EXHIBIT 10.32
May 29, 1998
This letter sets forth the understanding and agreement between you and FSC
Semiconductor Corporation (the "Company") as follows:
Background. On March 11, 1997 you purchased from the Company certain shares
of the Company's Class A Common Stock ("Common Stock") and 12% Series A
Cumulative Compounding Preferred Stock pursuant to the terms of the Securities
Purchase and Holders Agreement (the "Stockholders Agreement"), dated March 11,
1997, among you, other FSC senior managers, the Company, Sterling Holding
Company, LLC and National Semiconductor Corporation.
Under the terms of the Stockholders Agreement, ten seventeenths (10/17) of
the shares of Common Stock you purchased were deemed to be "Incentive
Securities." Because the Company has the option under the Stockholders Agreement
to purchase Incentive Securities under some circumstances at a price
substantially below fair market value if your employment with the Company
terminates before March 11, 2002, the Incentive Securities are considered to be
subject to a substantial risk of forfeiture for United States federal income tax
purposes (hereinafter referred to as the "risk of forfeiture"). Assuming that a
section 83(b) election was not filed with respect to your Incentive Securities,
you will have reportable compensation income at the time the risk of forfeiture
ends. The compensation income will be equal to the value of your Incentive
Securities at that time less your cost.
The Company has agreed to eliminate the risk of forfeiture and to amend the
terms of the Stockholders Agreement accordingly. As a result, you will have
compensation income for 1998 equal to the value of your Incentive Securities
less your cost. An independent appraiser, Howard, Lawson & Co., has determined
that the Common Stock has a current fair market value of $7.75 per share. Since
you paid $.50 per share for your Incentive Securities, based upon the appraised
value of the Common Stock you will have 1998 compensation income of $7.25 per
share upon the elimination of the risk of forfeiture that will result from the
amendment of the Stockholders Agreement. The Company will report that amount on
your Form W-2 for 1998 and will take a compensation deduction in the same
amount. In addition, the Company will provide the program described immediately
below to enable you to pay the taxes arising from the elimination of the risk of
forfeiture.
Loan. To enable you to pay the taxes due as a result of this additional
1998 income, the Company will cause Fairchild Semiconductor Corporation
("Fairchild") to make you an interest-free loan (the "Loan"), which is subject
to cancellation and acceleration as described below. The Loan will be made upon
the amendment of the Stockholders Agreement in an amount equal to the net
additional taxes that will be due in the 1998 tax year as a result of the
elimination of the risk of forfeiture. The Loan will be equal to an amount no
greater than 49.6% of the income realized, for United States state and federal
income tax purposes, upon the elimination of the risk of forfeiture.
The attached Promissory Note will evidence the Loan. Please sign and return
the Promissory Note with the signed copy of this letter.
Loan Cancellation; Acceleration. For the purposes of the Loan cancellation
program, the Loan will consist of two components: (i) an "Ordinary Income
Component" equal to 42.5% of the Loan and (ii) a "Capital Gain Component" equal
to 57.5% of the Loan. The components of the Loan will be canceled in accordance
with the following terms and conditions:
1. One-third of the Ordinary Income Component of the Loan will be canceled
on each of the first, second and third anniversaries of the date hereof,
provided you remain employed by the Company or Fairchild on each such
anniversary date.
2. The entire Capital Gain Component of the Loan will be canceled on the
fourth anniversary of the date hereof, provided you remain employed by the
Company or Fairchild on such anniversary date.
3. Upon consummation of a Public Offering (as defined in the Stockholders
Agreement), provided
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you remain employed by the Company or Fairchild on the date of such
consummation, the Loan will be canceled in its entirety.
4. If your employment with the Company or Fairchild is terminated for any
reason, all portions of the Loan not canceled as of your Termination Date (as
defined in the Stockholders Agreement) will become immediately due and payable
in accordance with the terms of the Promissory Note evidencing the Loan.
However, if your employment is terminated as the result of your death or your
temporary or permanent disability, then:
(a) any remaining balance of the Ordinary Income Component of the Loan
shall be canceled in full on the date your employment terminates on account
of your death or disability;
(b) if the Company or its designee exercises the Purchase Option in
respect of your Incentive Securities pursuant to the Stockholders
Agreement, the Capital Gain Component of the Loan shall be repaid by
set-off against the proceeds due to you or your estate as the result of the
exercise of such Purchase Option; and
(c) if the Company fails to exercise the Purchase Option to acquire
all of your Incentive Securities, then (i) the Loan will not be accelerated
unless your Incentive Securities are sold prior to March 11, 2002, and in
the event of such sale the Capital Gain Component of the Loan shall be
immediately due and payable in accordance with the terms of the Promissory
Note evidencing the Loan, and (ii) following the date your employment
terminates on account of your death or disability the Capital Gain
Component of the Loan shall bear interest at the applicable federal rate
determined as of the date on which your employment terminates until such
component is repaid in full.
Loan Cancellation Income and Gross-Up. You will have additional
compensation income as result of the cancellation of the Loan under paragraphs
1, 2, 3, 4 and 5(a) above. The Company will pay you a bonus to cover the taxes
due as a result of this additional income. The gross amount of the bonus will be
"grossed-up" so that the net amount of the bonus, after taxes on the bonus
itself, will equal the taxes payable for the compensation income resulting from
cancellation of your debt.
Compensation from Interest-Free Loan Feature and Gross-Up. You will also
have compensation income each year equal to imputed interest on the Loan for
that year. The Company will pay you a "grossed-up" bonus to cover the taxes due
on account of this income.
Agreement as to Application of Loan Proceeds; Valuation. You agree that the
Loan shall be used to pay taxes due as a result of the elimination of the risk
of forfeiture. In addition, by signing this letter you authorize and direct the
Company to apply the proceeds of your Loan directly to the payment of
withholding taxes due upon the elimination of the risk of forfeiture. The
Company agrees that it shall report your income on Form W-2 and base its
associated compensation income tax deduction on the above-referenced valuation
of $7.75 per share of Common Stock, less your original cost of $.50 per share.
If the Company's deduction and your income resulting from the elimination of the
risk of forfeiture were to be adjusted by the Internal Revenue Service, an
appropriate compensating payment will be made by the Company to you or by you to
the Company. For example, if your income and the Company's deduction were
increased, the Company would reimburse you for your additional tax up to the
amount of the additional tax benefit that would be realized by the Company. This
reimbursement would be a loan to the extent of the anticipated capital gains tax
savings you would realize upon sale of the stock with an increased basis. The
loan would be payable when your stock is sold. Similarly, if your income and the
Company's deduction were reduced by the IRS, you would reimburse the Company for
its additional tax up to the amount your tax is reduced, provided that you would
subtract from your reimbursement to the Company the amount of the anticipated
capital gains tax cost to be incurred upon sale of the stock with a reduced
basis. Tax adjustments will include federal, state, local and foreign income and
payroll taxes and related interest and penalties. Payments will be grossed-up to
take into account the tax effect of the payment to the payer and the recipient.
The Company will bear the reasonable costs of any administrative tax or related
judicial proceeding concerning any proposed tax deficiency or refund related to
the elimination of the risk of forfeiture, provided that the Company will have
the right to appoint counsel and control the conduct or settlement of any such
proceeding, which right must be exercised reasonably and with a view to
achieving consistency and uniformity in tax treatment among you, the Company and
other managers of the Company or Fairchild.
Please indicate your agreement to the terms of this letter by signing where
indicated below.
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Yours very truly,
FSC SEMICONDUCTOR CORPORATION
By:
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Name: Kirk Pond
Title: President & CEO
ACKNOWLEDGED AND AGREED:
- ------------------------------ Date:
Name: ---------------------
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