Investment in NEC TOKIN

On March 12, 2012, KEC, a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) to acquire 51% of the common stock (representing a 34% economic interest) of NEC TOKIN Corporation (“NEC TOKIN”), a manufacturer of tantalum capacitors and electro-magnetic, electro-mechanical and access devices, (the “Initial Purchase”) from NEC Corporation (“NEC”) of Japan. The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of NEC TOKIN (the “Initial Closing”). The Company accounts for its investment using the equity method in a non-consolidated variable interest entity since KEC does not have the power to direct significant activities of NEC TOKIN.

In connection with KEC’s execution of the Stock Purchase Agreement, KEC entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with NEC TOKIN and NEC, which provides for restrictions on transfers of NEC TOKIN’s capital stock, certain tag-along and first refusal rights on transfer, restrictions on NEC’s ability to convert the preferred stock of NEC TOKIN held by it, certain management services to be provided to NEC TOKIN by KEC (or an affiliate of KEC) and certain board representation rights. KEC holds four of seven NEC TOKIN director positions. However, NEC has significant board rights.

Concurrent with execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC, which was amended on August 29, 2014, whereby KEC may purchase additional shares of NEC TOKIN common stock from NEC TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of NEC TOKIN’s common stock (the “First Call Option”) by providing notice of the First Call Option between the Initial Closing and April 30, 2015. Upon providing such First Call Option notice, but not before April 1, 2015, KEC may also exercise a second option to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. From April 1, 2015 through May 31, 2018, NEC may require KEC to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC (the "Put Option"). However, in the event that KEC issues new debt securities principally to refinance its outstanding 10.5% senior notes due 2018 and its currently outstanding credit agreement, including amounts to pay related fees and expenses and to use for general corporate purposes (“Refinancing Notes”), prior to NEC’s delivery of its notification of exercise of the Put Option, then the earliest date NEC may exercise the Put Option is automatically extended to the day immediately following the final scheduled maturity date of such Refinancing Notes, or in the event such Refinancing Notes are redeemed in full prior to such final scheduled maturity date, then on the day immediately following the date of such full redemption, but in any event beginning no later than November 1, 2019. If not previously exercised, the Put Option will expire on October 31, 2023.

The purchase price for the Put Option will be based on the greater of six times LTM EBITDA less previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN’s debt obligation to NEC as of the date the Put Option is exercised. The purchase price for the Put Option is reduced by the amount of NEC TOKIN’s debt obligation to NEC which KEC will assume. The determination of the purchase price will be modified in the event there is a disagreement between NEC and KEC under the Stockholders’ Agreement.

The Company has marked these options to fair value and in the quarter and nine month periods ended December 31, 2014 recognized a $2.5 million and $13.2 million gain, respectively, which was included on the line item “Other (income) expense, net” in the Condensed Consolidated Statement of Operations. The line item “Other assets” on the Condensed Consolidated Balance Sheets includes $16.8 million and $3.6 million, respectively as of December 31, 2014 and March 31, 2014 related to the options.

Summarized financial information for NEC TOKIN follows (amounts in thousands):



	December 31, 2014		March 31, 2014
Current assets	$	224,428	$	245,709
Non-current assets	280,381		302,161
Current liabilities	116,110		120,929
Non-current liabilities	299,788		360,908



	Three Months Ended December 31,				Nine Month Periods Ended December 31,
	2014		2013		2014		2013
Sales	$	119,841	$	129,639	$	371,926	$	387,905
Gross profit	26,162		24,879		79,227		68,748
Net income (loss)	5,628		23,228		4,928		11,286

A reconciliation between NEC TOKIN's net income (loss) and KEMET's equity investment income (loss) follows (amounts in thousands):



	Three Months Ended December 31,						Nine Month Periods Ended December 31,
	2014			2013			2014			2013
NEC TOKIN net income (loss)	5,628			23,228			4,928			11,286
KEMET's equity ownership %	34		%	34		%	34		%	34		%
Equity income (loss) from NEC TOKIN before Adjustments	1,914			7,898			1,676			3,837

Adjustments:
Amortization and depreciation	(547		)	(243		)	(1,752		)	(1,056		)
Gain on sale of long-lived assets	—			(5,998		)	—			(5,998		)
Inventory valuation	—			—			—			254
Equity income (loss) from NEC TOKIN	$	1,367		$	1,657		$	(76	)	$	(2,963	)

A reconciliation between NEC TOKIN's net assets and KEMET's investment in NEC TOKIN balance follows (amounts in thousands):



	December 31, 2014			March 31, 2014
Investment in NEC TOKIN	$	52,168		$	46,419
Purchase price accounting basis adjustment:
Property, plant and equipment	7,022			7,325
Technology	(15,082		)	(16,261		)
Long-term debt	(4,028		)	(4,754		)
Goodwill	(9,326		)	(9,326		)
Inventory Profit Elimination	264			—
Other	(788		)	(952		)
KEMET's 34% economic interest of NEC TOKIN's net assets	$	30,230		$	22,451

The above basis differences (except Goodwill) are being amortized over the respective estimated life of the assets. As of December 31, 2014, KEC’s maximum loss exposure as a result of its investments in NEC TOKIN is limited to the aggregate of the carrying value of the investment and any accounts receivable balance due from NEC TOKIN. For the quarter and nine month periods ended December 31, 2014, KEMET recorded sales of $3.7 million and $9.6 million, respectively, to NEC TOKIN and as of December 31, 2014 and March 31, 2014, KEMET's accounts receivable from NEC TOKIN were $2.2 million and $2.0 million, respectively. KEMET's accounts payable to NEC TOKIN were $0.4 million and $0.1 million as of December 31, 2014 and March 31, 2014, respectively. In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement with NEC TOKIN to provide services for which KEC would be reimbursed. As of December 31, 2014 and March 31, 2014, KEC’s receivable balance under this agreement was $0.5 million and $0.7 million, respectively.

In March and April 2014, NEC TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan and South Korea concerning alleged anti-competitive activities within the capacitor industry. Subsequently, NEC TOKIN has also communicated with government authorities regarding related investigations in Taiwan and Singapore. The investigations are continuing at various stages. In addition, beginning in July 2014, NEC TOKIN and its subsidiary, NEC TOKIN America, Inc., have been named, along with more than 20 other capacitor manufacturers and subsidiaries, as defendants in purported antitrust class action suits in the United States and Canada. As of this date, except for legal expenses, NEC TOKIN has not recorded an accrual as a result of the investigations and civil litigation.