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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, 1998
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
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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
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- -----------------------------------------
- ------------------------------------
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(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 9,1998, computed by reference to the closing sale
price of the registrant's Common Stock was approximately $424,354,949.
Number of shares of each class of Common Stock outstanding as of June 9,1998:
Common Stock, $.01 Par Value 38,090,762
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 22, 1998: 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 1998,KEMET shipped approximately 21.4
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; Lucent Technologies (formerly American Telephone & Telegraph
Company); Motorola Inc.; SCI Systems, Inc.; Siemens; and TTI, Inc.
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 manufacturing plants), 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 1926 as a business of Union Carbide Corporation
("UCC") 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 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 totaling $175.0 million. These new credit facilities, each
of which has a term of five years, include a $165.0 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
$14.9 billion in 1997, with tantalum and ceramic capacitors comprising
approximately 35%. According to industry sources, in 1997 tantalum and
ceramic capacitors accounted for approximately 65% of the $2.7 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 $391.8
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 88
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 each 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, 1996, 1997 and 1998.
Net Sales
(dollars in millions)
Fiscal Years Ended March 31,
1996 1997 1998
SALES PERCENT SALES PERCENT SALES PERCENT
Surface-mount $444.5 70% $399.8 72% $517.4 77%
Leaded 189.7 30% 155.5 28% 150.3 23%
------ ---- ------ ---- ------ ----
Total $634.2 100% $555.3 100% $667.7 100%
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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.
Only a single customer has accounted for over 10% of the Company's net sales
during fiscal year 1996, two customers in fiscal year 1997, and one customer
in fiscal year 1998. The Company's top 50 customers accounted for
approximately 85% of the Company's net sales during fiscal year 1998.
Preferred supplier and similar long-term relationships with OEMs accounted for
approximately 56% of the Company's net sales in fiscal year 1996, fiscal year
1997 and fiscal year 1988.
6
KEMET produced approximately 8% of its capacitors under military
specification
standards sold for both military and commercial uses during fiscal year 1998.
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 3% of its net sales during fiscal year 1998. 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 140 direct sales employees. The Company's domestic
sales staff is located in five regional offices, thirteen 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
ten satellite offices in Europe, and one in Asia. The Company also has
independent sales representatives located in Australia, Argentina, Brazil,
India, Israel, Mexico, South Africa, and South Korea.
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 33%, 29% and 32% of the
Company's net sales in fiscal years 1996, 1997 and 1998, respectively. In
fiscal years 1996, 1997 and 1998, 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 1998, the Company exported approximately $293.2 million of
capacitors representing approximately 44% 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 $74.1
million,
and $62.0 million, at March 31, 1997 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 1998. 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 the second half of fiscal year 1998, 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. In particular, beginning in the
3rd and 4th quarters of fiscal year 1998, the Company saw a dramatic increase
in
the price of palladium due to delays from the Russian supplies, which is
expected to continue into fiscal year 1999. The Company is taking corrective
action 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, 1998, the Company held 27 United States and 87 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 $23.8 million for fiscal year 1998
compared to $20.8 million for fiscal year 1997. These amounts include
expenditures for product development and the design and development of
machinery and equipment for new processes and cost reduction efforts. The
increase in research and development expense was primarily related to the
continuing improvements in surface-mount production processes. 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, 1998, KEMET had approximately 11,300 employees, of whom
approximately 3,900 were located in the United States, approximately 7,300
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 5,600 hourly employees in Mexico
represented by labor unions as required by Mexican law. 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. The Company has not
experienced any major work stoppages and considers its relations with its
employees to be good.
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 (which is
being expanded by 70,000 square feet) and Greenwood, South Carolina; Shelby,
North Carolina; and Matamoros and Monterrey, Mexico. The Company's existing
manufacturing and assembly facilities have approximately 1.5 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 54% 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. In addition, the
Company constructed a new manufacturing plant in Monterrey which comprises
240,000 square feet and was put in production in fiscal year 1997. 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
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.
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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 res
ults of operations.
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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, 1998
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 7, 1997, there were
approximately 534 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 1998
First Quarter $26.125 $17.875
Second Quarter 31.00 24.125
Third Quarter 30.563 17.75
Fourth Quarter 21.875 17.50
HIGH LOW
FISCAL 1997
First Quarter $27.50 $15.625
Second Quarter 20.50 15.875
Third Quarter 23.875 18.00
Fourth Quarter 27.125 18.75
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
fiscal year 1998.
14
ITEM 6. SELECTED FINANCIAL DATA
Years Ended
March 31,
- ------------------------------------------------------
Dollars in Thousands Except Per Share Data 1994 1995
1996 1997 1998
- --------------------------------------------------------------------------------
- -------------------------
Income Statement Data:
Net sales $385,064 $473,182
$634,171 $555,319 $667,721
Operating income 36,756 63,130
120,430 62,415 82,202
Interest expense 8,937 6,929
4,938 5,709 7,305
Net earnings before
extraordinary item $16,746 $30,968
$65,198 $37,169 $49,190
Extraordinary loss on
extinguishment of debt 4,279 1,058
- - - -
Net earnings $12,467 $29,910
$65,198 $37,169 $49,190
- --------------------------------------------------------------------------------
- -------------------------
Per Common Share Data:
Net earnings before extraordinary
item per common share (diluted) $0.45 $0.80
$1.67 $0.95 $1.25
Extraordinary loss per common share (1) 0.11 0.03
- - - -
Net earnings per common share (diluted) $0.34 $0.77
$1.67 $0.95 $1.25
Net earnings per common share (basic) $0.35 $0.79
$1.70 $0.96 $1.26
Weighted avg shares outstanding (diluted) 36,967,370 38,638,084
39,139,481 39,276,678 39,427,164
Weighted avg shares outstanding (basic) 36,121,312 37,717,718
38,265,678 38,737,160 39,073,222
- --------------------------------------------------------------------------------
- -------------------------
Balance Sheet Data:
Total assets $362,083 $387,459
$489,828 $543,244 $642,109
Working capital 43,331 30,315
33,008 63,068 48,772
Long-term debt 107,400 76,542
78,072 102,900 104,000
Stockholders' equity $108,467 $138,776
$211,940 $252,123 $306,260
- --------------------------------------------------------------------------------
- -------------------------
Other Data:
Cash flow from operating activities $37,378 $83,963
$109,989 $55,818 $88,153
Capital expenditures 29,336 42,818
120,328 84,755 114,516
Research and development $8,667 $13,145
$18,426 $20,753 $23,766
- --------------------------------------------------------------------------------
- -------------------------
(1) The extraordinary loss for fiscal year 1994 of $4,279 (net of income tax
benefit of $2,593) was incurred in connection with the additional public
offering and the refinancing of the Company's senior bank debt. 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 1998 to Fiscal Year 1997
Net sales for the 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%
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 the development and introduction of 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.
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.
16
Income tax expense for fiscal year 1998 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.
Comparison of Fiscal Year 1997 to Fiscal Year 1996
Net sales for the fiscal year 1997 were $555.3 million, a decrease of $78.9
million or 12% from fiscal year 1996. The decreases in net sales was
primarily attributable to the favorable average selling prices experienced in
fiscal year 1996 as compared to fiscal year 1997 during which prices returned
to the historical rate of decline, reduced sales volumes due to the
industry-wide inventory correction and the decline in demand for electronic
components by personal computer and telecommunication manufacturers in the
first half of fiscal year 1997. Sales of surface-mount capacitors for the
fiscal year 1997 were $399.8 million, a decline of $44.7 million or 10% as
compared to fiscal year 1996, and sales of leaded capacitors declined 18% to
$155.5 million. The sales decline was experienced in both domestic and export
markets with domestic sales declining 12% to $324.7 million and export sales
declining 14% to $230.6 million.
Cost of sales, exclusive of depreciation for the year ended March 31, 1997,
was $377.5 million as compared to $415.6 million, for the year ended March 31,
1996. As a percentage of net sales, cost of sales, exclusive of depreciation,
for fiscal year 1997 was 68% as compared to 66% for fiscal year 1996. The
increase in cost of sales as a percentage of net sales was attributable to a
decline in average selling prices from fiscal year 1996 to fiscal year 1997 as
discussed above and less favorable production efficiencies associated with
reduced capacity utilization rates. The effect of the decline in prices and
less favorable production efficiencies was partially offset by the benefits
realized from the movement of certain production operations to lower cost
manufacturing facilities in Mexico and cost containment actions implemented in
the prior quarters, including the savings associated with the early retirement
incentive program which was effective August 1, 1996.
Selling, general and administrative expenses for the year ended March 31,
1997, were $45.7 million as compared to $42.1 million for the year ended March
31, 1996. The increase in selling, general and administrative expense was
primarily due to an increase in marketing expenses and the expense associated
with the installation of a world-wide "intranet" communications system. The
Company's marketing philosophy is unique among capacitor manufacturers. KEMET
employs a direct sales force to sell its products versus exclusive use of
independent manufacturers representatives. This results in sales force expense
being relatively constant over time, and in a period of declining sales will
tend to increase selling expense as a percentage of sales.
Research, development and engineering expenses were $20.8 million for fiscal
year 1997 compared to $18.4 million for fiscal year 1996. The increase
reflects the Company's continued commitment to supporting and enhancing 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 1997 was $33.5 million, a
decrease of $4.1 million, or 11%, from $37.6 million for fiscal year 1996.
During fiscal year 1996 the Company reviewed the estimated useful lives of
certain of the Company's older fixed assets. This resulted in an adjustment
of $6.0 million of depreciation expense due to reducing certain older assets
to salvage value and shortening the useful lives on certain assets. This was
17
partially offset by depreciation expenses associated with increased capital
expenditures.
The Company recorded a pretax charge of $15.4 million ($9.9 million after
tax)
in the quarter ended September 30, 1996, in connection with an early
retirement
incentive program. The program reduced the U.S. hourly and salaried workforce
by 409 people, which is expected to result in an annualized cost savings of
approximately $15.0 million.
Operating income was $62.4 million for fiscal year 1997 compared to $120.4
million for fiscal year 1996. The decrease resulted primarily from a decrease
in net sales as discussed above.
Income tax expense for fiscal year 1997 was 32% of net earnings. 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, 1997, 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, 1997
First
Second Third Fourth
Dollars in Thousands Except Per Share Data Quarter
Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------
- --------------------------------------
Net sales $125,726
$130,192 $143,626 $155,775 $555,319
Gross profit (exclusive of depreciation) (1) 24,901
10,108 27,888 32,985 95,882
Net earnings $ 9,725 $
273 $12,083 $15,088 $37,169
Net earnings per common share (basic) $ 0.25 $
0.01 $0.31 $0.39 $0.96
Net earnings per common share (diluted) $0.25
$0.01 $0.31 $0.38 $0.95
Weighted average shares outstanding (basic) 38,676,170
38,699,072 38,768,745 38,807,330 38,737,160 Weighted average
shares outstanding (diluted) 39,210,818 39,169,234 39,291,629
39,331,204 39,276,678
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 1998, the Company generated $88.2 million in net cash from
operating activities as compared to $55.8 million in fiscal year 1997. The
increase in cash flow from operating activities was primarily a result of the
increase 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 incurred a pretax restructuring charge of $10.5 million during the
quarter ended
December 31, 1997. For the quarter ended March 31, 1998 the Company expended
4.8 million in charges
to the liability (including approximately $3.3 million in cash expenditures).
The Company expects the remaining $5.7 million in charges to be incurred and
completed by the third quarter of fiscal year 1999.
Management has initiated an aggressive enterprise wide program to prepare the
Company's computer systems and applications for the year 2000. The program
is
a combination of remediation efforts both internally and with the Company's
suppliers and the implementation of client server applications. The
acquisition
costs of the new software and equipment has and continues to be capitalized
and all other expenses have been charged against operating income. Amounts
incurred
for the twelve months ended March 31, 1998 were not material and the company
does not expect the amounts required to be expensed for the remaining
activities to have a material effect on its financial position or results of
operations. The Company expects its year 2000 date conversion projects to be
completed on a timely basis. However, there can be no assurance that other
companies' systems will be converted on a timely basis or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems.
The Company invested $114.5 million in capital expenditures in fiscal year
1998, and expects to invest $60.0 million in fiscal year 1999. The fiscal year
1998 capital was primarily invested in surface-mount manufacturing capacity.
During fiscal year 1998, the company completed a 70,000 square foot expansion
of its Fountain Inn, South Carolina plant. 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 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, 1998, the Company was in compliance with such
covenants. Borrowings are secured by guarantees of certain of the Company's
wholly-owned
subsidiaries.
20
During fiscal year 1998, the Company's long-term debt increased $1.1
million. At March 31, 1998, the Company had unused availability under its
revolving credit facility and its swingline credit facility of $61.0 million
and $10.0 million, respectively.
On November 12, 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 5.841%. 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. On November 18, 1997, KEMET Electronics,
S.A., a wholly owned subsidiary of the company, renewed its discounting
agreement with Swiss Bank Corporation. The agreement has been amended to
decrease the maximum amount of purchased receivables from $50.0 million to
$30.0 million through June 1998 at which time the maximum will be reduced to
$20.0 million for the duration of the agreement. In addition, the discount
has been increased from a rate per annum equal to .50% above LIBOR to a rate
per annum equal to .65% above LIBOR. The above amendments were effective as
of December 9, 1997. All other terms and conditions remain in full force and
effect until November 30, 1998.
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 will be 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 60% of the Company's
employees located there. In fiscal year 1998, 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.
21
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.
Safe Harbor Statement
The Company desires to take advantage of the new "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 1999 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;
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 and changes in trade, monetary and fiscal policies, laws and
regulations; other activities of governments, agencies and similar
22
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; and 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 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.
23
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
OF THE REGISTRANT
Years with
Name Age
Position Company(1)
- --------------------------------------------------------------------------------
- ------------------------------------
David E. Maguire 63 Chairman, Chief Executive Officer, President
and Director 39
Harris L. Crowley 48 Senior Vice President and General Manager,
Ceramics 23
Charles M. Culbertson 49 Senior Vice President and General Manager,
Tantalum 18
Glenn H. Spears 59 Senior Vice President and
Secretary 22
D. Ray Cash 49 Senior Vice President of Administration,
Treasurer and Assistant Secretary 28
Kenneth L. Martin 56 Senior Vice President of Engineering and
Quality 13
William W. Johnson 46 Vice President, Sales
Worldwide 6
Raymond L. Beck 48 Vice President of
Marketing 27
Gary W. Robert 46 Chief Information
Officer 2
Larry W. Sheppard 52 Vice President of Human
Resources 29
James A. Bruorton 49 Vice President, Worldwide
Distribution 25
Eugene J. DiCianni 48 Vice President,
Sales 23
Derek Payne 61 Vice President/Managing Director of
Europe 22
Ravi G. Sastry 38 Vice President/Managing Director of
Asia 14
Susan M. Smith 43 Vice President, Sales Key
Accounts 18
Manuel A. Cappella 50 Vice President, Managing
Director 26
Jose Padron 47 Vice President, Managing
Director 26
Donald A. Adams (3) 53 Vice President of Manufacturing
Mexico 22
Donald J. Poinsette (4) 58 Vice President of Sales, Asia/Rest of the
World 33
Edwin H. Bost, III (5) 61 Vice President of Tantalum Product
Management 32
Charles E. Volpe 60
Director
31
Stewart A. Kohl 42
Director
-
E. Erwin Maddrey, II 57
Director
-
Paul C. Schorr IV (7) 31
Director
-
Terry R. Weaver (2) 45 Former President, Chief Operating Officer and
Director 2
Charles E. Corpening (6) 32 Former
Director -
(1) Includes service with UCC.
(2) Effective November 3, 1997, Mr. Weaver resigned as President, Chief
Operating Officer, and Director from the
Corporation.
(3) Effective March 31, 1998, Mr. Adams retired from the Corporation.
(4) Effective June 30, 1997, Mr. Poinsette retired from the Corporation.
(5) Effective December 31, 1997, Mr. Bost retired from the Corporation.
(6) Effective April 21, 1998, Mr. Corpening resigned as a Director of the
Corporation.
(7) Effective April 21, 1998, Mr. Paul C. Schorr was unanimously elected by
members of the Board of Directors.
24
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 1998 (comprised of Messrs. Maguire and Kohl)
and 1999 (comprised of Messrs. Maddrey) and 2000 (comprised of Messrs. Volpe
and Shorr). 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 at which time Mr.
Volpe remained as a Vice President. Mr. Volpe 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.
25
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.; the South Florida
Newspaper Network, Inc.; Shore Bank and Trust Company and Trend Holdings, 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. Shorr 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 a 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 Semi-Conductors 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
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.
Kenneth L. Martin, Senior Vice President of Engineering and Quality, was
named such in January 1996. Mr. Martin had been Senior Vice President of
Engineering for the Company since October 1992. Prior thereto, Mr. Martin
had been Vice President of Engineering for the Company since December 1990 and
had also
served as Vice President of Engineering for KEMET Electronics since April
1987.
26
capacities with UCC and KEMET, including Process Engineering Manager and
Tantalum Surface-Mount Capacitor Plant Manager.
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 of 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.
Gary W. Robert, Chief Information Officer, was named such in January 1997. Mr.
Robert was previously a Vice President - Information Systems with White-
Rodgers, a division of Emerson Electric, a manufacturer of a wide variety of
controls for heating, ventilation and air conditioning industries. During his
tenure with Emerson Electric, he served as Corporate Director of I.S. Planning
and Support and Manufacturing Systems Manager.
Larry W. Sheppard, Vice President of 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.
Derek Payne, Vice President/Managing Director of 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.
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 22, 1998. 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 22, 1998, 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 22, 1998.
27
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 22, 1998.
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, 1998 and 1997
Consolidated Statements of Earnings for the years ended March 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity for the years ended March
31,
1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended March 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules.
None.
(a) (3) Exhibits.
The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission.
10.1 Note Purchase Agreement, dated as of May 1,1998, between KEMET
Corporation and the eleven purchasers of the Senior Notes named therein.
23.3 Consent of Independent Auditors.
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.
10.2 First 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,
1997).
10.3 Demand Note, dated as of November 12, 1997, between KEMET Corporation, as
borrower, and SunTrust Bank, Atlanta, as lender (incorporated by reference to
Exhibit 10.1 to the company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997).
28
10.3.1 Acceptance Agreement, dated as of November 12, 1997, between KEMET
Corporation, as borrower, and SunTrust Bank, Atlanta, as lender (incorporated
by reference to Exhibit 10.1.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997).
10.4 Thirteenth Amendment to the Purchase Agreement, as amended by and
between
KEMET Electronics, S.A., Geneva and Swiss Bank Corporation, Geneva dated as of
November 18, 1997 (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly report on Form 10-Q for the quarter ended December 31, 1997).
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the fiscal quarter ended March 31,
1998.
29
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, 1997 and 1998 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1998. 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, 1997 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, 1998, in conformity with generally accepted accounting
principles.
Greenville, South Carolina KPMG Peat Marwick LLP
April 20, 1998
30
KEMET CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997 and 1998
Dollars in Thousands Except Per Share Data
1997 1998
--------- --------
ASSETS
Current assets:
Cash $2,188 $1,801
Accounts receivable, net (notes 10 and 11) 55,189 62,040
Inventories:
Raw materials and supplies 35,880 37,275
Work in process 39,373 48,068
Finished goods 22,116 29,340
--------- ---------
Total inventories 97,369 114,683
Prepaid expenses 2,402 2,915
Deferred income taxes (note 7) 12,552 13,581
--------- ---------
Total current assets 169,700 195,020
Property and equipment, net (note 11) 319,509 393,551
Intangible assets, net (note 2) 48,431 46,816
Other assets 5,604 6,722
--------- ---------
Total assets $543,244 $642,109
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3) $ 72 20,000
Accounts payable, trade (note 10) 62,159 88,711
Accrued expenses (notes 5 and 11) 29,310 36,669
Income taxes (note 7) 15,091 868
--------- ---------
Total current liabilities 106,632 146,248
Long-term debt, excluding
current installments (note 3) 102,900
104,000
Other non-current obligations (note 4) 68,848 69,145
Deferred income taxes (note 7) 12,741 16,456
--------- ---------
Total liabilities 291,121 335,849
Stockholders' equity (notes 3 and 8):
Common stock, par value $.01, authorized
100,000,000 shares, issued and outstanding
37,717,011 and 38,064,069 shares at
March 31, 1997 and 1998, respectively 377 381
Non-voting common stock, par value $.01,
authorized 12,000,000 shares, issued and
outstanding 1,096,610 at March 31, 1997
and 1998 11 11
Additional paid-in capital 139,352 144,299
Retained earnings 112,387 161,577
--------- ---------
252,127 306,268
Equity adjustments from foreign currency
translation (4) (8)
--------- ---------
Total stockholders' equity 252,123 306,260
--------- ---------
Contingencies and commitments (notes 10 and 12)
Total liabilities and stockholders' equity $543,244 $642,109
========= =========
See accompanying notes to consolidated financial statements.
31
KEMET CORPORATION AND
SUBSIDIARIES
Consolidated Statements of
Earnings
Dollars in Thousands Except Per
Share Data
Years ended March 31,
--------------------------------
1996 1997 1998
--------------------------------
Net
sales
$634,171 $555,319 $667,721
Operating costs and expenses:
Cost of goods sold, exclusive of
depreciation 415,572 377,527
463,644
Selling, general and administrative
expenses 42,110 45,748 48,751
Research and
development
18,426 20,755 23,766
Depreciation and
amortization 37,633
33,467 38,858
Early retirement (note
4) -
15,407 -
Restructuring charge (note 14)
- - 10,500
--------- --------- ---------
Total operating costs and expenses
513,741 492,904 585,519
--------- --------- ---------
Operating income
120,430 62,415 82,202
Other expense:
Interest
expense
4,938 5,709 7,305
Other
expense
10,522 2,331 4,063
--------- --------- ---------
Earnings before income
taxes 104,970 54,375
70,834
Income tax expense (note
7) 39,772
17,206 21,644
--------- --------- ---------
Net
earnings $65,198
$37,169 $49,190
========= ========= =========
Net earnings per share (EPS):(note 13)
Basic
EPS
$1.70 $0.96 $1.26
========= ========= =========
Diluted
EPS
$1.67 $0.95 $1.25
========= ========= =========
Weighted-average shares
(diluted) 39,139,481 39,276,678
39,427,164
========== ========== ==========
See accompanying notes to consolidated financial statements.
32
KEMET CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders'
Equity
Dollars in Thousands
Equity
Adjustments
from
Common
Additional Foreign Total
Stock
Paid-in Retained Currency Stockholders'
Shares Amount
Capital Earnings Translation Equity
- --------------------------------------------------------------------------------
- --------------------------------------------
Balance at March 31, 1995 38,055,762 $380
$128,358 $ 10,020 $18 $138,776
Net earnings - -
- - 65,198 (26) 65,172
Exercise of stock options (note 8) 519,870 5
2,934 - - 2,939
Tax benefit on exercise of stock options - -
4,192 - - 4,192
Purchases of stock by Employee Savings Plan 35,371 1
860 - - 861
- --------------------------------------------------------------------------------
- --------------------------------------------
Balance at March 31, 1996 38,611,003 $386
136,344 75,218 (8) 211,940
Net earnings - -
- - 37,169 4 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
Net earnings - -
- - 49,190 (4) 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
- --------------------------------------------------------------------------------
- --------------------------------------------
See accompanying notes to consolidated financial statements.
33
KEMET CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash
Flows
Dollars in Thousands
Years ended March 31,
- --------------------------------------
1996 1997 1998
- --------------------------------------
Sources (uses) of cash:
Operating activities:
Net earnings
$65,198 $37,169 $49,190
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization
37,886 33,720 38,943
Postretirement and unfunded pension
4,655 19,238 1,107
Loss on sale and disposal of equipment
8,424 705 3,145
Deferred income taxes
(6,662) (1,600) 2,686
Changes in other non-current assets and liabilities
180 (1,151) (2,363)
Change in assets and liabilities:
Notes and accounts receivable
(3,206) (3,120) (6,852)
Inventories
(20,367) (13,648) (17,314)
Prepaid expenses
(665) (325) (513)
Accounts payable, trade
16,580 (10,870) 26,552
Accrued expenses and income taxes
7,966 (4,299) (6,428)
- -------- -------- --------
Net cash from operating activities
109,989 55,819 88,153
- -------- -------- --------
Investing activities:
Additions to property and equipment
(120,328) (84,753) (114,516)
Other
20 74 (3)
- -------- -------- --------
Net cash used by investing activities
(120,308) (84,679) (114,519)
- -------- -------- --------
Financing activities:
Proceeds from sale of common stock to Employee Savings Plan
861 1,171 1,131
Proceeds from exercise of stock options and warrants
including related tax benefit
7,130 1,839 3,820
Repayment of long-term debt
(245) (270) (72)
Net proceeds from revolving/swingline loan
1,800 24,900 21,100
- -------- -------- --------
Net cash provided by financing activities
9,546 27,640 25,979
- -------- -------- --------
Net decrease in cash
(773) (1,220) (387)
34
Cash at beginning of period
4,181 3,408 2,188
- -------- -------- --------
Cash at end of period
$3,408 $2,188 $1,801
======== ======== ========
Supplemental Cash Flow Statement Information
- --------------------------------------------
Years ended March 31,
- ---------------------------------------
1996 1997 1998
- ---------------------------------------
Interest paid
$4,822 $6,550 $ 7,418
======== ======== ========
Income taxes paid
$40,822 $15,283 $29,040
======== ======== ========
Reduction of goodwill and deferred taxes resulting from $
- - $13,390 $ -
Internal Revenue Service settlement
======== ======== ========
See accompanying notes to consolidated financial statements.
35
(1) Organization and Significant Accounting Policies
Nature of Business and Organization
KEMET Corporation and subsidiaries (the Company) is 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 4% and 3% of inventory costs of certain raw materials at
March 31, 1997 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 $914 and
$1,039 higher than reported at March 31, 1997 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 intangibles balance over
its remaining life can be recovered through undiscounted future operating
cash
flows of the acquired operation. 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.
Accounts Payable, Trade
Included in accounts payable, trade, are outstanding checks, net in the
amounts of $7,171 and $12,625 at March 31, 1997 and 1998, respectively.
36
Deferred Income Taxes
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," 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
Statement 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
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 established financial accounting
and reporting standards for stock-based compensation plans and transactions in
which an entity issues its equity instruments to acquire goods and services
from nonemployees. The Company has adopted the disclosure-only provisions of
SFAS No. 123. Accordingly, no compensation cost has been recognized for the
stock option plans.
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 year ended March 31, 1997, two customers
accounted
for more than 10% of net sales and in the fiscal year ended March 31, 1998,
one customer accounted for more than 10% of net sales.
Foreign Currency Translations
The Company translated foreign currencies using year-end exchange rates to
translate most foreign assets and liabilities and weighted average rates for
the period to translate foreign income and expenses. 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 approximates the fair market value determined as
of March 31, 1998.
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.
37
(2) Intangible Assets
Intangible assets consist of the following (dollars in thousands):
March 31,
----------------------
1997 1998
-------- ---------
Goodwill $40,709 $40,709
Trademarks 10,000 10,000
Patents and technology 10,000 10,000
-------- ---------
60,709 60,709
Accumulated amortization 12,278 13,893
-------- ---------
$48,431 $46,816
======== =========
(3) Debt
A summary of long-term debt follows (dollars in thousands):
March 31,
----------------------
1997 1998
--------- ---------
Revolving loan, interest payable commencing
on April 9,1998, at rates from 5.88%
to 5.89% due on October 18, 2001 $ 95,000 $104,000
Swingline loan, interest payable monthly at
a rate not to exceed prime minus 1%
due on October 18, 2001 7,900 -
Demand note, interest payable commencing
on April 3, 1998, at rates as offered
by the bank (5.83% at March 31, 1998) - 20,000
Other 72 -
--------- ---------
$102,972 $124,000
Less current installments 72 20,000
--------- ---------
Long-term debt, excluding current installments $102,900 $104,000
========= =========
On October 18, 1996, the Company refinanced the entire balance of its
outstanding revolving credit facility and swingline credit facility with new
credit facilities totaling $175.0 million. These new unsecured credit
facilities, each of which has a term of five years, include a $165.0 million
revolving credit facility and a $10.0 million swingline credit facility.
On November 12, 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 $20,000. 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. 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.
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, 1998, 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, 1998,
follow: 1999, $20,000, and 2002, $104,000.
In May 1998, the Company sold $100,000 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, 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. The terms of the Note
Purchase Agreement 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 debt to total
capitalization. The net proceeds from the sale of the Notes will be used to
repay existing indebtedness and for general corporate purposes.
(4)Other Non-Current Obligations
Non-current obligations are summarized as follows (dollars in thousands):
March 31,
----------------------
1997 1998
---------- ----------
Unfunded projected pension benefit obligation (note 5) $34,691 $35,072
Unfunded postretirement medical plans (note 6) 30,165 31,784
Other 3,992 2,289
---------- ----------
$68,848 $69,145
========== ==========
On June 5, 1996, the Company announced an early retirement incentive program
for its U.S. hourly and salaried employees. The Company reduced the U.S.
hourly and salaried workforce by 409 people with annualized cost savings of
approximately 415,000 (unaudited). The total cost of the program was $15,407
($9,900 after tax). The Senior Management of the Company was not eligible for
the early retirement incentive.
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.
39
(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.
Net pension expense included the following components (dollars in thousands):
Years ended March 31,
-------------------------------
1996 1997 1998
---------- ----------- --------
Service costs-benefits earned
during the period $3,179 $3,690 $3,705
Interest cost of projected benefit
obligation 4,614 5,857 6,638
Actual return on plan assets (7,806) (6,000)
(12,254)
Net amortization and deferral 4,742 2,123
7,949 ---------- -----------
- ---------
$4,729 $5,670 $6,038
========== =========== ========
40
The following table sets forth the Plan's funded status and amounts recognized
in the consolidated balance sheets (dollars in thousands):
March 31,
-----------------------------
1997 1998
------------ ------------
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $50,664 and
$60,164 at March 31, 1997 and 1998,
respectively $54,281 $64,497
------------ ------------
Projected benefit obligation for service
rendered to date 81,695 97,383
Less fair value of Plan assets, primarily
listed stocks and government bonds 51,642 63,912
------------ ------------
Projected benefit obligation in excess
of Plan assets 30,053 33,471
Unrecognized net losses resulting from
Plan amendment and other ( 449) (4,106)
Unrecognized prior service cost 789 699
------------ ------------
Total recorded obligation 30,393 30,064
Less current portion 972 643
------------ ------------
Non-current obligation $29,421 $29,421
============ ============
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 of 1974 and the Internal Revenue Code.
Net pension expense included the following components (dollars in thousands):
Years ended March 31,
--------------------------
1997 1998
---------- ----------
Service cost $232 $210
Interest cost 548 582
Amortization of prior service costs,
being amortized over participants'
remaining service 1,323 1,323
---------- ----------
$2,103 $2,115
========== ==========
41
The following table sets forth the status of the unfunded Deferred
Compensation Plan for key managers and the amounts included in other long-term
liabilities
in the Company's consolidated balance sheets (dollars in thousands):
March 31,
-------------------------
1997 1998
---------- ----------
Actuarial present value of projected
benefit obligation $7,068 $7,050
Actuarial losses (342) (1,238)
Unrecognized prior service costs (1,456) (161)
---------- ----------
Accrued Pension Costs $5,270 $5,651
========== ==========
A weighted average discount rate of 7.75% and 7.25% in 1997 and 1998,
respectively, and a rate of increase in future compensation levels of 5.0% in
both 1997 and 1998, were used in determining the actuarial present value of
the projected benefit obligation of each of the above plans. The expected
long-
term rate of return on assets was 8.5% in 1997 and 1998. A weighted-average
discount rate of 7.5% and 7.75% was used to determine the pension expense for
1997 and 1998, 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. 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% of salary reduction
contributions up to 7.5% of compensation. The Company contributed the
following amounts (dollars in thousands):
Year ended March 31, 1996 $1,706
Year ended March 31, 1997 1,868
Year ended March 31, 1998 1,896
42
(6) Postretirement Medical and Life Insurance Plans
Net periodic postretirement benefit cost for the Company included the
following components (dollars in thousands):
Years ended March 31,
-------------------------------
1996 1997 1998
--------- ---------- ----------
Service cost $690 $810 $739
Interest cost 1,574 2,037 2,343
Amortization of unrecognized items (125) - -
---------- ---------- ----------
$2,139 $2,847 $3,082
========== ========== ==========
The following table sets forth the Plan's funded status and amounts recognized
in the consolidated balance sheet (dollars in thousands):
March 31,
---------------------
1997 1998
---------- ----------
Accumulated postretirement benefit obligation (APBO):
Existing retirees $18,946 $20,714
Active employees 9,388 12,732
---------- ----------
28,334 $33,446
Unrecognized net gains (losses) 1,831 (1,662)
---------- ----------
Obligation $30,165 $31,784
========== ==========
A weighted average discount rate of 7.75% and 7.25% in 1997 and 1998,
respectively, and a descending medical trend rate from 9% to 7% and 8% to 7%
in 1997 and 1998, respectively, were used in determining the actuarial present
value of the APBO. A weighted average discount rate of 7.5% and 7.75% in 1997
and 1998, respectively, was used in determining the net periodic
postretirement benefit cost. A 1% increase or decrease in the medical trend
rate would increase or decrease the APBO by approximately $1,365.
43
(7) Income Taxes
Income taxes (benefits) consist of the following (dollars in thousands):
Federal State Foreign Total
---------- ------- --------- -------
Year ended March 31, 1996:
Current $40,942 $3,829 $1,663 $46,434
Deferred (6,042) (620) -
(6,662)
------- ------ ------ -------
$34,900 $3,209 $1,663 $39,772
======= ====== ====== =======
Year ended March 31, 1997:
Current $17,325 $ 658 $823 $18,806
Deferred (1,376) (150) (74)
(1,600)
------- ------- ----- -------
$15,949 $ 508 $749 $17,206
======= ======= ===== =======
Year ended March 31, 1998:
Current $15,835 $ 806 $2,317 $18,958
Deferred 1,970 216 500 2,686
------- ------- ------ -------
$17,805 $ 1,022 $2,817 $21,644
======= ======= ====== =======
+
The rates of income taxes (benefits) were different than the amounts computed
using the statutory income tax rate. A reconciliation of the statutory
federal income tax rate follows:
Years Ended March 31,
--------------------
1996 1997 1998
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal taxes 2.0 .6 .9%
Foreign sales corporation (1.3) (3.8) (3.3)
Goodwill amortization 1.3 . 7 .5
Reduction in prior year tax accrual - (1.8) (2.4)
Other .9 .9 ( .1)
------ ------ ------
Effective income tax rate 37.9% 31.6% 30.6%
====== ====== ======
44
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The tax effects of temporary differences and
carryforwards which give rise to deferred tax assets and liabilities are as
follows (dollars in thousands):
March 31,
--------------------
1997 1998
------- -------
Gross deferred tax assets:
Sales and product allowances $ 9,961 $ 8,135
Medical benefits 12,047 12,324
Pension benefits 12,922 13,100
All other 3,437 5,331
------- -------
38,367 38,890
------- -------
Gross deferred tax liabilities:
Depreciation and differences in basis (32,790) (36,228)
Amortization of intangibles ( 5,766) (5,537)
------- -------
(38,556) (41,765)
------- -------
Net deferred income tax liability $ (189) $ (2,875)
======= =======
The net deferred income tax liability is reflected in the accompanying 1997
and 1998 balance sheets as a $12,552 and $13,581 current asset and a $12,741
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 1997 or 1998.
On October 7, 1997, the Company and the Internal Revenue Service finalized a
settlement involving adjustments on 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.
On November 6, 1996, the Company and the Internal Revenue Service finalized a
settlement involving adjustments on the Company's consolidated income tax
returns for fiscal years 1989 through 1992. 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 $1,700. Also, in
relation to the final settlement with the IRS, the Company reduced goodwill
and tax liabilities by approximately $13,390 for income taxes it had
established at the date of acquisition pending resolution of the audit.
45
(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 1997 and 1998, 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,
-------------------------------------------
1997 1998
------------------- --------------------
As As
Reported Pro forma Reported Pro forma
-------- --------- -------- ---------
Net earnings $37,169 $36,146 $49,190 $47,554
Earnings per share
Basic $.96 $.93 $1.26 $1.22
Diluted $.95 $.92 $1.25 $1.21
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 1998 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
fiscal year 1997.
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:
Years ended March 31,
------------------------
1997 1998
-------- --------
Expected life (years) 5 5
Interest rate 6.1% 5.7%
Volatility 23.8% 42.6%
Dividend yield 0.0% 0.0%
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.
46
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 fair market 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.
A summary of the status of the Company's three stock option plans as of March
31, 1996, 1997, and 1998, and changes during the years ended on those dates is
presented below:
March 31,
- ----------------------------------------------------------------------------
1996
1997 1998
- --------------------------------------------------------------------------------
- -----------------------
Weighted- Weighted- Weighted-
Average
Average Average
Shares Exercisable Shares
Exercisable Shares Exercisable
Price
Price Price
Fixed Options
- --------------------------------------------------------------------------------
- -----------------------
Options Outstanding
at Beginning of Year 1,352,870 $ 6.490 1,114,885
$13.362 1,239,835 $15.532
Options Granted 281,885 32.125 281,330
19.250 308,445 25.750
Options Exercised (519,870) 5.651 (150,110)
6.190 (295,690) 6.446
Options Canceled - - (6,270)
20.132 (1,570) 11.828
- --------------------------------------------------------------------------------
- -----------------------
Options Outstanding
at End of Year 1,114,885 $13.362 1,239,835
$15.532 1,251,020 $20.203
- --------------------------------------------------------------------------------
- -----------------------
Option Price Range
at End of Year $5.00 to $32.125 $5.00 to $32.125
$5.00 to $32.125
Option Price Range
for Exercised Shares $5.00 to $5.715 $5.00 to $10.625
$5.00 to $10.625
Options Available for
Grant at End of Year 2,402,505
2,121,175 1,812,730
Options Exercisable
at Year-End 437,590
679,590 664,050
Weighted-Average Fair
Value of Options Granted
During the Year $8.64 $5.42
47
The following table summarizes information about stock options outstanding at
March 31, 1998:
Options Outstanding
Options Exercisable
- --------------------------------------------------------------------------------
- -----------------------
Range of Number Weighted-Average
Number
Exercisable Outstanding at Remaining Weighted-Average
Exercisable at Weighted-Average
Prices 3/31/98 Contractual Life Exercise Price
3/31/98 Exercisable Price
- --------------------------------------------------------------------------------
- -----------------------
$5 to $5.715 243,980 5 Years $5.49
243,980 $5.49
$10.625 to $14.188 139,920 7 Years $11.66
139,920 $11.66
$32.125 280,150 8 Years $32.13
280,150 $32.13
$19.25 278,525 9 Years $19.25
- - -
$25.75 308,445 10 Years $25.75
- - -
-------- --------
1,251,020 664,050
========= ========
48
(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,
--------------------------------------
1996 1997 1998
---------- ----------- -----------
Europe $124,750 $101,060 $134,623
Asia 114,564 104,932 123,671
Other 27,869 24,657 34,914
---------- ----------- -----------
Total $267,183 $230,649 $293,208
========== =========== ===========
(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 .50 to
.65 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 joint and several guarantees in an
aggregate amount up to but not to exceed $2,500 to guarantee this recourse
provision. The Company transferred receivables and incurred factoring costs
as follows (dollars in thousands):
Years ended March 31,
---------------------------------------------
1996 1997 1998
---------------------------------------------
Receivables transferred $256,131 $218,146 $283,153
Factoring cost $2,341 $2,109 $2,834
Included in accounts payable, trade, is $19,046 and $27,686 at March 31, 1997
and 1998, respectively, which represents factored receivables collected but
not remitted.
49
(c) Future minimum lease payments over the next five years under
noncancelable operating leases at March 31, 1998, are as follows (dollars in
thousands):
1999 $10,446
2000 7,428
2001 3,889
2002 2,066
2003 457
Total rental expense under cancelable and noncancelable operating leases was
as follows (dollars in thousands):
Year ended March 31, 1996 $ 8,333
Year ended March 31, 1997 11,653
Year ended March 31, 1998 12,592
50
(11) Supplementary Balance Sheet Detail (dollars in thousands)
March 31,
-----------------------
1997 1998
---------- ----------
Accounts receivable:
Trade $58,184 $61,773
Other 4,004 6,879
---------- ----------
62,188 68,652
Less:
Allowance for doubtful accounts 244 390
Allowance for price protection and
customer returns (note 10) 6,755 6,222
---------- ----------
$55,189 $62,040
========== ==========
Property and equipment, at cost Useful Life
Land and land improvements 10-20 years $11,789 $13,071
Buildings 10-40 years 40,632 61,702
Machinery and equipment 5-10 years 311,750 369,154
Furniture and fixtures 3-10 years 22,186 32,086
Construction in progress - 78,276 97,104
---------- ----------
464,633 573,117
Accumulated depreciation 145,124 179,566
---------- ----------
$319,509 $393,551
========== ==========
Accrued expenses:
Pension costs (note 5) $3,890 $4,031
Salaries, wages and related employee costs 11,272 12,009
Vacation 8,407 8,879
Other 5,741 11,750
---------- ----------
$29,310 $36,669
========== ==========
(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 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
51
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.
(13) Earnings Per Share (dollars in thousands except per share data)
Basic and diluted earnings per share (EPS) are calculated as follows:
Years ended March 31,
----------------------------------
1996 1997 1998
---------- ---------- --------
Numerator - net earnings $65,198 $37,169 $49,190
Denominator
Weighted-average common shares (Basic) 38,265,678 38,737,160 39,073,222
Stock Options 873,803 539,518 353,942
---------- ---------- ----------
Weighted-average common shares (Diluted) 39,139,481 39,276,678 39,427,164
========== ========== ==========
Basic EPS $1.70 $0.96 $1.26
Diluted EPS $1.67 $0.95 $1.25
The Company adopted Statement of Financial Accounting Standards No. 128 (FAS
128), Earnings Per Share, for fiscal year 1998. All prior period earnings per
common share data have been restated to conform to the provisions of FAS 128.
Basic earnings per common share is computed using the weighted average number
of shares outstanding. Diluted earnings per common share is computed using
the weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock.
(14) Restructuring Charge
52
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 5-7 months.
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 , 1998 /S/ D.Ray Cash
D. Ray Cash
Senior Vice President of Administration,
Treasurer and Assistant Secretary
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 , 1998 /S/ David E. Maguire
David E. Maguire
Chairman, Chief Executive Officer, President
and Director
Date: June , 1998 /S/ D. Ray Cash
D. Ray Cash
Senior Vice President of Administration,
Treasurer, and Assistant Secretary
(Principal Accounting and Financial Officer)
Date: June , 1998 /S/ Charles E. Volpe
Charles E. Volpe
Director
Date: June , 1998 /S/ Stewart A. Kohl
Stewart A. Kohl
Director
Date: June , 1998 /S/ E. Erwin Maddrey, II
E. Erwin Maddrey, II
Director
Date: June , 1998 /S/ Paul C. Schorr IV
Paul C. Schorr IV
Director