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September 21, 2005
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ML
Ref:
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Cyberonics,
Inc. (“Counterparty”)
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Merrill
Lynch International (“ML”)
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Merrill Lynch
Financial Centre
2 King Edward Street
London EC1A 1HQ
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Dear Sir / Madam:
The
purpose of this letter agreement (this “
Confirmation ”) is to confirm the terms and
conditions of the above-referenced transaction entered into between
Counterparty and ML through its agent Merrill Lynch, Pierce, Fenner
& Smith Incorporated (“ MLPFS ” or
“ Agent ”) on the Trade Date specified
below (the “ Transaction ”). This
Confirmation constitutes a “Confirmation” as referred
to in the Agreement specified below.
The
definitions and provisions contained in the 2000 ISDA Definitions
(the “ Swap Definitions ”) and the 2002
ISDA Equity Derivatives Definitions (the “ Equity
Definitions ” and, together with the Swap
Definitions, the “ Definitions ”), in
each case as published by the International Swaps and Derivatives
Association, Inc., are incorporated into this Confirmation. In the
event of any inconsistency between the Swap Definitions and the
Equity Definitions, the Equity Definitions will govern, and in the
event of any inconsistency between the Definitions and this
Confirmation, this Confirmation will govern. References herein to a
“Transaction” shall be deemed to be references to a
“Share Option Transaction” for purposes of the Equity
Definitions and a “Swap Transaction” for the purposes
of the Swap Definitions.
This
Confirmation evidences a complete binding agreement between you and
us as to the terms of the Transaction to which this Confirmation
relates. This Confirmation (notwithstanding anything to the
contrary herein), shall be subject to an agreement in the 1992 form
of the ISDA Master Agreement (Multicurrency Cross Border) (the
“ Master Agreement ” or “
Agreement ”) as if we had executed an agreement
in such form (but without any Schedule and with elections specified
in the “ISDA Master Agreement” Section of this
Confirmation) on the Trade Date of the first such Transaction
between us. In the event of any inconsistency between the
provisions of that agreement and this Confirmation, this
Confirmation will prevail for the purpose of this
Transaction.
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The terms of
the particular Transaction to which this Confirmation relates are
as follows:
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September 21, 2005
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Effective Date: The fourth
Business Day (as such term is defined in the Note Indenture)
immediately following the Trade Date.
Shares: The shares of common
stock, par value of $0.01, of Counterparty (Security Symbol:
“ CYBX ”) or such other securities or property
into which the Reference Notes are convertible on the date of
determination.
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Initial Payment
Amount:
Initial Payment Amount
Payment Date:
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$38.2 mm to be
paid on the Effective Date by Buyer to Seller
September 27, 2005
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Transaction
Notional:
Exchange:
Related Exchange(s):
Knock-in Event:
Knock-out Event:
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Outstanding
notional amount of Reference Notes
NASDAQ
All Exchanges
Not Applicable
Not Applicable
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Reference Notes: 3.00%
Convertible Notes of Counterparty due 2012 in the original
principal amount of $1,000
Conversion Event: Each conversion
of any Reference Note into Shares pursuant to the terms of the Note
Indenture (the principal amount of Reference Notes so converted,
the “ Conversion Amount ” with respect to
such Conversion Event) occurring before the Termination
Date.
If the
Conversion Amount for any Conversion Event is less than the
aggregate principal amount of Reference Notes then outstanding,
then the terms of this Transaction shall continue to apply, subject
to the terms and conditions set forth herein, with respect to the
remaining outstanding principal amount of the Reference
Notes.
Note Indenture: The Indenture,
dated as of closing of the issuance of the Reference Notes, between
Counterparty and MLPFS, as trustee relating to the Reference Notes,
as the same may be amended, modified or supplemented, subject to
the “Additional Termination Events” provisions of this
Confirmation.
Termination Date: The earlier of
(i) September 27, 2012 and (ii) the first day on
which none of the Reference Notes remain outstanding, whether by
virtue of conversion, issuer repurchase or otherwise.
Valuation:
Valuation Date: The final
Averaging Date in respect of each Conversion Event or Termination
Event.
Averaging Dates: 10 full Exchange
Business Days beginning one Exchange Business Day after a
Conversion Notice is received or the Termination Date.
Averaging Date Disruption:
Modified Postponement, provided that Section 6.7(c)(iii) of
the Equity Definitions shall be amended by substituting the word
“fifth” for the word “eighth” in each of
its occurrences.
Settlement
Terms:
Settlement Method: Net Share
Settlement or Net Cash Settlement at the election of the Buyer or,
in the event of a Cash Takeover, there being no underlying Shares,
Net Cash Settlement would apply.
Settlement Notice: Buyer shall
provide Seller with notice of its Settlement Method Election within
three (3) Business Days after a Conversion Notice is received
or the Termination Date.
Settlement Price: The arithmetic
mean of the closing price of the Shares on the Exchange on each
Averaging Date. If a Make-Whole Event has occurred, the price
determined per the Reference Notes.
Make-Whole Event: The occurrence
of a Fundamental Change (as defined in the Note Indenture) other
than a Fundamental Change described in clause (3) of Change of
Control (as defined in the Note Indenture).
Settlement Date: The third (3rd)
full Exchange Business Day following the Valuation Date.
Conversion Notice: Counterparty
agrees to provide ML with notice of any Conversion Event within two
(2) Business Days following the Conversion Date and in any
event no later than one (1) Business Day following
Counterparty’s receipt of notice of such Conversion Event
from the Trustee under the Note Indenture.
Net Share Settlement: On the
Settlement Date, ML shall deliver to Counterparty, through the
Agent, a number of Shares equal to the related Net Share Settlement
Amount.
Cash Settlement: On the
Settlement Date, ML shall deliver to Counterparty the Net Cash
Settlement Amount.
Net Share Settlement Amount: For
each Conversion Event and the Termination Date, the number of
Shares, rounded up to the nearest whole Share, determined by the
Calculation Agent to be equal to the quotient of (x) the
related Net Cash Settlement Amount divided by (y) the related
Settlement Price.
Net Cash Settlement Amount: For
each Conversion Event, the product of (x) the number of Shares
into which the Reference Notes subject to conversion are to be
converted in connection with the related Conversion Event
multiplied by (y) the Final Price Differential. For the
Termination Date, the product of (x) the number of Shares into
which the Reference Notes outstanding immediately prior to such
Termination Date and which were not subject to a Conversion Event
prior to the Termination Date could be converted on such
Termination Date multiplied by (y) the Final Price
Differential.
Final Price Differential: An
amount equal to the greater of (x) the excess of the related
Settlement Price over the related Adjusted Conversion Price and
(y) zero.
Adjusted Conversion Price: For
each Conversion Event, a quotient, the numerator of which $1,000
and the denominator of which is the Conversion Rate (as defined in
the Note Indenture and as adjusted from time to time pursuant to
the terms thereof) 1 as in effect on the related
Settlement Date.
Share
Adjustments:
Consequences for Merger
Events:
Share-for-Share: Not Applicable, Transaction
will be adjusted consistent with the Reference Notes as provided in
the Note Indenture.
Share-for-Other: Not Applicable, Transaction
will be adjusted consistent with the Reference Notes as provided in
the Note Indenture.
Share-for-Combined: Not Applicable, Transaction
will be adjusted consistent with the Reference Notes as provided in
the Note Indenture.
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Tender
Offer:
Nationalization, Insolvency or Delisting:
Additional Disruption Events:
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Not Applicable
Not Applicable
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Not
Applicable
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Failure to Deliver: Applicable. If there is
inability in the market to deliver Shares on a day that would have
been a Settlement Date, then the Settlement Date shall be the first
succeeding Exchange Business Day on which there is no inability to
deliver, but in no such event shall the Settlement Date be later
than the date that is twenty (20) Exchange Business Days
immediately following what would have been in the Settlement Date
but for such inability to deliver.
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Insolvency
Filing:
Hedging Disruption Event:
Increased Cost of Hedging:
Hedging Party:
Loss of Stock Borrow:
Increased Cost of Stock Borrow:
Determining Party:
Non-Reliance:
Agreements and Acknowledgments
Regarding Hedging Activities:
Additional Acknowledgments:
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Applicable
Not Applicable
Not Applicable
ML
Not Applicable
Not Applicable
ML
Applicable
Applicable
Applicable
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Additional Agreements,
Representations and Covenants of Counterparty,
Etc.:
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1.
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Counterparty
hereby represents and warrants to ML, on each day from the Trade
Date to and including the earlier of (i) September 27,
2005 and (ii) the date by which ML is able to initially
complete a hedge of its position relating to this Transaction,
that:
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a.
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it will not,
and will not permit any person or entity subject to its control to,
bid for or purchase Shares during such period except as disclosed
in the Offering Memorandum relating to the Reference Notes;
and
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b.
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Counterparty
has publicly disclosed all material information necessary for
Counterparty to be able to purchase or sell Shares in compliance
with applicable federal securities laws and that it has publicly
disclosed all material information with respect to its condition
(financial or otherwise).
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2.
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The parties
hereby agree that all documentation with respect to this
Transaction is intended to qualify this Transaction as an equity
instrument for purposes of EITF 00-19. If Counterparty would be
obligated to receive cash from ML pursuant to the terms of this
Agreement for any reason without having had the right (other than
pursuant to this paragraph (2)) to elect to receive Shares in
satisfaction of such payment obligation, then Counterparty may
elect that ML deliver to Counterparty a number of Shares having a
cash value equal to the amount of such payment obligation (such
number of Shares to be delivered to be determined by the
Calculation Agent acting in a commercially reasonable manner to
determine the number of Shares that could be purchased over a
reasonable period of time with the cash equivalent of such payment
obligation). Settlement relating to any delivery of Shares pursuant
to this paragraph (2) shall occur within a reasonable period
of time.
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Over-Allotment
Option:
If the Initial Purchasers (as
such term is defined in the Purchase Agreement among the
Counterparty and MLPFS as Initial Purchaser, dated as of
September 21, 2005 (the “ Purchase
Agreement ”) relating to the purchase of the
Reference Notes)] 2 exercise their right to receive
additional Reference Notes pursuant to their over-allotment option,
then ML and Counterparty will, concurrently with the closing of
such over-allotment option exercise, (i) enter into a
confirmation for a Convertible Note Hedge with respect to such
additional Reference Notes on substantially identical terms,
including pricing, as this Confirmation, or (ii) amend this
Confirmation to provide for the applicable increase in Reference
Notes. Such additional confirmation or amendment shall provide for
the payment by Counterparty to ML of the additional Initial Payment
Amount related thereto.
Additional Termination
Events:
The occurrence of any of the
following shall be an Additional Termination Event with respect to
Counterparty (which shall be the sole Affected Party and this
Transaction shall be the sole Affected Transaction):
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1.
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an Amendment
Event (as defined below) occurs (in which case the entirety of this
Transaction shall be subject to termination);
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2.
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a Repayment
Event (as defined below) occurs (in which case this Transaction
shall be subject to termination only in respect of the principal
amount of Reference Notes that cease to be outstanding in
connection with or as a result of such Repayment Event);
or
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3.
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the
transactions contemplated by the Purchase Agreement shall fail to
close for any reason, in which case the entirety of this
Transaction shall terminate automatically.
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If the transactions contemplated
by the Purchase Agreement shall fail to close because of a breach
of the Purchase Agreement by MLPFS, then the entirety of this
Transaction shall terminate automatically, and all payments
previously made hereunder, including the Initial Payment Amount,
shall be promptly returned to the person making such payment. In
addition, if an Amendment Event or Repayment Event occurs or the
transactions contemplated by the Purchase Agreement shall fail to
close as a result of any breach by any Initial Purchaser or as a
result of any action, or failure to act, by any Initial Purchaser
thereunder or as a result of a failure of any condition to the
Counterparty’s obligation thereunder (collectively, an
“ Initial Purchase Event ”), no payments
shall be required hereunder in connection with the Termination
Event arising as a result of such Amendment Event, Repayment Event
or Initial Purchase Event.
As used in this
Section Additional Termination Events:
“ Amendment Event ”
means that the Counterparty amends, modifies, supplements or waives
any term of the Note Indenture or the Reference Notes relating to
the principal amount, coupon, maturity, repurchase obligation of
the Counterparty, redemption right of the Counterparty, any term
relating to conversion of the Notes (including changes to the
conversion price, conversion settlement dates or conversion
conditions), or any other term that would require consent of the
holders of not less than 100% of the principal amount of the
Reference Notes to amend.
“ Repayment Event ”
means that (a) any Reference Notes are repurchased (whether in
connection with or as a result of a change of control, howsoever
defined, or for any other reason) by the Counterparty, (b) any
Reference Notes are delivered to the Counterparty in exchange for
delivery of any property or assets of the Counterparty or any of
its subsidiaries (howsoever described), other than as a result of
and in connection with a Conversion Event, (c) any principal
of any of the Reference Notes is repaid prior to the Final Maturity
Date, as defined in the Note Indenture (whether following
acceleration of the Reference Notes or otherwise), provided that no
payments of cash made in respect of the conversion a Note shall be
deemed a payment of principal under this clause (c), (d) any
Reference Notes are exchanged by or for the benefit of the holders
thereof for any other securities of the Counterparty or any of its
Affiliates (or any other property, or any combination thereof)
pursuant to any exchange offer or similar transaction or
(e) any of the Notes is surrendered by Counterparty to the
trustee for cancellation, other than registration of a transfer of
such Notes or as a result of and in connection with a Conversion
Event.
Staggered
Settlement:
If ML determines reasonably and
in good faith that the number of Shares required to be delivered to
Counterparty hereunder on any Settlement Date would exceed 8.0% of
all outstanding Shares, then ML may, by notice to Counterparty on
or prior to such Settlement Date (a “ Nominal
Settlement Date ”), elect to deliver the Shares
comprising the related the Net Share Settlement Amount on two or
more dates (each, a “ Staggered Settlement Date
”) as follows:
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1.
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in such notice,
ML will specify to Counterparty the related Staggered Settlement
Dates (the first of which will be such Nominal Settlement Date and
the last of which will be no later than the twentieth (20
th ) Exchange Business Day following such Nominal
Settlement Date) and the number of Shares that it will deliver on
each Staggered Settlement Date;
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2.
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the aggregate
number of Shares that ML will deliver to Counterparty hereunder on
all such Staggered Settlement Dates will equal the number of Shares
that ML would otherwise be required to deliver on such Nominal
Settlement Date; and
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3.
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the Net Share
Settlement terms will apply on each Staggered Settlement Date,
except that the Shares comprising the Net Share Settlement Amount
will be allocated among such Staggered Settlement Dates as
specified by ML in the notice referred to in clause (1)
above.
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Notwithstanding anything herein
to the contrary, ML shall be entitled to deliver Shares to
Counterparty from time to time prior to the date on which ML would
be obligated to deliver them to Counterparty pursuant to Net Share
Settlement terms set forth above, and Counterparty agrees to credit
all such early deliveries against ML’s obligations hereunder
in the direct order in which such obligations arise. No such early
delivery of Shares will accelerate or otherwise affect any of
Counterparty’s obligations to ML hereunder. In addition,
during the 30 day period prior to the Termination Date or any
Settlement Date, each of ML and Counterparty shall use its
reasonable efforts to refrain from activities which could
reasonably be expected to result in ML’s ownership of Shares
exceeding 8% of all issued and outstanding Shares.
Compliance with Securities
Laws: Each party
represents and agrees that it has complied, and will comply, in
connection with this Transaction and all related or contemporaneous
sales and purchases of Shares, with the applicable provisions of
the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the “ Exchange Act
”), and the rules and regulations each thereunder, including,
without limitation, Rules 10b-5 and Regulation M under
the Exchange Act; provided that each party shall be entitled
to rely conclusively on any information communicated by the other
party concerning such other party’s market activities; and
provided further that Counterparty shall have no liability as a
result of a breach of this representation due to ML’s gross
negligence or willful misconduct.
Each party further represents
that if such party (“X”) purchases any Shares from the
other party pursuant to this Transaction, such purchase(s) will
comply in all material respects with (i) all laws and
regulations applicable to X and (ii) all contractual
obligations of X.
Counterparty represents that as
of the date hereof:
(a) each of its filings
under the Exchange Act that are required to be filed from and
including the ending date of Counterparty’s most recent prior
fiscal year have been filed, and that, as of the respective dates
thereof and hereof, there is no misstatement of material fact
contained therein or omission of a material fact required to be
stated therein or necessary to make the statements therein in light
of the circumstances in which they were made not
misleading;
(b) if Counterparty were to
have purchased a number of Shares equal to the Number of Shares
using MLPFS as broker, such purchase(s) would have complied in all
material respects with all contractual obligations and applicable
legal and regulatory requirements of Counterparty, including
without limitation Rule 10b-18 under the Exchange
Act;
(c) Counterparty is not
entering into this Agreement to facilitate a distribution of the
common stock or in connection with a future distribution of
securities; and
(d) Counterparty is not
entering into this Agreement to create actual or apparent
trad