Note 6. 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”) to acquire 51% of the common stock (representing a 34% economic interest) of NEC TOKIN Corporation (“NEC TOKIN”), a manufacturer of tantalum capacitors, electro-magnetic, electro-mechanical and access devices, (the “Initial Purchase”) from NEC Corporation (“NEC”) of Japan. The transaction closed on February 1, 2013, at which time KEC paid a purchase price of $50.0 million for new shares of common stock of NEC TOKIN (the “Initial Closing”). The Company accounts for its investment using the equity method in a non-consolidated variable interest entity since KEC does not have the power to direct significant activities of NEC TOKIN.

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

Concurrent with execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC 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 a disagreement between NEC and KEC 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 has marked these options to fair value and in the quarter ended June 30, 2014 recognized a $4.1 million gain which was included on the line item “Other (income) expense, net” in the Condensed Consolidated Statement of Operations. The value included for the options in the line item “Other assets” on the Condensed Consolidated Balance Sheets as of June 30, 2014, is $7.7 million.

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



	June 30, 2014		March 31, 2014
Current assets	$	239,025	$	245,709
Non-current assets	311,389		302,161
Current liabilities	128,076		120,929
Non-current liabilities	358,014		360,908



	Quarters Ended June 30,
	2014			2013
Sales	$	122,408		$	123,192
Gross profit	26,678			18,300
Net loss	(3,154		)	(8,729		)

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



	Quarters Ended June 30,
	2014			2013
NEC TOKIN net loss	(3,154		)	(8,729		)
KEMET's equity ownership %	34		%	34		%
Equity loss from NEC TOKIN before Adjustments	(1,072		)	(2,968		)

Adjustments:
Amortization and depreciation	(603		)	(409		)
Equity loss from NEC TOKIN	$	(1,675	)	$	(3,377	)

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



	June 30, 2014			March 31, 2014
Investment in NEC TOKIN	$	45,235		$	46,419
Purchase price accounting basis adjustment:
Property, plant and equipment	7,220			7,325
Technology	(15,855		)	(16,261		)
Long-term debt	(4,504		)	(4,754		)
Goodwill	(9,326		)	(9,326		)
Other	(901		)	(952		)
KEMET's 34% economic interest of NEC TOKIN's net assets	$	21,869		$	22,451

The above basis differences (except Goodwill) are being amortized over the respective estimated life of the assets. As of June 30, 2014, KEC’s maximum loss exposure as a result of its investments in NEC TOKIN is limited to the aggregate of the carrying value of the investment and any accounts receivable balance due from NEC TOKIN. For the quarter ended June 30, 2014, KEMET recorded sales of $1.9 million to NEC TOKIN and as of June 30, 2014, KEMET's accounts receivable from NEC TOKIN was $1.6 million. In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement with NEC TOKIN to provide services for which KEC would be reimbursed. As of June 30, 2014, KEMET’s receivable balance under this agreement was $0.6 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. The investigations are at an early stage. As of this date, except for legal expenses, NEC TOKIN has not recorded an accrual as a result of the investigations.