KEMET® Preferred Supplier of High Performance Solutions 2 0 0 2 A n n u a l R e p o rt K E M E T 2 0 0 2 A n n u a l R e p o rt P r o f i l e KEMET Corporation is the world’s largest manufacturer of solid tantalum capacitors, and a world leader in the manufac- turing of multilayer ceramic capacitors and solid aluminum capacitors. 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 electronic 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. H i g h l i g h t s o f F i s c a l 2 0 0 2 Years ended March 31, (Dollars in thousands except per share data) 2000 2001 2002(2) Net sales Net earnings before nonrecurring charges Net earnings (loss) $822,095 $1,406,147 $508,555 $ 70,119 $ 325,346 $ 16,516 $ 70,119 $ 352,346 $ (27,289) Net earnings before nonrecurring charges/Net sales 8.5% 25.1% 3.2% Net earnings before nonrecurring charges per share, diluted(1) Selling, general and administrative expenses Research and development expenses Fixed asset expenditures Percent debt to capital Year-end number of employees (1) Reflects the impact of 2-for-1 stock split effective June 1, 2000. (2) Excludes nonrecurring, pre-tax charges of $66,537. $ 0.85 $ 48,457 $ 23,918 $ $ $ 4.00 $ 0.19 55,713 26,188 $ 46,626 $ 25,106 $ 82,009 $ 210,559 $ 78,546 15.4% 10.1% 10.5% 14,000 13,900 6,900 Net Sales (In Millions) Earnings Per Share— Diluted Shareholders’ Equity (In Millions) $1,600 1,200 800 400 0 $4.00 3.00 2.00 1.00 0 $1,000 750 500 250 0 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002(2) 1998 1999 2000* 2001 2002 *Includes $143 million from secondary stock offering High-Performance Solutions KEMET produces the most complete line of surface-mount capacitors. Tantalum Multilayer ceramic Solid aluminum KEMET leads the industry in easy-to-buy-from service. Perfect quality Delivered 100% on time Any customer location in the world Competitive prices Being easy to buy from is deeply embedded in KEMET’s corporate culture. A preferred supplier position is earned each day by excelling at delivering solutions, from technology to service, important to customers. KEMET’s mission is to earn and enhance the preferred capacitor very efficient operations that can deliver a high-performance solution supplier position at the most successful electronics equipment to each customer as defined by their needs. In fast-developing companies in the world. We lead our industry in producing high- sectors, like notebook computers, video games, and increasingly performance capacitor solutions, including the world’s most complete broadband infrastructure, advances in electronics are creating new line of surface-mount tantalum, ceramic, and aluminum capacitor demands for innovative capacitor solutions to deliver higher capac- technologies provided with near perfect quality and on-time delivery itance at higher frequencies. In more mature sectors, like PCs and at competitive prices to customer locations worldwide. Electronics wireless handsets, operational excellence is key to simplifying is a high-growth, but cyclical industry. By focusing exclusively on capacitors and by growing organically, KEMET has developed processes and driving out excess costs to deliver products at a competitive price. www.KEMET.com 1 C o m p e t i t i v e P r i c e s T e c h n o l o g y I n n o v a t i v e P r o d u c t s Electronics is a high-growth industry, because each company in the manager’s job is to produce perfect parts delivered 100 percent In recent years, KEMET has made substantial advances in capacitor on-time at declining costs. World-class information technologies technologies, in particular those directed at high-frequency electronics in a product measuring .03 centimeters by .08 centimeters. Recently KEMET introduced the world’s fastest tantalum capacitor, whose electronics supply chain delivers to its customers more value for less cost every year. KEMET’s focused plant concept is key to delivering products at competitive prices while maintaining acceptable profit margins. KEMET has sixteen manufacturing and distribution facilities in the Southeastern United States and Mexico, each focused on a limited number of production processes. Each day, a KEMET plant seamlessly tie together manufacturing facilities thousands of miles apart into a virtual factory. During fiscal 2002, KEMET executed significant productivity enhancement and cost reduction initiatives, positioning KEMET to be cost-competitive as the industry recovers. that require high capacitance, such as microprocessors operating at frequency response approaches that of ceramic, while providing clock speeds of greater than 1 gigahertz. Industry sources estimate that microprocessor speeds will increase three times within the next five years and eight times within the next ten. KEMET is a leader in significantly more capacitance per volume. During fiscal 2002, KEMET introduced solid aluminum capacitors that cost-effectively address certain high-frequency applications. Together, KEMET’s the capacitor technology necessary to manage the power for these tantalum, ceramic, and solid aluminum products represent the most high-frequency microprocessors. High-capacitance ceramics have complete line of high-performance capacitor solutions in the world. evolved from forty to over four hundred layers of ceramic and metal Focused manufacturing in low-cost locations, along with productivity and cost initiatives, allow KEMET to be cost-competitive. M o s t C o m p l e t e L i n e o f S u r f a c e - M o u n t C a p a c i t o r s Ceramic High Capacitance Ceramic Multiple Anode Organic Tantalum (KO-MAT) Aluminum Organic Capacitor (AO-CAP) Multiple Anode Tantalum (MAT) KEMET Organic Capacitor (KO-CAP) Low Resistance Tantalum Commercial Tantalum 1 10 100 1000 C a pa c i ta n c e i n M i c r o fa r a d s ( µ F ) r e t s a F d e e p S r e w o l S The most complete line of surface-mount capacitors allows KEMET to provide the best solution to the customer regardless of technology. 2 www.KEMET.com www.KEMET.com 3 G l o b a l L o g i s t i c s Finished manufactured parts from KEMET’s production plants are using their local currency. As a result, KEMET delivers parts with KEMET’s key customers are among the largest, most successful captured approximately 15 percent of the world electronics manu- transferred from our U.S. Distribution Center in Brownsville, Texas to near perfect quality and on-time delivery to any customer location electronics original equipment manufacturers (OEM), electronic facturing market from facilities acquired from electronics OEMs. local distribution hubs around the world from Asia to Europe. Our benchmark just-in-time logistics systems allow us to provide the kind anywhere in the world. Combined with the focused manufacturing strategy, KEMET’s systems allow the Company to achieve the most manufacturing services (EMS) providers, and distributors. Approxi- mately 35 percent of our revenue is generated through sales to Industry sources anticipate this penetration doubling within five years. KEMET’s service-oriented, easy-to-buy-from philosophy of reliable delivery customers might expect from a local supplier. KEMET’s industry leading, “Easy to Buy From” information systems allow us to do business with local buyers, in their local language, reliable order fulfillment in our industry and among the lowest total distributors, with the remaining split roughly evenly between OEM positions us to grow along with our service-oriented EMS customers. costs in the world. and EMS customers. Over the past decade, our EMS customers have Customers can place an order, receive an on-line confirmation and a delivery date within seconds, and experience on-time delivery anywhere in the world. KEMET’s industry leading service positions the Company to grow along with our customers as they gain market share globally. 4 www.KEMET.com www.KEMET.com 5 S e r v i c e L e t t e r t o O u r S h a r e h o l d e r s Following the most successful year in KEMET’s history, fiscal Significant productivity initiatives were implemented, which will I am particularly enthusiastic about the fiscal 2002 new product 2002 was one of the most challenging. Total sales for fiscal 2002 were $509 million, down from $1.4 billion in fiscal 2001. result in additional cost savings as our industry recovers. On approx- imately one-third of the revenue of the year earlier, KEMET achieved Electronics is a high-growth, but cyclical, industry. During most a break-even level of profitability from the June 2001 quarter through of calendar 2000, shipments in the electronics industry were at an unsustainably high level. Because many customers did not immedi- ately respond to their sales slowdown late in 2000 by reducing the March 2002 quarter, before nonrecurring charges, which is a significant accomplishment by the entire KEMET team. KEMET’s strategy remains earning the preferred supplier purchases of capacitors, by March 2001 some customers had accumu- lated inventory that was five times the normal level prior to the bubble. position at the world’s most successful electronic manufacturers and distributors. To service our key accounts, KEMET incurs selling, To reduce this huge pile of excess inventory, throughout most of general, and administrative (SG&A) expenses of approximately development activities. During the year, Dr. Jeffrey Graves joined KEMET from GE Corporation to accelerate our research and devel- opment. Also during the year, KEMET formally launched the While fiscal 2002 was one of the most challenging in KEMET’s history, I remain optimistic about KEMET’s future. The inventory correction is coming to an end. Electronic end markets are beginning to recover. Our business model, from our focused concept through AO-CAP, a solid surface-mountable aluminum capacitor. This is an our global logistics, is tuned to earning the preferred supplier posi- emerging capacitor sector where we believe we are the technology tion at the world’s most successful electronics companies. We have a leader and are becoming the worldwide market leader. Along with our tantalum and ceramic capacitors, AO-CAPs allow KEMET to deliver to customers the most complete line of surface-mount capac- itor technology in the world. In recent years, KEMET has made sig- broader portfolio of innovative products to capture a larger share of our customers’ capacitor dollars than ever before. We have a strong financial position and one of the most experienced teams in our industry. KEMET’s future is brighter than ever. fiscal 2002 customers purchased new capacitors at a rate that was half $48 million per year, primarily in a direct, salaried sales force and the nificant progress in the development of high-capacitance ceramic the rate at which they were consuming capacitors. In my forty-three years with KEMET, spanning eleven industry cycles, I have never previously experienced a correction of this magnitude and rapidity. KEMET has an experienced management team, and I am supporting information technologies. We consider this a long-term capacitors, which is a high-growth sector, and we will make important investment in our customer relationships, and our SG&A does not new high-capacitance, ceramic capacitor introductions during fiscal vary much from year to year. Likewise, annually, we invest approx- 2003. We continue to make advances in tantalum capacitors in proud of their performance in these exceptional circumstances. Costs innovative capacitor solutions and achieve world class costs. We imately $24 million in research and development (R&D) to create which we are the world leader. Shortly after the end of the fiscal year, KEMET launched the world’s fastest tantalum capacitor targeted at were substantially reduced to adjust to the new level of business. maintain these relatively fixed SG&A and R&D investment costs during power management of high-frequency electronics, such as note- From June 2000 through March 2002, the employee base was a down year like fiscal 2002, and this business model gives us con- books, advanced video games, and high-end servers. David E. Maguire Chairman, Chief Executive Officer, and President reduced from 16,000 to 6,900, as we downsized to match demand. siderable upside leverage when the capacitor industry does recover. With highly efficient operations, a broad portfolio of innovative products, a strong balance sheet, and an experienced management team, KEMET is well positioned for the future. L e a d e r s h i p 6 www.KEMET.com www.KEMET.com 7 D e p t h KEMET as a company is entering its eleventh electronics industry manufacturers and distributors. The Company’s growth has been cycle since it began producing tantalum capacitors in the 1950s. KEMET’s seventeen corporate officers have served the Company entirely organic, resulting in tightly integrated and highly efficient operations. At the end of fiscal 2002, KEMET had a strong balance on average over twenty years and managed through five of those cycles. Since before the Company went public in 1992, the KEMET team has a long history of pursuing a consistent strategy to be the sheet, with over $234 million in cash, $855 million in shareholders’ equity, and only $100 million in long-term debt. As the up cycle begins, KEMET is poised with strong depth in both management preferred capacitor supplier to the world’s most successful electronics and financial resources. back row, left to right: Manuel A. Cappella, Vice President/Managing Director, Mexico Tantalum; James P. McClintock, Vice President, Ceramic Operations; C. Ross Patterson, Vice President and Chief Information Officer; Rick C. Rickenbach, Vice President, Tantalum U.S. front row, left to right: Larry W. Sheppard, Vice President, Human Resources; Harris L. Crowley, Executive Vice President; D. Ray Cash, Senior Vice President and Chief Financial Officer E x p e r i e n c e 8 www.KEMET.com 8 www.KEMET.com Selected Financial Data Dollars in thousands except per share data Income Statement Data: Net sales Operating income (loss) Interest income Interest expense Net earnings (loss) Per Share Data: Net earnings (loss) per share—basic Net earnings (loss) per share—diluted Weighted-average shares outstanding —basic —diluted Balance Sheet Data: Total assets Working capital Long-term debt Stockholders’ equity Other Data: Cash flow from operating activities Capital expenditures Research and development Years ended March 31, 2002 2001 2000 1999 1998 $ 508,555 $1,406,147 $822,095 $565,569 $667,721 (40,365) 566,986 124,315 22,604 82,202 (16,713) (2,079) (9,809) 6,736 7,507 (27,289) 352,346 9,135 70,119 — 9,287 6,150 — 7,305 49,190 $ $ (0.32) (0.32) $ $ 4.05 4.00 $ $ 0.87 0.85 $ $ 0.08 0.08 $ $ 0.63 0.62 85,773,763 86,930,965 80,650,376 78,441,440 78,146,444 85,773,763 88,181,118 82,411,634 79,027,860 78,854,328 $1,171,714 $1,366,530 $927,256 $663,690 $642,109 454,776 100,000 855,045 460,055 100,000 886,176 260,154 100,000 547,456 90,371 144,000 313,674 48,772 104,000 306,260 $ (34,219) $ 392,440 $183,052 $ 20,817 $ 88,153 78,546 25,106 210,559 26,188 82,009 23,918 59,047 21,132 114,516 23,766 KEMET 2002 ANNUAL REPORT 9 Management’s Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Overview KEMET estimates that the compounded annual growth rate for capacitors was approximately 20% during the 1990s. Underlying the strong demand for capacitors is the cyclical nature of the electronics industry. The Company believes that the industry entered into another correction phase of a long-term growth trend during calendar 2001. The Company considers that the rapidity with which this inventory/capacity correction occurred was unprecedented compared to previous cycles. After achieving record revenues and profits in fiscal 2001, demand for capacitors fell considerably in fiscal 2002. Manufacturing throughput was down in response to the decrease in demand, which resulted in the absorption of fixed costs over fewer units than in the same period in the prior year. Combined with nonre- curring charges and decreasing average selling prices, this resulted in an increase in the cost of sales as a percentage of sales in the current year as compared to the prior year. Selling, general, and administrative expenses for the year ended March 31, 2002 were $46.6 million, or 9% of net sales, as compared to $55.7 million, or 4% of net sales, for the year ended March 31, 2001. Selling, general, and administrative expenses decreased compared to the prior year primarily due to the Company’s efforts to control over- head expenses in anticipation of declining capacitor demand. Selling, Comparison of Fiscal Year 2002 to Fiscal Year 2001 general, and administrative expenses increased as a percent of sales Net sales for fiscal year 2002 were $508.6 million, which repre- largely as the result of lower sales in the current year. sented a 64% decrease from fiscal year 2001 net sales of $1,406.1 million. There was a substantial decrease in demand across market segments Research, development, and engineering expenses were $25.1 mil- lion for fiscal year 2002, compared to $26.2 million for fiscal year during the year ended March 31, 2002. The Company believes that 2001. These costs reflect the Company’s continuing commitment to the shipments were down significantly compared to the prior year due to development and introduction of new products, such as aluminum the correction. The Company regards the decline as the most pro- capacitors, along with the improvement of product performance and nounced in its history, and it resulted from two factors. First, customers’ production efficiencies. capacitor consumption fell off as demand turned down. Second, cus- Depreciation, amortization, and impairment charges for the year tomers were purchasing capacitors significantly below their level of ended March 31, 2002 were $109.7 million, as compared to $63.6 mil- consumption as they used up inventory. lion for the prior period. The primary reason for the increase is that The decrease in net sales was attributable to a decline in both tan- $36.8 million of asset impairment charges were reflected in the year talum and ceramic capacitor unit volume and lower average selling ended March 31, 2002. There were no asset impairment charges in the prices. Unit volumes decreased 64% to approximately 12.9 billion year ended March 31, 2001. The increase, net of impairment charges, units in fiscal 2002 from approximately 36.1 billion units in fiscal 2001. was the result of the Company’s investment in additional capacity to After increasing throughout fiscal 2001, average selling prices support existing and new product expansions and reflects the deprecia- decreased each quarter during fiscal 2002. Sales of surface-mount tion on those capital expenditures. capacitors for fiscal 2002 were $399.6 million, a decrease of 72% from The operating loss for the year ended March 31, 2002 was the prior year. Both export and domestic sales decreased 64% to $40.4 million, compared to $567.0 million of operating income in the $277.0 and $231.6 million, respectively. prior year. The change from operating income in the prior year to oper- Cost of sales, exclusive of depreciation, for the year ended March 31, ating loss in the current year resulted primarily from a combination of 2002 was $367.5 million, as compared to $693.7 million for the year the aforementioned lower sales levels, nonrecurring charges, and the ended March 31, 2001. The year ended March 31, 2002 includes approx- corresponding reduction in manufacturing margins. imately $29.8 million of nonrecurring charges (See Nonrecurring Income tax benefit for fiscal year 2002 was $13.4 million, as com- Charges) as opposed to none in the prior year. As a percentage of net pared to income tax expense of $216.0 million in the prior year. The sales, cost of sales, exclusive of depreciation, was 72% for the year ended benefit in the current year versus the expense in the prior year was March 31, 2002, as compared to 49% for the prior year. Excluding the result of a current year pre-tax loss compared to a pre-tax profit in $29.8 million of nonrecurring charges and depreciation expense, cost the prior year. of sales was 66% of sales for the year ended March 31, 2002. 10 KEMET 2002 ANNUAL REPORT Quarterly Results of Operations The following table sets forth certain quarterly information for the years ended March 31, 2002 and 2001. 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 (loss) Net earnings (loss) per share (basic) Net earnings (loss) per share (diluted) Weighted-average shares outstanding (basic) Weighted-average shares outstanding (diluted) Dollars in thousands except per share data Net sales Gross profit (exclusive of depreciation)(1) Net earnings Net earnings per share (basic) Net earnings per share (diluted) Weighted-average shares outstanding (basic) Weighted-average shares outstanding (diluted) Fiscal year ended March 31, 2002 First Quarter $152,721 $ 58,240 $ 13,051 $ $ 0.15 0.15 Second Quarter $120,636 $ 38,254 $ $ $ 990 0.01 0.01 Third Quarter $117,296 $ 14,177 Fourth Quarter Total $117,902 $ 508,555 $ 30,356 $ 141,027 $ (26,919) $ (14,411) $ (27,289) $ $ (0.31) (0.31) $ $ (0.17) (0.17) $ $ (0.32) (0.32) 85,815,664 85,653,867 85,916,721 85,873,025 85,773,763 86,737,292 86,399,931 85,916,721 85,873,025 85,773,763 Fiscal year ended March 31, 2001 First Quarter Second Quarter Third Quarter Fourth Quarter Total $329,169 $159,333 $364,049 $187,875 $374,930 $194,011 $337,999 $1,406,147 $171,269 $ 712,488 $ 80,235 $ 96,264 $ 97,403 $ 78,444 $ 352,346 $ $ 0.92 0.90 $ $ 1.10 1.08 $ $ 1.11 1.10 $ $ 0.91 0.90 $ $ 4.05 4.00 87,324,021 87,414,074 87,416,454 86,362,252 86,930,965 88,915,974 88,804,300 88,678,409 87,414,105 88,181,118 (1) Gross profit (exclusive of depreciation) as a percentage of net sales fluctuates from quarter to quarter due to a number of factors, including net sales fluctuations, nonrecurring charges, product mix, the timing and expense of moving product lines to lower cost locations, and the relative mix of sales between distributors, original equipment manufacturers, and electronic manufacturing services providers. Nonrecurring Charges The Company incurred nonrecurring charges in the quarters ended December 31, 2001 and March 31, 2002. A summary of the nonrecurring charges incurred follows (dollars in millions): Inventory charges Impaired long-lived assets Personnel reductions Joint venture termination Total Quarter ended Classification Dec. 31 Mar. 31 Total COGS* Impairment $13.3 11.6 9.9 3.7 $ 3.7 21.5 2.9 — $17.0 33.1 12.8 3.7 $38.5 $28.1 $66.6 X X X X *Cost of Goods Sold KEMET 2002 ANNUAL REPORT 11 Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) Nonrecurring Charges in the Quarter Ended December 31, 2001 Personnel reductions—Consolidation of certain manufacturing Following two years of tremendous growth in product shipments and support personnel resulted in a reduction of approximately during calendar years 1999 and 2000, the electronics industry experi- 350 manufacturing personnel in the U.S. and Mexico in March enced a severe inventory correction. The Company anticipated that 2002, with an annualized savings of approximately $15 million at lower production levels would continue well into calendar 2002. The a cost of approximately $2.9 million. Company acted by streamlining manufacturing facilities, accelerating productivity improvement programs, and reducing manufacturing and support personnel in the Company’s U.S. and Mexican facilities. The nonrecurring charges related to the aforementioned activities in the quarter ended December 31, 2001 were: Comparison of Fiscal Year 2001 to Fiscal Year 2000 Net sales for fiscal year 2001 were $1,406.1 million, which repre- sented 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, Inventory—Inventory charges consisted of obsolete or scrapped and automotive electronic systems. Average selling prices continued an inventory and the loss on sale of excess precious metal inventory, upward trend that began in the prior fiscal year. Unit volumes increased primarily palladium, sold during the quarter and charged to Cost approximately 15% to 36.1 billion units in fiscal year 2001, from 31.5 of Goods Sold. Impaired long-lived assets—Certain long-lived assets used in pro- duction, as well as costs related to the disposal of those assets, were charged to Depreciation, Amortization, and Impairment Charges. These assets were retired as part of the effort to stream- line manufacturing facilities and in response to lack of anticipated product demand associated with the productive assets. Personnel reductions—The Company made manufacturing and support personnel reductions of approximately 600 and 1,000 employees in the U.S. and Mexico, respectively. A charge of $9.9 million was reflected in Cost of Goods Sold. The Company anticipates an annualized savings of approximately $30 million related to the reductions. Termination of joint venture—Through its wholly-owned sub- sidiary, the Company agreed with Australasian Gold Mines NL (AGM) to sell KEMET’s interest in Tantalum Australia, a joint venture in Australia. The investment was written down to its net realizable value and $3.7 million was charged to Depreciation, Amortization, and Impairment Charges. In conjunction with this transaction, the agreement for the Company to purchase product from Tantalum Australia was also canceled. The Company continues to hold a 10% equity interest in AGM. Nonrecurring Charges in the Quarter Ended March 31, 2002 The Company announced enhancements to its high-frequency products organization. High-frequency electronics include products such as notebook computers, advanced video games, and high-end servers using microprocessors operating at frequencies greater than 1 gHz. Two product lines are targeted at these applications, KEMET organic capacitors (KO-CAP), and solid aluminum organic capacitors (AO-CAP). The nonrecurring charges incurred in the quarter ended March 31, 2002 were: Inventory—Inventory charges consisted of obsolete or scrapped inventory during the quarter and were charged to Cost of Goods Sold. 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 percent- age of net sales was attributed to higher average selling prices during fiscal year 2001, gains from manufacturing efficiencies due to higher unit volume, and the results of the Company’s cost reduction programs 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 per- centage 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 mil- lion for fiscal year 2001, compared to $23.9 million for fiscal year 2000. These costs reflect the Company’s continuing commitment to the development 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 mil- lion, an increase of $7.9 million, or 14%, from $55.7 million for fiscal year 2000. The increase resulted primarily from depreciation expense associated with increased capital expenditures during the current and prior fiscal years. Operating income was $567.0 million for fiscal year 2001, com- pared to $124.3 million for fiscal year 2000. The increase in operating income resulted primarily 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 Impaired long-lived assets—Certain long-lived assets used in pro- year 2000 as loss carryforwards and credits were not available in fiscal duction, as well as costs related to the disposal of those assets, year 2001 to the extent they were available in the prior fiscal year. were charged to Depreciation, Amortization, and Impairment Charges. These assets were the first generation of high-frequency solid aluminum production equipment. 12 KEMET 2002 ANNUAL REPORT Liquidity and Capital Resources The agreement whereby a subsidiary of the Company sells certain The Company’s liquidity needs arise from working capital require- non-U.S. accounts receivable expired in April 2002. The Company is in ments, capital expenditures, and principal and interest payments on its the process of determining if it will replace this facility. Approximately indebtedness. The Company intends to satisfy its liquidity requirements $40.1 million in proceeds to the Company related to the sale of these primarily with funds provided by operations, short-term investments non-U.S. accounts receivable at March 31, 2002. and borrowings under its Loan Agreement. In May 1998, the Company sold $100.0 million of its Senior Notes Cash flows from operating activities for the year ended March 31, pursuant to the terms of a Note Purchase Agreement dated as of May 1, 2002 used $34.2 million, compared to a $392.4 million surplus in the 1998, between the Company and the eleven purchasers of the Senior prior year. The reduction in cash flow was primarily a result of the Notes named therein. These Senior Notes have a final maturity date of $27.3 million loss in fiscal 2002 versus the $352.3 million fiscal 2001 May 4, 2010, with required principal repayments beginning on May 4, profit, combined with the timing of cash flows from current assets and 2006. The Senior Notes bear interest at a fixed rate of 6.66%, with interest liabilities such as accounts receivable, inventories, accounts payable, payable semiannually beginning November 4, 1998. The terms of the accrued liabilities, and income taxes payable. Note Purchase Agreement include various restrictive covenants typical Capital expenditures were $78.5 million for the year ended of transactions of this type, and require the Company to meet certain March 31, 2002, compared to $210.6 million for the prior year. Capital expenditures in the prior year principally reflect capacity added to meet financial tests including a minimum net worth test and a maximum ratio of debt to total capitalization. The net proceeds from the sale of demand. The current period’s expenditures are principally the completion the Senior Notes were used to repay existing indebtedness and for of projects initiated during fiscal 2001. They represent the Company’s general corporate purposes. The Company was in compliance with its commitment to improve product quality, expand into new products, covenants at March 31, 2002, and at the time of this filing. and improve manufacturing efficiencies. The Company estimates its In April 2002, the Company entered into the Loan Agreement with capital expenditures for fiscal 2003 to be approximately $50 million. a bank. The Loan Agreement is an uncommitted credit facility which Inventories increased to $259.4 million at March 31, 2002, from allows borrowings by the Company in an aggregate principal amount $202.3 million at March 31, 2001, due to an increase in units as well not to exceed $50.0 million for a term not to exceed 180 days for any as higher raw material prices. Current liabilities decreased to $112.4 single borrowing. The interest rate charged on any borrowing under the million at March 31, 2002 versus $285.1 million at March 31, 2001, Loan Agreement is mutually agreed upon by the Bank and the Company commensurate with the decrease in business activity in fiscal year 2002 at the time of such borrowing. versus fiscal year 2001. The Company presently has a total of nine manufacturing facilities The Company is subject to restrictive covenants which, among in Matamoros, Monterrey, and Ciudad Victoria, Mexico, with approxi- others, restrict its ability to make loans or advances or to make invest- mately 70% of the Company’s employees located there. In fiscal year ments, and require it to meet financial tests related principally to 2002, the volatility of the Mexican peso did not have a material impact funded debt and net worth. At March 31, 2002, the Company was in on the Company’s performance. compliance with such covenants. Borrowings are secured by guarantees As discussed in Note 12 to the Consolidated Financial Statements, of certain of the Company’s wholly-owned subsidiaries. the Company or its subsidiaries are at any one time parties to a number On January 20, 2000, the Company sold 6,500,000 shares of its of lawsuits arising out of their respective operations, including workers’ common stock in a public offering for $142.6 million in net cash pro- compensation or workplace safety cases and environmental issues, ceeds after deducting underwriting fees and offering expenses. Included some of which involve claims of substantial damages. Although there in the offering were 2,193,220 shares sold by a stockholder of the can be no assurance, based upon information known to the Company, Company which were shares of non-voting common stock that were the Company does not believe that any liability which might result from converted into common stock on a share-for-share basis. The net proceeds an adverse determination of such lawsuits would have a material adverse were used to repay outstanding debt under the Company’s short-term effect on the Company. credit facility and to fund capital expenditures. The Company believes its strong financial position will permit the The Board of Directors has authorized programs to purchase up to financing of its business needs and opportunities. It is anticipated that 8.0 million shares of its common stock on the open market. Through ongoing operations will be financed primarily by internally generated March 31, 2002, the Company made purchases of 2.1 million shares for $38.7 million. Approximately 240,000 shares were subsequently reissued for the exercise of employee stock options. At March 31, 2002, the Company held approximately 1,860,000 treasury shares at a cost of $34.3 million and had outstanding put option obligations for approxi- mately 0.3 million shares at a weighted-average purchase price of $21.09 ($18.12 net of put premiums received) per share under the purchase program. The amount and timing of future purchases will depend on market conditions and other factors and will be funded from existing cash. funds and cash on hand. Business Outlook The Company believes that major cost saving initiatives that occurred throughout fiscal 2002 positioned KEMET to maintain a strong financial position and further enhance earnings capability. From a peak of 16,000 employees in the summer of 2000, the number of employees at June 1, 2002, was reduced to approximately 6,900. This was achieved through a variety of programs, such as attrition, leaves of absences, early retirement programs, and reductions-in-force. The Company also established other cost reduction or cost containment KEMET 2002 ANNUAL REPORT 13 Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) programs, including the aforementioned nonrecurring charges, in as some excess capacitor inventories were consumed. The Company response to the business downturn. The Company believes these actions believes unit shipments will continue to increase through the rest of will result in annualized savings of approximately $110.0 million. calendar 2002 as customers’ capacitor purchases in the coming months KEMET anticipates four drivers of growth as it enters the growth continue to approach their consumption. The Company believes that phase of the current cycle. • First, the Company’s preferred capacitor supplier relationships with the world’s most successful electronics companies remain strong. • Second, capacitor shipments will increase as customers’ busi- nesses recover. Some electronics end markets, such as notebook computers and servers, appear to have stabilized and begun growing again. unit shipments in the quarter ending June 30, 2002 will exceed the volumes shipped in the quarter ended March 31, 2002. Average selling prices for the March 2002 quarter decreased approximately 9% from average selling prices for the December 2001 quarter, following quarterly declines of 10% in the December 2001 quarter, 10% in the September 2001 quarter, and 11% in the June 2001 quarter. These declines are from average selling prices that were abnormally high in historical terms as a result of exceptional product demand and • Third, KEMET’s customer-service-oriented strategy has the higher raw materials costs that were passed through to customers Company particularly well positioned with Electronics Manu- during the fiscal year ended March 2001. As the industry reaches the facturing Services providers, and the Company believes that it will be a net beneficiary as global electronics manufacturing end of the inventory correction and unit volumes begin to increase toward the actual level of capacitor consumption, the Company believes continues to shift to our large EMS customers. Some analysts the decline in average selling prices should begin to moderate in the predict that the percentage of global electronics manufacturing June 2002 quarter. that is outsourced will double by 2005. The Company’s best current estimate, given the high level of eco- • Finally, the Company believes it has the world’s most complete line of surface-mount capacitor technologies, including innovative high-frequency tantalum, high-capacitance ceramic, and newly introduced solid aluminum capacitors. These high-performance capacitor solutions will allow KEMET to continue to earn a greater share of our customers’ capacitor business. The Company believes that unit shipments may have reached the low point of the current cycle in the quarter ended September 30, 2001, as unit shipments increased during subsequent quarters. The increase in the following quarters was broadly based across original equipment manufacturers, electronics manufacturing services providers, and distributors. The best visibility into customers’ inventories is through the distributor channel, where March 2002 capacitor inventory levels were reduced approximately 66% from a January 2001 peak. Sales to distributors increased 17% sequentially over the December 2001 quarter, Commitments nomic uncertainty, is that revenues for the quarter ending June 30, 2002 will be approximately equal to those for the quarter ended March 31, 2002, and that net income will be positive. The Company expects that the gross margin percentage for the quarter ending June 30, 2002 will be in the range of 30% to 32%. For fiscal 2003, the Company anticipates maintaining its invest- ments in key customer relationships through its direct sales and customer service professionals, as well as through research and development, to maintain its position at the leading edge of technology in the capac- itor industry. Capital expenditures for fiscal 2003 are anticipated to be approxi- mately $50 million, compared to $79 million in fiscal 2002. The Company continued to transfer the production of its smaller sizes of commercial tantalum products to its newest, low-cost manufacturing facility in Mexico. As of March 31, 2002, the Company had contractual obligations in the form of non-cancelable operating leases (see note 10 to the Consolidated Financial Statements), long-term contracts for the purchase of tantalum powder and wire (see note 10 to the Consolidated Financial Statements), and debt (see note 3 to the Consolidated Financial Statements), as follows (dollars in thousands): Fiscal years ended March 31, 2003 2004 2005 2006 2007 Thereafter Total $ 2,389 $ 979 $493 $80 $ 77,000 65,000 — — — — — — 21 — 20,000 80,000 — 142,000 100,000 $ — $ 3,962 $79,389 $65,979 $493 $80 $20,021 $80,000 $245,962 Description Operating leases Tantalum Debt Total 14 KEMET 2002 ANNUAL REPORT Cabot Corporation Revenue Recognition. Revenue is recognized from sales when a On April 10, 2002, the Company was sued by Cabot Corporation product is shipped. A portion of sales is made to distributor customers (“Cabot”) in the Superior Court of the Commonwealth of Massachusetts which, under certain conditions, allows for returns of overstocked (Suffolk Co. Civil Action No. 02-1585-BLS) with respect to its existing inventory and provides protection against price reductions initiated by supply agreement with Cabot for tantalum powder, ore and wire. The the Company. At the time sales to distributors are recorded, allowances action arises out of a tantalum supply agreement entered into between are also recognized against net sales for estimated product returns and Cabot and a KEMET subsidiary in December 2000. This agreement price protection. Historical distributor returns and price adjustments on requires the subsidiary to purchase and Cabot to sell certain specified both a consolidated level and on an individual distributor level as well amounts of tantalum powder and tantalum wire in the years 2001 as the economic climate are considered in determining the allowance. through 2003 and tantalum ore in 2001 and 2002. The supply agree- These procedures require the exercise of significant judgments, but the ment specifies a variety of tantalum powder and wire products and Company believes they reasonably estimate future credits for returns their associated year-by-year prices per pound. and price adjustments. The complaint requests various injunctive and declaratory relief Inventories. Inventories are valued at the lower of cost or market, requiring KEMET to purchase the contracted products at regular intervals with cost determined under the first-in, first-out method and market throughout the year, to specifically identify products that it intends to purchase under the agreement and to inspect products when and as based upon net realizable value. The valuation of inventories requires management to make estimates. For instance, unit volume decreased they are produced and tendered by Cabot. The complaint also seeks substantially compared to the prior year, which resulted in higher finished damages in an unspecified amount relating to an alleged repudiation of goods inventories cost and quantities. The Company computes an obso- the agreement to purchase 80,000 pounds of tantalum ore during 2002. lescence reserve by gauging the current demand for a specific product, The Company denies any liability under the supply agreement and comparing it with historical trends, and taking into account general intends to defend itself vigorously. The Company will exercise all of its economic conditions. The Company also must assess the prices at rights and remedies afforded by law. Critical Accounting Policies The Company’s significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements. The following identifies a number of policies which require significant judgments or estimates. The Company’s estimates and assumptions are based on historical data and other assumptions that KEMET believes are reasonable in the circumstances. These estimates and assumptions affect the reported which it believes the finished goods inventory can be sold compared to its cost. Pension and Other Nonpension Post-retirement Benefits. KEMET engages an independent actuarial firm to perform an actuarial valuation of the fair values of its post-retirement plans’ assets and benefit obliga- tions. Management provides the actuarial firm with certain assumptions that have a significant effect on the fair value of the assets and obligations such as the: amounts of assets and liabilities and the disclosure of contingent assets Weighted-average discount rate—used to arrive at the net present and liabilities at the date of the financial statements. In addition, they value of the obligation; affect the reported amounts of revenues and expenses during the report- ing period. The judgments are based on management’s assessment as to the effect certain estimates, assumptions, or future trends or events may have on the financial condition and results of operations reported in the Consolidated Financial Statements. It is important that a reader of the financial statements understand that actual results could differ from these estimates, assumptions, and judgments. KEMET’s management believes the following critical accounting policies contain the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements. Estimates for Nonrecurring Charges. In fiscal 2002, KEMET recorded nonrecurring charges of approximately $66.6 million. The nonrecurring charges were related to its high-frequency products organ- ization and in response to reduced product demand as the electronics industry entered into another correction phase of a long-term growth trend during calendar 2001. These activities were designed to cut both fixed and variable costs and included the consolidation of operations, inventory write downs, charges for impaired assets, and the termination of employees. These costs are recorded based upon estimates and may differ from the actual costs incurred. Any difference will be adjusted in a future period. Return on assets—used to estimate the growth in invested asset value available to satisfy certain obligations; Salary increases—used to calculate the impact future pay increases will have on post-retirement obligations; and Medical cost inflation—used to calculate the impact future medical costs will have on post-retirement obligations. Management understands that these assumptions directly impact the actuarial valuation of the assets and obligations recorded on the balance sheet and the income or expense that flows through the Consolidated Statement of Operations. Management bases its assumptions on either historical or market data that it considers reasonable in the circumstances. Variations in these assumptions could have a significant effect on the amounts reported through the Consolidated Statement of Operations. Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Management evaluates its tax assets and liabilities on a periodic basis KEMET 2002 ANNUAL REPORT 15 Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued) and adjusts these balances on a timely basis as appropriate. Management exists; (2) Delivery has occurred or services have been rendered; (3) The believes that it has adequately provided for its future tax consequences seller’s price to the buyer is fixed or determinable; and (4) Collectibility based upon current facts and circumstances and current tax law. How- is reasonably assured. Upon adoption of the SAB, there was no impact ever, should management’s tax positions be challenged and not prevail, on the Company’s results of operations or financial condition. different outcomes could result and have a significant impact on the In July 2001, the FASB issued Statement of Financial Accounting amounts reported through the Consolidated Statement of Operations. Standards No. 141, “Business Combinations” (Statement No. 141), and The carrying value of the Company’s net deferred tax assets (tax Statement of Financial Accounting Standards No. 142, “Goodwill and benefits expected to be realized in the future) assumes that KEMET will Other Intangible Assets” (Statement No. 142). Statement No. 141 requires be able to generate, based on certain estimates and assumptions, suffi- that the purchase method of accounting be used for all business combi- cient future taxable income in certain tax jurisdictions to utilize these nations initiated after June 30, 2001. Statement No. 141 also specifies deferred tax benefits. If these estimates and related assumptions change criteria that intangible assets acquired in a purchase method business in the future, the Company may be required to reduce the value of the combination must meet to be recognized and reported apart from deferred tax assets resulting in additional income tax expense. goodwill. Statement No. 142 requires that goodwill and intangible Management believes that it is more likely than not that the assets with indefinite useful lives no longer be amortized, but instead deferred tax assets will be realized, based on the scheduled reversal of deferred tax liabilities and projected future taxable income. However, be tested for impairment. Any unamortized negative goodwill must be written off at the date of adoption. Statement No. 142 is effective for there can be no assurance that we will meet our expectations of future fiscal years beginning after December 15, 2001, and was adopted by income. Management evaluates the deferred tax assets on a periodic the Company effective April 1, 2002. basis and assesses the need for additional valuation allowances. Adoption of Accounting Standards Effective October 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (Statement No. 133) as amended by Statement No. 138. Statement No. 133 establishes accounting and reporting 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 the 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 comprehensive income (“AOCI”) until the hedged item is recognized in earnings. Ineffective- ness is recognized immediately in earnings. For derivatives designated as fair value hedges, changes in fair value are recognized in earnings. Prior to adoption of Statement 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 adjustments of carrying amounts when the transactions occurred. The adoption of Statement No. 133 did not result in a significant transition adjustment and is therefore not separately captioned in the statement of earnings as a 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. 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 The Company believes that income will increase by $1.85 million in the year ending March 31, 2003, as the result of the adoption of Statement 142. As of the date of the adoption, the Company expects to have unamortized goodwill, trademarks, and patents and technology of approximately $28.4 million, $7.2 million, and $5.5 million, respec- tively, which will be subject to the provisions of Statement No. 142. In addition, the Company had $0.6 million of negative goodwill at March 31, 2002. Amortization expense related to goodwill, trademarks, and patents and technology was approximately $1.0 million, $0.3 million, and $0.4 million, respectively, for the year ended March 31, 2002. The Company anticipates that under Statement 142 it will increase income by $0.6 million by writing off negative goodwill in the quarter ending June 30, 2002, and goodwill and trademarks will not be amortized in the year ending March 31, 2003, reducing amortization expense by approximately $1.3 million. Patent and technology amortization is expected to remain the same in fiscal 2003. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (Statement No. 143). Statement No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the Company is required to capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the use- ful life of the related asset. Statement No. 143 is effective for fiscal years beginning after June 15, 2002, and will be adopted by the Company effective April 1, 2003. The Company believes the adoption of Statement No. 143 will not significantly impact financial results. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (Statement No. 144). Statement No. 144 requires entities to test a long-lived asset, excluding goodwill and other intangible assets that are not amortized, for recoverability whenever events or changes in circumstances indicate that the entity may not be 16 KEMET 2002 ANNUAL REPORT able to recover the carrying value of the asset. An impairment loss Occurrences affecting the slope or speed of decline of the pricing would be recognized for an asset that is assessed as being impaired. curve for the Company’s products, or affecting KEMET’s ability to Statement No. 144 is effective for fiscal years beginning after December reduce product and other costs and to increase productivity; the 15, 2001, and was adopted by the Company effective April 1, 2002. effect of changes in the mix of products sold and the resulting The Company believes the adoption of Statement No. 144 will not effects on gross margins; significantly impact financial results. Safe Harbor Statement From time to time, information provided by the Company, including but not limited to statements in this report or other statements made by or on behalf of the Company, may contain “forward-looking” informa- tion within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such state- Difficulties in obtaining raw materials, supplies, power, natural resources, and any other items needed for the production of capacitors; the effects of quality deviations in raw materials, par- ticularly tantalum powder and ceramic dielectric materials; the effects of significant price increases for tantalum or palladium, or an inability to obtain adequate supplies of tantalum from the limited number of suppliers; ments involve a number of risks and uncertainties. The Company’s The amount and rate of growth in the Company’s selling, general, actual results could differ materially from those discussed in the forward- and administrative expenses, and the impact of unusual items looking statements. The cautionary statements set forth in the Company’s resulting from KEMET’s ongoing evaluation of its business strategies, 2002 Annual Report under the heading Safe Harbor Statement identify asset valuations, and organizational structure; important factors that could cause actual results to differ materially from those in any forward-looking statements made by or on behalf of the Company. This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that these forward-looking statements be subject to the safe harbor created by that provision. These forward- looking statements involve risks and uncertainties beyond the Company’s control. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future events, plans or expectations contemplated by the Company will be achieved. Furthermore, past performance in operations and share price is not nec- essarily 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 impor- tant 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 2003 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company whether contained herein, in other documents subsequently filed by the Company with the SEC, or in oral statements: The acquisition of fixed assets and other assets, including inventories and receivables; the making or incurring of any expenditures and expenses, including, but not limited to, depreciation and research and development expenses; any revaluation of assets or related expenses; and the amount of and any changes to tax rates; The effect of any changes in trade, monetary, and fiscal policies, laws, and regulations; other activities of governments, agencies, and similar organizations; social and economic conditions, such as trade restrictions or prohibitions, inflation, and monetary fluctu- ations; 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 govern- ments and legal systems; intergovernmental disputes; the costs and other effects of legal and administrative cases and proceed- ings (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; adoption of new or changes in accounting policies and practices and the application of such policies and practices; the effects of changes within KEMET’s organization, particularly at the executive officer level, or in compensation and benefit plans; A moderating growth rate in end-use products which incorporate the amount, type, and cost of the financing which the Company the Company’s products and the effects of a downturn in the general has and any changes to that financing; the effects of severe weather 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 production 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 con- tinue to meet rising demand for surface-mount capacitors; 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 com- munications systems. Effect of Inflation Inflation generally affects the Company by increasing the cost of labor, equipment, and raw materials. The Company does not believe that inflation has had any material effect on the Company’s business over the past three years except for the following discussion in Commodity Price Risk. KEMET 2002 ANNUAL REPORT 17 Quantitative and Qualitative Disclosure about Market Risk Interest Rate Risk Commodity Price Risk The Company’s exposure to market risk for changes in interest The Company purchases various precious metals used in the man- rates relates primarily to the Company’s long-term debt obligations and ufacture of capacitors and is therefore exposed to certain commodity price interest rate swaps. The Company also has an uncommitted debt financ- risks. These precious metals consist primarily of palladium and tantalum. ing alternative in the form of an Offering Basis Loan Agreement for Palladium is a precious metal used in the manufacture of multi- $50 million which is priced on a mutually agreed upon rate by the bank layer ceramic capacitors and is mined primarily in Russia and South and the Company at the time of such borrowing. The Company had not Africa. Currently, the Company uses forward contracts and spot buys to historically used interest rate swaps, interest rate caps, or other derivative secure the acquisition of palladium and manage the price volatility in financial instruments for the purpose of hedging fluctuations in interest the market. The Company is also aggressively pursuing ways to reduce rates, but entered into interest rate swap agreements subsequent to palladium usage in ceramic capacitors and minimize the price risk. March 31, 2002. The Company will use interest rate swap agreements Tantalum powder is a metal used in the manufacture of tantalum to effectively convert a portion of its fixed rate debt to a floating rate capacitors and is primarily purchased under annual contracts. Manage- basis, reducing interest expense. Interest rate swaps are designated as ment believes the tantalum needed has generally been available in fair value hedges. The interest rate differential to be received or paid on sufficient quantities to meet manufacturing requirements. However, the the swaps is recognized over the lives of the swaps as an adjustment to interest expense. 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 availability. 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 in calendar 2001. 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. The Company’s contractual commitments for the supply of tantalum are at prices well above market prices that traded during calendar 2002 through the date this document was filed. Foreign Currency Exchange Rate Risk A portion of the Company’s sales to its customers in Europe are denominated in the Euro, thereby creating an exposure to foreign currency exchange rates. Also, a portion of the Company’s costs are in its Mexican operations and are denominated in Mexican pesos, creating an exposure to exchange rates. In order to minimize its exposure, the Company will periodically enter into forward foreign exchange contracts in which the net long or short position in the Euro or Mexican peso is hedged 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 instruments for speculative purposes or if there is no underlying business transaction supporting or related to the deriv- ative financial instrument. 18 KEMET 2002 ANNUAL REPORT Independent Auditors’ Report The Board of Directors KEMET Corporation: We have audited the accompanying consolidated balance sheets financial statement presentation. We believe that our audits provide a of KEMET Corporation and subsidiaries as of March 31, 2002 and reasonable basis for our opinion. 2001, and the related consolidated statements of operations, stockhold- In our opinion, the consolidated financial statements referred to ers’ equity and comprehensive income, and cash flows for each of above present fairly, in all material respects, the financial position of the years in the three-year period ended March 31, 2002. These consol- KEMET Corporation and subsidiaries as of March 31, 2002 and 2001, idated financial statements are the responsibility of the Company’s and the results of their operations and their cash flows for each of the management. Our responsibility is to express an opinion on these years in the three-year period ended March 31, 2002, in conformity consolidated financial statements based on our audits. with accounting principles generally accepted in the United States We conducted our audits in accordance with auditing standards of America. generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether the financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signif- Greenville, South Carolina icant estimates made by management, as well as evaluating the overall April 26, 2002 KEMET 2002 ANNUAL REPORT 19 KEMET CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets Dollars in thousands except per share data Assets Current assets: Cash and cash equivalents Accounts receivable (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 Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable, trade (note 10) Accrued expenses (note 11) Income taxes payable Total current liabilities Long-term debt (note 3) Other non-current obligations (note 4) Deferred income taxes (note 7) Total liabilities Stockholders’ equity (notes 8, 10, 14 and 16): Common stock, par value $.01, authorized 300,000,000 shares, issued 87,783,060 and 87,619,517 shares at March 31, 2002 and 2001, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income March 31, 2002 2001 $ 234,622 $ 360,758 22,101 96,583 118,527 68,318 72,547 79,002 81,975 41,300 259,392 202,277 10,791 40,255 567,161 539,785 41,856 22,912 50,493 35,018 745,129 567,262 44,027 10,112 $1,171,714 $1,366,530 $ 73,057 $ 201,767 32,252 7,076 112,385 100,000 48,926 55,358 49,229 34,078 285,074 100,000 51,084 44,196 316,669 480,354 878 321,734 562,903 3,808 876 322,068 590,192 2,355 Treasury stock, at cost (1,859,695 and 1,600,040 shares at March 31, 2002 and 2001, respectively) (34,278) (29,315) Total stockholders’ equity Commitments and contingencies (notes 10 and 12) Total liabilities and stockholders’ equity See accompanying notes to consolidated financial statements. 855,045 886,176 $1,171,714 $1,366,530 20 KEMET 2002 ANNUAL REPORT KEMET CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Dollars in thousands except per share data Net sales Operating costs and expenses: Cost of goods sold, exclusive of depreciation Selling, general, and administrative expenses Research and development Depreciation, amortization, and impairment charges Total operating costs and expenses Operating income (loss) Other income and expense: Interest income Interest expense Other expense (note 11) Earnings (loss) before income taxes Income tax expense (benefit) (note 7) Net earnings (loss) Net earnings (loss) per share (notes 10, 14 and 16): Basic Diluted Weighted-average shares outstanding: Basic Diluted See accompanying notes to consolidated financial statements. Years ended March 31, 2002 2001 2000 $508,555 $1,406,147 $822,095 367,528 693,659 569,706 46,626 25,106 109,660 55,713 26,188 63,601 48,457 23,918 55,699 548,920 839,161 697,780 (40,365) 566,986 124,315 (9,809) (16,713) 6,736 3,438 7,507 7,892 (40,730) (13,441) 568,300 215,954 (2,079) 9,135 11,695 105,564 35,445 $ (27,289) $ 352,346 $ 70,119 $ $ (0.32) (0.32) $ $ 4.05 4.00 $ $ 0.87 0.85 85,773,763 86,930,965 80,650,376 85,773,763 88,181,118 82,411,634 KEMET 2002 ANNUAL REPORT 21 KEMET CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity and Comprehensive Income Dollars in thousands except share amounts Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Treasury Stock Total Stock- holders’ Equity Balance at March 31, 1999 78,509,800 $785 $145,090 $167,727 $ 72 — $313,674 Comprehensive income (loss): Net earnings Foreign currency translation loss Total comprehensive income Exercise of stock options (note 8) Tax benefit on exercise of stock options Purchases of stock by Employee Savings Plan Secondary offering (note 16) — — — 1,944,260 — 71,848 6,500,000 — — — 20 — — 65 — — — 11,052 9,315 724 142,543 70,119 — — — — — — Balance at March 31, 2000 87,025,908 870 308,724 237,846 Comprehensive income (loss): Net earnings Unrealized gain on foreign exchange contracts, net of $1,398 tax Foreign currency translation loss Total comprehensive income Exercise of stock options (note 8) Tax benefit on exercise of stock options Purchases of stock by Employee Savings Plan Put options proceeds (note 10) Treasury stock purchases (note 16) — — — — 549,720 — 43,889 — (1,600,040) — — — — 5 — 1 — — — — — — 3,204 4,325 1,094 4,721 — 352,346 — — — — — — — — — (56) — — — — — 16 — 2,594 (255) — — — — — — — — — — — — — — — — — — — — — — 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 Comprehensive income (loss): Net loss Unrealized gain on foreign exchange contracts, net of $1,267 tax Unrealized securities loss, net of $425 tax Foreign currency translation gain Total comprehensive income (loss) Exercise of stock options (note 8) Tax benefit on exercise of stock options Purchases of stock by Employee Savings Plan Put options proceeds (note 10) Treasury stock purchases (note 16) — — — — — 299,315 — 104,573 — (500,000) — — — — — 1 — 1 — — — — — — — (1,893) 1,048 1,319 599 (1,407) (27,289) — — — — — — — — — — 2,143 (756) 66 — — — — — — — — — — — 4,430 — — — (27,289) 2,143 (756) 66 (25,836) 2,538 1,048 1,320 599 (9,393) (10,800) Balance at March 31, 2002 85,923,365 $878 $321,734 $562,903 $3,808 $(34,278) $855,045 See accompanying notes to consolidated financial statements. 22 KEMET 2002 ANNUAL REPORT KEMET CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Dollars in thousands Sources (uses) of cash Operating activities: Net earnings (loss) Years ended March 31, 2002 2001 2000 $ (27,289) $ 352,346 $ 70,119 Adjustments to reconcile net earnings (loss) to net cash from operating activities: Depreciation, amortization, and impairment charges 109,660 63,601 Post-retirement 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 and other current assets Accounts payable, trade Accrued expenses and income taxes Tax benefit of stock options exercised (2,158) 1,043 5,084 (5,987) 74,482 (57,115) 39,702 (128,710) (43,979) 1,048 (3,662) 5,266 (8,023) 2,233 (2,456) (71,318) (45,805) 78,059 17,874 4,325 55,699 (14,586) 11,579 2,931 (2,950) (38,025) (5,140) (55) 58,958 39,187 9,315 Net cash provided (used) by operating activities (34,219) 392,440 187,032 Investing activities: Purchases of short-term investments Proceeds from maturity of short-term investments Additions to property and equipment Investment in affiliates 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 Proceeds from secondary offering Proceeds from put options (note 10) Purchases of treasury stock Net payments to revolving loan and demand note Net cash provided (used) by financing activities Net increase (decrease) in cash Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental Cash Flow Statement Information: Interest paid Income taxes paid See accompanying notes to consolidated financial statements. (57,819) (202,354) (123,687) 57,819 326,041 — (78,546) (210,559) (82,009) (7,207) 179 — (255) — 81 (85,574) (87,127) (205,615) 1,320 2,538 — 599 1,095 3,209 — 4,721 (10,800) (29,315) 724 11,072 142,608 — — — — (64,000) (6,343) (20,290) 90,404 (126,136) 285,023 360,758 75,735 71,821 3,914 $ 234,622 $ 360,758 $ 75,735 $ 7,671 $ 7,361 $ 20,047 $ 209,186 $ $ 9,477 7,179 KEMET 2002 ANNUAL REPORT 23 Notes to Consolidated Financial Statements Note 1: Organization and Significant Accounting Policies Nature of Business and Organization approximately $0.9 million net of tax, and is included in cost of goods sold for the period. Inventories KEMET Corporation and subsidiaries (“KEMET” or the “Company”) Inventories are stated at the lower of cost or market. These costs is the world’s largest manufacturer of solid tantalum capacitors, the fifth do not include depreciation or amortization, the impact of which is not largest manufacturer of multilayer ceramic capacitors, and a leader in material to the consolidated financial statements. The cost of most the development of solid aluminum capacitors. The Company is head- inventories is determined by the “first-in, first-out” (FIFO) method. quartered in Simpsonville, South Carolina, and has fourteen manufac- Approximately 6% and 7% of inventory costs of certain raw materials at turing plants located in South Carolina, North Carolina, and Mexico. March 31, 2002 and 2001, respectively, have been determined on the Additionally, the Company has wholly-owned foreign subsidiaries “last-in, first-out”(LIFO) basis. It is estimated that if all inventories had which primarily sell KEMET’s products in foreign markets. been costed using the FIFO method, they would have been approxi- Principles of Consolidation The accompanying consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. 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 maturities of three months or less to be cash equivalents. Derivative Financial Instruments mately $824 and $902 higher than reported at March 31, 2002 and 2001, respectively. Property and Equipment Property and equipment are carried at cost. Depreciation is calcu- lated principally using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the respective leases. Maintenance costs are expensed; expenditures for renewals and improvements are generally capitalized. Upon sale or retirement of property and equip- ment, the related cost and accumulated depreciation are removed and any gain or loss is recognized. Reviews are regularly performed to Derivative financial instruments are utilized by the Company to determine whether facts and circumstances exist which indicate that reduce exposures to volatility of foreign currencies and commodities the carrying amount of assets may not be recoverable. The Company impacting the cost of its products. The Company does not enter into assesses the recoverability of its assets by comparing the projected financial instruments for trading or speculative purposes. undiscounted net cash flows associated with the related asset or group Effective October 1, 2000, the Company adopted Statement of assets over their remaining life against their respective carrying No. 133, “Accounting for Derivative Instruments and Hedging Activities,” amounts. Impairment, if any, is based on the excess of the carrying as amended by Statement No. 138. Statement No. 133 establishes amount over the fair value of those assets. accounting and reporting 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 meas- urement 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 immediately in earnings. For derivatives designated as fair value hedges, changes in fair value are recognized in earnings. Prior to adoption of Statement 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 adjustments of carrying amounts when the transactions occurred. The adoption of Statement No. 133 did not result in a significant transition adjustment and is therefore not separately captioned in the statement of operations as a cumulative effect of a change in accounting principle. The transition adjustment as of October 1, 2000 was a gain of Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected period to be benefited and does not exceed 40 years. KEMET assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future net cash flows. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting our average cost of funds. KEMET recorded goodwill amortization of approximately $1.0 million in 2002, 2001, and 2000. Unamortized goodwill totaled $27.7 million and $28.7 million at March 31, 2002 and 2001, respectively. In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142, “Goodwill and Other Intangible Assets.” Under Statement No. 142, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but will be tested for impair- ment at least on an annual basis in accordance with the provisions of Statement No. 142. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amor- tized prior to the adoption of Statement No. 142, which KEMET adopted on April 1, 2002. As of March 31, 2002, KEMET has unamortized 24 KEMET 2002 ANNUAL REPORT goodwill in the amount of $27.7 million. Effective April 1, 2002, temporary differences are expected to be recovered or settled. The KEMET will no longer amortize its goodwill. In connection with effect on deferred tax assets and liabilities of a change in tax rates is Statement No. 142’s transitional goodwill impairment evaluation, recognized in income in the period that includes the enactment date. KEMET will be required to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, KEMET must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and lia- bilities, including the existing goodwill, to those reporting units as of the date of adoption. KEMET will then have six months from the date of adoption to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. The Company believes that income will increase by $1.85 million in the year ending March 31, 2003 as the result of the adoption of Statement No. 142. As of the date of the adoption, the Company expects to have unamortized goodwill, trademarks, and patents and technology of approximately $27.7 million, $7.2 million, and $5.5 million, respectively, which will be subject to Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpreta- tions 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 Statement No. 123, “Accounting for Stock-Based Compensation,” which provide pro forma disclosure of earnings as if stock compensation were recognized on the fair value basis. Concentrations of Credit Risk the provisions of Statement No. 142. In addition, the Company had The Company sells to customers located throughout the United $0.6 million of negative goodwill at March 31, 2002. Amortization States and the world. Credit evaluations of its customers’ financial con- expense related to goodwill, trademarks, and patents and technology ditions are performed periodically, and the Company generally does was approximately $1.0 million, $0.25 million, and $0.4 million, not require collateral from its customers. respectively, for the year ended March 31, 2002. The Company antici- pates that under Statement No. 142 it will increase income by $0.6 mil- lion by writing off negative goodwill in the quarter ending June 30, 2002, and goodwill and trademarks will not be amortized in the year ending March 31, 2003, reducing amortization expense by approxi- mately $1.25 million. Intangible Assets 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 transactions, such as those resulting from the settlement of foreign receivables or payables, are reported in the Consolidated Statements of Earnings. Patents and technology are amortized using the straight-line Translation of other foreign operations to U.S. dollars occurs using method over twenty-five years. Trademarks are amortized using the the current exchange rate for balance sheet accounts and an average straight-line method over a forty-year period. The Company assesses the exchange rate for results of operations. Such translation gains or losses recoverability of its intangible assets by determining whether the amor- are recognized as a component of equity in “Accumulated Other tization of the intangible’s balance over its remaining life can be recovered Comprehensive Income.” through undiscounted future operating cash flows of the acquired assets. The amount of intangible impairment, if any, is measured based on projected discounted future operating cash flows. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved. Other Assets Other assets consist principally of the cash surrender value of life insurance policies, prepaid pension benefits, and marketable equitable securities designated as available-for-sale. The cost, gross unrealized holding losses, and fair value of available- for-sale marketable equity securities at March 31, 2002 were $2,261, $932, and $1,329, respectively. Deferred Income Taxes Comprehensive Income Comprehensive income consists of net earnings, foreign currency translation gains or losses, unrealized gains or losses from available-for- sale securities, and unrealized gains and losses from forward contracts and is presented in the Consolidated Statements of Stockholders’ 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 cer- tain 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 Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future revenue only when all of the following criteria are met: (1) Persuasive evidence of an arrangement exists; (2) Delivery has occurred or services tax consequences attributable to differences between the financial have been rendered; (3) The seller’s price to the buyer is fixed or deter- statement carrying amounts of existing assets and liabilities and their minable; and (4) Collectibility is reasonably assured. Upon adoption of respective tax bases and operating loss and tax credit carryforwards. the SAB, there was no impact on the Company’s results of operations or Deferred tax assets and liabilities are measured using enacted tax rates financial condition. expected to apply to taxable income in the years in which those KEMET 2002 ANNUAL REPORT 25 Notes to Consolidated Financial Statements (continued) Earnings per Share Note 2: Intangible Assets The Company calculates earnings per share in accordance with Intangible assets consist of the following (dollars in thousands): Statement 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 incremental shares attrib- uted to outstanding options to purchase common stock. Goodwill Trademarks On June 1, 2000, the Company issued additional shares in con- Patents and technology nection with the two-for-one stock split. The per common share amounts Other in the Consolidated Financial Statements and accompanying notes have Accumulated amortization Intangible assets, net Note 3: Debt A summary of long-term debt follows (dollars in thousands): The Company has determined, using the criteria in Statement date of May 4, 2010 No. 131, “Disclosures about Segments of an Enterprise and Related Less current installments Senior notes, interest payable semiannually at a rate of 6.66% with a final maturity March 31, 2002 2001 $ 40,709 $ 40,709 10,000 12,000 1,143 63,852 21,996 10,000 12,000 1,143 63,852 19,825 $ 41,856 $ 44,027 March 31, 2002 2001 $100,000 $100,000 — — $100,000 $100,000 been adjusted to reflect the stock splits. Environmental Cost The Company recognizes liabilities 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 discounted 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 Information,” that it operates in a single reporting segment. The Company’s products may be categorized generally based upon primary raw material (tantalum, palladium, or aluminum) or method of attach- ment (surface-mount or leaded), and are sold to original equipment manufacturers, electronics manufacturing services providers, and elec- tronics distributors. No customer accounted for more than 10% of net sales in fiscal 2002. 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 year ended March 31, 2000. Geographic information is included in note 9. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions. Reclassification Certain prior year amounts have been reclassified to conform to 2002 presentation. Other All amounts are presented in thousands unless otherwise noted. 26 KEMET 2002 ANNUAL REPORT Long-term debt, excluding current installments In May 1998, the Company sold $100,000 of its Senior Notes pur- suant to the terms of a Note Purchase Agreement dated May 1, 1998 between the Company and the eleven purchasers of the Senior Notes named therein. The Senior Notes have a final maturity date of May 4, 2010, and begin amortizing on May 4, 2006. The Senior Notes bear interest at a fixed rate of 6.66%, with interest payable semiannually beginning November 4, 1998. The aggregate maturities of the debt sub- sequent to March 31, 2002 follow: 2007, $20,000; 2008, $20,000; 2009, $20,000; 2010, $20,000; and 2011, $20,000. In April 2002, the Company entered into an Offering Basis Loan Agreement (the “Loan Agreement”) with a bank. The Loan Agreement is an uncommitted credit facility which allows borrowings by the Company in an aggregate principal amount not to exceed $50.0 million for a term not to exceed 180 days for any single borrowing. The interest rate charged on any borrowing under the Loan Agreement is mutually agreed upon by the Bank and the Company at the time of such borrowing. The Company is subject to restrictive covenants under its loan agreements which, among others, restrict its ability to make loans or advances or to make investments and require it to meet financial tests related principally to funded debt and net worth. At March 31, 2002, the Company was in compliance with such covenants. Borrowings are secured by guarantees of certain of the Company’s wholly-owned subsidiaries. Note 4: Other Non-Current Obligations The weighted-average rates used in determining pension cost for Non-current obligations are summarized as follows (dollars in the Plan are as follows: thousands): Deferred compensation and pension benefit March 31, 2002 2001 Years ended March 31, 2002 2001 2000 Discount rate 7.00% 7.00% 7.50% Rate of compensation increase 5.00% 5.00% 5.00% liabilities (note 5) $10,336 $12,098 Expected return on Plan assets 9.00% 9.00% 9.00% Accrued post-retirement medical plan liability (note 6) Other 36,448 36,820 2,142 2,166 A reconciliation of the Plan’s projected benefit obligation, fair value of the Plan assets, and funding status is as follows (dollars in thousands): Other non-current obligations $48,926 $51,084 Included as a part of other non-current obligations is the Company’s accrual for environmental liabilities. Note 5: Employee Pension and Savings Plans The Company has a non-contributory pension plan (the “Plan”) which covers substantially all employees in the United States who meet age and service requirements. The Plan provides defined benefits that are based on years of credited service, average compensation (as defined), and the primary social security benefit. The effective date of the Plan is April 1, 1987. March 31, 2002 2001 Accumulated benefit obligation $ 94,242 $ 86,530 Projected benefit obligation: Net obligation at beginning of year 128,658 111,698 Service cost Interest cost Actuarial gain Gross benefits paid Curtailment 4,891 9,201 205 (6,198) (4,629) 1,518 4,246 8,462 8,991 (4,739) — — The cost of pension benefits under the Plan is determined by an Special termination benefits independent actuarial firm using the “projected unit credit” actuarial cost method. Currently payable contributions to the Plan are limited to amounts that are currently deductible for income tax reporting purposes, and are included in accrued expenses in the consolidated balance sheets. Components of net periodic pension cost include the following (dollars in thousands): Years ended March 31, Net benefit obligation at end of year $133,646 $128,658 Fair value of Plan assets: Fair value of Plan assets at beginning of year Actual return on Plan assets Employer contributions Gross benefits paid $ 93,898 $ 94,880 2,050 21,200 (6,198) (7,743) 11,500 (4,739) 2002 2001 2000 Fair value of Plan assets at end of year $110,950 $ 93,898 Service cost Interest cost $ 4,891 $ 4,246 $ 4,544 9,201 8,462 8,071 Expected return on assets (9,612) (8,862) (6,323) Amortization of: Transition asset Prior service cost Actuarial loss Curtailment Special termination benefits (1) (76) 1,199 (121) 1,518 (6) (84) — — — (6) (83) 650 — — Total net periodic pension cost $ 6,999 $ 3,756 $ 6,853 Funding status: Funded status at end of year Unrecognized net actuarial loss Unrecognized prior service cost Unrecognized net transition asset (22,696) (34,760) 33,620 31,687 (195) — (399) — Net prepaid asset (accrued benefit liability) $ 10,729 $ (3,472) The Company sponsors an unfunded Deferred Compensation Plan for key managers. This plan is non-qualified and provides certain key employees defined pension benefits which would equal those provided by the Company’s non-contributory pension plan if the plan were not The special termination benefits and curtailment were the result of limited by the Employee Retirement Security Act of 1974 and the personnel reductions occurring within fiscal 2002. Internal Revenue Code. Expenses related to the deferred compensation plan totaled $1,710 in fiscal 2002, $1,504 in fiscal 2001, and $988 in fiscal 2000. Total benefits accrued under this plan were $10,336 at March 31, 2002 and $8,626 at March 31, 2001. KEMET 2002 ANNUAL REPORT 27 Notes to Consolidated Financial Statements (continued) In addition, the Company has a defined contribution plan (the A reconciliation of the post-retirement medical and life insurance “Savings Plan”) in which all U.S. employees who meet certain eligibil- plan’s projected benefit obligation, fair value of plan assets, and funding ity requirements may participate. A participant may direct the Company status is as follows (dollars in thousands): to contribute amounts, based on a percentage of the participant’s com- pensation, to the Savings Plan through the execution of salary reduction agreements. In addition, the participants may elect to make after-tax contributions. The Company will make annual matching contributions to the Savings Plan of 30% to 50%. The Company contributed $1,914 in fiscal 2002, $2,061 in fiscal 2001, and $1,801 in fiscal 2000. Note 6: Post-Retirement Medical and Life Insurance Plans The Company provides health care and life insurance benefits for certain retired employees who reach retirement age while working for the Company. The components of the expense for post-retirement medical and life insurance benefits are as follows (dollars in thousands): Service cost Interest cost Amortization of actuarial loss Expected return on assets Curtailment Special termination benefits Years ended March 31, 2002 2001 2000 $1,375 $1,268 $1,479 2,688 — (140) 251 306 2,985 111 2,834 248 — — — — — — Total net periodic benefits cost $4,480 $4,364 $4,561 March 31, 2002 2001 Projected benefit obligation: Net obligation at beginning of year $ 43,210 $ 40,396 Service cost Interest cost Actuarial (gain) loss Curtailment Special termination benefits Gross benefits paid 1,375 2,688 (4,813) 109 306 1,268 2,985 347 — — (2,452) (1,786) Net benefit obligation at end of year $ 40,423 $ 43,210 Fair value of plan assets: Employer contributions Actual return on plan assets Gross benefits paid $ 4,852 $ 1,786 25 — (2,452) (1,786) Fair value of plan assets at end of year $ 2,425 $ — Funding status: Funded status at end of year Unrecognized net actuarial loss $(37,998) $(43,210) 1,550 6,390 Net accrued benefit liability $(36,448) $(36,820) The weighted-average rates used in determining post-retirement medical and life insurance costs are as follows (dollars in thousands): Discount rate Rate of compensation increase Health care cost trend on covered charges Years ended March 31, 2002 7.00% 5.00% 2001 7.00% 5.00% 2000 7.50% 5.00% 7.5% decreasing to 8.0% decreasing to 9.5% decreasing to ultimate trend of ultimate trend of ultimate trend of 6.0% in 2005 6.0% in 2008 7.0% in 2008 Sensitivity of retiree welfare results Effect of a one percentage point increase in assumed health care cost trend: • On total service and interest cost components • On post-retirement benefit obligation Effect of a one percentage point decrease in assumed health care cost trend: • On total service and interest cost components • On post-retirement benefit obligation $ 129 $ 737 $(118) $(698) $ 143 $ 933 $(131) $(885) $ 538 $ 3,487 $ (472) $(3,196) 28 KEMET 2002 ANNUAL REPORT March 31, 2002 2001 $ — $ 4,424 14,565 41,638 4,363 14,296 35,853 1,896 60,566 56,469 (4,515) (2,665) (1,486) (4,678) (1,398) (2,476) (75,669) (65,647) Note 7: Income Taxes The components of deferred tax assets and liabilities are as follows The components of earnings (loss) before income taxes consist of (dollars in thousands): (dollars in thousands): Domestic Foreign Years ended March 31, 2002 2001 2000 $(50,111) $530,128 $ 91,373 9,381 38,172 14,191 $(40,730) $568,300 $105,564 Deferred tax assets: Pension benefits Medical benefits Sales and inventory allowances All other The provision for income tax expense (benefit) is as follows (dollars in thousands): Current Federal State and local Foreign Deferred Federal State and local Foreign Years ended March 31, 2002 2001 2000 Deferred tax liabilities: Depreciation and differences in basis (67,003) (57,095) Amortization of intangibles Tax effect of hedging $(22,376) $197,522 $ 27,342 All other (469) 4,321 16,384 10,071 1,051 4,121 (18,524) 223,977 32,514 4,629 (7,859) 2,568 512 (58) (499) 335 193 170 Net deferred income tax liability $(15,103) $ (9,178) The net deferred income tax liability is reflected in the accompany- ing 2002 and 2001 balance sheets as a $40,255 and $35,018 current asset and a $55,358 and $44,196 non-current liability, respectively. Based on the scheduled reversal of deferred tax liabilities and pro- jected future taxable income, the Company believes that the deferred 5,083 (8,023) 2,931 tax assets will ultimately be realized. Accordingly, no valuation allowance Provision for income taxes $(13,441) $215,954 $ 35,445 has been provided for in 2002 or 2001. A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows: Years ended March 31, At March 31, 2002, unremitted earnings of the subsidiaries out- side the United States were deemed to be permanently invested. No deferred tax liability was recognized with regard to such earnings. It is not practicable to estimate the income tax liability that might be 2002 2001 2000 incurred if such earnings were remitted to the United States. Statutory federal income tax rate (35.0)% 35.0% 35.0% State income taxes, net of federal taxes Foreign sales corporation Goodwill amortization Other (0.3) (2.1) 0.9 3.5 1.9 (1.8) 0.1 2.8 0.8 (1.9) 0.3 (0.6) Effective income tax rate (33.0)% 38.0% 33.6% KEMET 2002 ANNUAL REPORT 29 Notes to Consolidated Financial Statements (continued) Note 8: Stock Option Plans The pro forma amounts indicated above recognize compensation The Company has two option plans that reserve shares of common expense on a straight-line basis over the vesting period of the grant. The stock for issuance to executives and key employees. The Company has pro forma effect on net income for fiscal year 2002 is not representative adopted the disclosure-only provisions of Statement of Financial of the pro forma effects on net income in future years because it does Accounting Standards No. 123, “Accounting for Stock-Based Compen- not take into consideration pro forma compensation expense related to sation” (Statement No. 123). On July 1, 2000, the Company adopted grants made prior to 1996. the provisions of FASB Interpretation No. 44, “Accounting for Certain The fair value of each option grant is estimated on the date of Transactions Involving Stock Compensation,” which requires variable grant using the Black-Scholes option-pricing model with the following accounting treatment on certain re-priced options. This requires that weighted-average assumptions: expected life of 5 years for 2001, 2000, any increase in the stock price above the July 1, 2000 adoption date and 1999; a risk-free interest rate of 4.9% for 2002, 5.1% for 2001, and stock price be recognized immediately as compensation expense. For 6.8% for 2000; expected volatility of 57.8% for 2002, 58.0% for 2001, fiscal years 2002, 2001, and 2000, no compensation cost has been rec- and 49.7% for 2000; and a dividend yield of 0.0% for all three years. ognized for the stock option plans. Had compensation costs for the Under the 1992 Executive Stock Option Plan approved by the Company’s two stock option plans been determined based on the fair Company in April 1992, 1,905,120 options were granted to certain value at the grant date for awards in fiscal years 2002, 2001, and 2000, consistent with the provisions of Statement No. 123, the Company’s executives. In May 1992, the Company also approved the 1992 Key Employee Stock Option Plan, which authorizes the granting of options net earnings and earnings per share would have been reduced to the to purchase 2,310,000 shares of common stock. In addition, stockhold- pro forma amounts indicated below (dollars in thousands except per ers approved the 1995 Executive Stock Option Plan at the 1996 Annual share data): Years ended March 31, 2002 2001 2000 Meeting. This plan provides for the issuance of options to purchase 3,800,000 shares of common stock to certain executives. These plans provide that shares granted come from the Company’s authorized but unissued common stock or treasury stock. The prices of Net earnings (loss) As reported $(27,289) $352,346 $70,119 the options granted thus far pursuant to these plans are no less than Pro forma $(32,185) $348,628 $64,286 100% of the value of the shares on the date of grant. Also, the options Earnings (loss) per share: Basic As reported $ (0.32) $ Pro forma $ (0.38) $ Diluted As reported $ (0.32) $ 4.05 4.01 4.00 $ 0.87 $ 0.80 $ 0.85 Pro forma $ (0.38) $ 3.95 $ 0.78 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. 30 KEMET 2002 ANNUAL REPORT A summary of the status of the Company’s three stock option plans as of March 31, 2002, 2001, and 2000, and changes during the years ended on those dates is presented below: 2002 Weighted- Average Exercisable March 31, 2001 Weighted- Average Exercisable 2000 Weighted- Average Exercisable Fixed Options Shares Price Shares Price Shares Price Options outstanding at beginning of year 2,841,020 $13.12 2,632,020 $10.09 Options granted Options exercised Options cancelled 824,250 (299,315) (7,500) 16.59 8.35 16.50 828,000 (549,720) (69,280) 17.51 5.62 11.10 3,286,000 2,379,000 (1,944,260) (1,088,720) $ 6.81 10.71 5.83 9.66 Options outstanding at end of year 3,358,455 $14.39 2,841,020 $13.12 2,632,020 $10.09 Option price range at end of year Option price range for exercised shares Options available for grant at end of year Options exercisable at end of year Weighted-average fair value of options granted during the year $2.50 to $19.80 $2.50 to $18.19 1,823,620 1,717,205 $2.50 to $19.38 $2.50 to $16.07 2,647,870 723,020 $2.50 to $16.07 $2.50 to $16.07 1,412,590 504,210 $9.01 $9.61 $7.54 The following table summarizes information about stock options outstanding at March 31, 2002: Options Outstanding Options Exercisable Range of Exercisable Prices $ 2.50 $ 4.00 to $ 8.00 $12.00 to $16.00 $16.00 to $20.00 Number Outstanding at 3/31/02 9,200 502,005 1,194,000 1,653,250 3,358 455 Weighted- Average Remaining Contractual Life .6 years 5.3 years 6.7 years 8.5 years 7.4 years Weighted- Average Exercisable Price $ 2.50 $ 5.54 $14.50 $17.06 $14.39 Number Exercisable at 3/31/02 9,200 502,005 1,194,000 12,000 1,717,205 Weighted- Average Exercisable Price $ 2.50 $ 5.54 $14.50 $18.19 $11.84 KEMET 2002 ANNUAL REPORT 31 Notes to Consolidated Financial Statements (continued) Note 9: Geographic Information (dollars in thousands): United States Asia Pacific Germany Mexico(2) Years ended March 31,(1) 2002 2001 2000 $231,605 $ 642,406 $408,890 94,133 35,980 45,312 273,853 124,980 86,779 190,289 49,670 — 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 $306,693 and $2,399 in fiscal 2002, $529,946 and $5,236 in fiscal 2001, and $372,656 and $3,444 in fiscal 2000. The facility expired in April 2002, and the Company is determining if it will be replaced. Included in accounts payable, trade, is $19,974 and $30,310 at March 31, 2002 and 2001, respectively, which represents factored Other countries(3) 101,525 278,129 173,246 receivables collected but not remitted. $508,555 $1,406,147 $822,095 (1) Revenues are attributed to countries or regions based on the location of the customer. No customer accounted for more than 10% of net sales in the fiscal year ended March 31, 2002. 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 it $129,600 in the fiscal year ended March 31, 2000. (2) Did not exceed 5% of sales in 2000 and is 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 (dollars in thousands): March 31, (c) The Company sold put options to institutional parties as part of a program to purchase up to 8.0 million shares of its common stock. Net premiums generated from the sale of outstanding put options were $0.6 million and $4.7 million in fiscal 2002 and 2001, respectively, and accounted for as Additional Paid-in Capital. During the year ended March 31, 2002, the Company purchased 500,000 shares of treasury stock in connection with the exercise of such put options. At March 31, 2002, the Company had the maximum potential obligation to purchase approximately 342,000 shares of its common stock at a weighted- average purchase price of $21.09 ($18.12 net of put premiums received) for an aggregate of $7.2 million. The put options are exercisable only at maturity and expire in April and August of 2002 and had a fair value in 2002 2001 favor of the holder of approximately $1.0 million at March 31, 2002. United States Mexico Other $290,705 $314,980 248,222 251,331 858 951 $539,785 $567,262 Note 10: Commitments (a) The Company has agreements with distributor customers which, under certain conditions, allow for returns of overstocked inven- tory 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 for anticipated returns and price protection changes based on historical experience. Charges against sales in fiscal 2002, fiscal 2001, and fiscal 2000 were $33,509, $72,575, and $54,212 respectively. Actual applications against the allowances in fiscal 2002, fiscal 2001, and fiscal 2000, were $63,692, $35,603, and $44,623, respectively. (b) A subsidiary of the Company sells certain receivables dis- counted at .60% above LIBOR for the number of days the receivables 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. (d) The Company has a contract to purchase tantalum, a metal used in the manufacture of tantalum capacitors, through 2003. The con- tractual agreement requires the Company to purchase specific amounts of tantalum ore, powder and wire at fixed prices. The contracted amounts are estimated to be $77 million and $65 million for calendar 2002 and 2003, respectively. (e) The Company’s leases consist primarily of manufacturing equip- ment and expire principally between 2003 and 2007. A number of leases require that the Company pay certain executory costs (taxes, insurance, and maintenance) and contain certain renewal and purchase options. Annual rental expense for operating leases were included in results of operations and were approximately $6,011 in fiscal 2002, $7,346 in fiscal 2001, and $8,300 in fiscal 2000. Future minimum lease payments over the next five fiscal years under non-cancelable operating leases at March 31, 2002 are as follows (dollars in thousands): 2003 2004 2005 2006 2007 Total are outstanding, with a recourse provision not to exceed 5% of the face Minimum lease amount of the factored receivables. The Company has issued a joint and payments $2,389 $979 $493 $80 $21 $3,962 32 KEMET 2002 ANNUAL REPORT Note 11: Supplementary Balance Sheet and Income Statement Detail (dollars in thousands): Accounts receivable: Trade Other Less: Allowance for doubtful accounts Allowance for price protection and customer returns (note 10) Net accounts receivable 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 Net property and equipment Accrued expenses: Salaries, wages and related employee costs Vacation Other Total accrued expenses March 31, 2002 2001 $ 42,360 $143,681 2,708 6,273 45,068 149,954 661 882 22,306 52,489 $ 22,101 $ 96,583 $ 12,834 112,426 $ 12,817 94,462 746,928 653,645 44,424 31,145 947,757 407,972 41,368 75,894 878,186 310,924 $539,785 $567,262 $ 13,361 $ 23,795 8,848 10,043 9,526 15,908 $ 32,252 $ 49,229 Useful life 20 years 20–40 years 10 years 4–10 years — Years ended March 31, specifies a variety of tantalum powder and wire products and their 2002 2001 2000 associated year-by-year prices per pound. Other (income) expense: Loss on retirement of assets $ 931 $3,380 $ 9,405 Accounts receivable discounting 2,399 5,236 3,444 Unrealized gain on foreign currency exchange gains Other — 108 (941) 217 (1,682) 528 The complaint requests various injunctive and declaratory relief requiring KEMET to purchase the contracted products at regular intervals throughout the year, to specifically identify products that it intends to purchase under the agreement and to inspect products when and as they are produced and tendered by Cabot. The complaint also seeks damages in an unspecified amount relating to an alleged repudiation of the agreement to purchase 80,000 pounds of tantalum ore during 2002. $3,438 $7,892 $11,695 The Company has not recorded any liability associated with the Note 12: Legal Proceedings Cabot lawsuit. See commitments in note 10(d). Other Cabot Corporation The Comprehensive Environmental Response, Compensation, and On April 10, 2002, the Company was sued by Cabot Corporation Liability Act of 1980, as amended (CERCLA), and certain analogous (“Cabot”) in the Superior Court of the Commonwealth of Massachusetts state laws impose retroactive, strict liability upon certain defined (Suffolk Co. Civil Action No. 02-1585-BLS) with respect to its existing classes of persons associated with releases of hazardous substances into supply agreement with Cabot for tantalum powder, ore and wire. The the environment. Among those liable under CERCLA (known collec- action arises out of a tantalum supply agreement entered into between tively as “potentially responsible parties” or “PRPs”) is any person who Cabot and a KEMET subsidiary in December 2000. This agreement “arranged for disposal” of hazardous substances at a site requiring requires the subsidiary to purchase and Cabot to sell certain specified response action under the statute. While a company’s liability under amounts of tantalum powder and tantalum wire in the years 2001 through CERCLA is often based upon its proportionate share of overall waste 2003 and tantalum ore in 2001 and 2002. The supply agreement volume or other equitable factors, CERCLA has been widely held to KEMET 2002 ANNUAL REPORT 33 Notes to Consolidated Financial Statements (continued) permit imposition of joint and several liabilities on each PRP. The Note 14: Earnings (Loss) per Share Company has periodically incurred, and may continue to incur, liability Basic and diluted earnings (loss) per share are calculated as follows under CERCLA and analogous state laws with respect to sites used for (dollars in thousands except per share data): 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. Years ended March 31, 2002 2001 2000 Net earnings (loss) $(27,289) $352,346 $70,119 Weighted-average shares outstanding (basic) 85,773,763 86,930,965 80,650,376 Stock options — 1,250,153 1,761,258 The Company is participating, in coordination with Union Carbide, in Weighted-average shares certain PRP-initiated activities related to these sites. The Company expects that it will bear some portion of the liability with respect to these sites; however, any such share is not presently expected to be material to the Company’s financial condition or results of operations. In connection with the acquisition in 1990, Union Carbide agreed, sub- ject to certain limitations, to indemnify the Company with respect to the foregoing sites. The Company or its subsidiaries are at any one time parties to a number of lawsuits arising out of their respective operations, including workers’ compensation or workplace safety cases, some of which involve claims of substantial damages. Although there can be no assur- ance, based upon information known to the Company, the Company outstanding (diluted) 85,773,763 88,181,118 82,411,634 Basic earnings (loss) per share Diluted earnings (loss) per share $ (0.32) $ (0.32) $ $ 4.05 $ 0.87 4.00 $ 0.85 The year ended March 31, 2002 excluded potentially dilutive securities of 766,279 in the computation of diluted earnings per share because the effect would have been anti-dilutive. Note 15: Derivatives, Hedging, and Other Financial Instruments does not believe that any liability which might result from an adverse The Company uses certain derivative financial instruments to determination of such lawsuits would have a material adverse effect on reduce exposures to volatility of foreign currencies and commodities the Company’s financial condition or results of operations. Note 13: Nonrecurring Charges impacting the costs of its products. Hedging Foreign Currencies Certain nonrecurring charges were incurred during the quarters Certain operating expenses at the Company’s Mexican facilities ended December 31, 2001, and March 31, 2002. The charges totaled are paid in Mexican pesos. In order to hedge these forecasted cash $66.6 million in fiscal 2002 pre-tax and were included in the statement flows, management purchases forward contracts to buy Mexican pesos of operations under two captions: $29.8 million in cost of goods sold for periods and amounts consistent with the related underlying cash and $36.8 million in depreciation, amortization, and impairment flow exposures. These contracts are designated as hedges at inception charges. Demand for the Company’s products decreased substantially and monitored for effectiveness on a routine basis. At March 31, 2002 during the first nine months of fiscal 2002, requiring a reevaluation of and 2001, the Company had outstanding forward exchange contracts the Company’s cost structure resulting in (1) charges of $9.9 million that mature within approximately one year to purchase Mexican pesos associated with personnel reductions of approximately 600 and 1,000 with notional amounts of $93.0 million and $89.3 million, respectively. employees in the U.S. and Mexico, respectively, (2) charges of $13.3 The fair values of these contracts at March 31, 2002 and 2001 totaled million in connection with excess and obsolete inventories, including $7.4 million and $5.0 million, respectively, and are recorded as a deriv- precious metals, and (3) asset impairment charges of $15.3 million ative asset on the Company’s balance sheet as other current assets. including $11.6 million of machinery and equipment and a $3.7 mil- Changes in the derivatives’ fair values are deferred and recorded as a lion loss associated with the termination of the Company’s Australian component of “Accumulated Other Comprehensive Income (Loss)” joint venture, all of which were recorded in the quarter ended (AOCI), until the underlying transaction is recorded in earnings. When December 31, 2001. the hedged item affects earnings, gains or losses are reclassified from The Company announced enhancements to its high-frequency AOCI to the consolidated statement of earnings as cost of goods sold. products organization that resulted in the following charges in the quarter The Company anticipates all amounts in AOCI as of March 31, 2002 and ended March 31, 2002: (1) charges of $2.9 million associated with 2001 will be reclassified into earnings within one year. Any ineffective- personnel reductions of approximately 350 employees in the U.S. and Mexico, (2) charges of $3.7 million in connection with excess and ness in the Company’s hedging relationships is recognized immediately in earnings. obsolete inventories, and (3) asset impairment charges of $21.5 million, Prior to adoption of Statement No. 133 (as amended by Statement primarily machinery and equipment. No. 138), the Company recorded gains from foreign currency contracts At March 31, 2002, approximately $2.5 million related to the of $0.9 million and $1.7 million in 2001 and 2000, respectively, as a reduction in the labor force is included in accrued expenses. This component of other income and expense in its statement of operations. amount is expected to be paid within one year. Subsequent to adoption of the new standard, the Company recorded 34 KEMET 2002 ANNUAL REPORT $16.5 and $2.8 million of gains from foreign currency contracts as a Note 16: Common Stock component of cost of goods sold in 2002 and 2001, respectively. The Board of Directors has authorized programs to purchase up to The Company formally documents all relationships between hedging 8.0 million shares of its common stock in the open market. Through instruments and hedged items, as well as risk management objectives March 31, 2002, the Company made purchases of 2.1 million shares and strategies for undertaking various hedge transactions. for $38.7 million. Approximately 240,000 shares were subsequently Hedging Commodity Prices The Company occasionally enters into contracts for the purchase of its raw materials, primarily palladium, which are considered to be derivatives or 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 recorded as a com- ponent of cost of goods sold. At March 31, 2002 and 2001, the Company had derivative assets from these embedded derivatives of $0 and $3.7 million, respectively, 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 loss of $3.7 million and a gain of $2.1 million in 2002 and 2001, respectively. All other contracts to purchase raw materials qualify for the normal purchases exclusion and are not accounted for as derivatives. Other Financial Instruments reissued in connection with employee stock option exercises. At March 31, 2002, the Company held approximately 1,860,000 treasury shares at a cost of $34.3 million. The amount and timing of future 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/or put options may be used to execute the program. 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 The carrying values of cash and cash equivalents, accounts receiv- into common stock on a share-for-share basis. The net proceeds to the able, and accounts payable approximate their fair values. The fair value Company were used to repay outstanding debt under the Company’s of the Company’s debt outstanding at March 31, 2002 and 2001 was short-term credit facility and to fund capital expenditures. $96.5 million and $96.5 million, respectively, which was determined based on indications from a lending institution. KEMET 2002 ANNUAL REPORT 35 Corporate Information Stock Information Dividend Policy The common stock of KEMET Corporation is traded on The New The Company has not declared or paid any cash dividends on York Stock Exchange under the symbol KEM. its common stock. The Company currently intends to retain Registrar and Transfer Agent Boston EquiServe Limited Partnership 150 Royall Street earnings to support its growth strategy and does not anticipate paying dividends 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 requirements, operating results, and financial condi- Canton, Massachusetts 02021 tion of the Company from time to time. 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, 2002, 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 Phone: 864-963-6300 Email: investorrelations@kemet.com Website: www.kemet.com/ir Price Range of Common Stock As of December 9, 1999, the Company’s common stock began trading on The New York Stock Exchange under the symbol KEM. Prior to that date, the common stock was traded on The Nasdaq Stock Market(cid:2) 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: Fiscal year ended March 31, 2002 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal year ended March 31, 2001 First Quarter Second Quarter Third Quarter Fourth Quarter High Low $22.50 $15.95 20.70 19.35 19.96 13.90 15.75 15.75 High Low $44.22 $24.19 33.94 29.19 23.31 22.50 13.75 14.25 36 KEMET 2002 ANNUAL REPORT B o a r d o f D i r e c t o r s David E. Maguire Chairman, Chief Executive Officer, and President E. Erwin Maddrey, II President Maddrey and Associates, an investment and consulting firm Charles E. Volpe Former President and Chief Operating Officer Paul C. Schorr, IV Managing Director Citigroup Venture Capital Equity Partners, LP Stewart A. Kohl Managing General Partner The Riverside Company O f f i c e r s David E. Maguire Chairman, Chief Executive Officer, and President Harris L. Crowley Executive Vice President 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 m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D Larry W. Sheppard (Retired 7/02) Vice President, Human Resources Dr. Jeffrey A. Graves Vice President, Technology and Engineering James A. Bruorton Vice President, Worldwide Distribution Eugene J. DiCianni Vice President, Sales Americas Ravi G. Sastry Vice President, International Sales Manuel A. Cappella Vice President/Managing Director, Mexico Tantalum James P. McClintock Vice President, Ceramic Operations Rick C. Rickenbach Vice President, Tantalum U.S. Dr. Larry A. Mann Vice President, Ceramic Technology Dr. Daniel F. Persico Vice President, Organic Process Technology Michael W. Boone Treasurer/Director of Finance and Secretary KEMET® 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