Morgan Stanley
& Co. International Limited
c/o Morgan Stanley Bank
1585 Broadway
New York, NY 10036
(212) 761-4000
To: Cadence
Design Systems, Inc.
Bldg. 5, MS 5B1
2655 Seely Avenue
San Jose, CA 95134
Attention: Legal Department
Telephone No.: (408) 943-1234
Facsimile No.: (408) 943-0513
Re: Convertible
Note Hedge Transaction
The purpose of
this letter agreement is to confirm the terms and conditions of the
Transaction entered into between Morgan Stanley & Co.
International Limited (“Dealer”), represented by
Morgan Stanley Bank (“Agent”), as its agent, and
Cadence Design Systems, Inc., a Delaware corporation
(“Counterparty”), on the Trade Date specified
below (the “Transaction” ). This letter
agreement constitutes a “Confirmation” as referred to
in the ISDA Master Agreement specified below. This Confirmation
shall replace any previous letter and serve as the final
documentation for the Transaction.
The definitions
and provisions contained in the 2002 ISDA Equity Derivatives
Definitions (the “Equity Definitions” ), as
published by the International Swaps and Derivatives Association,
Inc., are incorporated into this Confirmation. In the event of any
inconsistency between the Equity Definitions and this Confirmation,
this Confirmation shall govern. Certain defined terms used herein
have the meanings assigned to them in the Offering Memorandum dated
December 14, 2006 (the “Offering
Memorandum” ) relating to the USD 250,000,000 principal
amount of Convertible Senior Notes due December 15, 2013 (the
“Convertible Notes” and each USD 1,000 principal
amount of Convertible Notes, a “Convertible
Note” ) issued by Counterparty pursuant to an Indenture
to be dated on or about December 19, 2006 between Counterparty
and Deutsche Bank Trust Company Americas, as trustee (the
“Indenture” ). In the event of any inconsistency
between the terms defined in the Offering Memorandum and this
Confirmation, the Confirmation shall govern. For the avoidance of
doubt, references herein to sections of the Indenture are based on
the draft of the Indenture most recently reviewed by the parties at
the time of execution of this Confirmation. If any relevant
sections of the Indenture are changed, added or renumbered
following execution of this Confirmation, the parties wil! amend
this Confirmation in good faith to preserve the economic intent of
the parties. The Transaction is subject to early unwind if the
closing of the Convertible Notes is not consummated for any reason,
as set forth below in Section 9(g).
Each party is
hereby advised, and each such party acknowledges, that the other
party has engaged in, or refrained from engaging in, substantial
financial transactions and has taken other material actions in
reliance upon the parties’ entry into Ihe Transaction to
which this Confirmation relates on the terms and conditions set
forth below.
1. This
Confirmation evidences a complete and binding agreement between
Dealer and Counterparty as to the terms of the Transaction to which
this Confirmation relates. This Confirmation shall supplement, form
a part of, and be subject to an agreement in the form of the 2002
ISDA Master Agreement (the “Agreement” ) as if
Dealer and Counterparty had executed an agreement in such form (but
without any Schedule except for the election of the laws of the
State of New York as the governing law) on the Trade Date. In the
event of
1
any
inconsistency between provisions of that Agreement and this
Confirmation, this Confirmation will prevail for the purpose of the
Transaction to which this Confirmation relates. The parties hereby
agree that no Transaction other than the Transaction to which this
Confirmation relates shall be governed by the Agreement.
2. The terms of
the particular Transaction to which this Confirmation relates are
as follows:
|
|
|
|
|
|
|
General
Terms:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Date:
|
|
December 14, 2006
|
|
|
|
|
|
|
|
|
|
Option
Style:
|
|
Modified
American, as described in the “Exercise and Valuation”
provisions set forth below.
|
|
|
|
|
|
|
|
|
|
Option
Type:
|
|
Call
|
|
|
|
|
|
|
|
|
|
Buyer:
|
|
Counterparty
|
|
|
|
|
|
|
|
|
|
Seller:
|
|
Dealer
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
The common
stock of Counterparty, par value USD 0.01 per Share (Exchange
symbol “CDNS”)
|
|
|
|
|
|
|
|
|
|
Number of
Options:
|
|
The number of
Convertible Notes issued by Counterparty on the closing date for
the initial issuance of the Convertible Notes.
|
|
|
|
|
|
|
|
|
|
Option
Entitlement:
|
|
As of any date,
a number equal to the Conversion Rate as of such date (as defined
in the Indenture, but without regard to any adjustments to the
Conversion Rate pursuant to Section 13.01(e) or
Section 13.03(g) of the Indenture) for each Convertible
Note.
|
|
|
|
|
|
|
|
|
|
Number of
Shares:
|
|
The product of
the Number of Options, the Option Entitlement and the Applicable
Percentage.
|
|
|
|
|
|
|
|
|
|
Applicable
Percentage:
|
|
15%
|
|
|
|
|
|
|
|
|
|
Strike
Price:
|
|
USD
21.15
|
|
|
|
|
|
|
|
|
|
Premium:
|
|
USD
10,147,500
|
|
|
|
|
|
|
|
|
|
Premium Payment
Date:
|
|
December 19, 2006 or such later date as
agreed upon by the parties
|
|
|
|
|
|
|
|
|
|
Exchange:
|
|
NASDAQ Global
Select Market.
|
|
|
|
|
|
|
|
|
|
Related
Exchange(s):
|
|
The principal
exchange(s) for options contracts or futures contracts, if any,
with respect to the Shares
|
|
|
|
|
|
|
|
Exercise and
Valuation:
|
|
|
2
|
|
|
|
|
|
|
Exercise
Period:
|
|
The period from
and excluding the Trade Date to and including the Final Expiration
Date.
|
|
|
|
|
|
|
|
Exercise
Dates:
|
|
Notwithstanding
the Equity Definitions, each “Conversion Date” as
defined in the Indenture occurring during the Exercise Period for
Convertible Notes other than Convertible Notes with respect to
which Counterparty makes the direction described hi
Section 13.10 of the Indenture that are accepted by the
financial institution designated by Counterparty in accordance with
Section 13.10 of the Indenture (a “Conversion
Date” ).
|
|
|
|
|
|
|
|
Exercisable
Options:
|
|
In respect of
each Exercise Date a number of Options equal to the number of
Convertible Notes properly surrendered to Counterparty for
conversion in respect of the relevant Conversion Date.
|
|
|
|
|
|
|
|
Expiration
Time:
|
|
At the close of
trading of the regular trading session on the Exchange
|
|
|
|
|
|
|
|
Expiration
Date:
|
|
Each Exercise
Date.
|
|
|
|
|
|
|
|
Final
Expiration Date:
|
|
The earlier of
(x) the last day on which any Convertible Notes remain
outstanding and (y) December 15, 2013.
|
|
|
|
|
|
|
|
Automatic
Exercise:
|
|
Notwithstanding
the Equity Definitions, on each Exercise Date, the number of
Options related to such Exercise Date shall be automatically
exercised at the Expiration Time on such Exercise Date if an
effective notice of exercise, if required, is given in accordance
with the provision immediately below.
|
|
|
|
|
|
|
|
Notice of
Exercise:
|
|
Notwithstanding
anything to the contrary in the Equity Definitions, in order to
exercise any Options, Counterparty must notify Dealer in writing
prior to 5:00 PM, New York City time, on the Scheduled Trading Day
prior to the first Exchange Business Day of the “Observation
Period”, as defined in the Indenture, relating to the
Convertible Notes converted on the relevant Exercise Date (the
“Notice Deadline” ) of (i) the number of
Options being exercised on such Exercise Date, (ii) the scheduled
settlement date under the Indenture for the Convertible Notes
converted on such Exercise Date and (iii) the first day of the
relevant “Observation Period”; provided that,
notwithstanding the foregoing, such notice (and the related
Automatic Exercise of Options) shall be effective if given after
the Notice Deadline but prior to 5:00 PM New York City time, on the
fifth Exchange Business Day of such “Observation
Period”, in which event the Calculation Agent shall have the
right to adjust the Net Share Settlement Obligation (as defined
below) as appropriate to reflect the additional costs (including,
but not limited
|
3
|
|
|
|
|
|
|
|
|
|
|
to, hedging
mismatches and losses) and reasonable expenses incurred by Dealer
in connection with its hedging activities (including the unwinding
of any hedge position) as a result of its not having received such
notice prior to the Notice Deadline; provided further that
Counterparty shall not be required to deliver any such notice of
exercise with respect to any Exercise Date occurring on or after
the 23rd scheduled “Trading Day”, as defined in the
Indenture, prior to December 15, 2013.
|
|
|
|
|
|
|
|
|
|
Dealer’s
Telephone Number and Telex and/or Facsimile Number and Contact
Details for purpose of Giving Notice:
|
|
To be provided
by Dealer.
|
|
|
|
|
|
|
|
Settlement
Terms:
|
|
|
|
|
|
|
|
|
|
|
|
Method of
Settlement:
|
|
Net Share
Settlement
|
|
|
|
|
|
|
|
|
|
Settlement
Date:
|
|
In respect of
an Exercise Date, the settlement date for the Shares to be
delivered in respect of the Convertible Notes converted on such
date pursuant to Section 13.02(a) or Section 13.02(b) of
the Indenture, as the case may be; provided that the
Settlement Date will not be prior to the date that is one
Settlement Cycle following the final day of the relevant
“Observation Period.”
|
|
|
|
|
|
|
|
|
|
Net Share
Settlement:
|
|
In respect of
each Exercise Date, Dealer will deliver to Counterparty, on the
related Settlement Date, a number of Shares (the “Net
Share Settlement Obligation” ) equal to the product of
the (x) the Applicable Percentage and (y) the aggregate number
of Shares that Counterparty is obligated to deliver to the
holder(s) of the Convertible Note (s) converted on such Exercise
Date pursuant to the terms of the Indenture as of the Trade Date (
“Convertible Obligation” ); provided,
however, that such obligation shall be determined excluding any
Shares that Counterparty is obligated to deliver to holder(s) of
the Convertible Note(s) as a result of any adjustments to the
Conversion Rate pursuant to Section 13.01(e) or
Section 13.03(g) of the Indenture.
|
|
|
|
|
|
|
|
|
|
Notice of
Convertible Obligation:
|
|
No later than the Exchange Business Day immediately following the
last day of any Observation Period, Counterparty shall give Dealer
notice of the final number of Shares comprising the relevant
Convertible Obligation for the relevant Exercise Date for, for the
Exercise Dates occurring on or after the 23 rd scheduled
“Trading Day” prior to December
15, 2013, the aggregate Number of Shares comprising the relevant
Convertible Obligation for such Exercise Dates).
|
4
|
|
|
|
|
|
|
|
|
Other
Applicable Provisions:
|
|
The provisions of Sections 9.1(c), 9.8, 9.9, 9.10, 9.11 and
9.12 of the Equity Definitions will be applicable to any Net Share
Settlement, as if “Physical Settlement” applied to the
Transaction; and provided that the Representation and
Agreement contained in Section 9.11 of the Equity Definitions
shall be modified by excluding any representations therein relating
to restrictions, obligations, limitations or requirements under
applicable securities laws as a result of the fact that Buyer is
the issuer of the Shares.
|
|
|
|
|
|
|
|
|
|
Failure to
Deliver:
|
|
Applicable
|
|
|
|
|
|
|
|
3. Additional
Terms applicable to the Transaction:
|
|
|
|
|
|
|
|
Adjustments applicable
to the Transaction:
|
|
|
|
|
|
|
|
|
|
Method of
adjustment:
|
|
Notwithstanding
Section 11.2 of the Equity Definitions, upon the occurrence of
any “Adjustment Event” set forth in
Sections 13.03(a), (b), (c), (d), (e) and (f) of the
Indenture, the Calculation Agent shall make a corresponding
adjustment, if necessary, to the terms relevant to the exercise,
settlement or payment of the Transaction, to the extent an
analogous adjustment is made under the Indenture. Immediately upon
the occurrence of any Adjustment Event, Counterparty shall notify
the Calculation Agent of such Adjustment Event; and once the
adjustments to be made to the terms of the Indenture and the
Convertible Notes in respect of such Adjustment Event have been
determined, Counterparty shall immediately notify the Calculation
Agent in writing of the details of such adjustments.
|
|
|
|
|
|
|
|
Extraordinary
Events applicable to the Transaction:
|
|
|
|
|
|
|
|
|
|
Merger
Events:
|
|
Notwithstanding
Section 12.1(b) of the Equity Definitions, a “Merger
Event” means the occurrence of any event or condition defined
as a “Merger Event” in Section 13.05 of the
Indenture.
|
|
|
|
|
|
|
|
|
|
|
|
Immediately
upon the occurrence of any Merger Event, Counterparty shall notify
the Calculation Agent of such Merger Event; and once the
adjustments to be made to the terms of the Indenture and the
Convertible Notes in respect of such Merger Event have been
determined, Counterparty shall immediately notify the Calculation
Agent in writing of the details of such adjustments.
|
|
|
|
|
|
|
|
|
|
Notice of
Merger Consideration:
|
|
Upon the
occurrence of a Merger Event that causes the Shares to be converted
into the right to receive more than a single type of consideration
(determined based in part upon any form of stockholder election),
Counterparty shall reasonably promptly (but in any event prior to
the Merger
|
5
|
|
|
|
|
|
|
|
|
|
|
Date) notify
the Calculation Agent of the weighted average of the types and
amounts of consideration received by the holders of Shares entitled
to receive cash, securities or other property or assets with
respect to or in exchange for such Shares in any Merger Event who
affirmatively make such an election.
|
|
|
|
|
|
|
|
|
|
Consequence of
Merger Events:
|
|
Notwithstanding
Section 12.2 of the Equity Definitions, upon the occurrence of
a Merger Event, the Calculation Agent shall make a corresponding
adjustment in respect of any adjustment under the Indenture to any
one or more of the nature of the Shares, the Number of Options, the
Option Entitlement and any other variable relevant to the exercise,
settlement or payment for the Transaction; provided,
however, that such adjustment shall be made without regard to
any adjustment to the Conversion Rate for the issuance of
additional shares as set forth in Section 13.01(e) or Section
13.03(g) of the Indenture.
|
|
|
|
|
|
|
|
Nationalization, Insolvency
or Delisting:
|
|
Cancellation and Payment (Calculation Agent Determination);
provided that (i) Section 12.6(a)(iii) of the
Equity Definitions shall be amended to delete, in the definition of
the term “Delisting” the parenthetical “(or will
cease)” and (ii) in addition to the provisions of
Section 12.6(a)(iii) of the Equity Definitions, it shall also
constitute a Delisting if the Exchange is located in the United
States and the Shares are not immediately re-listed, re-traded or
re-quoted on any of the New York Stock Exchange, the American Stock
Exchange, The NASDAQ Global Select Market or the NASDAQ Global
Market (or their respective successors); if the Shares are
immediately re-listed, re-traded or re-quoted on any such exchange
or quotation system, such exchange or quotation system shall
thereafter be deemed to be the Exchange and the Calculation Agent
shall make any adjustments it deems necessary to the terms of the
Transaction, as if Modified Calculation Agent Adjustment were
applicable to such event.
|
|
|
|
|
|
|
|
Additional
Disruption Events:
|
|
|
|
|
|
|
|
|
|
|
|
(a) Change in
Law:
|
|
Applicable
|
|
|
|
|
|
|
|
|
|
(b) Insolvency
Filing:
|
|
Applicable;
provided that Section 12.9(b)(i) of the Equity
Definitions shall be amended by adding, immediately following the
word “party” in the third line thereof, the phrase
“(or, upon the occurrence of an Insolvency Filing,
Dealer)”
|
|
|
|
|
|
|
|
|
|
Determining
Party:
|
|
For all
applicable Additional Disruption Events, Dealer
|
|
|
|
|
|
|
|
|
|
Non-Reliance:
|
|
Applicable
|
6
|
|
|
|
|
|
|
|
|
Agreements and
Acknowledgments Regarding Hedging Activities:
|
|
Applicable
|
|
|
|
|
|
|
|
|
|
Additional
Acknowledgments:
|
|
Applicable
|
|
|
|
|
|
|
Additional
Termination Events:
|
|
If any event of
default under the terms of the Convertible Notes, as set forth in
Section 5.01 of the Indenture, shall occur with respect to
Counterparty, then such event shall constitute an Additional
Termination Event applicable to the Transaction with respect to
which Counterparty shall be deemed to be the sole Affected Party
and the Transaction shall be the sole Affected
Transaction.
|
|
|
|
|
|
|
|
|
|
|
|
If any
provision of the Indenture or the Convertible Notes is amended,
modified, supplemented or waived without the written consent of
Dealer, Counterparty shall provide Dealer and the Calculation Agent
with notice thereof on or prior to the effective date thereof and,
if the Calculation Agent determines that such amendment,
modification, supplement or waiver has a material effect on the
Transaction or Dealer’s ability to hedge all or a portion (
“Affected Portion” ) of the Transaction, then
such event (an “Amendment Event” ) shall
constitute an Additional Termination Event with respect to which
Counterparty shall be deemed to be the sole Affected Party and the
Transaction (or the Affected Portion thereof) shall be the sole
Affected Transaction. For the avoidance of doubt, an election by
Counterparty to increase the conversion rate pursuant to Section
13.01(e) or Section 13.03(g) of the Indenture shall not
constitute an Amendment Event.
If any Convertible Notes are repurchased (whether in connection
with a put of Convertible Notes by holders thereof pursuant to the
terms of the Indenture as a result of a fundamental change,
howsoever defined, or for any other reason) by Counterparty or any
of its subsidiaries or if Counterparty gives notice to Dealer that
it intends to repurchase any Convertible Notes, then Counterparty
may notify Dealer that it wishes to designate an Early Termination
Date with respect to the portion of the Transaction relating to the
number of Convertible Notes that cease to be outstanding in
connection with or as a result of such repurchase and the parties
shall negotiate in good faith and in a commercially reasonable
manner the timing, pricing and other terms of such designation. For
the avoidance of doubt, no such designation shall be made if, after
such negotiation, the parties cannot agree on the terms of such
designation.
|
|
|
|
|
|
|
|
|
|
Morgan
Stanley
|
7
|
|
|
|
|
|
|
|
|
The letter from
Morgan Stanley to Counterparty that guarantees the due and punctual
payment of all amounts payable by Dealer under this Confirmation
when the same shall become due and payable.
|
|
|
|
|
|
|
|
4. Calculation
Agent:
|
|
Dealer. The
Calculation Agent shall, upon request by either party, provide a
written explanation of any calculation or adjustment made by it
hereunder, including, where applicable, a description of the
methodology and data applied.
|
|
|
|
|
|
|
|
5. Account
Details:
|
|
|
|
|
(a)
|
|
Account for payments to Company:
Cadence Design Systems, Inc.
Account
Wells Fargo Bank
550 California Street — 10th Floor
San Francisco CA 94104
ABA#
|
|
|
|
|
|
|
|
|
|
Account for delivery of Shares to
Company:
|
|
|
|
|
|
|
|
|
|
Mellon Investor Services
235 Montgomery Street, 23rd Floor
San Francisco, CA 94104
Cadence Design Systems Book Memo Treasury Reserve Account
Comment: When you are ready to deliver Shares contact Cadence
FIRST.
|
|
|
|
|
|
|
|
(b)
|
|
Account for payments to Dealer:
CITIBANK NA
Swift
ABA#
MS & CO Inc OTC Equity Derivatives
A/C#
REF:
Account for delivery of Shares from Dealer:
To be advised,
|
The Office of
Counterparty for the Transaction is: Inapplicable, Counterparty is
not a Multibranch Party.
The Office of
Dealer for the Transaction is:
8
1585 Broadway,
New York, NY 10036
7. Notices: For
purposes of this Confirmation:
|
|
(a)
|
|
Address for notices or
communications to Counterparty:
|
|
|
|
|
|
|
|
|
|
Cadence Design Systems, Inc.
Bldg. 5, MS 5B1
2655 Seely Avenue
San Jose, CA 95134
Attention: Legal Department
Telephone No.: 408) 943-1234
Facsimile No.: (408) 943-0513
|
|
|
|
|
|
|
|
(b)
|
|
Address for notices or
communications to Dealer:
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co.
International Limited
c/o Morgan Stanley Bank
One New York Plaza, 4 th Floor
New York, NY 10004
Attention: Fred Gonfiantini
Facsimile No.: (212) 507-0724
Telephone No.: (212) 276-2427
|
|
|
|
|
|
|
|
|
|
With a copy to:
|
|
|
|
|
|
|
|
|
|
Law
Division
Morgan Stanley
1585 Broadway, 38 th Floor
New York, NY 10036
Attention: Anthony Cicia
Facsimile No: (212) 507-4338
Telephone No: (212) 761-3452
|
8.
Representations and Warranties of Counterparty
The
representations and warranties of Counterparty set forth in
Section 1 of the Purchase Agreement dated as of the Trade Date
among Counterparty, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated, J.P. Morgan
Securities Inc. and Deutsche Bank Securities Inc. (the
“Purchase Agreement” ) are true and correct and
are hereby deemed to be repeated to Dealer as if set forth herein.
Counterparty hereby further represents and warrants to Dealer
that:
|
|
(a)
|
|
Counterparty has all necessary
corporate power and authority to execute, deliver and perform its
obligations in respect of the Transaction; such execution, delivery
and performance have been duly authorized by all necessary
corporate action on Counterparty’s part; and this
Confirmation has been duly and validly executed and delivered by
Counterparty and constitutes its valid and binding obligation,
enforceable against Counterparty in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors’ rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity) and except that rights to
indemnification and contribution
|
|
