TOKIN CORPORATION
(Formerly, NEC TOKIN CORPORATION)
Consolidated Financial Statements
As of March 31, 2017 and 2016 and for fiscal years ended March 31, 2017, 2016 and 2015
(With Report of Independent Auditors)
















TOKIN CORPORATION
(Formerly, NEC TOKIN CORPORATION)
Table of Contents


Page
Report of Independent Auditors                                         1
Consolidated Balance Sheets                                         2
Consolidated Statements of Operations                                    4
Consolidated Statements of Changes in Shareholders’ Equity                          5
Consolidated Statements of Cash Flows                                     6
Notes to Consolidated Financial Statements                                 7











Report of Independent Auditors
The Board of Directors and Management of TOKIN Corporation:

Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of TOKIN Corporation and subsidiaries, which comprise the consolidated balance sheets as of March 31, 2017 and 2016, and the consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended March 31, 2017, 2016 and 2015, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with accounting principles generally accepted in Japan; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TOKIN Corporation and subsidiaries as of March 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for the years then ended March 31, 2017, 2016 and 2015 in conformity with accounting principles generally accepted in Japan, which differ in certain respects from accounting principles generally accepted in the United States (see Note 12 to the consolidated financial statements).

We have also recomputed the translation of the consolidated financial statements as of and for the year ended March 31, 2017 into United States dollars. In our opinion, the consolidated financial statements expressed in Japanese yen have been translated into United States dollars on the basis described in Note 1.


/S/ Ernst & Young ShinNihon LLC
Tokyo, Japan
June 1, 2017



1





TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2017 AND 2016


 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
      Cash on hand and in banks
14,910

 
11,733

 
131,725

      Accounts and notes receivable
8,315

 
8,453

 
73,461

      Inventories (note 3)
5,087

 
5,809

 
44,942

      Deferred income taxes (note 5)
14,056

 
80

 
124,181

      Other current assets
993

 
916

 
8,772

      Allowance for doubtful accounts
(22
)
 
(28
)
 
(194
)
            Total current assets
43,339

 
26,963

 
382,887

Property, plant and equipment (note 7):
 
 
 
 
 
      Land
4,007

 
3,995

 
35,401

      Buildings and structures
30,587

 
30,510

 
270,227

      Machinery, equipment and vehicles
48,225

 
48,296

 
426,054

      Construction in progress
380

 
410

 
3,357

      Other
9,951

 
10,222

 
87,914

            Total
93,150

 
93,433

 
822,953

      Less: Accumulated depreciation
(72,489
)
 
(69,543
)
 
(640,419
)
            Property, plant and equipment, net
20,661

 
23,890

 
182,534

Investments and other non-current assets:
 
 
 
 
 
      Investments in affiliates
1,512

 
1,436

 
13,358

      Investments in securities
396

 
345

 
3,499

      Software, net
292

 
436

 
2,580

      Deferred income taxes (note 5)
149

 
186

 
1,316

      Other assets
1,049

 
1,101

 
9,268

      Allowance for doubtful accounts
(2
)
 
(2
)
 
(18
)
            Total investments and other non-current assets
3,396

 
3,502

 
30,003

            Total assets
67,396

 
54,355

 
595,424



See accompanying notes to the consolidated financial statements.


2





TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31, 2017 AND 2016


 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
      Accounts and notes payable
6,174

 
5,835

 
54,545

      Other payable
976

 
1,153

 
8,623

      Short-term borrowings
350

 
913

 
3,092

      Current installments of long-term debt (note 4)
25,911

 
711

 
228,916

      Provision for bonuses
1,119

 
933

 
9,886

      Accrued expenses
1,905

 
1,805

 
16,830

      Income taxes payable (note 5)
131

 
205

 
1,157

      Estimated liabilities for antitrust claims and settlements (note 11)
8,045

 
7,902

 
71,075

      Other current liabilities
316

 
475

 
2,792

            Total current liabilities
44,927

 
19,932

 
396,916

Long-term liabilities:
 
 
 
 
 
      Long-term debt, excluding current installments (note 4)
1,268

 
26,869

 
11,202

      Liability for retirement benefits (note 6)
5,686

 
5,782

 
50,234

      Deferred income taxes (note 5)
1,446

 
1,596

 
12,775

      Other non-current liabilities
1,572

 
2,074

 
13,889

            Total long-term liabilities
9,972

 
36,321

 
88,100

            Total liabilities
54,899

 
56,253

 
485,016

Shareholders’ equity:
 
 
 
 
 
      Capital stock
 
 
 
 
 
           Common stock, no par value (1,100,000 thousand shares authorized
             and 541,869 thousand shares issued and outstanding)
100

 
34,281

 
883

           Convertible preferred stock, no par value (300,000 thousand shares
             authorized, 270,934 thousand shares issued and outstanding) (note 1)

 

 

      Capital surplus

 

 

      Retained earnings (accumulated deficit)
11,429

 
(36,848
)
 
100,972

      Accumulated other comprehensive income
968

 
669

 
8,553

            Total shareholders’ equity
12,497

 
(1,898
)
 
110,408

            Total liabilities and shareholders’ equity
67,396

 
54,355

 
595,424



See accompanying notes to the consolidated financial statements.


3




TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2017, 2016 AND 2015

 
Millions of Yen
 

Thousands of
U.S. Dollars (note 1) 
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
 
 
 
 
 
 
 
 
Net sales
54,946

 
55,321

 
53,572

 
485,431

Cost of sales
(42,911
)
 
(43,514
)
 
(42,552
)
 
(379,106
)
            Gross profit
12,035

 
11,807

 
11,020

 
106,325

Selling, general and administrative expenses (note 8)
(8,935
)
 
(9,265
)
 
(9,536
)
 
(78,938
)
            Operating income
3,100

 
2,542

 
1,484

 
27,387

Other income (expenses):
 
 
 
 
 
 
 
      Interest income
33

 
48

 
31

 
292

      Interest expense
(279
)
 
(310
)
 
(327
)
 
(2,465
)
      Foreign currency exchange gain (loss)
(272
)
 
(141
)
 
812

 
(2,403
)
      Equity income from investments in affiliates
89

 
25

 
80

 
786

      Loss on impairment of long-lived assets (note 7)
(34
)
 
(38
)
 
(25
)
 
(300
)
      Compensation for damage to customers
(1
)
 
(6
)
 
(36
)
 
(9
)
      Gain (loss) on sale of long-lived assets
(6
)
 
(1
)
 
15

 
(53
)
      Gain on sale of business (note 9)

 

 
554

 

      Gain on transfer of plan assets (note 9)

 

 
371

 

      Compensation received for damage
30

 
342

 
186

 
265

      Costs for legal counsel
(524
)
 
(1,356
)
 
(1,314
)
 
(4,629
)
      Costs for antitrust claims and settlements (note 11)
(1,803
)
 
(6,147
)
 
(3,587
)
 
(15,929
)
      Restructuring charges (note 9)
(211
)
 

 
(424
)
 
(1,864
)
      Other
157

 
14

 
(33
)
 
1,387

            Other income (expenses), net
(2,821
)
 
(7,570
)
 
(3,697
)
 
(24,922
)
Income (loss) before income taxes
279

 
(5,028
)
 
(2,213
)
 
2,465

Income tax (expense) benefit (note 5):
 
 
 
 
 
 
 
      Current
(300
)
 
(337
)
 
(564
)
 
(2,650
)
      Deferred
14,117

 
60

 
(200
)
 
124,719

            Total benefit from (provision for) income taxes
13,817

 
(277
)
 
(764
)
 
122,069

Net income (loss)
14,096

 
(5,305
)
 
(2,977
)
 
124,534



 
 
 
 
 
 
 
 
Yen
 

U.S. Dollars (note 1)
Net income (loss) per share - basic (note 10)
26.01

 
(9.79)

 
(5.49)

 
0.23

Net income per share - diluted (note 10)
17.34

 

 

 
0.15




See accompanying notes to the consolidated financial statements.





4




TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FISCAL YEARS ENDED MARCH 31, 2017, 2016 AND 2015
 
Millions of Yen
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Common stock
 
Convertible preferred stock
 
Capital surplus
 
Retained earnings (accumulated deficit)
 
Unrealized gain on securities
 
Pension
liabilities
adjustment
 
Foreign currency translation adjustments
 
Total Shareholders’ equity
Balance at April 1, 2014
34,281

 

 
32,354

 
(60,920
)
 
31

 
(1,039
)
 
1,459

 
6,166

      Net loss

 

 

 
(2,977
)
 

 

 

 
(2,977
)
      Other comprehensive income

 

 

 

 
79

 
1,005

 
2,929

 
4,013

Balance at March 31, 2015
34,281

 

 
32,354

 
(63,897
)
 
110

 
(34
)
 
4,388

 
7,202

Balance at April 1, 2015
34,281

 

 
32,354

 
(63,897
)
 
110

 
(34
)
 
4,388

 
7,202

      Net loss

 

 

 
(5,305
)
 

 

 

 
(5,305
)
      Transfer between capital surplus and
        accumulated deficit

 

 
(32,354
)
 
32,354

 

 

 

 

      Other comprehensive loss

 

 

 

 
(54
)
 
(1,080
)
 
(2,661
)
 
(3,795
)
Balance at March 31, 2016
34,281

 

 

 
(36,848
)
 
56

 
(1,114
)
 
1,727

 
(1,898
)
Balance at April 1, 2016
34,281

 

 

 
(36,848
)
 
56

 
(1,114
)
 
1,727

 
(1,898
)
      Capital reduction
(34,181
)
 

 
34,181

 

 

 

 

 

      Transfer between capital surplus and
        accumulated deficit

 

 
(34,181
)
 
34,181

 

 

 

 

      Net income

 

 

 
14,096

 

 

 

 
14,096

      Other comprehensive income

 

 

 

 
34

 
161

 
104

 
299

Balance at March 31, 2017
100

 

 

 
11,429

 
90

 
(953
)
 
1,831

 
12,497


 
Thousands of U.S. Dollars (note 1)
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Common stock
 
Convertible preferred stock
 
Capital surplus
 
Retained earnings (accumulated deficit)
 
Unrealized gain on securities
 
Pension
liabilities
adjustment
 
Foreign currency translation adjustments
 
Total Shareholders’ equity
Balance at April 1, 2016
302,862

 

 

 
(325,541
)
 
495

 
(9,842
)
 
15,258

 
(16,768
)
      Capital reduction
(301,979
)
 

 
301,979

 

 

 

 

 

      Transfer between capital surplus and
        accumulated deficit

 

 
(301,979
)
 
301,979

 

 

 

 

      Net income

 

 

 
124,534

 

 

 

 
124,534

      Other comprehensive income

 

 

 

 
300

 
1,423

 
919

 
2,642

Balance at March 31, 2017
883

 

 

 
100,972

 
795

 
(8,419
)
 
16,177

 
110,408


See accompanying notes to the consolidated financial statements.

5



TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31, 2017, 2016 AND 2015
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Cash flows from operating activities:
 

 
 

 
 

 
 
     Income (loss) before income taxes
279

 
(5,028
)
 
(2,213
)
 
2,465

     Adjustments to reconcile income (loss) before income taxes
       to net cash provided by operating activities:
 
 
 
 
 
 
 
            Depreciation and amortization
4,794

 
5,752

 
5,204

 
42,354

            Loss on impairment of long-lived assets
34

 
38

 
25

 
300

            Equity income from investments in affiliates
(89
)
 
(25
)
 
(80
)
 
(786
)
            Foreign currency exchange (gain) loss
124

 
185

 
(659
)
 
1,096

            (Gain) loss on sale of long-lived assets
8

 
1

 
(15
)
 
71

            Gain on sale of businesses

 

 
(554
)
 

            Income taxes paid
(333
)
 
(354
)
 
(656
)
 
(2,942
)
            Changes in operating assets and liabilities:
 
 
 
 
 
 
 
                 Accounts and notes receivable, net
141

 
(1,051
)
 
(141
)
 
1,246

                 Inventories
695

 
(283
)
 
(330
)
 
6,140

                 Accounts and notes payable
336

 
461

 
(32
)
 
2,968

                 Liability for retirement benefits
64

 
133

 
(948
)
 
565

                 Accrued expenses
35

 
(343
)
 
305

 
309

                 Other payable
246

 
1,421

 
8

 
2,173

                 Estimated liabilities for antitrust claims and settlements
143

 
4,315

 
3,587

 
1,263

                 Other current liabilities
136

 
145

 
(104
)
 
1,202

                 Other, net
(364
)
 
(299
)
 
196

 
(3,217
)
                       Net cash provided by operating activities
6,249

 
5,068

 
3,593

 
55,207

Cash flows from investing activities:
 
 
 
 
 
 
 
            Purchases of property, plant and equipment
(1,875
)
 
(3,259
)
 
(3,714
)
 
(16,565
)
            Proceeds from sales of property, plant and equipment
2

 
2

 
26

 
18

            Purchase of software
(62
)
 
(429
)
 
(162
)
 
(548
)
            Proceeds from sales of securities

 
3

 

 

            Deposits made to time deposit accounts

 
(3
)
 
(77
)
 

            Withdrawals from time deposits
1

 
2

 
135

 
9

            Proceeds from sales of businesses

 

 
1,075

 

            Other, net
(20
)
 
(63
)
 
2

 
(177
)
                       Net cash used in investing activities
(1,954
)
 
(3,747
)
 
(2,715
)
 
(17,263
)
Cash flows from financing activities:
 
 
 
 
 
 
 
            Increase in short-term borrowings, net
350

 
350

 
350

 
3,092

            Repayments of short-term borrowings
(915
)
 
(1,884
)
 

 
(8,084
)
            Proceeds from issuance of long-term debt
339

 
1,534

 

 
2,995

            Repayments of long-term debt
(716
)
 
(847
)
 
(1,269
)
 
(6,325
)
            Repayments of capital lease obligation
(7
)
 
(74
)
 
(103
)
 
(62
)
                       Net cash used in financing activities
(949
)
 
(921
)
 
(1,022
)
 
(8,384
)
Effect of exchange rate changes on cash and cash equivalents
(169
)
 
(878
)
 
1,092

 
(1,493
)
Net increase (decrease) in cash and cash equivalents
3,177

 
(478
)
 
948

 
28,067

Cash and cash equivalents at beginning of period
11,733

 
12,211

 
11,263

 
103,658

Cash and cash equivalents at end of period
14,910

 
11,733

 
12,211

 
131,725


See accompanying notes to the consolidated financial statements.

6


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

1. Nature of Business and Basis of Presenting Consolidated Financial Statements

Nature of the Business:
TOKIN Corporation (the Company, formerly NEC TOKIN Corporation) was established in Japan in 1938 and is engaged in production and distribution of tantalum capacitors, proadlizer, miniature relays, transmitting communication devices, IC cards and IC tags, magnetic devices, piezoelectric devices and sensors.

On March 12, 2012, the Company entered into a stock purchase agreement (the Stock Purchase Agreement) with NEC Corporation (NEC) and KEMET Electronics Corporation (KEC), a wholly-owned subsidiary of KEMET Corporation (KEMET) based in the United States of America (U.S.), to issue 276.4 million new shares of common stock and KEC acquired 51% of the common stock of the Company (which represents a 34% economic interest, as calculated based on the number of common shares held by KEC, directly and indirectly, in proportion to the aggregate number of common and preferred shares of the Company as of such date) in exchange for cash consideration of 50 million U.S. dollars. The transaction was completed on February 1, 2013. As part of this Stock Purchase Agreement, the Company issued 270.9 million new non-voting convertible preferred stocks to NEC and NEC Capital Solutions Limited (NECAP) for no cash consideration.

In connection with the Stock Purchase Agreement, the Company entered into a stockholders' agreement with KEC and NEC (the Stockholders’ Agreement), which restricts transfers of the Company's capital stock, provides certain tag-along and first refusal rights on transfer for KEC, restricts NEC's ability to convert the preferred stock of the Company, assigns certain management services to be provided by KEC and receives certain board representation rights. The Stockholders' Agreement also refers to an existing loan from NEC to the Company, which matures on May 31, 2018.

Concurrent with execution of the Stock Purchase Agreement and the Stockholders' Agreement, KEC entered into an option arrangement (the Option Agreement) with NEC, which was amended on August 29, 2014, whereby KEC has the right to purchase additional shares of the Company’s common stock from the Company for a purchase price of $50.0 million resulting in an economic interest of approximately 49% while maintaining ownership of 51% of the Company's common stock (the "First Call Option") by providing notice of the First Call Option between February 1, 2013 and April 30, 2015. Upon providing such First Call Option notice, but not before April 1, 2015, KEC could also have exercised a second option (the Second Call Option) to purchase all outstanding capital stock of the Company from its stockholders, primarily NEC, for a purchase price based on a formula specified in the Option Agreement. Subsequent to March 31, 2015 the First and Second Call Options expired on April 30, 2015 without being exercised. From April 1, 2015 through May 31, 2018, NEC may require KEC to purchase all outstanding capital stock of the Company from its stockholders, primarily NEC (the "Put Option"). However, in the event that KEC issues new debt securities principally to refinance its outstanding 10.5% senior notes due 2018 and its currently outstanding credit agreement, including amounts to pay related fees and expenses and to use for general corporate purposes (Refinancing Notes), prior to NEC’s delivery of its notification of exercise of the Put Option, then the earliest date NEC may exercise the Put Option is automatically extended to the day immediately following the final scheduled maturity date of such Refinancing Notes, or in the event such Refinancing Notes are redeemed in full prior to such final scheduled maturity date, then on the day immediately following the date of such full redemption, but in any event beginning no later than November 1, 2019. If not previously exercised, the Put Option will expire on October 31, 2023.

On February 23, 2017, KEC entered into a definitive stock purchase agreement (the Definitive Stock Purchase Agreement) with NEC, to acquire all of the outstanding shares of common stock and preferred stock of the Company. The acquisition of the outstanding shares of common stock and preferred stock of the Company by KEC closed on April 19, 2017. In addition, the Company paid off all long-term debt from NEC amounting to 25,417 million yen (note 4) in accordance with the Stock Purchase Agreement, on the same date. Upon closing, the Company changed its name to TOKIN Corporation and became a wholly-owned subsidiary of KEC.

The Definitive Stock Purchase Agreement served to terminate the existing Stock Purchase Agreement upon the closing of the transaction. The Option Agreement and the Stockholders’ Agreement were also superseded and replaced by the Definitive Stock Purchase Agreement, and each of those agreements terminated at the closing of the transaction.

Concurrent with the Definitive Stock Purchase Agreement, the Company agreed to sell its EM device business.
Please refer to note 12(i)(2) for additional discussion of the divestiture of EM device business.


7


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

Basis for Presenting Consolidated Financial Statements:
The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Company Act of Japan and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan (Japanese GAAP).

The accompanying consolidated financial statements have been reorganized and translated into English (with some expanded descriptions and the added inclusion of consolidated statements of cash flows) from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not considered necessary for fair presentation, is not presented in the accompanying consolidated financial statements.

Currency translation into U.S. dollar
The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts for the year ended March 31, 2017 are included solely for the convenience of readers and have been made at the rate of 113.19 yen to 1 U.S. dollar, the approximate rate of exchange rate at March 31, 2017. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. Additionally, they are not intended to be computed or presented in accordance with generally accepted accounting principles in the United States for the translation of foreign currencies.


2. Summary of Significant Accounting Policies

(1) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its 13 subsidiaries (collectively, the Group). All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting. Such investments include 3 affiliated companies.

(2) Business Combination
In December 2008, the ASBJ issued a revised accounting standard for business combinations, ASBJ Statement No. 21, Accounting Standard for Business Combinations. Major accounting changes under the revised accounting standard are as follows: (1) The revised standard requires accounting for business combinations only by the purchase method. As a result, the pooling of interests method is no longer allowed. (2) The previous accounting standard accounts for research and development costs to be charged to income as incurred. Under the revised standard, in-process research and development (IPR&D) acquired in a business combination is capitalized as an intangible asset. (3) The previous accounting standard accounts for a bargain purchase gain (negative goodwill) to be systematically amortized over a period not exceeding 20 years. Under the revised standard, the acquirer recognizes the bargain purchase gain in profit or loss immediately on the acquisition date after reassessing and confirming that all of the assets acquired and all of the liabilities assumed have been identified after a review of the procedures used in the purchase allocation. This standard was applicable to business combinations undertaken on or after April 1, 2010. The Company adopted this accounting standard effective from April 1, 2010.

In addition, Accounting Standard for Business Combinations (ASBJ Statement No.21, September 13, 2013), Accounting Standard for Consolidated Financial Statements (ASBJ Statement No.22, September 13, 2013) and the Revised Accounting Standard for Business Divestitures (ASBJ Statement No.7, September 13, 2013) have been adopted from the year ended March 31, 2016.

(3) Cash Equivalents
Cash equivalents are short-term investments that are readily convertible into cash and exposed to insignificant risk of changes in value. Cash equivalents include time deposits, all of which mature or become due within three months of the date of acquisition.
 

8


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

(4) Valuation of Inventories
Inventories are stated at the lower of cost or market, determined by the first-in, first-out method.

(5) Method of Depreciation and Amortization
(a) Property, plant and equipment
Property, plant and equipment are stated at acquisition cost. Depreciation is computed by using the straight line method based on the following estimated useful lives:

Buildings and structures 5 to 38 years
Machinery, equipment and vehicles 4 to 10 years

(b) Intangible assets
Intangible assets are being amortized using the straight line method and the range of useful lives for the Company’s intangible assets, software for internal use, ranged from 3 to 5 years.

(6) Impairment of Long-lived Assets
Accounting Standards for Impairment of Long-lived Assets require that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of an asset or asset group may not be recoverable. The impairment losses are recognized when the book value of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continuing use and eventual disposition of the asset or asset group. The impairment losses are measured as the amount by which the book value of the asset exceeds its recoverable amount, which is the higher of the value in use or the net realizable value. Restoration of previously recognized impairment losses is prohibited.

(7) Investments in Securities
Marketable available-for-sale securities are reported at fair value with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity.

Non-marketable available-for-sale securities are stated at cost determined by the moving-average cost method. For other than temporary declines in fair value, non-marketable available-for-sale securities are reduced to net realizable value by a charge to income.

Declines in fair value of available-for-sale securities are analyzed to determine if the decline is temporary or other than temporary. When other than temporary declines occur, the investment is reduced to its fair value and the amount of the reduction is reported as a loss. Any subsequent increases in other than temporary declines in fair value will not be realized until the securities are sold.

(8) Derivative Financial Instruments
Derivative financial instruments, other than those which meet the hedge criteria, are measured at fair value. Gain or loss on such derivative instruments is recognized in earnings.

(9) Hedge Accounting
(a) Method of hedge accounting
Receivables and payables denominated in foreign currencies hedged with foreign exchange forward contracts to fix the future cash flows can be translated using the forward rate. Under this method, an entity can omit evaluation of hedge effectiveness and fair value measurement of the hedging instrument. In addition, the exchange differences arising from the change in the spot rates between the transaction date and the date of the forward contract will be allocated to the period in which the forward contract was made. The remaining exchange differences arising from the difference between the spot rate and the forward rate at the date of the forward contract will be allocated to the period of the settlement.



9


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

(b) Hedging instruments and hedged items
Hedging instruments are foreign currency forward contracts. Hedged items are those that have risk of losses due to fluctuation in foreign currency exchange rates, and that fluctuation is avoided by fixing cash flow.

(c) Hedging policy
The objective of hedging policy is to manage the hedged items exposure to fluctuations in interest rates and foreign currency exchange rates on assets and liabilities.

(d) Method of assessing hedging instruments’ effectiveness
Hedging instruments’ effectiveness is assessed by comparing accumulated cash flow fluctuations from the hedged item and the hedging instrument during a contract period. However, an assessment of effectiveness will be omitted, if the principal terms of the hedging instruments and the hedged items, such as related notional amount and contract terms, are identical and the variability in cash flows is completely offset in a contract period.

(10) Method of Accounting for Significant Allowances and Accruals
(a) Allowance for doubtful accounts
The allowance for doubtful accounts is provided against potential losses on collections at an amount determined using a historical bad debt loss ratio with the addition of an amount individually estimated on the collectability of receivables that are expected to be uncollectible due to bad financial condition or insolvency of the debtor.

(b) Provision for bonuses
Provision for bonuses is calculated based on an estimated amount of future bonus payments attributable to employees’ services for the period.

(c) Liability for retirement benefits
Actuarial gains and losses and past service costs are recognized within shareholders’ equity (accumulated other comprehensive income, hereinafter, AOCI), after adjusting for tax effects, and the difference between retirement benefit obligations and plan assets shall be recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits).

Since the year ended March 31, 2015, the new accounting standard allows the choice of the method of attributing expected benefit to periods between the Straight-line basis and Benefit formula basis. The new accounting standard also revised the calculation method of the discount rate and requires that the discount rate reflect the expected timing of each benefit payment. Compared with the previous fiscal year, the changes in standards related to the method of attributing expected benefit to periods and the calculation method of the discount rate had no effect on the Company’s financial statements.

(11) Asset Retirement Obligations
The Company recognizes asset retirement obligations as liabilities and the corresponding asset retirement costs as tangible fixed assets.

(12) Legal Contingencies
The Company recognizes legal contingencies when the following criteria are met: (a) future outflows of cash and other resources are identified, (b) the outflows occur as a result of the events during current or past accounting periods, (c) it is probable that such outflows occur, and (d) the outflows can be reasonably measured.

(13) Revenue Recognition
Revenue is recognized upon receipt of goods by customers.

(14) Research and Development Cost
Research and development costs are charged to income as incurred.


10


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

(15) Accounting for Leases (Lessee Accounting)
Finance leases, for those in which the ownership of leased property is ultimately transferred to the Group at the end of the lease term, are accounted for using the same depreciation method applied to property, plant and equipment owned by the Group.

Finance leases, in which the ownership of leased property is not ultimately transferred to the lessee at the end of the lease term, are depreciated on the straight line method over the period of lease with no residual value.

(16) Income Taxes
The provision for income taxes is computed based on the pretax income reported in the accompanying consolidated statement of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of net operating loss carry forwards and temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowance is provided to reduce deferred tax assets to an amount that is considered realizable.

(17) Accounting for Consumption Tax
Income and expenses are recorded net of consumption taxes.

(18) Recent Accounting Pronouncements under Japanese GAAP
On March 28, 2016, ASBJ Guidance No. 26 Revised Implementation Guidance on Recoverability of Deferred Tax Assets was issued with an effective date of April 1, 2016. The overview of the changes is as follows:

The revised guidance was set forth by ASBJ upon transfer of the Implementation Guidance on Tax Effect Accounting and the Audit Implementation Guidance on Tax Effect Accounting (sections on accounting treatment) from the Japanese Institute of Certified Public Accountants (JICPA) to ASBJ. The Revised Guidance on Recoverability of Deferred Tax Assets provides guidance on the recoverability of deferred tax assets when implementing the Accounting Standard for Tax Effect Accounting (the Business Accounting Council), in conformity with the guidance on recoverability as set forth in The Auditing Treatment of Determining the Recoverability of Deferred Tax Assets (JICPA Audit Committee Report No.66), which provides a framework for dividing companies into five categories and the accounting treatment when determining the amount to record for deferred tax assets by each category. To conform to this framework, the ASBJ guideline was revised to provide the criteria for categorizing the companies and update part of the accounting treatment for determining the amount to record for deferred tax assets as necessary.

Revised categorization criteria and accounting treatment of amount to record for deferred tax assets
Treatment for an entity that does not meet any of the criteria in types 1 to 5;
Criteria for types 2 and 3;
Treatment for deductible temporary differences which an entity classified as type 2 is unable to schedule;
Treatment for the period which an entity classified as type 3 is able to reasonably estimate with respect to future taxable income before consideration of taxable or deductible temporary differences that exist at the end of the current fiscal year; and
Treatment when an entity classified as type 4 also meets the criteria for types 2 or 3.



11


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

3. Inventories

Inventories consist of the following as of March 31, 2017 and 2016:
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Raw materials
1,298

 
1,332

 
11,467

Work in process
1,340

 
1,740

 
11,838

Finished goods
2,096

 
2,382

 
18,518

Supplies
353

 
355

 
3,119

      Total
5,087

 
5,809

 
44,942



4. Related-Party Transactions

Transactions of the Group with related-parties for the years ended March 31, 2017, 2016 and 2015 are as follows:
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended March 31, 2017
 
Year ended March 31, 2016
 
Year ended March 31, 2015
 
Year ended
March 31, 2017
Purchases from KEMET (**)
1,818

 
2,537

 
1,608

 
16,061

Sales transactions with NT Sales Co., Ltd. (*)
5,510

 
4,958

 
6,151

 
48,679

Gain on Transfer of plan assets
   to NEC Energy Device Ltd.(note 9)

 

 
371

 



The balances due to or due from related-parties at March 31, 2017 and 2016 are as follows:
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Accounts receivable from NT Sales Co., Ltd. (*)
527

 
478

 
4,656

Accounts payable to KEMET (**)
289

 
555

 
2,553

Long-term debt from NEC (***)

 
25,417

 

Current installments of long-term debt from NEC (***)
25,417

 

 
224,552


* The Company sells parts and materials to NT Sales Co., Ltd., its equity-method affiliate, within ordinary course of business.

** The Company sells parts and materials to and purchases parts and materials from KEMET, within ordinary course of business.
The amount of sales to KEMET is immaterial.

*** The Company has unsecured long-term debt from NEC. The loans are made at terms and conditions determined with reference
to current market rates and standards.



12


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

5. Income Taxes

Components of deferred tax assets and liabilities at March 31, 2017 and 2016 are as follows:

 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Deferred tax assets
 
 
 
 
 
      Inventories
66

 
91

 
583

      Provision for bonuses
332

 
255

 
2,933

      Accrued expenses
97

 
125

 
857

      Liability for retirement benefits
1,537

 
1,380

 
13,579

      Property, plant and equipment
1,752

 
1,646

 
15,478

      Investments in securities
436

 
396

 
3,852

      Estimated liabilities for antitrust claims and settlements
2,719

 
2,435

 
24,022

      Net operating loss carry forwards
17,663

 
16,505

 
156,047

      Other
219

 
274

 
1,935

            Total gross deferred tax assets
24,821

 
23,107

 
219,286

      Less: Valuation allowance (*)
(10,311
)
 
(22,840
)
 
(91,094
)
            Deferred tax assets
14,510

 
267

 
128,192

 
 
 
 
 
 
Deferred tax liabilities
 
 
 
 
 
      Unrealized losses on lands
(338
)
 
(308
)
 
(2,986
)
      Undistributed earnings of foreign subsidiaries and others
(1,078
)
 
(1,265
)
 
(9,524
)
      Other
(340
)
 
(28
)
 
(3,004
)
            Deferred tax liabilities
(1,756
)
 
(1,601
)
 
(15,514
)
            Net deferred tax assets (liabilities)
12,754

 
(1,334
)
 
112,678


* Valuation allowance decreased because future taxable profit is available against net operating loss carry forwards due to a gain on disposal of EM device business (see note 12 (i) (2)).


13


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

Reconciliation between the income tax expense (benefit) that would result from applying statutory tax rate to pretax income (loss) and the reported amount of income tax expense (benefit) for the years ended March 31, 2017, 2016 and 2015 are as follows:
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Computed expected tax expense (benefit)
95

 
(1,660
)
 
(788
)
 
839

      Increase (decrease) in income taxes resulting from:
 
 
 
 
 
 
 
            Nondeductible expenses
129

 
737

 
127

 
1,140

            Change of valuation allowance
(13,457
)
 
1,545

 
1,377

 
(118,889
)
            Payment of transfer price

 

 
(51
)
 

            Foreign income tax differential
(413
)
 
(291
)
 
(370
)
 
(3,649
)
            Taxes on undistributed earnings
(199
)
 
(32
)
 
347

 
(1,758
)
            Change in statutory tax rate
32

 
(26
)
 
(60
)
 
283

            Other
(4
)
 
4

 
182

 
(35
)
      Actual income tax expense (benefit)
(13,817
)
 
277

 
764

 
(122,069
)

Amendments to the Japanese tax regulations were enacted into law on March 31, 2015 and March 31, 2016. As a result of these amendments, the statutory income tax rate (1) was reduced to approximately 33.0% effective for the fiscal year beginning April 1, 2015, (2) was 33.8% effective for the fiscal year beginning April 1, 2016, (3) was approximately 33.6% effective for the fiscal year beginning April 1, 2018. Consequently, the statutory income tax rate utilized for deferred tax assets and liabilities expected to be settled or realized in the fiscal period ended March 31, 2017 is 33.8% and for periods subsequent to March 31, 2018 is approximately 33.6%. The Company reduced its capital from 34,281 million yen to 100 million yen during the fiscal year beginning April 1, 2016. The tax rate is different by the company’s capital size, so the Company is subject to different tax rates after the capital reduction. Tax rates above are the tax rates which the Company is subject to taxation based on the Company’s capital size.


6. Liability for Retirement Benefits

The Group has several defined benefit plans and defined contribution plans. Defined benefit plans include the defined benefit pension plans and the lump-sum severance payment plans. Additional retirement benefits are paid in certain circumstances.

Retirement benefit obligations at March 31, 2017 and 2016 are as follows:

 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Projected benefit obligations
12,720

 
12,756

 
112,377

Plan assets
(7,034
)
 
(6,974
)
 
(62,143
)
Unfunded retirement benefit obligations
5,686

 
5,782

 
50,234

Liability for retirement benefits
5,686

 
5,782

 
50,234



14


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

Retirement benefit expenses for the years ended March 31, 2017, 2016 and 2015 are as follows:

 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Service cost
504

 
497

 
582

 
4,453

Interest cost
37

 
136

 
155

 
327

Expected return on plan assets
(212
)
 
(219
)
 
(178
)
 
(1,873
)
Amortization of transitional obligation

 

 
274

 

Amortization of actuarial gains and losses
206

 
180

 
227

 
1,819

Amortization of past service costs
(35
)
 
(35
)
 
(35
)
 
(309
)
Contributions paid for defined
      contribution pension plans
87

 
89

 
97

 
769

Retirement benefit expenses
587

 
648

 
1,122

 
5,186



Basis for calculation of retirement benefit obligations for the years ended March 31, 2017, 2016 and 2015 are as follows:

Allocation method for projected
      retirement benefit cost
Straight line method
Discount rate
0.2% (year ended March 31, 2016: 0.2%, year ended March 31, 2015: 1.1%)
Expected rate of return on plan assets
3.0% (year ended March 31, 2016: 3.0%, year ended March 31, 2015: 2.5%)
Period for amortization of
      transitional obligation
15 years
Period for amortization of
      past service costs
Mainly 15 years (Past service costs are amortized on a straight line basis over certain number of years within employees’ average remaining service periods as incurred)
Period for amortization of
      actuarial gains and losses
Mainly 15 years (Actuarial gains and losses are amortized on a straight line
basis over certain number of years within employees’ average remaining
service periods, starting from the following year after incurred)


7. Loss on Impairment of Long-Lived Assets

Summary of assets or asset groups for which losses on impairment of long-lived assets were recognized for the years ended March 31, 2017, 2016 and 2015 are as follows:

Long lived assets - Idle assets
The Company treats fixed assets comprised of land, buildings, machinery and equipment located at Sendai, Japan as idle assets because no future usage is expected due to obsolescence. Recoverable amounts for idle assets were measured based on net realizable value. Land values are measured based on real estate appraisals, and machinery and equipment are measured based on market values.

For the years ended March 31, 2017, 2016 and 2015, the Company recognized impairment charges of 34 million yen (300 thousand U.S. dollars, note 1), 38 million yen and 25 million yen, respectively.


15


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

8. Research and Development Expenses

Research and development expenses for the years ended March 31, 2017, 2016 and 2015 are as follows:
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Research and development expenses
767

 
872

 
930

 
6,776



9. Other Income (Expenses)

The major components of other income (expense) are as follows:
(1) Gain on sale of business
The access device business was divested in July 2014, resulted in gain on sales of 554 million yen for the year ended March 31, 2015.
(2) Gain on transfer of plan assets
Part of plan assets of the Company was transferred to NEC Energy Device, Ltd., which was a subsidiary of the Company and sold to NEC in April 2010. The gain of 371 million yen for the year ended March 31, 2015 resulted from the actuarial calculation of the plan assets at transfer date.
(3) Restructuring charges
For the year ended March 31, 2015, the Company conducted business restructuring, and recorded losses of 395 million yen in relation to severance benefits and 29 million yen in relation to job-placement assistance.
For the year ended March 31, 2017, the Company recorded expenses of 211 million yen (1,864 thousand U.S. dollars, note 1), in relation to divestiture of EM device business.


10. Net income (loss) per Share

Net income (loss) per share is computed based on the weighted-average number of common shares outstanding during the year. The Company issued convertible preferred stock on March 12, 2012, which is convertible into 270,934 thousand shares of common stock. The diluted net loss per share is not presented as it is anti-dilutive due to the losses incurred for the years ended March 31, 2016 and 2015.


16


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015


11. Contingencies - Legal Proceeding

Beginning March 2014, the Company and certain subsidiaries have been subject to inquiries and investigative proceedings by the responsible authorities of the People’s Republic of China, the United States of America, European Commission, Japan, South Korea, Taiwan, Singapore and Brazil in relation to potential alleged anti-competitive behavior for capacitor products.

As a result of these proceedings, the United States Department of Justice announced a plea agreement with the Company in September 2015 and the plea agreement was approved by the United States District Court in January 2016; the "Statement of Objections" indicating a preliminary opinion of the European Committee on the suspicion of the European competition law violation was received in November 2015; the Taiwan Fair Trade Commission announced a penalty against the Company in December 2015, however the Company is dissatisfied with the sentence and an administrative litigation has been lodged to the Taiwan court in February 2016; in Japan, a cease-and-desist order and a penalty were issued by the Japan Fair Trade Commission in March 2016; Brazil’s Administrative Council for Economic Defense approved a cease and desist agreement with the Company in July 2016. In addition, various civil and class action lawsuits have been filed in the United States and Canada. In May 2016, the Company reached settlement agreements with the class plaintiffs in the United States. For other jurisdictions where the proceedings are still ongoing, the Company estimated the possible losses based on available information. As a result, additional estimated losses of 1,803 million yen (15,929 thousand U.S. dollars, note 1) which may result from the lawsuits, verdicts and investigations were accrued as costs for antitrust claims and settlements for the year ended March 31, 2017.

The actual amounts of payments ultimately made as these investigations are completed and settled may be different from the amounts accrued, which could have an adverse effect on the Company’s business, results of operations and financial condition.


17


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015


12. Significant Differences Between Japanese GAAP and U.S. Generally Accepted Accounting Principles (U.S. GAAP)

The U.S. GAAP information included herein has been retrospectively restated to present the EM device business as a discontinued operation for all periods. Japanese GAAP differs in certain respects from U.S. GAAP. The significant differences between Japanese GAAP and U.S. GAAP as they pertain to the Group are described below, which also includes reconciliations of net loss and shareholders’ equity under Japanese GAAP with the corresponding amounts under U.S. GAAP, along with summary consolidated statements of operations, summary consolidated statements of comprehensive income (loss), summary consolidated balance sheets, and summary consolidated statements of changes in shareholders’ equity under U.S. GAAP.

Summary U.S. GAAP Consolidated Statements of Operations
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended March 31, 2017
 
Year ended March 31, 2016
 
Year ended March 31, 2015
 
Year ended March 31, 2017
Net sales
35,684

 
36,460

 
35,165

 
315,257

Costs of sales
(27,603
)
 
(28,319
)
 
(27,868
)
 
(243,864
)
      Gross profit
8,081

 
8,141

 
7,297

 
71,393

Selling, general and administrative expenses
(7,645
)
 
(8,606
)
 
(8,929
)
 
(67,541
)
      Operating income (loss)
436

 
(465
)
 
(1,632
)
 
3,852

Interest income
31

 
47

 
31

 
274

Interest expense
(226
)
 
(249
)
 
(258
)
 
(1,997
)
Foreign currency exchange gain (loss)
(252
)
 
(25
)
 
777

 
(2,226
)
Equity income from investments in affiliates
89

 
25

 
80

 
786

Loss on sale of long-lived assets

 
(2
)
 
(11
)
 

Compensation received for damage
30

 
342

 
186

 
265

Costs for antitrust claims and settlements
(1,803
)
 
(6,147
)
 
(3,587
)
 
(15,929
)
Restructuring charges

 

 
(553
)
 

Other
60

 
(123
)
 
(106
)
 
531

      Loss before income taxes
(1,635
)
 
(6,597
)
 
(5,073
)
 
(14,444
)
Income tax benefit (note (h))
13,833

 
6

 
361

 
122,210

      Net income (loss) from continuing operations
12,198

 
(6,591
)
 
(4,712
)
 
107,766

 
 
 
 
 
 
 
 
      Net income from discontinued operations (note (i))
2,436

 
1,477

 
1,829

 
21,521

 
 
 
 
 
 
 
 
      Net income (loss)
14,634

 
(5,114
)
 
(2,883
)
 
129,287





18


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

Net income (loss) reconciliations

 
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
note
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Net income (loss) under Japanese GAAP
 
14,096

 
(5,305
)
 
(2,977
)
 
124,534

U.S. GAAP adjustments:
 
 
 
 
 
 
 
 
      Depreciation of property, plant and equipment
(b)
630

 
(69
)
 
(198
)
 
5,566

      Impairment and depreciation adjustments on idle assets
(c)

 
39

 
(15
)
 

      Liability for retirement benefits
(e)
188

 
198

 
(7
)
 
1,661

      Accrued vacation
(f)
6

 
(44
)
 
42

 
53

      Other
(g)
(43
)
 
(49
)
 
(66
)
 
(380
)
      Income tax adjustments
(h)
(243
)
 
116

 
338

 
(2,147
)
Net income (loss) under U.S. GAAP
 
14,634

 
(5,114
)
 
(2,883
)
 
129,287

         Net income (loss) from continuing operations
 
12,198

 
(6,591
)
 
(4,712
)
 
107,766

         Net income from discontinued operations
(i)
2,436

 
1,477

 
1,829

 
21,521


Certain other income (expenses) under Japanese GAAP are classified as operating income (loss) under U.S. GAAP.



Net income (loss) per share attributable to the Company’s common shareholders under U.S. GAAP

 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Weighted average shares outstanding (in thousands)
 
 
 
 
 
 
 
      Basic
541,869

 
541,869

 
541,869

 
541,869

      Diluted
812,803

 
541,869

 
541,869

 
812,803


 
Yen (per share)
 
U.S. Dollars
(note 1)
Basic
 
 
 
 
 
 
 
   Net income (loss) from continuing operations
22.51

 
(12.16
)
 
(8.70
)
 
0.20

   Net income from discontinued operations (note (i))
4.50

 
2.72

 
3.38

 
0.04

   Net income (loss)
27.01

 
(9.44
)
 
(5.32
)
 
0.24

Diluted
 
 
 
 
 
 
 
   Net income (loss) from continuing operations
15.00

 
(12.16
)
 
(8.70
)
 
0.13

   Net income from discontinued operations (note (i))
3.00

 
2.72

 
3.38

 
0.03

   Net income (loss)
18.00

 
(9.44
)
 
(5.32
)
 
0.16


The potential common stock upon conversion of the convertible preferred stock was excluded from the computation of diluted net loss per share, as including such potentially dilutive shares would have an anti-dilutive effect to the net loss from continuing operations per share as the Group recorded a net loss from continuing operations for the fiscal years ended March 31, 2016 and 2015. Such convertible preferred stock is considered a participating security under U.S. GAAP. However, because there is no contractual obligation for the preferred shareholders to fund the losses of the Company, such losses have not been allocated to the preferred shareholders for purposes of determining basic net loss from continuing operations per share attributable to common shareholders.


19


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015


Summary U.S. GAAP consolidated statements of comprehensive income (loss)

 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Net income (loss) under U.S. GAAP
14,634

 
(5,114
)
 
(2,883
)
 
129,287

Other comprehensive income (loss):
 
 
 
 
 
 
 
      Unrealized gain on securities,
            net of tax effect of 17 million yen in 2017,
            none in 2016, and 28 million yen in 2015
16

 
(55
)
 
52

 
141

      Liability for retirement benefits,
            net of tax effect of 38 million yen in 2017,
            none in 2016, and 131million yen in 2015
64

 
(587
)
 
207

 
566

      Foreign currency translation,
            net of tax effect of 21 million yen in 2017,
            none in 2016, and 184 million yen in 2015
88

 
(2,614
)
 
2,617

 
778

Comprehensive income (loss) under U.S. GAAP
14,802

 
(8,370
)
 
(7
)
 
130,772



Shareholders’ equity reconciliations

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
note
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Shareholders’ equity under Japanese GAAP
 
12,497

 
(1,898
)
 
110,408

U.S. GAAP adjustments:
 
 
 
 
 
 
      Business combination adjustments
(a)
1,496

 
1,478

 
13,217

      Accumulated depreciation
(b)
1,192

 
1,082

 
10,531

      Carrying value adjustments due to reversal of
        impairment loss on idle long-lived assets
(c)
998

 
998

 
8,817

      Carrying value adjustments due to impairment
        loss on long-lived assets related to capacitor business
(d)
(1,781
)
 
(1,674
)
 
(15,735
)
      Liability for retirement benefits
(e)
(731
)
 
(859
)
 
(6,458
)
      Accrued vacation
(f)
(255
)
 
(261
)
 
(2,253
)
      Other
(g)
666

 
90

 
5,883

      Income tax adjustments
(h)
(832
)
 
(508
)
 
(7,350
)
Shareholders’ equity under U.S. GAAP
 
13,250

 
(1,552
)
 
117,060



Summary U.S. GAAP consolidated statements of changes in shareholders’ equity

 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Shareholders’ equity at beginning of year
(1,552
)
 
6,818

 
6,821

 
(13,712
)
      Total comprehensive loss
14,802

 
(8,370
)
 
(7
)
 
130,772

      Increase in capital surplus

 

 
4

 

Shareholders’ equity at end of year
13,250

 
(1,552
)
 
6,818

 
117,060


20


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015




Summary U.S. GAAP Consolidated Balance Sheets

 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
      Cash and cash equivalents
11,928

 
10,292

 
105,380

      Accounts and notes receivable, net
6,948

 
7,397

 
61,384

      Inventories
3,458

 
4,129

 
30,550

      Other current assets
551

 
597

 
4,868

      Assets held for sale (current) (note (i))
13,305

 
4,847

 
117,546

            Total current assets
36,190

 
27,262

 
319,728

Property, plant and equipment, net (notes (b), (c) and (d))
16,652

 
17,758

 
147,116

Deferred income taxes (note (h)) (*)
12,150

 
230

 
107,342

Total investments and other non-current assets
3,174

 
3,236

 
28,041

Assets held for sale (non-current) (note (i))

 
8,129

 

            Total assets
68,166

 
56,615

 
602,227

 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
      Short term borrowings and current installments of long-term debt
25,767

 
350

 
227,644

      Other current liabilities
16,215

 
16,075

 
143,254

      Liabilities held for sale (current) (note (i))
5,592

 
4,053

 
49,404

            Total current liabilities
47,574

 
20,478

 
420,302

Long-term debt, excluding current installments

 
25,418

 

Liability for retirement benefits (note (e))
5,722

 
5,938

 
50,552

Deferred income tax liabilities (note (h)) (*)
160

 
1,823

 
1,414

Other non-current liabilities
1,460

 
2,070

 
12,899

Liabilities held for sale (non-current) (note (i))

 
2,440

 

            Total liabilities
54,916

 
58,167

 
485,167

Shareholders’ equity:
 
 
 
 
 
      Capital stock
100

 
34,281

 
883

      Capital surplus (note (j))
32,222

 
32,222

 
284,672

      Accumulated deficit (note (j))
(18,971
)
 
(67,787
)
 
(167,603
)
      Accumulated other comprehensive income
(101
)
 
(268
)
 
(892
)
            Total shareholders’ equity
13,250

 
(1,552
)
 
117,060

Commitments and Contingencies
 
 
 
 
 
            Total liabilities and shareholders’ equity
68,166

 
56,615

 
602,227


* Deferred tax assets are separately presented because these balance sheet amounts have become individually important.
The Company has early adopted Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes.


21


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

Cash flows reconciliation

There are no material differences between Japanese GAAP and U.S. GAAP for purposes of presenting or reconciling the consolidated statements of cash flows, except for discontinued operations. Cash and cash equivalents, depreciation and amortization, and capital expenditures relating to the relevant component that was disposed of during fiscal years beginning on or after December 15, 2014, reclassified as discontinued operations, are as follows.
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
Year ended
March 31, 2017
 
Year ended
March 31, 2016
 
Year ended
March 31, 2015
 
Year ended
March 31, 2017
Cash and cash equivalents
2,982

 
1,440

 
1,045

 
26,345

Depreciation and amortization
1,885

 
2,892

 
2,245

 
16,653

Capital expenditures
511

 
2,568

 
3,077

 
4,515





Notes:
(a)
Business combination adjustments
Historically, the Company entered into various business combinations and accounted for such transactions in accordance with common business practices dictated by the Commercial Code of Japan, where acquired assets and liabilities were not required to be fair valued. For U.S. GAAP purposes, the Company retroactively applied a purchase price allocation at the time of each transaction to reflect the fair value adjustments to acquired assets and liabilities, including the determination of identifiable intangible assets and goodwill because acquired assets and liabilities were required to be recorded at fair value under ASC 805. Except for the acquired value of the land (including the effects of changes in foreign exchange rates), impact of such fair value adjustments to acquired assets, intangible assets, liabilities and goodwill were subsequently diminished through depreciation and amortization, or disposition and impairment, resulting in no adjustment to the consolidated balance sheets as of March 31, 2017 and 2016.

(b)
Depreciation of property, plant and equipment
Under Japanese GAAP, the Company depreciated property and equipment over the useful life of each asset under the declining-balance method through March 31, 2011. The Company changed its depreciation method to the straight-line method on a prospective basis effective April 1, 2011.

For U.S. GAAP, ASC 360, Property, Plant and Equipment provides that the cost of property and equipment be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from its use. The Company has determined that the straight-line method should be used.


22


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

The following table presents a reconciliation of property, plant and equipment from Japanese GAAP to U.S. GAAP as of March 31, 2017 and 2016:
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
Gross carrying amount
 
Accumulated depreciation
 
Gross carrying amount
 
Accumulated depreciation
 
Gross carrying amount
 
Accumulated depreciation
Balance under Japanese GAAP
93,150

 
(72,489
)
 
93,433

 
(69,543
)
 
822,953

 
(640,419
)
U.S. GAAP adjustments:
 
 
 
 
 
 
 
 
 
 
 
   Change in depreciation
55

 
1,053

 
(1
)
 
994

 
486

 
9,303

   Impairment and depreciation adjustments
      related to idle assets (note (c))
1,032

 
(33
)
 
1,224

 
(226
)
 
9,117

 
(292
)
   Step up in asset value related to
      purchase price allocation from historical
      business combination (note (a))
1,496

 

 
1,478

 

 
13,217

 

   Impairment loss related to
      capacitor business (note (d))
(1,781
)
 

 
(1,674
)
 

 
(15,735
)
 

   Reclassification to assets held for sale
       (note (i))
(25,448
)
 
18,921

 
(25,415
)
 
17,399

 
(224,825
)
 
167,161

   Other
202

 
494

 
202

 
(113
)
 
1,786

 
4,364

   Total adjustments
(24,444
)
 
20,435

 
(24,186
)
 
18,054

 
(215,954
)
 
180,536

Balance under U.S. GAAP
68,706

 
(52,054
)
 
69,247

 
(51,489
)
 
606,999

 
(459,883
)


(c)
Impairment and depreciation adjustments on idle assets
Under Japanese GAAP, the Company groups assets for business use based on business units. In addition, the Company groups idle assets, including temporarily idle assets where no future use is expected, into a separate asset group.

Under U.S. GAAP, for purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and liabilities at the smallest unit of which identifiable cash flows can be determined. Further, under U.S. GAAP, long-lived asset that has been temporarily idle shall not be accounted for as if abandoned.

Therefore, the impairment losses related to the Company’s temporarily idle assets which had been recognized under Japanese GAAP is reversed under U.S. GAAP. When the temporarily idled assets are grouped with other assets and liabilities at the smallest unit of which identifiable cash flows can be determined, as required under U.S. GAAP, the carrying amount of its temporarily idled assets are deemed recoverable.


(d)
Impairment loss related to capacitor business
Since it was determined that the carrying amounts of long-lived assets related to the capacitor business are not recoverable, impairment losses were measured and recognized as the amount by which the carrying amounts exceeded fair value.

Under both U.S. GAAP and Japanese GAAP, discounted cash flows were used to determine fair value. However, the carrying amounts under U.S. GAAP were higher than under Japanese GAAP due to differences in depreciation methods and the fair value adjustments related to purchase price allocation in the historical business combination under U.S. GAAP. Further, impairment losses were recognized as other expenses under Japanese GAAP while recognized as selling, general and administrative expenses under U.S. GAAP.


23


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015


(e)
Liability for retirement benefits
Under U.S. GAAP, the differences between the fair value of the plan assets and the projected benefit obligation of pension or post retirement plans are required to be recognized on the balance sheet. Actuarial gains or losses are permitted to be either recorded as gains or losses as incurred or deferred through the use of the corridor approach, or in any systematic method that results in earlier recognition than the corridor approach.
Prior to March 31, 2014, under Japanese GAAP, the differences between the fair value of the plan assets and the projected benefit obligation of pension or post retirement plans were not required to be recognized on the balance sheet. Actuarial gains or losses were recognized immediately or allocated over a certain number of years within the average remaining service period starting from the period in which they were incurred or a subsequent period. Use of the corridor approach was not permitted. As of March 31, 2014, the Company adopted the revised Japanese GAAP accounting standard for pension, as described in note 2(10)(c), and the differences between the fair value of the plan assets and the projected benefit obligation of pension or post retirement plans were recognized on the consolidated balance sheet as described in note 6.

The basis for actuarial determination of projected retirement benefit obligations (PBO), such as allocation method for projected retirement benefit cost and discount rate, are different between Japanese GAAP and U.S. GAAP, which has been adjusted accordingly.

The following represent the most relevant differences between Japanese GAAP and U.S. GAAP in connection with assumptions used to calculate the pension liability:
(1)
Under Japanese GAAP, it is acceptable to select the same discount rate as the prior years unless there would be a material difference between the projected benefit obligations estimated using the rate as of the balance sheet date and the one estimated using the prior year’s rate. However, there is no such exception under U.S. GAAP.
(2)
Under Japanese GAAP, it is allowed to choose the method of attributing expected benefit to periods between the Straight-line basis and Benefit formula basis. However, only benefit the formula method is permitted under U.S. GAAP.


(f)
Accrued vacation
Under U.S. GAAP, an employer shall accrue a liability for employees’ compensation for future absences, such as paid vacation, if certain conditions are met. Such liabilities are accrued in the periods in which the benefits are earned. Japanese GAAP does not specifically require a company to accrue a liability for future compensated absences.


(g)
Other
Others included in the net loss and shareholders’ equity reconciliations consist of U.S. GAAP adjustments related to inventory valuation, allowance for doubtful accounts and timing difference for recognition of certain accruals.


(h)
Income tax adjustments
Intraperiod tax allocation
U.S. GAAP requires total income tax expense or benefit for a period be allocated to different components of comprehensive income and shareholders' equity, including continuing operations, discontinued operations, extraordinary items, each component of other comprehensive income, and items charged or credited directly to shareholders' equity. All components are considered in determining the tax benefit of a loss from continuing operations. There is no similar or equivalent guidance under Japanese GAAP.

Deferred taxes on undistributed earnings of investees accounted for under the equity method
Under Japanese GAAP, with respect to profits related to investments in equity method investees, deferred taxes are not recognized except when a parent company plans recovery through dividend distributions unless the parent company has a clear intention to sell the investment in the equity method investees in the foreseeable future. Under U.S. GAAP, deferred

24


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

taxes are generally recognized on temporary differences related to investments in investees accounted for under the equity method except for corporate joint ventures that are essentially permanent in duration. The amounts of deferred tax liabilities on undistributed earnings amount to 109 million yen (963 thousand U.S. dollars, note 1) and 89 million yen as of March 31, 2017 and 2016, respectively.

Offset and presentation of deferred tax liabilities and assets
The Company has early adopted Accounting Standards Update 2015-17. Under this update, U.S. GAAP requires that all deferred tax liabilities and assets, as well as any related valuation allowance shall be offset and presented as a single noncurrent amount, for a particular tax-paying component of an entity and within a particular tax jurisdiction. Under Japanese GAAP, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets shall be offset and presented a single amount for a particular tax-paying component of an entity and within a particular tax jurisdiction.


(i)
Discontinued operations
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). ASU 2014-08 changes the definition of a discontinued operation and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years for a public business entity and not-for-profit entity, and for fiscal years beginning on or after December 15, 2014, and interim period within annual periods beginning on or after December 15, 2015 for all other entities.

(1)
Divestiture of access device business
On March 31, 2014, the Company reached an agreement with a third party to divest the access device business. After a thorough review of the business portfolio, the Company no longer believed that the access device business is aligned with its long-term strategy. The divestiture was completed in July 2014.

The divestiture of the access device business met the conditions of discontinued operations under U.S. GAAP. The results of discontinued operation for the year ended March 31, 2015 are 307 million yen and presented as a separate line item from the net loss from continued operations in the summary U.S. GAAP consolidated statements of operations.

(2)
Divestiture of EM device business
In order to concentrate the Company’s business resources on its main business, the Company incorporated a wholly-owned subsidiary named EM Devices Corporation (EMD Corporation) by means of a company split to hold its EM device business, and on the same date as such incorporation, sold all the outstanding shares of EMD Corporation to NTJ Holdings 1 Ltd., a special purpose entity owned by funds managed or operated by Japan Industrial Partners, Inc. (JIP), with which the Company entered into a definitive sales agreement on February 23, 2017. The sale price is expected to be approximately 49.6 billion yen (438 million U.S. dollars, note 1), reflecting adjustments for net debt at closing. The proceeds of this transaction was used in part to repay the NEC intercompany debt resulting in a pre-tax gain on disposal of approximately 40.7 billion yen (360 million U.S. dollars, note 1) to be recorded in the first quarter of fiscal year ending March 31, 2018. The closing date was April 14, 2017. Subsequent to the transaction, the Group does not retain significant continuing involvement with EMD Corporation. JIP is not a related party of the Company.

The above-mentioned decision represents a strategic shift that will have a major effect on the Group’s business operation and financial results. Consequently, pursuant to ASC 205-20, the financial position and operating results of the component that was disposed of are presented separately in the summary U.S. GAAP consolidated balance sheets and consolidated statements of operations as those of discontinued operations. Under Japanese GAAP, there are no classification requirements between discontinued operations and continuing operations.

The financial position and results of operations of the relevant component that was disposed of during fiscal years beginning on or after December 15, 2014, reclassified as discontinued operations, are as follows.


25


TOKIN CORPORATION AND SUBSIDIARIES
(Formerly, NEC TOKIN CORPORATION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017, 2016 AND 2015

Financial position
 
Millions of Yen
 
Thousands of
U.S. Dollars (note 1)
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
Assets:
 
 
 
 
 
      Cash and cash equivalents
2,982

 
1,440

 
26,345

      Accounts and notes receivable, net
1,637

 
1,378

 
14,462

      Inventories
1,624

 
1,707

 
14,348