Kemet Corporation
Annual Report 2001

Plain-text annual report

THE PREFERRED CAPACITOR SUPPLIER 2001 KEMETCORPORATION ANNUAL REPORT Highlights of Fiscal 2001 (In thousands, except per share data) KEMET Corporation and Subsidiaries Years ended March 31, 2001 2000 1999 Average Net sales Net earnings $1,406,147 $822,095 $565,569 $931,270 $ 352,346 $ 70,119 $ 6,150 $142,872 Net earnings/Net sales 25.1% 8.5% 1.1% 15.3% Net earnings per share, diluted (1) $ 4.00 $ 0.85 $ 0.08 $ 1.64 Selling, general and administrative expenses $ 55,713 $ 48,457 $ 46,552 $ 50,241 Research and development expenditures $ 26,188 $ 23,918 $ 21,132 $ 23,746 Fixed asset expenditures Percent of debt to capital 13,900 Year-end employment (number of employees) (1) Reflects the impact of the 2-for-1 stock split effective June 1, 2000. $ 210,559 $ 82,009 $ 59,047 $117,205 10.1% 15.4% 14,000 34.3% 10,800 Net Sales ($ Millions) Net Earnings ($ Millions) Stockholders’ Equity ($ Millions) 1,500 1,250 1,000 750 500 250 0 360 300 240 180 120 60 0 900 750 600 450 300 150 0 FY97 FY98 FY99 FY00 FY01 FY97 FY98 FY99 FY00 FY01 FY97 FY98 FY99 FY00* FY01 *Includes $142.6 million from secondary stock offering KEMET Corporation is the world’s largest manufacturer of solid tantalum capacitors, the fourth largest manufacturer of multilayer ceramic capacitors, and a leader in the development of solid aluminum capaci- tors. These surface-mount technologies are the fastest growing segment of the capacitor industry. Capacitors, which store, filter, and regulate electrical energy and current flow, are found in virtually all elec- tronic applications and products. KEMET’s capacitors are used in a wide variety of electronic applications, including Internet infrastructure, communication systems and devices, personal computers, automotive electronic systems, and military and aerospace systems. KEMET’s strategy is to be the preferred capacitor supplier to the world’s most successful electronics firms. The Company’s stock is traded on The New York Stock Exchange under the symbol KEM. Contents Highlights of Fiscal 2001 Letter to Stockholders Management’s Discussion and Analysis Independent Auditors’ Report Consolidated Financial Statements Directors and Officers Corporate Data Inside front cover 7 10 19 20 40 Inside back cover 1 CARLOS VIVEROS SENIOR PROGRAMMER ANALYST Our vision is to establish a distinctive competence that differentiates KEMET as the unquestioned Best-In-Class supplier. Ever ything at KEMET revolves around one goal–earning the right to be the preferred capacitor supplier at each of the world’s most successful electronics companies. Electronics is a phenomenal growth industry. Measured by shipments of integrated circuits, the electronics industry has grown 11 percent per year for the past decade. While some sectors of electronics are maturing and others are emerging, a high long-term growth rate for the electronics industry as a whole is expected to continue. Capacitors are small energy storage devices that are essential components in all electronics. Because faster, more sophisticated integrated circuits require more capaci- tors to support them, unit shipments of capacitors have grown 20 percent per year for the past decade. Offering the most complete line of surface-mount capacitors, KEMET is the world’s largest manufacturer of solid tantalum capacitors, the fourth largest manufacturer of multi- layer ceramic capacitors, and a leader in the development of solid aluminum capacitors. KEMET’s capacitor shipments have grown 24 percent per year for the past decade. 2 ROB NANCE ROB NANCE EASTERN SALES DIRECTOR EASTERN SALES DIRECTOR The world’s most successful electronics companies include the largest original equip- ment manufacturers, electronics manufacturing services providers, and electronics dis- tributors. The right to be their preferred capacitor supplier is earned by meeting their long-term capacitor needs for the right parts with the highest quality, the most flexibility in ordering, the most reliable delivery, and competitive prices. Clear, effective communications with customers is vital. Unique among capacitor manufacturers, KEMET reaches each of our key customers through direct, salaried sales and customer service professionals. KEMET is on the forefront of information technology required to serve customers. Customers can place an order for any of 35,000 different types of capacitors through KEMET’s Easy-To-Buy-From system. Within three seconds, the system schedules and reserves manufacturing capacity and provides a target delivery date that we meet over 99 percent of the time. No matter where in the world our customers are located, we do busi- ness with local people, in the local language, using the local currency. We are an industry leader in the use of electronic data interchange and emerging Internet technologies. 3 FAITH THOMAS AOPOLYWHEEL OPERATOR K E M E T ’s ex t e n d e d p l a n t c o n c e p t focuses each facility on being the best in the world at performing a closely related family of processes. KEMET’s information technology ties facilities together into a fa c t o r y – f r o m t h e C a r o l i n a s t o v i r t u a l Mexico–from order entry to shipping. This allows KEMET to manufacture up to 35,000 different types of capacitors with near-per- fect quality and on-time delivery, as well as declining costs. Numerous quality awards from our customers bear testimony to our quality achievements. Long-term sales relationships with our key customers allow KEMET to sell capaci- ty, not capacitors. Production requirements for many of KEMET’s customers are man- aged through schedule or forecast sharing. B y bu i l d i n g t o a c u s t o m e r ’s fo r e c a s t , KEMET can provide shorter lead times and better overall customer support from any of our manufacturing facilities. KEMET works hard to be a good cor- porate neighbor in all our locations. As a result, we have received numerous envi- ronmental, educational, community, and professional awards. 4 PHIL SARACIN GLOBAL LOGISTICS MANAGER The globalization of the world’s economy and the dramatic growth of outsourced elec- tronics manufacturing services are increasing the demand for world-class global logistics that maximize ordering flexibility and get the right parts to the right places at the right times. From KEMET’s Brownsville, Texas, distribution center, finished parts can be delivered within 72 hours to customer locations anywhere in the world. On-time deliveries are above 99 percent, which leads the industry by far. Our just-in-time logistics systems allow us to provide the kind of personalized service customers hope for from a local supplier. KEMET operates a state-of-the-art material handling facility in Amsterdam, Holland, known as the Euro-Hub. This facility allows us to deliver anywhere in Europe in 48 hours with real-time tracking and proof of delivery–performance that surpasses even the best local suppliers. A similar facility in Guadalajara, Mexico, allows us to service the extensive electronics manufacturing services providers in the region. Local distribution centers in Hong Kong and Singapore provide world-class service to the Pacific Rim market. 5 GABRIELA GIL PLANT MANAGER, CIUDAD VICTORIA Advances in integrated circuits place new demands on capacitors–more capacitance in smaller packages for portable electronics, lower electrical resistance to extend battery life, and support for high processing speeds of high-end microprocessors. The fastest growing types of capacitors are surface-mount because they can survive the rigors of high-volume, automated printed circuit board assembly. KEMET supplies the world’s most complete line of surface-mount capacitors. KEMET manufactures one quarter of the tantalum capacitors consumed in the world annually. Leading-edge tantalum products include organic tantalums and multiple-anode tantalums, providing the highest capacitance per volume with the lowest electrical resis- tance of any capacitors sold. KEMET’s mining joint venture, Tantalum Australia, helps ensure that we can support our customers’ increasing demands for tantalum capacitors. KEMET is the fourth largest manufacturer of multilayer ceramic capacitors, a fast- growing, $6 billion market. A key fiscal 2002 goal is to be at the leading edge of technology in high-capacitance ceramics, allowing further penetration of the ceramics market. KEMET has recently introduced innovative solid aluminum capacitors, designed to support high-end applications that require high capacitance at high frequencies. 6 CHARLES CULBERTSON CHARLES CULBERTSON PRESIDENT AND CHIEF OPERATING OFFICER PRESIDENT AND CHIEF OPERATING OFFICER KEMET is an eighty-year-old company. Our current business structure is the result of a 1990 purchase from Union Carbide and a 1992 initial public offering led by David Maguire, Chairman and CEO. David’s career with KEMET now spans forty-two years and ten business cycles. President and COO Charles Culbertson’s twenty-year tenure with KEMET has involved all aspects of the manufacturing and sales operations. Senior VP and CFO Ray Cash rose through KEMET/Union Carbide’s accounting and finance ranks over the past thirty years. Senior VP, Technology and Engineering, Harris Crowley has a diversified background in manufacturing and technology with KEMET spanning twenty-five years. KEMET’s culture has resulted in longevity and consistency throughout the top man- agement team. The average tenure of KEMET’s top ten senior managers is over 20 years. Electronics is a high-growth, but cyclical, industry. Experience with, and the ability to manage through, business cycles is a critical core competency at KEMET. Over the last cycle, extending from the Asian crisis in fiscal 1999 through the industry-wide capacity shortage in fiscal 2001, KEMET’s net income as a percentage of sales was 15.3%, demon- strating the strengths of KEMET’s business model and the capabilities of our management team. 7 DAVID MAGUIRE DAVID MAGUIRE CHAIRMAN AND CHIEF EXECUTIVE OFFICER CHAIRMAN AND CHIEF EXECUTIVE OFFICER Dear Fellow Stockholder: Fiscal 2001 was the most successful year in KEMET’s history. Financially, we realized record sales and earnings. Our business model, from our extended plant concept through our industry-leading global logistics, is tuned to earning the preferred supplier position at the world’s most successful electronics companies. Our flexibility, reliability, and customer service set the standard for our industry. Our product development efforts have made sig- nificant progress toward our goal of being on the leading edge of technology across the fastest-growing capacitor segments: surface-mount tantalum, multilayer ceramic, and solid aluminum capacitors. KEMET is poised to take the next leap in the company’s progress over the next several years. KEMET’s total sales for FY01 were $1.406 billion, up 71% from $822.1 million in FY00. Net earnings for FY01 increased to a new record high of $352.3 million, or $4.00 per diluted share, up from $70.1 million, or $0.85 per diluted share, for the prior year. While electronics is a high growth, but cyclical, industry and last year saw tremendous 8 success, we have already entered the next cycle. In my forty-two years with KEMET this is cycle number ten. They are all somewhat the same, but each is also different in its own way. I am impressed by the rapidity with which this inventory correction has occurred compared to previous cycles. Rest assured, though, that this too will pass. The extraordinary financial results of fiscal 2001 come at the end of a cycle that began with the Asian crisis in fiscal 1999, which was a very challenging year. KEMET’s net income as a percentage of revenue averaged 15.3% over the thirty-six months from the beginning of fiscal 1999 through the end of fiscal 2001. This per- formance validates KEMET’s successful busi- ness model, focused on earning the preferred supplier position at the world’s most success- ful electronics firms, as well as the capabilities of our experienced management team. KEMET ended fiscal 2001 with $361 million in cash, $100 million in long-term debt, and $886 million in stockholders’ equity, the strongest financial position in the company’s history. We anticipate using these resources to take advantage of sig- nificant market opportunities, including high-fre- quency tantalum, high-capacitance ceramic, and new solid aluminum capacitors. While cycles will ebb and flow, I remain very confident in the long-ter m prospects of the electronics industry. To remain competitive long term, KEMET must maintain strong relationships with our key customers, we must be on the lead- ing edge of technology in core products, and we must continually drive production costs down the learning curve while maintaining near-per- fect quality and delivery reliability. The expenses that suppor t this are Selling, General, and Administrative and Research and Development. In recent years, we have maintained these investments at roughly consistent levels regard- less of where we are in the cycle. FY1998 FY1999 FY2000 FY2001 (In Millions) SG&A R&D $48.8 $23.8 $46.6 21.1 $48.5 $23.9 $55.7 $26.2 and to have floor space to add equipment lines as needed to respond to mar ket demands. “Production capacity” is equipment and other manufacturing assets that can be added incre- mentally during the year as market demand dic- tates. Our willingness to invest in capacity through the last cycle positioned us to realize the extraordinar y gains last year during the upstroke of the cycle. FY1998 FY1999 FY2000 FY2001 (In Millions) Production Capacity Facilities and Cost Reduction $85 $35 $61 $135 $30 $24 $21 $76 An added challenge to the most recent cycle has been a significant increase in raw material costs, particularly of tantalum powder and palladium. In the past year the cost of tan- talum ore increased dramatically from around $50 per pound to over $300 per pound. The capacitor industry responded to this increase with a par tial cost pass-through to our cus- tomers. KEMET entered into a tantalum mining joint venture in Western Australia, known as Tantalum Australia, establishing an independent source to assure an adequate supply and to mit- i g a t e t h e c o s t o f t a n t a l u m . To o f f s e t t h e increased palladium costs, we have accelerated our use of base metal electrode technologies, displacing approximately fifty percent of our pal- ladium usage. Over time KEMET has persistently pursued our vision–to establish a distinctive compe- tence that differentiates KEMET as the unquestioned Best-in-Class supplier. With a high-growth industry, a proven business strate- gy, an experienced management team, and the contributions of the 13,900 KEMET employees worldwide, I remain very bullish on KEMET’s future. We also manage capital expenditures for the long term. “Facilities and cost reduction” capital expenditures are long-term investments that maintain KEMET’s ability to be cost competitive David E. Maguire Chairman and CEO 10 Management’s Discussion and Analysis of Results of Operations and Financial Condition Business Outlook The fiscal year ended March 31, 2001, was the most financially successful year in the history of the Company. The Company’s net income for the year ended March 31, 2001, of $352.3 million, exceeded the earnings from all previous periods combined. The Company also ended the fiscal year in the strongest financial position in its history with $360.8 million in cash, $100.0 million in long-term debt, and $ 8 8 6 . 2 m i l l i o n i n s t o c k h o l d e r s ’ e q u i t y . T h e Company believes this performance validates its business model as well as the capabilities of its experienced management team. The Company antic- ipates using these resources to take advantage of significant market opportunities, including high-fre- quency tantalum, high-capacitance ceramic, and new solid aluminum capacitors. The electronics industry is a high-growth, cyclical industry. The extraordinary financial results for the fiscal year ended March 31, 2001, coincidentally came near the end of a cycle that began with the Asian crisis in fis- cal year 1999. t h e t h a t r a p i d i t y w i t h w h i c h The industry is now in another correction phase of the long-term growth trend. The Company is of the t h i s o p i n i o n i n v e n t o r y / c a p a c i t y c o r r e c t i o n i s o c c u r r i n g i s unprecedented compared to previous cycles. The Company’s near-term visibility is limited because of t h e g e n e r a l u n c e r t a i n t y i n t h e i n d u s t r y . T h e Company estimates, given the high level of econom- ic uncertainty, that revenues for the quarter ending June 30, 2001, will be down over 40% from the quar- ter ended March 31, 2001, due to an inventory cor- rection in the electronics industry. The backlog entering the quarter ending Jun e 3 0 , 2 00 1, o f $168.6 million, is less than half that of a year ago. Selling prices for tantalum capacitors increased sig- nificantly during the 15 months ended March 31, 2001, due to strong demand and the dramatic rise in the cost of tantalum ore. The Company expects sell- ing prices for tantalum capacitors to decline indus- try-wide during calendar 2001 as demand decreases due to the inventory correction and shortages in the world supply of tantalum powder are alleviated. The Company thinks that the gross margin percentage for the fiscal year ending March 31, 2002, will aver- age in the range of 30% to 35%. The Company believes the quarter ending June 30, 2001, will be the low point in the correction phase of the current cycle. In this environment, the Company will contin- ue to focus its efforts on cost reduction and devel- opment of new products so it will again be well positioned to benefit as the industry recovers. Please refer to the discussion under the caption "Safe Harbor Statement" below for a discussion of certain risks and uncertainties relating to the state- ments made above. During fiscal year 2001, the Company entered into a 50/50 joint venture agreement with Australasian Gold Mines NL (“AGM”) to establish an independent source of tantalum to meet the increasing demand for tantalum capacitors from key customers. This transaction closed in April 2001. The Company’s ini- tial investment in the joint venture is approximately $4.9 million. The Company also acquired a 10 per- cent interest in AGM for approximately $2.3 million. The Company has the right to acquire all processed tantalum products from the initial production plant, which began operations in the March quarter, and from any future processing operations. These tanta- lum products are expected to be toll converted into tantalum powder necessary for the production of capacitors. The Company anticipates that current mining operations will initially provide up to 15% of its annual tantalum requirements. Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) 11 Comparison of Fiscal Year 2001 to Fiscal Year 2000 Net sales for fiscal year 2001 were $1,406.1 mil- lion, which represented a 71% increase from fiscal year 2000 net sales of $822.1 million. The increase in net sales was attributed to the strong growth in demand for electronic products such as computers and peripherals, cell phones, and automotive elec- tronic systems. Average selling prices continued an upward trend that began in the prior fiscal year. Unit volumes increased approximately 15% to 36.1 bil- lion units in fiscal year 2001, from 31.5 billion units in fiscal year 2000. The Company experienced growth in both domestic and export markets as domestic sales increased 57% and export sales increased 85%. Cost of sales, exclusive of depreciation, for the year ended March 31, 2001, was $693.7 million as compared to $569.7 million for the year ended March 31, 2000. As a percentage of net sales, cost of sales, exclusive of depreciation, for fiscal year 2001 was 49% as compared to 69% for fiscal year 2000. The decrease in cost of sales as a percentage of net sales was attributed to higher average selling prices during fiscal year 2001, gains from manufac- turing efficiencies due to higher unit volume, and the results of the Company’s cost reduction pro- grams such as reduced palladium usage in ceramic capacitors. Selling, general, and administrative expenses for the year ended March 31, 2001, were $55.7 million, or 4% of net sales, as compared to $48.5 million, or 6% of net sales, for the year ended March 31, 2000. The decrease in selling, general, and administrative expenses as a percentage of sales is primarily due to the impact of higher sales volume and increased average selling prices. Research, development, and engineering expenses were $26.2 million for fiscal year 2001, compared to $23.9 million for fiscal year 2000. These costs reflect the Company’s continuing commitment to the devel- opment and introduction of new products, such as aluminum capacitors, along with the improvement of product performance and production efficiencies. Depreciation and amortization for fiscal year 2001 was $63.6 million, an increase of $7.9 million, or 14%, from $55.7 million for fiscal year 2000. The i n c r e a s e r e s u l t e d p r i m a r i l y f r o m d e p r e c i a t i o n expense associated with increased capital expendi- tures during the current and prior fiscal years. Operating income was $567.0 million for fiscal year 2001, compared to $124.3 million for fiscal year 2000. The increase in operating income resulted pri- marily from the increase in net sales and improve- ments in cost of sales as discussed above. Income tax expense for fiscal year 2001 was 38% of net earnings before income taxes. Both federal and state taxes increased over fiscal year 2000 as loss carryforwards and credits were not available in fiscal year 2001 to the extent they were available in the prior fiscal year. 12 Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) Research, development, and engineering expens- es were $23.9 million for fiscal year 2000, compared to $21.1 million for fiscal year 1999. These costs reflect the Company’s continuing 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 2000 was $55.7 million, an increase of $8.8 million, or 19%, from $46.9 million for fiscal year 1999. The i n c r e a s e r e s u l t e d p r i m a r i l y f r o m d e p r e c i a t i o n expense associated with increased capital expendi- tures during the current and prior fiscal years. Operating income was $124.3 million for fiscal year 2000, compared to $22.6 million for fiscal year 1999. The increase in operating income resulted pri- marily from the increase in net sales and improve- ments in cost of sales as discussed above. Income tax expense for fiscal year 2000 was 34% 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 2000 to Fiscal Year 1999 Net sales for fiscal year 2000 were $822.1 million, which represents a 45% increase from fiscal year 1999 net sales of $565.6 million. The increase in net sales was attributed to the strong growth in demand for electronic products such as computers and peripherals, cell phones, and automotive electrical systems. This growth in demand led to increased unit volume and an improvement in the pricing envi- ronment as average selling prices increased from their previously depressed levels. Demand for sur- face-mount capacitors contributed to the growth as net sales increased 55% to $711.0 million for fiscal year 2000. The Company experienced growth in both domestic and export markets as domestic sales increased 39% and export sales increased 52%, partially due to the recovery of the Asian econ- omy. Cost of sales, exclusive of depreciation, for the year ended March 31, 2000, was $569.7 million as compared to $428.4 million for the year ended March 31, 1999. As a percentage of net sales, cost of sales, exclusive of depreciation, for fiscal year 2000 was 69% as compared to 76% for fiscal year 1999. The decrease in cost of sales as a percentage of net sales was attributed to higher sales in fiscal year 2000, gains from manufacturing efficiencies due to higher unit volume, and the results of the C o m p a n y ’ s c o s t r e d u c t i o n p r o g r a m s s u c h a s reduced palladium usage in ceramic capacitors. Selling, general, and administrative expenses for the year ended March 31, 2000, were $48.5 million, or 6% of net sales, compared to $46.6 million, or 8% of net sales, for the year ended March 31, 1999. The decrease in selling, general, and administrative expenses as a percentage of sales is primarily due to the impact of higher sales volume and increased average selling prices. Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) 13 Quarterly Results of Operations The following table sets forth certain quarterly information for the years ended March 31, 2001 and 2000. This information is unaudited 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. Dollars in Thousands (except per share data) Net sales Gross profit (exclusive of depreciation) (1) Net earnings Net earnings per common share (basic) Net earnings per common share (diluted) Fiscal year ended March 31, 2001 First Quarter $329,169 $159,333 $80,235 $0.92 $0.90 Second Quarter $364,049 $187,875 $96,264 $1.10 $1.08 Third Quarter $374,930 $194,011 $97,403 $1.11 $1.10 Fourth Quarter Total $337,999 $1,406,147 $171,269 $78,444 $0.91 $0.90 $712,488 $352,346 $4.05 $4.00 Weighted average shares outstanding (basic) 87,324,021 87,414,074 87,416,454 86,362,252 86,930,965 Weighted average shares outstanding (diluted) 88,915,974 88,804,300 88,678,409 87,414,105 88,181,118 Dollars in Thousands (except per share data) Net sales Gross profit (exclusive of depreciation) (1) Net earnings Net earnings per common share (basic) Net earnings per common share (diluted) Fiscal year ended March 31, 2000 First Quarter Second Quarter Third Quarter Fourth Quarter $162,649 $186,187 $215,139 $258,120 $39,665 $4,694 $0.06 $0.06 $49,794 $9,199 $0.12 $0.11 $65,501 $18,160 $0.23 $0.22 $97,429 $38,066 $0.44 $0.44 Total $822,095 $252,389 $70,119 $0.87 $0.85 Weighted average shares outstanding (basic) 78,571,116 78,822,996 79,713,170 85,554,814 80,650,376 Weighted average shares outstanding (diluted) 79,778,122 80,614,798 81,199,048 87,379,088 82,411,634 (1) Gross profit (exclusive of depreciation) as a percentage of net sales fluctuates from quarter to quarter due to a num- ber 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. 14 Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) Liquidity and Capital Resources The Company’s liquidity needs arise from working capital requirements, capital expenditures, and prin- cipal and interest payments on its indebtedness. The Company intends to satisfy its liquidity require- ments primarily with funds provided by operations and borrowings under its bank credit facilities. During fiscal year 2001, the Company generated $385.5 million in net cash from operating activities as compared to $177.7 million in fiscal year 2000. In turn, this led to a significant increase in cash and s h o r t - t e r m i n v e s t m e n t s t o $ 3 6 0 . 8 m i l l i o n f r o m $199.4 million at March 31, 2001 and 2000, respec- tively. The increase in cash flow from operating activities was primarily a result of the increase in net income and, to a lesser extent, the timing of cash flows from current assets and liabilities, such as accounts receivable, inventory, accounts payable, accrued liabilities, and income taxes payable. Inventories increased to $202.3 million at March 31, 2001, from $131.0 million at March 31, 2000, due to an increase in units as well as higher raw material prices. Current liabilities increased to $285.1 million at March 31, 2001, versus $189.1 million at March 31, 2000, commensurate with the increase in business activity in fiscal year 2001 versus fiscal year 2000. The Company invested $210.6 million in capital expenditures in fiscal year 2001 versus $82.0 million in fiscal year 2000, and expects to invest approxi- mately $100.0 to $150.0 million in fiscal year 2002. The fiscal year 2001 capital was primarily invested in surface-mount manufacturing capacity as the Company expects continued future growth in capac- itor demand. 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, 2001, the Company was in compliance with such covenants. Borrowings are secured by guarantees of certain of the Company’s wholly-owned sub- sidiaries. During fiscal year 2000, the Company’s long-term debt decreased $44.0 million, as the Company reduced its indebtedness with the proceeds from the January 2000 Secondary Offering. At March 31, 2001, the Company had unused availability under its revolving credit facility and its swingline credit facili- ty, both of which expire in October 2002, of $150.0 million and $10.0 million, respectively. On January 20, 2000, the Company sold 6,500,000 shares of its common stock in a public offering for $142.6 million in net cash proceeds after deducting underwriting fees and offering expenses. Included in the offering were 2,193,220 shares sold by a stockholder of the Company which were shares of non-voting common stock that were converted into common stock on a share-for-share basis. The net proceeds were used to repay outstanding debt under the Company’s short-term credit facility and to fund capital expenditures. In August 2000, the Company announced that its Board of Directors had authorized a program to pur- chase up to 4.0 million shares of its common stock in the open market. As of March 31, 2001, the Company had made direct purchases of 1.6 million shares for $29.3 million and had outstanding put option obligations for 1.9 million shares with an average exercise price of $18.31 under the program. The program was fulfilled in April 2001, at which time the Company announced that its Board of Directors had authorized a second 4.0 million stock purchase program. The amount and timing of pur- chases will depend on market conditions and other factors. The program will be funded from existing cash, and a combination of direct purchases and put options may be used to execute the program. Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) 15 Additional liquidity is generated by the Company t h r o u g h i t s a c c o u n t s r e c e i v a b l e d i s c o u n t i n g 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 $80.0 million of accounts receivable at any one time outstanding at a discount rate of .60% above LIBOR. 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 begin- ning November 4, 1998. The terms of the Note Purchase Agreement include various restrictive covenants typical of transactions of this type, and require the Company to meet certain financial tests including a minimum net worth test and a maximum ratio of debt to total capitalization. The net pro- ceeds from the sale of the Senior Notes were used to repay existing indebtedness and for general cor- porate purposes. The Company presently has a total of eight manu- facturing facilities in Matamoros, Monterrey, and Ciudad Victoria, Mexico, with over 60% of the Company’s employees located there. In fiscal year 2001, the volatility of the Mexican peso did not have a material impact on the Company’s performance. As discussed in Note 12 to the Consolidated Financial Statements, the Company or its sub- sidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including workers’ compensation or work place safe- ty 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 posi- tion 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 borrowings under its bank credit facilities. Adoption of Accounting Standards Effective October 1, 2000, the Company adopted S F A S N o . 1 3 3 , f o r D e r i v a t i v e “ A c c o u n t i n g Instruments and Hedging Activities,” as amended by SFAS No.138. SFAS No.133 establishes accounting and report- ing standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. It requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet and measurement of those instruments at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. For derivatives designated as cash flow hedges, to the extent effective, changes in fair value are recognized in accumulated other compre- hensive income (“AOCI”) until the hedged item is 16 Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) recognized in earnings. Ineffectiveness is recog- nized immediately in earnings. For derivatives des- ignated as fair value hedges, changes in fair value are recognized in earnings. Prior to adoption of SFAS No.133, the Company recorded gains and losses related to the hedges of forecasted foreign currency transactions directly to earnings (“Other income and expense”), and gains and losses related to hedges of firm commitments were deferred and recognized in earnings as adjust- ments of carrying amounts when the transactions occurred. The adoption of SFAS No.133 did not result in a significant transition adjustment and is therefore not separately captioned in the statement of earn- ings as cumulative effect of a change in accounting principle. The transition adjustment as of October 1, 2000, was a gain of approximately $0.9 million net of tax, and is included in cost of goods sold for the period. T h e C o m p a n y a d o p t e d t h e S e c u r i t i e s a n d Exchange Commission’s Staff Accounting Bulletin No.101 (the “SAB”) effective January 1, 2001. The SAB requires that a company recognize revenue only when all of the following criteria are met: (1) Persuasive evidence of an arrangement exists; (2) Delivery has occurred or services have been ren- dered; (3) The seller’s price to the buyer is fixed or determinable; and (4) Collectibility is reasonably assured. Upon adoption of the SAB, there was no impact on the Company’s results of operations or financial condition. Safe Harbor Statement This Annual Report on Form 10-K contains for- ward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that these for- ward-looking statements be subject to the safe har- bor created by that provision. These forward look- i n g statements involve risks and uncertainties beyond the Company’s control. The inclusion of t h i s forward-looking information should not be regarded as a representation by the Company that the future events, plans, or expectations contemplat- ed by the Company will be achieved. Furthermore, past performance in operations and share price is not necessarily predictive of future performance. Finally, the Company cannot assume responsibility for certain information that is based upon market estimates. 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 2002 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 state- ments: A moderating growth rate in end-use products which incorporate the Company’s products and the effects of a downturn in the general economy or in general business conditions; Underutilization of KEMET’s plants and factories, or of any plant expansion or new plant, including, but not limited to, those in Mexico, resulting in pro- duction inefficiencies and higher costs; start-up expenses, inefficiencies, 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; O c c u r r e n c e s a f f e c t i n g t h e s l o p e o r s p e e d o f decline of the pricing curve for the Company’s prod- ucts, or affecting KEMET’s ability to reduce product Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) 17 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 need- ed for the production of capacitors; the effects of quality deviations in raw materials, particularly tanta- lum 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, asset valuations, and organizational structure; The acquisition of fixed assets and other assets, including inventories and receivables; the making or incurring of any expenditures and expenses, i n c l u d i n g , b u t n o t l i m i t e d t o , d e p r e c i a t i o n a n d research and development expenses; any revalua- tion 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 organiza- tions; 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; intergov- ernmental 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 account- ing 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 ben- efit plans; the amount, type, and cost of the financ- ing which the Company has and any changes to that financing; 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 I n f l a t i o n g e n e r a l l y a f f e c t s t h e C o m p a n y b y increasing the cost of labor, equipment, and raw materials. The Company does not believe that infla- tion has had any material effect on the Company’s business over the past three years. Quantitative and Qualitative Disclosure About Market Risk Interest Rate Risk T h e C o m p a n y ’ s d e b t f i n a n c i n g a l t e r n a t i v e s 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 L I B O R w o u l d i m p a c t t h e C o m p a n y ’ s i n t e r e s t expense, except for the fact that the outstanding balance under this facility at March 31, 2001, was $0. The Company has not historically used interest rate swaps, interest rate caps, or other derivative finan- cial instruments for the purpose of hedging fluctua- tions in interest rates on its floating rate debt. 18 Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) Foreign Currency Exchange Rate Risk A portion of the Company’s sales to its customers in Europe are denominated in local European cur- rencies, thereby creating an exposure to foreign currency exchange rate risk. Also, a portion of the C o m p a n y ’ s c o s t i n i t s M e x i c a n o p e r a t i o n s i s denominated in Mexican pesos, creating an expo- sure to exchange rate risk. In order to minimize its exposure to such risk, the Company will periodically enter into forward foreign exchange contracts in w h i c h t h e n e t l o n g o r s h o r t p o s i t i o n i n a l o c a l E u r o p e a n c u r r e n c y o r M e x i c o p e s o i s h e d g e d against the U.S. dollar. The impact of changes in the relationship of other currencies to the U.S. dollar has 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 instru- ments for speculative purposes or if there is no underlying business transaction supporting or relat- ed to the derivative financial instrument. Commodity Price Risk The Company purchases various precious metals used in the manufacture of capacitors and is there- fore exposed to certain commodity price risks. These precious metals consist primarily of palladium and tantalum. Palladium is a precious metal used in the manu- facture of multilayer ceramic capacitors and is m i n e d p r i m a r i l y i n R u s s i a a n d S o u t h A f r i c a . Currently, the Company uses forward contracts and spot buys to secure the acquisition of palladium and manage the price volatility in the market. There has been a dramatic increase in the price of palladi- um attributed to delays from the Russian supply of the metal which has caused the price to fluctuate between $554 and $1,090 per troy ounce during fis- cal year 2001. As a result, the Company is aggres- sively pursuing ways to reduce palladium usage in ceramic capacitors and minimize the price risk. Tantalum powder is a metal used in the manufac- ture of tantalum capacitors and is primarily purchased under annual contracts. Management believes the tantalum needed has generally been available in suf- ficient quantities to meet manufacturing requirements. However, the increase in demand for tantalum capacitors during fiscal year 2001, along with the limited number of tantalum powder suppliers, led to increases in tantalum prices and impacted availabili- ty. Tight supplies of tantalum raw material and some tantalum powders caused the price to increase from under $50 per pound early in calendar 2000 to over $300 per pound late in the year. The Company was able to pass price increases to its customers due to the strong demand for capacitors but may not be able to do so in the future. Although the price of tan- talum is down from its peak, the Company is explor- ing various alternative sources of supply to ensure a supply of tantalum at reasonable prices. Independent Auditors’ Report 19 The Board of Directors KEMET Corporation: We have audited the accompanying consolidated balance sheets of KEMET Corporation and subsidiaries as of March 31, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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 suppor ting 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Greenville, South Carolina April 27, 2001 20 KEMET Corporation and Subsidiaries Consolidated Balance Sheets Dollars in Thousands Except per Share Data ASSETS Current assets: Cash and cash equivalents Short-term investments (note 15) Accounts receivable, net (notes 10 and 11) Inventories: Raw materials and supplies Work in process Finished goods Total inventories Prepaid expenses and other current assets (note 15) Deferred income taxes (note 7) Total current assets Property and equipment, net (note 11) Intangible assets, net (note 2) Other assets March 31, 2001 2000 $ 360,758 - 96,583 79,002 81,975 41,300 202,277 50,493 35,018 745,129 567,262 44,027 10,112 $ 75,735 123,687 94,127 53,532 58,220 19,207 130,959 4,688 20,099 449,295 423,399 46,198 8,364 Total assets $1,366,530 $927,256 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade (note 10) Accrued expenses (notes 11) Income taxes payable Total current liabilities Long-term debt, excluding current installments (note 3) Other non-current obligations (note 4) Deferred income taxes (note 7) Total liabilities Stockholders' equity (notes 8, 13 and 16): Common stock, par value $.01, authorized 300,000,000 shares, issued 87,619,517 and 87,025,908 shares at March 31, 2001 and 2000, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock, at cost (1,600,040 shares at March 31, 2001) Total stockholders' equity $ 201,767 49,229 34,078 285,074 100,000 51,084 44,196 480,354 876 322,068 590,192 2,355 (29,315) 886,176 $123,708 42,045 23,388 189,141 100,000 54,757 35,902 379,800 870 308,724 237,846 16 - 547,456 Contingencies and commitments (notes 10 and 12) Total liabilities and stockholders' equity $1,366,530 $927,256 See accompanying notes to consolidated financial statements. KEMET Corporation and Subsidiaries Consolidated Statement of Earnings 21 Dollars in Thousands Except per Share Data 2001 2000 1999 Years ended March 31, Net sales Operating costs and expenses: Cost of goods sold, exclusive of depreciation Selling, general and administrative expenses Research and development Depreciation and amortization $1,406,147 $822,095 $565,569 693,659 55,713 26,188 63,601 569,706 48,457 23,918 55,699 428,409 46,552 21,132 46,872 Total operating costs and expenses 839,161 697,780 542,965 Operating income Other income and expense: Interest income Interest expense Other (note 11) Earnings before income taxes Income tax expense (note 7) 566,986 124,315 22,604 (16,713) 7,507 7,892 568,300 215,954 (2,079) 9,135 11,695 105,564 35,445 - 9,287 4,273 9,044 2,894 Net earnings $ 352,346 $ 70,119 $ 6,150 Net earnings per share (notes 13, 14 and 16): Basic Diluted $4.05 $4.00 $0.87 $0.85 $0.08 $0.08 Weighted-average shares outstanding: Basic Diluted 86,930,965 88,181,118 80,650,376 82,411,634 78,441,440 79,027,860 See accompanying notes to consolidated financial statements. 22 KEMET Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity and Comprehensive Income Dollars in Thousands Balance at March 31, 1998 Comprehensive income: Net earnings Foreign currency translation gain Total comprehensive income Exercise of stock options (note 8) Tax benefit on exercise of stock options Balance at March 31, 1999 Comprehensive income: Net earnings Foreign currency translation loss Total comprehensive income Purchases of stock by Employee Savings Plan 135,322 Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Retained Earnings Comprehensive Treasury Income Stock 78,321,358 $783 $143,908 $161,577 $ (8) - - 53,120 - - - - - 2 - - 164 72 946 6,150 - - - - - 80 - - - 78,509,800 785 145,090 167,727 72 - - - - - - Exercise of stock options (note 8) 1,944,260 20 11,052 Tax benefit on exercise of stock options - Purchases of stock by Employee Savings Plan 71,848 - - 9,315 724 Secondary offering (note 16) 6,500,000 65 142,543 87,025,908 870 308,724 237,846 Balance at March 31, 2000 Comprehensive income: Net earnings Unrealized gain on foreign exchange contracts, net of tax $1,398 Foreign currency translation loss Total comprehensive income Exercise of stock options (note 8) Tax benefit on exercise of stock options - - - 549,720 - Purchases of stock by Employee Savings Plan 43,889 Put options proceeds (note 13) - Treasury stock purchases (note 16) (1,600,040) - - - 5 - 1 - - - - - 3,204 4,325 1,094 4,721 - 352,346 - - - - - - - 70,119 - - - - - - (56) - - - - 16 - 2,594 (255) - - - - - Total Stockholders’ Equity $306,260 6,150 80 6,230 164 72 948 313,674 70,119 (56) 70,063 11,072 9,315 724 142,608 547,456 352,346 2,594 (255) 354,685 3,209 4,325 1,095 4,721 - - - - - - - - - - - - - - - - - - - - - (29,315) (29,315) Balance at March 31, 2001 86,019,477 $876 $322,068 $590,192 $2,355 $(29,315) $886,176 See accompanying notes to consolidated financial statements. KEMET Corporation and Subsidiaries Consolidated Statements of Cash Flows 23 Dollars in Thousands Sources (uses) of cash: Operating activities: Net earnings Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization Postretirement and unfunded pension Loss on sale and disposal of equipment Deferred income taxes Changes in other non-current assets and liabilities Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses Accounts payable, trade Accrued expenses and income taxes Net cash from operating activities Investing activities: Purchase of short-term investments Proceeds from maturity of short-term investments Additions to property and equipment Other Net cash used by investing activities Financing activities: Proceeds from sale of common stock to Employee Savings Plan Proceeds from exercise of stock options including related tax benefit Proceeds from secondary offering Proceeds from put options (note 13) Purchases of treasury stock Net proceeds from (payments to) revolving loan and demand note Issuance of senior notes, net of debt issue costs Net cash provided by financing activities Net increase (decrease) in cash Cash and cash equivalents at beginning of period Years ended March 31, 2000 2001 1999 $ 352,346 $ 70,119 $ 6,150 63,601 (3,662) 5,266 (6,625) (1,759) (2,456) (71,318) (45,805) 78,059 17,874 385,521 (202,354) 326,041 (210,559) 2,339 (84,533) 1,095 7,534 - 4,721 (29,315) - - (15,965) 285,023 75,735 55,699 (14,586) 11,579 2,931 (2,950) (38,025) (5,140) (55) 58,958 39,187 177,717 (123,687) - (82,009) 81 (205,615) 724 20,387 142,608 - - (64,000) - 99,719 71,821 3,914 46,872 (236) 985 9,997 (782) 4,256 (11,136) (36) (23,961) (11,292) 20,817 - - ( 59,047) ( 197) ( 59,244) 947 236 - - - (60,000) 99,357 40,540 2,113 1,801 Cash and cash equivalents at end of period $ 360,758 $ 75,735 $ 3,914 Supplemental Cash Flow Statement Information: Interest paid Income taxes paid See accompanying notes to consolidated financial statements. $7,361 $ 209,186 $ 9,477 $ 7,179 $ 7,730 $ 3,065 24 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements Note 1: Organization and Significant Accounting Policies Nature of Business and Organization: KEMET C o r p o r a t i o n a n d s u b s i d i a r i e s ( “ K E M E T ” o r t h e “Company”) is the world’s largest manufacturer of solid tantalum capacitors, the fourth largest manufac- turer of multilayer ceramic capacitors, and a leader in the development of solid aluminum capacitors. The Company is headquartered in Greenville, South Carolina, and has thirteen manufacturing plants located in South Carolina, North Carolina, and Mexico. Additionally, the Company has wholly- owned foreign subsidiaries which primarily sell KEMET’s products in foreign markets. Principles of Consolidation: The accompanying consolidated financial statements of the Company i n c l u d e t h e a c c o u n t s o f i t s w h o l l y - o w n e d s u b - sidiaries. Intercompany balances and transactions have been eliminated in consolidation. Cash Equivalents: Cash equivalents consist of direct obligations of U.S. government agencies and investment-grade commercial paper with an initial term of less than three months. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original matu- rities of three months or less to be cash equivalents. Short-Term Investments: Short-term investments consist of direct obligations of U.S. government agencies and investment-grade commercial paper w i t h o r i g i n a l m a t u r i t i e s o f g r e a t e r t h a n t h r e e months, but less than one year. These investments are considered to be held-to-maturity and are there- fore stated at cost that approximates market value. Derivative Financial Instruments: Derivative finan- cial instruments are utilized by the Company to reduce exposures to volatility of foreign currencies and commodities impacting the cost of its products. The Company does not enter into financial instru- ments for trading or speculative purposes. Effective O c t o b e r 1 , 2 0 0 0 , t h e C o m p a n y a d o p t e d S F A S No.133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No.138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including cer- tain derivative instruments embedded in other con- t r a c t s a n d h e d g i n g a c t i v i t i e s . I t r e q u i r e s t h e recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet and measurement of those instruments at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. For derivatives designated as cash flow hedges, to the extent effective, changes in fair value are recognized in accumulated other compre- hensive income until the hedged item is recognized in earnings. Ineffectiveness is recognized immedi- ately in earnings. For derivatives designated as fair value hedges, changes in fair value are recognized in earnings. Prior to adoption of SFAS No.133, the Company recorded gains and losses related to the hedges of forecasted foreign currency transactions directly to earnings ("Other income and expense"), and gains and losses related to hedges of firm com- mitments were deferred and recognized in earnings as adjustments of carrying amounts when the trans- actions occurred. The adoption of SFAS No. 133 did not result in a significant transition adjustment and is therefore not separately captioned in the statement of earnings as cumulative effect of a change in accounting principle. The transition adjustment as of October 1, 2000, was a gain of approximately $0.9 million net of tax, and is included in cost of goods sold for the period. Inventories: Inventories are stated at the lower of cost or market. These costs do not include depreci- ation or amortization, the impact of which is not material to the consolidated financial statements. The cost of most inventories is determined by the “first-in, first-out”(FIFO) method. Approximately 7% and 6% of inventory costs of certain raw materials at March 31, 2001 and 2000, 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 $902 and $854 higher than reported at March 31, 2001 and 2000, respectively. Property and Equipment: Property and equipment are carried at cost. Depreciation is calculated princi- pally using the straight-line method over the esti- m a t e d u s e f u l l i v e s o f t h e r e s p e c t i v e a s s e t s . 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 respec- tive leases. Expenditures for maintenance are expensed; expenditures for renewals and improve- ments are generally capitalized. Upon sale or retire- ment of property and equipment, the related cost and accumulated depreciation are removed and any gain or loss is recognized. Reviews are regularly KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 25 performed to determine whether facts and circum- s t a n c e s e x i s t w h i c h i n d i c a t e t h a t t h e c a r r y i n g amount of assets may not be recoverable. The Company assesses the recoverability of its assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining life against their respec- tive carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Intangible Assets: Patents and technology are amortized using the straight-line method over twen- ty-five years. Goodwill and trademarks are amor- t i z e d u s i n g t h e s t r a i g h t - l i n e m e t h o d o v e r a forty-year period. The Company assesses the recov- erability 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 impair- ment, if any, is measured based on projected dis- c o u n t e d f l o w s . T h e assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved. f u t u r e o p e r a t i n g c a s h Other Assets: Other assets consist principally of the cash surrender value of life insurance policies. Deferred Income Taxes: I n c o m e t a x e s a r e accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differ- ences 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 liabili- ties 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. The effect on deferred tax assets and liabilities of a change in tax rates is rec- ognized in income in the period that includes the enactment date. Stock-based Compensation: T h e C o m p a n y a p p l i e s t h e i n t r i n s i c v a l u e - b a s e d m e t h o d o f 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 S F A S N o . 1 2 3 , “ A c c o u n t i n g f o r S t o c k B a s e d Compensation,” which provide pro forma disclosure of earnings as if stock compensation were recog- nized 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. Foreign Operations: Financial statements of the Company’s Mexican operations are prepared using the U.S. dollar as its functional currency. Translation of the Mexican operations, as well as gains and losses from non-U.S. dollar foreign currency trans- actions, such as those resulting from the settlement of foreign receivables or payables, are reported in t h e C o n s o l i d a t e d S t a t e m e n t s o f E a r n i n g s . Translation of other foreign operations to U.S. dol- lars occurs using the current exchange rate for bal- ance sheet accounts and an average exchange rate for results of operations. Such translation gains or losses are recognized as a component of equity in “Accumulated Other Comprehensive Income.” Comprehensive Income: Comprehensive income consists of net earnings and foreign currency trans- lation gains or losses and unrealized gains and losses from forward contracts and is presented in t h e C o n s o l i d a t e d S t a t e m e n t s o f S t o c k h o l d e r s ' Equity and Comprehensive Income. 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). The Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin No.101 (the "SAB") effective January 1, 2001. The SAB requires that a company recognize revenue only when all of the following criteria are met: (1) Persuasive evidence of an arrangement exists; (2) Delivery has occurred or services have been ren- dered; (3) The seller's price to the buyer is fixed or determinable; and (4) Collectibility is reasonably 26 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) gent 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. Reclassification: Certain prior year amounts have been reclassified to conform to 2001 presentation and for the effect of the June 1, 2000, stock split (see note 16). Note 2: Intangible Assets Intangible assets consist of the following: March 31, Dollars in Thousands 2001 2000 Goodwill Trademarks Patents and technology Other Accumulated amortization $40,709 $40,709 10,000 12,000 1,143 63,852 19,825 10,000 12,000 1,143 63,852 17,654 Net intangible assets $44,027 $46,198 assured. Upon adoption of the SAB, there was no impact on the Company's results of operations or financial condition. Earnings per Share: The Company calculates e a r n i n g s p e r s h a r e i n a c c o r d a n c e w i t h S F A S No.128, “Earnings per Share.” 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 i n c r e m e n t a l s h a r e s a t t r i b u t e d t o o u t s t a n d i n g options to purchase common stock. On June 1, 2000, the Company issued additional shares in con- nection with the two-for-one stock split. The per c o m m o n s h a r e a m o u n t s i n t h e C o n s o l i d a t e d Financial Statements and accompanying notes have been adjusted to reflect the stock splits. Environmental Cost: The Company recognizes lia- bilities for environmental remediation when it is probable that a liability has been incurred and can be reasonably estimated. The Company determines its liability on a site-by-site basis, and it is not dis- counted or reduced for possible recoveries from insurance carriers. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Business Segments: The Company has deter- m i n e d , u s i n g t h e c r i t e r i a i n S F A S N o . 1 3 1 , "Disclosures about Segments of an Enterprise and Related Information," that it operates in a single reporting segment. The Company's products may be categorized generally based upon primary raw material (tantalum or ceramic) or method of attach- ment (surface-mount or leaded), and are sold to original equipment manufacturers, electronics man- ufacturing services providers, and electronics dis- tributors. Two customers each accounted for more than 10% of net sales in the fiscal year ended March 31, 2001, and one customer accounted for more than 10% of net sales in the fiscal years ended March 31, 2000 and 1999. Geographic information is included in note 9. 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 contin- KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 27 Note 3: Debt A summary of long-term debt follows: Dollars in Thousands Senior notes, interest payable semiannually at a rate of 6.66% with a final maturity date of May 4, 2010 March 31, 2001 2000 $100,000 100,000 - $100,000 100,000 - Less current installments Long-term debt, excluding current installments In May 1998, the Company sold $100,000 of its S e n i o r N o t e s p u r s u a n t t o t h e t e r m s o f a N o t e Purchase Agreement dated May 1, 1998, between the Company and the eleven purchasers of the Senior Notes named therein. The Senior Notes have a final maturity date of May 4, 2010, and begin amor- tizing on May 4, 2006. The Senior Notes bear inter- est at a fixed rate of 6.66%, with interest payable semiannually beginning November 4, 1998. The aggregate maturities of the debt subsequent to March 31, 2001, follow: 2007, $20,000; 2008, $20,000; 2009, $20,000; 2010, $20,000; and 2011, $20,000. The Company had two unsecured and unused credit facilities during the fiscal year ended March 31, Note 4: Other Non-Current Obligations Non-current obligations are summarized as follows: Dollars in Thousands Unfunded projected pension benefit obligation (note 5) Unfunded postretirement medical plans (note 6) Other Other non-current obligations $100,000 2001: a $150.0 million revolving credit facility and a $10.0 million swingline credit facility. The annual fee for the revolving credit facility is approximately $190 and both facilities expire on October 18, 2002. $100,000 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, 2001, the Company was in compliance with such covenants. Borrowings a r e s e c u r e d b y g u a r a n t e e s o f c e r t a i n o f t h e Company's wholly owned subsidiaries. March 31, 2001 $12,098 36,820 2,166 $51,084 2000 $18,337 34,243 2,177 $54,757 Included as a part of other non-current obligations is the Company's accrual for environmental liabilities. 28 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 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 require- ments. The Plan provides defined benefits that are based on years of credited service, average compen- sation (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 deter- mined by an independent actuarial firm using the “ p r o j e c t e d u n i t c r e d i t ” a c t u a r i a l c o s t m e t h o d . 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 Service cost Interest cost Expected return on assets Amortization of: Transition asset Prior service cost Actuarial loss Gain on curtailment of employee benefit plan Years ended March 31, 2001 $4,246 8,462 (8,862) (6) (84) - - 2000 $4,544 8,071 (6,323) (6) (83) 650 - Total net periodic pension cost $3,756 $6,853 The weighted-average rates used in determining pension cost for the Plan are as follows: Discount rate Rate of compensation increase Expected return on plan assets Years ended March 31, 2001 7.0% 5.0% 9.0% 2000 7.50% 5.00% 9.00% 1999 $3,472 6,494 (6,084) (6) (90) - (1,818) $1,968 1999 7.00% 4.00% 9.50% KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 29 A reconciliation of the Plan’s projected benefit obligation, fair value of the Plan assets, and funding status is as follows: Dollars in Thousands Projected benefit obligation: March 31, 2001 2000 Net obligation at beginning of year $111,698 $ 96,830 Service cost Interest cost Actuarial (gain) loss Gross benefits paid Net benefit obligation at end of year Fair value of plan assets: 4,246 8,462 8,991 (4,739) $128,658 4,544 8,071 7,164 (4,911) $111,698 Fair value of plan assets at beginning of year $ 94,880 $ 62,153 Actual return on plan assets Employer contributions Gross benefits paid (7,743) 11,500 (4,739) 11,343 26,295 (4,911) Fair value of plan assets at end of year $ 93,898 $ 94,880 Funding status: Funded status at end of year Unrecognized net actuarial (gain) loss Unrecognized prior service cost Unrecognized net transition obligation (asset) $ (34,760) $ (16,818) 31,687 (399) - 6,091 (482) (7) Net amount recognized at end of year $ (3,472) $ (11,216) T h e C o m p a n y s p o n s o r s a n u n f u n d e d D e f e r r e d 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 pen- sion plan if the plan was not limited by the Employee Retirement Security Act of 1974 and the Internal Revenue Code. Expenses related to the deferred compensation plan totaled $1,504 in fiscal 2001, $988 in fiscal 2000, and $885 in fiscal 1999. Total benefits accrued under this plan were $8,626 at March 31, 2001, and $7,121 at March 31, 2000. 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 exe- cution of salary reduction agreements. In addition, the participants may elect to make after-tax contribu- tions. The Company will make annual matching con- tributions to the Savings Plan of 30% to 50%. The Company contributed $2,061 in fiscal 2001, $1,801 in fiscal 2000, and $1,786 in fiscal 1999. 30 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) Note 6: Postretirement Medical and Life Insurance Plans The Company provides health care and life insurance benefits for certain retired employees who reach retire- ment age while working for the Company. The components of the expense for postretirement medical and life insurance benefits are as follows: Dollars in Thousands Service cost Interest cost Amortization of actuarial gain Curtailment gain Total net periodic benefits cost Years ended March 31, 2001 $1,268 2,985 111 - $4,364 2000 $1,479 2,834 248 - $4,561 1999 $ 701 2,086 (23) (611) $2,153 A reconciliation 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 Projected benefit obligation: March 31, 2001 2000 Net obligation at beginning of year $ 40,396 $ 29,241 Service cost Interest cost Actuarial (gain) loss Gross benefits paid Net benefit obligation at end of year Fair value of plan assets: Employer contributions Gross benefits paid Fair value of plan assets at end of year Funding status: Funded status at end of year Unrecognized net actuarial (gain) loss Net amount recognized at end of year 1,268 2,985 347 (1,786) $ 43,210 $ 1,786 (1,786) $ - $(43,210) 6,390 $(36,820) 1,479 2,834 8,880 (2,038) $ 40,396 $ 2,038 (2,038) $ - $(40,396) 6,153 $(34,243) KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 31 The weighted-average rates used in determining postretirement medical and life insurance costs are as follows: Dollars in Thousands Discount rate Rate of compensation increase Years ended March 31, 2001 7.00% 5.00% 2000 7.50% 5.00% 1999 7.00% 4.00% Health care cost trend on covered charges 8.0% decreasing to 9.5% decreasing to 8.0% decreasing to ultimate trend of ultimate trend of ultimate trend of 6.0% in 2008 7.0% in 2008 7.0% in 2008 Sensitivity of retiree welfare results: Effect of a one percentage point increase in assumed health care cost trend: (cid:127) on total service and interest cost components (cid:127) on postretirement benefit obligation Effect of a one percentage point decrease in assumed health care cost trend: (cid:127) on total service and interest cost components (cid:127) on postretirement benefit obligation $ 143 $ 933 $(131) $(885) Note 7: Income Taxes The components of earnings before income taxes consist of: $ 538 $3,487 $ (472) $(3,196) Dollars in Thousands Domestic Foreign Years ended March 31, 2001 $530,128 38,172 $568,300 2000 $ 91,373 14,191 $105,564 $ 140 $1,023 $ (128) $ (970) 1999 $4,449 4,595 $9,044 The provision for income tax expense for continuing operations: Dollars in Thousands 2001 2000 1999 Years ended March 31, Current: Federal State and local Foreign Deferred: Federal State and local Foreign Provision for income taxes $197,522 16,384 10,071 223,977 (7,859) (499) 335 (8,023) $215,954 $27,342 1,051 4,121 32,514 2,568 193 170 2,931 $35,445 $(9,810) 232 2,475 (7,103) 9,969 447 (419) 9,997 $ 2,894 32 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows: Statutory federal income tax rate State income taxes, net of federal taxes Foreign sales corporation Goodwill amortization Other Effective income tax rate Years ended March 31, 2001 35.0% 1.9 (1.8) .1 2.8 2000 35.0% .8 (1.9) .3 (0.6) 38.0% 33.6% 1999 35.0% 4.9 (10.7) 3.8 (1.0) 32.0% The components of deferred tax assets and liabilities are as follows: Dollars in Thousands Deferred tax assets: Pension benefits Medical benefits Sales and product allowances All other Deferred tax liabilities: Depreciation and differences in basis Amortization of intangibles Tax effect of hedging All other Net deferred income tax liability March 31, 2001 2000 $ 4,424 $ 6,768 14,296 35,853 1,896 56,469 (57,095) (4,678) (1,398) (2,476) (65,647) $ (9,178) 12,116 15,911 5,365 40,160 (50,892) (5,071) - - (55,963) $(15,803) The net deferred income tax liability is reflected in the accompanying 2001 and 2000 balance sheets as a $35,018 and $20,099 current asset and a $44,196 and $35,902 non-current liability, respectively. Based on the scheduled reversal of deferred tax liabili- ties and projected future taxable income, the Company believes that the deferred tax assets will ultimately be realized. Accordingly, no valuation allowance has been provided for in 2001 or 2000. Note 8: Stock Option Plans The Company has two option plans that reserve shares of common stock for issuance to executives and key employees. The Company has adopted the disclosure- At March 31, 2001, unremitted earnings of the sub- sidiaries outside the United States were deemed to be permanently invested. No deferred tax liability was rec- ognized with regard to such earnings. It is not practica- ble to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. only provisions of Statement of Financial Accounting S t a n d a r d s N o . 1 2 3 , " A c c o u n t i n g f o r S t o c k - B a s e d Compensation." On July 1, 2000, the Company adopted KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 33 I n t e r p r e t a t i o n N o . 4 4 , t h e p r o v i s i o n s o f F A S B "Accounting for Certain Transactions Involving Stock Compensation," which requires variable accounting treatment on certain re-priced options. This requires that any increase in the stock price above the July 1, 2000, adoption date stock price be recognized immedi- ately as compensation expense. For fiscal years 2001, 2000, and 1999, no compensation cost has been recog- Years ended March 31, Dollars in Thousands Except per Share Data Net earnings Earnings per share: Basic Diluted As reported Pro forma As reported Pro forma As reported Pro forma 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 2001 is not representa- tive 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 2001, 2000, and 1999; a risk-free interest rate of 5.1% for 2001, 6.8% for 2000, and 5.4% for 1999; expected volatility of 58.0% for 2001, 49.7% for 2000, and 45.1% for 1999; and a dividend yield of 0.0% for all three years. U n d e r t h e 1 9 9 2 E x e c u t i v e S t o c k O p t i o n P l a n approved by the Company in April 1992, 1,905,120 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 2,310,000 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 nized 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 years 2001, 2000, and 1999, 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: 2001 $352,346 $348,628 $4.05 $4.01 $4.00 2000 $70,119 $64,286 $0.87 $0.80 $0.85 1999 $6,150 $4,203 $0.08 $0.06 $0.08 $3.95 $0.78 of options to purchase 3,800,000 shares of common stock to certain executives. $0.06 These plans provide that shares granted come from the Company’s authorized but unissued common stock. The price of the options granted thus far pur- suant to these plans is 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 and Executive Stock Option Plan, effective February 1, 1999, and April 1, 1999, respectively. Under this program, options to purchase 658,260 shares under the Key Employee Stock Option Plan and 1,048,000 shares under the Executive Stock Option Plan at prices ranging from $9.63 to $16.07 per share were canceled and reis- sued at $5.00 and $6.00 per share, respectively. The reissued price was the fair market value at the time. The vesting date of the options originally granted in 1995 and 1996 was changed to April 2000. The vest- ing date for those options originally issued in 1997 remains at October 1999. 34 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) A summary of the status of the Company’s three stock option plans as of March 31, 2001, 2000, and 1999, and changes during the years ended on those dates, is presented below: Fixed Options Options outstanding at beginning of year Options granted Options exercised Options canceled 2001 Weighted- Average Exercisable Price Shares March 31, 2000 Weighted- Average Exercisable Price Shares 1999 Weighted- Average Exercisable Price Shares 2,632,020 $10.09 3,286,000 $ 6.81 2,502,040 $10.10 828,000 17.51 2,379,000 10.71 1,869,140 (549,720) 5.62 (1,944,260) (69,280) 11.10 (1,088,720) 5.83 9.66 (53,120) (1,032,060) 12.55 5.48 3.51 Options outstanding at end of year 2,841,020 $13.12 2,632,020 $10.09 3,286,000 $6.81 Option price range at end of year $2.50 to $19.38 $2.50 to $16.07 $2.50 to $16.07 Option price range for exercised shares $2.50 to $16.07 $2.50 to $16.07 $2.50 to $7.10 Options available for grant at end of year Options exercisable at year-end Weighted-average fair value of options 2,647,870 723,020 1,412,590 504,210 2,414,580 624,860 granted during the year $9.61 $7.54 $2.69 The following table summarizes information about stock options outstanding at March 31, 2001: Range of Exercisable Prices $2.50 $5.00 to $6.75 $14.50 to $19.38 Options Outstanding Options Exercisable Number Outstanding at 3/31/01 9,200 Weighted-Average Remaining Contractual Life 1.6 years Weighted-Average Exercisable Price $ 2.50 713,820 2,118,000 2,841,020 6.0 years 9.0 years 8.2 years $ 5.62 $15.70 $13.12 Number Exercisable at 3/31/01 9,200 713,820 - 723,020 Weighted-Average Exercisable Price $2.50 $5.62 - $5.58 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 35 Note 9: Geographic Information The following geographic information includes net sales based on product shipment destination (1): Dollars in Thousands United States Asia Pacific Germany Mexico (2) Other countries (3) 2001 $ 642,406 273,853 124,980 86,779 278,129 $1,406,147 Years ended March 31, 2000 $408,890 190,289 49,670 - 173,246 $822,095 1999 $293,427 119,938 34,142 - 118,062 $565,569 (1) Revenues are attributed to countries or regions based on the location of the customer. The Company sold $231,801 and $148,158 to two customers and each accounted for more than 10% of net sales in the fiscal year ended March 31, 2001. One customer accounted for more than 10% of net sales as the Company sold $129,600 and $59,367 to it in the fiscal years ended March 31, 2000 and 1999, respectively. (2) Did not exceed 5% of sales in 2000 and 1999 and included with "Other countries." (3) No country in this group exceeded 5% of consolidated net sales. The following geographic information includes long-lived assets based on physical location: March 31, 2000 Dollars in Thousands 2001 United States Mexico Other $314,980 251,331 951 $243,385 179,092 922 1999 $247,966 157,795 974 Note 10: Commitments (a) The Company has agreements with distributor cus- tomers 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 pro- vision 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 $4,000 to guarantee this recourse provision. The Company transferred receivables and incurred factoring costs of $529,946 and $5,236 in fiscal 2001, $372,656 and $3,444 in fiscal 2000, and $258,619 and $2,988 in fiscal 1999. Included in accounts payable, trade, is $30,310 and $44,212 at March 31, 2001 and 2000, respectively, which represents factored receivables collected but not remitted. $567,262 $423,399 $406,735 (c) The Company’s leases consist primarily of manufactur- ing equipment and expire principally between 2001 and 2006. A number of leases require that the Company pay certain executory costs (taxes, insurance, and mainte- nance) and certain renewal and purchase options. Annual rental expense for operating leases are included in results of operations and were approximately $7,346 in fiscal 2001, $8,300 in fiscal 2000, and $10,229 in fiscal 1999. Future min- imum lease payments over the next five years under non- cancelable operating leases at March 31, 2001, are as follows: Dollars in Thousands 2002 2003 2004 2005 2006 Total $3,997 2,245 852 422 50 $7,566 36 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) Note 11: Supplementary Balance Sheet and Income Statement Detail Dollars in Thousands Accounts receivable: Trade Other Total accounts receivable Less: Allowance for doubtful accounts Allowance for price protection and customer returns (note 10) March 31, 2001 2000 $143,681 $103,139 6,273 149,954 882 52,489 6,767 109,906 262 15,517 Net accounts receivable $ 96,583 $ 94,127 Property and equipment, at cost Land and land improvements Buildings Machinery and equipment Furniture and fixtures Construction in progress Total property and equipment Accumulated depreciation Useful Life 20 years 20-40 years 10 years 4-10 years $ 12,817 $ 12,946 94,462 653,645 41,368 75,894 878,186 310,924 86,465 522,514 36,989 41,326 700,240 276,841 Net property and equipment $567,262 $423,399 Accrued expenses: Salaries, wages and related employee costs Vacation Other Total accrued expenses Dollars in Thousands Other (income)/expense: Loss on retirement of assets Accounts receivable discounting Unrealized gain on foreign currency forward contracts Other $ 23,795 $ 18,254 9,526 15,908 8,752 15,039 $ 49,229 $ 42,045 Years ended March 31, 2001 2000 1999 $3,380 5,236 (941) 217 $ 9,405 3,444 (1,682) 528 $ 985 2,988 - 300 $7,892 $11,695 $4,273 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 37 Note 12: Legal Proceedings T h e C o m p r e h e n s i v e E n v i r o n m e n t a l R e s p o n s e , 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 sub- stances 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-initi- ated 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 opera- tions. 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’ compensa- tion 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 lia- bility which might result from an adverse determina- tion of such lawsuits would have a material adverse effect on the Company's financial condition or results of operations. Note 13: Put Options During the fiscal year ended March 31, 2001, the Company sold put options to institutional parties as part of a program to purchase up to 4.0 million (note 16) of its common shares. Premiums generated from the sale of the put options were $4.7 million and have been accounted for as Additional Paid-In Capital. The fair value of the put options at March 31, 2001, totaled $4.4 million. The Company had the maximum potential obligation to purchase 1.9 million shares of its com- mon stock at a weighted average purchase price of $18.31 for an aggregate of $34.8 million at March 31, 2001. The put options are exercisable only at maturity and expire between April and October 2001. The Company has the right to settle the put options through physical settlement or net share settlement using shares of the Company's common stock. 38 KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) Note 14: Earnings Per Share Basic and diluted earnings per share (EPS) are calculated as follows: Dollars in Thousands Except per Share Data 2001 2000 1999 Years ended March 31, Net earnings $352,346 $70,119 $6,150 Weighted-average shares outstanding (Basic) 86,930,965 80,650,376 78,441,440 Stock options 1,250,153 1,761,258 586,420 Weighted-average shares outstanding (Diluted) 88,181,118 82,411,634 79,027,860 Basic earnings per share $4.05 $0.87 $0.08 Diluted earnings per share $4.00 $0.85 $0.08 Note 15: Derivatives, Hedging, and Financial Instruments The Company uses certain derivative financial instruments to reduce exposures to volatility of for- eign currencies and commodities impacting the costs of its products. Hedging Foreign Currencies C e r t a i n o p e r a t i n g e x p e n s e s a t t h e C o m p a n y ' s Mexican facilities are paid in Mexican pesos. In order to hedge these forecasted cash flows, man- a g e m e n t p u r c h a s e s f o r w a r d c o n t r a c t s t o b u y Mexican pesos for periods and amounts consistent with the related underlying cash flow exposures. These contracts are designated as hedges at incep- tion and monitored for effectiveness on a routine basis. At March 31, 2001, the Company had out- standing forward exchange contracts that mature within one year to purchase Mexican pesos with notional amounts of $89.3 million. The fair values of these contracts at March 31, 2001, totaled $5.0 mil- lion, which is recorded as a derivative asset on the Company's balance sheet as other current assets. Changes in the derivatives' fair values are deferred and recorded as a component of "Accumulated Other Comprehensive Income (Loss)" (AOCI), until the underlying transaction is recorded in earnings. When the hedged item affects earnings, gains or losses are reclassified from AOCI to the consolidat- ed statement of earnings as cost of goods sold. The Company anticipates all amounts in AOCI as of March 31, 2001, will be reclassified into earnings w i t h i n o n e y e a r . A n y i n e f f e c t i v e n e s s i n t h e Company's hedging relationships is recognized immediately in earnings. Prior to adoption of SFAS No.133 (as amended by SFAS No.138), the Company recorded gains from foreign currency contracts of $0.9 million, $1.7 mil- lion, and $0 in fiscal 2001, fiscal 2000, and fiscal 1999, respectively, as a component of other income a n d e x p e n s e i n i t s s t a t e m e n t o f e a r n i n g s . Subsequent to adoption of the new standard, the Company recorded $2.8 million of gains from foreign currency contracts as a component of cost of goods sold in fiscal 2001. The Company formally docu- ments all relationships between hedging instru- m e n t s a n d h e d g e d i t e m s , a s w e l l a s r i s k management objectives and strategies for undertak- ing various hedge transactions. KEMET Corporation and Subsidiaries Notes To Consolidated Financial Statements (continued) 39 Hedging Commodity Prices The Company occasionally enters into contracts for the purchase of its raw materials, primarily palladi- u m , w h i c h a r e c o n s i d e r e d t o b e d e r i v a t i v e s o r embedded derivatives with underlyings not clearly and closely related to the host contract. As such, the fair values of these embedded derivatives are recorded on the balance sheet as derivative assets or liabilities and the change in fair values is record- e d a s a c o m p o n e n t o f c o s t o f g o o d s s o l d . A t March 31, 2001, the Company had derivative assets from these embedded derivatives of $3.7 million included in other current assets on the balance sheet, and the change in fair values of such derivatives since adoption of the new standard in fiscal 2001 was a gain of $2.1 million. All other contracts to purchase raw materials qualify for the normal purchases exclusion and are not accounted for as derivatives. Other Financial Instruments The carrying values of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their fair values. The fair value of the Company's debt outstanding at March 31, 2001 and 2000, was $96.5 million and $92.1 million, respectively, which was determined based on quotes from lending institutions. Note 16: Common Stock In August 2000, the Company announced that its Board of Directors had authorized a program to pur- chase up to 4.0 million shares of its common stock in the open market. Through March 31, 2001, the Company had acquired 1.6 million shares for $29.3 million and had outstanding put option obligations for 1.9 million shares with an average exercise price of $18.31. The program was fulfilled in April 2001, at which time the Company announced that its Board of Directors had authorized a second 4.0 million stock purchase program. The amount and timing of purchases will depend on market conditions and other factors. The program will be funded from existing cash and a combination of direct purchases and/or put options may be used to execute the pro- gram. On May 15, 2000, the Company's Board of Directors declared a two-for-one stock split. The record date for the split was May 24, 2000, with distribution of the additional shares on June 1, 2000. All references in the consolidated financial statements to number of shares outstanding, price per share, per share amounts, and stock option plan data have been restated to reflect the split. On January 20, 2000, the Company sold 6,500,000 shares of its common stock in a public offering for $142.6 million in net cash proceeds after deducting underwriting fees and offering expenses. Included in the offering were 2,193,220 shares sold by a stockholder of the Company which were shares of non-voting common stock that were converted into common stock on a share-for-share basis. The net proceeds were used to repay outstanding debt under the Company's short-term credit facility and to fund capital expenditures. Note 17: Joint Venture During the fiscal year ended March 31, 2001, the Company entered into a 50/50 joint venture agree- ment with Australasian Gold Mines NL (AGM) to establish an independent source of tantalum to meet the increasing demand for tantalum capacitors from key customers. This transaction closed in April 2001. The Company's initial investment in the joint venture is approximately $4.9 million. The Company also acquired a 10 percent interest in AGM for approximately $2.3 million. The Company has the right to acquire all processed tantalum products from the initial production plant, which began oper- ations in the quarter ended March 31, 2001, and from any future processing operations of the joint venture. These tantalum products are expected to be toll converted into tantalum powder necessary for the production of capacitors. 40 Board of Directors Officers David E. Maguire Chairman and Chief Executive Officer Charles M. Culbertson II President and Chief Operating Officer Glenn H. Spears (Retired 4/01) Executive Vice President and Secretary Harris L. Crowley Senior Vice President, Technology and Engineering D. Ray Cash Senior Vice President and Chief Financial Officer William W. Johnson Vice President, Sales Worldwide Raymond L. Beck Vice President, Quality and Marketing C. Ross Patterson Vice President and Chief Information Officer Larry W. Sheppard Vice President, Human Resources James A. Bruorton Vice President, Worldwide Distribution Eugene J. DiCianni Vice President, Sales Americas Derek Payne Vice President/Managing Director, Europe Ravi G. Sastry Vice President International Sales Manuel A. Cappella Vice President/Managing Director, Mexico Tantalum James P. McClintock Vice President, Ceramic Operations Dr. Larry A. Mann Vice President, Ceramic Technology Dr. Daniel F. Persico Vice President, Tantalum Technology Michael W. Boone Treasurer/Director of Finance and Secretary David E. Maguire Chairman and Chief Executive Officer Charles M. Culbertson II President and Chief Operating Officer E. Erwin Maddrey, II Chief Executive Officer Maddrey and Associates, an investment and consulting firm Charles E. Volpe Former President and Chief Operating Officer Paul C. Schorr IV Managing Director Citicorp Venture Capital, Ltd. Stewart A. Kohl Managing General Partner The Riverside Company Stock Information Dividend Policy The common stock of KEMET Corporation is traded on The New York Stock Exchange under the symbol KEM. Registrar and Transfer Agent Boston EquiServe Limited Partnership 150 Royall Street Canton, Massachusetts 02021 Inquiries regarding stock transfers, lost certificates, or address changes should be directed to the Stock Transfer Department at the address above. Independent Auditors KPMG LLP Greenville, South Carolina Stockholder Inquiries and Availability of Form 10-K Report A copy of the Company’s annual report on Form 10-K for the year ended March 31, 2001, filed with the Securities and Exchange Commission is available to stockholders free of charge from the following: John Warner, Director of Investor and Public Relations KEMET Corporation Post Office Box 5928 Greenville, South Carolina 29606 Email: investorrelations@kemet.com Website: http://www.kemet.com The Company has not declared or paid any cash dividends on its Common Stock. The Company cur- rently intends to retain earnings to support its growth strategy and does not anticipate paying divi- dends in the foreseeable future. Any future determi- nation to pay dividends will be at the discretion of the Company’s Board of Directors and will depend upon, among other factors, the capital require- ments, operating results, and financial condition of the Company from time to time. Price Range of Common Stock As of December 9, 1999, the Company’s Common S t o c k b e g a n t r a d i n g o n t h e N e w Y o r k S t o c k Exchange under the symbol KEM. Prior to that date, the Common Stock was traded on the Nasdaq Stock Market under the symbol KMET. The following table represents the high and low sale prices of the Common Stock as reported by the appropriate exchange for the periods indicated: High Low Fiscal Year Ended March 31, 2001: $44.22 $24.19 First Quarter Second Quarter Third Quarter Fourth Quarter 33.94 29.19 23.31 Fiscal Year Ended March 31, 2000: First Quarter Second Quarter Third Quarter Fourth Quarter $11.63 16.50 22.69 40.00 On June 1, 2001, the last sale price of the Common Stock as reported on The New York Stock Exchange was $19.00. 22.50 13.75 14.25 $5.72 10.57 13.19 16.00 CORPORATE OFFICES KEMET Corporation Post Office Box 5928 Greenville, South Carolina 29606 (864) 963-6300 SUBSIDIARIES KEMET Electronics Corporation 2835 Kemet Way Simpsonville, South Carolina 29681 KEMET de Mexico S.A. de C.V. Av. Carlos Salazar y Blv. Manuel Cavazos Lerma #15 Matamoros, Tamaulipas, Mexico 87380 KEMET Electronics S.A. 1-3, Avenue de la Paix Ch-1211 Geneva 20 Switzerland KEMET Electronics Asia Ltd. 4A Chuan Hing Industrial Building 14 Wang Tai Road Kowloon Bay, Hong Kong 

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