Investment in NEC TOKIN

On March 12, 2012, KEMET Electronics Corporation ("KEC"), a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with NEC TOKIN Corporation ("NEC TOKIN"), a manufacturer of tantalum capacitors, electro-magnetic, electro-mechanical and access devices, to acquire 51% of the commmon stock of NEC TOKIN (which represents a 34% economic interest, as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of common and preferred shares of NEC TOKIN as of such date) (the "Initial Purchase") from NEC Corporation ("NEC") of Japan. The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of NEC TOKIN (the "Initial Closing"). The Company accounts for its investment in NEC TOKIN using the equity method for a non-consolidated variable interest entity since KEC does not have the power to direct significant activities of NEC TOKIN. The Company believes that the NEC TOKIN preferred stock represents in-substance common stock of NEC TOKIN and, as a result, its method of calculating KEC’s economic basis in NEC TOKIN is the appropriate basis on which to recognize its share of the earnings or loss of NEC TOKIN.

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

Concurrent with execution of the Stock Purchase Agreement and the Stockholders' Agreement, KEC entered into an Option Agreement (the "Option Agreement") with NEC whereby KEC may purchase additional shares of NEC TOKIN common stock from NEC TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of NEC TOKIN's common stock (the "First Call Option") by providing notice of the First Call Option between the Initial Closing and August 31, 2014. Upon providing such notice, but not before August 1, 2014, KEC may also exercise an option to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC, for a purchase price based on the greater of six times LTM EBITDA (as defined in the Option Agreement) less the previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN's debt obligation to NEC (the "Second Call Option") by providing notice of the Second Call Option by May 31, 2018. From August 1, 2014 through May 31, 2018, NEC may require KEC to purchase all outstanding capital stock of NEC TOKIN from its stockholders, primarily NEC. However, NEC may only exercise this right (the "Put Option") from August 1, 2014 through April 1, 2016 if NEC TOKIN achieves certain financial performance measures. The purchase price for the Put Option will be based on the greater of six times LTM EBITDA less previous payments and certain other adjustments, or the outstanding amount of NEC TOKIN's debt obligation to NEC as of the date the Put Option is exercised. The purchase price for the Put Option is reduced by the amount of NEC TOKIN's debt obligation to NEC which KEC will assume. The determination of the purchase price will be modified in the event there is an unresolved agreement between NEC and us under the Stockholders' Agreement. In the event the Put Option is exercised, NEC will be required to maintain in place the outstanding debt obligation owed by NEC TOKIN to NEC. The Company valued these options as a net call derivative of $0.5 million which is included in line item "Other Assets" on the Consolidated Balance Sheets. The Company has marked these options to fair value and in the fiscal year ended March 31, 2014 recognized a $3.1 million gain which was included on the line item “Other expense, net” in the Consolidated Statement of Operations. The value included for the options in the line item “Other assets” on the Consolidated Balance Sheets as of March 31, 2014, is $3.6 million.

KEC's total investment in NEC TOKIN including the net call derivative described above on February 1, 2013 was $54.5 million which includes $50.0 million cash consideration plus approximately $4.5 million in transaction expenses (fees for legal, accounting, due diligence, investment banking and other various services necessary to complete the transactions). The Company has made an allocation of the aggregate purchase price, which were based upon estimates that the Company believes are reasonable.

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



	March 31, 2014		March 31, 2013
Current assets	$	245,709	$	220,652
Noncurrent assets	302,161		422,246
Current liabilities	120,929		121,238
Noncurrent liabilities	360,908		411,789



	Fiscal Year March 31, 2014			Two Months Ended March 31, 2013
Net sales	$	512,073		$	82,772
Gross profit	90,325			9,147
Net loss	(42,937		)	(2,216		)

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



	Fiscal year Ended March 31, 2014			Two Months Ended March 31, 2013
NEC TOKIN net Loss	$	(42,937	)	$	(2,216	)
KEMET's equity ownership %	34		%	34		%
Equity loss from NEC TOKIN before Adjustments	$	(14,599	)	$	(753	)

Adjustments:
Amortization and depreciation	(1,390		)	(247		)
Gain on sale of long-lived assets adjustment	(5,998		)	—
Loss on impairment of long-lived assets adjustment	14,643			—
Inventory valuation adjustment	254			(254		)
Equity Loss from NEC TOKIN	$	(7,090	)	$	(1,254	)

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



	March 31, 2014			March 31, 2013
Investment in NEC TOKIN	$	46,419		$	52,738
Purchase price accounting basis adjustment:
Property, plant and equipment	7,325			21,593
Technology	(16,261		)	(18,000		)
Long-term debt	(4,754		)	(5,824		)
Goodwill	(9,326		)	(9,326		)
Other	(952		)	(3,825		)
KEMET's 34% interest of NEC TOKIN's equity	$	22,451		$	37,356

The above basis differences (except Goodwill) are being amortized over the respective estimated life of the assets. As of March 31, 2014, KEC's maximum loss exposure as a result of its investments in NEC TOKIN is limited to the aggregate of the carrying value of the investment and any accounts receivable balance. For the fiscal year ended March 31, 2014, KEMET recorded sales of $6.0 million to NEC TOKIN. As of March 31, 2014, KEMET’s accounts receivable and accounts payable balances with NEC TOKIN were $2.0 million and $0.1 million respectively. In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement to provide services for which KEC would be reimbursed. As of March 31, 2014, KEMET’s receivable balance under this agreement is $0.7 million.

In March and April, 2014, NEC TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Commission, Japan and South Korea concerning alleged anti-competitive activities within the capacitor industry. According to NEC TOKIN, the investigations are at an early stage. As of this date, NEC TOKIN has not recorded an accrual as a result of the investigations.