Document:

exv10w84

 

Exhibit 10.84

Morgan Stanley & Co. International Limited

c/o Morgan Stanley Bank

1585 Broadway

New York, NY 10036

(212) 761-4000

December 14, 2006

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

Reference:            CEDBE7

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:

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 7,815,000
	 
	 	 	 	 
	 

	 	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:

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	 	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 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”).
	 
	 	 	 	 
	 

	 	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, 2011,
	 
	 	 	 	 
	 

	 	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

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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.
	 
	 	 	 	 
	 

	 	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 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.”
	 
	 	 	 	 
	 

	 	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 (or, for
the Exercise Dates occurring on or after the
23rd
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:
	 	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

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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.
	 
	 	 	 	 
	 

	 	          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 Patty:
	 	For all applicable Additional Disruption Events, Dealer
	 
	 	 	 	 
	 

	 	Non-Reliance:
	 	Applicable

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	 	          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.
	 
	 	 	 	 
	 

	 	Credit Support Provider:
	 	Morgan Stanley

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	 	    Credit Support Document:
	 	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.

6. Offices:

The Office of Counterparty for the Transaction is: Inapplicable, Counterparty is not a
Multibranch Party.

The Office of Dealer for the Transaction is:

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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, 4th 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,
38th 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 hereunder may be limited by federal or state securities laws or
public policy relating thereto.

9

 

	 	(b)	 	Neither the execution and delivery of this Confirmation nor the
incurrence or
performance of obligations of Counterparty hereunder will conflict with or result in a
breach of the certificate of incorporation or by-laws (or any equivalent documents) of
Counterparty, or any applicable law or regulation, or any order, writ, injunction or
decree
of any court or governmental authority or agency or any agreement or instrument to
which Counterparty or any of its subsidiaries is a party or by which Counterparty or any
of its subsidiaries is bound or to which Counterparty or any of its subsidiaries is
subject,
or constitute a default under, or result in the creation of any lien under, any such
agreement or instrument, or breach or constitute a default under any agreements and
contracts of Counterparty or its significant subsidiaries filed as exhibits to
Counterparty’s
Annual Report on Form 10-K for the year ended December 31, 2005, incorporated by
reference in the Offering Memorandum, as updated by any subsequent filings.
	 
	 	(c)	 	No consent, approval, authorization, or order of, or filing with, any governmental agency
or body or any court is required in connection with the execution, delivery or
performance by Counterparty of this Confirmation, except such as have been obtained or
made and such as may be required under the Securities Act of 1933, as amended (the
“Securities Act”) or state securities laws.
	 
	 	(d)	 	Counterparty is not, and after giving effect to the transactions contemplated hereby will
not be, an “investment company” as such term is defined in the Investment Company Act
of 1940, as amended.
	 
	 	(e)	 	Counterparty is an “eligible contract participant” (as such term is defined in Section
la(12) of the Commodity Exchange Act, as amended (the
“CEA”)) because one or more
of the following is true:
	 
	 	 	 	Counterparty is a corporation, partnership, proprietorship, organization, trust or other
entity and:

	 	(A)	 	Counterparty has total assets in excess of USD 10,000,000;
	 
	 	(B)	 	the obligations of Counterparty hereunder are guaranteed, or
otherwise
supported by a letter of credit or keepwell, support or other agreement, by an
entity of the type described in Section 1a(12)(A)(i) through (iv),
1a(12)(A)(v)(I),
1a(12)(A)(vii) or 1a(12)(C) of the CEA; or
	 
	 	(C)	 	Counterparty has a net worth in excess of USD 1,000,000 and has entered
into
this Agreement in connection with the conduct of Counterparty’s business or to
manage the risk associated with an asset or liability owned or incurred or
reasonably likely to be owned or incurred by Counterparty in the conduct of
Counterparty’s business.

	 	(f)	 	On the Trade Date, (A) none of Counterparty and its officers and directors is aware of
any material nonpublic information regarding Counterparty or the Shares and (B) all
reports and other documents filed by Counterparty with the Securities and Exchange
Commission pursuant to the Exchange Act when considered as a whole (with the more
recent such reports and documents deemed to amend inconsistent statements contained in
any earlier such reports and documents), do not contain any untrue statement of a
material fact or any omission of a material fact required to be stated therein or
necessary
to make the statements therein, in the light of the circumstances in which they were
made, not misleading.

10

 

	 	(g)	 	Without limiting the generality of Section 3(a)(iii) of the Agreement, the
Transaction will not violate Rule 13e-l or Rule 13e-4 under the Exchange Act.
	 
	 	(h)	 	Counterparty is an “accredited investor” (as such term is defined in Section 2(a)(15)(ii)
of the Securities Act).
	 
	 	(i)	 	Counterparty’s financial condition is such that it has no need for liquidity with respect to
its investment in the Transaction and no need to dispose of any portion thereof to
satisfy any existing or contemplated undertaking or indebtedness.
	 
	 	(j)	 	On the Trade Date (A) the assets of Counterparty at their fair valuation exceed the
liabilities of Counterparty, including contingent liabilities, (B) the capital of
Counterparty is adequate to conduct the business of Counterparty and (C) Counterparty has
the ability to pay its debts and obligations as such debts mature and does not intend to,
or does not believe that it will, incur debt beyond its ability to pay as such debts
mature.
	 
	 	(k)	 	Counterparty’s investments in and liabilities in respect of the Transaction, which it
understands are not readily marketable, are not disproportionate to its net worth, and it is
able to bear any loss in connection with the Transaction, including the loss of its entire
investment in the Transaction.
	 
	 	(1)	 	Counterparty hereby agrees and acknowledges that the Transaction has not been
registered with the Securities and Exchange Commission or any state securities commission
and that the Options are being written by Dealer to Counterparty in reliance upon
exemptions from any such registration requirements. Counterparty acknowledges that all
Options acquired from Dealer will be acquired for investment purposes only and not for
the purpose of resale or other transfer except in compliance with the requirements of the
Securities Act. Counterparty will not sell or otherwise transfer any Option or any
interest therein except in compliance with the requirements of the Securities Act and any
subsequent offer or sale of the Options will be solely for Counterparty’s account and not
as part of a distribution that would be in violation of the Securities Act.
	 
	 	(m)	 	Counterparty understands no obligations of Dealer to it hereunder will be entitled to the
benefit of deposit insurance and that such obligations will not be guaranteed by any
affiliate of Dealer or any governmental agency.
	 
	 	(n)	 	Counterparty is capable of assessing the merits of and understanding (on its own behalf
or through independent professional advice), and understands and accepts, the terms,
conditions and risks of the Transaction.
	 
	 	(o)	 	Without limiting the generality of Section 13.1 of the Equity Definitions, Counterparty
acknowledges that Dealer is not making any representations or warranties with respect to the
treatment of the Transaction under FASB Statements 128, 133, as amended, 149 or 150, EITF
Issue No. 00-19, Issue No. 01-6 or Issue No. 03-6 (or any successor issue statements) or
under FASB’s Liabilities & Equity Project.
	 
	 	(p)	 	Counterparty is not on the date hereof engaged in a distribution, as such term is used in
Regulation M under the Exchange Act such distribution, a Regulation M Distribution, of
any securities of Counterparty, other than distributions meeting the requirements of the
exception set forth in Rules 101(b)(10) and 102(b)(7) of Regulation M. Counterparty shall
not, until the second Exchange Business Day immediately following the Trade Date, engage
in any Regulation M Distribution.

11

 

9. Other Provisions:

	 	(a)	 	Opinions. Counterparty shall deliver to Dealer an opinion of
counsel, dated as of the
Closing Date (as defined in the Purchase Agreement), with respect to the matters
set forth
in Sections 8(a) through (d) of this Confirmation.
	 
	 	(b)	 	Repurchase Notices. Counterparty shall, on any day on which
Counterparty effects any
repurchase of Shares, promptly give Dealer a written notice of such repurchase (a
“Repurchase Notice”) on such day if, following such repurchase, the Options Equity
Percentage as determined on such day is (i) greater than 6% and (ii) greater by
0.5% than
the Options Equity Percentage included in the immediately preceding Repurchase
Notice
(or, in the case of the first such Repurchase Notice, greater than the Options
Equity
Percentage as of the date hereof). The “Options Equity Percentage” as of any day is
the
fraction (A) the numerator of which is the sum of (A) the Number of Shares
hereunder
and (B) the Number of Shares for the Convertible Note Hedge Transaction between
Counterparty and Dealer relating to the USD 250,000,000 principal
amount of
Convertible Senior Notes due December 15, 2013 (the “Aggregate Transaction
Amount”) and (B) the denominator of which is the number of Shares outstanding on
such day. Counterparty agrees to indemnify and hold harmless Dealer and its
affiliates
and their respective officers, directors, employees, affiliates, advisors,
agents and
controlling persons (each, an “Indemnified Person”) from and against any and all
losses
(including losses relating to Dealer’s hedging activities as a consequence of
becoming, or
of the risk of becoming, a Section 16 “insider”, including without limitation, any
forbearance from hedging activities or cessation of hedging activities and any
tosses in
connection therewith with respect to the Transaction), claims, damages, judgments,
liabilities and expenses (including reasonable attorney’s fees), joint or several,
which an
Indemnified Person may become subject to, as a result of Counterparty’s failure to
provide Dealer with a Repurchase Notice on the day and in the manner specified in
this
Section 9(b), and to reimburse, within 30 days, upon written request, each of such
Indemnified Persons for any reasonable legal or other expenses incurred in
connection
with investigating, preparing for, providing testimony or other evidence in
connection
with or defending any of the foregoing. If any suit, action, proceeding
(including any
governmental or regulatory investigation), claim or demand shall be brought or
asserted
against the Indemnified Person, such Indemnified Person shall promptly
notify
Counterparty in writing, and Counterparty, upon request of the Indemnified Person,
shall
retain counsel reasonably satisfactory to the Indemnified Person to represent the
Indemnified Person and any others Counterparty may designate in such proceeding and
shall pay the fees and expenses of such counsel related to such proceeding.
Counterparty
shall not be liable for any settlement of any proceeding effected without its
written
consent, but if settled with such consent or if there be a final judgment for the
plaintiff,
Counterparty agrees to indemnify any Indemnified Person from and against any loss
or
liability by reason of such settlement or judgment. Counterparty shall not,
without the
prior written consent of the Indemnified Person, effect any settlement of any
pending or
threatened proceeding in respect of which any Indemnified Person is or could have
been a
party and indemnity could have been sought hereunder by such Indemnified Person,
unless such settlement includes an unconditional release of such Indemnified Person
from
all liability on claims that are the subject matter of such
proceeding. If the
indemnification provided for in this paragraph (b) is unavailable to an Indemnified
Person or insufficient in respect of any losses, claims, damages or liabilities
referred to
therein, then Counterparty under such paragraph, in lieu of indemnifying
such
Indemnified Person thereunder, shall contribute to the amount paid or payable by
such
Indemnified Person as a result of such losses, claims, damages or liabilities.
The

12

 

	 	 	 	remedies provided for in this paragraph (b) are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any Indemnified Person at law or in
equity. The indemnity and contribution agreements contained in this paragraph (b) shall
remain operative and in full force and effect regardless of the termination of the
Transaction.
	 
	 	(c)	 	No Manipulation. Counterparty is not entering into the Transaction to create actual
or
apparent trading activity in the Shares (or any security convertible into or exchangeable
for the Shares) or to raise or depress or otherwise manipulate the price of the Shares (or
any security convertible into or exchangeable for the Shares) or otherwise to violate the
Exchange Act.
	 
	 	(d)	 	Board Authorization. Each of the Transaction and the issuance of the Convertible
Notes
was approved by its board of directors and publicly announced, solely for the purposes
stated in such board resolution and public disclosure and, prior to any exercise of Options
hereunder, Counterparty’s board of directors will have duly authorized any repurchase of
Shares pursuant to the Transaction. Counterparty further represents that there is no
internal policy, whether written or oral, of Counterparty that would prohibit Counterparty
from entering into any aspect of the Transaction, including, but not limited to, the
purchase of Shares to be made pursuant hereto.
	 
	 	(e)	 	Transfer or Assignment. Neither party may transfer any of its rights or obligations
under
the Transaction without the prior written consent of the non-transferring party; provided
that if, as determined at Dealer’s sole discretion, (x) its “beneficial ownership” (within
the meaning of Section 13 of the Exchange Act and rules promulgated thereunder) with
respect to the Shares exceeds 8.5% of Counterparty’s outstanding Shares or (y) the
Aggregate Transaction Amount exceeds 8.5% of Counterparty’s outstanding Shares,
Dealer may transfer or assign a number of Options sufficient to reduce such “beneficial
ownership” to 8% or the Aggregate Transaction Amount to 8%, as applicable, to any
third party with a rating (or whose guarantor has a rating) for its long term, unsecured
and
unsubordinated indebtedness of A- or better by Standard & Poor’s Ratings Services or its
successor (“S&P”), or a3 or better by Moody’s Investors Service (“Moody’s”) or, if
either S&P or Moody’s ceases to rate such debt, at least an equivalent rating or better by
a substitute agency rating mutually agreed by Counterparty and Dealer, If, in the sole
discretion of Dealer, Dealer is unable after its commercially reasonable efforts to effect
such transfer or assignment on pricing terms reasonably acceptable to Dealer and within a
time period reasonably acceptable to Dealer, Dealer may designate any Exchange
Business Day as an Early Termination Date with respect to a portion (the “Terminated
Portion”) of the Transaction, such that its “beneficial ownership” following such partial
termination will be equal to or less than 8.5% or the Aggregate Transaction Amount will
be equal to or less than 8.5%, as the case may be. In the event that Dealer so designates
art Early Termination Date with respect to a portion of the Transaction, a payment shall
be made pursuant to Section 6 of the Agreement as if (i) an Early Termination Date had
been designated in respect of a Transaction having terms identical to the Transaction and
a Number of Options equal to the Terminated Portion, (ii) Counterparty shall be the sole
Affected Party with respect to such partial termination and (iii) such Transaction shall be
the only Terminated Transaction. Notwithstanding any other provision in
this
Confirmation to the contrary requiring or allowing Dealer to purchase, sell, receive or
deliver any shares or other securities to or from Counterparty, Dealer may designate any
of its affiliates to purchase, sell, receive or deliver such shares or other securities and
otherwise to perform Dealer’s obligations in respect of the Transaction and any such
designee may assume such obligations. Dealer shall be discharged of its obligations to
Counterparty to the extent of any such performance.

13

 

	 	(f)	 	Staggered Settlement. Dealer may, by notice to Counterparty prior to
any Settlement
Date (a “Nominal Settlement Date”), elect to deliver the Shares on two or more dates
(each, a “Staggered Settlement Date”) or at two or more times on the Nominal
Settlement Date as follows:

	 	(a)	 	in such notice, Dealer will specify to Counterparty the related Staggered
Settlement Dates (each of which will be on or prior to such Nominal Settlement
Date) and how it will allocate the Shares it is required to deliver under “Net
Share Settlement” (above) among the Staggered Settlement Dates; and
	 
	 	(b)	 	the aggregate number of Shares that Dealer will deliver to Counterparty
hereunder on all such Staggered Settlement Dates and delivery times will equal
the number of Shares that Dealer would otherwise be required to deliver on such
Nominal Settlement Date.

	 	(g)	 	Early Unwind. In the event the sale of Convertible Notes is not consummated with the
underwriters for any reason by the close of business in New York on December 19, 2006
or such later date as agreed upon by the parties (December 19, 2006 or such later date as
agreed upon being the “Early Unwind Date”), the Transaction shall automatically
terminate (the “Early Unwind”), on the Early Unwind Date and (i) the Transaction and
all of the respective rights and obligations of Dealer and Counterparty under the
Transaction shall be cancelled and terminated and (ii) each party shall be released and
discharged by the other party from and agrees not to make any claim against the other
party with respect to any obligations or liabilities of the other party arising out of and
to
be performed in connection with the Transaction either prior to or after the Early Unwind
Date; provided that, other than to the extent the Early Unwind Date occurred as a result
of a breach of the Purchase Agreement by Dealer or an affiliate thereof, Counterparty
shall reimburse Dealer for any costs or expenses (including market losses) relating to the
unwinding of its hedging activities in connection with the Transaction (including any loss
or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing
any
hedge or related trading position). The amount of any such reimbursement shall be
determined by Dealer in its sole good faith and commercially reasonable discretion.
Dealer shall notify Counterparty of such amount and Counterparty shall pay such amount
in immediately available funds on the Early Unwind Date. Dealer and Counterparty
represent and acknowledge to the other that, subject to the proviso included in this
Section, upon an Early Unwind, all obligations with respect to the Transaction shall be
deemed fully and finally discharged.
	 
	 	(h)	 	Disclosure. Effective from the date of commencement of discussions concerning
the Transaction, Counterparty and each of its employees, representatives, or other agents may
disclose to any and all persons, without limitation of any kind, the tax treatment and tax
structure of the Transaction and all materials of any kind (including opinions or other tax
analyses) that are provided to Counterparty relating to such tax treatment and tax structure.
	 
	 	(i)	 	Setoff. The provisions of Section 2(c) of the Agreement shall not apply to the
Transaction. Each party waives any and all rights it may have to set-off delivery or payment
obligations it owes to the other party under the Transaction against any delivery or payment
obligations owed to it by the other party, whether arising under the Agreement, under any
other agreement between parties hereto, by operation of law or otherwise.

14

 

	 	(j)	 	Alternative Calculations and Payment on Early Termination and on Certain
Extraordinary Events. If, in respect of the Transaction, an amount is payable by Dealer to
Counterparty upon an early termination or cancellation of the Transaction (i) pursuant to
Section 12.2, 12.6, 12.7 or 12.9 of the Equity Definitions or “Consequences of Merger
Events” above (except in the event of an Extraordinary Event in which the consideration to
be paid to holders of Shares consists solely of cash) or (ii) pursuant to Section 6(d)(ii)
of the Agreement (except in the event of an Event of Default in which Counterparty is the
Defaulting Party or a Termination Event in which Counterparty is the Affected Party, other
than an Event of Default of the type described in Section 5(a)(iii), (v), (vi), (vii) or
(viii) of the Agreement or a Termination Event of the type described in Section 5(b)(i),
(ii), (iii), (iv), (v) or (vi) of the Agreement, in each case resulting from an event or
events outside Counterparty’s control) (a “Payment Obligation”), Counterparty may, in its
sole discretion, request that Dealer satisfy such Payment Obligation by the Share
Termination Alternative (as defined below) and shall give irrevocable telephonic notice to
Dealer, confirmed in writing within one Currency Business Day, no later than 12:00 p.m. New
York local time on the Merger Date, the Announcement Date or the Early Termination Date, as
applicable; provided that if Counterparty does not validly request that Dealer satisfy such
Payment Obligation by the Share Termination Alternative, Dealer shall nevertheless have the
right, in its sole discretion, to satisfy its Payment Obligation by the Share Termination
Alternative, notwithstanding Counterparty’s lack of election. In calculating any amounts
under Section 6(e) of the Agreement, notwithstanding anything to the contrary in the
Agreement, (1) separate amounts shall be calculated as set forth in Section 6(e) with
respect to (i) the Transaction and (ii) all other Transactions, and (2) such separate
amounts shall be payable pursuant to Section 6(d)(ii) of the Agreement, subject to, in the
case of clause (1) (i), the Share Termination Alternative right hereunder.

	 	 	 	 	 
	 

	 	Share Termination Alternative:
	 	If applicable, Dealer shall deliver to
Counterparty the Share Termination Delivery
Property on the date when the Payment
Obligation would otherwise be due pursuant
to Section 12.7 or 12.9 of the Equity
Definitions, this Confirmation or Section
6(d)(ii) and 6(e) of the Agreement, as
applicable (the “Share Termination Payment
Date”), in satisfaction of the Payment
Obligation in the manner reasonably
requested by Counterparty free of payment.
	 
	 	 	 	 
	 

	 	Share Termination Delivery Property:
	 	A number of Share Termination Delivery
Units, as calculated by the Calculation
Agent, equal to the Payment Obligation
divided by the Share Termination Unit Price.
The Calculation Agent shall adjust the Share
Termination Delivery Property by replacing
any fractional portion of a security therein
with an amount of cash equal to the value of
such fractional security based on the values
used to calculate the Share Termination Unit
Price.
	 
	 	 	 	 
	 

	 	Share Termination Unit Price:
	 	The value to Dealer of property contained in
one Share Termination Delivery Unit on the

15

 

	 	 	 	 	 
	 

	 	 	 	date such Share Termination Delivery Units
are to be delivered as Share Termination
Delivery Property, as determined by the
Calculation Agent in its discretion by
commercially reasonable means and notified by
the Calculation Agent to Dealer at the time
of notification of the Payment Obligation.
	 
	 	 	 	 
	 

	 	Share Termination Delivery Unit:
	 	In the case of a Termination Event, Event of
Default or Delisting, one Share or, in the
case of an Insolvency, Nationalization or
Merger Event, one Share or a unit consisting
of the number or amount of each type of
property received by a holder of one Share
(without consideration of any requirement to
pay cash or other consideration in lieu of
fractional amounts of any securities) in such
Insolvency, Nationalization or Merger Event,
as the case may be. If such Insolvency,
Nationalization or Merger Event involves a
choice of consideration to be received by
holders, such holder shall be deemed to have
elected to receive the maximum possible amount
of cash.
	 
	 	 	 	 
	 

	 	Failure to Deliver:
	 	Applicable
	 
	 	 	 	 
	 

	 	Other applicable provisions:
	 	If Share Termination Alternative is
applicable, the provisions of Sections 9.8,
9,9, 9.10, 9.11 and 9.12 of the Equity
Definitions will be applicable, as if
“Physical Settlement” applied to such
cancellation or termination of the
Transaction, except that all references
therein to “Shares” shall be read as
references to “Share Termination Delivery
Units”; 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 any Share Termination
Delivery Units (or any part thereof).

	 	(k)	 	Securities Contract; Swap Agreement. Each of Dealer and Counterparty agrees and
acknowledges that Dealer is a “stock broker,” “swap participant” and “financial participant”
within the meaning of Sections 101(22), 101(53C) and 101(22A) of Title 11 of the United
States Code (the “Bankruptcy Code”). The parties hereto further agree and acknowledge (A)
that this Confirmation is (i) a “securities contract,” as such term is defined in Section
741(7) of the Bankruptcy Code, with respect to which each payment

16

 

	 	 	 	and delivery hereunder is a “settlement payment,” as such term is defined in Section
741(8) of the Bankruptcy Code, and (ii) a “swap agreement,” as such term is defined in
Section 101(53B) of the Bankruptcy Code, with respect to which each payment and delivery
hereunder is a “transfer,” as such term is defined in Section 101(54) of the Bankruptcy
Code, and (B) that Dealer is entitled to the protections afforded by, among other
sections, Section 362(b)(6), 362(b)(17), 546(e), 546(g), 555 and 560 of the Bankruptcy
Code.
	 
	 	(1)	 	Governing Law. New York law (without reference to choice of law doctrine).
	 
	 	(m)	 	Waiver of Jury Trial. Each party waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in respect of any suit, action or
proceeding relating to the Transaction. Each party (i) certifies that no representative,
agent or attorney of the other party has represented, expressly or otherwise, that such other
party would not, in the event of such a suit, action or proceeding, seek to enforce the
foregoing waiver and (ii) acknowledges that it and the other party have been induced to enter
into the Transaction, as applicable, by, among other things, the mutual waivers and
certifications provided herein.
	 
	 	(n)	 	Registration. Counterparty hereby agrees that if, in the good faith reasonable
judgment of Dealer, the Shares (the “Hedge Shares”) acquired by Dealer for the purpose of
hedging its obligations pursuant to the Transaction cannot be sold in the U.S. public market
by Dealer without registration under the Securities Act, Counterparty shall, at its election:
(i) in order to allow Dealer to sell the Hedge Shares in a registered offering, make available
to Dealer an effective registration statement under the Securities Act to cover the resale of
such Hedge Shares and (A) enter into an agreement, in form and substance satisfactory to
Dealer, substantially in the form of an underwriting agreement for a registered secondary
offering, (B) provide accountant’s “comfort” letters in customary form for registered
offerings of equity securities, (C) provide disclosure opinions of nationally recognized
outside counsel to Counterparty reasonably acceptable to Dealer, (D) provide other customary
opinions, certificates and closing documents customary in form for registered offerings of
equity securities and (E) afford Dealer a reasonable opportunity to conduct a “due diligence”
investigation with respect to Counterparty customary in scope for underwritten offerings of
equity securities; provided, however, that if Dealer, in its sole reasonable discretion, is
not satisfied with access to due diligence materials, the results of its due diligence
investigation, or the procedures and documentation for the registered offering referred to
above, then clause (ii) or clause (iii) of this Section 9(n) shall apply at the election of
Counterparty; (ii) in order to allow Dealer to sell the Hedge Shares in a private placement,
enter into a private placement agreement substantially similar to private placement
Underwriting Agreements customary for private placements of equity securities, in form and
substance satisfactory to Dealer, including customary representations, covenants, blue sky and
other governmental filings and/or registrations, indemnities to Dealer, due diligence rights
(for Dealer or any designated buyer of the Hedge Shares from Dealer), opinions and
certificates and such other documentation as is customary for private placements agreements,
all reasonably acceptable to Dealer (in which case, the Calculation Agent shall make any
adjustments to the terms of the Transaction that are necessary, in its reasonable judgment, to
compensate Dealer for any discount from the public market price of the Shares incurred on the
sale of Hedge Shares in a private placement); or (iii) purchase the Hedge Shares from Dealer
at the “VWAP Price” (as defined herein) on the relevant Exchange Business Days, and in the
amounts, requested by Dealer. “VWAP Price” means, on any Exchange Business Day, the per Share
volume-weighted average price as displayed under the heading “Bloomberg VWAP” on Bloomberg
page

17

 

	 	 	 	<CDNS>.UQ <equity> AQR (or any successor thereto) in respect of the period
from 9:30 a.m. to 4:00 p.m. (New York City time) on such Exchange Business Day (or if such
volume-weighted average price is unavailable, the market value of one Share on such
Exchange Business Day, as determined by the Calculation Agent using a volume-weighted
method).
	 
	 	(o)	 	Role of Agent. Each party agrees and acknowledges that:

	 
	 	 	 	
(i) Agent is acting as agent for both parties but does not guarantee the performance of
either party; (ii) Dealer is not a member of the Securities Investor Protection
Corporation; (iii) Agent, Dealer and Counterparty each hereby acknowledges that any
transactions by Dealer or Agent in the Shares will be undertaken by Dealer as principal for
its own account; and (iv) all of the actions to be taken by Dealer and Agent in connection
with the Transaction, including but not limited to any exercise of any rights with respect
to the Options, shall be taken by Dealer or Agent independently and without any advance or
subsequent consultation with Counterparty; and (v) Agent is hereby authorized to act as
agent for Counterparty only to the extent required to satisfy the requirements of Rule
15a-6 under the Exchange Act in respect of the Options described hereunder.
	 
	 	(p)	 	Quarterly Valuations. Dealer hereby agrees, upon request by Counterparty, to
provide to the Counterparty, within 5 Exchange Business Days after the end of the fiscal
quarter of the Counterparty during which Counterparty made such request, a valuation estimate
of the fair value of the Transaction as of the Counterparty’s
fiscal quarter end.
	 
	 	(q)	 	Equity Rights. Dealer acknowledges and agrees that this Confirmation is not
intended to convey to it rights with respect to the Transaction that are senior to the claims
of common stockholders in the event of Company’s bankruptcy.

18

 

     Please confirm that the foregoing correctly sets forth the terms of our agreement by
executing this Confirmation and returning it by facsimile to the address provided in the Notices
section of this Confirmation.

Very truly yours,

	 	 	 	 	 
	 	Morgan Stanley & Co. International

Limited

 	 
	 	By:  	/s/
Steven Nash	 
	 	Authorized Signatory 	 
	 	Name: Steven Nash, Executive
Director	 
	 
	 	Morgan Stanley Bank, as agent

 	 
	 	By:  	/s/
Richard A. Uhlig	 
	 	Authorized Signatory 	 
	 	Name: Richard A. Uhlig
       
    Chairman and Chief Executive Officer	 
	 

Accepted and confirmed as

of the Trade Date:

Cadence Design Systems, Inc.

By:
/s/ William Porter

 

Authorized Signatory

Name: William Porter

19exv10w85

 

Exhibit 10.85

Morgan Stanley & Co. International Limited

c/o Morgan Stanley Bank

1585 Broadway
 New
York, NY 10036

(212) 761-4000

December 14, 2006

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

Reference:  CEDBFO

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 23rd 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.
	 
	 	 	 	 
	Credit Support Provider:
	 	Morgan Stanley

7

 

	 	 	 	 	 
	Credit Support Document:

	 	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,

6. Offices:

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, 4th 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,
38th 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 hereunder may be limited by federal or state securities laws or
public policy relating thereto.

9

 

	 	(b)	 	Neither the execution and delivery of this Confirmation nor the incurrence or
performance of obligations of Counterparty hereunder will conflict with or result in a
breach of the certificate of incorporation or by-laws (or any equivalent documents) of
Counterparty, or any applicable law or regulation, or any order, writ, injunction or
decree of any court or governmental authority or agency or any agreement or instrument to
which Counterparty or any of its subsidiaries is a party or by which Counterparty or any
of its subsidiaries is bound or to which Counterparty or any of its subsidiaries is
subject, or constitute a default under, or result in the creation of any lien under, any
such agreement or instrument, or breach or constitute a default under any agreements and
contracts of Counterparty or its significant subsidiaries filed as exhibits to
Counterparty’s Annual Report on Form 10-K for the year ended December 31, 2005,
incorporated by reference in the Offering Memorandum, as updated by any subsequent
filings.
	 
	 	(c)	 	No consent, approval, authorization, or order of, or filing with, any governmental agency or
body or any court is required in connection with the execution, delivery or performance by
Counterparty of this Confirmation, except such as have been obtained or made and such as may
be required under the Securities Act of 1933, as amended (the “Securities Act”) or state
securities laws.
	 
	 	(d)	 	Counterparty is not, and after giving effect to the transactions contemplated hereby will not
be, an “investment company” as such term is defined in the Investment Company Act of 1940, as
amended.
	 
	 	(e)	 	Counterparty is an “eligible contract participant”
(as such term is defined in Section 1a(12)
of the Commodity Exchange Act, as amended (the “CEA”)) because one or more of the following is
true:
	 
	 	 	 	Counterparty is a corporation, partnership, proprietorship, organization, trust or other
entity and:

	 	(A)	 	Counterparty has total assets in excess of USD 10,000,000;
	 
	 	(B)	 	the obligations of Counterparty hereunder are guaranteed, or
otherwise supported by a letter of credit or keepwell, support or other agreement, by
an entity of the type described in Section 1a(12)(A)(i) through (iv),
1a(12)(A)(v)(I),
1a(12)(A)(vii) or 1a(12)(C) of the CEA; or
	 
	 	(C)	 	Counterparty has a net worth in excess of USD 1,000,000 and has entered
into this Agreement in connection with the conduct of Counterparty’s business or to
manage the risk associated with an asset or liability owned or incurred or reasonably
likely to be owned or incurred by Counterparty in the conduct of Counterparty’s
business.

	 	(f)	 	On the Trade Date, (A) none of Counterparty and its officers and directors is aware of any
material nonpublic information regarding Counterparty or the Shares and (B) all reports and
other documents filed by Counterparty with the Securities and Exchange Commission pursuant to
the Exchange Act when considered as a whole (with the more recent such reports and documents
deemed to amend inconsistent statements contained in any earlier such reports and documents),
do not contain any untrue statement of a material fact or any omission of a material fact
required to be stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading.

10

 

	 	(g)	 	Without limiting the generality of Section 3(a)(iii) of the Agreement, the Transaction
will not violate Rule 13e-1 or Rule 13e-4 under the Exchange Act,
	 
	 	(h)	 	Counterparty is an “accredited investor” (as such term is defined in Section 2(a)(15)(ii) of
the Securities Act).
	 
	 	(i)	 	Counterparty’s financial condition is such that it has no need for liquidity with respect to
its investment in the Transaction and no need to dispose of any portion thereof to
satisfy any existing or contemplated undertaking or indebtedness.
	 
	 	(j)	 	On the Trade Date (A) the assets of Counterparty at their fair valuation exceed the
liabilities of Counterparty, including contingent liabilities, (B) the capital of
Counterparty is adequate to conduct the business of Counterparty and (C) Counterparty has
the ability to pay its debts and obligations as such debts mature and does not intend to,
or does not believe that it will, incur debt beyond its ability to pay as such debts
mature.
	 
	 	(k)	 	Counterparty’s investments in and liabilities in respect of the Transaction, which it
understands are not readily marketable, are not disproportionate to its net worth, and it is
able to bear any loss in connection with the Transaction, including the loss of its entire
investment in the Transaction.
	 
	 	(l)	 	Counterparty hereby agrees and acknowledges that the
Transaction has not been registered with the Securities and Exchange Commission or any state securities commission
and that the Options are being written by Dealer to Counterparty in reliance upon
exemptions from any such registration requirements. Counterparty acknowledges that all
Options acquired from Dealer will be acquired for investment purposes only and not for
the purpose of resale or other transfer except in compliance with the requirements of the
Securities Act. Counterparty will not sell or otherwise transfer any Option or any
interest therein except in compliance with the requirements of the Securities Act and any
subsequent offer or sale of the Options will be solely for Counterparty’s account and not
as part of a distribution that would be in violation of the Securities Act.
	 
	 	(m)	 	Counterparty understands no obligations of Dealer to it hereunder will be entitled to the
benefit of deposit insurance and that such obligations will not be guaranteed by any
affiliate of Dealer or any governmental agency.
	 
	 	(n)	 	Counterparty is capable of assessing the merits of and understanding (on its own behalf or
through independent professional advice), and understands and accepts, the terms, conditions
and risks of the Transaction.
	 
	 	(o)	 	Without limiting the generality of Section 13.1 of the Equity Definitions, Counterparty
acknowledges that Dealer is not making any representations or warranties with respect to
the treatment of the Transaction under FASB Statements 128, 133, as amended, 149 or 150,
EITF Issue No. 00-19, Issue No. 01-6 or Issue No. 03-6 (or any successor issue
statements) or under FASB’s Liabilities & Equity Project.
	 
	 	(p)	 	Counterparty is not on the date hereof engaged in a distribution, as such term is used in
Regulation M under the Exchange Act such distribution, a Regulation M Distribution, of any
securities of Counterparty, other than distributions meeting the requirements of the
exception set forth in Rules 101(b)(10) and 102(b)(7) of Regulation M. Counterparty shall
not, until the second Exchange Business Day immediately following the Trade Date, engage in
any Regulation M Distribution

11

 

9. Other Provisions:

	 	(a)	 	Opinions. Counterparty shall deliver to Dealer an opinion of
counsel, dated as of the Closing Date (as defined in the Purchase Agreement), with
respect to the matters set forth in Sections 8(a) through (d) of this Confirmation.
	 
	 	(b)	 	Repurchase Notices. Counterparty shall, on any day on which
Counterparty effects any repurchase of Shares, promptly give Dealer a written notice
of such repurchase (a “Repurchase Notice”) on such day if, following such repurchase,
the Options Equity Percentage as determined on such day is (i) greater than 6% and
(ii) greater by 0.5% than the Options Equity Percentage included in the immediately
preceding Repurchase Notice (or, in the case of the first such Repurchase Notice,
greater than the Options Equity Percentage as of the date hereof). The “Options
Equity Percentage” as of any day is the fraction (A) the numerator of which is the
sum of (A) the Number of Shares hereunder and (B) the Number of Shares for the
Convertible Note Hedge Transaction between Counterparty and Dealer relating to
the USD 250,000,000 principal amount of Convertible Senior Notes due
December 15, 2011 (the “Aggregate Transaction Amount”) and (B) the denominator
of which is the number of Shares outstanding on such day. Counterparty agrees to
indemnify and hold harmless Dealer and its affiliates and their respective officers,
directors, employees, affiliates, advisors, agents and controlling persons (each,
an “Indemnified Person”) from and against any and all losses (including losses
relating to Dealer’s hedging activities as a consequence of becoming, or of the risk
of becoming, a Section 16 “insider”, including without limitation, any forbearance
from hedging activities or cessation of hedging activities and any losses in
connection therewith with respect to the Transaction), claims, damages, judgments,
liabilities and expenses (including reasonable attorney’s fees), joint or several,
which an Indemnified Person may become subject to, as a result of Counterparty’s
failure to provide Dealer with a Repurchase Notice on the day and in the manner
specified in this Section 9(b), and to reimburse, within 30 days, upon written
request, each of such Indemnified Persons for any reasonable legal or other expenses
incurred in connection with investigating, preparing for, providing testimony or
other evidence in connection with or defending any of the foregoing. If any suit,
action, proceeding (including any governmental or regulatory investigation), claim or
demand shall be brought or asserted against the Indemnified Person, such
Indemnified Person shall promptly notify Counterparty in writing, and
Counterparty, upon request of the Indemnified Person, shall retain counsel reasonably
satisfactory to the Indemnified Person to represent the Indemnified Person and any
others Counterparty may designate in such proceeding and shall pay the fees and
expenses of such counsel related to such proceeding. Counterparty shall not be liable
for any settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff,
Counterparty agrees to indemnify any Indemnified Person from and against any loss or
liability by reason of such settlement or judgment. Counterparty shall not, without
the prior written consent of the Indemnified Person, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Person is or
could have been a party and indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement includes an unconditional release of such
Indemnified Person from all liability on claims that are the subject
matter of such proceeding. If the indemnification provided for in this paragraph
(b) is unavailable to an Indemnified Person or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then Counterparty under such
paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall
contribute to the amount paid or payable by such Indemnified Person as a result of
such losses, claims, damages or liabilities. The

12

 

	 	 	 	remedies provided for in this paragraph (b) are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any Indemnified Person at law or in equity. The
indemnity and contribution agreements contained in this paragraph (b) shall remain operative and in
full force and effect regardless of the termination of the Transaction.
	 
	 	(c)	 	No Manipulation. Counterparty is not entering into the Transaction to create actual
or apparent trading activity in the Shares (or any security convertible into or exchangeable
for the Shares) or to raise or depress or otherwise manipulate the price of the Shares (or any
security convertible into or exchangeable for the Shares) or otherwise to violate the Exchange
Act.
	 
	 	(d)	 	Board Authorization. Each of the Transaction and the issuance of the Convertible
Notes was approved by its board of directors and publicly announced, solely for the purposes
stated in such board resolution and public disclosure and, prior to any exercise of Options
hereunder, Counterparty’s board of directors will have duly authorized any repurchase of
Shares pursuant to the Transaction. Counterparty further represents that there is no
internal policy, whether written or oral, of Counterparty that would prohibit Counterparty
from entering into any aspect of the Transaction, including, but not limited to, the purchase
of Shares to be made pursuant hereto.
	 
	 	(e)	 	Transfer or Assignment. Neither party may transfer any of its rights or obligations
under the Transaction without the prior written consent of the non-transferring party;
provided that if, as determined at Dealer’s sole discretion, (x) its “beneficial ownership”
(within the meaning of Section 13 of the Exchange Act and rales promulgated thereunder) with
respect to the Shares exceeds 8.5% of Counterparty’s outstanding Shares or (y) the Aggregate
Transaction Amount exceeds 8.5% of Counterparty’s outstanding Shares, Dealer may transfer or
assign a number of Options sufficient to reduce such “beneficial ownership” to 8% or the
Aggregate Transaction Amount to 8%, as applicable, to any third party with a rating (or whose
guarantor has a rating) for its long term, unsecured and unsubordinated indebtedness of A- or
better by Standard & Poor’s Ratings Services or its successor (“S&P”), or a3 or better by
Moody’s Investors Service (“Moody’s”) or, if either S&P or Moody’s ceases to rate such debt,
at least an equivalent rating or better by a substitute agency rating mutually agreed by
Counterparty and Dealer. If, in the sole discretion of Dealer, Dealer is unable after its
commercially reasonable efforts to effect such transfer or assignment on pricing terms
reasonably acceptable to Dealer and within a time period reasonably acceptable to Dealer,
Dealer may designate any Exchange Business Day as an Early Termination Date with respect to a
portion (the “Terminated Portion”) of the Transaction, such that its “beneficial ownership”
following such partial termination will be equal to or less than 8.5% or the Aggregate
Transaction Amount will be equal to or less than 8.5%, as the case may be. In the event that
Dealer so designates an Early Termination Date with respect to a portion of the Transaction, a
payment shall be made pursuant to Section 6 of the Agreement as if (i) an Early Termination
Date had been designated in respect of a Transaction having terms identical to the Transaction
and a Number of Options equal to the Terminated Portion, (ii) Counterparty shall be (he sole
Affected Party with respect to such partial termination and (iii) such Transaction shall be
the only Terminated Transaction. Notwithstanding any other provision in this
Confirmation to the contrary requiring or allowing Dealer to purchase, sell, receive or
deliver any shares or other securities to or from Counterparty, Dealer may designate any of
its affiliates to purchase, sell, receive or deliver such shares or other securities and
otherwise to perform Dealer’s obligations in respect of the Transaction and any such designee
may assume such obligations. Dealer shall be discharged of its obligations to Counterparty to
the extent of any such performance.

13

 

	 	(f)	 	Staggered Settlement. Dealer may, by notice to Counterparty prior to any Settlement
Date (a “Nominal Settlement Date”), elect to deliver the Shares on two or more dates (each, a
“Staggered Settlement Date”) or at two or more times on the Nominal Settlement Date as follows:

	 	(a)	 	in such notice, Dealer will specify to Counterparty the related Staggered
Settlement Dates (each of which will be on or prior to such Nominal Settlement Date)
and how it will allocate the Shares it is required to deliver under “Net Share
Settlement” (above) among the Staggered Settlement Dates; and
	 
	 	(b)	 	the aggregate number of Shares that Dealer will deliver to Counterparty
hereunder on all such Staggered Settlement Dates and delivery times will equal the
number of Shares that Dealer would otherwise be required to deliver on such Nominal
Settlement Date.

	 	(g)	 	Early Unwind. In the event the sale of Convertible Notes is not consummated with the
underwriters for any reason by the close of business in New York on December 19, 2006 or such
later date as agreed upon by the parties (December 19, 2006 or such later date as agreed upon
being the “Early Unwind Date”), the Transaction
shall automatically terminate (the “Early Unwind”), on the Early Unwind Date and (i) the Transaction and all of the respective rights
and obligations of Dealer and Counterparty under the Transaction shall be cancelled and
terminated and (ii) each party shall be released and discharged by the other party from and
agrees not to make any claim against the other party with respect to any obligations or
liabilities of the other party arising out of and to be performed in connection with the
Transaction either prior to or after the Early Unwind Date; provided that, other than to the
extent the Early Unwind Date occurred as a result of a breach of the Purchase Agreement by
Dealer or an affiliate thereof, Counterparty shall reimburse Dealer for any costs or expenses
(including market losses) relating to the unwinding of its hedging activities in connection
with the Transaction (including any loss or cost incurred as a result of its terminating,
liquidating, obtaining or reestablishing any hedge or related trading position). The amount
of any such reimbursement shall be determined by Dealer in its sole good faith and
commercially reasonable discretion. Dealer shall notify Counterparty of such amount and
Counterparty shall pay such amount in immediately available funds on the Early Unwind Date.
Dealer and Counterparty represent and acknowledge to the other that, subject to the proviso
included in this Section, upon an Early Unwind, all obligations with respect to the
Transaction shall be deemed fully and finally discharged.
	 
	 	(h)	 	Disclosure. Effective from the date of commencement of discussions concerning the
Transaction, Counterparty and each of its employees, representatives, or other agents may
disclose to any and all persons, without limitation of any kind, the tax treatment and tax
structure of the Transaction and all materials of any kind (including opinions or other tax
analyses) that are provided to Counterparty relating to such tax treatment and tax structure.
	 
	 	(i)	 	Setoff. The provisions of Section 2(c) of the Agreement shall not apply to the
Transaction. Each party waives any and all rights it may have to set-off delivery or payment
obligations it owes to the other party under the Transaction against any delivery or payment
obligations owed to it by the other party, whether arising under the Agreement, under any
other agreement between parties hereto, by operation of law or otherwise

14

 

	(j)	 	Alternative Calculations and Payment on Early Termination and on Certain
Extraordinary
Events. If, in respect of the Transaction, an amount is payable by Dealer to Counterparty
upon an early termination or cancellation of the Transaction (i) pursuant to Section 12.2,
12.6, 12.7 or 12.9 of the Equity Definitions or “Consequences of Merger Events” above
(except in the event of an Extraordinary Event in which the consideration to be paid to
holders of Shares consists solely of cash) or (ii) pursuant to Section 6(d)(ii) of the
Agreement (except in the event of an Event of Default in which Counterparty is the
Defaulting Party or a Termination Event in which Counterparty is the Affected Party, other
than an Event of Default of the type described in Section 5(a)(iii), (v), (vi), (vii) or
(viii) of the Agreement or a Termination Event of the type described in Section 5(b)(i),
(ii), (iii), (iv), (v) or (vi) of the Agreement, in each case resulting from an event or
events outside Counterparty’s control) (a “Payment Obligation”), Counterparty may, in its
sole discretion, request that Dealer satisfy such Payment Obligation by the Share
Termination Alternative (as defined below) and shall give irrevocable telephonic notice to
Dealer, confirmed in writing within one Currency Business Day, no later than 12:00 p.m.
New York local time on the Merger Date, the Announcement Date or the Early Termination
Date, as applicable; provided that if Counterparty does not validly request that Dealer
satisfy such Payment Obligation by the Share Termination Alternative, Dealer shall
nevertheless have the right, in its sole discretion, to satisfy its Payment Obligation by
the Share Termination Alternative, notwithstanding Counterparty’s lack of election. In
calculating any amounts under Section 6(e) of the Agreement, notwithstanding anything to
the contrary in the Agreement, (1) separate amounts shall be calculated as set forth in
Section 6(e) with respect to (i) the Transaction and (ii) all other Transactions, and (2)
such separate amounts shall be payable pursuant to Section 6(d)(ii) of the Agreement,
subject to, in the case of clause (1)(i), the Share Termination Alternative right
hereunder.

	 	 	 
	Share Termination Alternative:

	 	If applicable, Dealer
shall deliver to
Counterparty the Share
Termination Delivery
Property on the date when
the Payment Obligation would
otherwise be due pursuant to
Section 12,7 or 12.9 of the
Equity Definitions, this
Confirmation or Section
6(d)(ii) and 6(e) of the
Agreement, as applicable
(the “Share Termination
Payment Date”), in
satisfaction of the Payment
Obligation in the manner
reasonably requested by
Counterparty free of
payment.
	 
	 	 
	Share Termination Delivery Property:

	 	A number of Share
Termination Delivery Units,
as calculated by the
Calculation Agent, equal to
the Payment Obligation
divided by the Share
Termination Unit Price. The
Calculation Agent shall
adjust the Share Termination
Delivery Property by
replacing any fractional
portion of a security
therein with an amount of
cash equal to the value of
such fractional security
based on the values used to
calculate the Share
Termination Unit Price.
	 
	 	 
	Share Termination Unit Price:

	 	The value to Dealer of
property contained in one
Share Termination Delivery
Unit on the

15

 

	 	 	 
	 

	 	date such Share Termination Delivery Units
are to be delivered as Share Termination Delivery
Property, as determined by the Calculation Agent in its
discretion by commercially reasonable means and notified
by the Calculation Agent to Dealer at the time of
notification of the Payment Obligation.
	 
	 	 
	Share Termination Delivery Unit:

	 	In the case of a Termination Event, Event of
Default or Delisting, one Share or, in the case of an
Insolvency, Nationalization or Merger Event, one Share or
a unit consisting of the number or amount of each type of
property received by a holder of one Share (without
consideration of any requirement to pay cash or other
consideration in lieu of fractional amounts of any
securities) in such Insolvency, Nationalization or Merger
Event, as the case may be. If such Insolvency,
Nationalization or Merger Event involves a choice of
consideration to be received by holders, such holder
shall be deemed to have elected to receive the maximum
possible amount of cash.
	 
	 	 
	Failure to Deliver:

	 	Applicable
	 
	 	 
	Other applicable provisions:

	 	If Share Termination Alternative is applicable, the
provisions of Sections 9.8, 9.9, 9.10, 9.11 and 9.12 of
the Equity Definitions will be applicable, as if
“Physical Settlement” applied to such cancellation or
termination of the Transaction, except that all
references there in to “Shares” shall be read as
references to “Share Termination Delivery Units”; 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 any Share
Termination Delivery Units (or any part thereof).

	(k)	 	Securities Contract; Swap Agreement. Each of Dealer and Counterparty agrees and acknowledges
that Dealer is a “stock broker,” “swap
participant” and “financial participant” within the meaning of Sections 101(22), 101(53C)
and 101(22A) of Title 11 of the United States Code (the “Bankruptcy Code”). The parties hereto further agree and acknowledge
(A) that this Confirmation is (i) a “securities contract,” as such term is defined in Section 741(7) of the Bankruptcy Code, with respect to which each payment

16

 

	 	 	and delivery hereunder is a “settlement payment,” as such term is defined in Section 741(8)
of the Bankruptcy Code, and (ii) a “swap agreement,” as such term is defined in Section 101(53B) of
the Bankruptcy Code, with respect to which each payment and delivery hereunder is a “transfer,” as
such term is defined in Section 101(54) of the Bankruptcy Code, and (B) that Dealer is entitled to
the protections afforded by, among other sections, Section 362(b)(6), 362(b)(17), 546(e), 546(g),
555 and 560 of the Bankruptcy Code.
	 
	(1)	 	Governing Law. New York law (without reference to choice of law doctrine).
	 
	(m)	 	Waiver of Jury Trial. Each party waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in respect of any suit, action or
proceeding relating to the Transaction. Each party (i) certifies that no representative,
agent or attorney of the other party has represented, expressly or otherwise, that such other
party would not, in the event of such a suit, action or proceeding, seek to enforce the
foregoing waiver and (ii) acknowledges that it and the other party have been induced to enter
into the Transaction, as applicable, by, among other things, the mutual waivers and
certifications provided herein.
	 
	(n)	 	Registration. Counterparty hereby agrees that if, in the good faith reasonable
judgment of Dealer, the Shares (the “Hedge Shares”) acquired by Dealer for the purpose of
hedging its obligations pursuant to the Transaction cannot be sold in the U.S. public market
by Dealer without registration tinder the Securities Act, Counterparty shall, at its election:
(i) in order to allow Dealer to sell the Hedge Shares in a registered offering, make available
to Dealer an effective registration statement under the Securities Act to cover the resale of
such Hedge Shares and (A) enter into an agreement, in form and substance satisfactory to
Dealer, substantially in the form of an underwriting agreement for a registered secondary
offering, (B) provide accountant’s “comfort” letters in customary form for registered
offerings of equity securities, (C) provide disclosure opinions of nationally recognized
outside counsel to Counterparty reasonably acceptable to Dealer, (D) provide other customary
opinions, certificates and closing documents customary in form for registered offerings of
equity securities and (E) afford Dealer a reasonable opportunity to conduct a “due diligence”
investigation with respect to Counterparty customary in scope for underwritten offerings of
equity securities; provided, however, that if Dealer, in its sole reasonable discretion, is
not satisfied with access to due diligence materials, the results of its due diligence
investigation, or the procedures and documentation for the registered offering referred to
above, then clause (ii) or clause (iii) of this Section 9(n) shall apply at the election of
Counterparty; (ii) in order to allow Dealer to sell the Hedge Shares in a private placement,
enter into a private placement agreement substantially similar to private placement
Underwriting Agreements customary for private placements of equity securities, in form and
substance satisfactory to Dealer, including customary representations, covenants, blue sky and
other governmental filings and/or registrations, indemnities to Dealer, due diligence rights
(for Dealer or any designated buyer of the Hedge Shares from Dealer), opinions and
certificates and such other documentation as is customary for private placements agreements,
alt reasonably acceptable to Dealer (in which case, the Calculation Agent shall make any
adjustments to the terms of the Transaction that are necessary, in its reasonable judgment, to
compensate Dealer for any discount from the public market price of the Shares incurred on the
sale of Hedge Shares in a private placement); or (iii) purchase the Hedge Shares from Dealer
at the “VWAP Price” (as defined herein) on the relevant Exchange Business Days, and in the
amounts, requested by Dealer. “VWAP Price” means, on any Exchange Business Day, the per Share
volume-weighted average price as displayed under the heading “Bloomberg VWAP” on Bloomberg
page

17

 

	 	 	<CDNS>.UQ <equity> AQR (or any successor thereto) in respect of the period from 9:30
a.m. to 4:00 p.m. (New York City time) on such Exchange Business Day (or if such
volume-weighted average price is unavailable, the market value of one Share on such Exchange
Business Day, as determined by the Calculation Agent using a volume-weighted method).
	 
	(o)	 	Role of Agent. Each party agrees and acknowledges that:
	 
	 	 	(i)Agent is acting as agent for both parties but does not guarantee the performance of
either party; (ii) Dealer is not a member of the Securities Investor Protection
Corporation; (iii) Agent, Dealer and Counterparty each hereby acknowledges that any
transactions by Dealer or Agent in the Shares will be undertaken by Dealer as principal
for its own account; and (iv) all of the actions to be taken by Dealer and Agent in
connection with the Transaction, including but not limited to any exercise of any rights
with respect to the Options, shall be taken by Dealer or Agent independently and without
any advance or subsequent consultation with Counterparty; and (v) Agent is hereby
authorized to act as agent for Counterparty only to the extent required to satisfy the
requirements of Rule 15a-6 under the Exchange Act in respect of the Options described
hereunder.
	 
	(p)	 	Quarterly Valuations. Dealer hereby agrees, upon request by Counterparty, to provide to
the Counterparty, within 5 Exchange Business Days after the end of the fiscal quarter of
the Counterparty during which Counterparty made such request, a valuation estimate of the
fair value of the Transaction as of the Counterparty’s fiscal quarter end.
	 
	(q)	 	Equity Rights. Dealer acknowledges and agrees that this Confirmation is not intended
to convey to it rights with respect to the Transaction that are senior to the claims of
common stockholders in the event of Company’s bankruptcy.

18

 

	 	 	Please confirm that the foregoing correctly sets forth the terms of our agreement by
executing this Confirmation and returning it by facsimile to the address provided in the
Notices section of this Confirmation.

Very
truly yours,

	 	 	 	 	 
	 	Morgan Stanley & Co. 

International Limited

 	 
	 	By:  	/s/ Steven Nash
 	 
	 	 	Authorized Signatory       	 
	 	 	Name: Steven Nash,
Executive Director 	 
	 
	 	Morgan Stanley Bank, as agent

 	 
	 	By:  	/s/
Richard A. Uhlig	 
	 	 	Authorized Signatory      	 
	 	 	Name: Richard A. Uhlig

            Chairman and Chief Executive Officer	 
	 

	 	 	 	 	 
	Accepted and confirmed 

as of the Trade Date:
	 	 
	 
	 	 	 	 
	Cadence Design Systems, Inc.	 	 
	 
	 	 	 	 
	By:
	 	/s/ William Porter	 	 
	 

	 	 
	Authorized Signatory
	 	 
	Name:
 William Porter

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