 )     (873,646 )
Net cash provided by financing activities
    179,627       491,709  
                 
Net increase (decrease) in cash and cash equivalents
    159,418       (139,327 )
Cash and cash equivalents at beginning of the fiscal year
    117,630       277,048  
                 
Cash and cash equivalents at end of the fiscal year
    277,048       137,721  
                 
 
                 
    Fiscal Year Ended March 31
  Sony without the Financial Services segment   2007   2008
    (Yen in millions)
 
Net cash provided by operating activities
    305,571       519,112  
Net cash used in investing activities
    (431,086 )     (14,925 )
Net cash provided by (used in) financing activities
    59,598       (12,100 )
Effect of exchange rate changes on cash and cash equivalents
    3,300       (66,228 )
                 
Net increase (decrease) in cash and cash equivalents
    (62,617 )     425,859  
Cash and cash equivalents at beginning of the fiscal year
    585,468       522,851  
                 
Cash and cash equivalents at end of the fiscal year
    522,851       948,710  
                 
 


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    Fiscal Year Ended March 31
  Consolidated   2007   2008
    (Yen in millions)
 
Net cash provided by operating activities
    561,028       757,684  
Net cash used in investing activities
    (715,430 )     (910,442 )
Net cash provided by financing activities
    247,903       505,518  
Effect of exchange rate changes on cash and cash equivalents
    3,300       (66,228 )
                 
Net increase in cash and cash equivalents
    96,801       286,532  
Cash and cash equivalents at beginning of the fiscal year
    703,098       799,899  
                 
Cash and cash equivalents at end of the fiscal year
    799,899       1,086,431  
                 
 
 
The description below covers basic financial policy and figures for Sony’s consolidated operations except for the Financial Services segment and So-net, which secure liquidity on their own.  Furthermore, the Financial Services segment is described separately at the end of this section.
 
 
An important financial objective of Sony is to maintain the strength of its balance sheet, while securing adequate liquidity for business activities.  Sony defines its liquidity sources as the amount of cash and cash equivalents (“cash balance”) (excluding restrictions on capital transfers mainly due to country regulations) and the unused amount of committed lines of credit.  Sony’s basic liquidity management policy is to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as 50 percent of monthly consolidated sales and repayments on debt that comes due within six months.
 
Funding requirements that arise from maintaining liquidity are principally covered by free cash flow generated from business operations and by the cash balance, however, as needed, Sony has demonstrated the ability to procure funds from the financial and capital markets.  In the event financial and capital markets became illiquid, based on its current forecasts, Sony could sustain sufficient liquidity through access to committed lines of credit with financial institutions, together with its cash balance.
 
For the fiscal year ended March 31, 2009, Sony’s cash flow from operations deteriorated mainly due to a sharp decline in profitability after September 2008.  To maintain a minimum level of cash balance, Sony raised funds mainly from the Japanese CP market towards the end of the fiscal year ended March 31, 2009.  The recent condition of the Japanese CP market has improved from that of the autumn of 2008, however, in the event Sony has difficulty obtaining financing due to a deterioration in the Japanese CP market, Sony does not anticipate difficulty in maintaining liquidity by utilizing other sources of financing, such as bank loans (including committed lines of credit).  Based on its current business forecast, Sony anticipates maintaining the ability to repay all debts maturing within one year with existing cash balances and, if necessary, committed lines of credit.
 
Sony procures funds mainly from the financial and capital markets through Sony Corporation and SGTS, a finance subsidiary in the U.K. Sony Corporation issued domestic straight bonds totalling 257.5 billion yen (37.5 billion yen in December 2008, 220.0 billion yen in June 2009), under a bond shelf registration filed in Japan.  Proceeds of these issues have been and will be used for the redemption of corporate bonds and CP.  Also, in order to meet working capital requirements, Sony Corporation and SGTS maintain CP programs which have the ability to access the Japanese, the U.S. and European CP markets, subject to prevailing market conditions.  As of March 31, 2009, the CP program limit amounts translated into yen was 1,187.6 billion yen in total for Sony Corporation and SGTS, and the total amount of CP issued under these programs, translated into yen was 172.5 billion yen, which was mainly issued in the Japanese CP market.
 
Sony typically raises funds through the aforementioned straight bonds, CP programs and bank loans (including syndicated loans), in the unlikely event Sony could not access liquidity from these sources, and Sony can also draw on committed lines of credit from various financial institutions.  In November 2008, Sony increased yen-based

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committed lines of credit contracted with Japanese financial institutions (increased to 475 billion yen, from 150 billion yen, effective for three years, due November 2011).  In December 2008, Sony established a new multi-currency committed line of credit with Japanese financial institutions (in the amount of 1.5 billion U.S. dollars effective for five years, due December 2013).  These contracts were aimed at securing sufficient liquidity in a quick and stable manner even in the event of financial and capital markets turmoil seen since September 2008.  Sony had a total, translated into yen, of 1,047.3 billion yen in committed lines of credit, none of which had been used as of March 31, 2009.  As a part of such committed lines of credit, Sony also had a multi-currency committed line of credit contracted with a syndicate of global banks (translated into yen of 420.4 billion yen), which expired on April 1, 2009.  Sony renegotiated these multi-currency committed lines of credit with a reduced commitment amount (translated into yen of 183.7 billion yen) on April 1, 2009.  As a result, Sony has a total, translated into yen, of 810.6 billion yen in committed lines of credit as of April 1, 2009.
 
In the event of a downgrade in Sony’s credit ratings, even though the cost of some of those borrowings could increase, there are no financial covenants in any of Sony’s material financial agreements that would cause an acceleration of the obligation or any impairment on the ability to drawdown on unused facilities.  Furthermore, there are no restrictions on the uses of most proceeds except that certain borrowings may not be used to acquire securities listed on a U.S. stock e