Investment in TOKIN

On March 12, 2012, KEC, a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with TOKIN and NEC Corporation (“NEC”) (together with its affiliate NEC Capital Solutions Limited, the sole shareholder of TOKIN) to acquire 51% of the common stock of TOKIN (which represented 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 outstanding common and convertible preferred shares of TOKIN as of such date) (the “Initial Purchase”). 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 TOKIN (the “Initial Closing”). Through March 31, 2017, the Company accounted for its investment in TOKIN using the equity method for a non-consolidated variable interest entity since KEC did not have the power to direct significant activities of TOKIN. The Company believes that the TOKIN convertible preferred stock represents in-substance common stock of TOKIN and, as a result, its method of calculating KEC’s economic basis in TOKIN is the appropriate basis on which to recognize its share of the earnings or loss of TOKIN.

In connection with KEC’s execution of the Stock Purchase Agreement, KEC entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with TOKIN and NEC, which provided for restrictions on transfers of TOKIN’s capital stock, certain tag-along and first refusal rights on transfer, restrictions on NEC’s ability to convert the preferred stock of TOKIN held by it, certain management services provided to TOKIN by KEC (or an affiliate of KEC) and certain board representation rights. During fiscal year 2017, KEC held four of seven TOKIN director positions. However, NEC has significant board rights.

Concurrent with the execution of the Stock Purchase Agreement and the Stockholders’ Agreement, KEC entered into an Option Agreement (the “Option Agreement”) with NEC, which was amended on August 29, 2014, whereby KEC had the right to purchase additional shares of TOKIN common stock from TOKIN for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of TOKIN’s common stock (the “First Call Option”) by providing notice of the First Call Option between the Initial Closing and April 30, 2015. Upon providing such First Call Option notice, but not before April 1, 2015, KEC could also have exercised a second option to purchase all outstanding capital stock of 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 TOKIN’s debt obligation to NEC (the “Second Call Option”) by providing notice of the Second Call Option by May 31, 2018. The First and Second Call Options expired on April 30, 2015 without being exercised.

Under the Option Agreement, from April 1, 2015 through May 31, 2018, NEC could have required KEC to purchase all outstanding capital stock of TOKIN from its stockholders, primarily NEC (the “Put Option”), provided that KEC’s payment of the Put Option price was permitted under the 10.5% Senior Notes and Loan and Security Agreement.Subsequent to year-end, the Company completed its acquisition of the remaining 66% economic interest in TOKIN and TOKIN became a 100% owned subsidiary of KEMET. See Note 19, “Subsequent Events” for additional information. The Put Option was canceled under the Definitive TOKIN Stock Purchase Agreement, herein defined, for acquisition of the remaining 66% of TOKIN.

The Company has marked these options to fair value and in the fiscal years ended March 31, 2017, 2016 and 2015 recognized a $10.7 million gain, $26.3 million loss, and $2.1 million gain respectively, which was included on the line item “Change in value of the TOKIN options” in the Consolidated Statement of Operations. The line item “Other non-current obligations” on the Consolidated Balance Sheets includes $9.9 million and $20.6 million as of March 31, 2017 and 2016, respectively, related to the options.

KEC’s total investment in TOKIN including the net call forward contract 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 TOKIN follows (in thousands):



	March 31, 2017		March 31, 2016
Current assets continuing operations	$	204,654	$	199,527
Assets held for sale (current) (1)	118,983		43,146
Noncurrent assets continuing operations	285,952		188,925
Assets held for sale (noncurrent) (1)	—		72,360
Current liabilities continuing operations	375,433		146,207
Liabilities held for sale (current) (1)	50,008		36,078
Noncurrent liabilities continuing operations	65,657		313,768
Liabilities held for sale (noncurrent) (1)	—		21,720

(1) As discussed in Note 19, “Subsequent Events,” TOKIN sold its EMD business on April 14, 2017.



	Fiscal Year March 31, 2017		Fiscal Year March 31, 2016			Fiscal Year March 31, 2015
Net sales	$	328,822	$	301,898		$	321,540
Gross profit	74,465		67,409			66,722
Net income (loss) from continuing operations	106,103		(54,575		)	(43,085		)
Net income (loss) from discontinued operations (1)	22,399		11,580			18,994
Net income (loss)	128,502		(42,995		)	(24,091		)

(1) As discussed in Note 19, “Subsequent Events,” TOKIN sold its EMD business on April 14, 2017.

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



	Fiscal Year March 31, 2017			Fiscal Year March 31, 2016			Fiscal Year March 31, 2015
TOKIN net income (loss)	$	128,502		$	(42,995	)	$	(24,091	)
KEMET’s equity ownership %	34		%	34		%	34		%
Equity income (loss) from TOKIN before Adjustments	$	43,691		$	(14,618	)	$	(8,191	)

Adjustments:
Amortization and depreciation	(2,210		)	(1,625		)	(2,270		)
Indemnity asset	—			—			8,500
Inventory profit elimination	162			(163		)	(208		)
Equity income (loss) from TOKIN	$	41,643		$	(16,406	)	$	(2,169	)

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



	March 31, 2017			March 31, 2016
Investment in TOKIN	$	63,416		$	20,334
Purchase price accounting basis adjustment:
Property, plant and equipment (1)	3,080			3,365
Technology (1)	(8,691		)	(10,134		)
Long-term debt (1)	(1,067		)	(1,975		)
Goodwill	(7,590		)	(7,555		)
Indemnity asset for legal investigation	(8,500		)	(8,500		)
Inventory profit elimination (2)	208			371
Other	(569		)	(603		)
KEMET’s 34% interest of TOKIN’s equity	$	40,287		$	(4,697	)


(1)	Depreciated or amortized over the estimated lives.


(2)	Adjusted each period for any activity.

As of March 31, 2017, KEC’s maximum loss exposure as a result of its investments in TOKIN is limited to the aggregate of the carrying value of the investment, any accounts receivable balance due from TOKIN and obligations in the Put Option.

Summarized transactions between KEC and TOKIN are as follows (amounts in thousands):



	Twelve Month Periods Ended March 31,
	2017		2016		2015
KEC’s sales to TOKIN	$	17,100	$	21,061	$	13,500
TOKIN’s sales to KEMET	8,341		5,912		3,605



	March 31, 2017		March 31, 2016
Accounts receivable	$	2,662	$	5,220
Accounts payable	1,378		1,019
Management service agreement receivable (1)	775		748


(1)	In accordance with the Stockholders’ Agreement, KEC entered into a management services agreement with TOKIN to provide services for which KEC is being reimbursed.

Beginning in March 2014, TOKIN and certain of its subsidiaries received inquiries, requests for information and other communications from government authorities in China, the United States, the European Union, Japan, South Korea, Taiwan, Singapore and Brazil concerning alleged anti-competitive activities within the capacitor industry.

On September 2, 2015, the United States Department of Justice announced a plea agreement with TOKIN in which TOKIN agreed to plead guilty to a one-count felony charge of unreasonable restraint of interstate and foreign trade and commerce in violation of Section 1 of the Sherman Act, and to pay a criminal fine of $13.8 million. The plea agreement was approved by the United States District Court, Northern District of California, on January 21, 2016. The fine is payable over 5 years in six installments of $2.3 million each, plus accrued interest. The first and second payments were made in February 2016 and January 2017, respectively, while the next payment is due in January 2018.

On December 9, 2015, the Taiwan Fair Trade Commission (“TFTC”) publicly announced that TOKIN would be fined 1,218.2 million New Taiwan dollars (“NTD”) (approximately U.S. $40.2 million) for violations of the Taiwan Fair Trade Act. Subsequently, the TFTC indicated the fine would be reduced to NTD609.1 million (approximately U.S. $20.1 million). In February 2016, TOKIN commenced an administrative suit in Taiwan, challenging the validity of the amount of the fine.

On March 29, 2016, the Japan Fair Trade Commission published an order by which TOKIN was fined ¥127.2 million (approximately U.S. $1.1 million) for violation of the Japanese Antimonopoly Act. Payment of the fine was made in October 2016.

On July 27, 2016, Brazil’s Administrative Council for Economic Defense approved a cease and desist agreement with TOKIN in which TOKIN made a financial contribution of Brazilian real 601 thousand (approximately U.S. $0.2 million) to Brazil’s Fund for Defense of Diffuse Rights.

On May 2, 2016, TOKIN reached a preliminary settlement, followed by definitive settlement agreements on July 15, 2016, in two antitrust suits pending in the United States District Court, Northern District of California as In re: Capacitors Antitrust Litigation, No. 3:14-cv-03264-JD (the “Class Action Suits”), which was approved by the court on April 6, 2017 (for the purported direct purchaser plaintiffs), or is subject to court approval (for the purported indirect purchaser plaintiffs). Pursuant to the terms of the settlement, in consideration of the release of TOKIN and its subsidiaries (including TOKIN America, Inc.) from claims asserted in the Class Action Suits, TOKIN will pay an aggregate $37.3 million to a settlement class of direct purchasers of capacitors and a settlement class of indirect purchasers of capacitors. Each of the respective class payments is payable in five installments, the first of which became due on July 29, 2016, the next three of which are due each year thereafter on the anniversary of the initial payment, and the final payment is due by December 31, 2019. TOKIN has paid the initial installment payments into the two plaintiff classes’ respective escrow accounts.

Pursuant to the Stock Purchase Agreement, NEC is required to indemnify TOKIN and/or KEC for any breaches by TOKIN or NEC of certain representations, warranties and covenants in the Stock Purchase Agreement. NEC’s aggregate liability for indemnification claims is limited to $25.0 million. Accordingly, KEMET, under equity method accounting, has established an indemnity asset in the amount of $8.5 million (based upon our 34% economic interest in TOKIN). Under the Definitive TOKIN Stock Purchase Agreement, herein defined, for acquisition of the remaining 66% of TOKIN this indemnity was released, and as such in the first quarter of fiscal year 2018 the indemnity asset will be removed.

In the fiscal year ended March 31, 2017, KEMET incurred a loss of $7.1 million related to TOKIN’s antitrust and civil litigation, based upon its 34% economic interest in TOKIN, which is included in the line item “Equity income (loss) from TOKIN” on the Condensed Consolidated Statements of Operations.

The remaining governmental investigations are continuing at various stages. As of March 31, 2017, TOKIN’s accrual for antitrust and civil litigation totaled $83.4 million. This amount includes the best estimate of losses which may result from the ongoing antitrust investigations, civil litigation and claims. However, the actual outcomes could differ from what has been accrued. Additionally, under the terms of the TOKIN Purchase Agreement (as hereinafter defined), TOKIN will be responsible for defending all suits, paying all expenses and satisfying all judgments to the extent arising out of or related the capacitor antitrust investigations and related litigation described above.