Note 3.
Restructuring of Operations

Fiscal 1998 Cost Reduction Action

As part of an overall cost reduction plan implemented in April 1998, the Company announced a worldwide workforce reduction of approximately 1,400 people, primarily in its Santa Clara, California, headquarters and other front-end wafer manufacturing operations. This included approximately 500 employees affected by the previously announced closure of the Company’s 5- and 6-inch wafer manufacturing facilities in Santa Clara. In addition to new cost reduction actions, the plan includes modification of certain previously announced actions related to the closure of the Santa Clara 5- and 6-inch wafer manufacturing facilities, as well as additional impairment loss related to the write-down of certain assets in the 0.65-micron wafer manufacturing facility in Arlington, Texas.

As a result, the Company recorded a net $63.8 million restructuring charge in fiscal 1998. The restructuring charge included approximately $32.5 million for severance and lease termination costs, $10.6 million for the write-off of assets related to discontinued product development programs and $10.2 million for the write-off of assets related to discontinued process technology development. It also included an additional $20.3 million impairment loss on certain assets in the Arlington wafer manufacturing facility. The additional impairment loss was caused by weakened business conditions that significantly reduced the demand for wafers from the 0.65-micron wafer manufacturing facility. Of these charges, $32.5 million represent cash charges. These charges were partially offset by the release of $6.8 million of excess reserves for severance and other exit costs related to the Company’s reorganization of its operating structure in the first quarter of fiscal 1997 and the release of $3.0 million of excess reserves for other exit costs related to the Company’s planned realignment of its manufacturing facilities announced in the fourth quarter of fiscal 1997.

In connection with these cost reduction actions, the Company paid $9.6 million of severance to approximately 357 terminated employees. Included in accrued liabilities at May 31, 1998 is $25.0 million related to severance and other exit costs for those actions that have not yet been completed as of May 31, 1998. The Company expects these actions to be completed by the end of calendar 1998.

Fairchild Semiconductor

In June 1996, the Company reorganized its operating structure into four business groups that comprised the Analog Group, the Communications and Consumer Group, the Personal Systems Group and the Fairchild Semiconductor ("Fairchild") Group. The purpose of the reorganization was to enhance the focus and support of the Company’s strength in analog and mixed-signal technology. In connection with this reorganization, Fairchild was formed as a separate organization consisting of the Company’s family logic, memory and discrete product lines, which the Company announced it intended to divest. As a result, the Company recorded a $55.3 million special charge that included a restructuring charge of $49.7 million for the write-down of fixed assets to estimated fair value, as well as costs associated with staffing reductions and other exit costs necessary to reduce the Company’s infrastructure in both Fairchild and the remaining National core business. Of the $49.7 million restructuring charge, $39.7 million represented cash charges and $10.0 million represented fixed asset write-downs and other noncash items. The remaining components of the $55.3 million special charge were recorded in cost of sales and consisted of $2.0 million to write-down certain Fairchild inventory to net realizable value and $3.6 million for other cost reduction activities.

As a result of these work force reductions, the Company paid $6.9 million of severance to approximately 87 terminated employees and $3.3 million for other exit costs. Included in accrued liabilities at May 31, 1998 was $5.1 million related to remaining severance and other costs of restructuring activities from the realignment of the Company’s selling, general and administrative expenses. These costs are expected to be paid over the next 6 months. In fiscal 1997, the Company also paid approximately $5.2 million in retention bonuses to certain Fairchild employees, which were expensed to operations.

The Company’s reorganization included plans to divest the Fairchild businesses, including related assets, by the end of fiscal 1997. The Fairchild fixed assets held for disposition included land, buildings and building improvements, and equipment associated with the 4-inch, 5-inch and 6-inch wafer fabrication operations in South Portland, Maine, the 6-inch wafer fabrication operation in West Jordan, Utah, and the assembly and test operations in Penang, Malaysia, and Cebu, Philippines. The carrying value of the Fairchild fixed assets held for disposition was $318.5 million. The Company originally recorded a $192.0 million charge, as part of the restructuring charge, primarily to write-down Fairchild assets to estimated fair value. This charge was fully reversed in the third quarter of fiscal 1997 when the disposition of the Fairchild businesses and related assets became imminent and it was apparent that the reserves were no longer required. In March 1997, the Company completed the disposition of Fairchild under a recapitalization transaction with Sterling, LLC, a Citicorp Venture Capital, Ltd. investment portfolio company in related businesses, and Fairchild’s management. The recapitalization was valued at $550 million. In addition to retaining a 15 percent equity interest in Fairchild, for which the Company invested $12.9 million, the Company received cash of $401 million and a promissory note with a face value of $77 million, and certain liabilities were assumed by Fairchild. The Company recorded a gain of $40.6 million from the disposition.

Realignment of Manufacturing Facilities

In May 1997, the Company announced that it planned a comprehensive realignment of its manufacturing facilities designed to accelerate its production transition to manufacturing 8-inch wafers with 0.35-micron circuit geometries, reduce costs and rationalize production flows. In connection with this plan, the Company recorded a restructuring charge of $84.5 million that included an impairment loss of $60.1 million related to the write-down of certain assets in its Arlington wafer manufacturing facility. This impairment arose from the Company’s cancellation of further investment in its 6-inch, 0.65-micron wafer fabrication expansion that began in 1995. The Company’s acceleration of investment in its 8-inch wafer fabrication facility in Maine, which has resulted in the availability of 0.35-micron capacity sooner than previously expected, has significantly reduced the Company’s requirements for 0.65-micron capacity.

In addition to the impairment loss, the Company also recorded $11.0 million of exit costs related to the closure of the 5- and 6-inch wafer fabrication facilities in Santa Clara. The closure process is expected to be completed within the next 6 months, during which time the Company will transfer remaining production activities to other existing manufacturing lines. The exit costs primarily related to severance costs, the removal of production equipment and the dismantling of the production facilities. Approximately 500 employees are currently employed in these two wafer fabrication facilities and the Company does not expect to place the majority of the affected employees elsewhere in the organization. The Company expects to pay approximately $7.2 million in retention bonuses to certain Santa Clara, California, employees as a result of the previously announced closure of the Santa Clara 5- and 6-inch wafer fabrication facilities, which is expected to be completed by the end of calendar 1998. These amounts are being expensed to operations ratably over the employees’ service period up through the close of the facilities. The Company also recorded $10.3 million of exit costs associated with the Company’s decision to halt expansion of its 6-inch wafer fabrication line in Greenock, Scotland. These costs primarily related to the write-off of previously capitalized construction in progress costs and other exit costs including employee related costs. The remaining $3.1 million related to severance and other exit costs at other manufacturing facilities. Of these restructuring charges, $20.2 million represented cash charges.

During fiscal 1998, the Company paid $1.5 million of severance to approximately 54 terminated employees and $0.8 million for other exit costs related to these restructuring actions. Included in accrued liabilities at May 31, 1998 is $15.6 million related to severance and other exit costs for those actions that have not yet been completed as of May 31, 1998.

Other Restructuring Actions

During fiscal year 1996, the Company utilized $6.8 million of restructuring reserves primarily attributable to severance and fixed asset disposals related to the completion of the consolidation of two California locations into one location of the Company’s wholly owned subsidiary, Dynacraft, Inc. ("DCI"), which was sold in fiscal 1996, and the transfer of the remaining military assembly operations in South Portland, Maine, to Singapore.