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, 2011 (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 will 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 the 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
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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:
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Trade
Date:
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December 14, 2006
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Option
Style:
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Modified
American, as described in the “Exercise and Valuation”
provisions set forth below.
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Option
Type:
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Call
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Buyer:
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Counterparty
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Seller:
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Dealer
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Shares:
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The common
stock of Counterparty, par value USD 0.01 per Share (Exchange
symbol “CDNS”)
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Number of
Options:
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The number of
Convertible Notes issued by Counterparty on the closing date for
the initial issuance of the Convertible Notes.
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Option
Entitlement:
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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.
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Number of
Shares:
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The product of
the Number of Options, the Option Entitlement and the Applicable
Percentage.
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Applicable
Percentage:
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15%
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Strike
Price:
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USD
21.15
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Premium:
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USD
7,815,000
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Premium Payment
Date:
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December 19, 2006 or such later date as
agreed upon by the parties
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Exchange:
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NASDAQ Global
Select Market.
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Related
Exchange(s):
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The principal
exchange(s) for options contracts or futures contracts, if any,
with respect to the Shares
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Exercise
Period:
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The period from
and excluding the Trade Date to and including the Final Expiration
Date.
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Exercise
Dates:
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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 in
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” ).
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Exercisable
Options:
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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.
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Expiration
Time:
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At the close of
trading of the regular trading session on the Exchange
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Expiration
Date:
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Each Exercise
Date.
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Final
Expiration Date:
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The earlier of
(x) the last day on which any Convertible Notes remain
outstanding and (y) December 15, 2011,
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Automatic
Exercise:
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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.
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Notice of
Exercise:
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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
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to, hedging
mismatches and market 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,
2011.
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Dealer’s
Telephone Number and Telex and/or Facsimile Number and Contact
Details for purpose of Giving Notice:
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To be provided
by Dealer.
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Settlement
Terms:
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Method of
Settlement:
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Net Share
Settlement
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Settlement
Date:
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In respect of
an Exercise Date, the settlement date for the Shares to be
delivered in respect of the Convertible Notes converted on such
dale 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.”
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Net Share
Settlement:
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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.
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Notice of
Convertible Obligation:
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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 (or, for the Exercise
Dates occurring on or after the 23 rd scheduled “Trading Day” prior to
December 15, 2011, the aggregate Number of Shares comprising
the relevant Convertible Obligation for such Exercise
Dates).
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Other
Applicable Provisions:
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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.
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Failure to
Deliver:
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Applicable
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3. Additional
Terms applicable to the Transaction:
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Adjustments applicable to the
Transaction:
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Method of
Adjustment:
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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.
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Extraordinary
Events applicable to the Transaction:
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Merger
Events:
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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.
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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.
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Notice of
Merger Consideration:
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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
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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.
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Consequence
of Merger Events:
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Notwithstanding
Section 12.2 of the Equity Definitions, upon the occurrence of
a Merger Event, the Calculation Agent shall make a corresponding
adjustment in
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