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