-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qb26wfD3owIWzdbAnkQAQCcai5jNjieOfycV5DftgomoNl6ETxZAtdUnIK1MqtR/ L9za3I2mVvvCIfH/cUcVKQ== 0000887730-99-000005.txt : 20030213 0000887730-99-000005.hdr.sgml : 20030213 19990630174040 ACCESSION NUMBER: 0000887730-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 DATE AS OF CHANGE: 19990701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEMET CORP CENTRAL INDEX KEY: 0000887730 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 570923789 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20289 FILM NUMBER: 99657344 BUSINESS ADDRESS: STREET 1: 2835 KEMET WAY CITY: SIMPSONVILLE STATE: SC ZIP: 29681 BUSINESS PHONE: 8039636300 MAIL ADDRESS: STREET 1: P O BOX 5928 STREET 2: 2835 KEMET WAY CITY: SIMPSONVILLE STATE: SC ZIP: 29681 10-K 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 or [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the transition period from to ------------------------- - ---------------------- Commission file Number 0-20289 KEMET Corporation (Exact name of registrant as specified in its charter) Delaware 57-0923789 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2835 KEMET Way, Simpsonville, South Carolina 29681 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (864)963-6300 Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered - ------------------------------------ - ----------------------------------------- - ------------------------------------ - ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value - ------------------------------------------------------------------------------ (Title of class) Indicated 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. [ x ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] Aggregate market value of voting Common Stock held by non-affiliates of the registrant as of June 11,1999, computed by reference to the closing sale price of the registrant's Common Stock was approximately $615,177,416. Number of shares of each class of Common Stock outstanding as of June 11,1999: Common Stock, $.01 Par Value 38,204,709 Non-Voting Common Stock, $.01 Par Value 1,096,610 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the definitive Proxy Statement relating to the annual meeting of Stockholders to be held on July 21, 1999: Part III 2 PART I ITEM 1. BUSINESS General KEMET Corporation and its subsidiaries ("KEMET" or the "Company")is the largest manufacturer of solid tantalum ("tantalum") capacitors in the world and the second largest manufacturer of multilayer ceramic ("ceramic") capacitors in the United States. According to industry sources, tantalum and ceramic capacitors are the two fastest growing segments of the United States capacitor industry. During fiscal year 1999, KEMET shipped approximately 22.3 billion capacitors and approximately 35,000 different types of capacitors, with "types" being distinguished by dielectric material, configuration, encapsulation, capacitance level and tolerance, performance characteristics, marking and packaging. Capacitors store, filter and regulate electrical energy and current flow and are found in virtually all electronic applications and products. The Company's capacitors are used in a wide variety of electronic applications, including communication systems, data processing equipment, personal computers, automotive electronic systems, and military and aerospace systems. KEMET markets its capacitors to a diverse and growing number of original equipment manufacturers ("OEMs") as well as a worldwide network of distributors. KEMET's largest customers include Alcatel, Arrow, Compaq Computer, Ford Motor Company, General Motors Corporation, Hewlett- Packard Company, IBM Corporation, Intel, Lucent Technologies, Motorola Inc., SCI Systems, Inc., Siemens, Solectron, and TTI. Since its divestiture from Union Carbide ("UCC") in December 1990, the Company has pursued one distinct vision: To establish a distinctive competence which differentiates KEMET as the unquestioned Best-In-Class supplier. The core values that support this vision are: Best Trained and Motivated People, Company-Wide Quality Concept (as evidenced by ISO 9000 and QS-9000 registration at all of KEMET's facilities), an "Easy To Buy From" philosophy (supported by the Company's direct sales force and executed by KEMET's Key Account Teams), Lowest Cost Producer (by achieving significant production cost savings through the focused plant concept and the transfer to and expansion of manufacturing operations in Mexico where the Company can take advantage of lower overall costs) and Leading Edge of Technology (as evidenced by the Company's continued increase in expenditures for new product development and the design and development of new machinery and equipment). Background of Company KEMET's operations began in 1919 as a business of Union Carbide Corporation to manufacture component parts for vacuum tubes. As vacuum tubes were gradually replaced by solid-state transistors, the Company changed its manufacturing focus from vacuum tube parts to tantalum capacitors, and later added ceramic capacitors to meet the expected need for capacitors in electronic circuit boards. The Company entered the market for tantalum capacitors in 1958 as one of approximately 25 United States manufacturers. By 1966, the Company was the United States' market leader in tantalum capacitors, a position which it still holds in an industry consisting of four major tantalum capacitor manufacturers. In 1969, the Company began production of ceramic capacitors as one of approximately 35 United States manufacturers. Within five years, the Company was the second largest United States manufacturer of ceramic capacitors, a position which it still holds in a market consisting of five major capacitor manufacturers. 3 The current Company was formed in 1990 by certain members of the Company's current management, Citicorp Venture Capital, Ltd. ("CVC"), and other investors to acquire the outstanding common stock of KEMET Electronics Corporation from Union Carbide Corporation. Public Offerings and Recapitalization In October 1992, the Company completed an initial public offering of its Common Stock and a related recapitalization to simplify its capital structure. In June 1993, the Company completed an additional public offering of Common Stock and used the net proceeds to reduce outstanding indebtedness. Stock Split On September 6, 1995, the Board of Directors declared a two-for-one stock split whereby one additional Common Share, par value $.01, was issued for each common share outstanding to shareholders of record on September 13, 1995. All share and per share data appearing in the consolidated financial statements and notes thereto have been restated to reflect the stock split. Refinancing of Outstanding Senior Debt On October 18, 1996, the Company refinanced the entire balance of its outstanding revolving credit facility and swingline credit facility with new credit facilities. These new credit facilities, each of which has a term of five years, include a $150.0 million revolving credit facility and a $10.0 million swingline credit facility. In May 1998, the Company sold $100 million of its Senior Notes due May 4, 2010. Industry Description The Company estimates that worldwide capacitor consumption was approximately $13.9 billion in 1998, with tantalum and ceramic capacitors comprising approximately 37%. According to industry sources, in 1998 tantalum and ceramic capacitors accounted for approximately 62% of the $2.6 billion market for capacitors consumed in the United States and constitute the two fastest growing segments of the United States capacitor market. Capacitors store, filter and regulate electrical energy and current flow, and are one of the essential passive components used on circuit boards. Capacitors are found in virtually all electronic applications and products. Capacitors are used to alter the relationship of currents and voltages in a given electrical system, to filter or smooth out electrical signals where required, and to retard signals of low frequencies while permitting signals of higher frequencies to pass with minimal attenuation. Because of their fundamental nature and widespread application, demand for capacitors tends to reflect the general demand for electronic products, which has been growing over the past several years. Growth in the electronics market and corresponding growth in the capacitor market has been fueled by both the development of new electronic products, such as cellular phones, personal computers and electronic controls for engines and machinery, and increases in the electronic content of existing products, such as appliances, medical equipment and automobiles. For example, electronic circuit boards, and therefore capacitors, are now routinely integrated into automotive systems that until recently had been mainly mechanical in nature, including transmissions, brakes, ignitions and electronic fuel injection systems. Fluid monitors, pollution control systems and anti-theft devices also add to the electronic content and capacitor use in automobiles. 4 In response to the needs of OEMs to increase circuit board densities, decrease the size of electronic components, and shift to more highly automated production techniques, the capacitor industry in general and KEMET in particular has increasingly shifted its manufacturing focus from traditional leaded capacitors toward surface-mount capacitors. In order to meet the increased demand for surface-mount capacitors the Company has invested $421.5 million in capital expenditures during the past five fiscal years, a substantial portion of which was spent to expand surface-mount manufacturing capacity. Surface-mounting allows capacitors and other electronic components to be soldered directly to a circuit board, rather than having lead wires passed through holes to be soldered on the reverse side of a board. This results in greater manufacturing efficiency by allowing capacitors to be mounted on both sides of a circuit board. In addition, surface-mount capacitors are generally smaller than similar leaded capacitors and allow for higher circuit board density. Capacitors Capacitors are electronic components consisting of conducting materials separated by a dielectric or insulating material (such as tantalum, ceramic, aluminum, film, paper and mica), which allows a capacitor to interrupt the flow of electrical current. They are divided between leaded and surface-mount capacitors, describing the method by which the capacitors are attached to the circuit board. KEMET manufactures a full line of capacitors using two types of dielectrics, solid tantalum and multilayer ceramic. Most customers buy both tantalum and ceramic capacitors from the Company. The Company manufactures these types of capacitors in many different sizes and configurations. The Company produces leaded capacitors, which are attached to a circuit board using lead wires, and surface-mount capacitors, which are attached directly to the circuit board without lead wires. The Company is currently shipping approximately 106 million capacitors each business day. The choice of capacitor dielectric is driven by the engineering specifications and application of the component product into which the capacitor is incorporated. Product design engineers in the electronics industry typically select capacitors on the basis of capacitance levels, size and cost. Tantalum and ceramic capacitors continue to be the preferred dielectrics in new design applications, as compared to capacitors made of aluminum, film, mica, paper or ceramic disks. Tantalum and ceramic capacitors are commonly used in conjunction with integrated circuits, and are best suited for applications requiring lower to medium capacitance values. Generally, ceramic capacitors are more cost-effective at lower capacitance values, and tantalum capacitors are more cost-effective at higher capacitance values. Management believes that sales of tantalum and ceramic capacitors will continue to grow more rapidly than other types of capacitors in both the United States and worldwide markets because technological breakthroughs in electronics are regularly expanding the number and type of applications for these products. Both tantalum and ceramic capacitors have special properties valuable for surface-mount applications. Leaded and Surface-Mount Capacitors The Company's capacitors can be divided into two general groups, leaded and surface-mount, based on the method by which the capacitor is attached to the circuit board. Despite the differences in configuration between leaded and surface-mount capacitors, both types of capacitors rely on similar technology. 5 The manufacture of the internal capacitor element is the same whether it is ultimately incorporated into a leaded or surface-mount capacitor. Consequently, much of the know-how and some of the capital equipment required to produce these products is common. The primary distinction between leaded and surface- mount capacitors occurs in the assembly, testing and finishing stages, which utilize different equipment and processes. Surface-mount capacitors must be able to withstand temperatures up to 260 degrees C during circuit board assembly and are placed on circuit boards using high-speed automatic placement equipment. These requirements result in quality and process standards greater than those demanded for leaded components. The Company believes it has taken advantage of the growth of the surface-mount capacitor market and is an industry leader in designing and marketing surface- mount capacitors. Demand has been gradually shifting from leaded to surface- mount capacitors because surface-mount capacitors are more commonly incorporated in new product designs which rely on higher density circuit boards. As a result, worldwide sales of leaded capacitors have been declining over the past five years and have been offset by an increase in worldwide sales of surface-mount capacitors. Consequently, although KEMET intends to make further capital investments in surface-mount manufacturing capacity to serve the growing needs of its customers, the Company's results of operations and growth prospects could be adversely affected in the event that the Company does not continue to increase its sales and production of surface-mount capacitors. The following table shows the respective percentages of the Company's sales of surface-mount capacitors and leaded capacitors for the fiscal years ended March 31, 1999, 1998 and 1997.
Net Sales (dollars in millions) Fiscal Years Ended March 31, 1999 1998 1997 SALES PERCENT SALES PERCENT SALES PERCENT Surface-mount $459.3 81% $517.4 77% $399.8 72% Leaded 106.3 19% 150.3 23% 155.5 28% ------ ---- ------ ---- ------ ---- Total $565.6 100% $667.7 100% $555.3 100% ====== ==== ====== ==== ====== ====
Markets and Customers KEMET's products are sold to a variety of OEMs in a broad range of industries including the computer, communications, automotive, military and aerospace industries. Because of their fundamental nature and widespread application, demand for capacitors tends to reflect the demand for electronic products. The Company is not dependent on any one customer or group of related customers. Two customers accounted for over 10% of the Company's net sales during fiscal year 1997, and one customer in fiscal years 1998 and 1999. The Company's top 50 customers accounted for approximately 90% of the Company's net sales during fiscal year 1999. Preferred supplier and similar long-term relationships with OEMs accounted for approximately 56% of the Company's net sales in fiscal years 1997, 1998 and 1999. 6 KEMET produced approximately 5% of its capacitors under military specification standards sold for both military and commercial uses during fiscal year 1999. The Company does not sell any of its capacitors directly to the U.S. government. Although the Company does not track sales of capacitors by industry, the Company estimates that sales of its capacitors to OEMs which produce products principally for the military and aerospace industries accounted for less than 2% of its net sales during fiscal year 1999. Certain of the Company's other customers may also purchase capacitors for products in the military and aerospace industries. Sales and Distribution KEMET's domestic sales, and most of its foreign sales, are made through the Company's approximately 200 direct sales and customer service employees. The Company's domestic sales staff is located in six regional offices, twelve local offices and eight satellite offices. A substantial majority of the Company's international sales are made through local sales offices in four European locations, six Far East locations, and two Canadian locations. There are also nine satellite offices in Europe, and one in South America. The Company also has independent sales representatives located in Australia, Argentina, Brazil, India, South Korea, and Thailand. KEMET markets and sells its products in its major markets with a direct sales force in contrast to its competitors which generally utilize independent commissioned representatives or a combination of representatives and direct sales employees. The Company believes its direct sales force creates a distinctive competence in the market place and has established an enviable relationship with its customers. With a global sales organization that is customer-based and geographically independent, KEMET's direct sales personnel from around the world serve on KEMET Key Account Teams. These teams are committed to serving any customer location in the world with a dedicated KEMET representative. This approach requires a unique blend of accountability and responsibility to specific customer locations, guided by an overall account strategy for each key customer. Electronic distributors are an important distribution channel in the electronics industry and accounted for approximately 29%, 32%, and 29% of the Company's net sales in fiscal years 1997, 1998 and 1999, respectively. In fiscal years 1997, 1998 and 1999, TTI, Inc., a distributor of passive components, accounted for more than 10% of net sales. The Company's distributor policy includes the inventory price protection and "ship-from-stock and debit" programs common in the industry. The price protection policy protects the value of the distributors' inventory in the event the Company reduces its published selling price to distributors. The Company has established a rolling 12-month financial reserve for this program. The ship-from-stock and debit program provides a mechanism for the distributor to meet a competitive price after obtaining authorization from the local Company sales office. This program allows the distributor to ship its higher- priced inventory and debit the Company for the difference between KEMET's list price and the lower authorized price for that specific transaction. Each sale under this program requires specific authorization. The Company expenses these authorized discounts on a monthly basis and the expense is included in calculating net sales. 7 Foreign Sales During fiscal year 1999, the Company exported approximately $272.1 million of capacitors, representing approximately 48% of the Company's net sales. Although management believes that the Company is able to provide a level of delivery and service that is competitive with local suppliers, the Company's capacitor market shares in European and Asian markets tend to be significantly lower than in the United States because some foreign electronics manufacturers prefer to purchase components from local producers. As a result, a large percentage of the Company's export sales are made to foreign operations of United States manufacturers. The Company's European sales are denominated in local currencies and therefore a significant appreciation of the United States dollar against such foreign currencies would reduce the gross profit realized by the Company on its European sales as measured in United States dollars. Substantially all of the Company's European export shipments are made duty-paid, free delivery as required by local market conditions (see note 9 to Consolidated Financial Statements). Inventory and Backlog Although the Company manufactures and inventories standardized products, a portion of its products are produced to meet specific customer requirements. Cancellations by customers of orders already in production could have an impact on inventories; however, to date cancellations have not been significant. The backlog of outstanding orders for the Company's products was $50.6 million, and $62.0 million, at March 31, 1999 and 1998, respectively. The decrease was primarily a result of the additional manufacturing capacity brought on-stream by the Company and reduced industry lead times as well as the industry-wide inventory correction experienced in fiscal year 1999. The current backlog is expected to be filled during the next 12 months. Most of the orders in the Company's backlog may be canceled by its customers, in whole or in part, although sometimes subject to penalty. Competition The market for tantalum and ceramic capacitors is highly competitive worldwide. The capacitor industry is characterized by, among other factors, a long-term trend toward lower prices for capacitors, low transportation costs and few import barriers. Competitive factors that influence the market for the Company's products include product quality, customer service, technical innovation, pricing and timely delivery. The Company believes that it competes favorably on the basis of each of these factors. The Company's major domestic competitors include AVX Corporation in the production of tantalum and ceramic capacitors and Vishay Intertechnology, Inc., in the production of tantalum and surface-mount ceramic capacitors. The Company's major foreign competitors include AVX Corporation in the production of tantalum and ceramic capacitors, Murata Manufacturing Company Ltd. and TDK Corporation in the production of ceramic capacitors, and NEC Corporation in the production of tantalum capacitors. Cyclicality of Demand for Electronic Components Capacitors are essential electronic components used on circuit boards in virtually all electronic products and applications and the demand for capacitors tends to reflect the demand for products in the electronics market. 8 During fiscal year 1999, the growth rate for personal computers and cellular phones slowed and the slower end-use growth rate resulted in a slower growth for capacitors. This slower growth rate of electronic equipment resulted in excess inventory in the equipment distributor channel. Future changes in business cycles could adversely affect the Company's results. Raw Materials The principal raw materials used in the manufacture of the Company's products are tantalum powder, palladium and silver. These materials are considered commodities and are subject to price volatility. Tantalum powder is primarily purchased under annual contracts, while palladium and silver are primarily purchased on the spot and forward markets, depending on market conditions. For example, if the Company believes that prices are likely to rise, it may purchase a significant amount of its annual requirements on a forward delivery basis. There are presently three suppliers that process tantalum ore into capacitor- grade tantalum powder. Management believes tantalum required by the Company has generally been available in sufficient quantities to meet requirements and that there are a sufficient number of tantalum processors relative to foreseeable demand; however, the limited number of tantalum powder suppliers could lead to increases in tantalum prices that the Company may not be able to pass on to its customers. Although palladium is presently found primarily in South Africa and Russia, the Company believes that there are a sufficient number of domestic and foreign suppliers from which the Company can purchase its palladium requirements. Although the palladium required by the Company has generally been available in sufficient quantities, the limited number of palladium suppliers could lead to higher prices, and the inability of the Company to pass any increase on to its customers could have an adverse effect on the margin of those products in which the metal is used. The dramatic increase in the price of palladium experienced in the second half of fiscal 1998 continued into fiscal 1999. This again is attributed to delays from the Russian supply of palladium which is expected to continue into fiscal 2000. The Company continues to take actions to minimize the impact of this increase on its profit margins. Silver has generally been available in sufficient quantities, and the Company believes there are a number of suppliers from which the Company can purchase its silver requirements. Patents and Trademarks At March 31, 1999, the Company held 23 United States and 98 foreign patents and four United States and 62 foreign trademarks. The Company does not generally engage in licensing technology or products, whether as licensor or licensee. The Company believes that the success of its business is not materially dependent on the existence or duration of any patent, license or trademark, other than the name "KEMET." The Company's engineering and research and development staffs have developed and continue to develop proprietary manufacturing processes and equipment designed to enhance the Company's manufacturing facilities and reduce costs. 9 Research and Development Research and Development expenses were $21.1 million for fiscal year 1999 compared to $23.8 million for fiscal year 1998. These amounts include expenditures for product development and the design and development of machinery and equipment for new processes and cost reduction efforts. Most of the Company's products and manufacturing processes have been designed and developed by Company engineers. The Company continues to invest in new technology to improve product performance and production efficiencies. Environmental The Company is subject to various Mexican and United States federal, state and local environmental laws and regulations relating to the protection of the environment, including those governing the handling and management of certain chemicals used and generated in manufacturing electronic components. Based on the annual costs incurred by the Company over the past several years, management does not believe that compliance with these laws and regulations will have a material adverse effect upon the Company's capital expenditures, earnings or competitive position. The Company believes, however, that it is reasonably likely that the trend in environmental litigation and laws and regulations will continue to be toward stricter standards. Such changes in the law and regulations may require the Company to make additional capital expenditures which, while not currently estimable with certainty, are not presently expected to have a material adverse effect on the Company's financial condition. See "Legal Proceedings" for a discussion of certain other environmental matters. Employees As of March 31, 1999, KEMET had approximately 10,800 employees, of whom approximately 3,500 were located in the United States, approximately 7,500 were located in Mexico, and the remainder were located in the Company's foreign sales offices. The Company believes that its future success will depend in part on its ability to recruit, retain and motivate qualified personnel at all levels of the Company. While none of its United States employees are unionized, the Company has approximately 5,700 hourly employees in Mexico represented by labor unions as required by Mexican law. The Company has not experienced any major work stoppages and considers its relations with its employees to be good. In addition, the Company's labor costs in Mexico are denominated in pesos, and Mexican inflation or a significant depreciation of the United States dollar against the Mexican peso would increase the Company's labor costs in Mexico. ITEM 2. PROPERTIES KEMET is headquartered in Greenville, South Carolina, and has a total of 12 manufacturing plants located in the southeastern United States and Mexico. The manufacturing operations are in Greenville, Mauldin, Fountain Inn, and Greenwood, South Carolina; Shelby, North Carolina; and Matamoros and Monterrey, Mexico. The Company's existing manufacturing and assembly facilities have approximately 1.6 million square feet of floor space and are highly automated with proprietary manufacturing processes and equipment. 10 The Mexican facilities operate under the Maquiladora Program. In general, a company that operates under the program is afforded certain duty and tax preferences and incentives on products brought back into the United States. The Company has operated in Mexico since 1969 and approximately 69% of its employees are located in Mexico. The Company's Mexican facilities in Matamoros are located within five miles of Brownsville, Texas, with easy access for daily shipments of work-in-process and finished products. The Company also has manufacturing facilities in Monterrey which commenced operations in 1991, and were expanded by 130,000 square feet in fiscal year 1997. Also in 1997, the Company constructed and put in production a new manufacturing plant in Monterrey which comprises 240,000 square feet of space. The Company is currently in the process of building a new manufacturing facility for tantalum capacitors in Ciudad Victoria, Mexico. Construction of this facility is expected to be completed in the fall of 1999. The Company's manufacturing processes and standards, including compliance with applicable environmental and worker safety laws and regulations, are essentially identical in the United States and Mexico. The Company's Mexican operations, like its United States operations, have won numerous quality awards from their customers. Each of the Company's manufacturing and assembly facilities produces one product or a family of closely related products. Management believes that this focused approach to manufacturing allows each facility to shorten manufacturing time, optimize product flow, and avoid long and costly equipment retooling and employee training time, all of which lead to overall reduced costs. The Company has developed just-in-time manufacturing and sourcing systems. These systems enable the Company to meet customer requirements for faster deliveries while minimizing the need to carry significant inventory levels. The Company continues to emphasize flexibility in all of its manufacturing operations to improve product delivery response times. Management believes that substantially all of its property and equipment is in good condition and that it has sufficient capacity to meet its current and projected manufacturing and distribution needs for leaded capacitors. The Company continues to add capacity to meet its projected manufacturing and distribution needs for surface-mount capacitors. 11 The following table provides certain information regarding the Company's principal facilities:
Date Constructed, Acquired Square Type of Description or First Occupied Location Footage Interest of Use by the Company - -------------------------------------------------------------------------------- - ----------------------- Greenville, South Carolina 359,015 Owned Manufacturing/Headquarters 1963 Mauldin, South Carolina 109,696 Owned Manufacturing 1971 Matamoros, Mexico (1) 209,928 Owned Manufacturing 1977 Greenwood, South Carolina 108,210 Owned Manufacturing 1981 Shelby, North Carolina 115,266 Owned Manufacturing 1982 Fountain Inn, South Carolina 138,522 Owned Manufacturing 1985 Monterrey, Mexico (2) 508,500 Owned Manufacturing 1991 Matamoros, Mexico 51,257 Owned Manufacturing 1985 Victoria, Mexico (3) 160,000 Owned Manufacturing Mauldin, South Carolina 80,000 Leased Distribution/Storage 1976 Brownsville, Texas 60,000 Leased Shipping/Distribution 1992
(1) Includes three separate facilities. (2) Includes three separate facilities. (3) Facility is currently being constructed and is expected to be complete by the fall of 1999. 12 ITEM 3. LEGAL PROCEEDINGS The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) and certain analogous state laws, impose retroactive, strict liability upon certain defined classes of persons associated with releases of hazardous substances into the environment. Among those liable under CERCLA (known collectively as "potentially responsible parties" or "PRPs") is any person who "arranged for disposal" of hazardous substances at a site requiring response action under the statute. While a company's liability under CERCLA is often based upon its proportionate share of overall waste volume or other equitable factors, CERCLA has been widely held to permit imposition of joint and several liability on each PRP. The Company has periodically incurred, and may continue to incur, liability under CERCLA and analogous state laws with respect to sites used for off-site management or disposal of Company-derived wastes. The Company has been named as a PRP at the Seaboard Chemical Site in Jamestown, North Carolina. The Company is participating in the clean-up as a "de minimis" party and does not expect its total exposure to be material. In addition, Union Carbide Corporation (Union Carbide), the former owner of the Company, is a PRP at certain sites relating to the off-site disposal of wastes from properties presently owned by the Company. The Company is participating in coordination with Union Carbide in certain PRP-initiated activities related to these sites. The Company expects that it will bear some portion of the liability with respect to these sites; however, any such share is not presently expected to be material to the Company's financial condition. In connection with the acquisition in 1990, Union Carbide agreed, subject to certain limitations, to indemnify the Company with respect to the foregoing sites. The Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including workers compensation or work place safety cases, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to the Company, the Company does not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on the Company's financial condition or results of operations. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the Company's quarter ended March 31, 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock is traded on the over-the-counter market and price and volume data are reported on the NASDAQ Stock Market (National Market) under the symbol "KMET". At the close of business on June 11, 1999, there were approximately 600 holders of record of the Company's Common Stock. The following table sets forth the high and low sale prices of the Common Stock as reported on the NASDAQ National Market System for the periods indicated (all per share prices have been restated to reflect the stock split effective on September 6, 1995):
HIGH LOW FISCAL 1999 First Quarter $20.00 $13.00 Second Quarter 14.50 8.75 Third Quarter 15.81 9.13 Fourth Quarter 13.94 9.88 HIGH LOW FISCAL 1998 First Quarter $26.13 $17.88 Second Quarter 31.00 24.13 Third Quarter 30.56 17.75 Fourth Quarter 21.88 17.50
The Company has not declared or paid any cash dividends on its Common Stock since the acquisition. The Company currently intends to retain earnings to support its growth strategy and reduce indebtedness and does not anticipate paying dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other factors, the capital requirements, operating results and the financial condition of the Company from time to time. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-Liquidity and Capital Resources" contained in this Form 10-K for fisc al year 1999. 14 ITEM 6. SELECTED FINANCIAL DATA
Years Ended March 31, - ---------------------------------------------------------- Dollars in Thousands Except Per Share Data 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- - ------------------------- Income Statement Data: Net sales $565,569 $667,721 $555,319 $634,171 $473,182 Operating income 22,604 82,202 62,415 120,430 63,130 Interest expense 9,287 7,305 5,709 4,938 6,929 Net earnings before extraordinary item 6,150 49,190 37,169 65,198 30,968 Extraordinary loss on extinguishment of debt - - - - - 1,058 Net earnings $ 6,150 $49,190 $37,169 $65,198 $29,910 - -------------------------------------------------------------------------------- - ------------------------- Per Common Share Data: Net earnings before extraordinary item per common share (diluted) $0.16 $1.25 $0.95 $1.67 $0.80 Extraordinary loss per common share (1) - - - - - 0.03 Net earnings per common share (diluted) $0.16 $1.25 $0.95 $1.67 $0.77 Net earnings per common share (basic) $0.16 $1.26 $0.96 $1.70 $0.79 Weighted avg shares outstanding (diluted) 39,513,930 39,427,164 39,276,678 39,139,481 38,638,084 Weighted avg shares outstanding (basic) 39,220,720 39,073,222 38,737,160 38,265,678 37,717,718 - -------------------------------------------------------------------------------- - ------------------------- Balance Sheet Data: Total assets $663,690 $642,109 $543,244 $489,828 $387,459 Working capital 90,371 48,772 63,068 33,008 30,315 Long-term debt 144,000 104,000 102,900 78,072 76,542 Stockholders' equity $313,674 $306,260 $252,123 $211,940 $138,776 - -------------------------------------------------------------------------------- - ------------------------- Other Data: Cash flow from operating activities $20,818 $ 88,153 $ 55,818 $109,989 $83,963 Capital expenditures 59,047 114,516 84,755 120,328 42,818 Research and development $21,132 $23,766 $ 20,753 $18,426 $13,145 - -------------------------------------------------------------------------------- - ------------------------- (1) In fiscal year 1995, the Company refinanced its outstanding senior debt and incurred an extraordinary loss of $1,058 (net of income tax benefit of $697).
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Comparison of Fiscal Year 1999 to Fiscal Year 1998 Net sales for fiscal year 1999 were $565.6 million which represents a 15% decrease from fiscal year 1998 net sales of $667.7 million. The decrease in net sales was primarily attributed to the imbalance of supply and demand that the electronics industry experienced during the year. This imbalance, or oversupply situation, was created as a result of several factors, including increased demand in the previous year, the Asian economic crisis, and the move by our customers to reduce their inventory levels, in part due to new "Build to Order" production methods. All these factors, along with the higher-than-normal rate of decline in average selling prices, contributed to the decrease in net sales. Cost of sales, exclusive of depreciation for the year ended March 31, 1999, was $428.4 million as compared to $463.6 million for the year ended March 31, 1998. As a percentage of net sales, cost of sales, exclusive of depreciation, for fiscal year 1999 was 76% as compared to 69% for fiscal year 1998. The increase in cost of sales as a percentage of net sales was attributable to the decline in net sales from fiscal year 1998 and the higher cost of palladium during the year. To offset the rising cost of palladium, the Company has been taking action to reduce the palladium usage in traditional ceramic capacitors and replace the high-priced palladium with a less expensive metal in some new ceramic products. Also, in an effort to improve profit margins, the Company announced a workforce reduction of approximately 1,000 employees and 450 contract personnel in the U.S. and Mexico, and a deferral of all wage and salary increases and bonuses. Selling, general and administrative expenses for the year ended March 31, 1999, were $46.6 million, or 8% of net sales as compared to $48.8 million, or 7% for the year ended March 31, 1998. The increase in selling, general, and administrative expenses as a percentage of sales is primarily due to the impact of lower sales volume. Research, development and engineering expenses were $21.1 million for fiscal year 1999 compared to $23.8 million for fiscal year 1998. These costs reflect the Company's continued commitment to the development and introduction of new products, along with the improvement of product performance and production efficiencies. Depreciation and amortization for fiscal year 1999 was $46.9 million, an increase of $8.0 million, or 21%, from $38.9 million for fiscal year 1998. The increase resulted primarily from depreciation expense associated with increased capital expenditures during the current and prior fiscal years. 16 Operating income was $22.6 million for fiscal year 1999 compared to $82.2 million for fiscal year 1998. The decrease in operating income resulted primarily from the lower net sales and increase in costs discussed above. Income tax expense for fiscal year 1999 was 32% of net earnings before income taxes. The decrease from the federal statutory rate of 35% is primarily the result of increased foreign sales corporation benefits and lower state tax expense. Comparison of Fiscal Year 1998 to Fiscal Year 1997 Net sales for fiscal year 1998 were $667.7 million, an increase of $112.4 million or 20% from fiscal year 1997. The growth in net sales reflects the Company's continued investment in production capacity to support the demand for surface-mount capacitors worldwide. Sales of surface-mount capacitors for fiscal year 1998 were $517.4 million, an increase of $117.6 million or 29% as compared to fiscal year 1997, and sales of leaded capacitors declined 3% to $150.3 million. The Company experienced growth in both the domestic and export markets with increases of 15% and 27%, respectively, over the prior years. Cost of sales, exclusive of depreciation, for the year ended March 31, 1998, was $463.6 million as compared to $377.5 million for the year ended March 31, 1997. As a percentage of net sales, cost of sales, exclusive of depreciation, for fiscal year 1998 was 69% as compared to 68% for fiscal year 1997. The increase in cost of sales as a percentage of net sales was attributable to the decline in average selling prices from fiscal year 1997 to fiscal year 1998 combined with higher palladium prices experienced by the industry during the last quarter of fiscal year 1998. The Company continues to address this negative impact on cost of sales through cost reduction activities as evidenced by the announced restructuring during the third quarter of fiscal year 1998. Selling, general and administrative expenses for the year ended March 31, 1998, were $48.8 million, or 7% of net sales, as compared to $45.7 million, or 8% of net sales, for the year ended March 31, 1997. The decrease in selling, general, and administrative expenses as a percentage of sales is primarily due to efficiencies resulting from increased sales volume. Research, development and engineering expenses were $23.8 million for fiscal year 1998 compared to $20.8 million for fiscal year 1997. The increase reflects the Company's commitment to develop and introduce new products, and to support and enhance the growth of its surface-mount capacitor manufacturing capacity. The Company also continued to invest to improve product performance and production efficiencies. Depreciation and amortization for fiscal year 1998 was $38.9 million, an increase of $5.4 million, or 16%, from $33.5 million for fiscal year 1997. The increase resulted primarily from depreciation expense associated with increased capital expenditures during the current and prior fiscal years. 17 The Company recorded a pretax charge of $10.5 million ($7.3 million after tax) in the quarter ended December 31, 1997, in conjunction with a plan to restructure the manufacturing and support operations between its U.S. facilities in North and South Carolina and its Mexican operations in Monterrey, Mexico. The restructuring plan is expected to reduce the Company's U.S. work force by approximately 1,000 employees and result in an annualized pretax cost savings of approximately $18.0 million. During the quarter ended March 31, 1998, the Company charged $4.8 million against the liability. The Company expects the remaining costs to be incurred and charged against the liability during the next 5 to 7 months. Operating income was $82.2 million for fiscal year 1998 compared to $62.4 million for fiscal year 1997. The increase resulted primarily from increased sales and improved operating efficiencies as discussed above. Income tax expense for fiscal year 1999 was 31% of net earnings before income taxes. The decrease from the federal statutory rate of 35% is primarily the result of increased foreign sales corporation benefits and lower state tax expense. Quarterly Results of Operations The following table sets forth certain quarterly information for the years ended March 31, 1999 and 1998. This information is unaudited and has not been reviewed by the Company's independent auditors in accordance with standards established by the American Institute of Certified Public Accountants but, in the opinion of the Company's management, reflects all adjustments (consisting only of normal recurring adjustments) necessary to present fairly this information when read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein. 18
Fiscal Year ended March 31, 1999 First Second Third Fourth Dollars in Thousands Except Per Share Data Quarter Quarter Quarter Quarter Total - -------------------------------------------------------------------------------- - -------------------------------------- Net sales $142,471 $137,733 $141,914 $143,451 $565,569 Gross profit (exclusive of depreciation) (1) 35,205 32,184 35,050 34,721 137,160 Net earnings $ 1,497 $ 426 $ 1,851 $ 2,376 $ 6,150 Net earnings per common share (basic) $0.04 $0.01 $0.05 $0.06 $0.16 Net earnings per common share (diluted) $0.04 $0.01 $0.05 $0.06 $0.16 Weighted average shares outstanding (basic) 38,185,382 39,203,606 39,220,367 39,248,955 39,220,720 Weighted average shares outstanding (diluted) 39,390,046 39,348,334 39,368,977 39,422,220 39,513,930 Fiscal Year ended March 31, 1998 First Second Third Fourth Dollars in Thousands Except Per Share Data Quarter Quarter Quarter Quarter Total - -------------------------------------------------------------------------------- - -------------------------------------- Net sales $161,205 $165,477 $170,359 $170,680 $667,721 Gross profit (exclusive of depreciation) (1) 32,854 32,621 24,383 31,202 121,060 Net earnings $14,009 $14,242 $ 7,557 $13,382 $49,190 Net earnings per common share (basic) $0.36 $0.36 $0.19 $0.34 $1.26 Net earnings per common share (diluted) $0.36 $0.36 $0.19 $0.34 $1.25 Weighted average shares outstanding (basic) 38,881,448 39,022,225 39,092,517 39,140,512 39,073,222 Weighted average shares outstanding (diluted) 39,393,007 39,502,700 39,424,840 39,389,831 39,427,164 (1) Gross profit (exclusive of depreciation) as a percentage of net sales fluctuates from quarter to quarter due to a number of factors, including net sales fluctuations, product mix, the timing and expense of moving product lines to lower cost locations, and the relative mix of sales between distributors and original equipment manufacturers.
19 Liquidity and Capital Resources The Company's liquidity needs arise from working capital requirements, capital expenditures and principal and interest payments on its indebtedness. The Company intends to satisfy its liquidity requirements primarily with funds provided by operations and borrowings under its bank credit facilities. During fiscal year 1999, the Company generated $20.8 million in net cash from operating activities as compared to $88.2 million in fiscal year 1998. The decrease in cash flow from operating activities was primarily a result of the decrease in net income and the timing of cash flows from current assets and liabilities, such as accounts receivable, inventory, accounts payable, accrued liabilities and income taxes payable. The Company invested $59.0 million in capital expenditures in fiscal year 1999, and expects to invest $50.0 million in fiscal year 2000. The fiscal year 1999 capital was primarily invested in surface-mount manufacturing capacity. In April 1998, the company announced plans to build a new tantalum manufacturing facility in Ciudad Victoria, Mexico. The new facility will initially produce tantalum leaded products; however, this expansion is a direct result of the ever-growing demand for the Company's tantalum surface-mount products. The completion of this facility is expected in the fall of 1999. The Company is subject to restrictive covenants which, among others, restrict its ability to make loans or advances or to make investments, and require it to meet financial tests related principally to funded debt, cash flows, and net worth. At March 31, 1999, the Company was in compliance with such covenants. Borrowings are secured by guarantees of certain of the Company's wholly-owned subsidiaries. During fiscal year 1999, the Company's long-term debt increased $40.0 million, primarily to fund capital expenditures. At March 31, 1999, the Company had unused availability under its revolving credit facility and its swingline credit facility of $106.0 million and $10.0 million, respectively. In November 1997, the Company entered into an agreement with SunTrust Bank, Atlanta, whereby SunTrust Bank, Atlanta, has offered to extend unsecured short- term loans to the Company of which the aggregate principal amount of all loans outstanding may not exceed $20.0 million. The term of each loan may have a maturity of not more than 90 days and the interest rate on each loan will be negotiated and determined at the time of each borrowing. During the quarter ended March 31, 1998, the Company initiated short-term borrowings with an average effective interest rate of 5.279%. SunTrust Bank, Atlanta, does not have any commitment to lend any funds in the future, and may cease to consider loan requests from the Company at any time. Additional liquidity is generated by the Company through its accounts receivable discounting arrangements. For the past several years, KEMET Electronics, S.A., a wholly-owned subsidiary of the Company, has been a party to accounts receivable discounting agreements with both Swiss Bank Corporation and Union Bank of Switzerland. As a result of the merger of these two entities in 1998, KEMET Electronics, S.A. entered into a single replacement discounting agreement with UBS AG on November 19, 1998 which allows for the sale of up to $60.0 million of accounts receivable at any one time outstanding at a discount rate of .60% above LIBOR. 20 In May 1998, the Company sold $100.0 million of its Senior Notes pursuant to the terms of a Note Purchase Agreement dated as of May 1, 1998, between the Company and the eleven purchasers of the Senior Notes named therein. These Senior Notes have a final maturity date of May 4, 2010, with required principal repayments beginning on May 4, 2006. The Senior Notes bear interest at a fixed rate of 6.66%, with interest payable semiannually beginning November 4, 1998. The terms of the Note Purchase Agreements include various restrictive covenants typical of transactions of this type, and require the Company to meet certain financial tests including a minimum net worth test and a maximum ratio of debt to total capitalization. The net proceeds from the sale of the Notes were used to repay existing indebtedness and for general corporate purposes. The Company presently has a total of seven manufacturing facilities in Matamoros and Monterrey, Mexico, with approximately 69% of the Company's employees located there. In fiscal year 1999, the devaluation of the Mexican peso proved favorable, but did not have a material impact on the Company's performance. There is no assurance that the devaluation will continue and any effect this might have on the future performance of the Company cannot be determined. As discussed in Note 12 to the Consolidated Financial Statements, the Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including workers' compensation or work place safety cases and environmental issues, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to the Company, the Company does not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on the Company. The Company believes its strong financial position will permit the financing of its business needs and opportunities. It is anticipated that ongoing operations will be financed primarily by internally-generated funds. In addition, the Company has the flexibility to meet short-term working capital and other temporary requirements through utilization of its borrowings under its bank credit facilities. Impact of Year 2000 The Company has a Year 2000 Readiness Program that began in December 1996. The scope of the program includes all business-critical operations in all locations worldwide. Areas assessed include business applications, technical infrastructure, facilities, end-user computing, manufacturing, and suppliers. Overall, the Readiness Program is scheduled to be completed by June 30, 1999. The Company's plan to resolve the Year 2000 issue includes the process of inventory, assessment, remediation, testing, and implementation. As of March 31, 1999, the Company had completed 100% of assessment, and 97% of the remediation, testing, and implementation work. The completion of this final phase is expected on or before June 30, 1999. The Company's Readiness Program is a combination of both internal and external resources to reprogram, implement, test, or replace existing hardware and software. The total cost of the program is estimated at $6.4 million and will be funded through operating cash flows. As of March 31, 1999, the company had expended $6.1 million related to the Year 2000 Readiness Program. 21 Suppliers that are not prepared for the Year 2000 issues could have an impact on the Company's ability to meet customer requirements. To reduce this risk, the company has conducted a survey of key suppliers to determine potential exposure to Year 2000 issues. Suppliers not in compliance will be expected to be in compliance before the issue could affect delivery. Date-sensitive equipment and software are required to be Year 2000 ready before being approved for purchase. The Company is in the process of developing a comprehensive contingency plan with respect to year 2000 and expects to have it completed by July 1999. Safe Harbor Statement The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1996. Many of the following important factors discussed below have been discussed in the Company's prior SEC filings. The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, KEMET's actual results and could cause KEMET's actual consolidated results for the first quarter of fiscal year 2000 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company whether contained herein, in other documents subsequently filed by the Company with the SEC, or in oral statements: A moderating growth rate in end-use products which incorporate the Company's products and the effects of a down-turn in the general economy or in general business conditions; Underutilization of KEMET's plants and factories, or of any plant expansion or new plants, including, but not limited to, those in Mexico, resulting in production inefficiencies and higher costs; start-up expenses, inefficiencies, and delays, and increased depreciation costs in connection with the start of production in new plants and expansions; capacity constraints that could limit the ability to continue to meet rising demand for surface-mount capacitors; Occurrences affecting the slope or speed of decline of the pricing curve for the Company's products, or affecting KEMET's ability to reduce product and other costs and to increase productivity; the effect of changes in the mix of products sold and the resulting effects on gross margins; Difficulties in obtaining raw materials, supplies, power, natural resources, and any other items needed for the production of capacitors; the effects of quality deviations in raw materials, particularly tantalum powder and ceramic dielectric materials; the effects of significant price increases for tantalum or palladium, or an inability to obtain adequate supplies of tantalum from the limited number of suppliers; The amount and rate of growth in the Company's selling, general and administrative expenses, and the impact of unusual items resulting from KEMET's ongoing evaluation of its business strategies, assets valuations and organizational structure; 22 The acquisition of fixed assets and other assets, including inventories and receivables; the making or incurring of any expenditures and expenses including, but not limited to, depreciation and research and development expenses; any revaluation of assets or related expenses; and the amount of and any changes to tax rates; The effect of any changes in trade, monetary and fiscal policies, laws and regulations; other activities of governments, agencies and similar organizations; social and economic conditions, such as trade restrictions or prohibitions, inflation and monetary fluctuations; import and other charges or taxes; the ability or inability of KEMET to obtain, or hedge against, foreign currency; foreign exchange rates and fluctuations in those rates, particularly a strengthening of the U.S. dollar; nationalization; unstable governments and legal systems; and intergovernmental disputes; the costs and other effects of legal and administrative cases and proceedings (whether civil, such as environmental and product-related, or criminal); settlements, investigations, claims, and changes in those items; developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses; adoptions of new or changes in accounting policies and practices and the application of such policies and practices; the effects of changes within KEMET's organization, particularly at the executive officer level, or in compensation and benefit plans; the amount, type and cost of the financing which the Company has, and any changes to that financing; and the effects of severe weather on KEMET's operations, including disruptions at manufacturing facilities; the effects of a disruption in KEMET's computerized ordering systems; and the effects of a disruption in KEMET's communications systems. Effect of Inflation Inflation generally affects the Company by increasing the cost of labor, equipment, and raw materials. The Company does not believe that inflation has had any material effect on the Company's business over the past three years. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk The Company's debt financing alternatives include a revolving Credit Agreement which is priced on a floating rate basis at a spread over U.S. dollar LIBOR. Accordingly, any movement in U.S. dollar LIBOR will impact the Company's interest expense. The outstanding balance under this facility at March 31, 1999 was $44,000,000. Based on this balance, a hypothetical 10% increase in U.S. dollar LIBOR would result in an increase in annual interest expense of approximately $221,000, and would therefore not have a material impact on the Company's results of operations. The Company has not historically used interest rate swaps, interest caps or other derivative financial instruments for the purpose of hedging fluctuations in interest rates on its floating rate debt. Foreign Currency Exchange Rate Risk A portion of the Company's sales to its customers in Europe are denominated in local European currencies thereby creating an exposure to foreign currency exchange rate risk. In order to minimize its exposure to such risk, the Company will periodically enter into forward foreign exchange contracts in which the net long or short position in a local European currency is hedged against the U.S. dollar. 23 The impact of changes in the relationship of other currencies to the U.S. dollar have historically not been significant, and such changes in the future are not expected to have a material impact on the Company's results of operations or cash flows. The Company does not use derivative financial instruments for speculative purposes or if there is no underlying business transaction supporting or related to the derivative financial instrument. Commodity Price Risk The Company purchases various precious metals used in the manufacture of capacitors and is therefore exposed to certain commodity price risks. These precious metals consist primarily of palladium and tantalum. Palladium is a precious metal used in the manufacture of ceramic multi-layer capacitors and is mined primarily in Russia and South Africa. Currently the Company uses forward contracts and spot buys to secure the acquisition of palladium and manage the price volatility in the market. In recent years, there has been a dramatic increase in the price of palladium attributed to delays from the Russian supply of the metal and has caused the price to fluctuate between $135 and $410 per troy ounce. As a result, the Company is aggressively pursuing ways to reduce the palladium usage in ceramic capacitors and minimize the price risk. Tantalum powder is a metal used in the manufacture of tantalum capacitors and is primarily purchased under annual contracts. Management believes the tantalum needed has generally been available in sufficient quantities to meet manufacturing requirements. It also believes that there are sufficient number of tantalum processors relative to forecasted demand. However, the limited number of tantalum powder suppliers could lead to increases in tantalum prices. In recent years, the price volatility in tantalum prices has not been considered material to Company performance. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES OF THE REGISTRANT
Years with Name Age Position Company(1) - -------------------------------------------------------------------------------- - ------------------------------------ David E. Maguire 64 Chairman, Chief Executive Officer, President and Director 40 Harris L. Crowley 49 Senior Vice President and General Manager, Ceramics 24 Charles M. Culbertson 50 Senior Vice President and General Manager, Tantalum 19 Glenn H. Spears 60 Senior Vice President and Secretary 23 D. Ray Cash 50 Senior Vice President of Administration, Treasurer and Assistant Secretary 29 William W. Johnson 47 Vice President, Sales Worldwide 7 Raymond L. Beck 49 Vice President, Quality and Marketing 28 C. Ross Patterson Jr. 43 Chief Information Officer 3 Larry W. Sheppard 53 Vice President, Human Resources 30 James A. Bruorton 50 Vice President, Worldwide Distribution 26 Eugene J. DiCianni 49 Vice President, Sales Americas 24 Derek Payne 62 Vice President/Managing Director Europe 23 Ravi G. Sastry 39 Vice President/Managing Director Asia 15 Susan M. Smith 44 Vice President, Sales Key Accounts 19 Manuel A. Cappella 51 Vice President/Managing Director, Mexico, Tantalum 27 E. Thomas Coyle, Jr. 51 Vice President/Managing Director, Mexico, Ceramic 22 James P. McClintock 43 Vice President, Tantalum 20 Charles E. Volpe 61 Director 32 Stewart A. Kohl 43 Director - E. Erwin Maddrey, II 58 Director - Paul C. Schorr IV 32 Director - (1) Includes service with UCC.
25 The Board of Directors of the Company is divided into three classes, as nearly equal in number as possible, having terms expiring at the annual meeting of the Company's stockholders for 1999 (comprised of Mr. Maddrey) and 2000 (comprised of Messrs. Volpe and Schorr) and 2001 (comprised of Messrs. Maguire and Kohl). At each annual meeting of stockholders, successors to the class of directors whose term expires at such meeting are elected to serve for three-year terms and until their successors are elected and qualified. The directors (other than directors that are employed by the Company or CVC and its affiliates) are entitled to an annual directors' fee of $20,000. Directors that are employed by CVC or its affiliates are entitled to an annual directors' fee of $8,000, and directors that are employed by the Company are not entitled to an annual directors' fee. All directors are reimbursed for out-of-pocket expense incurred in connection with attending meetings. There are three Committees of the Board of Directors: the Executive Committee, the Compensation Committee and the Audit Committee. The Executive Committee, which is currently composed of Messrs. Maguire, Volpe and Kohl, exercises the powers of the Board of Directors during intervals between Board meetings and acts as an advisory body to the Board by reviewing various matters prior to their submission to the Board. The Compensation Committee, which is currently composed of Messrs. Schorr, Kohl and Maddrey, reviews and makes recommendations to the Board of Directors regarding salaries, compensation and benefits of executive officers and key employees of the Company and grants all options to purchase Common Stock of the Company. The Audit Committee is currently composed of Messrs. Schorr, Kohl and Maddrey. Among other duties, the Audit Committee reviews the internal and external financial reporting of the Company, reviews the scope of the independent audit, and considers comments by the auditors regarding internal controls and accounting procedures and management's response to these comments. The Company does not have a standing nominating committee. Directors and Executive Officers David E. Maguire, Chairman, Chief Executive Officer, President and Director, has served as Chairman of the Company since August 1992. Mr. Maguire has served as Chief Executive Officer, President, and Director of the Company since November 1997, and from December 1990 until October 1996. Mr. Maguire also served as Chairman, President and Chief Executive Officer of KEMET Electronics since April 1987. From January 1959 until April 1987, Mr. Maguire served in a number of capacities with the KEMET capacitor business of UCC, most recently as Vice President from June 1978 until April 1987. Charles E. Volpe, Director, was named a Director of the Company in December 1990. Mr. Volpe also served as Executive Vice President and Chief Operating Officer, and most recently served as President and Chief Operating Officer from October 1995 until his retirement on March 31, 1996. Mr. Volpe served as a Vice President of the Corporation from March 1996 until July 1997. Mr. Volpe had also served as Executive Vice President and Director of KEMET Electronics since April 1987. From August 1966 until April 1987, Mr. Volpe served in a number of capacities with the KEMET capacitor business of UCC, most recently as General Manager. Mr. Volpe is also a director of Trend Technologies, Inc., and Encad Inc. 26 Stewart A. Kohl, Director, was named a Director of the Company in May 1992. Mr. Kohl has been a Managing General Partner in The Riverside Company, an investment company, since October 1993. Mr. Kohl was previously a Vice President of Citicorp North America, Inc., and has been employed by various subsidiaries of Citicorp North America, Inc. since 1988. Mr. Kohl also serves on the board of directors of Agri-Max, Inc.; Hudson Sharp Machine Company; Porcelain Products Company; Shore Bank and Trust Company; and Trend Technologies, Inc. E. Erwin Maddrey, II, Director, was named a Director of the Company in May 1992. Mr. Maddrey has been President, Chief Executive Officer and a director of Delta Woodside Industries, Inc., a textile manufacturer, and its predecessors since 1984. Prior thereto, Mr. Maddrey served as President and Chief Operating Officer and director of Riegel Textile Corporation. Mr. Maddrey also serves on the board of directors of Blue Cross of South Carolina and Renfro Corp. Paul C. Schorr IV, Director, was unanimously elected by members of the Board of Directors on April 21, 1998. Mr. Schorr is a Vice President of Citicorp Venture Capital, Ltd., a subsidiary of Citibank. Mr. Schorr joined Citicorp Venture Capital, Ltd. in 1996. Mr. Schorr was previously an engagement manager for McKinsey and Company, Inc., a management consulting company, since 1993. Mr. Schorr also serves on the boards of Inland Resources Company, Inc.; Sybron Chemicals, Inc; and Fairchild Semiconductors Company, Inc. Harris L. Crowley, Jr., Senior Vice President and General Manager, Ceramics, was named such in November 1997. Mr. Crowley had been Vice President and General Manager of Ceramic Capacitors since January 1996 and Vice President and General Manager of Ceramic Surface Mount Capacitors since September, 1993. Prior thereto, Mr. Crowley had been Vice President of Product Marketing (Ceramics) since October, 1992. Prior to that time, Mr. Crowley had been Product Marketing Manager (Ceramics) for the Company since December 1990, and had served KEMET Electronics in that same capacity since April 1987. Charles M. Culbertson, Senior Vice President and General Manager, Tantalum, was named such in November 1997. Mr. Culbertson had been Vice President and General Manager of Tantalum Surface-Mount Capacitors since January 1996. Since June 1980, Mr. Culbertson has served in a number of engineering and management positions in the Company. Glenn H. Spears, Senior Vice President and Secretary, was named such in October 1992. Mr. Spears had been Vice President and Secretary of the Company since December 1990 and had also served as Vice President and Secretary of KEMET Electronics since April 1987. From June 1977 until April 1987, Mr. Spears served in a number of managerial capacities with the KEMET capacitor business of UCC, including Director of Human Resources and Plant Manager. D. Ray Cash, Senior Vice President of Administration, Treasurer and Assistant Secretary, was named such in April 1997. Mr. Cash had been Vice President of Administration for the Company since December 1990. Mr. Cash had also served as Vice President of Administration for KEMET Electronics since April 1987. Prior thereto Mr. Cash had served in a number of different capacities with the KEMET capacitor business of UCC, most recently as Director of Administration. Mr. Cash also serves on the Board of Directors of Specialty Electronics, Inc. 27 Other Key Employees William W. Johnson, Vice President, Sales Worldwide, was named such in July 1996. Mr. Johnson was previously a plant manager with Vitramon, Incorporated, which was acquired by Vishay Intertechnology, Inc., a manufacturer and supplier of a broad line of passive electronic components. Also during his tenure with Vitramon, Incorporated, Mr. Johnson was Director of Sales and Marketing. Raymond L. Beck, Vice President, Quality and Marketing, was named such in November, 1997. Prior to that time, Mr. Beck had been Vice President of Ceramic Product Management since January 1995. Mr. Beck has served in various sales and marketing positions including Regional Sales Manager and Ceramic Surface-Mount Capacitor Product Manager with UCC and KEMET since October 1971. C. Ross Patterson Jr., Vice President and Chief Information Officer, was named such in January 1999. Mr. Patterson was previously Group Director, Information Systems, with Glaxo Wellcome Inc., based in Research Triangle Park, N.C. Glaxo Wellcome, a subsidiary of London-based Glaxo Wellcome plc, is a leading research-based pharmaceutical firm. Mr. Patterson served in various Information Systems capacities beginning in November 1986. Larry W. Sheppard, Vice President, Human Resources, was named such in January 1995. Mr. Sheppard has served in various employee relations capacities with UCC and KEMET in Greenville, SC, and Columbus, GA, since December 1969. James A. Bruorton, Vice President, Worldwide Distribution, was named such in July 1996. Mr. Bruorton has served in various sales and marketing capacities with UCC and KEMET since September 1973. Eugene J. DiCianni, Vice-President, Sales Americas, was named such in December 1997. Mr. DiCianni has served in various sales capacities with UCC and KEMET since August 1975. Derek Payne, Vice President/Managing Director, Europe, was named such in August 1995. Mr. Payne has been Managing Director for KEMET Electronics S.A., a wholly-owned subsidiary of KEMET Electronics Corporation, located in Geneva, Switzerland, since April 1988. Prior thereto, Mr. Payne held various sales and marketing positions with UCC and KEMET Electronics since March 1977. Mr. Ravi Sastry, Vice President/Managing Director, Asia, was named such in December 1997. Mr. Sastry has served in various sales, marketing, and manufacturing capacities with UCC and KEMET since August 1983. Ms. Susan M. Smith, Vice President, Sales Key Accounts, was named such in December 1997. Ms. Smith has served in various sales capacities with UCC and KEMET since September 1979. Manuel A. Cappella, Vice President/Managing Director, Mexico, Tantalum, was named such in April 1997. Mr. Cappella has served in various engineering and manufacturing capacities for UCC and KEMET since January 1977. Prior thereto, Mr. Cappella held various engineering positions with Ucarbie in South America beginning in March 1972. E. Thomas Coyle, Jr., Vice President/Managing Director, Mexico, Ceramics, was named such in September 1998. Mr. Coyle has served in various engineering and manufacturing capacities with UCC and KEMET since May 1976. 28 James P. McClintock, Vice President, Tantalum, was named such in June 1999. Mr. McClintock has served in various engineering and manufacturing capacities with UCC and KEMET since January 1979. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on July 21, 1999. The information specified in Item 402 (k) and (1) of Regulation S-K and set forth in the Company's definitive proxy statement for its annual stockholders' meeting to be held on July 21, 1999, is not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on July 21, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on July 21, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following financial statements are filed as a part of this report: Independent Auditors' Report Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 1999 and 1998 Consolidated Statements of Earnings for the years ended March 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended March 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements (a) (2) Financial Statement Schedules. None. 29 (a) (3) Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission. 23.3 Consent of Independent Auditors 27.1 Financial Data Schedule Exhibits Incorporated by Reference The Exhibits listed below have been filed with the Commission and are incorporated herein by reference to the exhibit number and file number of such documents which are stated in parentheses. 10.1 Third Amendment to Credit Agreement among KEMET Corporation, Wachovia Bank, N.A. as agent, and the Banks named in the Credit Agreement dated as of the 30th day of August 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.1 Fourth Amendment to Credit Agreement among KEMET Corporation, Wachovia Bank, N.A. as agent, and the Banks named in the Credit Agreement dated as of the 30th day of August 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31 1998). (b) Reports on Form 8-K. No reports were filed on Form 8-K during the fiscal quarter ended March 31, 1999. 30 Independent Auditors' Report The Board of Directors KEMET Corporation: We have audited the accompanying consolidated balance sheets of KEMET Corporation and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KEMET Corporation and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999, in conformity with generally accepted accounting principles. Greenville, South Carolina KPMG Peat Marwick LLP April 30, 1999 31
KEMET CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets March 31, 1999 and 1998 Dollars in Thousands Except Per Share Data 1999 1998 --------- -------- ASSETS Current assets: Cash $ 3,914 $ 1,801 Accounts receivable, net (notes 10 and 11) 57,784 62,040 Inventories: Raw materials and supplies 45,288 37,275 Work in process 52,225 48,068 Finished goods 28,306 29,340 --------- --------- Total inventories 125,819 114,683 Prepaid expenses 2,951 2,915 Income taxes receivable (note 7) 1,855 - Deferred income taxes (note 7) 10,899 13,581 --------- --------- Total current assets 203,222 195,020 Property and equipment, net (note 11) 406,735 393,551 Intangible assets, net (note 2) 46,268 46,816 Other assets 7,465 6,722 --------- --------- Total assets $663,690 $642,109 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt (note 3) $ 20,000 $ 20,000 Accounts payable, trade (note 10) 64,750 88,711 Accrued expenses (notes 5 and 11) 28,101 36,669 Income taxes (note 7) - 868 --------- --------- Total current liabilities 112,851 146,248 Long-term debt, excluding current installments (note 3) 144,000 104,000 Other non-current obligations (note 4) 69,394 69,145 Deferred income taxes (note 7) 23,771 16,456 --------- --------- Total liabilities 350,016 335,849 Stockholders' equity (notes 3 and 8): Common stock, par value $.01, authorized 100,000,000 shares, issued and outstanding 38,158,290 and 38,064,069 shares at March 31, 1999 and 1998, respectively 382 381 Non-voting common stock, par value $.01, authorized 12,000,000 shares, issued and outstanding 1,096,610 at March 31, 1999 and 1998 11 11 Additional paid-in capital 145,482 144,299 Retained earnings 167,727 161,577 Accumulated other comprehensive income 72 (8) --------- --------- Total stockholders' equity 313,674 306,260 --------- --------- Contingencies and commitments (notes 10 and 12) Total liabilities and stockholders' equity $663,690 $642,109 ========= =========
See accompanying notes to consolidated financial statements. 32
KEMET CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Dollars in Thousands Except Per Share Data Years ended March 31, -------------------------------- 1999 1998 1997 -------------------------------- Net sales $565,569 $667,721 $555,319 Operating costs and expenses: Cost of goods sold, exclusive of depreciation 428,409 463,644 377,527 Selling, general and administrative expenses 46,552 48,751 45,748 Research and development 21,132 23,766 20,755 Depreciation and amortization 46,872 38,858 33,467 Restructuring and early retirement charges (note 13) - 10,500 15,407 --------- --------- --------- Total operating costs and expenses 542,965 585,519 492,904 --------- --------- --------- Operating income 22,604 82,202 62,415 Other expense: Interest expense (note 7) 9,287 7,305 5,709 Other expense 4,273 4,063 2,331 --------- --------- --------- Earnings before income taxes 9,044 70,834 54,375 Income tax expense (note 7) 2,894 21,644 17,206 --------- --------- --------- Net earnings $ 6,150 $ 49,190 $ 37,169 ========= ========= ========= Net earnings per share:(note 14) Basic $0.16 $1.26 $0.96 Diluted $0.16 $1.25 $0.95 Weighted-average shares outstanding: Basic 39,220,720 39,073,222 38,737,160 Diluted 39,513,930 39,427,164 39,276,678 See accompanying notes to consolidated financial statements.
33
KEMET CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Dollars in Thousands Accumulated Additional Other Total ---Common Stock--- Paid-in Retained Comprehensive Stockholders' Shares Amount Capital Earnings Income Equity - -------------------------------------------------------------------------------- - -------------------------------------------- Balance at March 31, 1996 38,611,003 $386 $136,344 $ 75,218 $ (8) $211,940 Comprehensive income: Net earnings - - - - 37,169 - 37,169 Foreign currency translation gain - - - - - 4 4 Total comprehensive income 37,173 Exercise of stock options (note 8) 150,110 1 927 - - 928 Tax benefit on exercise of stock options - - 911 - - 911 Purchases of stock by Employee Savings Plan 52,508 1 1,170 - - 1,171 - -------------------------------------------------------------------------------- - -------------------------------------------- Balance at March 31, 1997 38,813,621 $388 139,352 112,387 (4) 252,123 Comprehensive income: Net earnings - - - - 49,190 - 49,190 Foreign currency translation loss - - - - (4) (4) Total comprehensive income 49,186 Exercise of stock options (note 8) 295,690 3 1,889 - - - 1,892 Tax benefit on exercise of stock options - - 1,928 - - 1,928 Purchases of stock by Employee Savings Plan 51,368 1 1,130 - - 1,131 - -------------------------------------------------------------------------------- - -------------------------------------------- Balance at March 31, 1998 39,160,679 $392 144,299 161,577 (8) 306,260 Comprehensive income: Net earnings - - - - 6,150 - 6,150 Foreign currency translation gain - - - - 80 80 Total comprehensive income 6,230 Exercise of stock options (note 8) 26,560 - 164 - - 164 Tax benefit on exercise of stock options - - 72 - - 72 Purchases of stock by Employee Savings Plan 67,661 1 947 - - 948 - -------------------------------------------------------------------------------- - --------------------------------------------Balance at March 31, 1999 39,254,900 $393 $145,482 $167,727 $72 $313,674 - -------------------------------------------------------------------------------- - -------------------------------------------- See accompanying notes to consolidated financial statements.
34
KEMET CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Dollars in Thousands Years ended March 31, - -------------------------------------- 1999 1998 1997 - -------------------------------------- Sources (uses) of cash: Operating activities: Net earnings $ 6,150 $ 49,190 $ 37,169 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 46,873 38,943 33,720 Postretirement and unfunded pension (236) 1,107 19,238 Loss on sale and disposal of equipment 985 3,145 705 Deferred income taxes 9,997 2,686 (1,600) Changes in other non-current assets and liabilities (782) (2,363) (1,151) Change in assets and liabilities: Notes and accounts receivable 4,256 (6,852) (3,120) Inventories (11,136) (17,314) (13,648) Prepaid expenses (36) (513) (325) Accounts payable, trade (23,961) 26,552 (10,870) Accrued expenses and income taxes (11,292) (6,428) (4,299) - -------- -------- -------- Net cash from operating activities 20,818 88,153 55,819 - -------- -------- -------- Investing activities: Additions to property and equipment (59,047) (114,516) (84,753) Other (198) (3) 74 - -------- -------- -------- Net cash used by investing activities (59,245) (114,519) (84,679) - -------- -------- -------- Financing activities: Proceeds from sale of common stock to Employee Savings Plan 947 1,131 1,171 Proceeds from exercise of stock options including related tax benefit 236 3,820 1,839 Repayment of long-term debt - - (72) (270) Net proceeds from (payments to) revolving loan (60,000) 21,100 24,900 Issuance of senior notes, net of debt issue costs 99,357 - - - -------- -------- -------- Net cash provided by financing activities 40,540 25,979 27,640 - -------- -------- -------- Net decrease in cash 2,113 (387) (1,220) Cash at beginning of period 1,801 2,188 3,408 - -------- -------- -------- Cash at end of period $ 3,914 $ 1,801 $ 2,188
======== ======== ======== 35 Supplemental Cash Flow Statement Information - --------------------------------------------
Years ended March 31, - --------------------------------------- 1999 1998 1997 - --------------------------------------- Interest paid $ 7,730 $ 7,418 $ 6,550 Income taxes paid $ 3,065 $29,040 $15,283 Reduction of goodwill and deferred taxes resulting from $ - - $ - $13,390 Internal Revenue Service settlement See accompanying notes to consolidated financial statements.
36 Note 1: Organization and Significant Accounting Policies Nature of Business and Organization KEMET Corporation and subsidiaries (the Company) are engaged in the manufacture and sale of solid tantalum and multilayer ceramic capacitors in the worldwide market under the KEMET brand name. The Company is headquartered in Greenville, South Carolina, and has twelve manufacturing plants located in South Carolina, North Carolina and Mexico. Additionally, the Company has wholly-owned foreign subsidiaries which primarily market KEMET's products in foreign markets. Principles of Consolidation The accompanying consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition Revenue is recognized from sales when a product is shipped. A portion of sales is made to distributors under agreements allowing certain rights of return and price protection on unsold merchandise held by distributors (See note 10). Inventories Inventories are stated at the lower of cost or market. The cost of most inventories is determined by the "first-in, first-out"(FIFO) method. Approximately 6% of inventory costs of certain raw materials at March 31, 1999 and 1998, respectively, have been determined on the "last-in, first-out"(LIFO) basis. It is estimated that if all inventories had been costed using the FIFO method, they would have been approximately $917 and $1,039 higher than reported at March 31, 1999 and 1998, respectively. Property and Equipment Property and equipment are carried at cost. Depreciation is calculated principally using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight- line method over the lesser of the estimated useful lives of the assets or the terms of the respective leases. Expenditures for maintenance are expensed; expenditures for renewals and improvements are generally capitalized. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed and any gain or loss is recognized. Intangible Assets Values assigned to patents and technology are based on management estimates and are amortized using the straight-line method over twenty-five years. Goodwill and trademarks are amortized using the straight-line method over a forty year period. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the intangible's balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired assets. The amount of intangible impairment, if any, is measured based on projected discounted future operating cash flows. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved. Other Assets Other assets consist principally of the cash surrender value of life insurance. 37 Deferred Income Taxes Under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS No. 109) deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock-based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations in accounting for stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has elected the "disclosure only" provisions of SFAS No. 123, "Accounting for Stock Based Compensation," which provide pro forma disclosure of earnings as if stock compensation were recognized on the fair value basis. Concentrations of Credit Risk The Company sells to customers located throughout the United States and the world. Credit evaluations of its customers' financial conditions are performed periodically, and the Company generally does not require collateral from its customers. In the fiscal years ended March 31, 1999 and 1998, one customer accounted for more than 10% of net sales. Foreign Currency Translations The Company translates the balance sheets of foreign operations, excluding Mexico, using year-end exchange rates and weighted-average rates for the period to translate the statement of earnings. Translation gains and losses arising from the conversion of the balance sheets of foreign entities into U.S. dollars are deferred as adjustments to stockholders' equity. With respect to operations in Mexico, the functional currency is the U.S. dollar, and any gains or losses from translating foreign denominated balances are included directly in income. Gains and losses arising from foreign currency transactions are also included directly in income. Fair Value of Financial Instruments The Company's Financial Instruments include accounts receivable, accounts payable, long-term debt and other financing commitments. The carrying values of such financial instruments approximate the fair market value determined as of March 31, 1999. Comprehensive Income In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net earnings and foreign currency translation gains (losses) and is presented in the consolidated statements of stockholders' equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No.130. 38 Pension and Other Postretirement Plans In 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits." SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. SFAS No. 132 does not change the method of accounting for such plans. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions. Earnings per Share The Company adopted SFAS No. 128 "Earnings per Share," beginning with fiscal year 1998. All prior period earnings per share data has been restated to conform to the provisions of SFAS No. 128. Basic earnings per share is computed using the weighted-average number of shares outstanding. Diluted earnings per share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Reclassification Certain prior year amounts have been reclassified to conform to 1999 presentation. Note 2: Intangible Assets Intangible assets consist of the following (dollars in thousands):
March 31, ---------------------- 1999 1998 -------- --------- Goodwill $40,709 $40,709 Trademarks 10,000 10,000 Patents and technology 10,000 10,000 Other 1,143 - -------- --------- 61,852 60,709 Accumulated amortization 15,584 13,893 -------- --------- Net intangible assets $46,268 $46,816 ======== =========
39 Note 3: Debt A summary of long-term debt follows (dollars in thousands):
March 31, ---------------------- 1999 1998 --------- --------- Revolving loan, interest at rates ranging from 5.64% to 5.67% and 5.88% to 5.89% at March 31, 1999 and 1998 respectively, due on October 18, 2001 $ 44,000 $104,000 Demand note, interest at rates as offered by the bank (5.47% at March 31, 1999) 20,000 20,000 Senior notes, interest payable semiannually at a rate of 6.66% with a final maturity date of May 4, 2010 100,000 - --------- --------- 164,000 124,000 Less current installments 20,000 20,000 --------- --------- Long-term debt, excluding current installments $144,000 $104,000 ========= =========
In May 1998, the Company sold $100,000 of its Senior Notes pursuant to the terms of a Note Purchase Agreement dated May 1, 1998, between the Company and the eleven purchasers of the Senior Notes named therein. These Senior Notes have a final maturity date of May 4, 2010, and begin amortizing on May 4, 2006. The Senior Notes bear interest at a fixed rate of 6.66%, with interest payable semiannually beginning November 4, 1998. On November 12, 1997, the Company entered into an agreement with a bank which offered to extend unsecured short-term loans to the Company in which the aggregate principal amount of all loans outstanding may not exceed $20,000. The term of each loan may have a maturity of not more than 90 days and the interest rate on each loan is negotiated and determined at the time of each borrowing. The Company is subject to restrictive covenants under its loan agreements which, among others, restrict its ability to make loans or advances or to make investments, and require it to meet financial tests related principally to funded debt, cash flows, and net worth. At March 31, 1999, the Company was in compliance with such covenants. Borrowings are secured by guarantees of certain of the Company's wholly-owned subsidiaries. The aggregate maturities of long-term debt subsequent to March 31, 1999, follow: 2000, $20,000; 2002, $44,000; 2007, $20,000; 2008, $20,000; 2009, $20,000; 2010, $20,000; and 2011, $20,000. 40 Note 4: Other Non-Current Obligations Non-current obligations are summarized as follows (dollars in thousands):
March 31, ---------------------- 1999 1998 ---------- ---------- Unfunded projected pension benefit obligation $35,447 $35,072 Unfunded postretirement medical plans (note 6) 31,719 31,784 Other 2,228 2,289 ---------- ---------- Other non-current obligations $69,394 $69,145 ========== ==========
Included as a part of other non-current obligations is the Company's accrual for environmental liabilities. The Company's policy is to accrue remediation costs when it is probable that such efforts will be required and the related costs can be reasonably estimated. Note 5: Employee Pension and Savings Plans The Company has a non-contributory pension plan (Plan) which covers substantially all employees in the United States who meet age and service requirements. The Plan provides defined benefits that are based on years of credited service, average compensation (as defined), and the primary social security benefit. The effective date of the Plan is April 1, 1987. The cost of pension benefits under the Plan is determined by an independent actuarial firm using the "projected unit credit" actuarial cost method. Currently payable contributions to the Plan are limited to amounts that are currently deductible for income tax reporting purposes, and are included in accrued expenses in the consolidated balance sheets. Components of net periodic pension cost include the following (dollars in thousands):
Years ended March 31, ------------------------------- 1999 1998 1997 ---------- ----------- -------- Service cost $3,472 $3,705 $3,690 Interest cost 6,494 6,638 5,857 Expected return on assets (6,084) (4,209) (3,805) Amortization of: Transition obligation (asset) (6) (6) (6) Prior service cost (90) (90) (90) Actuarial loss - - 24 Gain on curtailment of employee benefit plan (1,818) - - ---------- --------- -------- Total net periodic pension cost $1,968 $6,038 $5,670 ========== ========= ========
41 The weighted-average rates used in determining pension cost for the plan are as follows:
Years ended March 31, ------------------------------- 1999 1998 1997 --------- ---------- ---------- Discount rate 7.00% 7.25% 7.75% Rate of compensation increase 4.00% 5.00% 5.00% Expected return on plan assets 9.50% 8.50% 8.50%
A reconciliation of the plan's projected benefit obligation, fair value of plan assets, and funding status is as follows (dollars in thousands):
March 31, ----------------------------- 1999 1998 ------------ ------------ Projected benefit obligation: Net obligation at beginning of year $ 97,383 $ 81,695 Service cost 3,472 3,705 Interest cost 6,494 6,638 Actuarial (gain) loss (4,099) 9,592 Curtailments (1,818) - Gross benefits paid (4,602) (4,247) ------------ ------------ Net benefit obligation at end of year 96,830 97,383 Fair value of plan assets: Fair value of plan assets at beginning of year 65,116 49,538 Actual return on plan assets 264 13,457 Employer contributions 1,374 6,368 Gross benefits paid (4,602) (4,247) ------------ ------------ Fair value of plan assets at end of year 62,152 65,116 Funding status: Funded status at end of year (34,677) (32,267) Unrecognized net actuarial (gain) loss 4,597 2,922 Unrecognized prior service cost (565) (700) Unrecognized net transition obligation (asset) (13) (19) ------------ ------------ Net amount recognized at end of year $(30,658) $(30,064) ============ ============
The Company sponsors an unfunded Deferred Compensation Plan for key managers. This plan is non-qualified and provides certain key employees defined pension benefits which would equal those provided by the Company's non-contributory pension plan if the plan was not limited by the Employee Retirement Security Act 42 of 1974 and the Internal Revenue Code. Expenses related to the deferred compensation plan totalled $885, $2,115, and $2,103 in 1999, 1998, and 1997 respectively. In addition, the Company has a defined contribution plan (Savings Plan) in which all U.S. employees who meet certain eligibility requirements may participate. A participant may direct the Company to contribute amounts, based on a percentage of the participant's compensation, to the Savings Plan through the execution of salary reduction agreements. In addition, the participants may elect to make after-tax contributions. The Company will make annual matching contributions to the Savings Plan of 30% to 50% and salary reduction contributions up to 7.5% of compensation. The Company contributed $1,786 in fiscal 1999, $1,896 in fiscal 1998 and $1,868 in fiscal 1997. Note 6: Postretirement Medical and Life Insurance Plans The Company provides health care and life insurance benefits for certain retired employees who reach retirement age while working for the Company. The components of the expense for postretirement medical and life insurance benefits are as follows(dollars in thousands):
Years ended March 31, -------------------------------- 1999 1998 1997 -------- --------- -------- Service cost $ 701 $ 739 $ 810 Interest cost 2,086 2,343 2,037 Amortization of actuarial gain (23) - - Curtailment gain (611) - - -------- --------- -------- $2,153 $3,082 $2,847 ======== ========= ========
A reconciliaton of the postretirement medical and life insurance plan's projected benefit obligation, fair value of plan assets, and funding status is as follows(dollars in thousands): March 31, ---------------------- 1999 1998 --------- -------- Projected benefit obligation: Net obligation at beginning of year $33,446 $28,334 Service cost 701 739 Interest cost 2,086 2,343 Actuarial (gain) loss (4,163) 3,493 Curtailments (611) - Gross benefits paid (2,218) (1,463) --------- -------- Net benefit obligation at end of year $29,241 $33,446 ========= ======== 43 Fair value of plan assets: Employer contributions $ 2,218 $ 1,463 Gross benefits paid (2,218) (1,463) --------- -------- Fair value of plan assets at end of year $ - $ - ========= ======== Funding status: Funded status at end of year $(29,241) $(33,446) Unrecognized net actuarial (gain) loss (2,478) 1,662 --------- -------- Net amount recognized at end of year $(31,719) $(31,784) ========= ========
The weighted-average rates used in determining postretirement medical and life insurance costs are as follow (dollars in thousands):
Years ended March 31, -------------------------------- 1999 1998 1997 -------- --------- -------- Discount rate 7.00% 7.25% 7.75% Rate of compensation increase 4.00% 5.00% 5.00% Health care cost trend on covered charges: 8% decreasing to ultimate trend of 7% in 2008 for 1999 and 1998. 9% decreasing to ultimate trend of 7% in 2008 for 1997. Sensitivity of retiree welfare results: Effect of a one percentage point increase in assumed health care cost trend: * On total service and interest cost components $ 140 $ 220 $ 172 * On postretirement benefit obligation $1,023 $ 1,365 $ 1,129 Effect of a one percentage point decrease in assumed health care cost trend: * On total service and interest cost components $ (128) $ (201) $ (161) * On postretirement benefit obligation $ (970) $(1,307) $(1,086)
Note 7: Income Taxes Information with respect to income taxes is as follows(dollars in thousands):
Years ended March 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Current: Federal $(9,810) $15,835 $17,325 State and Local 232 806 658 Foreign 2,475 2,317 823 -------- -------- -------- (7,103) 18,958 18,806 44 Deferred: Federal 9,969 1,970 (1,376) State and local 447 216 (150) Foreign (419) 500 (74) -------- -------- -------- 9,997 2,686 (1,600) -------- -------- -------- Provision for income taxes $ 2,894 $21,644 $17,206 ======== ======== ========
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
Years ended March 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal taxes 4.9 .9 .6 Foreign sales corporation (10.7) (3.3) (3.8) Goodwill amortization 3.8 .5 .7 Reduction in prior year tax accrual (4.9) (2.4) (1.8) Other 3.9 (.1) .9 -------- -------- -------- Effective income tax rate 32.0% 30.6% 31.6%
The components of deferred tax assets and liabilities are as follows(dollars in thousands):
March 31, ----------------------------- 1999 1998 ------------ ------------ Deferred tax assets: Pension benefits $ 13,372 $ 13,100 Medical benefits 12,535 12,324 Sales and product allowances 6,899 8,135 All other 4,086 5,331 ------------ ------------ 36,892 38,890 Deferred tax liabilities: Depreciation and differences in basis (44,355) (36,228) Amortization of intangibles (5,409) (5,537) ------------ ------------ (49,764) (41,765) ------------ ------------ Net deferred income tax liability $(12,872) $ (2,875) ============ ============
45 The net deferred income tax liability is reflected in the accompanying 1999 and 1998 balance sheets as a $10,899 and $13,581 current asset and a $23,771 and $16,456 non-current liability, respectively. The Company anticipates that the reversal of existing taxable temporary differences will provide sufficient taxable income to realize the remaining deferred tax assets. Accordingly, no valuation allowance has been provided for in 1999 or 1998. For fiscal year ended March 31, 1999, the Company had a regular tax loss of $15 million which will be carried back to recover Federal income taxes paid in prior years. During fiscal year 1998, the Company and the Internal Revenue Service finalized a settlement involving adjustments to the Company's consolidated income tax returns for fiscal years 1994 and 1995. The adjustments to the consolidated income tax return primarily involved the partial disallowance of amortization of a non-compete agreement. The total tax including interest associated with the settlement amounted to approximately $1,050. During fiscal year 1999, the Company received Federal income tax refunds related to amending various years. These refunds were recognized as tax benefits during the current year. Interest income received from these refunds was netted against interest expense. Note 8: Stock Option Plans The Company has two option plans which reserve shares of common stock for issuance to executives and key employees. The Company has adopted the disclosure-only provisions of statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation costs for the Company's two stock option plans been determined based on the fair value at the grant date for awards in fiscal year 1999, 1998 and 1997, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (dollars in thousands except per share data):
Years ended March 31, -------------------------------- 1999 1998 1997 -------- -------- - -------- Net earnings As reported $6,150 $49,190 $37,169 Pro forma $4,203 $47,554 $36,146 Earnings per share: Basic As reported $0.16 $1.26 $0.96 Pro forma $0.11 $1.22 $0.93 Diluted As reported $0.16 $1.25 $0.95 Pro forma $0.11 $1.21 $0.92
46 The pro forma amounts indicated above recognize compensation expense on a straight line basis over the vesting period of the grant. The pro forma effect on net income for fiscal year 1999 is not representative of the pro forma effects on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: expected life of 5 years for 1999, 1998 and 1997; a risk-free interest rate of 5.4% for 1999, 5.7% for 1998 and 6.1% for 1997; expected volatility of 45.1% for 1999, 42.6% for 1998 and 23.8% for 1997; and a dividend yield of 0.0% for all three years. Under the 1992 Executive Stock Option Plan approved by the Company in April 1992, 952,560 options were granted to certain executives. In May 1992, the Company also approved the 1992 Key Employee Stock Option Plan, which authorizes the granting of options to purchase 1,155,000 shares of Common Stock. In addition, stockholders approved the 1995 Executive Stock Option Plan at the 1996 Annual Meeting. This plan provides for the issuance of options to purchase 1,900,000 shares of common stock to certain executives. These plans provide that shares granted come from the Company's authorized but unissued common stock. The price of the options granted thus far pursuant to these plans are no less than 100% of the value of the shares on the date of grant. Also, the options may not be exercised within two years from the date of grant and no options will be exercisable after ten years from the date of grant. In fiscal 1999, the Company's Board of Directors approved an option re-price program for the Key Employee Stock Option Plan. Under this program, options to purchase 329,130 shares of the Company's Common Stock at prices ranging from $19.25 to $32.13 per share were canceled and reissued at $10.00 per share, which was the fair market value at that time. The vesting date of the options originally granted in 1995 and 1996 was changed to April 2000. The vesting date for those options originally issued in 1997 remains at October 1999. 47 A summary of the status of the Company's three stock option plans as of March 31, 1999, 1998, and 1997, and changes during the years ended on those dates is presented below:
March 31, - ---------------------------------------------------------------------------- 1999 1998 1997 -------------------------- - ------------------------- - --------------------- Weighted- Weighted- Weighted- Average Average Average Exercisable Exercisable Exercisable Fixed Options Shares Price Shares Price Shares Price - ----------------------------------------------------- - ------------------------- --------------------- Options outstanding at beginning of year 1,251,020 $20.20 1,239,835 $15.53 1,114,885 $13.36 Options granted 934,570 10.95 308,445 25.75 281,330 19.25 Options exercised (26,560) 7.02 (295,690) 6.45 (150,110) 6.19 Options canceled (516,030) 25.10 (1,570) 11.83 (6,270) 20.13 - -------------------------------------------------------------------------------- - ----------------------- Options outstanding at end of year 1,643,000 $13.61 1,251,020 $20.20 1,239,835 $15.53 - -------------------------------------------------------------------------------- - ----------------------- Option price range at end of year $5.00 to $32.13 $5.00 to $32.13 $5.00 to $32.13 Option price range for exercised shares $5.00 to $14.19 $5.00 to $10.63 $5.00 to $10.63 Options available for grant at end of year 1,207,290 1,812,730 2,121,175 Options exercisable at year-end 312,430 664,050 679,590 Weighted-average fair value of options granted during the year $5.38 $11.89 $5.42
48 The following table summarizes information about stock options outstanding at March 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------------- - ---------------------------------- Range of Number Weighted-Average Number Exercisable Outstanding Remaining Weighted-Average Exercisable Weighted-Average Prices at 3/31/99 Contractual Life Exercise Price at 3/31/99 Exercisable Price - ------------------------------------------------------------------- - ---------------------------------- $5.00 to $5.72 222,160 4.0 Years $5.50 222,160 $5.50 $10.00 to $11.47 1,024,840 9.1 Years $10.92 90,270 $10.24 $19.25 to $32.13 396,000 8.1 Years $25.13 - - - --------- - -------- 1,643,000 312,430 ========= ========
49 Note 9: Foreign Sales The Company has wholly-owned foreign subsidiaries which primarily market products in foreign markets. Foreign sales by geographic region were as follows (dollars in thousands):
Years ended March 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Europe $109,512 $134,623 $101,060 Asia 120,991 123,671 104,932 Other 41,639 34,914 24,657 ---------- ---------- ---------- Total $272,142 $293,208 $230,649 ========== ========== ==========
Note 10: Commitments (a) The Company has agreements with distributor customers which, under certain conditions, allow for returns of overstocked inventory and provide protection against price reductions initiated by the Company. Allowances for these commitments are included in the consolidated balance sheets as reductions in trade accounts receivable (note 11). The Company adjusts sales to distributors through the use of allowance accounts based on historical experience. (b) A subsidiary of the Company sells certain receivables discounted at .60 of 1% above LIBOR for the number of days the receivables are outstanding, with a recourse provision not to exceed 5% of the face amount of the factored receivables. The Company has issued a joint and several guarantee in an aggregate amount up to but not to exceed $3,000 to guarantee this recourse provision. The Company transferred receivables and incurred factoring costs of $258,619 and $2,988 in 1999, $283,153 and $2,834 in 1998, and $218,146 and $2,109 in 1997. Included in accounts payable, trade, is $32,715 and $27,686 at March 31, 1999 and 1998, respectively, which represents factored receivables collected but not remitted. (c) The Company's leases consist primarily of manufacturing equipment and expire principally between 1999 and 2004. A number of leases require that the Company pay certain executory costs (taxes, insurance and maintenance) and certain renewal and purchase options. Annual rental expense for operating leases are included in results of operations and were approximately $10,229 in 1999, $12,592 in 1998, and $11,653 in 1997. Future minimum lease payments over the next five years under noncancelable operating leases at March 31, 1999, are as follows (dollars in thousands): 2000 $ 7,910 2001 4,454 2002 2,371 2003 791 2004 253 ------- TOTAL $15,779
50 Note 11: Supplementary Balance Sheet Detail (dollars in thousands)
March 31, ----------------------- 1999 1998 ---------- ---------- Accounts receivable: Trade $56,773 $61,773 Other 7,236 6,879 ---------- ---------- 64,009 68,652 Less: Allowance for doubtful accounts 297 390 Allowance for price protection and customer returns (note 10) 5,928 6,222 ---------- ---------- Net accounts receivable $57,784 $62,040 ========== ========== Property and equipment, at cost Useful Life ----------- Land and land improvements 10-20 years $ 12,919 $ 13,071 Buildings 10-40 years 73,402 61,702 Machinery and equipment 5-10 years 464,041 369,154 Furniture and fixtures 3-10 years 35,532 32,086 Construction in progress - 49,896 97,104 ---------- ---------- Total property and equipment 635,790 573,117 Accumulated depreciation 229,055 179,566 ---------- ---------- Net property and equipment $406,735 $393,551 ========== ========== Accrued expenses: Pension costs $ 3,799 $ 4,031 Salaries, wages and related employee costs 7,863 12,009 Vacation 8,150 8,879 Other 8,289 11,750 ---------- ---------- Total accrued expenses $28,101 $36,669 ========== ==========
51 Note 12: Legal Proceedings The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), and certain analogous state laws, impose retroactive, strict liability upon certain defined classes of persons associated with releases of hazardous substances into the environment. Among those liable under CERCLA (known collectively as "potentially responsible parties" or "PRPs") is any person who "arranged for disposal" of hazardous substances at a site requiring response action under the statute. While a company's liability under CERCLA is often based upon its proportionate share of overall waste volume or other equitable factors, CERCLA has been widely held to permit imposition of joint and several liabilities on each PRP. The Company has periodically incurred, and may continue to incur, liability under CERCLA, and analogous state laws, with respect to sites used for off-site management or disposal of Company-derived wastes. The Company has been named as a PRP at the Seaboard Chemical Site in Jamestown, North Carolina. The Company is participating in the clean-up as a "de minimis" party and does not expect its total exposure to be material. In addition, Union Carbide Corporation (Union Carbide), the former owner of the Company, is a PRP at certain sites relating to the off-site disposal of wastes from properties presently owned by the Company. The Company is participating in coordination with Union Carbide in certain PRP-initiated activities related to these sites. The Company expects that it will bear some portion of the liability with respect to these sites; however, any such share is not presently expected to be material to the Company's financial condition or results of operations. In connection with the acquisition in 1990, Union Carbide agreed, subject to certain limitations, to indemnify the Company with respect to the foregoing sites. The Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including workers' compensation or work place safety cases, some of which involve claims of substantial damages. Although there can be no assurance, based upon information known to the Company, the Company does not believe that any liability which might result from an adverse determination of such lawsuits would have a material adverse effect on the Company's financial condition or results of operations. Note 13: Restructuring and Early Retirement Charges (a) The Company recorded a pretax charge of $10.5 million ($7.3 million after tax) in the quarter ended December 31, 1997, in conjunction with a plan to restructure the manufacturing and support operations between its U.S. facilities in North and South Carolina and its Mexican operations in Monterrey, Mexico. Under the restructuring plan, the Company reduced the U.S. workforce by 1,182 people. Through March 31, 1999, the Company has paid $10.5 million in severance, pension, and outplacement costs under the restructuring plan, reducing the liability to zero. (b) On June 5, 1996, the Company announced an early retirement incentive program for its U.S. hourly and salaried employees. Under this program, the Company reduced the U.S. hourly and salaried workforce by 409 people. The total cost of the program was $15,407 ($9,900 after tax). Senior Management of the Company was not eligible for the early retirement incentive. 52 Note 14: Earnings Per Share Basic and diluted earnings per share are calculated as follows (dollars in thousands except per share data):
Years ended March 31, - ---------------------------------- 1999 1998 1997 ---------- ---------- - ---------- Net earnings $ 6,150 $49,190 $37,169 Weighted-average shares outstanding (Basic) 39,220,720 39,073,222 38,737,160 Stock Options 293,210 353,942 539,518 ---------- ---------- - ---------- Weighted-average shares outstanding (Diluted) 39,513,930 39,427,164 39,276,678 ========== ========== ========== Basic earnings per share $0.16 $1.26 $0.96 Diluted earnings per share $0.16 $1.25 $0.95
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KEMET Corporation (Registrant) Date: June 29, 1999 /S/ D.Ray Cash D. Ray Cash Senior Vice President of Administration, Treasurer and Assistant Secretary 53 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: June 29, 1999 /S/ David E. Maguire David E. Maguire Chairman, Chief Executive Officer, President and Director Date: June 29, 1999 /S/ D. Ray Cash D. Ray Cash Senior Vice President of Administration, Treasurer, and Assistant Secretary (Principal Accounting and Financial Officer) Date: June 29, 1999 /S/ Charles E. Volpe Charles E. Volpe Director Date: June 29, 1999 /S/ Stewart A. Kohl Stewart A. Kohl Director Date: June 29, 1999 /S/ E. Erwin Maddrey, II E. Erwin Maddrey, II Director Date: June 29, 1999 /S/ Paul C. Schorr IV Paul C. Schorr IV Director
EX-27 2
5 1000 12-MOS MAR-31-1999 MAR-31-1999 3914 0 64009 6225 125819 203222 635790 229055 663690 112851 0 0 0 393 313281 663690 565569 565569 428409 542965 4273 0 9287 9044 2894 6150 0 0 0 6150 0.16 0.16
EX-23 3 1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Kemet Corporation: We consent to incorporation by reference in the Registration Statements as listed below, of our report dated April 30, 1999, relating to the consolidated balance sheets of Kemet Corporation and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 1999, which reports are included in the March 31, 1999 annual report on Form 10-K of Kemet Corporation.
Registration Registration Form Number Name - -------------------------------------------------------------------------------- S-8 333-67849 Kemet Corporation 1995 Executive Stock Option Plan S-8 33-60092 Kemet Employee Savings Plan S-8 33-96226 Kemet 1992 Key Employee Stock Option Plan S-3 33-98912 Kemet 1992 Executive Stock Options
/S/ KPMG LLP KPMG LLP Greenville, South Carolina June 29, 1999
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